As filed with the Securities and Exchange Commission on
January 11, 2010
Registration
No. 333-150864
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 9
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Patriot
Risk Management, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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6331
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73-1665495
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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401 East Las Olas Boulevard, Suite 1540
Fort Lauderdale, Florida 33301
(954) 670-2900
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Steven M. Mariano
Chairman, President and Chief Executive Officer
401 East Las Olas Boulevard, Suite 1540
Fort Lauderdale, Florida 33301
(954) 670-2900
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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J. Brett Pritchard
Christopher A. Pesch
Locke Lord Bissell & Liddell LLP
111 South Wacker Drive
Chicago, Illinois 60606
(312) 443-0700
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John J. Sabl
Beth Flaming
Sidley Austin LLP
One South Dearborn Street
Chicago, Illinois 60603
(312) 853-7000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. 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. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
CALCULATION OF REGISTRATION
FEE
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Proposed Maximum
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Amount of
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Title of Each Class of
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Aggregate
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Registration
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Securities to be Registered
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Offering Price(1)(2)
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Fee(3)
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Common Stock, par value $0.001 per share
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$207,000,000
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$11,550.60
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(1)
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Includes amount attributable to
shares of common stock issuable upon the exercise of the
underwriters over-allotment option.
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(2)
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Estimated solely for the purpose of
calculating the amount of the registration fee in accordance
with Rule 457(o) under the Securities Act of 1933, as
amended.
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(3)
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Previously paid.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION, DATED
JANUARY 11, 2010
PRELIMINARY PROSPECTUS
[ ] Shares
Common Stock
We are
offering [ ]
shares of our common stock in this firm commitment underwritten
public offering. This is our initial public offering. We
anticipate that the initial public offering price of our common
stock will be between
$ [ ] and
$ [ ] per share.
Prior to this offering, there has been no public market for our
common stock, and our common stock is not currently listed on
any national exchange or market system. We have applied to have
shares of our common stock approved for listing on the New York
Stock Exchange under the symbol PMG.
Investing in our common stock involves risks. See Risk
Factors beginning on page 14 of this prospectus to
read about the risks you should consider before buying our
common stock.
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Per Share
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Total
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Price to public
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$
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$
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Discounts and commissions to underwriters(1)
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$
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$
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Net proceeds (before expenses) to us
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$
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$
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(1) |
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No discounts will be paid to underwriters with respect to shares
purchased by our directors, officers and employees or persons
having business relationships with us in the directed share
program. See Underwriting on page 186 of this
prospectus for a description of the underwriters
compensation. |
We have granted the underwriters the right to purchase up
to [ ] additional shares of
our common stock at the public offering price, less the
underwriting discounts, solely to cover over-allotments, if any.
The underwriters can exercise this right at any time within
30 days after the date of our underwriting agreement with
them.
Neither the Securities and Exchange Commission nor any state
securities commission or other regulatory body has approved or
disapproved of these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a
criminal offense.
The underwriters expect to deliver the shares of our common
stock to purchasers against payment on or about
[ ,
2010].
The date of this prospectus
is ,
2010.
TABLE OF
CONTENTS
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Page
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ii
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1
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14
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F-1
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EX-23.2 |
EX-24.2 |
CERTAIN
IMPORTANT INFORMATION
For your convenience we have included below definitions of
terms used in this prospectus.
In this prospectus:
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references to Patriot, our company,
we, us or our refer to
Patriot Risk Management, Inc. and its direct and indirect
wholly-owned subsidiaries, including Patriot National Group,
Inc., Guarantee Insurance Company, PRS Group, Inc. and its
subsidiaries and Patriot Underwriters, Inc. and its subsidiary,
unless the context suggests otherwise;
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references to Patriot Risk Management refer solely
to Patriot Risk Management, Inc., unless the context suggests
otherwise;
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references to Guarantee Insurance refer solely to
Guarantee Insurance Company, our wholly-owned insurance company;
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references to PUI refer collectively to Patriot
Underwriters, Inc. and its direct wholly-owned subsidiary,
Patriot General Agency, Inc.;
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references to PRS refer collectively to PRS Group,
Inc. and its direct and indirect wholly-owned subsidiaries,
including Patriot Risk Services, Inc., Patriot Risk Management
of Florida, Inc., Patriot Insurance Management Company, Inc.,
Patriot Re International, Inc. and Patriot Recovery, Inc.,
unless the context suggests otherwise;
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references to PF&C and
Argonaut-Southwest refer solely to
Argonaut-Southwest Insurance Company, a shell property and
casualty insurance company domiciled in Illinois that is not
currently writing new business and that, subject to receiving
regulatory approvals, we plan to acquire on or prior to
March 4, 2010 and rename as Patriot Fire &
Casualty Insurance Company;
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references to alternative market business refer to
arrangements in which workers compensation insurance
policies are written by Guarantee Insurance and the policyholder
or another party bears a substantial portion of the underwriting
risk, primarily through the reinsurance of the risk by a
segregated portfolio captive (as described below). This business
also includes other arrangements through which we share
underwriting risk with our policyholders, such as pursuant to a
large deductible policy or a retrospectively rated policy;
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references to traditional business refer to
guaranteed cost workers compensation insurance policies
written by Guarantee Insurance in which Guarantee Insurance
bears substantially all of the underwriting risk, subject to
reinsurance arrangements. Workers compensation insurance
is a system established under state and federal laws under which
employers provide insurance for benefit payments to their
employees for work-related injuries, deaths and diseases,
regardless of fault, in exchange for mandatory relinquishment of
the employees right to sue his or her employer for the
tort of negligence; and
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references to segregated portfolio captive refer to
a captive reinsurance company that operates as a single legal
entity with segregated pools of assets, or segregated portfolio
cells. The pool of assets and associated liabilities of each
segregated portfolio cell within a segregated portfolio captive
are solely for the benefit of the segregated portfolio cell
participants, and the pool of assets of one segregated portfolio
cell is statutorily protected from the creditors of the others.
In this prospectus, we sometimes refer to the segregated
portfolio cell participants as the owners of the cell.
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Unless otherwise stated, in this prospectus:
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all amounts assume no exercise of the underwriters
over-allotment option;
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all share numbers assume the automatic conversion of our
Series A convertible preferred stock, stated value $1,000
per share,
into [ ]
shares of our common stock and the automatic conversion of our
Series B common stock, par value $.001 per share,
into [ ] shares
of our common stock upon completion of this offering; and
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all share amounts (other than the stock options and warrants to
be issued upon completion of this offering) have been adjusted
to reflect
a [ ]
to 1 stock split to be effected immediately prior to completion
of this offering.
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You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with information that
is different from that contained in this prospectus. If anyone
provides you with different or inconsistent information, you
should not rely on it. We and the underwriters are offering to
sell and seeking offers to buy these securities only in
jurisdictions where offers and sales are permitted. You should
assume that the information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of common
stock. Our business, financial condition, results of operations
and prospects may have changed since that date.
iii
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. Before making a decision to purchase our common
stock, you should read the entire prospectus carefully,
including the Risk Factors and Forward-Looking
Statements sections and our consolidated financial
statements and the notes to those financial statements. Except
as otherwise noted, all information in this prospectus assumes
that all of
the [ ]
shares of common stock offered hereby will be sold and that the
underwriters will not exercise their over-allotment option.
Overview
We produce, underwrite and administer alternative market and
traditional workers compensation insurance plans and
provide claims services for insurance companies, segregated
portfolio captives and reinsurers. Through our wholly owned
insurance company subsidiary, Guarantee Insurance Company
(Guarantee Insurance), we generally participate in a portion of
the insurance underwriting risk. Our business model has two
components:
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In our insurance services segment, we generate fee income by
providing workers compensation claims services as well as
agency and underwriting services almost entirely for the benefit
of Guarantee Insurance, segregated portfolio captives and
Guarantee Insurances traditional business quota share
reinsurers under the Patriot Risk Services brand, and have
recently begun providing these services for another insurance
company under the Patriot Underwriters brand, a practice
which we refer to as business process outsourcing, or BPO.
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In our insurance segment, we generate underwriting income and
investment income by providing alternative market workers
compensation risk transfer solutions and traditional
workers compensation insurance coverage in Florida and 22
other jurisdictions.
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We believe that our insurance services capabilities, specialized
alternative market product knowledge and our hybrid business
model allow us to achieve attractive returns through a range of
industry pricing cycles and provide a substantial competitive
advantage in areas that are underserved by competitors, which
are generally insurance service providers or insurance carriers.
In 2009, we began producing business and performing insurance
services for ULLICO Casualty Company, which we refer to as our
BPO client. ULLICO Casualty Company is licensed to write
workers compensation insurance in 47 states plus the
District of Columbia and is rated B+ (Good) by A.M
Best. We earn commissions for producing business and insurance
services income for providing underwriting, policy and claims
administration, nurse case management and cost containment
services and, in certain cases, services to segregated portfolio
cell captives on the business we produce for our BPO client.
Additionally, we assume a portion of the premium and associated
losses and loss adjustment expenses on the business we produce
for our BPO client, as mutually determined on a
policy-by-policy
basis.
Our
Services and Products
Through our subsidiary, PRS Group, Inc. and its subsidiaries,
which we collectively refer to as PRS, and our subsidiary,
Patriot Underwriters, Inc. and its subsidiary, which we
collectively refer to as PUI, we earn income for workers
compensation claims services as well as agency and underwriting
services. Workers compensation claims services include
nurse case management, cost containment services and claims
administration and adjudication services. Cost containment
services refer to workers compensation bill review and
re-pricing services. Workers compensation agency and
underwriting services include general agency services and
specialty underwriting, policy administration and captive
management services. We currently provide these services
principally to Guarantee Insurance for its benefit, for the
benefit of segregated portfolio captives and for the benefit of
Guarantee Insurances traditional business quota share
reinsurers. We also provide these services to our BPO client.
Through Guarantee Insurance, we provide alternative market
workers compensation risk transfer solutions, including
workers compensation policies or arrangements where the
policyholder, an agent or
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another party generally bears a substantial portion of the
underwriting risk. For example, the policyholder, an agent or
another party may bear a substantial portion of the underwriting
risk through the reinsurance of the risk by a segregated
portfolio captive that is controlled by the policyholder, an
agent or another party. A segregated portfolio captive refers to
a captive reinsurance company that operates as a single legal
entity with segregated pools of assets, or segregated portfolio
cells, the assets and associated liabilities of which are solely
for the benefit of the segregated portfolio cell participants.
Through our segregated portfolio captive arrangements, we
generally retain between 10% and 90% of the underwriting risk
and earn a ceding commission from the segregated portfolio
captive, which is payment to Guarantee Insurance by the captive
of a commission as compensation for providing underwriting,
policy and claims administration, captive management and
investment portfolio management services. For the nine months
ended September 30, 2009, we retained approximately 14% of
the underwriting risk under our segregated portfolio captive
arrangements.
Our alternative market business also includes other arrangements
through which we share underwriting risk with our policyholders,
such as large deductible policies or policies for which the
final premium is based on the insureds actual loss
experience during the policy term, which we refer to as
retrospectively rated policies. Unlike our traditional
workers compensation policies, these arrangements align
our interests with those of the policyholders or other parties
participating in the risk-sharing arrangements, allowing them to
share in the underwriting profit or loss. In addition, our
alternative market business includes guaranteed cost policies
issued to certain professional employer organizations and
professional temporary staffing organizations on which we retain
the risk. The excess of loss reinsurance on these policies is
provided by the same reinsurer that covers our segregated
portfolio captive insurance plans, retrospectively rated plans
and large deductible plans, and these plans may be converted to
risk sharing arrangements in the future.
We provide alternative market risk transfer solutions to
companies in a broad array of industries, including employers
such as hospitality companies, construction companies,
professional employer organizations, clerical and professional
temporary staffing companies, industrial companies, car
dealerships, food services and retail and wholesale operations.
Through Guarantee Insurance, we also provide traditional
workers compensation insurance coverage. We manage risk
through the use of quota share and excess of loss reinsurance.
Quota share reinsurance is a form of proportional reinsurance in
which the reinsurer assumes an agreed upon percentage of each
risk being insured and shares all premiums and losses with us in
that proportion. Excess of loss reinsurance covers all or a
specified portion of losses on underlying insurance policies in
excess of a specified amount, or retention. We typically provide
traditional workers compensation insurance coverage to:
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small to medium-sized employers in a broad array of industries,
including clerical and professional services, food services,
retail and wholesale operations and industrial services;
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low to medium hazard classes; and
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accounts with annual premiums below $250,000.
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Our
Competitive Strengths
We believe we have the following competitive strengths:
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Exclusive Focus on Workers Compensation Services and
Products. Our operations are focused exclusively
on workers compensation insurance services, workers
compensation alternative market risk management solutions and
traditional workers compensation insurance coverage. We
believe this focus allows us to provide superior services and
products to our customers relative to multiline insurance
service providers and multiline insurance carriers. Furthermore,
a significant portion of our services and products are provided
in Florida, and we believe that certain of our multiline
competitors that offer workers compensation coverage as
part of a package policy including commercial property coverage
tend to compete less for Florida workers compensation
business because of property-related loss experience.
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Hybrid Business Model. In addition to the fee
income we earn for nurse case management, cost containment and
other insurance services, we also earn ceding commissions on our
alternative market business involving segregated portfolio cell
captives, and we earn underwriting and investment income on our
alternative market and traditional workers compensation
business. Because our nurse case management and cost containment
service income is principally related to workers
compensation claim frequency and medical costs, the operating
results of our insurance services segment are not materially
dependent on fluctuations or trends in prevailing workers
compensation insurance premium rates. We believe that by
changing the emphasis we place on our insurance services segment
and ceding commission-based alternative market business relative
to our traditional workers compensation business, we will
be better able to achieve attractive returns and growth through
a range of market cycles.
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Targeted Market for Alternative Market Risk Transfer
Solutions. Although other insurers generally only
offer alternative market products to large corporate customers,
we offer alternative market workers compensation solutions
to small, medium and larger-sized employers, enabling them and
others to share in the claims experience and benefit from
favorable loss experience.
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Enhanced Traditional Business Product
Offerings. In our traditional business, we offer
a number of flexible payment plans, including pay-as-you-go
plans in which we partner with payroll service companies and our
independent agents and their small employer clients to collect
premiums and payroll information on a monthly or bi-weekly
basis. Pay-as-you-go plans provide us with current payroll data
and allow employers to remit premiums through their payroll
service provider in an automated fashion. Flexible payment plans
give employers a way to purchase workers compensation
insurance without having to make a large upfront premium deposit
payment. We believe that flexible payment plans, including
pay-as-you-go plans, for small employers provide us with the
opportunity to earn more favorable underwriting margins due to
several factors:
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favorable cash flows afforded under this plan can be more
important to smaller employers than a price differential;
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smaller employers are generally less able to obtain premium rate
credits and discounts; and
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the premium remittance mechanism results in a more streamlined
renewal process and a lower frequency of business being
re-marketed at renewal, leading to more favorable retention
rates.
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Specialized Underwriting Expertise. We select
and price our alternative market and traditional business
products based on the specific risk associated with each
potential policyholder rather than solely on the
policyholders industry class. We utilize state-specific
actuarial models on accounts with annual premiums over $100,000.
In our alternative market business, we seek to align our
interests with those of our policyholders or other parties
participating in the risk-sharing arrangements by having them
share in the underwriting profits and losses. We believe that we
can compete effectively for alternative market and traditional
insurance business based on our specialized underwriting focus
and our accessibility to our clients. We generally compete on
these attributes more so than on price, which we believe is
generally not a differentiating factor in the states in which we
write most of our business. For the nine months ended
September 30, 2009 and year ended December 31, 2008,
we reported consolidated net loss ratios of 55.9% and 58.3%,
respectively. The net loss ratio is the ratio between losses and
loss adjustment expenses incurred and net premiums earned, and
is a measure of the effectiveness of our underwriting efforts.
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Effective Claims Management, Nurse Case Management and Cost
Containment Services. Guarantee Insurance began
writing business as a subsidiary of Patriot Risk Management, in
the first quarter of 2004. As our business has grown, we have
been successful in reasonably estimating our total liabilities
for losses and loss adjustment expenses, establishing and
maintaining adequate case reserves and rapidly closing claims.
We provide our customers with an active claims management
program. Our claims department employees average more than
12 years of workers compensation insurance industry
experience, and members of our claims management team average
more than 24 years of workers
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compensation experience. In addition, our nurse case management
and bill review professionals have extensive training and
expertise in assisting injured workers to return to work
quickly. As of December 31, 2008, approximately 6%, 2%, 1%
and 0.4% of total reported claims for accident years 2007, 2006,
2005 and 2004, respectively, remained open. Final net paid
losses and loss adjustment expenses associated with closed
claims are approximately 5% less than the initial reserves
established for them.
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Strong Distribution Relationships. We maintain
relationships with our network of more than
570 independent, non-exclusive agencies in 23 jurisdictions
by emphasizing personal interaction and superior service and
maintaining an exclusive focus on alternative market
workers compensation solutions and traditional
workers compensation insurance coverage. Our experienced
underwriters work closely with our independent agents to market
our products and serve the needs of prospective policyholders.
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Proven Leadership and Experienced
Management. The members of our senior management
team average over 20 years of insurance industry experience
and over 15 years of workers compensation insurance
experience. Their authority and areas of responsibility are
consistent with their functional and state-specific experience.
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Our
Strategy
We believe that the net proceeds from this offering will provide
us with the additional capital necessary to increase the amount
of insurance that we write and to make strategic acquisitions of
insurance services operations and insurance companies. We plan
to continue pursuing profitable growth and favorable returns on
equity and believe that our competitive strengths will help us
achieve our goal of delivering attractive returns to our
investors. Our strategy to achieve these goals is to:
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Expand in Our Existing Markets. In all of the
states in which we operate, we believe that a significant
portion of total workers compensation insurance premium is
written by numerous companies that individually have a small
market share. We believe that our market share in each of the
states in which we currently write business does not exceed 2%.
We plan to continue to take advantage of our competitive
position to expand in our existing markets. We believe that our
risk selection, claims management, nurse case management and
cost containment capabilities position us to profitably increase
market share in our existing markets.
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Expand into Additional Markets. We are
licensed to write workers compensation insurance in
27 jurisdictions, and we also hold 4 inactive workers
compensation licenses. For the nine months ended
September 30, 2009, we wrote traditional and alternative
market business in 23 jurisdictions, principally in those
jurisdictions that we believe provide the greatest opportunity
for near-term profitable growth. For the nine months ended
September 30, 2009, approximately 74% of our traditional
and alternative market business was written in Florida, New
Jersey, Missouri, Georgia and New York. We wrote approximately
28% of our direct premiums written in Florida for the nine
months ended September 30, 2009. We plan to expand our
business in states where we believe we can profitably write
business. To do this, we plan to continue to leverage our
talented pool of personnel, some of whom have prior expertise
operating in states in which we do not currently operate. In
addition, we may seek to acquire other insurance companies,
books of business or other workers compensation policy and
claims administration providers, general agencies or general
underwriting organizations as we expand in our existing markets
and into additional markets.
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Expand our BPO Business. In 2009, we entered
into an agreement to produce business and perform insurance
services for our BPO client to gain access to workers
compensation insurance business in certain additional states.
For the nine months ended September 30, 2009, approximately
34% of the business we produced and serviced for our BPO client
was in California, and approximately 31% of such business was in
either Texas, Michigan, Illinois or South Carolina. In the
fourth quarter of 2009, we entered into BPO relationships with
two other companies, and we are seeking to enter into additional
BPO relationships.
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Expand Nurse Case Management, Cost Containment and Other
Insurance Services Operations. We plan to
continue to generate fee income through our insurance services
segment by offering workers compensation nurse case
management and cost containment services to segregated portfolio
captives and our quota share reinsurers. We plan to offer these
services, together with general agency, general underwriting and
policy and claims administration services, to other regional and
national insurance companies and self-insured employers. We also
plan to increase our insurance services income by expanding both
organically and through strategic acquisitions of workers
compensation policy and claims administration service providers,
general agencies or general underwriting organizations. Taking
advantage of our hybrid business model, we plan to identify and
acquire insurance services operations that will create synergies
with our alternative market and traditional workers
compensation business.
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Obtain a Favorable Rating from
A.M. Best. We have been informed by
A.M. Best that after completion of this offering, we may
expect Guarantee Insurance to receive a financial strength
rating of A− (Excellent), which is the fourth
highest of fifteen A.M. Best rating levels. This indicative
rating assignment is subject to the capitalization of Guarantee
Insurance (and PF&C if we acquire it) at a level that
A.M. Best requires to support the assignment of the
A− rating through 2012. We expect that the
contribution of $155 million of the net proceeds of this
offering to Guarantee Insurance (and PF&C if we acquire it)
on or prior to March 4, 2010 will be sufficient to satisfy
this requirement. If we acquire PF&C as described elsewhere
in this prospectus, this rating assignment is also conditioned
upon regulatory approval of a pooling agreement between
Guarantee Insurance and PF&C. Pooling is a risk-sharing
arrangement under which premiums and losses are shared between
the pool members. We expect to make the contemplated capital
contributions when we purchase PF&C or conclude not to
proceed with that transaction, in either event prior to
March 4, 2010. The prospective rating indication we
received from A.M. Best is not a guarantee of final rating
outcome. In addition, in order to maintain this rating,
Guarantee Insurance (as well as PF&C if it is acquired)
must maintain capitalization at a level that A.M. Best
requires to support the assignment of the A−
rating, and any material negative developments in our
operations, including in terms of management, earnings,
capitalization or risk profile could result in negative rating
pressure and possibly a rating downgrade. While we have expanded
our business profitably without an A.M. Best rating and we
believe that we can continue to do so with the net proceeds from
this offering, we believe that an A− rating
from A.M. Best would increase our ability to market to
large employers and create new opportunities for our products
and services in rating sensitive markets. A.M. Bests
ratings reflect its opinion of an insurance companys
financial strength and ability to meet ongoing obligations to
policyholders and are not intended for the protection of
investors.
|
|
|
|
|
|
Leverage Existing Infrastructure. We service
our insurance services customers and policyholders through
regional offices in three states, each of which we believe has
been staffed to accommodate a certain level of insurance
services business and premium growth. We plan to realize
economies of scale in our workforce and leverage other scalable
infrastructure costs.
|
Our
Challenges and Risks
Our company and our business are subject to numerous risks as
more fully described in the section of this prospectus entitled
Risk Factors. As part of your evaluation of our
business, you should consider the challenges and risks we face
in implementing our business strategies, including the following:
|
|
|
|
|
Adequacy of Loss Reserves. Our loss reserves
are based upon estimates that are uncertain. These estimates may
be inadequate to cover our actual losses, in which case we would
need to increase our reserves, which would result in a decrease
in our net income. In addition, Guarantee Insurance has legacy
asbestos and environmental claims arising out of the sale of
general liability insurance and participations in reinsurance
assumed through underwriting management organizations prior to
1984. There are significant additional uncertainties in
estimating the amount of potential losses from asbestos and
environmental claims. As a result, it is more difficult to
estimate what the ultimate loss costs will be for these claims
than for other types of claims.
|
5
|
|
|
|
|
Pricing Our Premiums. We underwrite and price
our insurance policies at their inception before all of the
underlying costs are known. If we price our premiums too low, we
will have insufficient income to cover our losses and expenses.
In addition, we do business in several administered pricing
states, including Florida, where insurance rates are set by the
state insurance regulatory authorities and are adjusted
periodically. There can be no assurance that state-mandated
insurance rates in administered pricing states will enable us to
generate appropriate underwriting margins. For the nine months
ended September 30, 2009 and the year ended
December 31, 2008, we wrote approximately 52% and 67% of
our direct premiums written, respectively, in administered
pricing states.
|
|
|
|
Geographic Concentration. Our business is
concentrated in Florida and a few other states. Our financial
performance is tied to the business, economic and regulatory
conditions in these states. If the environment in these states
worsens, there could be an adverse effect on our business,
financial condition and results of operations.
|
|
|
|
Cyclical Nature of the Workers Compensation Industry
and Economic Downturn. The workers
compensation insurance industry 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. This cyclicality is beyond our
control and may adversely affect our overall financial
performance. In addition, the prevailing macroeconomic
conditions in the fourth quarter of 2008 and in 2009 have led to
a decrease in payrolls and a corresponding decrease in
workers compensation direct premiums written.
|
|
|
|
Limited Operating History. We commenced
operations in 2004 after acquiring Guarantee Insurance, and we
formed PRS in 2005. An investor in our common stock should
consider that, as a relatively new company, we have a limited
operating history on which you can evaluate our performance and
base an estimate of our future earning prospects. Accordingly,
our future results of operations or financial condition may vary
significantly from expectations.
|
Recent
Developments
New
BPO Relationships
In December 2009, we entered into a new BPO relationship with
Advantage Workers Compensation Insurance Company (Advantage WC),
an insurer rated A− (Excellent) by A.M. Best,
pursuant to which we will produce business and perform insurance
services for Advantage WC in certain Midwestern states. In
November 2009, we entered into an agreement with Advantage
Specialty, Inc. and its affiliate, Scibal Associates, Inc., to
produce business for SPARTA Insurance Holdings, Inc. in certain
states. We do not expect to assume any risk related to the
business we produce for Advantage WC or SPARTA. Because we
established these relationships in the fourth quarter of 2009,
references in this prospectus to our BPO client
refer only to Ullico Casualty Company.
Warrant
Issuance
Prior to the completion of this offering, we expect that our
board of directors will declare a dividend of warrants to
purchase a total
of [ ]
shares of our common stock, payable to our stockholders at the
effective time of this offering. Each warrant would represent
the right to purchase one share of our common stock at the same
price as the common stock sold in this offering. The right to
purchase common stock under the warrants would begin upon the
expiration of the
lock-up
agreements as described in Shares Eligible for Future
Sale
Lock-Up
Agreements. The warrants would expire 10 years after
the date of issuance. The warrants also would contain a cashless
exercise provision. These warrants would be subject to the
restrictions contained in the
lock-up
agreements.
Acquisition
of Shell Insurance Company
On December 18, 2009, we entered into a stock purchase
agreement with Argonaut Insurance Company to acquire
Argonaut-Southwest Insurance Company, a shell property and
casualty insurance company
6
domiciled in Illinois that is licensed to write workers
compensation insurance in Arizona, Arkansas, California,
Illinois, Louisiana, Mississippi, New Jersey, New Mexico,
Oklahoma, Oregon, and Texas. Guarantee Insurance is licensed in
each of these jurisdictions except for Arizona, California,
Illinois, Oregon, and Texas. We plan to rename
Argonaut-Southwest as Patriot Fire & Casualty
Insurance Company (PF&C) when we acquire it, and as a
condition to the acquisition we will seek to have it
redomesticated to Florida. The redomestication and acquisition
are subject to regulatory approvals by both the Illinois and
Florida insurance departments. In addition, if we acquire
PF&C, our prospective rating assignment from A.M. Best
is conditioned upon Florida regulatory approval of a pooling
agreement between PF&C and Guarantee Insurance that is
satisfactory to A.M. Best. If we receive all regulatory
approvals for this transaction, we plan to acquire PF&C on
or prior to March 4, 2010. There can be no assurance that
we will obtain the necessary regulatory approvals to complete
this acquisition. We do not believe that our failure to acquire
PF&C will adversely affect our business plan or prevent us
from obtaining the A− rating from
A.M. Best that we expect to receive upon completion of this
offering.
We intend to contribute a substantial portion of the net
proceeds of this offering to Guarantee Insurance and PF&C
(if we acquire it) in order to support their premium writings.
Our
Organization
Patriot Risk Management, Inc. was incorporated in Delaware in
April 2003 by Steven M. Mariano, our Chairman, President and
Chief Executive Officer. In September 2003, our wholly owned
subsidiary, Patriot National Insurance Group, Inc., acquired
Guarantee Insurance, a shell property and casualty insurance
company that was not writing new business at the time we
acquired it. At that time, Guarantee Insurance had approximately
$3.2 million in loss and loss adjustment expense reserves
relating to commercial general liability claims that had been in
run-off since 1983, and was licensed to write insurance business
in 41 states and the District of Columbia. Guarantee
Insurance is domiciled in Florida and began writing business as
a subsidiary of Patriot Risk Management in the first quarter of
2004. Guarantee Insurance is currently licensed to write
workers compensation insurance in 27 jurisdictions, and
also holds 4 inactive workers compensation licenses.
In 2005, we formed PRS Group, Inc. as a wholly owned subsidiary
and incorporated Patriot Risk Services, Inc. PRS provides nurse
case management and cost containment services for the benefit of
Guarantee Insurance, segregated portfolio captives, our quota
share reinsurers and our BPO client.
In 2008, we formed Patriot Recovery, Inc. to assist us in
investigation and subrogation activities.
In 2009, we established Patriot Underwriters, Inc. and its
subsidiary, Patriot General Agency, Inc., to provide general
agency and general underwriting services to third parties.
Through PUI and PRS, we are currently licensed as an insurance
agent or producer in 46 jurisdictions, and currently have
several pending agency licenses.
Prior to November 2009, Patriot National Insurance Group, Inc.
was named Guarantee Insurance Group, Inc.
7
Patriots current corporate structure is as follows:
|
|
|
* |
|
Subject to obtaining regulatory approvals, we plan to acquire
PF&C on or prior to March 4, 2010. See
Recent Developments Acquisition of
Shell Insurance Company. |
Patriot Risk Management, Inc. is an insurance holding company
that was incorporated in Delaware in 2003. Our principal
subsidiaries are Guarantee Insurance Company, Patriot
Underwriters, Inc. and Patriot Risk Services, Inc. Our executive
offices are located at 401 East Las Olas Boulevard,
Suite 1540, Fort Lauderdale, Florida 33301, and our
telephone number at that location is
(954) 670-2900.
8
The
Offering
|
|
|
Shares of common stock offered by us |
|
[ ]
shares |
|
Over-allotment shares of common stock offered by us
|
|
[ ]
shares |
|
Shares of common stock to be outstanding after the offering
|
|
[ ]
shares |
|
|
|
Use of proceeds |
|
We estimate that our net proceeds from this offering will be
approximately $[ ] million, based
on an assumed initial public offering price of
$[ ] per share, which is the
mid-point of the price range set forth on the cover page of this
prospectus, and after deducting the estimated underwriting
discounts and commissions and our estimated offering expenses.
We estimate that our net proceeds will be approximately
$[ ] million if the underwriters
exercise their over-allotment option in full. We intend to
contribute approximately $[ ]
million to Guarantee Insurance to support its premium writings.
As described elsewhere in this prospectus, we have entered into
a stock purchase agreement to acquire PF&C, a shell
property and casualty insurance company. The acquisition of
PF&C is subject to various regulatory approvals. If we
obtain these regulatory approvals and consummate the acquisition
on or prior to March 4, 2010, we plan instead to use
approximately $16.7 million of the net proceeds of this
offering to pay the purchase price for PF&C (of which
approximately $15.5 million represents the capital and
surplus of PF&C), to contribute approximately
$[ ] million to PF&C to
support its premium writings, and to contribute approximately
$[ ] million to Guarantee Insurance
to support its premium writings. We expect that the remaining
$[ ] million, or
$[ ] million if we acquire
PF&C, will be used to support our anticipated growth and
general corporate purposes and to fund other holding company
operations, including the repayment of all or a portion of our
existing indebtedness and potential acquisitions although we
have no current understandings or agreements regarding any such
acquisitions (other than PF&C). If the underwriters
exercise all or any portion of their over-allotment option, we
intend to use all or a substantial portion of the net proceeds
therefrom to pay down the balance of our credit facilities as
described elsewhere in this prospectus. See Use of
Proceeds. |
|
|
|
Dividend policy |
|
We do not expect to pay any cash dividends on our common stock
for the foreseeable future. We currently intend to retain any
additional future earnings to finance our operations and growth.
Any future determination to pay cash dividends on our common
stock will be at the discretion of our board of directors and
will be dependent on our earnings, financial condition,
operating results, capital requirements, any contractual,
regulatory and other restrictions on the payment of dividends by
us or by our subsidiaries to us, and other factors that our
board of directors deems relevant. |
|
|
|
Proposed New York Stock Exchange symbol
|
|
PMG |
9
The number of shares of common stock shown to be outstanding
upon completion of the offering excludes:
|
|
|
|
|
up to
[ ]
shares of common stock that may be issued pursuant to the
underwriters over-allotment option;
|
|
|
|
|
|
163,500 shares of common stock issuable upon the exercise
of options outstanding as of December 31, 2009;
|
|
|
|
|
|
[ ]
shares of common stock issuable upon the exercise of stock
options we intend to grant to our directors, executive officers
and other employees upon completion of this offering, at an
exercise price equal to the initial public offering price;
|
|
|
|
[ ]
shares of common stock issuable upon the exercise of warrants we
intend to issue to our existing stockholders upon completion of
this offering, at an exercise price equal to the initial public
offering price; and
|
|
|
|
|
|
[ ]
additional shares of common stock available for future issuance
under our 2010 Stock Incentive Plan.
|
10
SUMMARY
HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following income statement data for the nine months ended
September 30, 2009 and 2008 and balance sheet data as of
September 30, 2009 were derived from our unaudited
consolidated financial statements included elsewhere in this
prospectus. The income statement data for the years ended
December 31, 2008, 2007 and 2006 were derived from our
audited consolidated financial statements included elsewhere in
this prospectus. The income statement data for the years ended
December 31, 2005 and 2004 were derived from our audited
consolidated financial statements that are not included in this
prospectus. These historical results are not necessarily
indicative of results to be expected in any future period. You
should read the following summary financial information together
with the other information contained in this prospectus,
including Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
financial statements and related notes included elsewhere.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
In thousands, except per share data and percentages
|
|
|
Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
95,972
|
|
|
$
|
94,878
|
|
|
$
|
117,563
|
|
|
$
|
85,810
|
|
|
$
|
62,372
|
|
|
$
|
47,576
|
|
|
$
|
30,911
|
|
Ceded premiums written
|
|
|
56,573
|
|
|
|
52,926
|
|
|
|
71,725
|
|
|
|
54,894
|
|
|
|
42,986
|
|
|
|
23,617
|
|
|
|
22,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
|
39,399
|
|
|
|
41,952
|
|
|
|
45,838
|
|
|
|
30,961
|
|
|
|
19,386
|
|
|
|
23,959
|
|
|
|
8,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
|
28,369
|
|
|
|
32,276
|
|
|
|
49,220
|
|
|
|
24,613
|
|
|
|
21,053
|
|
|
|
21,336
|
|
|
|
2,948
|
|
Insurance services income
|
|
|
9,753
|
|
|
|
4,706
|
|
|
|
5,657
|
|
|
|
7,027
|
|
|
|
7,175
|
|
|
|
4,369
|
|
|
|
6,429
|
|
Net investment income
|
|
|
1,354
|
|
|
|
1,487
|
|
|
|
2,028
|
|
|
|
1,326
|
|
|
|
1,321
|
|
|
|
1,077
|
|
|
|
233
|
|
Net realized gains (losses) on investments
|
|
|
903
|
|
|
|
(253
|
)
|
|
|
(1,037
|
)
|
|
|
(5
|
)
|
|
|
(1,346
|
)
|
|
|
(2,298
|
)
|
|
|
(4,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
40,379
|
|
|
|
38,216
|
|
|
|
55,868
|
|
|
|
32,961
|
|
|
|
28,203
|
|
|
|
24,484
|
|
|
|
4,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
15,864
|
|
|
|
20,719
|
|
|
|
28,716
|
|
|
|
15,182
|
|
|
|
17,839
|
|
|
|
12,022
|
|
|
|
2,616
|
|
Net policy acquisition and underwriting expenses
|
|
|
8,498
|
|
|
|
8,176
|
|
|
|
13,535
|
|
|
|
6,023
|
|
|
|
3,834
|
|
|
|
3,168
|
|
|
|
2,016
|
|
Other operating expenses
|
|
|
11,100
|
|
|
|
8,055
|
|
|
|
10,930
|
|
|
|
8,519
|
|
|
|
9,704
|
|
|
|
6,378
|
|
|
|
4,989
|
|
Interest expense
|
|
|
1,119
|
|
|
|
1,102
|
|
|
|
1,437
|
|
|
|
1,290
|
|
|
|
1,109
|
|
|
|
1,129
|
|
|
|
555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
36,581
|
|
|
|
38,052
|
|
|
|
54,618
|
|
|
|
31,014
|
|
|
|
32,486
|
|
|
|
22,697
|
|
|
|
10,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
219
|
|
|
|
1,469
|
|
|
|
|
|
|
|
796
|
|
|
|
|
|
|
|
110
|
|
Loss from write-off of deferred equity offering costs(1)
|
|
|
|
|
|
|
|
|
|
|
(3,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on early extinguishment of debt(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense benefit
|
|
|
3,798
|
|
|
|
383
|
|
|
|
(767
|
)
|
|
|
1,947
|
|
|
|
3,099
|
|
|
|
1,787
|
|
|
|
(5,088
|
)
|
Income tax expense (benefit)
|
|
|
1,422
|
|
|
|
(217
|
)
|
|
|
(643
|
)
|
|
|
(432
|
)
|
|
|
1,489
|
|
|
|
687
|
|
|
|
(751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,376
|
|
|
$
|
600
|
|
|
$
|
(124
|
)
|
|
$
|
2,379
|
|
|
$
|
1,610
|
|
|
$
|
1,100
|
|
|
$
|
(4,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.95
|
|
|
$
|
0.44
|
|
|
$
|
(0.09
|
)
|
|
$
|
1.77
|
|
|
$
|
1.16
|
|
|
$
|
0.88
|
|
|
|
NM
|
(3)
|
Diluted
|
|
|
1.94
|
|
|
|
0.44
|
|
|
|
(0.09
|
)
|
|
|
1.76
|
|
|
|
1.15
|
|
|
|
0.87
|
|
|
|
NM
|
(3)
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,216
|
|
|
|
1,361
|
|
|
|
1,361
|
|
|
|
1,342
|
|
|
|
1,392
|
|
|
|
1,251
|
|
|
|
NM
|
(3)
|
Diluted
|
|
|
1,225
|
|
|
|
1,370
|
|
|
|
1,361
|
|
|
|
1,351
|
|
|
|
1,398
|
|
|
|
1,258
|
|
|
|
NM
|
(3)
|
Return on average equity(4)
|
|
|
36.7
|
%
|
|
|
15.1
|
%
|
|
|
NM
|
(6)
|
|
|
58.5
|
%
|
|
|
107.0
|
%
|
|
|
NM
|
(7)
|
|
|
NM
|
(8)
|
Selected Insurance Ratios(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio
|
|
|
55.9
|
%
|
|
|
64.2
|
%
|
|
|
58.3
|
%
|
|
|
61.7
|
%
|
|
|
84.7
|
%
|
|
|
56.3
|
%
|
|
|
NM
|
(3)
|
Net expense ratio
|
|
|
30.0
|
%
|
|
|
25.3
|
%
|
|
|
27.5
|
%
|
|
|
24.5
|
%
|
|
|
18.2
|
%
|
|
|
14.8
|
%
|
|
|
NM
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net combined ratio
|
|
|
85.9
|
%
|
|
|
89.5
|
%
|
|
|
85.8
|
%
|
|
|
86.2
|
%
|
|
|
102.9
|
%
|
|
|
71.1
|
%
|
|
|
NM
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
Actual
|
|
|
As Adjusted(9)
|
|
|
|
(Unaudited)
|
|
|
|
In thousands
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
47,051
|
|
|
|
47,051
|
|
Cash and cash equivalents
|
|
|
7,452
|
|
|
|
[ ]
|
|
Amounts recoverable from reinsurers
|
|
|
58,328
|
|
|
|
58,328
|
|
Premiums receivable, net
|
|
|
83,040
|
|
|
|
83,040
|
|
Prepaid reinsurance premiums
|
|
|
42,010
|
|
|
|
42,010
|
|
Other assets
|
|
|
19,910
|
|
|
|
21,110
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
257,791
|
|
|
|
[ ]
|
|
|
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses
|
|
$
|
83,210
|
|
|
|
83,210
|
|
Unearned and advanced premium reserves
|
|
|
63,702
|
|
|
|
63,702
|
|
Reinsurance funds withheld and balances payable
|
|
|
56,458
|
|
|
|
56,458
|
|
Debt and accrued interest
|
|
|
20,089
|
|
|
|
20,089
|
|
Other liabilities
|
|
|
24,203
|
|
|
|
24,203
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
247,662
|
|
|
|
247,662
|
|
Stockholders equity
|
|
|
10,129
|
|
|
|
[ ]
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
257,791
|
|
|
|
[ ]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In 2008, we wrote off approximately $3.5 million of
deferred equity offering costs incurred in connection with our
prior efforts to consummate an initial public offering during
2007 and 2008. |
|
(2) |
|
In 2006, Guarantee Insurance entered into a settlement and
termination agreement with the former owner of Guarantee
Insurance that allowed for an early extinguishment of debt in
the amount of $8.8 million in exchange for
$2.2 million in cash and release of the indemnification
agreement previously entered into by the parties. As a result,
we recognized a gain on the early extinguishment of debt on a
pre-tax basis of approximately $6.6 million. We also
recognized other income in connection with the forgiveness of
accrued interest associated with the early extinguishment of
debt on a pre-tax basis of $796,000. |
|
(3) |
|
We do not believe this metric is meaningful for the period
indicated. |
|
(4) |
|
Return on average equity for a given period (annualized in the
case of periods less than one year) is calculated by dividing
net income for that period by average stockholders equity
as of the beginning and end of the period. |
|
(5) |
|
The net loss ratio is calculated by dividing net losses and loss
adjustment expenses by net premiums earned. The net expense
ratio is calculated by dividing net policy acquisition and
underwriting expenses (which are comprised of gross policy
acquisition costs and other gross expenses incurred in our
insurance operations, net of ceding commissions earned from our
reinsurers) by net premiums earned. The net combined ratio is
the sum of the net loss ratio and the net expense ratio. |
|
|
|
(6) |
|
In 2008, we reported a net loss of $124,000, principally as a
result of a non-recurring loss from the write-off of deferred
equity offering costs of approximately $3.5 million as
described above. Due to this non-recurring charge, our return on
average equity for 2008 was (2.0)%, which we do not believe is
meaningful. |
|
|
|
(7) |
|
In 2005, we reported net income of $1.1 million. However,
our average stockholders equity for 2005 was only
approximately $180,000, which results in a return on average
equity of 609.4%, which we do not believe is meaningful. |
|
|
|
(8) |
|
In 2004, we reported a net loss of $4.3 million,
principally as a result of a loss from the write-off of an
investment in Foundation Insurance Company, a subsidiary of
Tarheel Group, Inc., as described below |
12
|
|
|
|
|
under Certain Relationships and Related
Transactions. Due to this change, our return on average
equity for 2004 was (19,275.6)%, which we do not believe is
meaningful. |
|
|
|
(9) |
|
The As Adjusted balance sheet data as of September 30, 2009
reflects the issuance of
[ ]
shares of our common stock at the assumed initial public
offering price of $[ ] per share,
which is the mid-point of the price range set forth on the cover
page of this prospectus, and the application of the net proceeds
therefrom after deducting estimated underwriting discounts and
commissions and our estimated offering expenses. |
13
RISK
FACTORS
An investment in our common stock involves a number of risks.
Before making a decision to purchase our common stock, you
should carefully consider the following information about these
risks, together with the other information contained in this
prospectus. Many factors, including the risks described below,
could result in a significant or material adverse effect on our
business, financial condition and results of operations. If this
were to happen, the price of our shares could decline
significantly and you could lose all or part of your
investment.
Risks
Related to Our Business
Our
business, financial condition and results of operations may be
adversely affected if our actual losses and loss adjustment
expenses exceed our estimated loss and loss adjustment expense
reserves.
We maintain reserves for estimated losses and loss adjustment
expenses. Loss and loss adjustment expense reserves represent an
estimate of amounts needed to pay and administer claims with
respect to insured events that have occurred, including events
that have occurred but have not yet been reported to us. Such
reserves are estimates and are therefore inherently uncertain.
Judgment is required to determine the degree to which historical
payment and claim settlement patterns should be considered in
establishing loss and loss adjustment expense reserves. The
interpretation of historical data can be impacted by external
forces, such as legislative changes, economic fluctuations and
legal trends.
Our net reserves for losses and loss adjustment expenses at
December 31, 2008, 2007, 2006, 2005 and 2004 were
$37.1 million, $26.6 million, $24.8 million,
$17.4 million and $11.8 million, respectively. At
December 31, 2008, our re-estimated reserves for the years
ended December 31, 2007, 2006, 2005 and 2004 were
$27.9 million, $21.3 million, $16.7 million and
$11.4 million, respectively. Accordingly, at
December 31, 2008, our reserves for the years ended
December 31, 2007, 2006, 2005 and 2004 showed a net
cumulative redundancy (deficiency) of approximately
($1.3 million), $3.6 million, $697,000 and $429,000,
respectively. Our historical claims data is not fully developed,
and, accordingly, in addition to our own historical claims data,
we currently utilize industry data in establishing our reserves.
Key assumptions that we utilize to estimate our reserves include
industry frequency and severity trends and health care cost and
utilization patterns. There can be no assurance that our
reserves will be adequate in the future. If there are
unfavorable changes in our assumptions, our reserves may need to
be increased.
It is difficult to estimate reserves for workers
compensation claims, because workers compensation claims
are often paid over a long period of time, and there are no
policy limits on liability for claim amounts. Accordingly, our
reserves may prove to be inadequate to cover our actual losses.
We review our loss reserves each quarter. We may adjust our loss
reserves based on the results of these reviews, and these
adjustments could be significant. If we change our estimates,
these changes would result in adjustments to our loss reserves
and losses and loss adjustment expenses incurred in the period
in which the estimates are changed. If the estimate is
increased, our pre-tax income for the period in which we make
the change will decrease by a corresponding amount.
Additionally, we have certain exposures related to legacy
commercial general liability claims, including asbestos and
environmental liability claims, and there can be no assurance
that our loss and loss adjustment expense reserves for these
claims are adequate. See Guarantee Insurance
has legacy commercial general liability claims, including
asbestos and environmental liability claims.
If we
do not properly price our insurance policies, our business,
financial condition and results of operations will be adversely
affected; we do not set prices for our policies in Florida or
the other administered pricing states where we write
premiums.
If our premium rates are too low, our results of operations and
our profitability will be adversely affected, and if our premium
rates are too high, our competitiveness may be reduced and we
may generate lower revenues.
14
In general, the premium rates for our insurance policies are
established by us (in states other than administered pricing
states, as discussed below) when coverage is initiated and,
therefore, before all of the underlying costs are known. Like
other workers compensation insurance companies and
insurance holding companies, we rely on estimates and
assumptions in setting our premium rates. Establishing adequate
rates is necessary to generate sufficient revenue, together with
investment income, to operate profitably. If we fail to
accurately assess the risks that we assume, we may fail to
charge adequate premium rates. For example, when underwriting
coverage on a new policy, we estimate future claims expense
based, in part, on prior claims information provided by the
policyholders previous insurance carriers. If this prior
claims information is not accurate or not indicative of future
claims experience, we may under-price our policies by using
claims estimates that are too low. As a result, our actual costs
for providing insurance coverage to our policyholders may be
significantly higher than our premiums. In order to set premium
rates accurately, we must:
|
|
|
|
|
collect and properly analyze a substantial volume of data;
|
|
|
|
develop, test and apply appropriate rating formulae;
|
|
|
|
closely monitor and timely recognize changes in trends; and
|
|
|
|
make assumptions regarding both the frequency and severity of
losses with reasonable accuracy.
|
We must also price our insurance policies appropriately for each
jurisdiction. The assumptions we make regarding our premium
rates in states in which we currently write policies may not be
appropriate for new geographic markets into which we may expand.
Our ability to establish appropriate premium rates in new
markets is subject to a number of risks and uncertainties,
principally:
|
|
|
|
|
insufficient reliable data;
|
|
|
|
incorrect or incomplete analysis of available data;
|
|
|
|
uncertainties generally inherent in estimates and assumptions,
especially in markets in which we have less experience;
|
|
|
|
our inability to implement appropriate rating formulae or other
pricing methodologies;
|
|
|
|
regulatory constraints on rate increases;
|
|
|
|
costs of ongoing medical treatment;
|
|
|
|
our inability to accurately estimate retention, investment
yields and the duration of our liability for losses and loss
adjustment expenses; and
|
|
|
|
unanticipated court decisions, legislation or regulatory action.
|
For the nine months ended September 30, 2009 and the years
ended December 31, 2008 and 2007, we wrote approximately
52%, 67% and 70% of our direct premiums written, respectively,
in administered pricing states Florida, Indiana, New
Jersey, and, prior to October 1, 2008, New York. Effective
October 1, 2008, New York is no longer an administered
pricing state. In 2008, we wrote approximately 46% of our direct
premiums written in Florida. In administered pricing states,
insurance rates are set by the state insurance regulators and
are adjusted periodically. Rate competition generally is not
permitted in these states. Therefore, rather than setting rates
for the policies, our underwriting efforts in these states for
our traditional business relate primarily to the selection of
the policies we choose to write at the premium rates that have
been set.
The Florida Office of Insurance Regulation, or the Florida OIR,
has approved overall workers compensation rate decreases
of 6.8%, 18.6%, 18.4% and 15.7%, effective as of January 1,
2010, 2009, 2008 and 2007, respectively. If a state insurance
regulator lowers premium rates, we may be less profitable, and
we may choose not to write policies in that state. We have
responded to Florida rate decreases by expanding our alternative
market business in Florida and strengthening our collateral on
that business where appropriate. In addition, we have the
ability to offer different kinds of policies in administered
pricing states, including retrospectively rated policies and
dividend policies, for which an insured can receive a return of
a portion of the premium paid if the insureds claims
experience is favorable. We expect an increase in Florida
experience
15
rate modifications, which permit us to increase the premium
charged based on a policyholders loss history. We
anticipate that our ability to adjust to these market changes
will create opportunities as our competitors find the Florida
market less desirable. However, there can be no assurance that
state mandated insurance rates in administered pricing states
will enable us to generate appropriate underwriting margins.
Furthermore, there can be no assurance that alternative kinds of
policies in administered pricing states will continue to be
permitted or will enable us to generate appropriate underwriting
margins.
Our
geographic concentration ties our performance to business,
economic and regulatory conditions in Florida and certain other
states.
In 2008, we wrote insurance in 22 states and the District
of Columbia. For the nine months ended September 30, 2009
and the years ended December 31, 2008 and 2007,
approximately 28%, 46% and 59% of our total direct premiums
written, respectively, were concentrated in our largest state,
Florida.
For the nine months ended September 30, 2009, approximately
34% of our alternative market business direct premiums written
were concentrated in Florida, and approximately 20%, 12% and 10%
were concentrated in New Jersey, Georgia and New York,
respectively. No other state accounted for more than 5% of our
alternative market business direct premiums written for the nine
months ended September 30, 2009.
For the nine months ended September 30, 2009, approximately
22% and 21% of our traditional business direct premiums written
were concentrated in Florida and New Jersey, respectively, and
between 5% and 10% were concentrated in each of Georgia,
Indiana, Arkansas, New York and Missouri. No other state
accounted for more than 5% of our traditional business direct
premiums written for the nine months ended September 30,
2009.
Unfavorable business, economic or regulatory conditions in the
states where we conduct the majority of our traditional and
alternative market business could have a significant adverse
impact on our business, financial condition and results of
operations. In Florida, the state in which we write the majority
of our premium, and also in Indiana and New Jersey, insurance
regulators establish the premium rates we charge. In these
states, insurance regulators may set rates below those that we
require to maintain profitability.
Because our business is concentrated in Florida and certain
other states, we may be exposed to economic and regulatory risks
that are greater than the risks we would face if our business
were spread more evenly by state. Our workers compensation
insurance operations are affected by the economic health of the
states in which we operate. Premium growth is dependent upon
payroll growth, which, in turn, is affected by economic
conditions. Furthermore, losses and loss adjustment expenses can
increase in weak economic conditions because it is more
difficult to return injured workers to work when employers are
otherwise reducing payrolls. Florida is exposed to severe
natural perils, such as hurricanes. If Florida were to
experience a natural peril of the magnitude of Hurricane Katrina
or other catastrophic event, the result could be a disruption of
the entire local economy and the loss of jobs, which could have
a material adverse effect on our business, financial condition
and results of operations. We could also be adversely affected
by any material change in Florida law or regulation or any
Florida court decision affecting workers compensation
carriers generally. Unfavorable changes in economic conditions
affecting the states in which we write business could adversely
affect our business, financial condition and results of
operations.
The
workers compensation insurance industry is cyclical in
nature, which may affect our overall financial
performance.
Historically, the workers compensation insurance market
has undergone cyclical periods of price competition and excess
underwriting capacity (known as a soft market), followed by
periods of high premium rates and shortages of underwriting
capacity (known as a hard market). Although an individual
insurance companys financial performance is dependent on
its own specific business characteristics, the profitability of
most workers compensation insurance companies tends to
follow this cyclical market pattern. Additional underwriting
capacity, and the resulting increased competition for premium,
is the result of insurance companies expanding the types or
amounts of business they write, or of companies seeking to
maintain or increase market share at the expense of underwriting
discipline. In our traditional workers compensation
16
business, we have been experiencing increased price competition
since 2007 in certain markets, and these cyclical patterns, the
actions of our competitors and general economic factors could
cause our revenue and net income to fluctuate, which may cause
the price of our common stock to be volatile. Because this
cyclicality is due in large part to the actions of our
competitors and general economic factors beyond our control, we
cannot predict with certainty the timing or duration of changes
in the market cycle.
Because
we have a limited operating history, our future operating
results and financial condition are more likely to vary from
expectations.
We commenced operations in 2004 after acquiring Guarantee
Insurance, and we formed PRS Group, Inc. in 2005. As a
relatively new company, we have a limited operating history on
which you can evaluate our performance and base an estimate of
our future earning prospects. In addition, our business plan
contemplates that we will expand into new geographic areas and
provide claims administration, general agency and general
underwriting services to other insurance companies and
self-insured employers through additional business process
outsourcing relationships. We cannot assure you that we will
obtain the regulatory approvals necessary for us to conduct
business as planned or that any approval granted will not be
subject to conditions that restrict our operations. In addition,
we cannot assure you that we will have, or be able to raise, the
funds necessary to capitalize our subsidiaries in order to
further grow our business. Accordingly, our future results of
operations or financial condition may vary significantly from
expectations.
Our
insurance services fee income and insurance services net income
is currently substantially dependent on Guarantee
Insurances premium levels.
Our insurance services fee income and insurance services net
income is generated primarily from Guarantee Insurance,
segregated portfolio captives and our quota share reinsurers. If
Guarantee Insurance premium levels decrease, we would experience
a corresponding decrease in insurance services fee income and
insurance services net income. There can be no assurance that
Guarantee Insurance premium levels will not decrease.
Our
insurance services fee income is currently substantially
dependent on Guarantee Insurances risk retention
levels.
Because insurance services fee income earned by PRS from
Guarantee Insurance attributable to the portion of the insurance
risk that Guarantee Insurance retains and assumes from other
insurance companies is eliminated upon consolidation, our
insurance services income, on a consolidated basis, is currently
substantially dependent on Guarantee Insurances risk
retention levels. If Guarantee Insurance increases its risk
retention levels, our insurance services fee income will
decrease, in which case we would also experience a corresponding
decrease in our losses and loss adjustment expenses and net
policy acquisition and underwriting expenses. Guarantee
Insurances risk retention levels, measured by the ratio of
net premiums earned to gross premiums earned, were 49% and 33%
for the years ended December 31, 2008 and 2007,
respectively. Guarantee Insurance entered into additional quota
share agreements effective December 31, 2008 and
January 1, 2009 which reduced our risk retention levels in
2009. Our risk retention rate for the nine months ended
September 30, 2009 was 37%. There can be no assurance as to
our overall risk retention levels in the future.
We
need to obtain additional licenses to allow us to provide
insurance services to third parties.
As part of our business plan, we expect to expand our
fee-generating insurance services by offering policy and claims
administration, general agency and general underwriting services
to other regional and national insurance companies and
self-insured employers. We also plan to explore strategic
acquisitions of policy and claims administrators, general
agencies or general underwriters. In order to expand these
services, we will need to obtain additional licenses to allow us
to provide certain of these services to third parties. However,
there can be no assurance that we will be successful in
expanding these fee-generating services or obtaining the
necessary licenses. Our failure to expand these services would
have a material adverse effect on our business plan.
17
Guarantee
Insurance has legacy commercial general liability claims,
including asbestos and environmental liability
claims.
Guarantee Insurance has legacy commercial general liability
claims, including asbestos and environmental liability claims,
arising out of the sale of general liability insurance and
participations in reinsurance assumed through underwriting
management organizations, commonly referred to as pools.
Guarantee Insurance ceased offering direct liability coverage in
1983 and ceased participations in reinsurance pools after 1982.
In addition to the general uncertainties encountered in
estimating workers compensation loss and loss adjustment
expense reserves described above, there are significant
additional uncertainties in estimating the amount of our
potential losses from asbestos and environmental claims.
Generally, reserves for asbestos and environmental claims cannot
be estimated with traditional loss reserving techniques that
rely on historical accident year development factors due to the
uncertainties surrounding asbestos and environmental liability
claims. Among the uncertainties impacting the estimation of such
losses are:
|
|
|
|
|
potentially long waiting periods between exposure and emergence
of any bodily injury or property damage;
|
|
|
|
difficulty in identifying sources of environmental or asbestos
contamination;
|
|
|
|
difficulty in properly allocating responsibility and liability
for environmental or asbestos damage;
|
|
|
|
changes in underlying laws and judicial interpretation of those
laws;
|
|
|
|
potential for an environmental or asbestos claim to involve many
insurance providers over many policy periods;
|
|
|
|
long reporting delays from insureds to insurance companies;
|
|
|
|
historical data concerning asbestos and environmental losses
being more limited than historical information on other types of
claims;
|
|
|
|
questions concerning interpretation and application of insurance
coverage; and
|
|
|
|
uncertainty regarding the number and identity of insureds with
potential asbestos or environmental exposure.
|
These factors generally render traditional actuarial methods
less effective at estimating reserves for asbestos and
environmental losses than reserves on other types of losses. As
of December 31, 2008, we had established gross reserves of
approximately $6.8 million and net reserves, net of
reinsurance recoverable on unpaid losses and loss adjustment
expenses, of approximately $3.0 million for legacy asbestos
and environmental claims, which include 22 direct claims
and Guarantee Insurances participation in two reinsurance
pools and our estimate for the impact of unreported claims. As
of December 31, 2008, one of the pools in which we are a
participant (which accounted for approximately 80% of these net
reserves at December 31, 2008) had approximately 1,600
open claims. Of these, one claim carries reserves of more than
$100,000. In this pool, Guarantee Insurance reinsured the risks
of other insurers and then ceded a portion (generally 80%) of
these reinsurance risks to other reinsurers, which we refer to
as participating pool reinsurers. Under this structure,
Guarantee Insurance remains obligated for the total liability
under each reinsurance contract to the extent any of the
participating pool reinsurers fails to pay its share. Over time,
Guarantee Insurances net liabilities under these
reinsurance contracts have increased from approximately 20% to
approximately 50% of the pooled risks due to the insolvency of
some participating pool reinsurers. In the second pool (which
accounted for approximately 20% of our net reserves for legacy
asbestos and environmental claims at December 31, 2008),
Guarantee Insurance is one of a number of participating pool
reinsurers, and Guarantee Insurances liability is based on
the percentage share of the pool obligations it reinsures. We
review our loss and loss adjustment expense reserves for
asbestos and environmental claims based on historical
experience, current developments and actuarial reports for the
pools, and this review entails a detailed analysis of our direct
and assumed exposure.
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In addition, as of December 31, 2008, we had established
gross reserves of approximately $3.6 million and net
reserves, net of reinsurance recoverable on unpaid losses and
loss adjustment expenses, of approximately $1.5 million for
legacy commercial general liability claims.
For the year ended December 31, 2008, incurred losses and
loss adjustment expenses associated with adverse development of
reserves for legacy claims were approximately $709,000. For the
year ended December 31, 2007, we recognized a reduction of
incurred losses and loss adjustment expenses attributable to
favorable development of reserves for legacy claims of
approximately $1.3 million. For the year ended
December 31, 2006, incurred losses and loss adjustment
expenses associated with adverse development of reserves for
legacy asbestos and environmental and commercial general
liability claims were approximately $516,000.
We plan to continue to monitor industry trends and our own
experience in order to determine the adequacy of our
environmental and asbestos reserves. However, there can be no
assurance that the reserves we have established are adequate. In
addition, we are reviewing whether to adopt the survival ratio
reserve methodology for our asbestos and environmental
exposures, an asbestos and environmental exposure reserving
methodology commonly utilized by our publicly held insurance
company peers. If we had adopted the survival ratio reserve
methodology as of December 31, 2008, our net reserve for
asbestos and environmental exposures would have been
approximately $5.1 million, representing an increase in net
losses and net loss adjustment expenses of approximately
$2.1 million. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Outlook Reserving Methodology
for Legacy Asbestos and Environmental Exposures.
If we
cannot sustain our relationships with independent agencies, we
may be unable to operate profitably.
We market and sell our insurance products and services primarily
through direct contracts with more than 570 independent,
non-exclusive agencies. Our products are marketed by independent
wholesale and retail agencies, some of which account for a large
portion of our revenues. Other insurance companies compete with
us for the services and allegiance of these agents. These agents
may choose to direct business to our competitors, or may direct
less desirable business to us. Our business relationships are
generally governed by agreements with agents that may be
terminated on short notice. For the nine months ended
September 30, 2009, approximately 11.2% and 6.5% of our
total new and renewal direct premiums written were derived from
various offices of Appalachian Underwriters, Inc. and the
Insurance Office of America, Inc., respectively, and no other
agent accounted for more than 5% of our new and renewal direct
premiums written. For the year ended December 31, 2008,
approximately 14% of our total new and renewal direct premiums
written were derived from the agent whose single account with us
in 2008 was Progressive Employer Services, Inc., or PES, our
then largest policyholder. The policy with PES was cancelled in
October 2008. For the year ended December 31, 2008,
approximately 9% and 7% of our total new and renewal direct
premiums written were derived from various offices of
Appalachian Underwriters, Inc. and the Insurance Office of
America, Inc., respectively, and no other agent accounted for
more than 5% of our new and renewal direct premiums written. As
a result, our continued profitability depends, in part, on the
marketing efforts of our independent agencies and on our ability
to offer workers compensation insurance that meets the
requirements and preferences of our independent agencies and
their customers. A significant decrease in business from, or the
entire loss of, our largest agency or several of our other large
agencies would have a material adverse effect on our business,
financial condition and results of operations.
We
have filed a lawsuit against our former largest customer
regarding amounts we contend are due and owing and are in
dispute. This customer is controlled by an individual who was
one of our stockholders as of December 31, 2008. We may
never receive any of the disputed amounts that we contend are
due and owing.
For the years ended December 31, 2008 and 2007,
approximately 14% and 15% of our direct premiums written,
respectively, were attributable to one customer, PES. The policy
was cancelled in October 2008 for non-payment of premium and
duplicate coverage. PES is a company controlled by Steven
Herrig, an individual who, as of December 31, 2008,
beneficially owned shares of our common stock through Westwind
Holding
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Company, LLC, or Westwind, a company controlled by
Mr. Herrig. Westwinds stock ownership represented
approximately 15.8% of our outstanding common stock as of
December 31, 2008. Most of PESs employees are located
in Florida, where workers compensation insurance premium
rates are established by the state. Premiums receivable from PES
totaled approximately $8.3 million as of September 30,
2009 and December 31, 2008. This amount is comprised of
approximately $1.1 million for billed but unpaid premium
audits for the 2006 policy year, approximately $2.0 million
for a billed but unpaid experience rate modification as
determined by NCCI, approximately $300,000 for billed but unpaid
premium installments for the 2008 policy year and approximately
$4.9 million of estimated but unbilled premium audits for
the 2007 and 2008 policy years.
We have filed a lawsuit against PES to collect these and
additional amounts we believe are due and owing. See
Business Legal Proceedings Actions
Involving Progressive Employer Services, et al. We have
the right to access certain collateral pledged by Westwind to
offset against premium and other amounts owed by PES and
Westwind to Guarantee Insurance, including funds held under
reinsurance treaties, which totaled approximately
$3.3 million as of September 30, 2009 and
December 31, 2008. Additionally, in March 2009, we
exercised a call option on all 215,263 shares of our common
stock owned by Westwind to partially satisfy the amounts we
contend are due and owing. On May 11, 2009, Westwind filed
a complaint in Florida State Court related to the exercise of
the call option, claiming breach of contract and conversion,
seeking damages of $2.2 million and other damages as
determined by the court. There can be no assurance that we will
prevail in the lawsuit or that, if we prevail, we ultimately
will be able to collect any amounts awarded. PES has contended
that we have failed to arrange for the issuance of a dividend
from Guarantee Insurance to PES from the segregated portfolio
cell controlled by it in the amount of $3.9 million and
that we have failed to provide PES with certain information.
Moreover, PES may bring claims against us alleging that our
conduct has damaged it. As the litigation continues, we and PES
may identify additional amounts in dispute. If we are unable to
recover from PES any of the $8.3 million premiums
receivable plus the $2.2 million that we have offset
against the premiums receivable through the exercise of our call
option, we would recognize a pre-tax charge in the amount of
such unrecovered amount.
If we
do not obtain reinsurance from traditional reinsurers or
segregated portfolio captives on favorable terms, our business,
financial condition and results of operations could be adversely
affected.
We purchase reinsurance to manage our risk and exposure to
losses. Reinsurance is a transaction between insurance companies
in which an original insurer, or ceding company, remits a
portion of its premiums to a reinsurer, or assuming company, as
payment for the reinsurers commitment to indemnify the
original insurer for a portion of its insurance liability. In
return, the reinsurer assumes insurance risk from the ceding
company. We participate in quota share and excess of loss
reinsurance arrangements. Our quota share reinsurers include
Swiss Reinsurance America Corporation, one of the largest
reinsurers in the United States and rated A+ by
A.M. Best Company, ULLICO Casualty Company, rated
B+ (Good) by A.M Best and Harco National Insurance
Company rated A− (Very Good) by
A.M. Best. Under our traditional business quota share
reinsurance agreement effective July 1, 2008, we ceded 50%
of all net retained liabilities arising from all traditional
business premiums written, excluding certain states, for all
losses up to $500,000 per occurrence, subject to various
restrictions and exclusions. Effective January 1, 2009,
coverage from one of the reinsurers under this quota share
agreement, which comprised 37.5% of the total 50.0% coverage,
expired, the participation of the other quota share reinsurer
was increased from 12.5% to 25.0% and previously excluded states
were added to the coverage. We entered into an additional
traditional business quota share agreement pursuant to which we
ceded 37.83% of our gross unearned premium reserves as of
December 31, 2008. Additionally, effective January 1,
2009, we entered into a traditional business quota share
agreement pursuant to which we cede 68% of all traditional
business written in Florida, Georgia and New Jersey during
calendar year 2009 for all losses up to $1.0 million per
occurrence, subject to various restrictions, exclusions and
limitations. We do not have any other quota share reinsurance
arrangements for our traditional business.
We reinsure, on a quota share basis, a substantial portion of
our underwriting risk on our alternative market business to
segregated portfolio captives in which our policyholders or
other parties have an economic interest. Generally, we cede
between 50% and 90% of the premium and losses under such
alternative market
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policies to segregated portfolio captives, up to $1 million
per occurrence subject to various restrictions and exclusions,
including an aggregate limit on the captives reinsurance
obligations. For the year ended December 31, 2008, we ceded
approximately 88% of our segregated portfolio captive
alternative market gross premiums written under quota share
reinsurance agreements with segregated portfolio captives. For
the years ended December 31, 2007 and 2006, we ceded 82%
and 87% of our segregated portfolio captive alternative market
gross premiums written under quota share reinsurance agreements
with segregated portfolio captives, respectively. On our
segregated portfolio captive alternative market business, any
losses in excess of the aggregate limit are borne by us. Thus,
if we set this aggregate limit too low, our business, financial
condition and results of operations would be adversely affected.
The excess of loss reinsurance for both our traditional and
alternative market business under our 2009/2010 reinsurance
program covers, subject to certain restrictions and exclusions,
losses that exceed $1.0 million per occurrence up to
$29.0 million per occurrence per life, with coverage of up
to an additional $20.0 million per occurrence for certain
losses involving injuries to several employees. Since Guarantee
Insurances quota share reinsurance is included within its
retention for purposes of its excess of loss reinsurance, its
effective retention for a $1.0 million claim arising out of
its traditional business covered by quota share reinsurance
would be $875,000 in all states except Georgia, Florida and New
Jersey where the effective retention is $195,000.
The excess of loss reinsurance for both our traditional and
alternative market business under our 2008/2009 reinsurance
program covers, subject to certain restrictions and exclusions,
losses that exceed $1.0 million per occurrence up to
$9.0 million per occurrence, with coverage of up to an
additional $10.0 million per occurrence for certain losses
involving injuries to several employees. However, effective
July 1, 2008, the first layer of this excess of loss
reinsurance for our traditional business ($4.0 million
excess of a $1.0 million retention) is subject to an annual
deductible of $1.0 million such that this reinsurance only
applies to losses in excess of $1.0 million per occurrence
after July 1, 2008 to the extent that such losses exceed
$1.0 million in the aggregate. See
Business Reinsurance.
The availability, amount and cost of reinsurance are subject to
market conditions and our experience with insured losses. There
can be no assurance that our reinsurance agreements can be
renewed or replaced prior to expiration upon terms as
satisfactory to us as those currently in effect. If we are
unable to renew or replace any of our quota share or excess of
loss reinsurance agreements, our net liability on individual
risks would increase, we would have greater exposure to
catastrophic losses, our underwriting results would be subject
to greater variability, and our underwriting capacity would be
reduced. Any reduction or other changes in our reinsurance
arrangements could materially adversely affect our business,
financial condition and results of operations.
If we
are not able to recover amounts due from our reinsurers, our
business, financial condition and results of operations would be
adversely affected.
Reinsurance does not discharge us of our obligations under our
insurance policies. We remain liable to our policyholders even
if we are unable to make recoveries that we believe we are
entitled to receive under our reinsurance contracts. As a
result, we are subject to credit risk with respect to our
reinsurers. Losses are recovered from our reinsurers as claims
are paid. With respect to long-term workers compensation
claims, the creditworthiness of our reinsurers may change before
we recover amounts to which we are entitled. If a reinsurer is
unable to meet any of its obligations to us, we would be
responsible for all claims and claim settlement expenses for
which we would have otherwise received payment from the
reinsurer. For example, we have experienced an increase in
certain liabilities relating to some of our legacy exposures as
a result of the insolvency of some participating pool
reinsurers. See Guarantee Insurance has legacy
commercial general liability claims, including asbestos and
environmental liability claims.
As of December 31, 2008, we had $42.1 million of gross
exposures to reinsurers, comprised of reinsurance recoverables
on paid and unpaid losses and loss adjustment expenses.
Furthermore, as of December 31, 2008, we had
$26.1 million of net exposure to reinsurers
$23.5 million from reinsurers licensed in Florida, which we
refer to as authorized reinsurers, and $2.6 million from
reinsurers not licensed in
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Florida, which we refer to as unauthorized reinsurers. If we are
unable to collect amounts recoverable from our reinsurers, our
business, financial condition and results of operations would be
adversely affected.
We are
subject to extensive state regulation; regulatory and
legislative changes may adversely impact our
business.
We are subject to extensive regulation by the Florida OIR, and
the insurance regulatory agencies of other states in which we
are licensed and, to a lesser extent, federal regulation. State
agencies have broad regulatory powers designed primarily to
protect policyholders and their employees, and not our
stockholders. Regulations vary from state to state, but
typically address:
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standards of solvency, including risk-based capital measurements;
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restrictions on the nature, quality and concentration of
investments;
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restrictions on the terms of insurance policies;
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restrictions on the way premium rates are established and the
premium rates are charged;
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procedures for adjusting claims, which can affect the ultimate
amount for which a claim is settled;
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standards for appointing general agencies;
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limitations on transactions with affiliates;
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restrictions on mergers and acquisitions;
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medical privacy standards;
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restrictions on the ability of insurance companies to pay
dividends;
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establishment of reserves for unearned premiums, losses and
other purposes;
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licensing requirements and approvals that affect our ability to
do business;
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certain required methods of accounting; and
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potential assessments for state guaranty funds, second injury
funds and other mandatory pooling arrangements.
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We may be unable to comply fully with the wide variety of
applicable laws and regulations that are frequently undergoing
revision. In addition, we follow practices based on our
interpretations of laws and regulations that we believe are
generally followed by the insurance industry. These practices
may be different from interpretations of insurance regulatory
agencies. As a result, insurance regulatory agencies could
preclude us from conducting some or all of our activities or
otherwise penalize or fine us. Moreover, in order to enforce
applicable laws and regulations or to protect policyholders,
insurance regulatory agencies have relatively broad discretion
to impose a variety of sanctions, including examinations,
corrective orders, suspension, revocation or denial of licenses
and the takeover of insurance companies. As a result, if we fail
to comply with applicable laws or regulations, insurance
regulatory agencies could preclude us from conducting some or
all of our activities or otherwise penalize us. The extensive
regulation of our business may increase the cost of our
insurance and may limit our ability to obtain premium rate
increases or to take other actions to increase our
profitability. For example, as a result of a financial
examination by the Florida OIR in 2006 for the year ended
December 31, 2004, Guarantee Insurance was fined $40,000
for various violations including failure to maintain a minimum
statutory policyholders surplus. Also, as a result of
writing premiums in South Carolina in an inadvertent breach of
our agreement with the South Carolina Department of Insurance
not to write any new business in South Carolina without the
Departments consent, we may be required to pay a fine or
face other disciplinary action.
Guarantee Insurance is subject to periodic examinations by state
insurance departments in the states in which it is licensed. In
March 2008, the Florida OIR completed its financial examination
of Guarantee Insurance as of and for the year ended
December 31, 2006. In its examination report, the Florida
OIR made a
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number of findings relating to Guarantee Insurances
failure to comply with corrective comments made in earlier
examination reports by the Florida OIR for the year ended
December 31, 2004 and by the South Carolina Department of
Insurance for the year ended December 31, 2005. The Florida
OIR also made a number of proposed adjustments to the statutory
financial statements of Guarantee Insurance for the year ended
December 31, 2006, attributable to, among other things,
corrections of accounting errors and an upward adjustment in
Guarantee Insurances reserves for unpaid losses and loss
adjustment expenses. These proposed adjustments resulted in a
$119,000 net decrease in Guarantee Insurances
reported policyholders surplus but did not cause Guarantee
Insurance to be in violation of a consent order issued by the
Florida OIR in 2006 in connection with the redomestication of
Guarantee Insurance from South Carolina to Florida that requires
Guarantee Insurance to maintain a minimum statutory
policyholders surplus of the greater of $9.0 million or 10%
of total liabilities excluding taxes, expenses and other
obligations due or accrued, and Guarantee Insurance was not
required to file an amended 2006 annual statement with the
Florida OIR reflecting these adjustments.
In connection with the Florida OIR examination report for the
year ended December 31, 2006, the Florida OIR issued a
consent order requiring Guarantee Insurance to pay a penalty of
$50,000, pay $25,000 to cover administrative costs and undergo
an examination prior to June 1, 2008 to verify that it has
addressed all of the matters raised in the examination report.
In addition, the consent order required Guarantee Insurance to
hold annual stockholder meetings, maintain complete and accurate
minutes of all stockholder and board of director meetings,
implement additional controls and review procedures for its
reinsurance accounting, perform accurate and timely
reconciliations for certain accounts, establish additional
procedures in accordance with Florida OIR information technology
specialist recommendations, correctly report all annual
statement amounts, continue to maintain adequate loss and loss
adjustment reserves and continue to maintain a minimum statutory
policyholders surplus of the greater of $9.0 million or 10%
of total liabilities excluding taxes, expenses and other
obligations due or accrued. The consent order required Guarantee
Insurance to provide documentation of compliance with these
requirements. In 2008, the Florida OIR engaged a consultant to
perform a target examination of Guarantee Insurance to assess
its compliance with these requirements. In August 2008, the
consultants target examination fieldwork was completed,
and the Florida OIR issued its report on the target examination,
concluding that, with certain immaterial exceptions, Guarantee
Insurance was in compliance with all of the findings from the
examination report for the year ended December 31, 2006.
State laws require insurance companies to maintain minimum
surplus balances and place limits on the amount of insurance a
company may write based on the amount of that companys
surplus. These limitations may restrict the rate at which our
insurance operations can grow.
In May 2009 in connection with a Florida OIR targeted
examination, we advised the Florida OIR that all intercompany
receivables would be settled within 30 days. As of
September 30, 2009, Guarantee Insurance had approximately
$2.1 million in intercompany receivables that have been
outstanding for more than 30 days, and approximately
$975,000 that had been outstanding for more than 90 days
(although subsequent to September 30, 2009, these balances
were repaid). Because some of the intercompany receivables were
outstanding for more than 30 days, the Florida OIR may
object to these transactions or take other regulatory action
against us. In addition, under statutory accounting rules,
Guarantee Insurance is required to record the amount of any
intercompany receivables that have been outstanding for more
than 90 days as a nonadmitted asset. Therefore, to the
extent that any intercompany receivables have been outstanding
for more than 90 days, Guarantee Insurance will be required
to nonadmit the amount of such receivables, which will result in
a corresponding decrease in the surplus of Guarantee Insurance.
If the decrease in Guarantee Insurances surplus were to
cause Guarantee Insurance to be out of compliance with certain
ratios or minimum surplus levels as required by the Florida OIR,
we could face possible regulatory action and would be required
to obtain additional reinsurance, reduce our insurance writings
or add capital to Guarantee Insurance.
State laws also require insurance companies to establish
reserves for payments of policyholder liabilities and impose
restrictions on the kinds of assets in which insurance companies
may invest. These restrictions may require Guarantee Insurance
to invest in assets more conservatively than it would if we were
not subject to state law restrictions and may prevent it from
obtaining as high a return on its assets as it might otherwise
be able to realize.
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State regulation of insurance company financial transactions and
financial condition are based on statutory accounting
principles, or SAP. State insurance regulators closely monitor
the financial condition of insurance companies reflected in SAP
financial statements and can impose significant operating
restrictions on an insurance company that becomes financially
impaired. Regulators generally have the power to impose
restrictions or conditions on the following kinds of activities
of a financially impaired insurance company: transfer or
disposition of assets, withdrawal of funds from bank accounts,
extension of credit or advancement of loans and investment of
funds.
Many states have laws and regulations that limit an
insurers ability to withdraw from a particular market. For
example, states may limit an insurers ability to cancel or
not renew policies. Furthermore, certain states prohibit an
insurer from withdrawing from one or more lines of business in
the state, except pursuant to a plan that is approved by the
state insurance department. The state insurance department may
disapprove a plan that may lead to market disruption. Laws and
regulations that limit cancellation and non-renewal and that
subject program withdrawals to prior approval requirements may
restrict our ability to exit unprofitable markets.
Licensing laws and regulations vary from state to state. In all
states, the applicable licensing laws and regulations are
subject to amendment or interpretation by regulatory
authorities. Generally such authorities are vested with
relatively broad and general discretion as to the granting,
renewing and revoking of licenses and approvals. Licenses may be
denied or revoked for various reasons, including the violation
of regulations and conviction of crimes. Possible sanctions
which may be imposed by regulatory authorities include the
suspension of individual employees, limitations on engaging in a
particular business for specified periods of time, revocation of
licenses, censures, redress to clients and fines.
In some instances, we follow practices based on interpretations
of laws and regulations generally followed by the industry,
which may prove to be different from the interpretations of
regulatory authorities.
We
currently are not rated by A.M. Best or any other insurance
rating agency, and if we do not receive a favorable rating from
A.M. Best after the offering, or if we do obtain such a
rating and then fail to maintain it, our business, financial
condition and results of operations may be adversely
affected.
Rating agencies rate insurance companies based on their
financial strength and their ability to pay claims, factors that
are relevant to agents and policyholders. We have never been
rated by any nationally recognized independent rating agency.
The ratings assigned by nationally recognized independent rating
agencies, particularly A.M. Best, may become material to
our ability to maintain and expand our business. Ratings from
A.M. Best and other rating agencies are used by some
insurance buyers, agents and brokers as an indicator of
financial strength and security.
We have been informed by A.M. Best that after completion of
this offering, we may expect Guarantee Insurance to receive a
financial strength rating of A− (Excellent),
which is the fourth highest of fifteen A.M. Best rating
levels. This indicative rating assignment is subject to the
capitalization of Guarantee Insurance (and PF&C if we
acquire it) at a level that A.M. Best requires to support
the assignment of the A− rating through 2012 .
We expect that the contribution of $155 million of the net
proceeds of this offering to Guarantee Insurance (and PF&C
if we acquire it) on or prior to March 4, 2010 will be
sufficient to satisfy this requirement. If we acquire PF&C
as described elsewhere in this prospectus, this rating
assignment is also conditioned upon regulatory approval of a
pooling agreement between Guarantee Insurance and PF&C.
Pooling is a risk-sharing arrangement under which premiums and
losses are shared between the pool members. We expect to make
the contemplated capital contributions when we purchase
PF&C or conclude not to proceed with that transaction, in
either event prior to March 4, 2010. The prospective rating
indication we received from A.M. Best is not a guarantee of
final rating outcome. In addition, in order to maintain this
rating, Guarantee Insurance (as well as PF&C if it is
acquired) must maintain capitalization at a level that
A.M. Best requires to support the assignment of the
A− rating, and any material negative
developments in our operations, including in terms of
management, earnings, capitalization or risk profile could
result in negative rating pressure and possibly a rating
downgrade. While we have expanded our business profitably
without an A.M. Best rating and we believe that we can
continue to do so with the net proceeds from this offering, we
believe that an A− rating from A.M. Best
would increase our ability to market to large
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employers and create new opportunities for our products and
services in rating sensitive markets. A.M. Bests
ratings reflect its opinion of an insurance companys
financial strength and ability to meet ongoing obligations to
policyholders and are not intended for the protection of
investors.
A.M. Best ratings tend to be more important to our
alternative market customers than our traditional business
customers. A favorable A.M. Best rating would increase our
ability to sell our alternative market products to larger
employers. We believe that a favorable rating would also open
significant new markets for our products and services. Our
failure to obtain or maintain a favorable rating may have a
material adverse affect on our business plan.
We expect to apply to A.M. Best for a rating as soon as
practicable. We may not be given a favorable rating or if we are
given a favorable rating such rating may be downgraded, which
may adversely affect our ability to obtain business and may
adversely affect the price we can charge for the insurance
policies we write. The ratings of A.M. Best are subject to
periodic review using, among other things, proprietary capital
adequacy models, and are subject to revision or withdrawal at
any time. Other companies in our industry that have been rated
and have had their rating downgraded have experienced negative
effects. A.M. Best ratings are directed toward the concerns
of policyholders and insurance agencies and are not intended for
the protection of investors or as a recommendation to buy, hold
or sell securities. Although we are not currently rated by
A.M. Best, if we obtain an A.M. Best rating after the
offering, our competitive position relative to other companies
will be determined in part by our A.M. Best rating.
If we
are unable to realize our investment objectives, our business,
financial condition and results of operations may be adversely
affected.
Investment income is an important component of our net income.
As of September 30, 2009 and December 31, 2008, our
investment portfolio, including cash and cash equivalents, had a
carrying value of $54.5 million and $63.4 million,
respectively. For the nine months ended September 30, 2009
and the year ended December 31, 2008, we had net investment
income of $1.4 million and $2.0 million, respectively.
Our investment portfolio is managed by Gen Re New
England Asset Management (a subsidiary of Berkshire Hathaway,
Inc.), an independent asset manager, pursuant to investment
guidelines approved by Guarantee Insurances board of
directors. Although these guidelines stress diversification and
capital preservation, our investments are subject to a variety
of risks, including risks related to general economic
conditions, interest rate fluctuations and market volatility.
For example, in 2008 and 2007, credit markets were significantly
impacted by
sub-prime
mortgage losses, increased mortgage defaults and worldwide
market dislocations. Furthermore, financial markets experienced
substantial and unprecedented volatility as a result of further
dislocations in the credit markets, including the bankruptcy of
Lehman Brothers Holdings Inc. In 2008, we recognized an
other-than-temporary-impairment
charge of approximately $350,000 related to investments in
certain bonds issued by Lehman Brothers Holdings, Inc., which
filed a voluntary petition for relief under Chapter 11 of
Title 11 of the United States Code in the United States
Bankruptcy Court, and approximately $875,000 related to
investments in certain common stocks purchased in 2005.
In addition, our investment portfolio includes asset-backed and
mortgage-backed securities. As of September 30, 2009 and
December 31, 2008, asset-backed and mortgage-backed
securities constituted approximately 25% and 26% of our invested
assets, respectively, including cash and cash equivalents. As
with other fixed income investments, the fair market value of
these securities fluctuates depending on market and other
general economic conditions and the interest rate environment.
Interest rates are highly sensitive to many factors, including
governmental monetary policies and domestic and international
economic and political conditions. Changes in interest rates
could have an adverse effect on the value of our investment
portfolio and future investment income. For example, changes in
interest rates can expose us to prepayment risks on asset-backed
and mortgage-backed securities included in our investment
portfolio. When interest rates fall, asset-backed and
mortgage-backed securities are prepaid more quickly than
expected and the holder must reinvest the proceeds at lower
interest rates. In periods of increasing interest rates,
asset-backed and mortgage-backed securities are prepaid more
slowly, which may require us to receive interest payments that
are below the interest rates then prevailing for longer than
expected.
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We also seek to manage our investment portfolio such that the
security maturities provide adequate liquidity relative to our
expected claims payout pattern. However, the duration of our
insurance liabilities may differ from our expectations. If we
need to liquidate invested assets prematurely in order to
satisfy our claim obligations and the fair value of such assets
is below our original cost, we may recognize losses on
investments, which could have a material adverse effect on our
business, financial condition and results of operations.
Additionally, our fixed maturity securities were reclassified as
available for sale at December 31, 2008 and, accordingly,
are carried at market value. Decreases in the value of our fixed
securities may have a material adverse effect on our business,
financial condition and results of operations.
General economic conditions may be adversely affected by a
variety of factors, including U.S. involvement in
hostilities with other countries, large-scale acts of terrorism
and the threat of hostilities or terrorist acts. These and other
factors affect the capital markets and, consequently, the value
of our investment portfolio and our investment income. Any
significant decline in our investment income would adversely
affect our business, financial condition and results of
operations.
We are
more vulnerable to negative developments in the workers
compensation insurance industry than companies that also write
other lines of insurance.
Our business involves providing insurance services related to
underwriting, workers compensation insurance policies, and
we have no current plans to focus our efforts on offering other
lines of insurance. As a result, negative developments in the
economic, competitive or regulatory conditions affecting the
workers compensation insurance industry could have a
material adverse effect on our business, financial condition and
results of operations. Negative developments in the
workers compensation insurance industry could have a
greater effect on us than on more diversified insurance
companies that also sell other lines of insurance.
We
derive a significant portion of our insurance services income
from our BPO client.
For the nine months ended September 30, 2009, approximately
35% of our insurance services income was derived from our BPO
client. Our BPO client may terminate its service arrangement
with us at anytime without cause, upon 180 days
notice, so there is no assurance that our arrangement with our
BPO client will continue. The loss of our BPO client would, and
the loss of any additional BPO client that we may develop may
have a material adverse effect on our business, financial
condition and results of operations.
New
agreements involving fronting arrangements or distribution and
insurance services relationships with other carriers or
acquisitions could result in operating difficulties and other
harmful consequences.
In 2009, we started producing business and performing insurance
services for our BPO client and entered into BPO relationships
with two other companies. We are seeking to enter into
additional BPO relationships. Developing the technology
infrastructure necessary to service or facilitate new
relationships will require substantial time and effort on our
part, and the integration and management of these relationships
may divert management time and focus from operating our current
business.
We
have limited experience in acquiring other companies, and we may
have difficulty integrating the operations of companies that we
may acquire and may incur substantial costs in connection
therewith.
Our business plan includes growing our revenues through the
acquisition of other insurance services operations and insurance
companies. However, our experience acquiring companies has been
limited to our acquisition of Guarantee Insurance and our
proposed acquisition of PF&C. See Summary
Recent Developments Acquisition of Shell Insurance
Company. We have evaluated, and expect to continue to
evaluate, a wide array of potential strategic transactions. From
time to time, we may engage in discussions regarding potential
acquisitions. The costs and benefits of future acquisitions are
uncertain. Any of these transactions could be material to our
business, financial condition and results of operations. In
addition, the
26
process of integrating the operations of an acquired company may
create unforeseen operating difficulties and expenditures and is
risky. The areas where we may face risks include:
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the need to implement or remediate controls, procedures and
policies appropriate for a public company at companies that,
prior to the acquisition, lacked these controls, procedures and
policies;
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diversion of management time and focus from operating our
business to acquisition integration challenges;
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cultural challenges associated with integrating employees from
the acquired company into our organization;
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retaining employees from the businesses we acquire; and
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the need to integrate each companys accounting, management
information, human resource and other administrative systems to
permit effective management.
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We
operate in a highly competitive industry, and others may have
greater financial resources to compete
effectively.
The market for workers compensation insurance products and
risk management services is highly competitive. Competition in
our business is based on many factors, including pricing (with
respect to insurance products, either through premiums charged
or policyholder dividends), services provided, underwriting
practices, financial ratings assigned by independent rating
agencies, capitalization levels, quality of care management
services, speed of claims payments, reputation, perceived
financial strength, effective loss prevention, ability to reduce
claims expenses and general experience. In some cases, our
competitors offer lower priced products and services than we do.
If our competitors offer more competitive prices, payment plans,
services or commissions to independent agencies, we could lose
market share or have to reduce our prices in order to maintain
market share, which would adversely affect our profitability.
Our competitors are insurance companies, self-insurance funds,
state insurance pools and workers compensation insurance
service providers, many of which are significantly larger and
possess considerably greater financial, marketing, management
and other resources than we do. Consequently, they can offer a
broader range of products, provide their services nationwide and
capitalize on lower expenses to offer more competitive pricing.
With respect to our insurance services business, we believe
PRSs principal competitors in the nurse case management
and cost containment services market are CorVel Corporation,
GENEX Services, Inc. and various other smaller providers. In the
general agency market, we believe we compete with numerous
national wholesale agents and brokers.
With respect to our insurance business, we believe our principal
competitors are American International Group, Inc., Liberty
Mutual Insurance Company and Hartford Insurance Company, as well
as smaller regional carriers. Many of our competitors are
substantially larger and have substantially greater market share
and capital resources than we have.
State insurance regulations require maintenance of minimum
levels of surplus and of ratios of net premiums written to
surplus. Accordingly, competitors with more surplus than us have
the potential to expand in our markets more quickly and to a
greater extent than we can. Additionally, greater financial
resources permit a carrier to gain market share through more
competitive pricing, even if that pricing results in reduced
underwriting margins or an underwriting loss. Many of our
competitors are multi-line carriers that can price the
workers compensation insurance that they offer at a loss
in order to obtain other lines of business at a profit. If we
are unable to compete effectively, our business, financial
condition and results of operations could be materially
adversely affected.
27
An
inability to effectively manage the growth of our operations
could make it difficult for us to compete and affect our ability
to operate profitably.
Our continuing growth strategy includes expanding in our
existing markets, acquiring insurance services companies,
entering new geographic markets and further developing our
agency relationships. Our growth strategy is subject to various
risks, including risks associated with our ability to:
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identify profitable new geographic markets for entry;
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attract and retain qualified personnel for expanded operations;
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identify potential acquisition targets and successfully acquire
them;
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expand existing and develop new agency relationships;
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identify, recruit and integrate new independent
agencies; and
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augment our internal monitoring and control systems as we expand
our business.
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The
effects of emerging claim and coverage issues on our business
are uncertain.
As industry practices and legal, judicial, social and other
environmental conditions change, unexpected and unintended
issues related to claims and coverage may emerge. These issues
may adversely affect our business by either extending coverage
beyond our underwriting intent or by increasing the number or
size of claims. In some instances, these changes may not become
apparent until after we have issued insurance policies that are
affected by the changes. As a result, the full extent of our
liability under an insurance policy may not be known until many
years after the policy is issued. For example, medical costs
associated with permanent and partial disabilities may increase
more rapidly or be higher than we currently expect. Changes of
this nature may expose us to higher claims than we anticipated
when we wrote the underlying policy. As of December 31,
2008, approximately 0.4%, 1%, 2% and 6% of our total reported
claims for accident years 2004, 2005, 2006 and 2007,
respectively, remained open.
As more fully described under Business Legal
Proceedings, we are involved in certain litigation
matters. Litigation is subject to inherent uncertainties, and if
there were an outcome unfavorable to us, our business, financial
condition and results of operations could be materially
adversely affected.
Our
business is dependent on the efforts of our senior management
and other key employees because of their industry expertise,
knowledge of our markets and relationships with the independent
agencies that sell our insurance.
We believe our success will depend in substantial part upon our
ability to attract and retain qualified executive officers,
experienced underwriting talent and other skilled employees who
are knowledgeable about our business. We rely substantially on
the services of our executive management team and other key
employees. The key executive officers and employees upon whom we
rely are Steven M. Mariano, Chairman of the Board, President and
Chief Executive Officer; Michael W. Grandstaff, Senior Vice
President and Chief Financial Officer; Charles K. Schuver,
Senior Vice President and Chief Underwriting Officer of
Guarantee Insurance; Timothy J. Ermatinger, Chief Executive
Officer of PRS Group, Inc.; Richard G. Turner, Senior Vice
President and Executive Vice President of Alternative Markets
and Theodore G. Bryant, Senior Vice President, Counsel and
Secretary. We entered into employment agreements with each of
these officers in 2008. Although we are not aware of any planned
departures or retirements, if we were to lose the services of
members of our senior management team, our business, financial
condition and results of operations could be adversely affected.
We do not currently maintain key man life insurance policies
with respect to our employees.
Our ability to attract and retain new key employees may be
adversely impacted by the limited number of shares available for
future grants ([ ] shares)
under our 2010 Stock Plan after option grants are made at the
time this offering is completed. In addition, our compensation
for our independent directors includes an equity component,
which will utilize a portion of available shares. While we would
not expect new grants to be made to current officers in the near
term, we may need to offer equity compensation as a component of
28
compensation for hiring new members of senior management as we
grow. In the absence of our ability to do this, we may need to
pay higher levels of cash compensation in the near term to
attract desired candidates and may be unable to hire some
candidates.
Our
status as an insurance holding company with no direct operations
could adversely affect our ability to pay dividends in the
future.
Patriot Risk Management is a holding company that transacts
business through its operating subsidiaries. Patriot Risk
Managements primary assets are the capital stock of these
operating subsidiaries. Thus, the ability of Patriot Risk
Management to pay dividends to our stockholders depends upon the
surplus and earnings of our subsidiaries and their ability to
pay dividends to Patriot Risk Management. Payment of dividends
by our insurance subsidiary is restricted by state insurance
laws, including laws establishing minimum solvency and liquidity
thresholds, and could be subject to contractual restrictions in
the future, including those imposed by indebtedness we may incur
in the future. See Business
Regulation Dividend Limitations. As a result,
Patriot Risk Management may not be able to receive dividends
from Guarantee Insurance, its insurance company subsidiary or
may not receive dividends in amounts necessary to pay dividends
on our capital stock.
Neither PRS nor PUI is statutorily restricted from paying
dividends to Patriot Risk Management, although our credit
facilities prohibit us and our operating subsidiaries from
paying any dividends on our and their respective capital stock
without the consent of our lenders. In addition, future debt
agreements may contain certain prohibitions or limitations on
the payment of dividends. Because Guarantee Insurance is, and if
we acquire it, PF&C will be, regulated by the Florida OIR,
both companies will be subject to significant regulatory
restrictions limiting their ability to declare and pay dividends.
At the time we acquired Guarantee Insurance, it had a large
statutory unassigned deficit. See Note 13 to our audited
consolidated financial statements as of December 31, 2008
and for the year then ended, which financial statements are
included elsewhere in this prospectus (our Consolidated
Financial Statements). As of September 30, 2009,
Guarantee Insurances statutory unassigned deficit was
$95.5 million. Under Florida law, insurance companies may
only pay dividends out of available and accumulated surplus
funds derived from realized net operating profits on their
business and net realized capital gains, except under limited
circumstances with the prior approval of the Florida OIR.
Moreover, Florida law has several different tests that limit the
payment of dividends, without the prior approval of the Florida
OIR, to an amount generally equal to 10% of the surplus or gain
from operations, with additional restrictions. However, pursuant
to a consent order issued by the Florida OIR on
December 29, 2006 in connection with the redomestication of
Guarantee Insurance from South Carolina to Florida, Guarantee
Insurance is prohibited from paying dividends, without approval
of the Florida OIR, until December 29, 2009. Therefore, it
is unlikely that Guarantee Insurance will be able to pay
dividends for the foreseeable future without prior approval of
the Florida OIR. Currently, we do not intend to pay cash
dividends on our common stock.
Additional
capital that we may require in the future may not be available
to us or may be available to us only on unfavorable
terms.
Our future capital requirements will depend on many factors,
including state regulatory requirements, the financial stability
of our reinsurers, future acquisitions and our ability to write
new business and establish premium rates sufficient to cover our
estimated claims. We may need to raise additional capital or
curtail our growth if the portion of our net proceeds of this
offering to be contributed to the capital of our insurance
subsidiaries is insufficient to support future operating
requirements or cover claims.
If we need to raise additional capital, equity or debt financing
may not be available to us or may be available only on terms
that are not favorable to us. In the case of equity financings,
dilution to our stockholders could result and the securities
sold may have rights, preferences and privileges senior to the
common stock sold in this offering. In addition, under certain
circumstances, we may sell our common stock, or securities
convertible or exchangeable into shares of our common stock, at
a price per share less than the market value of our common
stock. In the case of debt financings, we may be subject to
unfavorable interest
29
rates and covenants that restrict our ability to operate our
business freely. We may need to finance our expansion or future
acquisitions with borrowings under one or more financing
facilities. As of the date of this prospectus, we do not have
any commitment for any such facility. If we cannot obtain
financing on commercially reasonable terms, we may be required
to modify our expansion plans, delay acquisitions or incur
higher than anticipated financing costs, any of which could have
an adverse impact on the execution of our growth strategy and
business. If we cannot obtain adequate capital on favorable
terms or at all, we may be unable to support future growth or
operating requirements, and, as a result, our business,
financial condition and results of operations could be adversely
affected.
Assessments
for state guaranty funds and second injury funds and other
mandatory pooling arrangements may reduce our
profitability.
Most states require insurance companies licensed to do business
in their state to participate in guaranty funds, which require
the insurance companies to bear a portion of the unfunded
obligations of impaired, insolvent or failed insurance
companies. These obligations are funded by assessments, which
are expected to continue in the future. State guaranty
associations levy assessments, up to prescribed limits, on all
member insurance companies in the state based on their
proportionate share of premiums written in the lines of business
in which the impaired, insolvent or failed insurance companies
are engaged. See Business Regulation.
Accordingly, the assessments levied on Guarantee Insurance may
increase as it increases its premiums written. Some states also
have laws that establish second injury funds to reimburse
insurers and employers for claims paid to injured employees for
aggravation of prior conditions or injuries. These funds are
supported by assessments based on premiums or paid losses. For
the years ended December 31, 2008 and 2007, gross expenses
incurred in connection with assessments for state guaranty funds
and second injury funds were $4.1 million and
$3.4 million, respectively. Our alternative market
customers reimburse us for their pro rata share of any such
amounts that we are assessed with respect to premiums written
for such customers.
In addition, as a condition to conducting business in some
states, insurance companies are required to participate in
residual market programs to provide insurance to those employers
who cannot procure coverage from an insurance carrier on a
negotiated basis. Insurance companies generally can fulfill
their residual market obligations by, among other things,
participating in a reinsurance pool where the results of all
policies provided through the pool are shared by the
participating insurance companies. Although we price our
insurance to account for obligations we may have under these
pooling arrangements, we may not be successful in estimating our
liability for these obligations. It is possible that losses from
our participation in these pools may exceed the premiums we
receive from the pools. Accordingly, mandatory pooling
arrangements may cause a decrease in our profits. Guarantee
Insurance currently participates in the NCCI national
workers compensation insurance pool. Net underwriting
income (losses) associated with this mandatory pooling
arrangement for the years ended December 31, 2008 and 2007
were approximately ($98,000) and $159,000, respectively. As we
write policies in new states that have mandatory pooling
arrangements, we will be required to participate in additional
pooling arrangements. Furthermore, the impairment, insolvency or
failure of other insurance companies in these pooling
arrangements would likely increase our liability under these
pooling arrangements. The effect of assessments or changes in
assessments could reduce our profitability in any given period
or limit our ability to grow our business.
The
outcome of insurance industry investigations and regulatory
proposals could adversely affect our business, financial
condition and results of operations.
The United States insurance industry has in recent years become
the focus of investigations and increased scrutiny by regulatory
and law enforcement authorities, as well as class action
attorneys and the general public, relating to allegations of
improper special payments, price-fixing, bid-rigging, improper
accounting practices and other alleged misconduct, including
payments made by insurers to brokers and the practices
surrounding the placement of insurance business. Formal and
informal inquiries have been made of a large segment of the
industry, and a number of companies in the insurance industry
have received or may receive subpoenas, requests for information
from regulatory agencies or other inquiries relating to these
and similar matters. For example, on September 28, 2007, we
received a Subpoena from the New Jersey Office of the
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Insurance Fraud Prosecutor regarding insurance policies issued
to one of our policyholders. We have responded to the subpoena
and expect no further action. These efforts have resulted and
are expected to result in both enforcement actions and proposals
for new state and federal regulation. Some states have adopted
new disclosure requirements in connection with the placement of
insurance business. It is difficult to predict the outcome of
these investigations, whether they will expand into other areas
not yet contemplated, whether activities and practices currently
thought to be lawful will be characterized as unlawful, what
form any additional laws or regulations will have when finally
adopted and the impact, if any, of increased regulatory and law
enforcement action and litigation on our business, financial
condition and results of operations.
Recently, Congress has examined a possible repeal of the
McCarran-Ferguson Act, which exempts the insurance industry from
federal anti-trust laws. There can be no assurance that the
McCarran-Ferguson Act will not be repealed, or that any such
repeal, if enacted, would not have a material adverse effect on
our business, financial condition and results of operations.
We may
have exposure to losses from terrorism for which we are required
by law to provide coverage.
When writing workers compensation insurance policies, we
are required by law to provide workers compensation
benefits for losses arising from acts of terrorism. The impact
of any terrorist act is unpredictable, and the ultimate impact
on our business would depend upon the nature, extent, location
and timing of such an act as well as the availability of any
reinsurance that we purchase for terrorism losses and of any
assistance for the payment of such losses provided by the
Federal government pursuant to the Terrorism Risk Insurance Act
of 2002, or TRIA.
TRIA provides co-assistance to commercial property and casualty
insurers for payment of losses from an act of terrorism which is
declared by the U.S. Secretary of Treasury to be a
certified act of terrorism. Assistance under the
TRIA program is subject to other limitations and restrictions.
Such assistance is only available for losses from a certified
act of terrorism if aggregate insurance industry losses from the
act exceed $100 million. As originally enacted, TRIA only
applied to acts of terrorism committed on behalf of foreign
persons or interests. However, legislation extending the program
through December 31, 2014 removed this restriction so that
TRIA now applies to both domestic and foreign terrorism
occurring in the U.S. Under the TRIA program, the federal
government covers 85% of the losses from covered certified acts
of terrorism in excess of a deductible amount. This deductible
is calculated as 20% of an affiliated insurance groups
prior year premiums on commercial lines policies (with certain
exceptions, such as commercial auto insurance policies) covering
risks in the United States. We estimate that our deductible
would be approximately $23.5 million for 2009. Because TRIA
does not cover 100% of our exposure to terrorism losses and
there are substantial limitations and restrictions on the
protection against terrorism losses provided to us by our
reinsurance, the risk of severe losses to us from acts of
terrorism remains. Accordingly, events constituting acts of
terrorism may not be covered by, or may exceed the capacity of,
our reinsurance and TRIA protections and could adversely affect
our business, financial condition and results of operations.
The federal terrorism risk assistance provided by TRIA will
expire at the end of 2014 and may not be renewed. Any renewal
may be on substantially less favorable terms.
Risks
Related to Our Common Stock and This Offering
There
has been no prior public market for our common stock, and,
therefore, you cannot be certain that an active trading market
or a specific share price will be established.
Currently, there is no public trading market for our common
stock, and it is possible that an active trading market will not
develop upon completion of this offering or that the market
price of our common stock will decline below the initial public
offering price. We have applied to have our shares of common
stock approved for listing on the New York Stock Exchange under
the symbol PMG. The initial public offering price
per share will be determined by negotiation among us and the
underwriters and may not be indicative of the market price of
our common stock after completion of this offering.
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The
trading price of our common stock may decline after this
offering.
The trading price of our common stock may decline after this
offering for many reasons, some of which are beyond our control,
including, among others:
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our results of operations;
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changes in expectations as to our future results of operations,
including financial estimates and projections by securities
analysts and investors;
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results of operations that vary from those expected by
securities analysts and investors;
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developments in the healthcare or insurance industry;
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changes in laws and regulations;
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announcements of claims against us by third parties;
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future sales of our common stock;
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rising levels of claims costs, including medical and
prescription drug costs, that we cannot anticipate at the time
we establish our premium rates;
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fluctuations in interest rates, inflationary pressures and other
changes in the investment environment that affect returns on
invested assets;
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changes in the frequency or severity of claims;
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the financial stability of our reinsurers and changes in the
level of reinsurance capacity and our capital and surplus;
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new types of claims and new or changing judicial interpretations
relating to the scope of liabilities of insurance companies;
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volatile and unpredictable developments, including man-made,
weather-related and other natural catastrophes or terrorist
attacks; and
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price competition.
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In addition, the stock market in general has experienced
significant volatility that often has been unrelated to the
operating performance of companies whose shares are traded.
These market fluctuations could adversely affect the trading
price of our common stock, regardless of our actual operating
performance. As a result, the trading price of our common stock
may be less than the initial public offering price, and you may
not be able to sell your shares at or above the price you pay to
purchase them.
Public
investors will suffer immediate and substantial dilution as a
result of this offering.
The initial public offering price per share is significantly
higher than our net tangible book value per share of our common
stock. Accordingly, if you purchase shares in this offering, you
will suffer immediate and substantial dilution of your
investment. Based upon the issuance and sale of
[ ] shares
of our common stock at an assumed initial offering price of
$[ ] per share, which is the
midpoint of the price range set forth on the cover page of this
prospectus, you will incur immediate dilution of approximately
$[ ] in the net tangible book value
per share if you purchase common stock in this offering. See
Dilution. In addition, investors in this offering
will:
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pay a price per share that substantially exceeds the book value
of our assets after subtracting liabilities; and
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contribute [ ]% of the total amount
invested to date to fund our company based on an assumed initial
offering price to the public of
$[ ] per share, which is the
midpoint of the price range set forth on the cover page of this
prospectus, but will own only [ ]%
of the shares of common stock outstanding after completion of
this offering.
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Future
sales of our common stock may affect the trading price of our
common stock and the future exercise of options may lower the
price of our common stock.
We cannot predict what effect, if any, future sales of our
common stock, or the availability of shares for future sale,
will have on the trading price of our common stock. Sales of a
substantial number of shares of our common stock in the public
market after completion of this offering, or the perception that
such sales could occur, may adversely affect the trading price
of our common stock and may make it more difficult for you to
sell your shares at a time and price that you determine
appropriate. See Shares Eligible for Future
Sale for further information regarding circumstances under
which additional shares of our common stock may be sold. Upon
completion of this offering, there will be
[ ]
shares of our common stock outstanding. An additional
[ ]
shares of common stock will be issuable upon the exercise of
warrants we intend to issue to our existing stockholders upon
completion of this offering, at an exercise price equal to the
initial public offering price. Moreover,
[ ]
additional shares of our common stock are issuable upon the
exercise of options granted under our equity compensation plans
and
[ ]
shares will be issuable upon the exercise of outstanding options
that we intend to grant to our directors, executive officers and
other employees upon the completion of this offering, at an
exercise price equal to the initial public offering price.
Following completion of this offering, we intend to register all
[ ]
of these shares and also the
[ ]
shares reserved for issuance under the 2010 Stock Incentive
Plan. See Description of Capital Stock and
Executive Compensation. We and our current
directors, executive officers and stockholders have entered into
180-day
lock-up
agreements. The
lock-up
agreements are described in Shares Eligible for
Future Sale
Lock-Up
Agreements. An aggregate of
[ ]
shares of our common stock will be subject to these
lock-up
agreements upon completion of this offering.
Being
a public company will increase our expenses and administrative
workload and will expose us to risks relating to evaluation of
our internal controls over financial reporting required by
Section 404 of the Sarbanes-Oxley Act of
2002.
As a public company, we will need to comply with additional laws
and regulations, including the Sarbanes-Oxley Act of 2002 and
related rules of the Securities and Exchange Commission, or the
SEC, and requirements of the New York Stock Exchange. We were
not required to comply with these laws and requirements as a
private company. Complying with these laws and regulations will
require the time and attention of our board of directors and
management and will increase our expenses. Among other things,
we will need to: design, establish, evaluate and maintain a
system of internal controls over financial reporting in
compliance with the requirements of Section 404 of the
Sarbanes-Oxley Act and the related rules and regulations of the
SEC and the Public Company Accounting Oversight Board; prepare
and distribute periodic reports in compliance with our
obligations under the federal securities laws; establish new
internal policies, principally those relating to disclosure
controls and procedures and corporate governance; institute a
more comprehensive compliance function; and involve to a greater
degree our outside legal counsel and accountants in the above
activities. We anticipate that our annual expenses in complying
with these requirements will be approximately $500,000 to
$1,500,000.
In addition, we also expect that being a public company will
make it more expensive for us to obtain director and officer
liability insurance. We may be required to accept reduced
coverage or incur substantially higher costs to obtain this
coverage. These factors could also make it more difficult for us
to attract and retain qualified executives and members of our
board of directors, particularly directors willing to serve on
our audit committee.
We are in the process of evaluating our internal control systems
to allow management to report on, and our independent auditors
to assess, our internal controls over financial reporting. We
plan to perform the system and process evaluation and testing
(and any necessary remediation) required to comply with the
management certification and auditor attestation requirements of
Section 404 of the Sarbanes-Oxley Act. We are required to
comply with Section 404 in our annual report for the year
ending December 31, 2010. However, we cannot be certain as
to the timing of completion of our evaluation, testing and
remediation actions or the impact of the same on our operations.
Furthermore, upon completion of this process, we may identify
control deficiencies of varying degrees of severity under
applicable SEC and Public Company Accounting Oversight Board
rules and regulations that remain unremediated.
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If we fail to implement the requirements of Section 404 in
a timely manner, we might be subject to sanctions or
investigation by regulatory agencies such as the SEC. In
addition, failure to comply with Section 404 or the report
by us of a material weakness may cause investors to lose
confidence in our financial statements or the trading price of
our common stock to decline. If we fail to remediate any
material weakness, our financial statements may be inaccurate,
our access to the capital markets may be restricted and the
trading price of our common stock may decline.
As a public company, we will be required to report, among other
things, control deficiencies that constitute a material
weakness or changes in internal controls that materially
affect, or are reasonably likely to materially affect, internal
controls over financial reporting. A control
deficiency exists when the design or operation of a
control does not allow management or employees, in the normal
course of performing their assigned functions, to prevent or
detect misstatements on a timely basis. A significant
deficiency is a control deficiency, or combination of
control deficiencies, that adversely affects the ability to
initiate, authorize, record, process or report financial data
reliably in accordance with generally accepted accounting
principles that results in more than a remote likelihood that a
misstatement of financial statements that is more than
inconsequential will not be prevented or detected. A
material weakness is a significant deficiency, or a
combination of significant deficiencies, that results in more
than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or
detected.
Our
independent registered public accounting firm has in the past
identified certain deficiencies in internal controls that it
considered to be control deficiencies and material weaknesses.
If we fail to remediate these internal control deficiencies and
material weaknesses and maintain an effective system of internal
controls over financial reporting, we may not be able to
accurately report our financial results.
During their audit of our financial statements for the year
ended December 31, 2006, BDO Seidman, LLP, our independent
registered public accounting firm (independent auditors),
identified certain deficiencies in internal controls that they
considered to be control deficiencies and material weaknesses.
Specifically, our independent auditors identified material
weaknesses relating to: (1) a lack of independent
reconciliation regarding the schedule of premiums receivable,
and (2) problems regarding the files maintained for
reinsurance agreements, making it difficult to determine which
agreement was in force and which versions of the various
agreements are in force.
In response, we initiated corrective actions to remediate these
control deficiencies and material weaknesses, including the
implementation of timely account reconciliations, formal
purchasing policies, accurate premium tax accruals, the
appropriate segregation of accounting duties, a formal
impairment analysis for intangible assets, proper accounting for
equity-based compensation in accordance with Financial
Accounting Standards Board (FASB) guidance and enhanced
reinsurance documentation and risk transfer analysis.
Our independent auditors did not identify any material
weaknesses during their audit of our 2007 and 2008 financial
statements. However, during their audit of our financial
statements for the year ended December 31, 2008, our
independent auditors identified certain deficiencies in internal
controls that they considered to be significant control
deficiencies, but not material weaknesses. The significant
control deficiencies identified by our independent auditors
related to insufficient internal controls in our financial
reporting process, specifically due to a lack of segregation of
duties in the financial statement preparation process, and the
insufficient assessment and documentation of managements
consideration of significant accounting issues, including the
appropriate accounting literature cited, conclusions reached and
an appropriate level of review and approval for such decisions.
In connection with their review of our financial statements for
the nine months ended September 30, 2009, our independent
auditors noted that certain of these significant deficiencies
had not yet been remediated. In response, we have taken the
following actions to address these deficiencies: improving our
financial statement review process by adding an independent
review of the financial statements by qualified management,
actively seeking to hire a corporate controller who is a
certified public accountant with significant public-company
accounting and reporting experience, identifying other
accounting personnel requirements, and initiating the process to
engage a qualified independent consulting firm to evaluate our
internal controls and identify areas for improvement, including
areas related to the deficiencies identified by our independent
auditors. However, we have not yet completed the process of
34
identifying and implementing enhanced controls that we believe
will be necessary to remediate these deficiencies.
It is possible that we or our independent auditors may identify
additional significant deficiencies or material weaknesses in
our internal control over financial reporting in the future. Any
failure or difficulties in implementing and maintaining these
controls could cause us to fail to meet the periodic reporting
obligations that we will become subject to after this offering
or result in material misstatements in our financial statements.
The existence of a material weakness could result in errors to
our financial statements requiring a restatement of our
financial statements, cause us to fail to meet our reporting
obligations and cause investors to lose confidence in our
reported financial information, which could lead to a decline in
our stock price.
Due to
the concentration of our capital stock ownership with our
founder, Chairman, President and Chief Executive Officer, Steven
M. Mariano, he may be able to influence stockholder decisions,
which may conflict with your interests as a
stockholder.
Immediately upon completion of this offering, Steven M. Mariano,
our founder, Chairman, President and Chief Executive Officer,
directly and through trusts that he controls, will beneficially
own shares representing approximately
[ ]% of the voting power of our
common stock. As a result of his ownership position,
Mr. Mariano may have the ability to significantly influence
matters requiring stockholder approval, including, without
limitation, the election or removal of directors, mergers,
acquisitions, changes of control of our company and sales of all
or substantially all of our assets. Your interests as a
stockholder may conflict with his interests, and the trading
price of shares of our common stock could be adversely affected.
Provisions
in our executive officers employment agreements and
provisions in our certificate of incorporation and bylaws and
under the laws of the State of Delaware and the State of Florida
could impede an attempt to replace or remove our directors or
otherwise effect a change of control of Patriot Risk Management,
which could diminish the price of our common
stock.
We have entered into employment agreements with our executive
officers. These agreements provide for substantial payments upon
a change in control. These payments may deter any transaction
that would result in a change in control. See Executive
Compensation Employment Agreements.
Our charter and bylaws contain provisions that may entrench
directors and make it more difficult for stockholders to replace
directors even if the stockholders consider it beneficial to do
so. In particular, stockholders are required to provide us with
advance notice of stockholder nominations and proposals to be
brought before any annual meeting of stockholders, which could
discourage or deter a third party from conducting a solicitation
of proxies to elect its own slate of directors or to introduce a
proposal. In addition, our charter eliminates our
stockholders ability to act without a meeting.
These provisions could delay or prevent a change of control that
a stockholder might consider favorable. For example, these
provisions may prevent a stockholder from receiving the benefit
from any premium over the market price of our common stock
offered by a bidder in a potential takeover. Even in the absence
of an attempt to effect a change in management or a takeover
attempt, these provisions may materially adversely affect the
prevailing market price of our common stock if they are viewed
as discouraging changes in management and takeover attempts in
the future.
Further, our amended and restated certificate of incorporation
and our amended and restated bylaws provide that the number of
directors shall be fixed from time to time by our board of
directors, provided that the board shall consist of at least
three and no more than thirteen members. Our board of directors
is divided into three classes with the number of directors in
each class being as nearly equal as possible. Each director
serves a three-year term. The classification and term of office
for each of our directors is noted in the table listing our
directors and executive officers under
Management Directors, Executive Officers and
Key Employees. These provisions make it more difficult for
stockholders to replace directors, which may materially
adversely affect the prevailing market price of our common stock
if they are viewed as discouraging changes in management and
takeover attempts in the future.
35
In addition, Section 203 of the Delaware General
Corporation Law may limit the ability of an interested
stockholder to engage in business combinations with us. An
interested stockholder is defined to include persons owning 15%
or more of any class of our outstanding voting stock. See
Description of Capital Stock Anti-Takeover
Effects of Delaware Law and Our Certificate of
Incorporation and Bylaws.
Florida insurance law prohibits any person from acquiring 5% or
more of our outstanding voting securities or those of any of our
insurance subsidiaries without the prior approval of the Florida
OIR. However, a party may acquire less than 10% of our voting
securities without prior approval if the party files a
disclaimer of affiliation and control. Any person wishing to
acquire control of us or of any substantial portion of our
outstanding shares would first be required to obtain the
approval of the Florida OIR or file such a disclaimer. In
addition, any transaction that would constitute a change of
control of Guarantee Insurance, including a change of control of
Patriot, may require pre-notification in other states in which
Guarantee Insurance operates. Obtaining these approvals may
result in the material delay of, or may deter, any such
transaction.
36
FORWARD-LOOKING
STATEMENTS
Some of the statements under the captions Prospectus
Summary, Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Business and elsewhere in this
prospectus may include forward-looking statements. These
statements reflect the current views of our senior management
with respect to future events and our financial performance.
These statements include forward-looking statements with respect
to our business and the insurance industry in general.
Statements that include the words expect,
intend, plan, believe,
project, estimate, may,
should, anticipate and similar
statements of a future or forward-looking nature identify
forward-looking statements for purposes of the federal
securities laws or otherwise.
Forward-looking statements address matters that involve risks
and uncertainties. Accordingly, there are or will be important
factors that could cause our actual results to differ materially
from those indicated in these statements. We believe that these
factors include, but are not limited to, the following:
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greater frequency or severity of claims and loss activity,
including as a result of natural or man-made catastrophic
events, than our underwriting, reserving or investment practices
anticipate based on historical experience or industry data;
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increased competition on the basis of coverage availability,
claims management, loss control services, payment terms, premium
rates, policy terms, types of insurance offered, overall
financial strength, financial ratings and reputation;
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regulatory risks, including further rate decreases in Florida
and other states where we write business;
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the cyclical nature of the workers compensation insurance
industry;
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negative developments in the workers compensation
insurance industry;
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decreased level of business activity of our policyholders;
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decreased demand for our insurance;
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adverse developments regarding our legacy asbestos and
environmental claims arising from policies written or assumed
prior to 1983;
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changes in the availability, cost or quality of reinsurance and
the failure of our reinsurers to pay claims in a timely manner
or at all;
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changes in regulations or laws applicable to us, our
policyholders or the agencies that sell our insurance;
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changes in rating agency policies or practices;
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changes in legal theories of liability under our insurance
policies;
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developments in capital markets that adversely affect the
performance of our investments;
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loss of the services of any of our senior management or other
key employees;
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the effects of U.S. involvement in hostilities with other
countries and large-scale acts of terrorism, or the threat of
hostilities or terrorist acts; and
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changes in general economic conditions, including inflation and
other factors.
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The foregoing factors should not be construed as exhaustive and
should be read together with the other cautionary statements
included in this prospectus, including in particular the risks
described under Risk Factors beginning on page 14 of
this prospectus. If one or more of these or other risks or
uncertainties materialize, or if our underlying assumptions
prove to be incorrect, actual results may differ materially from
what we anticipate. Any forward-looking statements you read in
this prospectus reflect our views as of the date of this
prospectus with respect to future events and are subject to
these and other risks, uncertainties and assumptions relating to
our operations, results of operations, growth strategy and
liquidity. Before making a decision to purchase our common
stock, you should carefully consider all of the factors
identified in this prospectus that could cause actual results to
differ.
37
USE OF
PROCEEDS
We estimate that our net proceeds from this offering will be
approximately $[ ] million, based
on an assumed initial public offering price of
$[ ] per share, which is the
mid-point of the price range set forth on the cover page of this
prospectus, and after deducting the estimated underwriting
discounts and commissions and our estimated offering expenses.
We estimate that our net proceeds will be approximately
$[ ] million if the underwriters
exercise their over-allotment option in full.
We intend to contribute approximately
$[ ] million to Guarantee Insurance
to support its premium writings. As described elsewhere in this
prospectus, we have entered into a stock purchase agreement to
acquire PF&C, a shell property and casualty insurance
company. The acquisition of PF&C is subject to various
regulatory approvals. If we obtain these regulatory approvals
and consummate the acquisition on or prior to March 4,
2010, we plan instead to use approximately $16.7 million of
the net proceeds of this offering to pay the purchase price for
PF&C (of which approximately $15.5 million represents
the capital and surplus of PF&C), to contribute
approximately $[ ] million to
PF&C to support its premium writings, and to contribute
approximately $[ ] million to
Guarantee Insurance to support its premium writings.
We expect that the remaining $[ ]
million, or $[ ] million if we
acquire PF&C, will be used to support our anticipated
growth and general corporate purposes and to fund other holding
company operations, including the repayment of all or a portion
of our existing indebtedness and potential acquisitions,
although we have no current understandings or agreements
regarding any such acquisitions (other than PF&C).
If the underwriters exercise all or any portion of their
over-allotment option, we intend to use all or a substantial
portion of the net proceeds from any such exercise to pay down
the balance of our credit facilities with Brooke Credit
Corporation (Brooke) and ULLICO, Inc. (ULLICO). If the
over-allotment option is exercised in full, we will use
approximately $[ ] million and
$[ ] of the net proceeds therefrom
to pay off the credit facilities with Brooke and ULLICO,
respectively, and the remaining
$[ ] million, or
$[ ] million if we acquire
PF&C, for general corporate purposes.
Pending the use of the net proceeds from this offering as
discussed above, we may invest some of the proceeds in certain
short-term high-grade instruments.
38
DIVIDEND
POLICY
We do not expect to pay any cash dividends on our common stock
for the foreseeable future. We currently intend to retain any
additional future earnings to finance our operations and growth.
Any future determination to pay cash dividends on our common
stock will be at the discretion of our board of directors and
will be dependent on our earnings, financial condition,
operating results, capital requirements, any contractual,
regulatory and other restrictions on the payment of dividends by
us or by our subsidiaries to us, and other factors that our
board of directors deems relevant.
Patriot Risk Management is a holding company and has no direct
operations. Our ability to pay dividends in the future depends
on the ability of our operating subsidiaries to pay dividends to
us. Neither PRS nor PUI is statutorily restricted from paying
dividends to us, although our credit facilities prohibit us and
our operating subsidiaries from paying any dividends on our and
their respective capital stock without the consent of our
lenders. In addition, future debt agreements may contain certain
prohibitions or limitations on the payment of dividends. Because
Guarantee Insurance is, and if we acquire it, PF&C will be,
regulated by the Florida OIR, both companies will be subject to
significant regulatory restrictions limiting their ability to
declare and pay dividends. In accordance with the terms of
Guarantee Insurances redomestication to Florida which
occurred on December 29, 2006, any and all dividends which
may be paid by Guarantee Insurance prior to December 29,
2009 must be pre-approved by the Florida OIR.
At the time we acquired Guarantee Insurance, it had a large
statutory unassigned deficit. As of September 30, 2009,
Guarantee Insurances statutory unassigned deficit was
$95.5 million. Under Florida law, insurance companies may
only pay dividends out of available and accumulated surplus
funds which are derived from realized net operating profits on
their business and net realized capital gains, except under
certain limited circumstances with the approval of the Florida
OIR. Consequently, for the foreseeable future no dividends may
be paid by Guarantee Insurance except with the prior approval of
the Florida OIR.
For additional information regarding restrictions on the payment
of dividends by us and our insurance company subsidiaries, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources and Business
Regulation Dividend Limitations.
39
CAPITALIZATION
The table below sets forth our consolidated capitalization as of
September 30, 2009 on an actual basis and on an as adjusted
basis giving effect to (i) the sale of
[ ]
shares of common stock in this offering and (ii) the
conversion of each outstanding share of Series A
convertible preferred stock into
[ ]
shares of common stock at an assumed initial public offering
price of $[ ] per share, which is
the mid-point of the price range set forth on the cover page of
this prospectus, and after deducting estimated underwriting
discounts and commissions and our estimated offering expenses
and assuming that the underwriters do not exercise their
over-allotment option.
You should read this table in conjunction with the Use of
Proceeds, Selected Historical Consolidated Financial
Data and Managements Discussion and Analysis
of Financial Condition and Results of Operations sections
of this prospectus and our financial statements and related
notes included in the back of this prospectus.
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As of September 30, 2009
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Actual
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As Adjusted
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(Unaudited)
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(In thousands)
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Debt Outstanding
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Notes payable
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$
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16,815
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$
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16,815
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Surplus notes
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1,187
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1,187
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Subordinated debentures
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1,634
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1,634
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Total debt outstanding
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19,636
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|
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19,636
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Stockholders equity
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Series A convertible preferred stock, par value $.001 per
share, 1,200 shares authorized; 1,000 shares issued
and outstanding, actual; no shares issued and outstanding, as
adjusted(1)
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1,000
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Preferred stock, par value $.001 per share,
5,000,000 shares authorized; no shares issued and
outstanding, actual and as adjusted
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Common stock, par value $.001 per share, 40,000,000 shares
authorized, 346,026 shares issued and outstanding, actual;
[ ]
shares issued or outstanding, as adjusted
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1
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[ ]
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Series B common stock, par value $.001 per share,
4,000,000 shares authorized, 800,000 shares issued and
outstanding, actual; no shares authorized, issued or
outstanding, as adjusted(2)
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1
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Additional paid-in capital
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5,521
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[ ]
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Retained earnings
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2,390
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2,390
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Accumulated other comprehensive income (loss), net of deferred
income tax expense (benefit)
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1,216
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$
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1,216
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Total stockholders equity
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10,129
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$
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[ ]
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Total capitalization
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$
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29,765
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$
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[ ]
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(1) |
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At the closing of this offering, all outstanding shares of
Series A convertible preferred stock will be automatically
converted into
[ ]
shares of common stock, based on an assumed initial public
offering price of $[ ] per share,
which is the mid-point of the price range set forth on the cover
page of this prospectus. |
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(2) |
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At the closing of this offering, all outstanding shares of
Series B common stock will be automatically converted into
shares of common stock on a
one-for-one
basis. |
40
The number of shares of common stock shown to be outstanding
after this offering excludes:
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up to
[ ]
shares of common stock that may be issued pursuant to the
underwriters over-allotment option;
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163,500 shares of common stock issuable upon the exercise
of options outstanding as of December 31, 2009;
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[ ]
shares of common stock issuable upon the exercise of stock
options we intend to grant to our directors, executive officers
and other employees upon completion of this offering, at an
exercise price equal to the initial public offering price;
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[ ]
shares of common stock issuable upon the exercise of warrants we
intend to issue to our existing stockholders upon completion of
this offering, at an exercise price equal to the initial public
offering price; and
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[ ]
additional shares available for future issuance under our 2010
Stock Incentive Plan.
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41
DILUTION
As of September 30, 2009, our net tangible book value was
$8.8 million, or $7.72 per share of common stock. Net
tangible book value per share represents the amount of our total
tangible assets less our total liabilities divided by the number
of shares of our common stock outstanding. Our net tangible book
value as of September 30, 2009 is presented in the table
below on a pro forma basis, assuming the conversion of each
outstanding share of Series A convertible preferred stock
into
[ ]
shares of common stock based on an assumed public offering price
of $[ ] per share, which is the
mid-point of the price range set forth on the cover page of this
prospectus. As of September 30, 2009, our pro forma net
tangible book value was $[ ]
million, or $[ ] per share of
common stock. Our pro forma net tangible book value per share
represents the amount of our total tangible assets less total
liabilities divided by the number of shares of common stock
outstanding. After giving effect to the issuance of
[ ] shares of our common stock at
the assumed initial public offering price of
$[ ] per share, which is the
mid-point of the price range set forth on the cover page of this
prospectus, and the application of the estimated net proceeds
therefrom, and after deducting estimated underwriting discounts
and commissions and our estimated offering expenses, our pro
forma net tangible book value as of September 30, 2009
would have been approximately $[ ]
million, or $[ ] per share of
common stock. This amount represents an immediate increase in
net tangible book value of $[ ] per
share to our existing stockholders and an immediate dilution of
$[ ] per share from the assumed
initial public offering price of
$[ ] per share issued to new
investors purchasing shares in this offering. The table below
illustrates the dilution on a per share basis:
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Assumed initial public offering price per share
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$
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Pro forma net tangible book value per share as of
September 30, 2008
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Increase in pro forma net tangible book value per share
attributable to this offering
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$
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Pro forma net tangible book value per share after this offering
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Dilution per share to new investors in this offering
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$
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(1
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(1) |
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If the underwriters over-allotment is exercised in full,
dilution per share to new investors will be
$[ ]. |
The table below sets forth, as of September 30, 2009, the
number of shares of our common stock issued (assuming the
conversion of each share of our Series A convertible
preferred stock into [ ] shares of
common stock), the total consideration paid and the average
price per share paid by our existing stockholders and our new
investors in this offering, after giving effect to the issuance
of [ ] shares of common stock in
this offering at the assumed initial public offering price of
$[ ] per share, before deducting
underwriting discounts and commissions and our estimated
offering expenses.
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Average
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Shares Issued
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Total Consideration
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Price
|
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Number
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Percent
|
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Amount
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Percent
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per Share
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Existing stockholders
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|
[ ]
|
|
|
|
[ ]
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%
|
|
$
|
[ ]
|
|
|
|
[ ]
|
%
|
|
$
|
[ ]
|
|
New investors
|
|
|
[ ]
|
|
|
|
[ ]
|
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$
|
[ ]
|
|
|
|
[ ]
|
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|
[ ]
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Total
|
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|
[ ]
|
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100.0
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%
|
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$
|
[ ]
|
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100.0
|
%
|
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|
[ ]
|
|
This table does not give effect to:
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up to
[ ]
shares of common stock that may be issued pursuant to the
underwriters over-allotment option;
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163,500 shares of common stock issuable upon the exercise
of options outstanding as of December 31, 2009;
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[ ]
shares of common stock issuable upon the exercise of stock
options we intend to grant to our directors, executive officers
and other employees upon completion of this offering, at an
exercise price equal to the initial public offering price;
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[ ]
shares of common stock issuable upon the exercise of warrants we
intend to issue to our existing stockholders upon completion of
this offering, at an exercise price equal to the initial public
offering price; and
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[ ]
additional shares available for future issuance under our 2010
Stock Incentive Plan.
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To the extent that options with an exercise price below the
initial price to the public are exercised, there will be further
dilution to new investors.
42
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated financial
information as of such dates and for such periods indicated
below. The following income statement data for the nine months
ended September 30, 2009 and 2008 and balance sheet data as
of September 30, 2009 were derived from our unaudited
consolidated financial statements included elsewhere in this
prospectus. Such unaudited financial statements include, in the
opinion of management, all adjustments, consisting only of
normal recurring adjustments, which we consider necessary for a
fair presentation of our financial position and results of
operations. The income statement data for the years ended
December 31, 2008, 2007 and 2006 and balance sheet data as
of December 31, 2008 and 2007 were derived from our audited
consolidated financial statements included elsewhere in this
prospectus. The income statement data for the years ended
December 31, 2005 and 2004 and balance sheet data as of
December 31, 2006, 2005 and 2004 were derived from our
audited consolidated financial statements that are not included
in this prospectus. These historical results are not necessarily
indicative of results to be expected in any future period. You
should read the following summary financial information together
with the other information contained in this prospectus,
including Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
financial statements and related notes included elsewhere.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended September 30,
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
In thousands, except per share data and percentages
|
|
|
Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
95,972
|
|
|
$
|
94,878
|
|
|
$
|
117,563
|
|
|
$
|
85,810
|
|
|
$
|
62,372
|
|
|
$
|
47,576
|
|
|
$
|
30,911
|
|
Ceded premiums written
|
|
|
56,573
|
|
|
|
52,926
|
|
|
|
71,725
|
|
|
|
54,894
|
|
|
|
42,986
|
|
|
|
23,617
|
|
|
|
22,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
|
39,399
|
|
|
|
41,952
|
|
|
|
45,838
|
|
|
|
30,961
|
|
|
|
19,386
|
|
|
|
23,959
|
|
|
|
8,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
|
28,369
|
|
|
|
32,276
|
|
|
|
49,220
|
|
|
|
24,613
|
|
|
|
21,053
|
|
|
|
21,336
|
|
|
|
2,948
|
|
Insurance services income
|
|
|
9,753
|
|
|
|
4,706
|
|
|
|
5,657
|
|
|
|
7,027
|
|
|
|
7,175
|
|
|
|
4,369
|
|
|
|
6,429
|
|
Net investment income
|
|
|
1,354
|
|
|
|
1,487
|
|
|
|
2,028
|
|
|
|
1,326
|
|
|
|
1,321
|
|
|
|
1,077
|
|
|
|
233
|
|
Net realized gains (losses) on investments
|
|
|
903
|
|
|
|
(253
|
)
|
|
|
(1,037
|
)
|
|
|
(5
|
)
|
|
|
(1,346
|
)
|
|
|
(2,298
|
)
|
|
|
(4,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
40,379
|
|
|
|
38,216
|
|
|
|
55,868
|
|
|
|
32,961
|
|
|
|
28,203
|
|
|
|
24,484
|
|
|
|
4,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
15,864
|
|
|
|
20,719
|
|
|
|
28,716
|
|
|
|
15,182
|
|
|
|
17,839
|
|
|
|
12,022
|
|
|
|
2,616
|
|
Net policy acquisition and underwriting expenses
|
|
|
8,498
|
|
|
|
8,176
|
|
|
|
13,535
|
|
|
|
6,023
|
|
|
|
3,834
|
|
|
|
3,168
|
|
|
|
2,016
|
|
Other operating expenses
|
|
|
11,100
|
|
|
|
8,055
|
|
|
|
10,930
|
|
|
|
8,519
|
|
|
|
9,704
|
|
|
|
6,378
|
|
|
|
4,989
|
|
Interest expense
|
|
|
1,119
|
|
|
|
1,102
|
|
|
|
1,437
|
|
|
|
1,290
|
|
|
|
1,109
|
|
|
|
1,129
|
|
|
|
555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
36,581
|
|
|
|
38,052
|
|
|
|
54,618
|
|
|
|
31,014
|
|
|
|
32,486
|
|
|
|
22,697
|
|
|
|
10,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
219
|
|
|
|
1,469
|
|
|
|
|
|
|
|
796
|
|
|
|
|
|
|
|
110
|
|
Loss from write-off of deferred equity offering costs(1)
|
|
|
|
|
|
|
|
|
|
|
(3,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on early extinguishment of debt(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense benefit
|
|
|
3,798
|
|
|
|
383
|
|
|
|
(767
|
)
|
|
|
1,947
|
|
|
|
3,099
|
|
|
|
1,787
|
|
|
|
(5,088
|
)
|
Income tax expense (benefit)
|
|
|
1,422
|
|
|
|
(217
|
)
|
|
|
(643
|
)
|
|
|
(432
|
)
|
|
|
1,489
|
|
|
|
687
|
|
|
|
(751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,376
|
|
|
$
|
600
|
|
|
$
|
(124
|
)
|
|
$
|
2,379
|
|
|
$
|
1,610
|
|
|
$
|
1,100
|
|
|
$
|
(4,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.95
|
|
|
$
|
0.44
|
|
|
$
|
(0.09
|
)
|
|
$
|
1.77
|
|
|
$
|
1.16
|
|
|
$
|
0.88
|
|
|
|
NM
|
(3)
|
Diluted
|
|
|
1.94
|
|
|
|
0.44
|
|
|
|
(0.09
|
)
|
|
|
1.76
|
|
|
|
1.15
|
|
|
|
0.87
|
|
|
|
NM
|
(3)
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,216
|
|
|
|
1,361
|
|
|
|
1,361
|
|
|
|
1,342
|
|
|
|
1,392
|
|
|
|
1,251
|
|
|
|
NM
|
(3)
|
Diluted
|
|
|
1,225
|
|
|
|
1,370
|
|
|
|
1,361
|
|
|
|
1,351
|
|
|
|
1,398
|
|
|
|
1,258
|
|
|
|
NM
|
(3)
|
Return on average equity(4)
|
|
|
36.7
|
%
|
|
|
15.1
|
%
|
|
|
NM(6
|
)
|
|
|
58.5
|
%
|
|
|
107.0
|
%
|
|
|
NM(7
|
)
|
|
|
NM
|
(8)
|
Selected Insurance Ratios(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio
|
|
|
55.9
|
%
|
|
|
64.2
|
%
|
|
|
58.3
|
%
|
|
|
61.7
|
%
|
|
|
84.7
|
%
|
|
|
56.3
|
%
|
|
|
NM
|
(3)
|
Net expense ratio
|
|
|
30.0
|
%
|
|
|
25.3
|
%
|
|
|
27.5
|
%
|
|
|
24.5
|
%
|
|
|
18.2
|
%
|
|
|
14.8
|
%
|
|
|
NM
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net combined ratio
|
|
|
85.9
|
%
|
|
|
89.5
|
%
|
|
|
85.8
|
%
|
|
|
86.2
|
%
|
|
|
102.9
|
%
|
|
|
71.1
|
%
|
|
|
NM
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
In thousands
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
47,051
|
|
|
$
|
55,089
|
|
|
$
|
56,816
|
|
|
$
|
32,543
|
|
|
$
|
20,955
|
|
|
$
|
16,446
|
|
Cash and cash equivalents
|
|
|
7,452
|
|
|
|
8,333
|
|
|
|
4,946
|
|
|
|
17,841
|
|
|
|
20,420
|
|
|
|
3,965
|
|
Amounts recoverable from reinsurers
|
|
|
58,328
|
|
|
|
42,134
|
|
|
|
47,519
|
|
|
|
41,531
|
|
|
|
22,955
|
|
|
|
10,978
|
|
Premiums receivable, net
|
|
|
83,040
|
|
|
|
58,826
|
|
|
|
36,748
|
|
|
|
19,450
|
|
|
|
21,943
|
|
|
|
19,244
|
|
Prepaid reinsurance premiums
|
|
|
42,010
|
|
|
|
33,731
|
|
|
|
14,963
|
|
|
|
7,466
|
|
|
|
4,402
|
|
|
|
14,925
|
|
Other assets
|
|
|
19,910
|
|
|
|
13,179
|
|
|
|
14,248
|
|
|
|
11,838
|
|
|
|
9,563
|
|
|
|
8,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
257,791
|
|
|
$
|
211,292
|
|
|
$
|
175,237
|
|
|
$
|
130,669
|
|
|
$
|
100,238
|
|
|
$
|
74,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses
|
|
$
|
83,210
|
|
|
|
74,550
|
|
|
|
69,881
|
|
|
|
65,953
|
|
|
|
39,478
|
|
|
|
19,885
|
|
Unearned and advanced premium reserves
|
|
|
63,702
|
|
|
|
44,613
|
|
|
|
29,160
|
|
|
|
15,643
|
|
|
|
13,214
|
|
|
|
20,185
|
|
Reinsurance funds withheld and balances payable
|
|
|
56,458
|
|
|
|
47,449
|
|
|
|
44,073
|
|
|
|
26,787
|
|
|
|
25,195
|
|
|
|
15,697
|
|
Debt and accrued interest
|
|
|
20,089
|
|
|
|
22,592
|
|
|
|
16,907
|
|
|
|
11,741
|
|
|
|
11,995
|
|
|
|
10,379
|
|
Other liabilities
|
|
|
24,203
|
|
|
|
14,951
|
|
|
|
9,780
|
|
|
|
7,851
|
|
|
|
10,040
|
|
|
|
8,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
247,662
|
|
|
|
204,155
|
|
|
|
169,801
|
|
|
|
127,975
|
|
|
|
99,922
|
|
|
|
74,470
|
|
Stockholders equity
|
|
|
10,129
|
|
|
|
7,137
|
|
|
|
5,436
|
|
|
|
2,694
|
|
|
|
316
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
257,791
|
|
|
$
|
211,292
|
|
|
$
|
175,237
|
|
|
$
|
130,669
|
|
|
$
|
100,238
|
|
|
$
|
74,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In 2008, we wrote off approximately $3.5 million of
deferred equity offering costs incurred in connection with our
prior efforts to consummate an initial public offering in 2007
and 2008. |
|
(2) |
|
In 2006, Guarantee Insurance entered into a settlement and
termination agreement with the former owner of Guarantee
Insurance that allowed for an early extinguishment of debt in
the amount of $8.8 million in exchange for
$2.2 million in cash and release of the indemnification
agreement previously entered into by the parties. As a result,
we recognized a gain on the early extinguishment of debt on a
pre-tax basis of $6.6 million. We also recognized other
income in connection with the forgiveness of accrued interest
associated with the early extinguishment of debt on a pre-tax
basis of $796,000. |
|
(3) |
|
We do not believe this metric is meaningful for the period
indicated. |
|
(4) |
|
Return on average equity for a given period (annualized in the
case of periods less than one year) is calculated by dividing
net income for that period by average stockholders equity
as of the beginning and end of the period. |
|
(5) |
|
The net loss ratio is calculated by dividing net losses and loss
adjustment expenses by net earned premiums. The net expense
ratio is calculated by dividing net policy acquisition and
underwriting expenses (which are comprised of gross policy
acquisition costs and other gross expenses incurred in our
insurance operations, net of ceding commissions earned from our
reinsurers) by net earned premiums. The net combined ratio is
the sum of the net loss ratio and the net expense ratio. |
|
|
|
(6) |
|
In 2008, we reported a net loss of $124,000, principally as a
result of a non-recurring loss from the write-off of deferred
equity offering costs of approximately $3.5 million as
described above. Due to this non-recurring charge, our return on
average equity for 2008 was (2.0)%, which we do not believe is
meaningful. |
44
|
|
|
(7) |
|
In 2005, we reported net income of $1.1 million. However,
our average stockholders equity for 2005 was only
approximately $180,000, which results in a return on average
equity of 609.4%, which we do not believe is meaningful. |
|
|
|
(8) |
|
In 2004, we reported a net loss of $4.3 million,
principally as a result of a loss from the write-off of an
investment in Foundation Insurance Company, a subsidiary of
Tarheel Group, Inc., as described below under Certain
Relationships and Related Transactions. Due to this
change, our return on average equity for 2004 was (19,275.6)%,
which we do not believe is meaningful. |
45
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and
results of operations should be read in conjunction with our
consolidated financial statements and the notes thereto included
elsewhere in this prospectus. This discussion includes
forward-looking statements that are subject to risks,
uncertainties and other factors described under the captions
Risk Factors and Forward-Looking
Statements. These factors could cause our actual results
for the second half of 2009 and beyond to differ materially from
those expressed in, or implied by, those forward-looking
statements.
Overview
We produce, underwrite and administer alternative market and
traditional workers compensation insurance plans and
provide claims services for insurance companies, segregated
portfolio captives and reinsurers. Through our wholly owned
insurance company subsidiary, Guarantee Insurance, we generally
participate in a portion of the insurance underwriting risk. In
our insurance services segment, we generate fee income by
providing workers compensation claims services as well as
agency and underwriting services. In our insurance segment, we
generate underwriting income and investment income by providing
alternative market workers compensation risk transfer
solutions and traditional workers compensation insurance
coverage.
Insurance
Services Operations
Through our subsidiary, PRS Group, Inc. and its subsidiaries,
which we collectively refer to as PRS, and our subsidiary,
Patriot Underwriters, Inc. and its subsidiary, which we
collectively refer to as PUI, we earn income for workers
compensation claims services as well as agency and underwriting
services. Workers compensation claims services include
nurse case management, cost containment services and, beginning
in 2009, claims administration and adjudication services. Cost
containment services refer to workers compensation bill
review and re-pricing services. Workers compensation
agency and underwriting services include general agency services
and, beginning in 2009, specialty underwriting, policy
administration and captive management services. We currently
provide these services to Guarantee Insurance for its benefit,
for the benefit of segregated portfolio captives and for the
benefit of Guarantee Insurances traditional business quota
share reinsurers, all under the Patriot Risk Services brand. We
also provide these services for the benefit of another insurance
company under its brand, a practice which we refer to as
business process outsourcing, as described below.
In the second quarter of 2009, we entered into an arrangement
with ULLICO Casualty Company, which we refer to as our BPO
client, to gain access to workers compensation insurance
business in certain additional states, including California and
Texas. ULLICO is licensed to write workers compensation
insurance in 47 states plus the District of Columbia and is
rated B+ (Good) by A.M Best. Under this arrangement,
we earn commissions for producing business and insurance
services income for providing underwriting, policy and claims
administration, nurse case management and cost containment
services and, in certain cases, services to segregated portfolio
cell captives on the business we produce for this client. For
certain of these services, we earn insurance services income
based on a percentage of premiums produced. For other services,
we earn insurance services income based on a percentage of what
we refer to as reference premiums produced. Reference premiums
produced refers to premiums produced for large deductible
policies. Premiums on large deductible policies are
substantially reduced, through premium rate credits, due to the
fact that the insurer has no exposure to losses below the per
occurrence deductible. Reference premiums produced equal the
premiums produced for large deductible policies, grossed up to
include the premium credits applicable to the large deductible
policy, as if the policy did not feature a per occurrence
deductible. For the nine months ended September 30, 2009,
premiums produced for our BPO client were approximately
$19.4 million, and reference premiums produced were
approximately $36.5 million. With respect to premiums
produced for our BPO client, policy coverage is generally
provided by our BPO client, which has the primary obligation to
indemnify its policyholders for covered claims. Accordingly,
such premiums produced for our BPO client are not included in
gross written premiums in our consolidated results of
operations. However, Guarantee Insurance assumes a
46
portion of the premium and associated losses and loss
adjustment expenses on the business we produce for our BPO
client. This assumed written premium is included in our gross
written premiums in our consolidated results of operations.
In the fourth quarter of 2009, we entered into BPO relationships
with two other companies, and we continue to seek to enter into
additional business process outsourcing relationships. These
additional relationships may be solely distribution and
insurance services relationships, where we do not assume any
underwriting risk but earn commissions for producing business
and insurance services income for providing underwriting, policy
and claims administration, nurse case management and cost
containment services and, in certain cases, services to
segregated portfolio captives.
Insurance
Operations
We currently write insurance in 22 states and the District
of Columbia. For the nine months ended September 30, 2009,
approximately 52% of our total direct and assumed premiums
written involved workers compensation alternative market
insurance solutions and approximately 48% represented
workers compensation traditional business. For the nine
months ended September 30, 2009 and the years ended
December 31, 2008 and 2007, approximately 28%, 46% and 59%
of our total direct premiums written, respectively, were
concentrated in Florida.
For the nine months ended September 30, 2009, approximately
33% of our alternative market business direct premiums written
were concentrated in Florida, and approximately 20%, 13% and 10%
were concentrated in New Jersey, Georgia and New York,
respectively. No other state accounted for more than 5% of our
alternative market business direct premiums written for the nine
months ended September 30, 2009.
For the nine months ended September 30, 2009, approximately
22% and 20% of our traditional business direct premiums written
were concentrated in Florida and New Jersey, respectively, and
between 5% and 10% were concentrated in each of Georgia,
Indiana, Arkansas, New York, and Missouri. No other state
accounted for more than 5% of our traditional business direct
premiums written for the nine months ended September 30,
2009.
Investment income is an important part of our insurance
operations. We hold invested assets associated with the
statutory surplus we maintain for the benefit of our
policyholders. Additionally, because a period of time elapses
between the receipt of premiums and the ultimate settlement of
claims, we hold invested assets associated with our reserves for
losses and loss adjustment expenses which we believe will be
paid at a future date. Generally, the period of time that
elapses from the receipt of premium to the ultimate settlement
of claims for workers compensation insurance is longer
than many other property and casualty insurance products.
Accordingly, we are generally able to generate more investment
income on our loss and loss adjustment expense reserves than
insurance companies operating in most other lines of business.
As of September 30, 2009, our investment portfolio,
including cash and cash equivalents, was approximately
$54.5 million, and for the nine months ended
September 30, 2009, our net investment income was
approximately $1.4 million.
We utilize quota share and excess of loss reinsurance to
maintain what we believe are appropriate leverage ratios and
reduce our exposure to losses and loss adjustment expenses.
Quota share reinsurance is a form of proportional reinsurance in
which the reinsurer assumes an agreed upon percentage of each
risk being insured and shares all premiums and losses with us in
that proportion. Excess of loss reinsurance covers all or a
specified portion of losses on underlying insurance policies in
excess of a specified amount, or retention. The cost and limits
of the reinsurance coverage we purchase vary from year to year
based upon the availability of reinsurance at acceptable prices
and our desired level of retention. Retention refers to the
amount of risk we retain for our own account. See
Business Reinsurance.
Under the segregated portfolio cell captive insurance plans in
our alternative market business, we provide workers
compensation insurance to employers and facilitate the
establishment of a segregated portfolio cell within a segregated
portfolio captive by coordinating the necessary interactions
among the party controlling the cell, the insurance agency, the
segregated portfolio captive, its manager and insurance
regulators in the
47
jurisdiction where the captive is domiciled. Segregated
portfolio cells may be controlled by policyholders, parties
related to policyholders, insurance agencies or others. Once the
segregated portfolio cell is established, Guarantee Insurance
enters into a quota share reinsurance agreement (captive
reinsurance agreement) with the segregated portfolio
captive acting on behalf of the segregated portfolio cell. For
the nine months ended September 30, 2009, Guarantee Insurance
ceded to the segregated portfolio captive either 90% or between
10% and 50% of the risk up to a level specified in the captive
reinsurance agreement. For the nine months ended
September 30, 2009, approximately 93% of the direct
premiums written by Guarantee Insurance that were subject to
segregated portfolio arrangements were ceded on a 90% basis, and
approximately 7% of such premiums were ceded on a 10% to 50%
basis. If the aggregate covered losses for the segregated
portfolio cell exceed the level specified in the reinsurance
agreement, the segregated portfolio captive reinsures the entire
amount of the excess losses up to the aggregate liability limit
specified in the captive reinsurance agreement. If the aggregate
losses for the segregated portfolio cell exceed the aggregate
liability limit, Guarantee Insurance retains 100% of those
excess losses. Any amount of losses in excess of
$1.0 million per occurrence is not covered by the captive
reinsurance agreement. To the extent that any loss exceeds
$1.0 million per occurrence, the amount of such loss in
excess of $1.0 million is reinsured under Guarantee
Insurances excess of loss reinsurance program. See
Business Reinsurance Alternative
Market Business.
Under our traditional business, Guarantee Insurance had three
quota share reinsurance treaties inforce for the nine months
ended September 30, 2009 with Swiss Reinsurance America
Corporation, one of the largest reinsurers in the United States
and rated A+ by A.M. Best Company, and two
other authorized reinsurers. Any loss in excess of
$1.0 million is also reinsured under Guarantee
Insurances excess of loss reinsurance program for
traditional business. See Business
Reinsurance Traditional Business.
The workers compensation insurance industry is cyclical in
nature and influenced by many factors, including price
competition, medical cost increases, natural and man-made
disasters, changes in interest rates, changes in state laws and
regulations and general economic conditions. A hard market cycle
in the workers compensation insurance industry is
characterized by decreased competition that results in higher
premium rates, more restrictive policy coverage terms and lower
commissions paid to agencies. In contrast, a soft market cycle
is characterized by increased competition that results in lower
premium rates, expanded policy coverage terms and higher
commissions paid to agencies. We believe that the current
workers compensation insurance market has been
experiencing a soft market cycle in which underwriting capacity
and price competition have increased. In our traditional
workers compensation business, we have experienced
increased price competition since 2007 in certain markets. In
addition, for the nine months ended September 30, 2009 compared
to the same period in 2008, we experienced a decrease in
traditional business gross premiums written generally
attributable to lower payrolls associated with increases in
overall unemployment.
For the nine months ended September 30, 2009, we wrote
approximately 47% of our direct premiums written in administered
pricing states Florida, Indiana and New Jersey. In
administered pricing states, insurance rates are set by the
state insurance regulators and are adjusted periodically. Rate
competition generally is not permitted in these states.
Therefore, rather than setting rates for the policies, our
underwriting efforts in these states for our traditional
business relate primarily to the selection of the policies we
choose to write at the premium rates that have been set.
The Florida OIR has approved average statewide rate decreases in
each of the past three years, and has also approved a rate
decrease for 2010. If a state insurance regulator lowers premium
rates, our insurance operations will be less profitable, and we
may choose not to write policies in that state. We have
responded to these rate decreases by expanding our alternative
market business in Florida and strengthening our collateral on
that business where appropriate. In addition, we have the
ability to offer different kinds of policies in administered
pricing states, including retrospectively rated policies and
dividend policies, for which an insured can receive a return of
a portion of the premium paid if the insureds claims
experience is favorable. We expect an increase in Florida
experience modifications, which permit us to increase the
premiums we charge based on a policyholders loss history.
We anticipate that our ability to adjust to these market changes
will create opportunities as our competitors with higher expense
ratios find the Florida market less desirable.
48
The cyclical nature of the industry, the actions of our
competitors, state insurance regulation and general economic
factors could cause our revenues and net income from insurance
operations to fluctuate. We manage our insurance operations
across market cycles by striving to maintain premium rates in
non-administrative pricing states, deploy capital judiciously,
manage our expenses and focus on underserved sectors within our
target markets that we believe will provide opportunities for
favorable underwriting margins.
In September 2003, our wholly-owned subsidiary, Patriot National
Insurance Group, Inc., acquired Guarantee Insurance, a shell
property and casualty insurance company that was not then
writing new business, for a purchase price of approximately
$9.5 million, in the form of $750,000 in cash and a note in
the amount of approximately $8.8 million. At that time,
Guarantee Insurance had a number of commercial general liability
claims, including asbestos and environmental claims, that had
been in run-off since 1983. The former owner of Guarantee
Insurance agreed to indemnify us for certain losses in excess of
reserves arising from these claims up to the amount of the
original purchase price. On March 30, 2006, we entered into
a settlement and termination agreement with the seller where the
note issued as part of the purchase price was released in
exchange for a cash payment of $2.2 million and the release
of the sellers agreement to indemnify us for losses in
excess of reserves. In 2006, we recognized a pre-tax
$6.6 million gain on early extinguishment of debt in
connection with this settlement and termination agreement. As of
September 30, 2009, we held net reserves in the amount of
approximately $4.2 million for losses attributable to the
legacy claims.
Principal
Revenue and Expense Items
Our revenues consist primarily of the following:
Premiums
Earned
Premiums earned represent the earned portion of our net premiums
written. Net premiums written are equal to gross premiums
written less premiums ceded to reinsurers. Gross premiums
written include the estimated annual direct premiums written
from each insurance policy we write or renew during the
reporting period based on the policy effective date or the date
the policy is bound, whichever is later, as well as premiums
assumed.
Premiums are earned on a daily pro rata basis over the term of
the policy. At the end of each reporting period, premiums
written that are not yet earned are classified as unearned
premiums and are earned in subsequent periods over the remaining
term of the policy. Our insurance policies typically have a term
of one year. Thus, for a one-year policy written on July 1,
2009 for an employer with constant payroll during the term of
the policy, we would earn half of the premiums in 2009 and the
other half in 2010.
Many of our policies renew on January 1 of each year. As a
result, we have experienced some seasonality in our gross and
net premiums written in that generally we write more new and
renewal policies during the first quarter of the calendar year.
The actual premium we earn on a policy is based on the actual
payroll during the term of the policy. We conduct premium audits
on our traditional and alternative market policyholders annually
upon the expiration of each policy, including when the policy is
renewed. The purpose of these audits is to verify that
policyholders have accurately reported their payroll expenses
and employee job classifications and therefore have paid us the
premium required under the terms of their policies. In addition
to annual audits, we selectively perform interim audits on
certain classes of business if significant or unusual claims are
filed or if the monthly reports submitted by a policyholder
reflect a payroll pattern or any aberrations that cause
underwriting, safety or fraud concerns.
Insurance
Services Income
Insurance services income is a key component of our hybrid
business model. In 2009, we began producing business and
performing insurance services for our BPO client. We earn
insurance services income for producing business, providing
underwriting, policy and claims administration, nurse case
management and cost containment services and, in certain cases,
providing services to segregated portfolio cell captives on the
business we produce for our BPO client. We collect fronting fees
from policyholders and remit such fees to our BPO client.
Additionally, Guarantee Insurance assumes a portion of the
premium and associated losses
49
and loss adjustment expenses on the business we produce for our
BPO client. Commission income and other insurance services
income attributable to underwriting, policy and claims
administration services and services to segregated portfolio
cell captives associated with this business are based on a
percentage of premiums produced or reference premiums produced,
as applicable, for our BPO client, reduced by an allowance for
estimated insurance services income that will not be received
due to the cancellation of policies prior to expiration and
reductions in payroll. Income attributable to nurse case
management and cost containment services is recognized in the
period during which such services are provided.
Guarantee Insurance assumes a portion of the premium and
associated losses and loss adjustment expenses on the business
we produce for our BPO client, which is mutually determined by
the parties for each policy. The portion of risk assumed by
Guarantee Insurance on business we produced for our BPO client
during the third quarter of 2009 ranged from approximately 10%
to 100%. Based on the total amount of premiums on the business
produced for our BPO client, Guarantee Insurance assumed an
average of approximately 40% of the business produced during the
third quarter of 2009, although we expect this percentage may
vary significantly from quarter to quarter. For the nine months
ended September 30, 2009, Guarantee Insurance assumed
approximately 100% of the risk on large deductible business
produced for our BPO client and 10% to 30% of the risk on all
other business produced for our BPO client. In connection with
business assumed by us under this arrangement, we provide
collateral in the form of cash, letters of credit or other forms
of acceptable collateral, as required by the agreement. No
collateral was required as of September 30, 2009.
Our insurance services segment income includes all nurse case
management, cost containment and other insurance services fee
income earned by PRS and PUI. However, the fees earned by PRS
and PUI that are attributable to the portion of the insurance
risk that Guarantee Insurance retains and assumes from other
insurance companies are eliminated upon consolidation.
Therefore, our insurance services income, on a consolidated
basis, consists of income for services provided to unaffiliated
clients. With respect to business written by Guarantee
Insurance, the fees earned by PRS represent the fees paid by
segregated portfolio captives and our quota share reinsurers for
services performed on their behalf and for which Guarantee
Insurance is reimbursed through a ceding commission. For
financial reporting purposes, we treat these ceding commissions
as a reduction in net policy acquisition and underwriting
expenses. With respect to business produced for our BPO client,
the fees earned by PRS and PUI represent fees paid by the BPO
client attributable to the portion of insurance risk it retains.
Because our insurance services income is currently generated
principally from the services we provide to Guarantee Insurance
for the benefit of segregated portfolio captives and our quota
share reinsurers, our insurance services income is currently
substantially dependent on Guarantee Insurances premium
and risk retention levels. However, we expect that our nurse
case management, cost containment and other insurance services
operations will become less dependent over time on Guarantee
Insurances premium and risk retention levels as we expand
our business process outsourcing relationships and develop
additional general agency appointments and enter into agreements
with other BPO clients for nurse case management, cost
containment and other insurance services.
General agency services on Guarantee Insurances
alternative market segregated portfolio captive business were
provided by PRS prior to 2008, pursuant to which Guarantee
Insurance paid PRS a general agency commission, a portion of
which was retained by PRS and a portion of which was paid by PRS
as commission compensation to the producing agents. Effective
January 1, 2008, Guarantee Insurance began working directly
with agents to market segregated portfolio captive business and
paying commissions directly to the producing agents. As a
result, PRS ceased earning general agency commissions and ceased
paying commissions to producing agents attributable to Guarantee
Insurance business.
Net
Investment Income and Net Realized Gains and Losses on
Investments
Our net investment income includes interest and dividends earned
on our invested assets, net of investment expenses. In 2007, we
purchased tax exempt municipal debt securities, which are
classified as
available-for-sale,
to help increase the after-tax contribution of net investment
income. Tax exempt securities typically have an adverse effect
on net investment income and pre-tax investment portfolio
yields, which effect is generally offset by a reduction in
aggregate effective federal income tax rates.
50
We assess the performance of our investment portfolio using a
standard tax equivalent yield metric. Investment income that is
tax exempt is grossed up by our marginal federal tax rate of 34%
to express yield on tax-exempt securities on the same basis as
taxable securities. Net realized gains and losses on investments
are reported separately from our net investment income. Net
realized gains occur when investment securities are sold for
more than their costs or amortized costs, as applicable. Net
realized losses occur when investment securities are sold for
less than their costs or amortized costs, as applicable, or are
written down as a result of an
other-than-temporary
impairment.
Our expenses consist primarily of the following:
Losses
and Loss Adjustment Expenses Incurred
Losses and loss adjustment expenses incurred represent our
largest expense item. Losses and loss adjustment expenses are
comprised of paid losses and loss adjustment expenses, estimates
of future claim payments on claims reported in the period,
changes in those estimates from prior reporting periods and
costs associated with investigating, defending and servicing
reported claims. These expenses fluctuate based on the amount
and types of risks we insure. We record losses and loss
adjustment expenses related to estimates of future claim
payments based on
case-by-case
valuations and statistical analyses. We seek to establish
reserves at the most likely ultimate exposure based on our
historical claims experience. More serious claims typically take
several years to close, and we revise our estimates as we
receive additional information about the condition of injured
employees and as industry conditions change. Our ability to
estimate losses and loss adjustment expenses accurately at the
time we price our insurance policies is a critical factor in our
profitability.
Net
Policy Acquisition and Underwriting Expenses
Net policy acquisition and underwriting expenses represent the
costs we incur in connection with our insurance operations,
principally costs to acquire, underwrite and administer
traditional and alternative market workers compensation
insurance policies. These expenses include commissions, salaries
and benefits related to insurance operations, state and local
premium taxes and fees and other operating costs, partially
offset by ceding commissions we earn from reinsurers under our
reinsurance program.
Other
Operating Expenses
Other operating expenses represent the costs we incur other than
those associated with our insurance operations, principally
costs incurred in connection with our insurance services
operations and holding company expenses. The costs associated
with our insurance services operations include the cost of
providing nurse case management services, preferred provider
network costs for access to discounted health care services and
commissions to producing agents. With respect to business
produced for our BPO client, commissions to producing agencies
and certain marketing and underwriting costs, which are
generally based on a percentage of premiums produced or
reference premiums produced, as applicable, for our BPO client,
are reduced by (i) an allowance for estimated commissions
that will not be paid due to the cancellation of policies prior
to expiration and reductions in payroll and (ii) policy
administration and claims costs, which are expensed as incurred.
All such expenses are included in other operating expenses in
our consolidated statements of income.
Interest
Expense
Interest expense represents amounts we incur on our outstanding
indebtedness based on the applicable interest rates during the
relevant periods.
Income
Tax Expense
Income tax expense represents both current and deferred federal
income taxes incurred.
Measurement
of Results
We use various measures to analyze the growth and profitability
of our operations.
51
For our insurance services operations, we measure growth in
terms of fee income produced from insurance services, which is
dependent on the number and size of claims being managed as well
as the amount of premium we produce for other insurance
companies. For our insurance operations, we measure growth in
terms of gross and net premiums written and we measure
underwriting profitability by examining our net loss, net
expense and combined ratios. A combined ratio is the sum of the
net loss ratio and the net underwriting expense ratio, each
calculated as described below. We also measure our gross and net
premiums written to surplus ratios to assess the adequacy of
capital in relation to premiums written. We measure
profitability in terms of pre-tax net income, net income and
return on average equity.
Premiums
Written
Gross premiums written represent the estimated gross premiums
for the duration of the policy, recognized at the inception of
the policy. We use gross premiums written to measure our sales
for our insurance operations. Gross premiums written also
correlates to our ability to generate net premiums earned and,
with respect to the premiums we cede to segregated portfolio
cell captives and our quota share reinsurers, ceding commissions
and insurance services income.
Loss
Ratio
We use calendar year and accident year loss ratios to measure
our underwriting profitability. A calendar year loss ratio
measures losses and loss adjustment expense for insured events
occurring during a particular year, together with changes in
loss reserves from prior accident years, as a percentage of
premiums earned during that year. An accident year loss ratio
measures losses and loss adjustment expenses for insured events
occurring in a particular year, regardless of when they are
reported, as a percentage of premium earned during that year.
The net loss ratio is calculated by dividing net losses and loss
adjustment expenses by net earned premiums. The net loss ratio
measures claims experience, net of the effects of reinsurance,
and therefore is a measure of the effectiveness of our
underwriting efforts. We report our net loss ratio on both a
calendar year and accident year basis.
Net
Expense Ratio
The net expense ratio is calculated by dividing net policy
acquisition and underwriting expenses (which are comprised of
gross policy acquisition costs and other gross expenses incurred
in our insurance operations, net of ceding commissions earned
from our reinsurers) by net earned premiums. The expense ratio
measures our operational efficiency in producing, underwriting
and administering our insurance operations. The gross expense
ratio is calculated before the effect of ceded reinsurance. We
calculate our expense ratio on a net basis (after the effect of
ceded premium and related ceding commissions) to measure the
results of our consolidated insurance operations. Ceding
commissions reduce our gross underwriting expenses in our
insurance operations.
Combined
Ratio
We use the combined ratio to measure the underwriting
profitability of our insurance operations. The combined ratio is
the sum of the net loss ratio and the net expense ratio.
Net
Income and Return on Average Equity
We use net income to measure our profits and return on average
equity to measure the effectiveness in utilizing our
stockholders equity to generate net income on a
consolidated basis. In determining return on average equity for
a given period, net income is divided by the average of
stockholders equity at the beginning and end of that
period and annualized in the case of periods less than one year.
Outlook
Set forth below are certain of our objectives with respect to
our business subsequent to this initial public offering. We
caution you that these objectives may not materialize and are
not indicative of the actual
52
results that we will achieve. Many factors and future
developments may cause our actual results to differ materially
and significantly from the information set forth below. See
Risk Factors and Forward-Looking
Statements.
Upon completion of this initial public offering, the majority of
the net proceeds of the offering will be contributed to
Guarantee Insurance and, if we acquire it, PF&C, and
deployed in accordance with our primary investment objectives of
preserving capital and achieving an appropriate risk adjusted
return, with an emphasis on liquidity to meet claims obligations.
Return
on Average Equity
One of the key financial measures that we will use to evaluate
our operating performance will be return on average equity. We
will calculate return on average equity for a given year by
dividing net income by the average of stockholders equity
for that year. Our return on average equity was 36.7% for the
nine months ended September 30, 2009. With the increased
capitalization as a result of this initial public offering, we
expect a lower return on average equity. Our objective over the
long term is to produce a return on average equity of at least
15%. To help achieve our return on average equity objective, we
may consider funding our operations, in part, with borrowings or
other non-equity sources of capital in the future.
Indebtedness
We may utilize additional debt, as appropriate, to maintain a
net leverage ratio on our insurance operations that satisfies
the regulatory authorities that oversee Guarantee
Insurances operations. Furthermore, we may utilize
additional debt, as appropriate, in connection with the
acquisition of an insurance or insurance services organization
or book of business. Over the long term, we expect to target a
debt to equity ratio of 10% to 25%.
Insurance
Services Operations
Insurance
Services Income
Our insurance services income comprised approximately 24% of
total revenues for the nine months ended September 30, 2009. We
target our insurance services income to be 30% to 40% of total
revenues in the near term. Additionally, we target insurance
services income to generate 20% to 40% of average return on
equity in the near term.
Pre-Tax
Margin on Insurance Services Income
Our pre-tax margin on insurance services income was 35% for the
nine months ended September 30, 2009. Primarily due to
economies of scale related to generally fixed holding company
expenses allocated to the insurance services segment, we target
our pre-tax margin on insurance services income to increase to
40% to 45% over the long term.
Insurance
Operations
Mix of
Business
Alternative market and traditional gross premiums written
comprised approximately 49% and 57% of our total direct premiums
written, respectively, for the nine months ended
September 30, 2009. Upon completion of this offering, we
plan to increase our alternative market business more
significantly than our traditional business. In the near term,
we target our alternative market gross premiums written to
comprise 55% to 70% of our total direct premiums written.
Underwriting
Ratios
The net loss ratio is calculated by dividing consolidated net
losses and loss adjustment expenses by net earned premiums. The
net expense ratio is calculated by dividing consolidated net
policy acquisition and
53
underwriting expenses (which are comprised of gross policy
acquisition costs and other gross expenses incurred in our
insurance operations, net of ceding commissions earned from our
reinsurers) by net earned premiums. The net combined ratio is
the sum of the net loss ratio and the net expense ratio. Our net
loss ratio, net expense ratio and net combined ratio were 55.9%,
30.0% and 85.9% for the nine months ended September 30,
2009. Over the long term, we target a net combined ratio of less
than 85% and a net loss ratio at between 55% and 65%. We expect
our net expense ratio to decline over time as our alternative
market direct premiums written increase in proportion to our
total direct premiums written due to the fact that ceding
commissions on our segregated portfolio cell captive business,
which are recognized as a contra-expense, generally exceed our
gross expense ratio. Additionally, we expect our net expense
ratio to decline over time as our total direct premiums written
increase and we realize certain economies of scale.
Aggregate
Risk Retention Levels and Operating Leverage
Our aggregate risk retention level, as measured by dividing
alternative market and traditional net premiums written by
alternative market and traditional gross premiums written, was
42% for the nine months ended September 30, 2009. Over the
long term, we target our aggregate risk retention level to
decrease to 25% to 35% due to our expected increase in the
proportion of alternative market direct premiums written, a
substantial portion of which is comprised of segregated
portfolio cell captive arrangements, on which we retained
approximately 14% of the underwriting risk for the nine months
ended September 30, 2009.
Our net operating leverage ratio, as measured by dividing net
premiums earned by average stockholders equity, was
approximately 7.8 to 1 for 2008. With the increased capital from
this offering, we expect our net operating leverage ratio to
decrease significantly. In the near term, we target a net
leverage ratio of between 0.3 to 1 and 0.5 to 1. Actual
operating leverage ratios may vary from targets due to factors
that affect our ratings with various organizations and capital
adequacy requirements imposed by insurance regulatory
authorities. These factors include the amount of our statutory
surplus and stockholders equity, premium growth, debt
facilities, quality and terms of reinsurance and business mix.
Investment
Leverage Ratio
We expect most of our investment portfolio to continue to
principally consist of high quality fixed income securities. We
plan to continue to pursue competitive investment returns while
maintaining a diversified portfolio of securities with a primary
emphasis on the preservation of principal through high credit
quality issuers with limited exposure to any one issuer. We
expect our investment income to increase as our invested assets
grow, and we target a tax-adjusted yield on investment of 4.5%
in the near term. As we fully deploy the capital from this
offering, we expect to target an investment leverage ratio,
which is the ratio of average invested assets to average equity,
of between 1.0 to 1 and 1.5 to 1.
Reserving
Methodology for Legacy Asbestos and Environmental
Exposures
When we acquired Guarantee Insurance in 2003, it had certain
asbestos and environmental liability exposures arising out of
the sale of general liability insurance and participations in
reinsurance assumed through underwriting management
organizations, commonly referred to as pools. Generally,
reserves for asbestos and environmental claims cannot be
estimated with traditional loss reserving techniques that rely
on historical accident year development factors due to the
uncertainties surrounding asbestos and environmental liability
claims. As of December 31, 2008, we had established
reserves, net of reinsurance recoverables on unpaid losses, of
approximately $3.0 million attributable to asbestos and
environmental exposures. These reserves are attributable to 22
direct claims, Guarantee Insurances share of two
reinsurance pool claims and our estimate of the impact of
unreported claims. In one of these pools, Guarantee Insurance
reinsured the risks of other insurers and then ceded a portion
(generally 80%) of these reinsurance risks to other reinsurers,
which we call participating pool reinsurers. Under this
structure, Guarantee Insurance remains obligated for the total
liability under each reinsurance contract it issued, to the
extent any of the participating pool reinsurers fails to pay its
share. Over time, Guarantee Insurances net liabilities
under these reinsurance contracts have increased from
approximately 20% to approximately 50% of the pooled risks, due
to the insolvency of some participating pool reinsurers. In the
other pool, Guarantee Insurance is one of a number of
participating pool
54
reinsurers, and its liability is based on the percentage share
of the pool obligations it reinsures. Our reserves for direct
asbestos and environmental liability claims are based on a
detailed review of each case. Our reserves for pooled asbestos
and environmental liability exposures are based on our share of
aggregate reserves established by pool administrators through
their consultation with independent actuarial consultants.
We believe that our reserve methodology results in net reserves
for asbestos and environmental claims that are adequate to cover
the ultimate cost of losses and loss adjustment expenses
thereon. However, we believe that adopting the survival ratio
reserve methodology for asbestos and environmental exposures
would make our reserve methodology for these exposures generally
consistent with our publicly held insurance company peers.
Accordingly, we are evaluating the possibility of adopting this
methodology. Under the survival ratio reserve methodology, our
net reserve for asbestos and environmental liability exposures
would be estimated based on a multiple of approximately 15 times
our average net paid asbestos and environmental claims the three
most recent years. If we had adopted the survival ratio reserve
methodology as of December 31, 2008, our net reserve for
asbestos and environmental exposures would have been
approximately $5.1 million, representing an increase in net
losses and loss adjustment expenses of approximately
$2.1 million.
We expect to make a decision with respect to the adoption of the
survival ratio reserve methodology in connection with the
preparation of our financial statements for the fourth quarter
of 2009. If we adopt this methodology, our pre-tax income for
the period in which we increase our reserves will decrease by a
corresponding amount.
Target
Top Line for Fourth Quarter 2009
Our financial statements for the year ended December 31, 2009
are not yet available and have not been audited. However, for
the fourth quarter of 2009, we expect direct premiums written of
approximate $[ ] million to
$[ ] million, premiums produced for
our BPO client of approximately
$[ ] million to
$[ ] million, and reference
premiums produced for our BPO client of approximately
$[ ] million to
$[ ] million.
Critical
Accounting Policies
The following is a description of the accounting policies
management considers important to the understanding of our
financial condition and results of operations.
Reserves
for Losses and Loss Adjustment Expenses
We record reserves for estimated losses under insurance policies
that we write and for loss adjustment expenses related to the
investigation and settlement of policy claims. Our reserves for
losses and loss adjustment expenses represent the estimated cost
of all reported and unreported losses and loss adjustment
expenses incurred and unpaid at any given point in time based on
facts and circumstances known to us at the time. Our reserves
for losses and loss adjustment expenses are estimated using
case-by-case
valuations and statistical analyses. These estimates are
inherently uncertain. In establishing these estimates, we make
various assumptions regarding a number of factors, including
frequency and severity of claims, length of time to achieve the
ultimate settlement of claims, projected inflation of medical
costs and wages, insurance policy coverage interpretations,
judicial determinations and regulatory changes. Due to the
inherent uncertainty associated with these estimates, our actual
liabilities may be different from our original estimates. On a
quarterly basis, we review our reserves for losses and loss
adjustment expenses to determine whether any further adjustments
are appropriate. Any resulting adjustments are included in the
current periods results. We do not discount loss and loss
adjustment expense reserves for the time value of money from the
date claims are incurred to the date they are paid. Additional
information regarding our reserves for losses and loss
adjustment expenses can be found in Business
Loss and Loss Adjustment Expense Reserves.
As a result of unfavorable development on prior accident year
reserves, our estimate for incurred losses and loss adjustment
expenses increased by approximately $1.7 million and
$1.3 million for the nine months ended September 30,
2009 and for the year ended December 31, 2008,
respectively. As a result of favorable
55
development on prior accident year reserves, our estimate for
incurred losses and loss adjustment expenses decreased by
approximately $3.5 million for the year ended
December 31, 2007. As a result of unfavorable development
on prior accident year reserves, our estimate for incurred
losses and loss adjustment expenses increased by approximately
$2.5 million for the year ended December 31, 2006. See
Business Reconciliation of Reserves for Losses
and Loss Adjustment Expenses.
Amounts
Recoverable from Reinsurers
Amounts recoverable from reinsurers represent the portion of our
paid and unpaid losses and loss adjustment expenses that is
assumed by reinsurers. These amounts are reported on our balance
sheet as assets and do not reduce our reserves for losses and
loss adjustment expenses because reinsurance does not relieve us
of our primary obligation to our policyholders. We are required
to pay claims even if a reinsurer fails to pay us under the
terms of a reinsurance contract. We calculate amounts
recoverable from reinsurers based on our estimates of the
underlying losses and loss adjustment expenses and the terms and
conditions of our reinsurance contracts, which could be subject
to interpretation. In addition, we bear credit risk with respect
to our reinsurers, which can be significant because some of the
unpaid losses and loss adjustment expenses for which we have
reinsurance coverage remain outstanding for extended periods of
time.
We have reinsurance agreements with both authorized and
unauthorized reinsurers. Authorized reinsurers are licensed or
otherwise authorized to conduct business in the state of
Florida, Guarantee Insurances state of domicile. Under
statutory accounting principles, Guarantee Insurance receives
credit on its statutory financial statements for all paid and
unpaid losses ceded to authorized reinsurers. Unauthorized
reinsurers are not licensed or otherwise authorized to conduct
business in the state of Florida. Under statutory accounting
principles, Guarantee Insurance receives credit for paid and
unpaid losses ceded to unauthorized reinsurers to the extent
these liabilities are secured by funds held, letters of credit
or other forms of acceptable collateral. With respect to
authorized reinsurers, we manage our credit risk by generally
selecting reinsurers with a financial strength rating of
A− (Excellent) or better by A.M. Best and
by performing quarterly credit reviews of our reinsurers. With
respect to unauthorized reinsurers, including segregated
portfolio captives, we manage our credit risk by generally
maintaining collateral, typically in the form of funds withheld
and letters of credit, to cover reinsurance recoverable
balances. If one of our reinsurers suffers a credit downgrade,
we may consider various options to lessen the risk of asset
impairment, including commutation, novation and additional
collateral.
In order to qualify for reinsurance accounting and provide
accounting benefit to us, reinsurance agreements must transfer
insurance risk to the reinsurer. Risk transfer standards under
generally accepted accounting principles (GAAP) require that
(a) the reinsurer assume significant insurance risk
(underwriting risk and timing risk) under the reinsured portions
of the underlying insurance agreements, and (b) it be
reasonably possible that the reinsurer may realize a significant
loss from the transaction. In determining whether the degree of
risk transfer is adequate to qualify for reinsurance accounting,
each reinsurance contract is evaluated on its own facts and
circumstances. To the extent that the accounting risk transfer
thresholds are not met, the reinsurance transaction is accounted
for as a deposit. The treatment of reinsurance transactions as
deposits does not mean that economic risk has not been
transferred, but rather that the nature and the amount of the
risk transferred do not sufficiently satisfy GAAP risk transfer
criteria to be afforded reinsurance accounting treatment. We
evaluate our reinsurance contracts at their inception and upon
subsequent amendments to determine whether reinsurance
accounting or deposit accounting is appropriate.
Our reinsurance recoverable balance was carried net of an
allowance for doubtful accounts of $300,000 at
September 30, 2009 and December 31, 2008. For the nine
months ended September 30, 2009 and the years ended
December 31, 2008, 2007 and 2006, we did not, in the
aggregate, experience material difficulties in collecting
balances from our reinsurers. No assurance can be given,
however, regarding the future ability of our reinsurers to meet
their obligations.
56
Premiums
Receivable
Premiums receivable are uncollateralized policyholder
obligations due under normal policy terms requiring payment
within a specified period from the invoice date. Premium
receivable balances are reviewed for collectability and
management provides an allowance for estimated doubtful
accounts, which reduces premiums receivable. Our premiums
receivable were carried net of an allowance for uncollectible
accounts, based upon a specific impairment basis methodology, of
$650,000 at September 30, 2009 and December 31, 2008.
Due to an increase in the aging of our premiums receivable and
exposure to uncollateralized balances, we may establish an
additional allowance for accounts that may not be collectible
but which we have not specifically identified as impaired. We
believe that this methodology is consistent with the methodology
utilized by our publicly held insurance company peers. We
anticipate that the additional allowance amount that may be
required based upon this analysis is between $500,000 and
$1.0 million. This additional allowance, if determined by
management to be appropriate, would be recorded in the fourth
quarter of 2009. No assurance can be given regarding the future
ability of our policyholders to meet their obligations.
Revenue
Recognition
Through PRS, we earn insurance services income by providing
nurse case management and cost containment services to Guarantee
Insurance, on its behalf, on behalf of the segregated portfolio
captives and on behalf of Guarantee Insurances quota share
reinsurers. Through PRS and PUI, we also earn insurance services
income by providing nurse case management, cost containment,
claims administration, sales, underwriting, policy
administration and, in certain cases, segregated portfolio
captive management services to our BPO client.
Insurance services income for nurse case management services is
based on a monthly charge per claimant. Insurance services
income for cost containment services is based on a percentage of
claim savings. Insurance services income for claims
administration is based on a percentage of reference premiums
produced for our BPO client (recognized on a pro rata basis over
the period of time we are contractually obligated to administer
the claims). Insurance services income for sales, underwriting
and segregated portfolio cell captive setup, policy
administration and captive management services is based on a
percentage of premiums produced for our BPO client, reduced by
an allowance for estimated insurance services income that will
not be received due to the cancellation of policies prior to
expiration and reductions in payrolls. Insurance services income
for policy administration and captive management is based on a
percentage of premiums produced for our BPO client, recognized
on a pro rata basis over the lives of the policies produced.
Insurance services income includes all insurance services income
earned by PRS and PUI. However, the insurance services income
earned by PRS from Guarantee Insurance that is attributable to
the portion of the insurance risk that Guarantee Insurance
retains or assumes from our BPO client is eliminated upon
consolidation. Therefore, our consolidated insurance services
income consists of the fees earned by PUI and the portion of
fees earned by PRS that are attributable to the portion of the
insurance risk assumed by the segregated portfolio captives,
assumed by Guarantee Insurances quota share reinsurers or
retained by our BPO client.
Premiums are earned pro rata over the terms of the policies
which are typically annual. The portion of premiums that will be
earned in the future is deferred and reported as unearned
premiums. We estimate earned but unbilled premiums at the end of
the period by analyzing historical earned premium adjustments
made and applying an adjustment percentage to premiums earned
for the period. For the year ended December 31, 2008, we
reduced our earned but unbilled premium percentage to reflect
lower payrolls which we believe were largely reflective of
employment trends in the economy. For the nine months ended
September 30, 2009 and the year ended December 31,
2008, we did not experience any material changes in estimates
related to premiums earned, including earned but unbilled
premiums. No assurance can be given that there will be no
material changes in estimates related to premiums earned,
including earned but unbilled premiums, in the future.
57
Deferred
Policy Acquisition Costs and Deferred Ceding
Commissions
We defer commission expenses, premium taxes and certain
marketing, sales and underwriting costs that vary with and are
primarily related to the acquisition of insurance policies. We
also defer associated ceding commissions. These acquisition
costs are capitalized and charged to expense ratably as premiums
are earned. In calculating deferred policy acquisition costs and
deferred ceding commissions, we only include costs to the extent
of their estimated realizable value, which gives effect to the
premiums expected to be earned, anticipated losses and
settlement expenses and certain other costs we expect to incur
as the premiums are earned, less related net investment income.
Judgments as to the ultimate recoverability of deferred policy
acquisition costs and deferred ceding commissions are highly
dependent upon estimated future profitability of unearned
premiums. If unearned premiums are less than our expected claims
and expenses after considering investment income, we reduce the
related deferred policy acquisition costs. For the nine months
ended September 30, 2009 and the years ended
December 31, 2008 and 2007, we did not, in the aggregate,
experience material changes in our deferred policy acquisition
costs or deferred ceding commissions in connection with changes
in estimated recoverability. No assurance can be given, however,
regarding the future recoverability of deferred policy
acquisition costs or deferred ceding commissions.
Deferred
Income Taxes
We use the liability method of accounting for income taxes.
Under this method, deferred income tax assets and liabilities
are recognized for the future tax consequences attributed to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities resulting from
a tax rate change will impact our net income or loss in the
reporting period that includes the enactment date of the tax
rate change. In assessing whether our deferred tax assets will
be realized, we consider whether it is more likely than not that
we will generate future taxable income during the periods in
which those temporary differences become deductible. We consider
the scheduled reversal of deferred tax liabilities, tax planning
strategies and projected future taxable income in making this
assessment. If necessary, we will establish a valuation
allowance to reduce the deferred tax assets to the amounts that
are more likely than not to be realized.
At December 31, 2006, we provided a full valuation
allowance on the deferred tax asset attributable to net
operating loss carry forwards generated by The Tarheel Group,
Inc., or Tarheel. On April 1, 2007, when our majority
stockholder contributed all the outstanding capital stock of
Tarheel to Patriot Risk Management, we determined that our
operating performance, coupled with our expectations to generate
future taxable income, indicated that it was more likely than
not that we would be able to utilize this asset to offset future
taxes and, accordingly, we reversed this valuation allowance.
The deferred tax asset associated with net operating loss carry
forwards from Tarheel and its subsidiary, Tarheel Insurance
Management Company, or TIMCO, was fully utilized as of
September 30, 2009. As of September 30, 2009 and
December 31, 2008, no other deferred tax assets have been
deemed more likely than not to be unrealizable and, accordingly,
no valuation allowance was deemed necessary for unrealizable
deferred tax assets. No assurance can be given, however,
regarding the future realization of deferred tax assets.
Assessments
We are subject to various assessments related to our insurance
operations, including assessments for state guaranty funds and
second injury funds. State guaranty fund assessments are used by
state insurance oversight agencies to pay claims of
policyholders of impaired, insolvent or failed insurance
companies and the operating expenses of those agencies. Second
injury funds are used by states to reimburse insurers and
employers for claims paid to injured employees for aggravation
of prior conditions or injuries. In some states, these
assessments may be partially recovered through a reduction in
future premium taxes. In accordance with Financial Accounting
Standards Board (FASB) guidance contained in Accounting
Standards Codification (ASC) 450, Contingencies, we
establish a provision for these assessments at the time the
amounts are probable and estimable. Assessments based on
premiums are generally paid one year after the calendar year in
which
58
the policies are written. Assessments based on losses are
generally paid within one year of when claims are paid by us.
For the nine months ended September 30, 2009 and the years
ended December 31, 2008 and 2007, we did not experience any
material changes in our estimates of assessments for state
guaranty funds and second injury funds. No assurance can be
given, however, regarding the future changes in estimates of
such assessments.
Share-Based
Compensation Costs
In December 2004, the FASB issued guidance for accounting for
stock-based
compensation costs, now part of ASC 718,
Compensation-Stock
Compensation, which requires the compensation costs relating
to stock options granted or modified after December 31,
2005 to be recognized in financial statements using the fair
value of the equity instruments issued on the grant date of such
instruments and to be recognized as compensation expense over
the period during which an individual is required to provide
service in exchange for the award (typically the vesting
period). We adopted this guidance effective January 1,
2006, and the impact of the adoption was not significant to our
financial statements for the nine months ended December 31,
2009 or 2008 or the years ended December 31, 2008 or 2007.
We estimate share-based compensation costs of approximately
$[ ],
$[ ] and
$[ ] for the years ending
December 31, 2010, 2011 and 2012, respectively, relating to
stock options that we have granted and expect to grant to our
management and members of our board of directors, recognized on
a pro rata basis over the vesting period. As of
September 30, 2009, we had 163,500 outstanding options. For
the nine months ended September 30, 2009 and the years
ended December 31, 2008 and 2007, we did not experience any
material changes in our estimates of share-based compensation
costs. No assurance can be given, however, regarding the future
changes in estimates of share-based compensation costs.
The fair value of the underlying common stock for all option
grants made between December 2005 and July 2007 was determined
by the board of directors to be $8.02, which was based on the
boards evaluation of our financial condition and results
of operations. Our financial condition, as measured by our
internal financial statements and by Guarantee Insurances
statutory surplus levels and uncertainties related to our
abilities to increase premium writings due to surplus
constraints, did not change materially between December 2005 and
July 2007. We did not secure an independent appraisal to verify
that valuation because we concluded that an independent
appraisal would not result in a more meaningful or accurate
determination of fair value under the circumstances.
The intrinsic value of outstanding vested and unvested options
based on the midpoint of the price range set forth on the cover
page of this prospectus is $[ ] and
$[ ], respectively.
The increase from the $8.02 per share fair value as of each
stock option grant date from December 30, 2005 to
July 10, 2007 to the estimated initial public offering
price is largely attributable to two principal factors:
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The first factor is the liquidity driven valuation premium
inherently available to a company as it transitions from
privately held to publicly traded status.
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The second factor relates to our growth prospects, which have
improved because the additional capital from this offering will
allow us to increase our gross premiums written and retain more
of our business, together with improved prospects for claim and
cost containment and insurance services income.
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No options or stock awards were granted during the nine months
ended September 30, 2009 or the year ended
December 31, 2008.
See Note 8 to our consolidated interim financial statements
as of September 30, 2009 and for the nine months then ended
and Note 12 to our consolidated financial statements as of
December 31, 2008 and for the year then ended for more
information regarding our stock option plans, stock options and
stock awards granted during 2007 and 2006.
59
Impairment
of Invested Assets
Impairment of an invested asset results in a reduction of the
carrying value of the asset and the realization of a loss when
the fair value of the asset declines below our carrying value
and the impairment is deemed to be
other-than-temporary.
We regularly review our investment portfolio to evaluate the
necessity of recording impairment losses for
other-than-temporary
declines in the fair value of our invested assets. We consider
various factors in determining if a decline in the fair value of
a security is
other-than-temporary,
including the scope of the decline in value, the amount of time
that the fair value of the asset has been below carrying value,
the financial condition of the issuer and our intent and ability
to hold the asset for a period sufficient for us to recover its
value.
For the nine months ended September 30, 2009, we did not
recognize any
other-than-temporary
impairments. For the year ended December 31, 2008, we
recognized an
other-than-temporary
impairment charge of approximately $875,000 related to
investments in certain equity securities. Additionally, during
2008, we recognized an
other-than-temporary-impairment
charge of approximately $355,000 on our investment of
approximately $400,000 in certain Lehman Brothers Holdings, Inc.
bonds as a result of Lehman Brothers bankruptcy. For the
year ended December 31, 2007, we did not recognize any
other than temporary impairments. For the year ended
December 31, 2006, Tarheel invested approximately
$1.7 million in Foundation Insurance Company, a limited
purpose captive insurance subsidiary of Tarheel that reinsured
workers compensation program business, in order to permit
Foundation to settle certain obligations relating to its
business. We wrote down this investment in 2006. No assurance
can be given regarding future changes in estimates related to
other-than-temporary
impairment of our investment securities.
Adoption
of New Accounting Standards and Recent Accounting
Pronouncements
Accounting
Standards Codification
In June 2009, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles, a replacement of FASB Statement
No. 162 (the Codification). The Codification
reorganized existing U.S. accounting and reporting
standards issued by the FASB and other related private sector
standard setters into a single source of authoritative
accounting principles arranged by topic. The Codification
supersedes all existing U.S. accounting standards. All
other accounting literature not included in the Codification,
other than Securities and Exchange Commission guidance for
publicly traded companies, is considered non-authoritative. The
Codification was effective on a prospective basis for interim
and annual reporting periods ending after September 15,
2009. The adoption of the Codification changed our references to
U.S. GAAP accounting standards, but did not impact our
results of operations or financial position.
Business
Combinations
In December 2007, the FASB issued revised guidance for the
accounting for business combinations. The revised guidance,
which is now part of ASC 805, Business Combinations, is
effective for acquisitions during the fiscal years beginning
after December 15, 2008, and early adoption is prohibited.
This revised guidance establishes principles and requirements
for how the acquirer of a business recognizes and measures in
its financial statements the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the
acquired entity. The revised guidance also provides guidance for
recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to
enable users of the financial statements to evaluate the nature
and financial effects of the business combination. The adoption
of this revised guidance on January 1, 2009 did not have an
impact on our results of operations or financial position. The
future impact of the adoption of this revised guidance will
depend upon the extent and magnitude of future acquisitions, if
any.
Additional
Fair Value Measurement Guidance
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
60
or liability. The new guidance, which is now part of ASC 820,
Fair Value Measurements and Disclosures, is effective for
periods ending after June 15, 2009 with early adoption
permitted for periods ending after March 15, 2009.
Retrospective application is not permitted. This new guidance
requires disclosure of the inputs and valuation techniques used,
as well as any changes in valuation techniques and inputs used
during the period, to measure fair value in interim and annual
periods. In addition, the presentation of the fair value
hierarchy is required to be presented by major security type as
described in ASC 320. The adoption of this new guidance on
June 30, 2009 did not have a material impact on our results
of operations or financial position.
Disclosure
about 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, was effective for periods ending after
June 15, 2009 with early adoption permitted for periods
ending after March 15, 2009. The new guidance requires
disclosure of the fair value of financial instruments whenever a
publicly traded company issues financial information in interim
reporting periods in addition to the annual disclosure required
at yearend. The adoption of this new guidance on June 30,
2009 did not have a material impact on our disclosures since all
of our material financial instruments are carried at fair value.
Other-Than-Temporary
Impairments
In April 2009, the FASB issued new guidance for the accounting
for
other-than-temporary
impairments. The new guidance, which is now part of ASC 320,
Investments Debt and Equity Securities, was
effective for periods ending after June 15, 2009 with early
adoption permitted for periods ending after March 15, 2009.
Under the new guidance, an
other-than-temporary
impairment is recognized when an entity has the intent to sell a
debt security or when it is more likely than not that an entity
will be required to sell the debt security before its
anticipated recovery in value. The new guidance also changes the
presentation and amount of
other-than-temporary
impairment losses recognized in the income statement for
instances in which a company does not intend to sell a debt
security, or it is more likely than not that a company will not
be required to sell a debt security prior to the anticipated
recovery of its remaining cost basis. We separate the credit
loss component of the impairment from the amount related to all
other factors and report the credit loss component in net
realized investment gains (losses). The impairment related to
all other factors is reported in accumulated other comprehensive
income, net of deferred income taxes. In addition, the new
guidance expands disclosures related to
other-than-temporary
impairments related to debt securities and requires such
disclosures in both interim and annual periods. The adoption of
the new guidance on June 30, 2009 did not have any impact
on our results of operations or financial position.
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, was effective for interim and
annual periods ending after June 15, 2009. The new guidance
establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued.
Additionally, the new guidance requires the disclosure of the
date through which an entity has evaluated subsequent events and
the basis for that date. The adoption of the new guidance on
June 30, 2009 did not have any impact on our results of
operations or financial position.
Fair
Value Measurement of Liabilities
In August 2009, the FASB issued new guidance for the accounting
for the fair value measurement of liabilities. The new guidance,
which is now part of ASC 820, Fair Value Measurements and
Disclosures, is effective for interim and annual periods
beginning after August 27, 2009. The new guidance provides
clarification that in certain circumstances in which a quoted
price in an active market for an identical liability is not
available, an entity is required to measure fair value using one
or more of the following valuation techniques: The quoted price
of the identical when traded as an asset, the quoted price for
similar liabilities or similar liabilities when traded as an
asset or another valuation technique that is consistent with the
principles
61
of fair value measurements. We do not expect that the provisions
of the new guidance will have a material effect on our results
of operations or financial position.
Results
of Operations
Our results of operations are discussed below in two parts. The
first part discusses our consolidated results of operations. The
second part discusses our results of operations by segment.
Consolidated
Results of Operations
Nine
Months Ended September 30, 2009 Compared to Nine Months
Ended September 30, 2008
Overview of Operating Results. Net income for
the nine months ended September 30, 2009 was
$2.4 million compared to $600,000 for the comparable period
in 2008. Income before income taxes for the nine months ended
September 30, 2009 was $3.8 million compared to
$383,000 for the comparable period in 2008. The increase in
income before income taxes was principally the result of a 107%
increase in insurance services income, a 3.6 percentage
point decrease in net combined ratio and a $1.2 million
increase in net realized gains on investments, partially offset
by a 12% decrease in net premiums earned and a 38% increase in
other operating expenses.
Gross Premiums Written. Gross premiums written
were $96.0 million for the nine months ended
September 30, 2009 compared to $94.9 million for the
comparable period in 2008, an increase of $1.1 million or
1%. The increase was principally attributable to our assumption
of approximately $7.8 million of premiums produced for our BPO
client, beginning in the second quarter of 2009. This was
partially offset by a $7.5 million decrease in traditional
business direct premiums written. Gross premiums written by line
of business were as follows:
|
|
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|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
In thousands
|
|
|
Direct business:
|
|
|
|
|
|
|
|
|
Alternative market
|
|
$
|
42,163
|
|
|
$
|
42,168
|
|
Traditional business
|
|
|
44,378
|
|
|
|
51,912
|
|
|
|
|
|
|
|
|
|
|
Total direct business
|
|
|
86,541
|
|
|
|
94,080
|
|
|
|
|
|
|
|
|
|
|
Assumed business
|
|
|
|
|
|
|
|
|
BPO client
|
|
|
7,824
|
|
|
|
|
|
NCCI National Workers Compensation Insurance Pool
|
|
|
1,607
|
|
|
|
798
|
|
|
|
|
|
|
|
|
|
|
Total assumed business
|
|
|
9,431
|
|
|
|
798
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
95,972
|
|
|
$
|
94,878
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written on alternative market business were
$42.2 million for both the nine months ended
September 30, 2009 and 2008. Increases in alternative
market gross premiums written, primarily attributable to new
agency captive business and the transfer or renewal of
approximately $5.4 million of traditional business to
alternative market agency captive business during the nine
months ended September 30, 2008, were offset by the
January 1, 2009 non-renewal of our then largest alternative
market policyholder, which represented approximately
$15.4 million of gross premiums written upon renewal for
the nine months ended September 30, 2008, together with
lower payrolls associated with increases in overall unemployment.
Gross premiums written on traditional business were
$44.4 million for the nine months ended September 30,
2009 compared to $51.9 million for the comparable period in
2008, a decrease of $7.5 million or 15%. The decrease in
traditional business gross premiums written was generally
attributable to lower payrolls associated with increases in
overall unemployment, and also to the fact that approximately
$5.4 million
62
of traditional business was transferred to or renewed as
alternative market agency captive business during the nine
months ended September 30, 2009.
Net Premiums Written. Net premiums written
were $39.4 million for the nine months ended
September 30, 2009 compared to $42.0 million for the
comparable period of 2008, a decrease of $2.6 million or
6%. The decrease in net premiums written was primarily
attributable to a $3.6 million increase in ceded premiums
written, partially offset by the $1.1 million increase in
gross premiums written discussed above. We ceded approximately
58% and 44% of our traditional business for the nine months
ended September 30, 2009 and 2008, respectively. For the
nine months ended September 30, 2009, we had a 25% quota share
reinsurance agreement on traditional business in all states and
a 68% quota share reinsurance agreement in three states
(Florida, New Jersey and Georgia), which business collectively
comprised approximately 52% of our traditional direct premiums
written. For the nine months ended September 30, 2008, we
had a 50% quota share reinsurance agreement in all but three
states. We ceded approximately 72% and 71% of our alternative
market business for the nine months ended September 30,
2009 and 2008, respectively. In addition, the increase in ceded
premiums written was attributable to a premium rate adjustment
of approximately $1.3 million on an excess loss reinsurance
agreement covering risks attaching from July 1, 2005
through June 30, 2006.
Net Premiums Earned. Net premiums earned were
$28.4 million for the nine months ended September 30,
2009, compared to $32.3 million for the comparable period
in 2008, a decrease of $3.9 million or 12%. The decrease
was generally commensurate with the decrease in net premiums
written.
Insurance Services Income. Insurance services
income was $9.8 million for the nine months ended
September 30, 2009, compared to $4.7 million for the
comparable period in 2008, an increase of $5.0 million or
107%.Insurance services income from nurse case management and
cost containment services increased to $6.1 million for the
nine months ended September 30, 2009 from $4.2 million
for the comparable period in 2008, an increase of
$1.9 million or 64%, due to the increase in exposures
serviced by PRS. Additionally, PUI and PRS recognized
approximately $3.5 million of fee income for the nine
months ended September 30, 2009 related to the production,
underwriting and administration of business on behalf of our BPO
client pursuant to an agreement entered into during the second
quarter of 2009. This increase was partially offset by a
$406,000 decrease in fees for general agency services during the
nine months ended September 30, 2008. The majority of these
services were terminated in 2008.
Net Investment Income. Net investment income
was $1.4 million for the nine months ended
September 30, 2009, compared to $1.5 million for the
comparable period in 2008, a decrease of $133,000 or 9%. The
decrease in net investment income was attributable to a decrease
in our average investment portfolio during the period,
principally associated with the payment of reinsurance premiums
in early 2009 associated with a quota share reinsurance
agreement we entered into effective December 31, 2008,
pursuant to which we ceded unearned premium reserves, net of
ceding commissions, of approximately $8.1 million in order
for Guarantee Insurance to satisfy certain regulatory leverage
ratio requirements. Additionally, the book yield and taxable
equivalent book yield on our portfolio at September 30,
2009 were 3.92% and 4.48%, respectively, compared to 4.16% and
4.77%, respectively, at September 30, 2008. The reduced
yield on our portfolio of approximately 25 to 30 basis points
reflects lower yields available in the fixed income securities
market as our securities mature and new cash is deployed.
Net Realized Gains on Investments. Net
realized gains on investments were $903,000 for the nine months
ended September 30, 2009, compared to net realized losses
of $253,000 for the comparable period of 2008, an increase of
$1.2 million. The increase was principally attributable to
the sale of certain asset-backed and mortgage-backed securities,
the proceeds of which were used to pay net reinsurance premiums
of approximately $8.1 million as discussed above.
Net Losses and Loss Adjustment Expenses. Net
losses and loss adjustment expenses were $15.9 million for
the nine months ended September 30, 2009, compared to
$20.7 million for the comparable period in 2008, a decrease
of $4.9 million or 23%. Our consolidated calendar period
net loss ratio was 55.9% for the nine months ended
September 30, 2009, compared to 64.2% for comparable period
in 2008, a decrease of 8.3 percentage points. The decrease
in the loss ratio was the result of favorable accident period
loss experience
63
for the nine months ended September 30, 2009 as well as
lower adverse development on prior accident periods for the nine
months ended September 30, 2009 versus the comparable
period in 2008. For the nine months ended September 30,
2009, we recorded unfavorable development of approximately
$1.5 million on our workers compensation business,
primarily attributable to the 2007 accident year, and
approximately $248,000 on our legacy asbestos and environmental
exposures and commercial general liability exposures from prior
accident years. For the nine months ended September 30,
2008, we recorded unfavorable development of approximately
$2.2 million on our workers compensation business and
approximately $745,000 on our legacy asbestos and environmental
exposures and commercial general liability exposures from prior
accident years.
Net Policy Acquisition and Underwriting
Expenses. Net policy acquisition and underwriting
expenses were $8.5 million for the nine months ended
September 30, 2009, compared to $8.2 million for the
comparable period in 2008, an increase of $322,000 or 4%. The
increase was the net result in changes in our gross expense
ratio and effective ceding commission ratio as described below.
Net policy acquisition and underwriting expenses are comprised
of gross policy acquisition and underwriting expenses, which
include agent commissions, premium taxes and assessments and
general operating expenses associated with insurance operations,
net of ceding commissions on ceded quota share reinsurance
premiums on traditional and alternative market business, as
follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Dollar amounts in thousands
|
|
|
Direct and assumed business:
|
|
|
|
|
|
|
|
|
Gross policy acquisition and underwriting expenses
|
|
$
|
23,548
|
|
|
$
|
21,963
|
|
Gross premiums earned
|
|
|
77,154
|
|
|
|
70,829
|
|
|
|
|
|
|
|
|
|
|
Gross policy acquisition and underwriting expense ratio
|
|
|
30.5
|
%
|
|
|
31.0
|
%
|
|
|
|
|
|
|
|
|
|
Alternative market and traditional business ceded on a quota
share basis:
|
|
|
|
|
|
|
|
|
Ceding commissions
|
|
|
15,050
|
|
|
|
13,787
|
|
Ceded premiums earned
|
|
|
44,047
|
|
|
|
36,679
|
|
|
|
|
|
|
|
|
|
|
Effective ceding commission rate
|
|
|
34.2
|
%
|
|
|
37.6
|
%
|
|
|
|
|
|
|
|
|
|
Excess of loss reinsurance ceded premiums earned
|
|
|
4,738
|
|
|
|
1,874
|
|
|
|
|
|
|
|
|
|
|
Net business:
|
|
|
|
|
|
|
|
|
Net policy acquisition and underwriting expenses
|
|
|
8,498
|
|
|
|
8,176
|
|
Net premiums earned
|
|
|
28,369
|
|
|
|
32,276
|
|
|
|
|
|
|
|
|
|
|
Net policy acquisition and underwriting expense ratio
|
|
|
30.0
|
%
|
|
|
25.3
|
%
|
|
|
|
|
|
|
|
|
|
Gross policy acquisition and underwriting expenses were
$23.5 million for the nine months ended September 30,
2009, compared to $22.0 million for the comparable period
in 2008, an increase of $1.6 million or 7%. The increase in
gross policy acquisition and underwriting expenses was generally
consistent with the growth in gross premiums earned. Our gross
expense ratio was 30.5% for the nine months ended
September 30, 2009, compared to 31.0% for the comparable
period in 2008. The decrease in our gross expense ratio was
principally attributable to emerging economies of scale for the
nine months ended September 30, 2009 compared to the
comparable period in 2008, partially offset by an increase in
net policy acquisition and underwriting expenses allocated from
the holding company as discussed below.
Ceding commissions on alternative market and traditional
business ceded on a quota share basis were $15.1 million
for the nine months ended September 30, 2009 compared to
$13.8 million for comparable period in 2008, an increase of
$1.3 million or 9%. Our blended effective ceding commission
rate on alternative market and traditional business quota share
reinsurance was 34.2% for the nine months ended
September 30, 2009, compared to 37.6% for the comparable
period in 2008. The decrease in the blended effective ceding
commission rate was principally attributable to a lower ceding
commission rate on a traditional business quota
64
share reinsurance treaty we entered into effective
January 1, 2009. In addition, certain of our
agency-owned
captives have lower ceding commission rates than other captives.
For the nine months ended September 30, 2009, 64% of the
direct premiums written subject to segregated portfolio captive
arrangements were derived from agency-owned captives, as
compared to 13% for the comparable period in 2008.
Our net policy acquisition and underwriting expense ratio was
30.0% for the nine months ended September 30, 2009,
compared to 25.3% for the comparable period in 2008. The
increase in our net expense ratio was principally attributable
to a lower ceding commission rate on a traditional business
quota share reinsurance treaty entered into effective
January 1, 2009 and an increase in the allocation of
holding company expenses as discussed below.
Other Operating Expenses. Other operating
expenses, which are primarily comprised of holding company
expenses and expenses attributable to our insurance services
operations, were $11.1 million for the nine months ended
September 30, 2009, compared to $8.1 million for the
comparable period in 2008, an increase of $3.0 million or
38%. Other operating expenses included approximately
$9.4 million and $5.4 million associated with
insurance services operations for the nine months ended
September 30, 2009 and 2008, respectively, and
$1.7 million and $2.7 million associated with holding
company operations for the nine months ended September 30,
2009 and 2008, respectively. The $4.0 million increase in
expenses associated with insurance services operations was
attributable to infrastructure growth to support our expanding
nurse case management and cost containment services, together
with marketing, underwriting and policy administration costs
incurred by PUI in connection with gross premiums produced for
our BPO client.
The decrease in expenses associated with holding company
operations was primarily attributable to an increase in the
percentage of holding company expenses allocated to insurance
and insurance services segments and a true-up of state income
tax expenses for the nine months ended September 30, 2009,
resulting in a state income tax benefit of approximately
$220,000. Allocable holding company operating expenses, which
include all expenses other than holding company stock
compensation expense, state income taxes, loan guaranty fees,
amortization of capitalized loan costs and certain legal fees
associated with holding company matters, are incurred for the
benefit of the holding company and our operating segments and
allocated to each segment based on the proportion of such costs
devoted to each segment. For the nine months ended
September 30, 2009, approximately 67% of allocable holding
company operating expenses were allocated to the insurance and
insurance services segments. For the comparable period in 2008,
approximately 38% of allocable holding company operating
expenses were allocated to the insurance and insurance services
segments. The increase in the portion of allocable holding
company expenses allocated to insurance and insurance services
segments was attributable to the decrease in holding company
resources devoted to capital raising efforts and other holding
company matters for the nine months ended September 30,
2009.
Interest Expense. Interest expense was
$1.1 million for both the nine months ended
September 30, 2009 and 2008. The aggregate principal
balance of our notes payable was approximately
$18.0 million and $15.4 million at September 30,
2009 and 2008, respectively. The increase in the principal
balance was attributable to a $5.5 million loan made to us
on December 31, 2008, partially reduced by monthly
principal payments on all of our notes payable. Our debt
generally bears interest at a fixed percentage above the Federal
Reserve prime rate. The increase in interest expense associated
with the increase in the principal balance of our notes payable
was offset by the fact that the Federal Reserve prime rate was
3.25% for the nine months ended September 30, 2009, and
ranged from 5.00% to 7.25% for the nine months ended
September 30, 2008.
Income Tax Expense. Federal income tax expense
was $1.4 million for the nine months ended
September 30, 2009 compared to an income tax benefit of
$217,000 for the comparable period in 2008. For the nine months
ended September 30, 2009, our income tax expense at the
statutory rate, which was approximately $1.3 million, was
reduced by approximately $155,000 for tax exempt investment
income and approximately $131,000 for a decrease in reserve for
uncertain tax positions and increased by approximately $204,000
for a true-up of our prior year tax provision and approximately
$213,000 for other items, net. For the nine months ended
September 30, 2008, our income tax expense at the statutory
rate, which was approximately $130,000, was reduced by
approximately $178,000 and $290,000 for tax exempt investment
65
income and a decrease in reserves for uncertain tax positions,
respectively, and increased by approximately $121,000 for other
items, net.
2008
Compared to 2007
Overview of Operating Results. Our net loss
for 2008 was $124,000 compared to net income of approximately
$2.4 million for 2007. Our loss before income taxes for
2008 was $767,000 compared to income before income taxes of
$1.9 million for 2007. The $2.7 million decrease in
income before income taxes was the result of the write-off of
approximately $3.5 million of deferred equity offering
costs in 2008 incurred in connection with our efforts to
consummate an initial public offering and
other-than-temporary
impairment charges on our investment portfolio of approximately
$1.2 million, together with a $1.7 million increase in
holding company expenses in 2008, principally attributable to
increased staffing and other internal costs in anticipation of
an initial public offering and associated expanded business
opportunities. These charges were partially offset by a
1.6 percentage point decrease in our combined ratio from
insurance operations, together with a 103% increase in net
premiums earned, and the recognition of approximately
$1.5 million of other income in 2008 associated with gains
on the commutation of certain alternative market segregated
portfolio cell captive reinsurance treaties.
Gross Premiums Written. Gross premiums written
were $117.6 million for 2008 compared to $85.8 million
for 2007, an increase of $31.8 million or 37%. Gross
premiums written by line of business were as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
In thousands
|
|
|
Direct business:
|
|
|
|
|
|
|
|
|
Alternative market
|
|
$
|
47,374
|
|
|
$
|
34,316
|
|
Traditional business
|
|
|
69,182
|
|
|
|
50,599
|
|
|
|
|
|
|
|
|
|
|
Total direct business
|
|
|
116,556
|
|
|
|
84,915
|
|
Assumed business(1)
|
|
|
1,007
|
|
|
|
895
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
117,563
|
|
|
$
|
85,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents premiums assumed as a result of our participation in
the NCCI National Workers Compensation Insurance Pool. |
Gross premiums written on alternative market business for 2008
were $47.4 million for 2008 compared to $34.3 million
for 2007, an increase of $13.1 million or 38%. The increase
in alternative market gross premiums written was primarily
attributable to business with certain professional employer
organizations and professional temporary staffing organizations
on which we retain the risk. These plans may be converted to
risk sharing arrangements in the future. The increase was also
attributable to an increase in segregated portfolio cell captive
reinsurance business and certain large deductible plans, the
latter of which we began writing in 2008.
Gross premiums written on traditional business were
$69.2 million for 2008, compared to $50.6 million for
2007, an increase of $18.6 million or 37%. The increase in
traditional business gross premiums written was attributable to
an increase in policy counts. Traditional business policy counts
increased by 75%, to 5,305 at December 31, 2008 from 3,034
at December 31, 2007. The increase in policy counts was
principally attributable to our geographic expansion beyond
Florida and the Midwest, together with the expansion of our
traditional business pay-as-you-go plan. The increase in policy
counts was partially offset by an 11% decrease in average annual
in-force premium per policy, from approximately $16,400 at
December 31, 2007 to approximately $12,000 at
December 31, 2008. The decrease in average annual in-force
premium per policy was principally attributable to mandatory
rate decreases in the state of Florida, an administered pricing
state where we wrote approximately 30% of our traditional
business direct premiums written in 2008. The majority of the
increase in gross premiums written on traditional business in
2008 came from New Jersey, where gross
66
premiums written on traditional business were $9.7 million
for 2008 compared to $2.4 million for 2007, an increase of
$7.3 million or 307%.
Net Premiums Written. Net premiums written
were $45.8 million for 2008, compared to $31.0 million
for 2007, an increase of $14.9 million or 48%. The
$31.8 million
period-over-period
increase in gross premiums written was partially offset by a
$16.9 million increase in ceded premiums written. The
increase in ceded premiums written was primarily attributable to
(i) an increase in gross premiums written on traditional
business (which was subject to a 50% quota share reinsurance
treaty excluding certain states), (ii) an increase in
premiums written on alternative market business ceded to
segregated portfolio cell captives (which was generally subject
to 50% to 90% quota share reinsurance treaties) and (iii) a
quota share reinsurance agreement we entered into effective
December 31, 2008 pursuant to which we ceded 37.83% of our
gross unearned premium reserves, or approximately
$12.9 million. These increases in ceded premiums written
were partially offset by the commutation of certain alternative
market segregated portfolio cell captive reinsurance agreements
in 2008, which resulted in a reduction in ceded premiums written
of approximately $8.2 million.
Net Premiums Earned. Net premiums earned were
$49.2 million for 2008, compared to $24.6 million for
2007, an increase of $24.6 million or 100%. The increase
was attributable to the increase in net premiums written,
exclusive of the effects of the quota share reinsurance
agreement we entered into effective December 31, 2008, for
which no ceded premium was earned in 2008 because premiums are
recognized as revenue on a pro rata basis over the terms of the
policies written.
Insurance Services Income. Insurance services
income earned by PRS was $5.7 million for 2008, compared to
$7.0 million for 2007, a decrease of $1.4 million or
19%. Insurance services income in 2008 and 2007 was generated
principally from nurse case management, cost containment and
captive management services provided for the benefit of
segregated portfolio captives and our quota share reinsurers.
The decrease in insurance services income was attributable to
lower fees associated with general agency services, which
decreased to $361,000 in 2008 from $2.3 million in 2007 due
to termination of these services effective January 1, 2008.
This decrease was partially offset by an increase in insurance
services income associated with nurse case management and cost
containment services, which increased to $5.1 million in
2008 from $4.6 million in 2007 due to an increase in the
number of claims subject to nurse case management and bill
review. Insurance services income attributable to services
provided to parties other than segregated portfolio captives and
our quota share reinsurers increased to $241,000 in 2008 from
$98,000 in 2007.
Net Investment Income. Net investment income
was $2.0 million for 2008, compared to $1.3 million
for 2007. Gross investment income was $2.5 million in both
2008 and 2007. The average of our beginning and ending
investment portfolio, including cash and cash equivalents,
increased to $62.6 million for 2008, compared to
$57.1 million for 2007, an increase of $5.5 million,
or 10%. The increase in our net investment income attributable
to the increase in invested assets was partially offset by the
fact that the tax adjusted yield on our debt portfolio fell to
4.99% at December 31, 2008 from 5.19% at December 31,
2007, due to prevailing market conditions in the debt securities
market. The increase in our net investment income attributable
to the increase in invested assets was also offset by a lower
pre-tax yield on tax-exempt state and political subdivision debt
securities, which we began to own in the second quarter of 2007.
Investment expenses were $478,000 for 2008 compared to
$1.2 million for 2007, a decrease of $714,000 or 60%.
Investment expenses are principally comprised of interest
expense credited to funds-held balances on alternative market
segregated portfolio captive arrangements. Interest is credited
to funds-held balances based on
3-month
U.S. Treasury bill rates. The decrease in investment
expenses was primarily attributable to a decrease in short term
interest rates due to prevailing credit market conditions as
well as a decrease in funds-held balances.
Net Realized Losses on Investments. Net
realized losses on investments were approximately
$1.0 million for 2008, compared to $5,000 for 2007. Net
realized losses on investments in 2008 include an
other-than-temporary
impairment charge of approximately $875,000 related to
investments in certain equity securities purchased in 2005 and
approximately $350,000 on our investment of approximately
$400,000 in certain bonds issued by Lehman Brothers Holdings,
Inc., which filed for bankruptcy in September 2008.
67
Other Income. Other income was
$1.5 million for 2008. We did not recognize other income
for 2007. Other income for 2008 represents the recapture of
funds held balances and other collateral pursuant to the
commutation of six segregated portfolio cell captives in 2008.
Loss From Write-Off of Deferred Equity Offering
Costs. In 2008, we recorded a loss from the
write-off of deferred equity offering costs of approximately
$3.5 million, principally representing legal and audit
expenses incurred in 2007 and 2008 in connection with our
efforts to consummate an initial public offering, which was
suspended in the fourth quarter of 2008 due to market conditions.
Net Losses and Loss Adjustment Expenses. Net
losses and loss adjustment expenses were $28.7 million for
2008 compared to $15.2 million for 2007, an increase of
$13.5 million or 89%. The increase was attributable to a
103% increase in net premiums earned. Our calendar year net loss
ratio was 58.3% for 2008 compared to 61.7% for 2007, a decrease
of 3.4 percentage points. The decrease in the loss ratio
was principally the result of favorable loss experience for
accident year 2008, which was 54.9% compared to 75.7% for
accident year 2007.
The favorable 2008 accident year loss ratio was partially offset
by adverse development in 2008 on prior accident year net losses
and loss adjustment expenses of approximately $584,000 and
$710,000 on workers compensation and legacy commercial
general liability, asbestos and environmental exposures,
respectively. In 2007, incurred losses and loss adjustment
expenses attributable to prior accident years decreased by
approximately $3.5 million. Of this $3.5 million,
approximately $2.2 million relates to favorable development
on workers compensation reserves attributable to the fact
that 165 claims incurred in 2004 and 2005 were ultimately
settled in 2007 for approximately $600,000 less than the
specific case reserves that had been established for these
exposures at December 31, 2006. In addition, as a result of
this favorable case reserve development during 2007, we reduced
our loss development factors utilized in estimating claims
incurred but not yet reported resulting in a reduction of
estimated incurred but not reported reserves as of
December 31, 2007. The $3.5 million of favorable
development in 2007 also reflects approximately
$1.3 million of favorable development on legacy asbestos
and environmental exposures and commercial general liability
exposures as a result of the further run-off of this business
and additional information received from pool administrators on
pooled business in which we participate. See
Business Legacy Claims.
Net Policy Acquisition and Underwriting
Expenses. Net policy acquisition and underwriting
expenses were $13.5 million for 2008 compared to
$6.0 million for 2007, an increase of $7.5 million.
Net policy acquisition and underwriting expenses are comprised
of gross policy acquisition and underwriting expenses, which
include agent commissions, premium taxes and assessments and
general
68
operating expenses associated with insurance operations, net of
ceding commissions on ceded quota share reinsurance premiums on
traditional and alternative market segregated portfolio captive
business, as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Dollar amounts in thousands
|
|
|
Direct and assumed business:
|
|
|
|
|
|
|
|
|
Gross policy acquisition and underwriting expenses
|
|
$
|
31,499
|
|
|
$
|
22,644
|
|
Gross premiums earned
|
|
|
100,070
|
|
|
|
73,715
|
|
|
|
|
|
|
|
|
|
|
Gross policy acquisition and underwriting expense ratio
|
|
|
31.5
|
%
|
|
|
30.7
|
%
|
|
|
|
|
|
|
|
|
|
Alternative market and traditional business ceded on a quota
share basis:
|
|
|
|
|
|
|
|
|
Ceding commissions
|
|
|
17,964
|
|
|
|
16,621
|
|
Ceded premiums earned
|
|
|
46,748
|
|
|
|
44,589
|
|
|
|
|
|
|
|
|
|
|
Effective ceding commission rate
|
|
|
38.4
|
%
|
|
|
37.3
|
%
|
|
|
|
|
|
|
|
|
|
Excess of loss reinsurance ceded premiums earned
|
|
|
4,102
|
|
|
|
4,513
|
|
|
|
|
|
|
|
|
|
|
Net business:
|
|
|
|
|
|
|
|
|
Net policy acquisition and underwriting expenses
|
|
|
13,535
|
|
|
|
6,023
|
|
Net premiums earned
|
|
|
49,220
|
|
|
|
24,613
|
|
|
|
|
|
|
|
|
|
|
Net policy acquisition and underwriting expense ratio
|
|
|
27.5
|
%
|
|
|
24.5
|
%
|
|
|
|
|
|
|
|
|
|
Gross policy acquisition and underwriting expenses were
$31.5 million for 2008, compared with $22.6 million
for 2007, an increase of $8.9 million or 39%. The increase
in gross policy acquisition and underwriting expenses was
generally consistent with the growth in gross premiums earned.
Our gross expense ratio was 31.5% for 2008 compared to 30.7% for
2007. The increase in our gross expense ratio was principally
attributable to incremental expenses for professional fees and
additional compensation and compensation-related costs
associated with the hiring of additional members of senior
management as we positioned our company for growth and
diversification as well as establishing infrastructure to
support the requirements of being a publicly held company. These
additional expenses were partially offset by (i) economies
of scale as certain of our gross policy acquisition and
underwriting expenses did not increase in proportion to gross
premiums earned, (ii) a decrease in the portion of holding
company expenses allocated to insurance operations as discussed
more fully under Other Operating Expenses, and (iii) lower
commission expenses in connection with the fact that, effective
January 1, 2008, Guarantee Insurance began working directly
with agents to market segregated portfolio captive insurance
business and paying commissions directly to the producing agents
rather than paying a higher general agency commission to PRS.
Ceding commissions on alternative market and traditional
business ceded on a quota share basis were $18.0 million
for 2008, compared to $16.6 million for 2007, an increase
of $1.3 million or 8%. Our blended effective ceding
commission rate on alternative market and traditional business
quota share reinsurance was 38.4% for 2008 compared to 37.3% for
2007. The increase was principally attributable to the
proportional increase in ceded quota share reinsurance premiums
on our alternative market business, which have a higher
effective ceding commission rate than ceded premiums on our
traditional business.
Our net policy acquisition and underwriting expense ratio was
27.5% for 2008, compared to 24.5% for 2007. The ceding
commission rates we earn on our alternative market business and
traditional business quota share reinsurance are higher than our
gross policy acquisition and underwriting expense ratio.
Accordingly, if we cede more business on a quota share basis,
our net policy acquisition and underwriting expense ratio
decreases, and if we cede less business on a quota share basis,
our net policy acquisition and underwriting expense ratio
increases. The increase in our net expense ratio was principally
the result of the fact that a smaller portion of our gross
premiums were ceded on a quota share basis in 2008. To a lesser
extent, the increase in our net expense ratio was due to the
increase in our gross expense ratio.
69
Other Operating Expenses. Other operating
expenses, which are primarily comprised of holding company
expenses and expenses attributable to our insurance services
operations, were $10.9 million for 2008, compared to
$8.5 million for 2007, an increase of $2.4 million or
28%. Other operating expenses included approximately
$7.8 million and $7.1 million associated with
insurance services operations for 2008 and 2007, respectively,
and $3.1 million and $1.4 million associated with
holding company operations for 2008 and 2007, respectively. The
increase in expenses associated with insurance services
operations was attributable to the increase in insurance
services income associated with nurse case management and cost
containment services. The increase was also attributable to a
higher allocation of holding company expenses to our insurance
services operations.
The increase in expenses associated with holding company
operations reflects a substantial reduction in the proportion of
holding company expenses allocated to the insurance segment,
partially offset by an increase in the proportion of holding
company expenses allocated to the insurance services segment.
Allocable holding company operating expenses, which include all
expenses other than holding company stock compensation expense,
loan guaranty fees and amortization of capitalized loan costs,
are incurred for the benefit of the holding company and our
operating segments and allocated to each segment based on the
proportion of such costs devoted to each segment. For 2008,
approximately 30% of allocable holding company operating
expenses were allocated to the insurance segment, approximately
30% were allocated to the insurance services segment and
approximately 40% were retained by the holding company based on
our estimate of costs devoted to the insurance segment,
insurance services segment and holding company matters. These
allocations principally reflect the time and effort devoted to
our planned initial public offering during 2008. For 2007,
approximately 80% of allocable holding company operating
expenses were allocated to the insurance segment, approximately
8% were allocated to the insurance services segment and
approximately 12% were retained by the holding company, as we
determined that a higher proportion of holding company costs
were devoted to insurance operations.
Interest Expense. Interest expense was
$1.4 million for 2008, compared to $1.3 million for
2007, an increase of $147,000 or 11%. The increase was
attributable to the fact that we borrowed an additional
$5.7 million in September 2007 and another
$1.5 million from Mr. Mariano, our Chairman and Chief
Executive Officer and the beneficial owner of a majority of our
outstanding shares, in June 2008. Interest expense associated
with these additional borrowings was substantially offset by a
decrease in the effective interest rate on the debt, which is
based on the Federal Reserve prime rate.
Income Tax Expense. We recognized an income
tax benefit of approximately $643,000 for 2008, compared to
$432,000 for 2007. For 2008, our income tax benefit at the
statutory rate, which was approximately $261,000, was increased
by approximately $238,000 related to tax exempt investment
income and a $290,000 reduction in the reserve for uncertain tax
positions, partially offset by the tax effect of other permanent
tax differences of approximately $146,000.
For 2007, our income tax expense at the statutory rate, which
was approximately $662,000, was reduced by approximately
$1.9 million attributable to a change in the valuation
allowance related to the deferred tax asset arising from Tarheel
net operating loss carry forwards. For the three months ended
March 31, 2007 and the years ended December 31, 2006
and 2005, management did not consider it more likely than not
that Tarheel would generate future taxable income against which
Tarheel net operating loss carry forwards could be utilized and,
accordingly, maintained a 100% valuation allowance on the
deferred tax asset attributable to Tarheel net operating loss
carry forwards. On April 1, 2007, Mr. Mariano, our
Chairman, President and Chief Executive Officer and the
beneficial owner of a majority of our outstanding shares,
contributed all the outstanding capital stock of Tarheel to
Patriot Risk Management with the result that Tarheel and its
subsidiary, TIMCO, became wholly-owned indirect subsidiaries of
Patriot Risk Management. In conjunction with the business
contribution, management deemed the prospects for Tarheel
business to generate future taxable income and utilize Tarheel
net operating loss carry forwards, subject to annual
limitations, to be more likely than not and, accordingly,
eliminated the valuation allowance on the deferred tax asset
associated with Tarheel net operating losses.
70
Additionally, our income tax expense at the statutory rate for
2007 was reduced by approximately $85,000 related to tax exempt
investment income and increased by approximately $711,000 in
connection with the increase in the reserve for uncertain tax
positions and approximately $192,000 of other net permanent tax
differences.
2007
Compared to 2006
Overview of Operating Results. Net income for
2007 was $2.4 million compared to $1.6 million for
2006. The $769,000 increase in net income is comprised of a
$1.1 million decrease in pre-tax net income and a
$1.9 million decrease in income tax expense. The
$1.1 million decrease in pre-tax net income is comprised
principally of a $7.4 million decrease in pre-tax net
income related to the 2006 gain on early extinguishment of debt
and associated other income, which represents the forgiveness of
accrued interest on the extinguished debt, partially offset by
an increase in pre-tax net income related to (i) a
16.7 percentage point decrease in our combined ratio from
insurance operations, (ii) a $437,000 increase in pre-tax
net income from insurance services operations and (iii) a
decrease in net realized losses of $1.3 million.
The $1.9 million decrease in income tax expense is
principally attributable to the fact that we maintained a
valuation allowance equal to 100% of the deferred tax assets
associated with net operating loss carry forwards attributable
to Tarheel operations until April 2007, at which time we
reversed the valuation allowance, as discussed more fully below.
Gross Premiums Written. Gross premiums written
for 2007 were $85.8 million compared to $62.4 million
for 2006, an increase of $23.4 million or 38%. Gross
premiums written by line of business were as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
In thousands
|
|
|
Direct business:
|
|
|
|
|
|
|
|
|
Alternative market
|
|
$
|
34,316
|
|
|
$
|
33,921
|
|
Traditional business
|
|
|
50,599
|
|
|
|
26,636
|
|
|
|
|
|
|
|
|
|
|
Total direct business
|
|
|
84,915
|
|
|
|
60,557
|
|
Assumed business(1)
|
|
|
895
|
|
|
|
1,815
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
85,810
|
|
|
$
|
62,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents premiums assumed as a result of our participation in
the NCCI National Workers Compensation Insurance Pool. |
Gross premiums written on alternative market business for 2007
were $34.3 million compared to $33.9 million for 2006,
an increase of $395,000 or 1%.
The increase was attributable to traditional business, for which
gross premiums written for 2007 were $50.6 million compared
to $26.6 million for 2006, an increase of
$24.0 million or 90%. The increase in traditional business
gross premiums written was attributable to an increase in policy
counts. Traditional business policy counts increased by 127%,
from 1,340 at December 31, 2006 to 3,034 at
December 31, 2007. The increase in policy counts was
principally attributable to the expansion of the traditional
business pay-as-you-go plan. The increase in policy counts was
partially offset by an 11% decrease in average annual in-force
premium per policy, from approximately $18,500 at
December 31, 2006 to approximately $16,400 at
December 31, 2007. The decrease in average annual in-force
premium per policy was principally attributable to mandatory
rate decreases in the state of Florida, an administered pricing
state where we wrote approximately 41% of our traditional
business direct premiums written in 2007. The majority of the
increase in gross premiums written on traditional business came
from Florida, where gross premiums written on traditional
business were $20.8 million for 2007 compared to
$7.1 million for 2006, an increase of $13.7 million or
193%.
Net Premiums Written. Net premiums written for
2007 were $31.0 million compared to $19.4 million for
2006, an increase of $11.6 million or 60%. The
$23.4 million
period-over-period
increase in gross
71
premiums written was partially offset by a $11.9 million
increase in ceded premiums written. The increase in ceded
premiums written was primarily attributable to the increase in
gross premiums written on traditional business, which was
subject to a 50% quota share reinsurance treaty (excluding
certain states) for the full year 2007, but only the second half
of 2006.
Net Premiums Earned. Net premiums earned for
2007 were $24.6 million compared to $21.1 million for
2006, an increase of $3.6 million or 17%. The increase was
attributable to the increase in net premiums written, recognized
as revenue on a pro rata basis over the terms of the policies
written.
Insurance Services Income. Insurance services
income by PRS for 2007 was $7.0 million compared to
$7.2 million for 2006, a decrease of $148,000 or 2%.
Insurance services income in 2007 and 2006 was generated
principally from nurse case management and cost containment
services provided for the benefit of segregated portfolio
captives and our quota share reinsurers. In addition, as
consideration for providing insurance services, segregated
portfolio captives and our quota share reinsurers paid PRS
general agency commission compensation, a portion of which was
retained by PRS and a portion of which was paid by PRS as
commission compensation to the producing agents.
The decrease in insurance services income was attributable to
lower fees associated with general agency services, which
decreased to $2.3 million in 2007 from $3.0 million in
2006 due to lower earned premiums subject to general agency
services. Additionally, insurance services income attributable
to services provided to parties other than segregated portfolio
captives and our quota share reinsurers decreased to $107,000 in
2007 from $373,000 in 2006, primarily as a result of the
termination or sale of service relationships that Tarheel had
with other third parties. These decreases were partially offset
by an increase in insurance services income associated with
nurse case management and cost containment services, which
increased to $4.6 million in 2007 from $3.6 million in
2006 due to an increase in the number of claims subject to nurse
case management and bill review and a larger portion of the
insurance risk assumed by our quota share reinsurers.
Net Investment Income. Net investment income
for 2007 and 2006 was $1.3 million. Gross investment income
for 2007 was $2.5 million compared to $2.1 million for
2006, an increase of $465,000 or 23%. The increase is a
reflection of a higher weighted average invested asset base, the
result of growth in net premiums written and the corresponding
lag between the collection of premiums and the payment of
claims. The increase in gross investment income attributable to
a higher invested asset base was somewhat offset by the fact
that a portion of our fixed maturity securities at
December 31, 2007 were tax-exempt state and political
subdivision debt securities, which generate lower pre-tax
yields. We had no tax-exempt state and political subdivision
debt securities at December 31, 2006. Investment expenses
for 2007 were $1.2 million compared to $732,000 for 2006,
an increase of $461,000 or 63%. Investment expenses are
principally comprised of interest expense credited to funds-held
balances related to alternative market segregated portfolio
captive arrangements. The increase in investment expenses was
attributable to an increase in funds-held balances from
December 31, 2006 to December 31, 2007.
Net Realized Losses on Investments. Net
realized losses on investments for 2007 were $5,000 compared to
$1.3 million for 2006. In 2007, we did not recognize any
other-than-temporary
impairments. In 2006, we recognized realized losses of
approximately $1.7 million in connection with
Tarheels investment in Foundation, which was deemed to be
other-than-temporarily
impaired. This was partially offset by realized gains on the
sales of equity securities.
Other Income. We did not recognize any other
income for 2007. For 2006, we recognized $796,000 of other
income in connection with the forgiveness of accrued interest
associated with the early extinguishment of debt.
Net Losses and Loss Adjustment Expenses. Net
losses and loss adjustment expenses were $15.2 million for
2007 compared to $17.8 million for 2006, a decrease of
$2.7 million or 15%, despite an increase in net premiums
earned. The decrease was attributable to a lower calendar year
net loss ratio which was 61.7% for 2007 compared to 84.7% for
2006, a decrease of 23.0 percentage points. The decrease in
the loss ratio was principally the result of favorable
development in 2007 on both workers compensation and
legacy reserves associated with prior accident years, combined
with unfavorable development in 2006 on both workers
72
compensation and legacy reserves associated with prior accident
years. Our net loss ratio was 75.7% for accident year 2007
compared to 72.8% for accident year 2006, an increase of
2.9 percentage points.
As a result of favorable development on prior accident year
reserves, incurred losses and loss adjustment expenses decreased
by approximately $3.5 million for the year ended
December 31, 2007. Of this $3.5 million, approximately
$2.2 million relates to favorable development on
workers compensation reserves attributable to the fact
that 165 claims incurred in 2004 and 2005 were ultimately
settled in 2007 for approximately $600,000 less than the
specific case reserves that had been established for these
exposures at December 31, 2006. In addition, as a result of
this favorable case reserve development during 2007, we reduced
our loss development factors utilized in estimating claims
incurred but not yet reported resulting in a reduction of
estimated incurred but not reported reserves as of
December 31, 2007. The $3.5 million of favorable
development in 2007 also reflects approximately
$1.3 million of favorable development on legacy asbestos
and environmental exposures and commercial general liability
exposures as a result of the further run-off of this business
and additional information received from pool administrators on
pooled business that we participate in. See
Business Legacy Claims.
As a result of adverse development on prior accident year
reserves, incurred losses and loss adjustment expenses increased
by approximately $2.5 million for the year ended
December 31, 2006. Of the $2.5 million, approximately
$2.0 million relates to workers compensation claims
and approximately $500,000 to legacy asbestos and environmental
exposures and commercial general liability exposures. The
adverse development on workers compensation claims
primarily resulted from approximately $1.5 million of
unallocated loss adjustment expenses paid in 2006 related to the
2004 and 2005 accident years in excess of amounts reserved for
these expenses as of December 31, 2005. In addition, based
upon additional information that became available on known
claims during 2006, we strengthened our reserves by
approximately $500,000 for the 2004 and 2005 accident years. The
reserves for legacy claims were increased due to information
received from pool administrators as well as additional
consideration of specific outstanding claims.
Net Policy Acquisition and Underwriting
Expenses. Net policy acquisition and underwriting
expenses were $6.0 million for 2007 compared to
$3.8 million for 2006, an increase of $2.2 million or
57%.
Net policy acquisition and underwriting expenses are comprised
of gross policy acquisition and underwriting expenses, which
include agent commissions, premium taxes and assessments and
general operating expenses associated with insurance operations,
net of ceding commissions on ceded quota share reinsurance
premiums on traditional and alternative market segregated
portfolio captive business, as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Dollar amounts in thousands
|
|
|
Direct and assumed business:
|
|
|
|
|
|
|
|
|
Gross policy acquisition and underwriting expenses
|
|
$
|
22,644
|
|
|
$
|
18,622
|
|
Gross premiums earned
|
|
|
73,715
|
|
|
|
60,672
|
|
|
|
|
|
|
|
|
|
|
Gross policy acquisition and underwriting expense ratio
|
|
|
30.7
|
%
|
|
|
30.7
|
%
|
|
|
|
|
|
|
|
|
|
Alternative market and traditional business ceded on a quota
share basis:
|
|
|
|
|
|
|
|
|
Ceding commissions
|
|
|
16,621
|
|
|
|
14,788
|
|
Ceded premiums earned
|
|
|
44,589
|
|
|
|
37,391
|
|
|
|
|
|
|
|
|
|
|
Effective ceding commission rate
|
|
|
37.3
|
%
|
|
|
39.5
|
%
|
|
|
|
|
|
|
|
|
|
Excess of loss reinsurance ceded premiums earned
|
|
|
4,513
|
|
|
|
2,228
|
|
|
|
|
|
|
|
|
|
|
Net business:
|
|
|
|
|
|
|
|
|
Net policy acquisition and underwriting expenses
|
|
|
6,023
|
|
|
|
3,834
|
|
Net premiums earned
|
|
|
24,613
|
|
|
|
21,053
|
|
|
|
|
|
|
|
|
|
|
Net policy acquisition and underwriting expense ratio
|
|
|
24.5
|
%
|
|
|
18.2
|
%
|
|
|
|
|
|
|
|
|
|
73
Gross policy acquisition and underwriting expenses were
$22.6 million for 2007 compared with $18.6 million for
2006, an increase of $4.0 million or 22%. The increase in
gross policy acquisition and underwriting expenses was generally
consistent with the growth in gross premiums earned. Our gross
expense ratio was 30.7% for both 2007 and 2006.
Ceding commissions on alternative market and traditional
business ceded on a quota share basis were $16.6 million
for 2007 compared to $14.8 million for 2006, an increase of
$1.8 million or 12%. Our blended effective ceding
commission rate on alternative market and traditional business
quota share reinsurance was 37.3% for 2007 compared to 39.5% for
2006. The decrease was principally attributable to the
proportional increase in ceded quota share reinsurance premiums
on our traditional business, which have a lower effective ceding
commission rate than ceded premiums on our alternative market
business.
Our net policy acquisition and underwriting expense ratio was
24.5% for 2007 compared to 18.2% for 2006. The ceding commission
rates we earn on our alternative market business and traditional
business quota share reinsurance are higher than our gross
policy acquisition and underwriting expense ratio. Accordingly,
if we cede more business on a quota share basis, our net policy
acquisition and underwriting expense ratio decreases, and if we
cede less business on a quota share basis, our net policy
acquisition and underwriting expense ratio increases. In
addition, on our alternative market business quota share
reinsurance, we recoup a portion our excess of loss reinsurance
costs from the segregated portfolio captives. Accordingly, our
excess of loss reinsurance costs are lower, in proportion to
gross earned premium, on our alternative market business. The
increase in our net expense ratio was principally the result of
an increase in excess of loss ceded earned premium associated
with the increase in our traditional business and, to a lesser
extent, the fact that a smaller portion of our gross premiums
were ceded on a quota share basis in 2007 at a lower blended
effective ceding commission rate.
Other Operating Expenses. Other operating
expenses, which are primarily comprised of holding company
expenses and expenses attributable to our insurance services
operations, were $8.5 million for 2007 compared to
$9.7 million for 2006, a decrease of $1.2 million or 12%.
For 2007, other operating expenses included approximately
$7.1 million associated with insurance services operations
and $1.4 million associated with holding company
operations. For 2006, other operating expenses included
approximately $6.4 million associated with insurance
services operations and $3.3 million associated with
holding company operations. The decrease in other operating
expenses was primarily attributable to a higher allocation of
holding company expenses to insurance operations in 2007
compared to 2006, resulting in an increase in net policy
acquisition and underwriting expenses and a corresponding
decrease in other operating expenses.
Interest Expense. Interest expense for 2007
was $1.3 million compared to $1.1 million for 2006, an
increase of $181,000 or 16%. The increase was attributable to
the fact that we borrowed an additional $5.7 million in
September 2007 at an interest rate equal to the Federal Reserve
prime rate plus 4.5%.
Income Tax Expense. We recognized an income
tax benefit of $432,000 for 2007 compared to an income tax
expense of $1.5 million for 2006. The decrease in income
tax expense was principally the result of changes in the
valuation allowance related to the deferred tax asset arising
from Tarheel net operating loss carry forwards. For the three
months ended March 31, 2007 and the years ended
December 31, 2006 and 2005, management did not consider it
more likely than not that Tarheel would generate future taxable
income against which Tarheel net operating loss carry forwards
could be utilized and, accordingly, maintained a 100% valuation
allowance on the deferred tax asset attributable to Tarheel net
operating loss carry forwards. On April 1, 2007,
Mr. Mariano, our Chairman, President and Chief Executive
Officer and the beneficial owner of a majority of our
outstanding shares, contributed all the outstanding capital
stock of Tarheel to Patriot Risk Management with the result that
Tarheel and its subsidiary, TIMCO, became wholly-owned indirect
subsidiaries of Patriot Risk Management. In conjunction with the
business contribution, management deemed the prospects for
Tarheel business to generate future taxable income and utilize
Tarheel net operating loss carry forwards, subject to annual
limitations, to be more likely than not and, accordingly,
eliminated the valuation allowance on the deferred tax asset
associated with Tarheel net operating losses.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting and financial
74
reporting for uncertain tax positions. FIN 48 prescribes a
recognition threshold and measurement attributes for the
financial statement recognition, measurement and presentation of
uncertain tax positions taken or expected to be taken in an
income tax return. We adopted the provisions of FIN 48
effective January 1, 2007. Reserves for uncertain tax
positions associated with FIN 48 were approximately
$421,000 and $711,000 at December 31, 2008 and 2007,
respectively. We had no accrued interest or penalties related to
uncertain tax positions as of December 31, 2008 or 2007.
Excluding changes in the valuation allowance and excluding the
effect of changes in reserve for uncertain tax positions in
accordance with FIN 48, our effective tax rate was
approximately 39% for 2007 compared to 33% for 2006. The
increase in effective tax rate, exclusive of changes in the
valuation allowance and reserve for uncertain tax positions, was
primarily attributable to Tarheel pre-tax net losses in the
first quarter of 2007 for which no tax benefit was recognized
due to the then uncertainty of ultimate recoverability.
Segment
Information
We manage our operations through two business segments:
insurance services and insurance. The insurance services segment
provides workers compensation claims services and agency
and underwriting services. Workers compensation claims services
include nurse case management, cost containment services and
claims administration and adjudication services. Cost
containment services refer to workers compensation bill
review and re-pricing services. Workers compensation
agency and underwriting services include general agency services
and specialty underwriting, policy administration and captive
management services. We currently provide the services
principally to Guarantee Insurance, segregated portfolio
captives and Guarantee Insurances quota share reinsurers.
In the insurance segment, we provide workers compensation
policies to businesses. These products include both alternative
market products and traditional insurance. The products offered
in our insurance segment encompass a variety of options designed
to fit the needs of our policyholders and employer groups.
We consider many factors in determining reportable segments
including economic characteristics, production sources, products
or services offered and regulatory environment. Certain items
are not allocated to segments, including gains on the early
extinguishment of debt, holding company expenses and interest
expense. The accounting policies of the segments are the same as
those described in the summary of significant accounting
policies contained in the notes to our consolidated financial
statements. We manage our segments on the basis of both pre-tax
and after-tax net income, and, accordingly, our business segment
results
75
are shown for all periods to include pre-tax net income
(losses), income tax expenses (benefits) and net income
(losses). Business segment results are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
|
|
|
|
|
Insurance Services Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues insurance services income
|
|
$
|
14,448
|
|
|
$
|
9,031
|
|
|
$
|
12,308
|
|
|
$
|
11,325
|
|
|
$
|
10,208
|
|
|
$
|
6,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax net income
|
|
$
|
5,041
|
|
|
$
|
3,666
|
|
|
$
|
4,452
|
|
|
$
|
4,201
|
|
|
$
|
3,764
|
|
|
$
|
2,358
|
|
Income tax expense (benefit)
|
|
|
1,713
|
|
|
|
1,246
|
|
|
|
1,513
|
|
|
|
(481
|
)
|
|
|
1,744
|
|
|
|
938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,328
|
|
|
$
|
2,420
|
|
|
$
|
2,939
|
|
|
$
|
4,682
|
|
|
$
|
2,020
|
|
|
$
|
1,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned, net
|
|
$
|
28,369
|
|
|
$
|
32,276
|
|
|
$
|
49,220
|
|
|
$
|
24,613
|
|
|
$
|
21,053
|
|
|
$
|
21,336
|
|
Investment income, net
|
|
|
1,354
|
|
|
|
1,487
|
|
|
|
2,028
|
|
|
|
1,326
|
|
|
|
1,321
|
|
|
|
1,077
|
|
Net realized gains (losses) on investments
|
|
|
903
|
|
|
|
(253
|
)
|
|
|
(1,037
|
)
|
|
|
(5
|
)
|
|
|
393
|
|
|
|
(1,348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
30,626
|
|
|
$
|
33,510
|
|
|
$
|
50,211
|
|
|
$
|
25,934
|
|
|
$
|
22,767
|
|
|
$
|
21,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax net income (loss)
|
|
$
|
1,568
|
|
|
$
|
509
|
|
|
$
|
2,773
|
|
|
$
|
431
|
|
|
$
|
(1,939
|
)
|
|
$
|
3,692
|
|
Income tax expense (benefit)
|
|
|
751
|
|
|
|
(174
|
)
|
|
|
495
|
|
|
|
951
|
|
|
|
(689
|
)
|
|
|
1,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
817
|
|
|
$
|
683
|
|
|
$
|
2,278
|
|
|
$
|
(520
|
)
|
|
$
|
(1,250
|
)
|
|
$
|
2,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
Services Segment Results of Operations
Nine
Months Ended September 30, 2009 Compared to Nine Months
Ended September 30, 2008
Insurance Services Income. Insurance services
segment income consists of both income for services provided to
Guarantee Insurance, which is eliminated in consolidation, and
income for services provided to unaffiliated clients, which, on
a consolidated basis, represents our insurance services income.
For the nine months ended September 30, 2009 and 2008,
insurance services segment income and insurance services income
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
In thousands
|
|
|
Insurance services income
|
|
$
|
9,753
|
|
|
$
|
4,706
|
|
Insurance services income for services provided to Guarantee
Insurance, eliminated in consolidation
|
|
|
4,695
|
|
|
|
4,325
|
|
|
|
|
|
|
|
|
|
|
Insurance services segment income
|
|
$
|
14,448
|
|
|
$
|
9,031
|
|
|
|
|
|
|
|
|
|
|
Insurance services segment income was $14.4 million for the
nine months ended September 30, 2009, compared to
$9.0 million for the comparable period in 2008, an increase
of $5.4 million or 60%. Insurance services segment income
from nurse case management and cost containment services
increased to $10.6 million for the nine months ended
September 30, 2009 from $7.9 million for the
comparable period in 2008, an increase of $2.6 million or
33%, due to the increase in Guarantee Insurance exposures
serviced by PRS. Additionally, PUI recognized approximately
$3.5 million of fee income for the nine months ended
September 30, 2009 related to the production, underwriting
and administration of business on behalf of our BPO client
pursuant to an agreement entered into during the second quarter
of 2009. This was partially offset by a $776,000 decrease in
fees for general agency and reinsurance brokerage services
provided to Guarantee
76
Insurance during the nine months ended September 30, 2008.
The majority of these services were terminated in 2008.
Pre-Tax Net Income. Pre-tax net income for the
insurance services segment was $5.0 million for the nine
months ended September 30, 2009, compared to
$3.7 million for the comparable period in 2008, an increase
of $1.4 million or 38%. The increase in pre-tax net income
was attributable to the increase in insurance services segment
income, partially offset by an increase in insurance services
segment operating expenses to $9.4 million for the nine
months ended September 30, 2009 from $5.4 million for
the comparable period in 2008. The increase in expenses
associated with insurance services segment operations was
primarily attributable to marketing, underwriting and policy
administration costs incurred by PUI in connection with gross
premiums produced for our BPO client, for which we provide
general agency, underwriting and captive management services and
claims services.
Income Tax Expense. Income tax expense for the
insurance services segment was $1.7 million for the nine
months ended September 30, 2009, compared to
$1.2 million for the comparable period in 2008. The
effective tax rate for the insurance services segment was
approximately 34% for both the nine months ended
September 30, 2009 and 2008.
Net Income. Net income for the insurance
services segment was $3.3 million for the nine months ended
September 30, 2009, compared to $2.4 million for the
comparable period in 2008. The increase in net income was
attributable to the increase in pre-tax net income as discussed
above, partially offset by the increase in operating expenses
and income tax expense.
2008
Compared to 2007
Insurance Services Income. Insurance services
segment income consists of both income for services provided to
Guarantee Insurance, which is eliminated in consolidation, and
income for services provided to unaffiliated clients, which, on
a consolidated basis, represents our insurance services income.
For 2008 and 2007, insurance services segment income and
insurance services income were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
In thousands
|
|
|
Insurance services income
|
|
$
|
5,657
|
|
|
$
|
7,027
|
|
Insurance services income for services provided to Guarantee
Insurance, eliminated in consolidation
|
|
|
6,651
|
|
|
|
4,298
|
|
|
|
|
|
|
|
|
|
|
Insurance services segment income
|
|
$
|
12,308
|
|
|
$
|
11,325
|
|
|
|
|
|
|
|
|
|
|
Insurance services segment income was $12.3 million for
2008, compared to $11.3 million for 2007, an increase of
$1.0 million or 9%. Insurance services segment income for
both years was comprised of nurse case management and cost
containment services provided to Guarantee Insurance, for our
benefit and for the benefit of segregated portfolio captives and
our quota share reinsurers. Insurance services segment income
from nurse case management and cost containment services
increased to $11.0 million for 2008, compared to
$7.2 million for 2007, due to an increase in the number of
claims subject to nurse case management and medical bill review.
Insurance services segment income in 2007 was also generated
from general agency services on Guarantee Insurance business,
pursuant to which Guarantee Insurance paid PRS general agency
commission compensation, a portion of which was retained by PRS
and a portion of which was paid by PRS as commission
compensation to the producing agents. Effective January 1,
2008, Guarantee Insurance began working directly with agents to
market segregated portfolio captive business and paying
commissions directly to the producing agents. As a result, PRS
ceased earning general agency commissions and ceased paying
commissions to the producing agents on Guarantee Insurance
business. Insurance services segment income from general agency
services was $361,000 for 2008, which was attributable to
premiums earned in 2008 but written prior to January 1,
2008, compared to $3.1 million for 2007.
77
Insurance services segment income from reinsurance brokerage
services was $685,000 for 2008, compared to $967,000 for 2007, a
decrease of $282,000 or 29%. The decrease in insurance services
segment income from reinsurance brokerage services was
attributable to the fact that we appointed a third-party
reinsurance broker of record in 2008, from whom we were paid a
portion of the reinsurance commissions pursuant to a commission
sharing agreement. Insurance services segment income
attributable to services provided to parties other than
segregated portfolio captives and our quota share reinsurers
increased to $241,000 in 2008 from $98,000 in 2007.
Pre-Tax Net Income. Pre-tax net income for the
insurance services segment was $4.5 million for 2008,
compared to $4.2 million for 2007, an increase of $251,000
or 6%. The increase in pre-tax net income was generally
commensurate with an increase in insurance services segment
income to $12.3 million for 2008 compared to
$11.3 million for 2007. Expenses associated with the
insurance services segment, which include general expenses for
nurse case managers, bill review administrators and all
associated activities and infrastructure, network access fees
and commissions, increased at a lower rate than the increase in
insurance services segment income due to improved economies of
scale. This was partially offset by an increase in expenses
allocated from the holding company to the insurance services
segment, which are allocated based on the proportion of such
costs devoted to the segment. For 2008 and 2007, approximately
28% and 9% of holding company expenses were allocated to the
insurance services segment, respectively.
Income Tax Expense. Income tax expense for the
insurance services segment was $1.5 million for 2008,
compared to an income tax benefit of $481,000 for 2007. In 2007,
we recorded a $1.9 million decrease in the valuation
allowance related to the deferred tax asset arising from net
operating loss carryforwards on the insurance services
operations of Tarheel. On April 1, 2007, Mr. Mariano,
our Chairman, President and Chief Executive Officer and the
beneficial owner of a majority of our outstanding shares,
contributed all the outstanding capital stock of Tarheel to us
with the result that Tarheel and its subsidiary, TIMCO, became
our wholly-owned indirect subsidiaries. In conjunction with the
business contribution, management deemed the prospects for
Tarheel business to generate future taxable income and utilize
Tarheel net operating loss carryforwards, subject to annual
limitations, to be more likely than not and, accordingly,
eliminated the valuation allowance on the deferred tax asset
associated with Tarheel net operating losses. The effective tax
rate for the insurance services segment, excluding the decrease
in the valuation allowance for 2007, was approximately 34% for
both 2008 and 2007.
Net Income. Net income for the insurance
services segment was $2.9 million for 2008 compared to
$4.7 million for 2007. The decrease in net income was
attributable to the decrease in the valuation allowance on the
deferred tax asset associated with Tarheel net operating losses
for 2007, partially offset by the increase in pre-tax net income
as discussed above.
2007
Compared to 2006
Insurance Services Income. Insurance services
segment income both income consists of both income for services
provided to Guarantee Insurance, which is eliminated in
consolidation, and income for services provided to unaffiliated
clients, which, on a consolidated basis, represents our
insurance services income. For 2007 and 2006, insurance services
segment income and insurance services income were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
In thousands
|
|
|
Insurance services income
|
|
$
|
7,027
|
|
|
$
|
7,175
|
|
Insurance services income for services provided to Guarantee
Insurance, eliminated in consolidation
|
|
|
4,298
|
|
|
|
3,033
|
|
|
|
|
|
|
|
|
|
|
Insurance services segment income
|
|
$
|
11,325
|
|
|
$
|
10,208
|
|
|
|
|
|
|
|
|
|
|
Insurance services segment income for 2007 was
$11.3 million compared to $10.2 million for 2006, an
increase of $1.1 million or 11%. The increase in insurance
services segment income was principally attributable to nurse
case management and cost containment services, which increased
to $7.2 million in 2007
78
from $4.8 million in 2006 due to an increase in the number
of claims subject to nurse case management and cost containment.
Additionally, insurance services segment income attributable to
reinsurance brokerage fees from Guarantee Insurance increased to
$967,000 for 2007 compared to $625,000 for 2006. These increases
were partially offset by a $1.6 million decrease in
commissions associated with general agency services, which
decreased to $3.2 million in 2007 from $4.8 million in
2006 due to lower earned premium associated with segregated
portfolio cell captives serviced by PRS.
Pre-Tax Net Income. Pre-tax net income for
2007 for the insurance services segment was $4.2 million
compared to $3.8 million for 2006, an increase of $437,000
or 12%. The increase was generally commensurate with an increase
in insurance services segment income to $11.3 million for
2007 compared to $10.2 million for 2006.
Income Tax Expense (Benefit). Income tax
benefit for the insurance services segment was $481,000 for
2007, compared to income tax expense of $1.7 million for
2006. In 2007, we recorded a $1.9 million decrease in the
valuation allowance related to the deferred tax asset arising
from Tarheel net operating loss carryforwards as discussed
above. Excluding changes in the valuation allowance, the
effective tax rate for the insurance services segment was
approximately 34% for both 2007 and 2006.
Net Income. Net income for the insurance
services segment was $4.7 million for 2007, compared to
$2.0 million for 2006. The increase in net income was
commensurate with the increase in pre-tax net income and the
changes in the valuation allowance on the deferred tax asset
associated with Tarheel net operating losses discussed above.
Insurance
Segment Results of Operations
Nine
Months Ended September 30, 2009 Compared to Nine Months
Ended September 30, 2008
Net Premiums Earned. Net premiums earned were
$28.4 million for the nine months ended September 30,
2009, compared to $32.3 million for the comparable period
in 2008, a decrease of $3.9 million or 12%. The decrease
was generally commensurate with the decrease in net premiums
written, which was attributable to an increase in ceded premiums
written, partially offset by an increase in gross premiums
written, as discussed above.
Net Investment Income. Net investment income
was $1.4 million for the nine months ended
September 30, 2009, compared to $1.5 million for the
comparable period in 2008, a decrease of $133,000 or 9%. The
decrease in net investment income was attributable to a decrease
in our average investment portfolio during the period,
principally associated with the payment of reinsurance premiums
in early 2009 associated with a quota-share reinsurance
agreement we entered into effective December 31, 2008,
pursuant to which we ceded unearned premiums reserves, net of
ceding commissions, of approximately $8.1 million in order
for Guarantee Insurance to satisfy certain regulatory leverage
ratio requirements. Additionally, the book yield and taxable
equivalent book yield on our portfolio at September 30,
2009 were 3.92% and 4.48%, respectively, compared to 4.16% and
4.77%, respectively, at September 30, 2008. The reduced
yield on our portfolio of approximately 25 to 30 basis
points reflects lower yields available in the fixed income
securities market as our securities mature and new cash is
deployed.
Net Realized Gains on Investments. Net
realized gains on investments were $903,000 for the nine months
ended September 30, 2009, compared to net realized losses
of $253,000 for the comparable period of 2008, an increase of
$1.2 million. The increase was principally attributable to
the sale of certain asset-backed and mortgage-backed securities,
the proceeds of which were used to pay net reinsurance premiums
of approximately $8.1 million, as discussed above.
Pre-Tax Net Income. Pre-tax net income for the
insurance segment was $1.6 million for the nine months
ended September 30, 2009, compared to $509,000 for the
comparable period in 2008, an increase of $1.1 million. The
increase was attributable to the increase in net realized gains
on investments and a decrease in our loss and loss adjustment
expense ratio to 55.9% for the nine months ended
September 30, 2009 from 64.2% for the comparable period in
2008, partially offset by a premium rate adjustment of
approximately
79
$1.3 million on an excess loss reinsurance agreement
covering risks attaching from July 1, 2005 through
June 30, 2006.
Income Tax Expense. Income tax expense for the
insurance segment was $751,000 for the nine months ended
September 30, 2009, compared to an income tax benefit of
$174,000 for the comparable period in 2008. The effective tax
rate for the insurance segment was approximately 48% for the
nine months ended September 30, 2009, 14 percentage points
above the 34% statutory rate, primarily attributable to a true
up of the prior year tax provision. For the nine months ended
September 30, 2008, our insurance segment recognized a
decrease in reserves for uncertain tax positions of
approximately $290,000, resulting in an effective income tax
benefit rate for the period of 34%.
Net Income. Net income for the insurance
segment was $817,000 for the nine months ended
September 30, 2009, compared to $683,000 for the
comparable period in 2008, an increase of $134,000 or 20%. The
increase in net income was the result of an increase in pre-tax
net income, partially offset by an increase in income tax
expense, as discussed above.
2008
Compared to 2007
Net Premiums Earned. Net premiums earned were
$49.2 million for 2008, compared to $24.6 million for
2007, an increase of $24.6 million or 100%. The increase
was attributable to the increase in net premiums written,
exclusive of the effects of the quota share reinsurance
agreement we entered into effective December 31, 2008 for
which no ceded premium was earned in 2008, recognized as revenue
on a pro rata basis over the terms of the policies written.
Net Investment Income. Net investment income
was $2.0 million for 2008, compared to $1.3 million
for 2007. Gross investment income was $2.5 million for both
2008 and 2007. The average of our beginning and ending
investment portfolio, including cash and cash equivalents,
increased to $62.6 million for 2008 compared to
$57.1 million for 2007, an increase of $5.5 million,
or 10%. The increase in our invested asset base was partially
offset by the fact that the tax adjusted yield on our debt
portfolio fell to 4.99% at December 31, 2008 from 5.19% at
December 31, 2007 due to prevailing market conditions in
the debt securities market. The increase in our invested asset
base was also offset by lower pre-tax yield tax-exempt state and
political subdivision debt securities, which we began to own in
the second quarter of 2007. Investment expenses were $478,000
for 2008 compared to $1.2 million for 2007, a decrease of
$714,000 or 60%. Investment expenses are principally comprised
of interest expense credited to funds-held balances on
alternative market segregated portfolio captive arrangements.
Interest is credited to funds-held balances based on
3-month
U.S. Treasury Bill rates. The decrease in investment
expenses was primarily attributable to a decrease in short term
interest rates due to prevailing credit market conditions.
Net Realized Losses on Investments. Net
realized losses on investments were approximately
$1.0 million for 2008, compared to $5,000 for 2007. Net
realized losses on investments in 2008 include an
other-than-temporary
impairment charge of approximately $875,000 related to
investments in certain equity securities and approximately
$350,000 on investment of approximately $400,000 in certain
Lehman Brothers Holdings, Inc. bonds, as a result of Lehman
Brothers bankruptcy filing.
Pre-Tax Income. Pre-tax net income for the
insurance segment was approximately $2.8 million for 2008,
compared to $431,000 for 2007. The increase in pre-tax net
income was primarily attributable to an increase in underwriting
income attributable to a $24.6 million, or 100%, increase
in net earned premiums and, to a lesser extent, a decrease in
the portion of holding company expenses allocated to the segment
and an increase in net investment income. These factors were
partially offset by
other-than-temporary
impairment charges of approximately $1.0 million and lower
commission expenses in connection with the fact that, effective
January 1, 2008, Guarantee Insurance began working directly
with agents to market segregated portfolio captive insurance
business and paying commissions directly to the producing agents
rather than paying a higher general agency commission to PRS.
Holding company expenses are allocated to the insurance segment
based on the proportion of such costs devoted to the segment.
For 2008 and 2007, approximately 30% and 80% of holding company
expenses were allocated to the insurance services segment,
respectively.
80
Income Tax Expense. Income tax expense for the
insurance segment was approximately $495,000 for 2008, compared
to $951,000 for 2007. For 2008, the income tax expense for the
insurance segment at the statutory rate, which was approximately
$943,000, was reduced by approximately $238,000 related to tax
exempt investment income and $290,000 related to the reduction
in reserve for uncertain tax positions. For 2007, the income tax
expense for the insurance segment at the statutory rate, which
was approximately $146,000, was increased by approximately
$711,000 in connection with the increase in reserve for
uncertain tax positions, together with other net permanent tax
differences.
Net Income. Net income for the insurance
segment was approximately $2.3 million for 2008, compared
to a net loss of $520,000 for 2007. The increase in net income
was attributable to the increase in pre-tax net income and
changes in the reserve for uncertain tax positions as discussed
above.
2007
Compared to 2006
Net Premiums Earned. Net premiums earned were
$24.6 million for 2007, compared to $21.1 million for
2006, an increase of $3.5 million or 17%. The increase was
attributable to the increase in net premiums written, as
discussed above, recognized as revenue on a pro rata basis over
the terms of the policies written.
Net Investment Income. Net investment income
for 2007 and 2006 was $1.3 million. Gross investment income
was $2.5 million for 2007, compared to $2.1 million
for 2006, an increase of $465,000 or 23%. The increase is a
reflection of a higher weighted average invested asset base, the
result of growth in net premiums written and the lag between the
collection of premiums and the payment of claims. The increase
in gross investment income attributable to a higher invested
asset base was somewhat offset by the fact that a portion of our
fixed maturity securities at December 31, 2007 were
tax-exempt state and political subdivision debt securities,
which generate lower pre-tax yields. We had no tax-exempt state
and political subdivision debt securities at December 31,
2006. Investment expenses were $1.2 million for 2007
compared to $732,000 for 2006, an increase of $461,000 or 63%.
Investment expenses are principally comprised of interest
expense credited to funds held balances related to our
alternative market segregated portfolio captive reinsurers. The
increase in investment expenses was attributable to an increase
in funds held balances from December 31, 2006 to
December 31, 2007.
Net Realized Gains (Losses) on
Investments. Our insurance segment had $5,000 of
net realized losses on investments for 2007, compared to
$393,000 of net realized gains on investments for 2006. Realized
gains and losses on investments occur from time to time in
connection with the sale of debt securities prior to their
maturity and equity securities.
Pre-Tax Net Income (Loss). Pre-tax net income
for the insurance segment was $431,000 for 2007, compared to a
pre-tax loss of $1.9 million for 2006. The increase in
pre-tax net income primarily reflects a lower calendar year loss
ratio in 2007 as discussed above.
Income Tax Expense (Benefit). Income tax
expense for the insurance segment was $951,000 for 2007,
compared to an income tax benefit of $689,000 for 2006. For
2007, the income tax expense for the insurance segment at the
statutory rate, which was approximately $146,000, was increased
by approximately $711,000 in connection with the increase in
reserve for uncertain tax positions, together with other net
permanent tax differences. For 2006, the income tax benefit for
the insurance segment was approximately 36% of the insurance
segments pre-tax net loss.
Net Income (Loss). Net loss for the insurance
segment was $520,000 for 2007 compared to a net loss of
$1.3 million for 2006. The reduction in the net loss was
commensurate with the increase in pre-tax net income, partially
offset by the increase in income tax expense.
Liquidity
and Capital Resources
Sources
and Uses of Funds
Patriot Risk Management is organized as a holding company with
two principal operating units insurance services
through PRS and PUI, and insurance through Patriot National
Insurance Group, Inc. Patriot
81
Risk Managements principal liquidity needs include debt
service, payments of income taxes, payment of certain holding
company costs not attributable to subsidiary operations and, in
the future, may include stockholder dividends.
Historically, Patriot Risk Managements principal source of
liquidity has been, and we expect will continue to be, dividends
from PRS, as well as financing through borrowings, issuances of
our securities and fees received under intercompany agreements
as described below. In addition, we expect to retain
approximately $20 million of the net proceeds from this
offering at the holding company for general corporate purposes.
At the time we acquired Guarantee Insurance, it had a large
statutory unassigned deficit. As of September 30, 2009,
Guarantee Insurances statutory unassigned deficit was
$94.7 million. Under Florida law, insurance companies may
only pay dividends out of available and accumulated surplus
funds derived from realized net operating profits on their
business and net realized capital gains, except under limited
circumstances with the prior approval of the Florida OIR.
Moreover, pursuant to a consent order issued by the Florida OIR
on December 29, 2006 in connection with the redomestication
of Guarantee Insurance from South Carolina to Florida, Guarantee
Insurance is prohibited from paying dividends, without Florida
OIR approval, until December 29, 2009. Therefore, it is
unlikely that Guarantee Insurance will be able to pay dividends
for the foreseeable future without the prior approval of the
Florida OIR. Currently, Guarantee Insurance does not plan to pay
cash dividends on its common stock.
We presently expect that the net proceeds that the holding
company retains from this offering, projected cash flows from
dividends from our insurance and insurance services operating
companies, and cash flows from intercompany agreements with our
insurance and insurance services companies will provide Patriot
Risk Management with sufficient liquidity to repay our debt, pay
income taxes on behalf of Patriot and fund holding company
operating expenses not attributable to subsidiary operations for
the next two years.
We plan to contribute approximately
$[ ] million of the net proceeds
from this offering to Guarantee Insurance to support its premium
writings. As described elsewhere in this prospectus, we have
entered into a stock purchase agreement to acquire PF&C, a
shell property and casualty insurance company. Our acquisition
of PF&C is subject to various regulatory approvals. If we
obtain these regulatory approvals and consummate the acquisition
on or prior to March 4, 2010, we plan instead to use
approximately $16.7 million of the net proceeds from this
offering to pay the purchase price for PF&C (of which
approximately $15.5 million represents the capital and
surplus of PF&C), to contribute approximately
$[ ] million to, PF&C to
support its premium writings, and to contribute approximately
$[ ] million to Guarantee
Insurance, to support its premium writings.
We expect that the remaining $[ ]
million, or [ ] million if we
acquire PF&C, will be used to support our anticipated
growth and general corporate purposes and to fund other holding
company operations, including the repayment of all or a portion
of the Brooke loans and the ULLICO loan and potential
acquisitions, although we have no current understandings or
agreements regarding any such acquisitions (other than
PF&C).
If the underwriters exercise all or any portion of their
over-allotment option, we intend to use all or a substantial
portion of the net proceeds from any such exercise to pay down
the balance of our credit facilities with Brooke and ULLICO. If
the over-allotment option is exercised in full, we will use
approximately $[ ] million of the
net proceeds to pay off these credit facilities and the
remaining $[ ] million, or
$[ ] million if we acquire
PF&C, for general corporate purposes.
Pursuant to a tax allocation agreement by and among Patriot Risk
Management and its subsidiaries, Patriot Risk Management
computes and pays federal income taxes on a consolidated basis.
At the end of each consolidated return year, each subsidiary
computes and pays to Patriot Risk Management its respective
share of the federal income tax liability primarily based on
separate return calculations. During the nine months ended
September 30, 2009, Guarantee Insurance paid approximately
$300,000 to Patriot Risk Management under this agreement.
82
Pursuant to a Management Services Agreement dated as of
January 1, 2004 between Patriot Risk Management and
Guarantee Insurance, Patriot Risk Management provides Guarantee
Insurance with strategic planning and capital raising,
prospective acquisition management, human resources and benefits
administration and certain other management services. Patriot
Risk Management bills Guarantee Insurance for its share of the
actual costs of such services on a monthly basis. During the
nine months ended September 30, 2009, Patriot Risk
Management recouped approximately $1.1 million from
Guarantee Insurance under this agreement. Additionally, Patriot
Risk Management bills PRS for a portion of the actual costs for
such services. During the nine months ended September 30,
2009, Patriot Risk Management recouped approximately
$1.1 million from PRS for its share of such services.
Pursuant to a Managed Care Services Agreement between Guarantee
Insurance and Patriot Risk Services, dated as of January 1,
2006, Patriot Risk Services provides nurse case management and
cost containment services for Guarantee Insurances benefit
and for the benefit of segregated portfolio captives and our
quota share reinsurers. During the nine months ended
September 30, 2009, Patriot Risk Services earned a total of
$14.4 million under this agreement, $4.6 million of
which represented consideration for services performed for the
benefit of Guarantee Insurance and are eliminated in
consolidation. The remaining $9.8 million earned by Patriot
Risk Services under this agreement represents income derived
from segregated portfolio captives, our quota share reinsurers
and our BPO client for services performed on their behalf and is
reflected as insurance services income on our consolidated
income statement.
Pursuant to a Subrogation Services Agreement and an
Investigation Services Agreement, each dated as of
January 1, 2009, between Guarantee Insurance and Patriot
Recovery, Inc., Patriot Recovery, Inc. provides subrogation
recovery services and investigative services to Guarantee
Insurance. During the nine months ended September 30, 2009,
Patriot Recovery, Inc. earned approximately $6,000 of fee income
under these agreements.
Pursuant to an Expense Reimbursement Agreement effective
April 1, 2009 between Guarantee Insurance and PUI,
Guarantee Insurance pays salaries and certain other expenses on
behalf of PUI. Guarantee Insurance bills PUI for these salaries
and certain other expenses on a monthly basis. During the nine
months ended September 30, 2009, Guarantee Insurance
recouped approximately $1.9 million from PUI under this
agreement.
Operating
Activities
In our insurance services operations, our principal source of
operating funds is insurance services income generated by PRS
and PUI. PRS currently provides a range of insurance services
primarily to Guarantee Insurance, for its benefit and for the
benefit of segregated portfolio captives and our quota share
reinsurers. PRS and PUI also provide insurance services to our
BPO client. Our primary use of operating funds in our insurance
services operations is for the payment of operating expenses.
In our insurance operations, our principal sources of operating
funds are premium collections and investment income. Premiums
are generally collected over the terms of the policies.
Installments booked but deferred and not yet due represent
estimated future premium amounts to be paid ratably over the
terms of in-force policies based upon established payment
arrangements.
Our primary uses of operating funds in our insurance operations
include payments of claims, reinsurance premiums and operating
expenses. Currently, we pay claims using cash flow from
operations and invest our excess cash in debt securities. We
forecast claim payments based on our historical trends as well
as loss development factors from the NCCI. We seek to manage the
funding of claim payments by actively managing available cash
and forecasting cash flows on a short- and long-term basis.
Claims paid, net of reinsurance, were $18.2 million,
$13.5 million and $10.4 million for 2008, 2007 and
2006, respectively. Since our inception in 2004, we generally
have funded claim payments from cash flow from operations,
principally premiums, net of amounts ceded to our reinsurers,
and net investment income. With the proceeds of this offering,
we presently expect to maintain sufficient cash flows from
operations to meet our anticipated claim obligations and
operating needs for the next two years. However, depending on
our level of premium writings, retention and acquisition
activity, we may need to raise more capital over time to support
our operations.
83
Other factors may also influence our need to raise additional
capital. As of September 30, 2009, Guarantee Insurance had
approximately $2.7 million of intercompany receivables,
$975,000 of which had been outstanding for more than
90 days (although subsequent to September 30, 2009,
all intercompany receivables that had been outstanding for more
than 30 days were repaid). Under statutory accounting
rules, Guarantee Insurance is required to record the amount of
any intercompany receivables that have been outstanding for more
than 90 days as a non-admitted asset. Therefore, to the
extent that any intercompany receivables have been outstanding
for more than 90 days, Guarantee Insurance will be required
to non-admit the amount of such receivables, which will result
in a corresponding decrease in the surplus of Guarantee
Insurance. At year end, if the amount of our premium writings
relative to the amount of our surplus causes Guarantee Insurance
to be out of compliance with certain statutory leverage ratios,
we may need to obtain additional reinsurance, reduce our
insurance writings or raise additional capital before year end
to contribute to Guarantee Insurance in order to satisfy
regulatory leverage ratio requirements. See Risk
Factors Risks Related to Our Business We
are subject to extensive state regulation; regulatory and
legislative changes may adversely impact our business.
We purchase reinsurance to help protect us against severe claims
and catastrophic events and to help maintain desired capital
ratios. Based on our estimates of future claims, we believe we
are sufficiently capitalized to satisfy the deductibles,
retentions and aggregate limits in our annual reinsurance
program effective July 1, 2009. We reevaluate our
reinsurance program at least annually, taking into consideration
a number of factors, including cost of reinsurance, liquidity
requirements, operating leverage and coverage terms. If we
decrease our retention levels, or maintain our current retention
levels and the cost of reinsurance increases, assuming no
material change in our loss ratio, our cash flows from
operations would decrease because we would cede a greater
portion of our premiums written to our reinsurers. Conversely,
if we increase our retention levels, or maintain our current
retention levels and the cost of reinsurance declines, assuming
no material change in our loss ratio, our cash flow from
operations would increase. We do not have any immediate plans to
materially increase or reduce our retention levels subsequent to
this offering.
Investment
Activities
Our investment portfolio, including cash and cash equivalents,
was approximately $54.5 million at September 30, 2009.
The first priority of our investment strategy is capital
preservation, with a secondary focus on achieving an appropriate
risk adjusted return. We seek to manage our investment portfolio
such that the security maturities provide adequate liquidity
relative to our expected claims payout pattern. We expect to
maintain sufficient liquidity from funds generated from
operations to meet our anticipated insurance obligations and
operating and capital expenditure needs, with excess funds
invested in accordance with our investment guidelines. We
anticipate that all of our debt securities would be available to
be sold in response to changes in interest rates or changes in
the availability of and yields on alternative investments.
Accordingly, our debt securities are classified as available for
sale and stated at fair value, with net unrealized gains and
losses included in accumulated other comprehensive income net of
deferred income taxes.
Financing
Activities
We had a note payable to the former owner of Guarantee
Insurance, with a principal balance of $8.8 million as of
March 30, 2006. On that date, we entered into a settlement
and termination agreement with the former owner of Guarantee
Insurance that allowed for the early extinguishment of the
$8.8 million note payable for $2.2 million in cash and
release of the indemnification agreement previously entered into
by the parties. We recognized an associated gain on the early
extinguishment of debt of $6.6 million in 2006.
Effective March 30, 2006, we entered into a loan agreement
for $8.7 million with an interest rate equal to the Federal
Reserve prime rate plus 4.5% (7.75% at September 30, 2009).
The loan was originally entered into with Brooke and was
subsequently syndicated among 23 banks. This loan, which we
refer to as the Original Brooke loan, is, now administered by
Quivira Capital, LLC. The proceeds of the Original Brooke loan,
net of loan and guaranty fee costs, totaled approximately
$7.2 million and were used to provide $3.0 million of
additional surplus to Guarantee Insurance, pay the
$2.2 million early extinguishment of debt noted above,
provide $750,000 to Tarheel to settle certain liabilities of
Foundation Insurance Company, redeem common
84
stock for approximately $1.0 million and for general
corporate purposes. In September 2007, we borrowed an additional
$5.7 million from the same lender under the same interest
rate terms as the Original Brooke loan, and we refer to this
loan together with the Original Brooke loan as the Brooke loans.
The proceeds of the additional loan, net of loan and guaranty
fee costs, totaled approximately $4.9 million and were used
to provide $3.0 million of additional surplus to Guarantee
Insurance and to pay federal income taxes of approximately
$1.9 million on our 2006 gain on early extinguishment of
debt. The principal balance and accrued interest associated with
this loan at September 30, 2009 were approximately
$11.4 million and $36,000, respectively. Principal and
interest payments, based on the prevailing Federal Reserve prime
rate at September 30, 2009, are approximately $186,000 per
month. Due to the variable rate, payment amounts may change.
On December 31, 2008, we borrowed approximately
$5.5 million from ULLICO under the same terms as the Brooke
loans. The proceeds of this loan, which we refer to as the
ULLICO loan, net of loan and guaranty fee costs, totaled
approximately $5.0 million and were used to provide
additional surplus to Guarantee Insurance. The principal balance
and accrued interest associated with the ULLICO loan at
September 30, 2009 were approximately $5.0 million and
$16,000, respectively. Principal and interest payments, based on
the prevailing Federal Reserve prime rate at September 30,
2009, are approximately $81,000 per month. Due to the variable
rate, payment amounts may change.
The Brooke loans and the ULLICO loan are guaranteed by
Mr. Mariano, our Chairman, President and Chief Executive
Officer and the beneficial owner of a majority of our
outstanding shares. Mr. Mariano has pledged all of the
shares of our capital stock beneficially owned by him, and which
may be acquired by him in the future, as security for his
guarantee of the ULLICO loan. We pay a guaranty fee of 4% of the
principal balance on these loans to Mr. Mariano each year.
The Brooke loans and the ULLICO loan are secured by a first lien
on all the assets of Patriot Risk Management, PRS Group, Inc.,
Patriot National Insurance Group, Inc., Patriot Risk Services,
Inc., Patriot Underwriters, Inc. and Patriot Risk Management of
Florida, Inc. (each a borrower). In connection with
the ULLICO loan, the lenders under the Brooke loan and ULLICO
entered into an intercreditor agreement under which the parties
agreed that repayment and collateral security for the Brooke
loan and the ULLICO loan will be on a pari passu
basis. The loan agreements, as amended, contain covenants
including, among other things, a prohibition on the sale,
transfer or conveyance of the assets securing the loans that are
not in the ordinary course of business by a borrower without the
lenders consent, certain limitations on the incurrence of
future indebtedness, financial covenants requiring us to
maintain consolidated stockholders equity exceeding
$5.5 million on a GAAP basis and Guarantee Insurance to
maintain policyholders surplus exceeding
$14.5 million on a GAAP basis, limitations on certain
changes in management and the board of directors without the
lenders consent and a prohibition on making material
changes to agency relationships or business operations without
each lenders consent. Additionally, none of the borrowers
may pay dividends on its capital stock without each
lenders consent.
The lenders may declare outstanding amounts under the loan
agreements to be due and payable immediately by us if any
borrower defaults. Additionally, certain affiliates of the
borrowers are prohibited from soliciting, writing, processing or
servicing insurance policies of our customers for a period of
five years if there has been a default. Events of default
include among others, the following:
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non-payment of principal or interest within ten days of the
payment due date or any other material nonperformance;
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failure to maintain an employment agreement with Steven M.
Mariano or find a suitable replacement for him if he should die
or become legally incapacitated;
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insolvency of any borrower or Guarantee Insurance;
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cessation of Steven M. Marianos direct or indirect 51% or
more ownership
and/or
profit interest in us or 51% or more voting control of Patriot
Risk Management;
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transfer of direct or indirect ownership of the other borrowers;
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regulatory supervision, control or rehabilitation of Guarantee
Insurance, failure of Guarantee Insurance to meet certain risk
based capital ratios, or revocation or suspension of Guarantee
Insurances certificate of authority by the state of
Florida or any other regulatory body having authority over it;
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material impairment of the value of collateral;
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deviation by Guarantee Insurance from certain underwriting
guidelines without the prior written consent of the lenders;
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entry by Guarantee Insurance into any contract that involves the
payment of expenses in excess of 10% of the borrowers
combined annual revenues without the prior written consent of
the lenders;
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failure of Guarantee Insurance to perform its business
obligations under material contracts; and
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attempts by other creditors of a borrower to collect any debt
any borrower owes through a court proceeding.
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At September 30, 2009, we were in compliance with the
financial covenants of these loans. Although we were not in
compliance with certain non-financial covenants, we expect to
obtain a waiver from the lenders regarding these covenants, as
well as a waiver of the event of default provision relating to
Mr. Mariano ceasing to control at least 51% of Patriot Risk
Management.
On June 26, 2008, we borrowed $1.5 million from our
Chairman, President, Chief Executive Officer and the beneficial
owner of a majority of our outstanding shares, pursuant to a
promissory note that bears interest at the rate equal to the
Federal Reserve prime rate plus 3% (6.25% at September 30,
2009). The net proceeds of the loan totaled approximately
$1.3 million and were contributed to the surplus of
Guarantee Insurance to support its premium writings.
Concurrently with the loan, Mr. Mariano personally borrowed
$1.5 million to fund his loan to us. The loan to
Mr. Mariano contains terms similar to the terms contained
in the note between Mr. Mariano and us. Because
Mr. Mariano personally obtained this loan for our benefit,
we paid him a loan origination fee of $187,000. The principal
balance of the loan, which is payable on demand by the lender
subject to the cash flow requirements of Patriot, was
approximately $363,000 at September 30, 2009. There was no
accrued interest on the loan at September 30, 2009.
Subsequent to September 30, 2009, the loan was repaid in
full.
In connection with the Brooke loans, the loan from
Mr. Mariano and the ULLICO loan, we incurred approximately
$2.5 million in issuance costs, which have been capitalized
and are being amortized over the estimated terms of the debt.
Unamortized debt issuance costs of approximately
$1.8 million are included in other assets on the unaudited
consolidated balance sheet as of September 30, 2009.
Between July and August 2004, Guarantee Insurance issued five
fully subordinated surplus notes in the aggregate amount of
$1.3 million to certain policyholders. The aggregate
principal balance and accrued interest associated with these
notes at September 30, 2009 were approximately
$1.2 million and $190,000, respectively. The notes are
unsecured, are subordinated to all general liabilities and
claims of policyholders and creditors of Guarantee Insurance,
have stated maturities of five years and an interest rate of 3%.
The principal and interest due under the subordinated surplus
notes are not carried as a legal liability of Guarantee
Insurance, but are considered to be a special surplus on
Guarantee Insurances statutory financial statements. No
payments of interest or principal may be made on these
subordinated notes unless either (i) the total adjusted
capital and surplus of Guarantee Insurance exceeds 400% of the
authorized control level risk-based capital (calculated in
accordance with the rules promulgated by the NAIC) stated in
Guarantee Insurances most recent annual statement filed
with the appropriate state regulators, or (ii) Guarantee
Insurance obtains regulatory approval to make such payments.
Between May and August 2005, we issued subordinated debentures
totaling approximately $2.0 million. The debentures had an
initial
3-year term,
subject to renewal at the end of the term, generally for an
additional
3-year term.
Certain of the subordinated debentures are subject to renewal
for up to two additional
1-year
terms. The debentures bear interest at the rate of 3%. The
principal balance and accrued interest on these debentures as of
September 30, 2009 were approximately $1.6 million and
$211,000, respectively.
86
The following table summarizes our outstanding notes payable,
surplus notes payable and subordinated debentures, including
accrued interest thereon, as of September 30, 2009:
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Interest
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Principal
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Rate at
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and
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Year of
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Interest Rate
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September 30,
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Accrued
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Issuance
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Description
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Years Due
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Terms
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2009
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Interest
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In thousands
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2006/2007
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Brooke loans
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2009 2016
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Federal Reserve prime rate plus 4.5%
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7.75
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%
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$
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11,481
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2008
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ULLICO loan
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2009 2016
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Federal Reserve prime rate plus 4.5%
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7.75
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5,023
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2008
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Steven Mariano loan
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2009
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Federal Reserve prime rate plus 3.0%
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6.25
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363
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2004
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Surplus notes payable
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2009
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3.0%
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3.00
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1,377
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18,244
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2005
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Subordinated debentures
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2011
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3.0%
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3.00
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1,845
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
Nine
Months Ended September 30, 2009 Compared to Nine Months
Ended September 30, 2008
Net cash used in operating activities was $8.1 million for
the nine months ended September 30, 2009, compared to
$4.5 million for the comparable period in 2008, an increase
of $3.5 million. The increase in net cash used in operating
activities was primarily attributable to the payment of
reinsurance premiums associated with a quota share reinsurance
agreement we entered into effective December 31, 2008,
pursuant to which we ceded unearned premium reserves, net of
ceding commissions, of approximately $8.1 million. The
components of net cash used in operating activities are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
In thousands
|
|
|
Net income
|
|
$
|
2,376
|
|
|
$
|
600
|
|
Non-cash decreases in net income
|
|
|
1,365
|
|
|
|
837
|
|
Changes in balances generally reflecting growth in net premiums
written(1)
|
|
|
(7,498
|
)
|
|
|
(11,614
|
)
|
Changes in balances generally reflecting claim payment
patterns(2)
|
|
|
(7,534
|
)
|
|
|
7,823
|
|
Other items(3)
|
|
|
3,235
|
|
|
|
(2,171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(8,056
|
)
|
|
$
|
(4,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes premiums receivable, unearned and advanced premium
reserves, reinsurance funds withheld and balances payable,
prepaid reinsurance premiums and funds held by ceding companies
and other amounts due from reinsurers |
|
(2) |
|
Includes reserves for losses and loss adjustment expenses and
reinsurance recoverable balances on paid and unpaid losses and
loss adjustment expenses |
|
(3) |
|
Principally changes in other assets and accounts payable and
accrued expenses |
Net cash provided by investing activities was $9.2 million
for the nine months ended September 30, 2009 compared to
net cash used in investment activities of $960,000 for the
comparable period in 2008, an increase of $10.2 million.
For the nine months ended September 30, 2009, the principal
components of net cash provided by investing activities included
sales and maturities of debt securities of $20.5 million
and sales of equity securities of $329,000, partially offset by
purchases of debt securities of $10.8 million, net
purchases of short-term investments of $427,000 and purchases of
fixed assets of $407,000. For the nine months ended
September 30, 2008, the principal components of net cash
used in investing activities included purchases of debt
securities of $15.7 million, net purchases of short-term
investments of $144,000 and purchases of fixed assets of
$87,000, partially offset by sales and maturities of debt
securities of $15.0 million.
Net cash used in financing activities was $2.1 million for the
nine months ended September 30, 2009 compared to net cash
provided by financing activities of $739,000 for the comparable
period in 2008. For the nine months ended September 30,
2009, net cash used in financing activities included repayment
of notes payable of $2.6 million, partially offset by the
payment of a receivable from a related party for Series A
convertible preferred stock of $500,000. For the nine months
ended September 30, 2008, net cash provided by financing
activities included proceeds from notes payable of
$1.5 million, partially offset by repayment of notes
payable of $761,000.
88
2008
Compared to 2007
Net cash used in operating activities was $4.4 million for
2008 compared to net cash provided by operating activities of
$7.1 million for 2007, a decrease of $11.5 million.
The components of net cash provided by (used in) operating
activities are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
In thousands
|
|
|
Net income (loss)
|
|
$
|
(124
|
)
|
|
$
|
2,379
|
|
Non-cash decreases in net income
|
|
|
688
|
|
|
|
202
|
|
Changes in balances generally reflecting growth in net premiums
written(1)
|
|
|
(21,974
|
)
|
|
|
5,877
|
|
Changes in balances generally reflecting claim payment
patterns(2)
|
|
|
10,054
|
|
|
|
(2,060
|
)
|
Other items(3)
|
|
|
6,971
|
|
|
|
729
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,385
|
)
|
|
$
|
7,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes premiums receivable, unearned and advanced premium
reserves, reinsurance funds withheld and balances payable,
prepaid reinsurance premiums and funds held by ceding companies
and other amounts due to reinsurers |
|
(2) |
|
Includes reserves for losses and loss adjustment expenses and
reinsurance recoverable balances on paid and unpaid losses and
loss adjustment expenses |
|
(3) |
|
Principally changes in accounts payable and accrued expenses |
Net cash provided by investing activities was $1.4 million
for 2008 compared to net cash used in investing activities of
$25.0 million for 2007, an increase of $26.4 million.
For 2008, the components of net cash provided by investing
activities included proceeds from sales and maturities of debt
securities of $19.1 million, partially offset by purchases
of debt securities, net purchases of short-term investments and
purchases of fixed assets totaling $17.6 million. For 2007,
the components of net cash used by investing activities included
purchases of debt securities and fixed assets and net purchases
of short-term investments $46.1 million, partially offset
by proceeds from sales and maturities of debt and equity
securities totaling $21.1 million.
Net cash provided by financing activities was $6.3 million
for 2008 compared to $5.0 million for 2007, an increase of
$1.3 million. For 2008, net cash provided by financing
activities included proceeds from notes payable of approximately
$6.9 million and proceeds from the issuance of preferred
stock, net of receivable from related party, of $500,000. These
factors were partially offset by the repayment of notes payable
of approximately $1.1 million. For 2007, net cash used by
financing activities include proceeds from notes payable to
Brooke of $5.7 million, partially offset by repayment of
notes payable of $586,000 and net disbursements for the
redemption of common stock of $100,000.
89
2007
Compared to 2006
Net cash provided by operating activities was $7.1 million
in 2007 compared to $5.0 million in 2006, an increase of
$2.1 million. The components of net cash provided by
operating activities are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
In thousands
|
|
|
Net income
|
|
$
|
2,379
|
|
|
$
|
1,610
|
|
Non-cash income derived from early extinguishment of debt and
related other income
|
|
|
|
|
|
|
(7,382
|
)
|
Non-cash charges related to net realized investment losses
|
|
|
5
|
|
|
|
1,346
|
|
Other non-cash decreases (increases) in net income
|
|
|
202
|
|
|
|
1,081
|
|
Changes in balances typically reflecting growth in net premiums
written(1)
|
|
|
5,877
|
|
|
|
3,414
|
|
Changes in balances typically reflecting claim payment
patterns(2)
|
|
|
(2,060
|
)
|
|
|
7,899
|
|
Other items(3)
|
|
|
724
|
|
|
|
(2,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,127
|
|
|
$
|
4,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes premiums receivable, unearned and advanced premium
reserves, reinsurance funds withheld and balances payable,
prepaid reinsurance premiums and funds held by ceding companies
and other amounts due to reinsurers |
|
(2) |
|
Includes reserves for losses and loss adjustment expenses and
reinsurance recoverable balances on paid and unpaid losses and
loss adjustment expenses |
|
(3) |
|
Principally changes in accounts payable and accrued expenses |
Net cash used in investing activities was $25.0 million in
2007 compared to $13.7 million in 2006, an increase of
$11.3 million. In 2007, the primary components of net cash
used in investing activities included purchases of debt
securities, short-term investments and fixed assets totaling
$46.1 million, offset by proceeds from sales and maturities
of debt and equity securities totaling $21.1 million. In
2006, the primary components of net cash used in investing
activities included purchases of debt securities and, to a much
lesser extent, equity securities and fixed assets totaling
$25.2 million, offset by proceeds from sales and maturities
of debt and equity securities and short-term investments
totaling $11.5 million. The increase in net cash used in
investing activities in 2007 over 2006 was attributable to
increased cash flows from higher premium volume, together with
the deployment of $5.7 million of additional proceeds from
notes payable as discussed below.
Net cash provided by financing activities was $5.0 million
in 2007 compared to $6.1 million in 2006, a decrease of
$1.1 million. In 2007, we received $5.7 million of
proceeds from notes payable, redeemed common stock for $100,000
and made interest and principal payments on notes payable
totaling $586,000. In 2006, we received $8.7 million of
proceeds from notes payable, issued common stock for
$1.4 million, redeemed common stock for $1.0 million,
made interest and principal payments on notes payable totaling
$2.3 million and paid dividends of $600,000.
Investment
Portfolio
Our primary investment objective is capital preservation. Our
secondary objectives are to achieve an appropriate risk-adjusted
return and maintain an appropriate match between the duration of
our investment portfolio and the duration of the claims
obligations in our insurance operations.
At December 31, 2006, we did not anticipate that our fixed
maturity securities would be available to be sold in response to
changes in interest rates or changes in the availability of and
yields on alternative investments and, accordingly, these
securities were classified as held to maturity and stated at
amortized cost.
In 2007, we purchased state and political subdivision debt
securities with the intent that such securities would be
available to be sold in response to changes in interest rates or
changes in the availability of and yields on alternative
investments. Accordingly, we classified these state and
political subdivision debt securities
90
as available for sale and stated them at fair value, with net
unrealized gains and losses included in accumulated other
comprehensive income net of deferred income taxes.
At December 31, 2007, the increased volatility in the debt
securities market substantially increased the likelihood that we
would, on a routine basis, desire to sell our debt securities
and redeploy the proceeds into alternative asset classes or into
alternative securities with better yields or lower exposure to
decreases in fair value. We anticipated that all of our debt
securities would be available to be sold in response to changes
in interest rates or changes in the availability of and yields
on alternative investments. Accordingly, we transferred all of
our debt securities that were not already classified as
available for sale from held to maturity to available for sale.
All of our debt securities at December 31, 2008 and 2007
were stated at fair value, with net unrealized gains and losses
included in accumulated other comprehensive income net of
deferred income taxes. In connection with the transfer of debt
securities from held to maturity to available for sale, we
recognized a net unrealized gain of approximately $215,000,
which is included in other comprehensive income for the year
ended December 31, 2007.
Our fixed maturity securities, which are classified as
available-for-sale,
and certain cash equivalent investments are managed by Gen
Re New England Asset Managers (a subsidiary of
Berkshire Hathaway, Inc.), an independent asset manager that
operates under investment guidelines approved by our board of
directors. Cash and cash equivalents include cash on deposit,
commercial paper, short-term municipal securities, pooled
short-term money market funds and certificates of deposit. Our
fixed maturity securities available for sale include obligations
of the U.S. Treasury or U.S. agencies, obligations of
states and their subdivisions, long-term certificates of
deposit, U.S. dollar-denominated obligations of
U.S. corporations, mortgage-backed securities,
collateralized mortgage obligations, mortgages guaranteed by the
Federal National Mortgage Association and the Government
National Mortgage Association, and asset-backed securities. We
did not have any equity securities at September 30, 2009.
Our real estate portfolio consists of one residential property
in Florida. See Business Investments.
We manage our investment credit risk through a diversification
strategy that reduces our exposure to any business sector or
security. See Business Investments for
additional information. Our investment portfolio, including cash
and cash equivalents, had a carrying value of $54.5 million
at September 30, 2009, and is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Fair Value
|
|
|
Portfolio
|
|
|
|
(In thousands)
|
|
|
|
|
|
Debt securities available for sale:
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
$
|
3,599
|
|
|
|
6.6
|
%
|
U.S. government agencies
|
|
|
308
|
|
|
|
0.6
|
|
Asset-backed and mortgage-backed securities
|
|
|
13,887
|
|
|
|
25.4
|
|
State and political subdivisions
|
|
|
16,376
|
|
|
|
30.0
|
|
Corporate securities
|
|
|
11,964
|
|
|
|
22.0
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
|
46,134
|
|
|
|
84.6
|
|
Short-term investments
|
|
|
671
|
|
|
|
1.2
|
|
Real estate
|
|
|
246
|
|
|
|
0.5
|
|
Cash and cash equivalents
|
|
|
7,452
|
|
|
|
13.7
|
|
|
|
|
|
|
|
|
|
|
Total investments, including cash and cash equivalents
|
|
$
|
54,503
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
At September 30, 2009, 99.8% of our debt securities
available for sale were rated investment grade
(credit rating of AAA to BBB- by Standard &
Poors Corporation, or S&P) and 96.8% of our debt
securities available for sale were rated A or better by
Standard & Poors Corporation. The following
table shows the
91
distribution of our fixed maturity securities available for sale
as of September 30, 2009 as rated by S&P. Actual
ratings do not differ from ratings exclusive of guarantees by
third parties as of September 30, 2009.
|
|
|
|
|
S&P Credit Rating
|
|
|
|
AAA
|
|
|
50.9
|
%
|
AA
|
|
|
24.5
|
|
A
|
|
|
21.4
|
|
BBB
|
|
|
3.0
|
|
Below BBB
|
|
|
0.2
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
|
|
|
Approximately 44% of the fair value of our state and political
subdivision debt securities were guaranteed by third parties as
of September 30, 2009 as follows. We have no direct
investments in these financial guarantee companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Total
|
|
|
|
|
|
|
State and Political
|
|
|
|
|
|
|
Subdivision
|
|
Guarantor
|
|
Fair Value
|
|
|
Securities
|
|
|
|
(In thousands)
|
|
|
|
|
|
Ambac Assurance Corporation
|
|
$
|
1,676
|
|
|
|
10.2
|
%
|
Financial Guaranty Insurance Company
|
|
|
2,682
|
|
|
|
16.4
|
|
Financial Security Assurance, Inc.
|
|
|
1,675
|
|
|
|
10.2
|
|
MBIA, Inc.
|
|
|
1,146
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,179
|
|
|
|
43.8
|
%
|
|
|
|
|
|
|
|
|
|
We seek to manage our investment portfolio such that the
security maturities provide adequate liquidity relative to our
expected claims payout pattern. A summary of the carrying value
of our fixed maturity securities available for sale as of
September 30, 2009, by contractual maturity, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
Percentage of
|
|
|
|
Value
|
|
|
Portfolio
|
|
|
|
(In thousands)
|
|
|
|
|
|
Due in one year or less
|
|
$
|
5,171
|
|
|
|
11.2
|
%
|
Due after one year through five years
|
|
|
15,312
|
|
|
|
33.2
|
|
Due after five years
|
|
|
11,764
|
|
|
|
25.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,247
|
|
|
|
69.9
|
|
Asset-backed and mortgage-backed securities
|
|
|
13,887
|
|
|
|
30.1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,134
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
We regularly review our investment portfolio to identify
other-than-temporary
impairments in the fair values of our securities. 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 our
operations or earnings;
|
|
|
|
our intent and ability to keep the security for a sufficient
time period for us to recover our value;
|
|
|
|
any downgrades of the security by a rating agency; and
|
|
|
|
any reduction or elimination of dividends, or nonpayment of
scheduled interest payments.
|
92
For the nine months ended September 30, 2009, we did not
recognize any
other-than-temporary
impairments. For 2008, we recognized an
other-than-temporary
impairment charge of approximately $875,000 related to
investments in certain equity securities. Additionally, during
2008, we recognized an
other-than-temporary-impairment
charge of approximately $350,000 on our approximately $400,000
investment in certain Lehman Brothers Holdings, Inc. bonds. We
do not believe that our investment portfolio contains any
material exposure to subprime mortgage securities.
Effective January 1, 2008, we adopted FASB guidance, now
part of ASC 820, Fair Value Measurements and Disclosure,
which establishes a three-level hierarchy for fair value
measurements that distinguishes between market participant
assumptions based on market data obtained from sources
independent of the reporting entity (Observable Units) and the
reporting entitys own assumptions about market
participants assumptions (Unobservable Units). The
hierarchy level assigned to each security in our
available-for-sale
debt and equity securities portfolio is based upon our
assessment of the transparency and reliability of the inputs
used in the valuation as of the measurement date. The three
hierarchy levels are as follows:
|
|
|
|
|
Definition
|
|
Level 1
|
|
Observable unadjusted quoted prices in active markets for
identical securities
|
Level 2
|
|
Observable inputs other than quoted prices in active markets for
identical securities, including:
|
|
|
(i) quoted prices in active markets for similar
securities,
|
|
|
(ii) quoted prices for identical or similar
securities in markets that are not active,
|
|
|
(iii) inputs other than quoted prices that are
observable for the security (e.g. interest rates, yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, credit risks and default rates, and
|
|
|
(iv) inputs derived from or corroborated by
observable market data by correlation or other means
|
Level 3
|
|
Unobservable inputs, including the reporting entitys own
data, as long as there is no contrary data indicating market
participants would use different assumptions
|
At December 31, 2008, all of our debt securities were
classified as Level 1 or Level 2. If securities are
traded in active markets, quoted prices are used to measure fair
value (Level 1). All of our Level 2 securities are
priced based on observable inputs, including (i) quoted
prices in active markets for similar securities,
(ii) quoted prices for identical or similar securities in
markets that are not active or (iii) other observable
inputs, including interest rates, volatilities, prepayment
speeds, credit risks and default rates for the security. Our
management is responsible for the valuation process and uses
data from outside sources to assist with establishing fair
value. As part of our process of reviewing the reasonableness of
data obtained from outside sources, we review, in consultation
with our investment portfolio manager, pricing changes that
differ from those expected in relation to overall market
conditions.
The following table presents our debt securities available for
sale, classified by valuation hierarchy, as of
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement, Using
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Securities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
In thousands
|
|
|
U.S. government securities
|
|
$
|
3,339
|
|
|
$
|
259
|
|
|
$
|
|
|
|
$
|
3,598
|
|
U.S. government agencies
|
|
|
|
|
|
|
308
|
|
|
|
|
|
|
|
308
|
|
Asset-backed and mortgage-backed securities
|
|
|
|
|
|
|
11,965
|
|
|
|
|
|
|
|
11,965
|
|
State and political subdivisions
|
|
|
|
|
|
|
16,376
|
|
|
|
|
|
|
|
16,376
|
|
Corporate securities
|
|
|
|
|
|
|
13,887
|
|
|
|
|
|
|
|
13,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,339
|
|
|
$
|
42,795
|
|
|
$
|
|
|
|
$
|
46,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
The tax equivalent book yield on our investment portfolio was
4.48% and the average duration of the portfolio was
2.95 years at September 30, 2009.
Contractual
Obligations and Commitments
We manage risk on certain long-duration claims by settling these
claims through the purchase of annuities from unaffiliated life
insurance companies. In the event these companies are unable to
meet their obligations under these annuity contracts, we could
be liable to the claimants, but our reinsurers remain obligated
to indemnify us for all or part of these obligations in
accordance with the terms of our reinsurance contracts. At
December 31, 2008, we were contingently liable for
annuities totaling $952,000 in connection with the purchase of
structured settlements related to the resolution of claims. Loss
reserves eliminated by these annuities at December 31, 2008
totaled $1.4 million. Each of the life insurance companies
issuing these annuities, or the entity guaranteeing the life
insurance company, has an A.M. Best Company rating of
A (Excellent) or better.
The table below provides information with respect to our
long-term debt and contractual commitments as of
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
In thousands
|
|
|
Reserves for losses and loss adjustment expenses(1)
|
|
$
|
74,550
|
|
|
$
|
29,820
|
|
|
$
|
26,092
|
|
|
$
|
14,910
|
|
|
$
|
3,728
|
|
Notes payable(2)
|
|
|
28,208
|
|
|
|
5,466
|
|
|
|
7,610
|
|
|
|
7,257
|
|
|
|
7,875
|
|
Surplus notes payable(2)
|
|
|
1,359
|
|
|
|
1,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debentures(2)(3)
|
|
|
1,885
|
|
|
|
1,169
|
|
|
|
716
|
|
|
|
|
|
|
|
|
|
Non-cancelable operating leases
|
|
|
2,014
|
|
|
|
1,139
|
|
|
|
875
|
|
|
|
|
|
|
|
|
|
Other obligations
|
|
|
165
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
108,181
|
|
|
$
|
39,118
|
|
|
$
|
35,293
|
|
|
$
|
22,167
|
|
|
$
|
11,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The payment of reserves for losses and loss adjustment expenses
by period are based on actuarial estimates of expected payout
patterns and are not contractual liabilities as to a time
certain. Our contractual liability is to provide benefits under
the policy. As a result, our estimated payment of reserves for
losses and loss adjustment expenses by period is subject to the
same uncertainties associated with estimating loss and loss
adjustment expense reserves generally and to the additional
uncertainties arising from the difficulty of predicting when
claims (including claims that have not yet been reported to us)
will be paid. For a discussion of loss and loss adjustment
expense reserves, see Business Reserves for
Losses and Loss Adjustment Expenses. Actual payment of
reserves for losses and loss adjustment expenses by period will
vary, perhaps materially, from the table above to the extent
that reserves for losses and loss adjustment expenses vary from
actual ultimate claims and as a result of variations between
expected and actual payout patterns. Our business, financial
condition and results of operations may be adversely affected if
our actual losses and loss adjustment expenses exceed our
estimated loss and loss adjustment expense reserves. See
Risk Factors Risks Related to Our
Business for a discussion of the uncertainties associated
with estimating loss and loss adjustment expense reserves. |
|
|
|
(2) |
|
Amounts include interest at rates in effect on December 31,
2008 associated with these obligations. The principal balance
and accrued interest on our notes payable at December 31,
2008 was $18.0 million. The interest rate on our notes
payable to Brooke and ULLICO, which together comprise
approximately 92% of our total notes payable principal balance
at December 31, 2008, is equal to the Federal Reserve prime
rate plus 4.5% (7.75% at December 31, 2008 and
September 30, 2009 as utilized in the commitment table
above) and may change on a daily basis. The interest rate on our
notes payable to Mr. Mariano, our Chairman and Chief
Executive Officer and the beneficial owner of the majority of
our shares, which comprise approximately 6% of our total notes
payable principal balance at December 31, 2008, is equal to
the |
94
|
|
|
|
|
Federal Reserve prime rate plus 3.0% (6.25% at December 31,
2008 and September 30, 2009 as utilized in the commitment
table above) and may change on a daily basis. The note payable
to Mr. Mariano is payable on demand, and, accordingly, the
outstanding principal balance and interest payments on this note
are reflected as due in less than 1 year. Payments on our
notes payable to Brooke and ULLICO Inc. include guaranty fees
payable to Mr. Mariano and do not contemplate prepayment.
However, pursuant to the credit agreements and amendments
thereto, notes payable may be prepaid. There is no prepayment
premium. The principal and accrued interest on our surplus notes
payable at December 31, 2008 was $1.4 million. The
principal and accrued interest on our subordinated debentures at
December 31, 2008 was $1.8 million. Interest rates on
our surplus notes payable and subordinated debentures are fixed
at 3.0%. See Liquidity and Capital
Resources for further discussion of our notes payable,
surplus notes payable and subordinated debentures. |
|
|
|
(3) |
|
Subordinated debentures are subject to renewal generally for an
additional term of three years. Certain of the subordinated
debentures are subject to renewal for up to two additional
one-year terms. The subordinated debentures that are shown as
due and payable in less than one year became due and payable in
the second and third quarters of 2008. The subordinated
debentures are generally used as collateral in segregated
portfolio captives. As such, if a holder were to demand payment,
they would be required to post additional collateral of the same
value. To date, none of the current holders has requested
repayment of their subordinated debenture. We are in the process
of seeking the consent of the holder to extend each of these
subordinated debentures in accordance with their respective
terms. |
Off-Balance
Sheet Arrangements
We have no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures
or capital resources.
Quantitative
and Qualitative Disclosures About Market Risk
Market risk is the risk of potential economic loss principally
arising from adverse changes in the fair value of financial
instruments. The major components of market risk affecting us
are credit risk and interest rate risk. We did not own any
equity securities at September 30, 2009. We currently have
no exposure to foreign currency risk.
Credit Risk. Credit risk is the potential loss
arising principally from adverse changes in the financial
condition of the issuers of our fixed maturity securities and
the financial condition of our reinsurers. We manage our credit
risk related to the issuers of our fixed maturity securities by
generally investing in fixed maturity securities that have a
credit rating of A− or better by
Standard & Poors. We and our independent asset
manager also monitor the financial condition of all issuers of
our fixed maturity securities. To limit our risk exposure, we
employ diversification policies that limit our credit exposure
to any single issuer or business sector. At December 31,
2008, 99.9% of our fixed maturity securities available for sale
were rated investment grade (credit rating of AAA to
BBB-) by Standard & Poors and 99.0% of our fixed
maturity securities available for sale were rated A or better by
Standard & Poors. See Business
Investments.
We are subject to credit risk with respect to our reinsurers.
Although our reinsurers are obligated to reimburse us to the
extent we cede risk to them, we are ultimately liable to our
policyholders on all risks we have reinsured. As a result,
reinsurance contracts do not limit our ultimate obligations to
pay claims, and we might not collect amounts recoverable from
our reinsurers. With respect to authorized reinsurers, we manage
our credit risk by generally selecting reinsurers with a
financial strength rating of A− (Excellent) or
better by A.M. Best and by performing quarterly credit
reviews of our reinsurers. At December 31, 2008, 96.9% of
our gross exposures to authorized reinsurers were from
reinsurers rated A− (Excellent) or better by
A.M. Best. With respect to unauthorized reinsurers, which
include segregated portfolio captives, we manage our credit risk
by generally maintaining collateral, typically in the form of
funds withheld and letters of credit, to secure reinsurance
recoverable balances. At December 31, 2008, 94.8% of our
gross exposures to unauthorized reinsurers were collateralized.
If one of our reinsurers suffers a credit downgrade, we may
95
consider various options to lessen the risk of asset impairment
including commutation, novation and additional collateral. See
Business Reinsurance.
We are subject to credit risk with respect to our customers. If
a customer becomes insolvent or otherwise does not pay the full
amount of the premium due on a policy, we may not receive
adequate payment to compensate us for the risk incurred under
the policy. If we are unable to recover the full amount of our
premiums receivable, we recognize a pre-tax loss in the amount
of any such unrecovered amount. We currently have an $8.3
premium receivable from PES, our then largest policyholder. See
Risk Factors Risks Related to our
Company We have filed a lawsuit against our former
largest customer regarding amounts we contend are due and owing
and are in dispute. This customer is controlled by an individual
who was one of our stockholders as of December 31, 2008. We
may never receive any of the disputed amounts that we contend
are due and owing.
Interest Rate Risk. We have fixed maturity
debt securities available for sale with a fair value of
$54.4 million and notes payable with a fair value of
$18.0 million at December 31, 2008, both of which are
subject to interest rate risk. Interest rate risk is the risk
that we may incur losses due to adverse changes in interest
rates. Fluctuations in interest rates have a direct impact on
the market valuation of our fixed maturity securities and the
cost to service our notes payable.
The table below summarizes the interest rate risk associated
with our fixed maturity debt securities held at
December 31, 2008 by illustrating the sensitivity of fair
value to selected hypothetical changes in interest rates, and
the associated impact on our stockholders equity. We
classify our fixed maturity securities as
available-for-sale.
These fixed maturity securities
available-for-sale
are carried on our balance sheet at fair value. Temporary
changes in the fair value of our fixed maturity securities
available for sale impact the carrying value of these securities
and are reported in stockholders equity as a component of
other comprehensive income, net of deferred taxes. The selected
scenarios in the table below are not predictions of future
events, but rather are intended to illustrate the effect such
events may have on the fair value of our fixed maturity
securities and on our stockholders equity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Increase
|
|
|
|
|
(Decrease) in
|
|
|
|
|
|
|
Stockholders
|
Hypothetical Change in Interest Rates
|
|
Fair Value
|
|
Fair Value
|
|
Equity
|
|
|
In thousands
|
|
200 basis point increase
|
|
$
|
51,448
|
|
|
$
|
(2,925
|
)
|
|
$
|
(1,931
|
)
|
100 basis point increase
|
|
|
52,791
|
|
|
|
(1,582
|
)
|
|
|
(1,044
|
)
|
No change
|
|
|
54,373
|
|
|
|
|
|
|
|
|
|
100 basis point decrease
|
|
|
56,156
|
|
|
|
1,783
|
|
|
|
1,177
|
|
200 basis point decrease
|
|
|
58,130
|
|
|
|
3,757
|
|
|
|
2,479
|
|
Inflation
Inflation rates may impact our financial condition and results
of operations in several ways. Fluctuations in rates of
inflation influence interest rates, which in turn affect the
market value of our investment portfolio and yields on new
investments. Inflation also affects the portion of reserves for
losses and loss adjustment expenses that relates to hospital and
medical expenses and property claims and loss adjustment
expenses, but not the portion of reserves for losses and loss
adjustment expenses that relates to workers compensation
indemnity payments for lost wages, which are fixed by statute.
Adjustments for inflationary effects are included as part of our
review of loss reserve estimates. Increased costs are considered
in setting premium rates, and this is particularly important in
the health care area where hospital and medical inflation rates
have exceeded general inflation rates. Operating expenses,
including payrolls, are affected to a certain degree by the
inflation rate.
96
BUSINESS
Overview
We produce, underwrite and administer alternative market and
traditional workers compensation insurance plans and
provide claims services for insurance companies, segregated
portfolio captives and reinsurers. Through our wholly owned
insurance company subsidiary, Guarantee Insurance, we generally
participate in a portion of the insurance underwriting risk. In
our insurance services segment, we generate fee income by
providing workers compensation claims services as well as
agency and underwriting services. Workers compensation
claims services include nurse case management, cost containment
services and claims administration and adjudication services.
Workers compensation agency and underwriting services
include general agency services and specialty underwriting,
policy administration and captive management services. Claims
services and agency and underwriting services are performed
almost entirely for the benefit of Guarantee Insurance,
segregated portfolio captives and Guarantee Insurances
traditional business quota share reinsurers, all under the
Patriot Risk Services brand. We also provide these services for
the benefit of another insurance company under its brand, a
practice which we refer to as business process outsourcing. In
our insurance segment, we generate underwriting income and
investment income by providing alternative market workers
compensation risk transfer solutions and traditional
workers compensation insurance coverage.
We provide insurance services, alternative market workers
compensation risk transfer solutions and traditional
workers compensation insurance coverage in Florida and 22
other jurisdictions. We believe that our insurance services
capabilities, specialized alternative market product knowledge
and our hybrid business model allow us to achieve attractive
returns through a range of industry pricing cycles and provide a
substantial competitive advantage in areas that are underserved
by competitors, which are generally insurance service providers
or insurance carriers. Although we currently focus our business
in the Midwest and Southeast, we believe that there are
opportunities to market our insurance services, alternative
market workers compensation risk transfer solutions and
traditional workers compensation insurance coverage in
other areas of the United States.
Our
Services and Products
Workers
Compensation Insurance Services
Through our subsidiary, PRS Group, Inc. and its subsidiaries,
which we collectively refer to as PRS, and our subsidiary,
Patriot Underwriters, Inc. and its subsidiary, which we
collectively refer to as PUI, we earn income for workers
compensation claims services as well as agency and underwriting
services. Workers compensation claims services include
nurse case management, cost containment services and claims
administration and adjudication services. Cost containment
services refer to workers compensation bill review and
re-pricing services. Workers compensation agency and
underwriting services include general agency services and
specialty underwriting, policy administration and captive
management services. We currently provide these services
principally to Guarantee Insurance for its benefit, for the
benefit of segregated portfolio captives and for the benefit of
Guarantee Insurances traditional business quota share
reinsurers. We also provide these services to another insurance
company, ULLICO Casualty Company, which we refer to as our BPO
client, for business that PUI produces for ULLICO Casualty
Company pursuant to a fronting agreement between the two
companies. ULLICO Casualty Company is licensed to write
workers compensation insurance in 47 states plus the
District of Columbia and is rated B+ (Good) by A.M
Best.
Our insurance services segment income includes all nurse case
management, cost containment and other insurance services fee
income earned by PRS and PUI. However, the fees earned by PRS
and PUI that are attributable to the portion of the insurance
risk that Guarantee Insurance retains and assumes from other
insurance companies are eliminated upon consolidation.
Therefore, our insurance services income, on a consolidated
basis, consists of income for services provided to unaffiliated
clients. With respect to business written by Guarantee
Insurance, the fees earned by PRS represent the fees paid by
segregated portfolio captives and our quota share reinsurers for
services performed on their behalf and for which Guarantee
Insurance is reimbursed through a ceding commission. For
financial reporting purposes, we treat these ceding
97
commissions as a reduction in net policy acquisition and
underwriting expenses. With respect to business produced for our
BPO client, the fees earned by PRS and PUI represent fees paid
by the BPO client attributable to the portion of insurance risk
it retains.
In 2009, we began producing business and performing insurance
services for our BPO client. We earn commissions for producing
business and insurance services income for providing
underwriting, policy and claims administration, nurse case
management and cost containment services and, in certain cases,
services to segregated portfolio cell captives on the business
we produce for this customer. Additionally, we assume a portion
of the premium and associated losses and loss adjustment
expenses on the business we produce for our BPO client, as
mutually determined on a
policy-by-policy
basis.
Workers
Compensation Insurance Products
Alternative Market Business. Through Guarantee
Insurance, we provide alternative market workers
compensation risk transfer solutions, including workers
compensation policies or arrangements where the policyholder, an
agent or another party generally bears a substantial portion of
the underwriting risk. For example, the policyholder, an agent
or another party may bear a substantial portion of the
underwriting risk through the reinsurance of the risk by a
segregated portfolio captive that is controlled by the
policyholder, an agent or another party. A segregated portfolio
captive refers to a captive reinsurance company that operates as
a single legal entity with segregated pools of assets, or
segregated portfolio cells, the assets and associated
liabilities of which are solely for the benefit of the
segregated portfolio cell participants. Through our segregated
portfolio captive arrangements, we generally retain between 10%
and 90% of the underwriting risk and earn a ceding commission
from the segregated portfolio captive, which is payment to
Guarantee Insurance by the captive of a commission as
compensation for providing underwriting, policy and claims
administration, captive management and investment portfolio
management services. For the nine months ended
September 30, 2009, we retained approximately 14% of the
underwriting risk under our segregated portfolio captive
arrangements.
Our alternative market business also includes other arrangements
through which we share underwriting risk with our policyholders,
such as large deductible policies or policies for which the
final premium is based on the insureds actual loss
experience during the policy term, which we refer to as
retrospectively rated policies. Unlike our traditional
workers compensation policies, these arrangements align
our interests with those of the policyholders or other parties
participating in the risk-sharing arrangements, allowing them to
share in the underwriting profit or loss. In addition, our
alternative market business includes guaranteed cost policies
issued to certain professional employer organizations and
professional temporary staffing organizations on which we retain
the risk. The excess of loss reinsurance on these policies is
provided by the same reinsurer that covers our segregated
portfolio captive insurance plans, retrospectively rated plans
and large deductible plans, and these plans may be converted to
risk sharing arrangements in the future.
We provide alternative market risk transfer solutions to
companies in a broad array of industries, including employers
such as hospitality companies, construction companies,
professional employer organizations, clerical and professional
temporary staffing companies, industrial companies car
dealerships, food services and retail and wholesale operations.
Traditional Business. Through Guarantee
Insurance, we also provide traditional workers
compensation insurance coverage. We manage insurance risk
through the use of quota share and excess of loss reinsurance.
Quota share reinsurance is a form of proportional reinsurance in
which the reinsurer assumes an agreed upon percentage of each
risk being insured and shares all premiums and losses with us in
that proportion. Excess of loss reinsurance covers all or a
specified portion of losses on underlying insurance policies in
excess of a specified amount, or retention. We typically provide
traditional workers compensation insurance coverage to:
|
|
|
|
|
small to medium-sized employers in a broad array of industries,
including clerical and professional services, food services,
retail and wholesale operations and industrial services;
|
|
|
|
low to medium hazard classes; and
|
|
|
|
accounts with annual premiums below $250,000.
|
98
Our
Competitive Strengths
We believe we have the following competitive strengths:
|
|
|
|
|
Exclusive Focus on Workers Compensation Services and
Products. Our operations are focused exclusively
on workers compensation insurance services, workers
compensation alternative market risk management solutions and
traditional workers compensation insurance coverage. We
believe this focus allows us to provide superior services and
products to our customers relative to multiline insurance
service providers and multiline insurance carriers. Furthermore,
a significant portion of our services and products are provided
in Florida, and we believe that certain of our multiline
competitors that offer workers compensation coverage as
part of a package policy including commercial property coverage
tend to compete less for Florida workers compensation
business because of property-related loss experience.
|
|
|
|
Hybrid Business Model. In addition to the fee
income we earn for nurse case management, cost containment and
other insurance services, we also earn ceding commissions on our
alternative market business involving segregated portfolio cell
captives and we earn underwriting and investment income on our
alternative market and traditional workers compensation
business. Because our nurse case management and cost containment
service income is principally related to workers
compensation claim frequency and medical costs, the operating
results of our insurance services segment are not materially
dependent on fluctuations or trends in prevailing workers
compensation insurance premium rates. We believe that by
changing the emphasis we place on our insurance services segment
and ceding commission-based alternative market business relative
to our traditional workers compensation business, we will
be better able to achieve attractive returns and growth through
a range of market cycles.
|
|
|
|
Targeted Market for Alternative Market Risk Transfer
Solutions. Although other insurers generally only
offer alternative market products to large corporate customers,
we offer alternative market workers compensation solutions
to small, medium and larger-sized employers, enabling them and
others to share in the claims experience and benefit from
favorable loss experience.
|
|
|
|
Enhanced Traditional Business Product
Offerings. In our traditional business, we offer
a number of flexible payment plans, including pay-as-you-go
plans in which we partner with payroll service companies and our
independent agents and their small employer clients to collect
premiums and payroll information on a monthly or bi-weekly
basis. Pay-as-you-go plans provide us with current payroll data
and allow employers to remit premiums through their payroll
service provider in an automated fashion. Flexible payment plans
give employers a way to purchase workers compensation
insurance without having to make a large upfront premium deposit
payment. We believe that flexible payment plans, including
pay-as-you-go plans, for small employers provide us with the
opportunity to earn more favorable underwriting margins due to
several factors:
|
|
|
|
|
i.
|
favorable cash flows afforded under this plan can be more
important to smaller employers than a price differential;
|
ii. smaller employers are generally less able to obtain
premium rate credits and discounts; and
|
|
|
|
iii.
|
the premium remittance mechanism results in a more streamlined
renewal process and a lower frequency of business being
re-marketed at renewal, leading to more favorable retention
rates.
|
|
|
|
|
|
Specialized Underwriting Expertise. We select
and price our alternative market and traditional business
products based on the specific risk associated with each
potential policyholder rather than solely on the
policyholders industry class. We utilize state-specific
actuarial models on accounts with annual premiums over $100,000.
In our alternative market business, we seek to align our
interests with those of our policyholders or other parties
participating in the risk-sharing arrangements by having them
share in the underwriting profits and losses. We believe that we
can compete effectively for alternative market and traditional
insurance business based on our specialized underwriting focus
and our accessibility to our clients. We generally compete on
these attributes more so than on price, which we believe is
generally not a differentiating factor in the states in which we
write most of our business. For
|
99
|
|
|
|
|
the nine months ended September 30, 2009 and year ended
December 31, 2008, we reported consolidated net loss ratios
of 55.9% and 58.3%, respectively. The net loss ratio is the
ratio between losses and loss adjustment expenses incurred and
net premiums earned, and is a measure of the effectiveness of
our underwriting efforts.
|
|
|
|
|
|
Effective Claims Management, Nurse Case Management and Cost
Containment Services. Guarantee Insurance began
writing business as a subsidiary of Patriot Risk Management in
the first quarter of 2004. As our business has grown, we have
been successful in reasonably estimating our total liabilities
for losses and loss adjustment expenses, establishing and
maintaining adequate case reserves and rapidly closing claims.
We provide our customers with an active claims management
program. Our claims department employees average more than
12 years of workers compensation insurance industry
experience, and members of our claims management team average
more than 24 years of workers compensation
experience. In addition, our nurse case management and bill
review professionals have extensive training and expertise in
assisting injured workers to return to work quickly. As of
December 31, 2008, approximately 6%, 2%, 1% and 0.4% of
total reported claims for accident years 2007, 2006, 2005 and
2004, respectively, remained open. Final net paid losses and
loss adjustment expenses associated with closed claims are
approximately 5% less than the initial reserves established for
them.
|
|
|
|
Strong Distribution Relationships. We maintain
relationships with our network of more than 570 independent,
non-exclusive agencies in 23 jurisdictions by emphasizing
personal interaction and superior service and maintaining an
exclusive focus on alternative market workers compensation
solutions and traditional workers compensation insurance
coverage. Our experienced underwriters work closely with our
independent agents to market our products and serve the needs of
prospective policyholders.
|
|
|
|
Proven Leadership and Experienced
Management. The members of our senior management
team average over 20 years of insurance industry experience
and over 15 years of workers compensation insurance
experience. Their authority and areas of responsibility are
consistent with their functional and state-specific experience.
|
Our
Strategy
We believe that the net proceeds from this offering will provide
us with the additional capital necessary to increase the amount
of insurance that we write and to make strategic acquisitions of
insurance services operations and insurance companies. We plan
to continue pursuing profitable growth and favorable returns on
equity, and believe that our competitive strengths will help us
achieve our goal of delivering attractive returns to our
investors. Our strategy to achieve these goals is to:
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Expand in Our Existing Markets. In all of the
states in which we operate, we believe that a significant
portion of total workers compensation insurance premium is
written by numerous companies that individually have a small
market share. We believe that our market share in each of the
states in which we currently write business does not exceed 2%.
We plan to continue to take advantage of our competitive
position to expand in our existing markets. We believe that our
risk selection, claims management, nurse case management and
cost containment capabilities position us to profitably increase
market share in our existing markets.
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Expand into Additional Markets. We are
licensed to write workers compensation insurance in 27
jurisdictions, and we also hold 4 inactive workers
compensation licenses. For the nine months ended
September 30, 2009, we wrote traditional and alternative
market business in 23 jurisdictions, principally in those
jurisdictions that we believe provide the greatest opportunity
for near-term profitable growth. For the nine months ended
September 30, 2009, approximately 74% of our traditional
and alternative market business was written in Florida, New
Jersey, Missouri, Georgia and New York. We wrote approximately
28% of our direct premiums written in Florida for the nine
months ended September 30, 2009. We plan to expand our
business in states where we believe we can profitably write
business. To do this, we plan to continue to leverage our
talented pool of personnel, some of whom have prior
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expertise operating in states in which we do not currently
operate. In addition, we may seek to acquire other insurance
companies, books of business or other workers compensation
policy and claims administration providers, general agencies or
general underwriting organizations as we expand in our existing
markets and into additional markets.
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Expand our BPO Business. In 2009, we entered
into an agreement to produce business and perform insurance
services for our BPO client to gain access to workers
compensation insurance business in certain additional states.
For the nine months ended September 30, 2009, approximately
65% of the business we produced and serviced for our BPO client
was in California, Texas, Michigan, Illinois and South Carolina.
Approximately 34% of the business we produced and serviced for
our BPO client for the nine months ended September 30, 2009
was in California. We are in negotiations with two other
insurance companies, and are seeking additional agreements with
other insurance companies, with respect to similar BPO
arrangements.
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Expand Nurse Case Management, Cost Containment and Other
Insurance Services Operations. We plan to
continue to generate fee income through our insurance services
segment by offering workers compensation nurse case
management and cost containment services to segregated portfolio
captives and our quota share reinsurers. We plan to offer these
services, together with general agency, general underwriting and
policy and claims administration services, to other regional and
national insurance companies and self-insured employers. We also
plan to increase our insurance services income by expanding both
organically and through strategic acquisitions of workers
compensation policy and claims administration service providers,
general agencies or general underwriting organizations. Taking
advantage of our hybrid business model, we plan to identify and
acquire insurance services operations that will create synergies
with our alternative market and traditional workers
compensation business.
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Obtain a Favorable Rating from
A.M. Best. We have been informed by
A.M. Best that after completion of this offering, we may
expect Guarantee Insurance to receive a financial strength
rating of A− (Excellent), which is the fourth
highest of fifteen A.M. Best rating levels. This indicative
rating assignment is subject to the capitalization of Guarantee
Insurance (and PF&C if we acquire it) at a level that
A.M. Best requires to support the assignment of the
A− rating through 2012 . We expect that the
contribution of $155 million of the net proceeds of this
offering to Guarantee Insurance (and PF&C if we acquire it)
on or prior to March 4, 2010 will be sufficient to satisfy
this requirement. If we acquire PF&C as described elsewhere
in this prospectus, this rating assignment is also conditioned
upon regulatory approval of a pooling agreement between
Guarantee Insurance and PF&C. Pooling is a risk-sharing
arrangement under which premiums and losses are shared between
the pool members. We expect to make the contemplated capital
contributions when we purchase PF&C or conclude not to
proceed with that transaction, in either event prior to
March 4, 2010. The prospective rating indication we
received from A.M. Best is not a guarantee of final rating
outcome. In addition, in order to maintain this rating,
Guarantee Insurance (as well as PF&C if it is acquired)
must maintain capitalization at a level that A.M. Best
requires to support the assignment of the A−
rating, and any material negative developments in our
operations, including in terms of management, earnings,
capitalization or risk profile could result in negative rating
pressure and possibly a rating downgrade. While we have expanded
our business profitably without an A.M. Best rating and we
believe that we can continue to do so with the net proceeds from
this offering, we believe that an A− rating
from A.M. Best would increase our ability to market to
large employers and create new opportunities for our products
and services in rating sensitive markets. A.M. Bests
ratings reflect its opinion of an insurance companys
financial strength and ability to meet ongoing obligations to
policyholders and are not intended for the protection of
investors.
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Leverage Existing Infrastructure. We service
our insurance services customers and policyholders through
regional offices in three states, each of which we believe has
been staffed to accommodate a certain level of insurance
services business and premium growth. We plan to realize
economies of scale in our workforce and leverage other scalable
infrastructure costs.
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Our
Organization
Patriot Risk Management, Inc. was incorporated in Delaware in
April 2003 by Steven M. Mariano, our Chairman, President and
Chief Executive Officer. In September 2003, our wholly owned
subsidiary, Patriot National Insurance Group, Inc., acquired
Guarantee Insurance Company (Guarantee Insurance), a
shell property and casualty insurance company that was not
writing new business at the time we acquired it. At that time,
Guarantee Insurance had approximately $3.2 million in loss
and loss adjustment expense reserves relating to commercial
general liability claims that had been in run-off since 1983,
and was licensed to write insurance business in 41 states
and the District of Columbia. Guarantee Insurance is domiciled
in Florida and began writing business as a subsidiary of Patriot
Risk Management in the first quarter of 2004. Guarantee
Insurance is currently licensed to write workers
compensation insurance in 27 jurisdictions, and also holds 4
inactive workers compensation licenses.
In 2005, we formed PRS Group, Inc. as a wholly owned subsidiary
and incorporated Patriot Risk Services, Inc. and Patriot Re
International, Inc. as wholly owned subsidiaries of PRS Group,
Inc. PRS provides nurse case management and cost containment
services for the benefit of Guarantee Insurance, segregated
portfolio captives and our quota share reinsurers. Patriot Re
International, Inc. is licensed as a reinsurance intermediary
broker in 2 jurisdictions, although Patriot Res business
was in run-off through the second quarter of 2009 and is
currently inactive.
In 2008, we formed Patriot Recovery, Inc. to assist us in
investigation and subrogation activities.
On December 18, 2009, we entered into a stock purchase
agreement with Argonaut Insurance Company to acquire
Argonaut-Southwest Insurance Company, a shell property and
casualty insurance company domiciled in Illinois for a cash
price of $1.2 million plus the statutory surplus of that
company as of September 30, 2009, which was approximately
$15.0 million. We plan to rename Argonaut-Southwest as
Patriot Fire & Casualty Insurance Company when we
acquire it.
In connection with, and as a condition to our acquisition of
PF&C, we are seeking to have it redomesticated to Florida.
Both the redomestication and acquisition are subject to
regulatory approvals by both the Illinois and Florida insurance
departments. In addition, if we acquire PF&C, our
prospective rating assignment from A.M. Best is conditioned
upon Florida regulatory approval of a pooling agreement between
PF&C and Guarantee Insurance that is satisfactory to
A.M. Best. If we receive all regulatory approvals for this
transaction, we plan to acquire PF&C on or prior to
March 4, 2010. There can be no assurance that we will
obtain the necessary regulatory approvals to complete this
acquisition. We do not believe that our failure to acquire
PF&C will adversely affect our business plan or prevent us
from obtaining the A− rating from
A.M. Best that we expect to receive upon completion of this
offering.
As of December 31, 2008, PF&C had approximately
$17.7 million of total assets, comprised principally of
cash and invested assets, and had approximately $2.7 of total
liabilities, of which approximately $2.6 million
represented ceded reinsurance premiums payable. For the year
ended December 31, 2008, PF&C had approximately
$3.7 million of direct premiums written, $2.7 million
of direct premiums earned and $140,000 of net income, nearly all
of which income represented investment income. The operations of
PF&C for the years ended December 31, 2008, 2007 and
2006 were substantially different from our operations, and it
will be a condition to closing the consummation of the
acquisition that all in-force business is indemnity reinsured by
an affiliate of Argonaut Insurance Company, and further that all
of the liabilities of PF&C be transferred out of PF&C
prior to or as soon as practicable after the closing. All of the
in-force business is currently reinsured to an affiliate of
Argonaut Insurance Company. PF&Cs annual historical
financial statements for the years ended December 31, 2008,
2007 and 2006 and presentation of the pro forma effects of such
business combination would not be meaningful to the
understanding of our operations and, accordingly, have not been
included in this prospectus.
PF&C is licensed to write workers compensation
insurance in Arizona, Arkansas, California, Illinois, Louisiana,
Mississippi, New Jersey, New Mexico, Oklahoma, Oregon, and
Texas. Guarantee Insurance is licensed in each of these
jurisdictions except for Arizona, California, Illinois, Oregon,
and Texas. We intend to contribute a substantial portion of the
proceeds of this offering to Guarantee Insurance and, if we
acquire it, to
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PF&C, to support their premium writings. We intend to use
a portion of the net proceeds of this offering to pay the
purchase price to acquire PF&C on or prior to March 4,
2010. We believe that the acquisition of PF&C will allow us
to obtain licenses to write business in additional states and
offer, in certain states, separate rating plans from those
offered through Guarantee Insurance, thus allowing us and our
producers additional rating flexibility to write a broader range
of risks than might be possible under the rating plans of only a
single insurer.
In 2009, we renamed two of our inactive subsidiaries as Patriot
Underwriters, Inc. and Patriot General Agency, Inc. These
entities are obtaining licenses, as appropriate, to provide
general agency and general underwriting services to third
parties. General agency services were provided to third parties
by certain PRS Group, Inc. subsidiaries in 2008 and 2007.
Patriot Risk Services, Inc. is currently licensed as an
insurance agent or producer in 19 jurisdictions. Patriot
Insurance Management Company is currently licensed as an
insurance agent or producer in 34 jurisdictions. Patriot
Underwriters, Inc. is licensed as an insurance producer in 39
jurisdictions. Patriot General Agency, Inc. is licensed as an
insurance producer in 39 jurisdictions. We plan to utilize
Patriot Underwriters, Inc. and Patriot General Agency, Inc. to
provide general agency and general underwriting services to
third parties and cease providing general agency services
through Patriot Risk Services, Inc. and Patriot Insurance
Management Company. In 2009, we renamed Guarantee Insurance
Group, Inc. as Patriot National Insurance Group, Inc.
Patriot Risk Management, Inc. is an insurance holding company
that was incorporated in Delaware in 2003. Our principal
subsidiaries are Guarantee Insurance Company, Patriot
Underwriters, Inc. and Patriot Risk Services, Inc. Our executive
offices are located at 401 East Las Olas Boulevard,
Suite 1540, Fort Lauderdale, Florida 33301, and our
telephone number at that location is
(954) 670-2900.
Industry
Overview and Outlook
Workers compensation insurance is a system established
under state and federal laws under which employers are required
to pay for their employees medical, disability, vocational
rehabilitation and death benefit costs for injuries, death or
occupational diseases arising out of employment, regardless of
fault. The principal concept underlying workers
compensation laws is that employees injured in the course and
scope of their employment have only the legal remedies available
under workers compensation laws and do not have any other
recourse against their employer. An employers obligation
to pay workers compensation benefits does not depend on
any negligence or wrongdoing on the part of the employer and
exists even for injuries that result from the negligence or
fault of another person, a co-employee or, in most instances,
the injured employee.
Insurance
Services
Insurance services include workers compensation general
agency, underwriting and captive management services, including
policy administration, and claims services. Claims services
include nurse case management, cost containment and claims
administration.
With respect to claims services, workers compensation
nurse case management and cost containment services are intended
to help control the cost of workers compensation claims
through intervention and ongoing review of services proposed and
provided. Claims case management and cost containment techniques
were originally developed to stem the rising costs of medical
care for employers and health insurance companies. Employers and
workers compensation insurance companies have been slow to
implement nurse case management and cost containment techniques
to workers compensation claims, primarily because the
aggregate costs of workers compensation claims are
relatively small compared to costs associated with group health
benefits and because
state-by-state
regulations related to workers compensation are far more
complex than those related to group health insurance. However,
we believe that employers and insurance carriers have been
increasing their focus on nurse case management and cost
containment to control their workers compensation costs.
An increasing number of states have adopted legislation
encouraging the use of workers compensation nurse case
management and cost containment to assist employers in
controlling their workers compensation
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costs. These laws generally provide employers an opportunity to
channel injured employees into provider networks. In certain
states, these laws require licensed organizations to offer
certain specified services, such as utilization management, case
management, peer review and provider bill review. We believe
that these laws generally establish a framework within which we
can provide our customers with a full range of nurse case
management and cost containment services for greater
workers compensation cost control.
Certain states do not permit employers to restrict a
claimants choice of provider, making it more difficult for
employers to utilize, or engage other organizations to provide,
nurse case management and cost containment techniques. However,
in certain states, employers have the right to direct employees
to a specific primary healthcare provider during the onset of a
workers compensation case, subject to the right of the
employee to change physicians after a specific period. In
addition, workers compensation laws vary from state to
state, making it difficult for multi-state employers to adopt
uniform policies to administer, manage and control the costs of
benefits. As a result, we believe that effective nurse case
management and cost containment requires approaches tailored to
the specified regulatory environment in which the employer is
operating.
Insurance
Workers compensation insurance policies generally provide
that the insurance carrier will pay all benefits that the
insured employer may become obligated to pay under applicable
workers compensation laws. Each state has a regulatory and
adjudicatory system that quantifies the level of wage
replacement to be paid, determines the level of medical benefits
to be provided and the cost of permanent impairment and
specifies the options in selecting medical providers available
to the injured employee or the employer. These state laws
generally require two types of benefits for injured employees:
medical benefits, which include expenses related to diagnosis
and treatment of the injury, as well as any required
rehabilitation, and indemnity payments, which consist of
temporary wage replacement, permanent disability payments and
death benefits to surviving family members. To fulfill these
mandated financial obligations, virtually all employers are
required to purchase workers compensation insurance or, if
permitted by state law or approved by the U.S. Department
of Labor, to self-insure. The employers may purchase
workers compensation insurance from a private insurance
carrier, a state-sanctioned assigned risk pool or a
self-insurance fund, which is an entity that allows employers to
obtain workers compensation coverage on a pooled basis.
Employers, agents and other parties may also participate in
workers compensation underwriting risk through a
segregated portfolio captive that is controlled by the
policyholder, agent or another party, or through other risk
sharing arrangements, such as large deductible policies or
retrospectively rated policies.
We believe the challenges faced by the workers
compensation insurance industry over the past few years have
created significant opportunity for us to increase the amount of
business we write. According to the 2009 NCCI State of the Line
Report, the workers compensation insurance industry combined
ratio for both 2008 (preliminary) and 2007 was 101%, an
eight-point increase from 2006s combined ratio of 93%.
Large carriers that traditionally compete for business on price
rather than service dominate the industry. As the industry
experiences an average underwriting loss (greater than 100%
combined ratio), the large carriers charge higher prices and
workers compensation clients may turn elsewhere for the
lowest cost option. When the commodity portion of the market
constricts, we believe more business moves towards specialty
carriers like us.
Generally, market opportunities for commercial workers
compensation insurers are more favorable when residual markets
are less active and less profitable. Residual market
organizations generally serve as insurers of last
resort, issuing policies to those who are not able to find
traditional coverage in the voluntary market. These
organizations come in several forms, including joint
underwriting associations, health associations, and compensation
funds. The 2009 NCCI State of the Line Report shows that
residual market policy year premium volume decreased from
approximately $1.2 billion in 2006 to approximately
$1.0 billion in 2007 and a projected $0.7 billion in
2008. According to the report, market share for the residual
market decreased from approximately 10% in 2006 to approximately
8% in 2007 and approximately 6% in 2008 (preliminary).
According to the 2009 NCCI State of the Line Report, medical
costs remain an area of concern. The report indicates that
medical costs increased by approximately 7% per year from 2002
through 2007. The
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report projects that medical costs will comprise approximately
58% of total workers compensation claim costs in 2008, compared
to approximately 53% in 1998 and 46% in 1988. To help control
the impact of rising medical costs on workers
compensation, we believe that states will continue to enact
medical fee schedules and insurers will continue to aggressively
manage vendor selection and performance and to control
prescription drug expenditures through the use of generic drugs
and care management initiatives.
For the nine months ended September 30, 2009 and the years
ended December 31, 2008 and 2007, we wrote approximately
52%, 67% and 70%, of our direct premiums written, respectively,
in administered pricing states Florida, Indiana, New
Jersey, and, prior to October 1, 2008, New York. Effective
October 1, 2008, New York is no longer an administered
pricing state. In 2008, we wrote approximately 46% of our direct
premiums written in Florida. In administered pricing states,
insurance rates are set by the state insurance regulators and
are adjusted periodically. Rate competition generally is not
permitted in these states. Therefore, rather than setting rates
for the policies, our underwriting efforts in these states for
our traditional business relate primarily to the selection of
the policies we choose to write at the premium rates that have
been set.
The Florida OIR has approved workers compensation rate
decreases each year over the past several years. In August 2009,
the NCCI submitted a filing proposing an overall workers
compensation rate level decrease of 6.8%, effective
January 1, 2010, which was approved by the Florida OIR on
October 15, 2009. In October 2008, the Florida OIR approved
an average statewide rate decrease of 18.6% effective
January 1, 2009. In February 2009, the Florida OIR approved
an average statewide rate increase of 6.4%, effective
April 1, 2009, associated with the Florida Supreme
Courts decision to eliminate statutory limits on
attorneys fees that were imposed as a result of 2003
reforms. In June 2009, the Florida OIR approved a rollback to
the rates that became effective on January 1, 2009 in
connection with Florida legislation that restored the limit on
attorneys fees and clarified related statutory language
that the Florida Supreme Court had determined to be ambiguous.
In October 2007, the NCCI submitted an amended filing calling
for a Florida statewide rate decrease of 18.4%, which was
approved by the Florida OIR on October 31, 2007 and was
effective January 1, 2008. In October 2006, the Florida OIR
approved an average statewide rate decrease of 15.7%, effective
January 1, 2007.
Significant declines in claim frequency and an improvement in
loss development in Florida since the legislature enacted
certain reforms in 2003 are two principal reasons for the
mandated premium level decreases. We have responded to these
rate decreases by expanding our alternative market business in
Florida and strengthening our collateral on reinsurance balances
on Florida alternative market business. We expect an increase in
Florida experience modifications, which serve as a basic factor
in the calculation of premiums. We anticipate that our ability
to adjust to these market changes will create opportunities as
our competitors find the Florida market less desirable.
Business
Segments
We operate in two business segments:
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Insurance Services Segment. In our insurance
services segment, we generate fee income by providing
workers compensation claims services as well as agency and
underwriting services. Workers compensation claims
services include nurse case management, cost containment
services and, beginning in the second quarter of 2009, claims
administration and adjudication services. Workers
compensation agency and underwriting services include general
agency services and, beginning in the second quarter of 2009,
specialty underwriting, policy administration and captive
management services. Nurse case management and cost containment
services are performed for the benefit of Guarantee Insurance,
segregated portfolio captives and our traditional business quota
share reinsurers under the Patriot Risk Services brand. In
addition, claims services and agency and underwriting services
are performed for the benefit of another insurance company,
which we refer to as our BPO client, through business process
outsourcing relationships.
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Insurance Segment. In our insurance segment,
we provide workers compensation alternative market
insurance solutions and traditional workers compensation
policies for small to mid-sized employers as well as larger
companies, generally with annual premiums of less than
$3 million. In the alternative
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market, we write policies under which the policyholder, an agent
or another party bears a substantial portion of the underwriting
risk through a segregated portfolio captive. Alternative market
business also includes other arrangements through which we share
underwriting risk with our policyholders, including large
deductible policies and retrospectively rated policies, all of
which allow policyholders to share in their own claims
experience. We also write workers compensation business
for employers with annual premiums generally below $250,000 for
which Guarantee Insurance bears substantially all of the
underwriting risk (subject to reinsurance arrangements), which
we refer to as traditional business. For employers with larger
annual premiums, we evaluate whether the risk is appropriate for
our traditional business or more suited to an alternative market
solution.
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Insurance
Services Segment
Operating
Strategy
Through PRS and, beginning in 2009, PUI, the primary insurance
services provided by us are claims services, including nurse
case management and cost containment services for workers
compensation claims. In the second quarter of 2009, we began
providing these claims services, together with claims
administration and adjudication services and general agency,
underwriting and captive management services to our BPO client.
For the nine months ended September 30, 2009, services
provided to Guarantee Insurance for the benefit of segregated
portfolio captives and our quota share reinsurers and services
provided to our BPO client accounted for approximately 64% and
36%, respectively, of insurance services income. For the years
ended December 31, 2008, 2007 and 2006, services provided
to Guarantee Insurance for the benefit of segregated portfolio
captives and our quota share reinsurers accounted for
substantially all of our insurance services income. We expect
our nurse case management, cost containment and other insurance
services operations will become less dependent over time on
Guarantee Insurances premium and risk retention levels as
we expand our BPO relationships, obtain additional general
agency appointments and secure other third-party insurance
services contracts for nurse case management, cost containment
and claims administration and adjudication services.
To complement our organic insurance services growth, we intend
to expand our insurance services operations through additional
targeted strategic relationships and explore acquisition
opportunities. These relationships may involve fronting
arrangements, where we assume a portion of the underwriting
risk, or distribution and insurance services relationships,
where we do not assume any underwriting risk but earn
commissions for producing business and insurance services income
for providing nurse case management and cost containment
services and, in certain cases, services to segregated portfolio
cell captives. In addition, we may seek to acquire other
workers compensation policy and claims administration
providers, general agencies or general underwriting
organizations as we expand in our existing markets and into
additional markets. Although we are not currently engaged in
discussions with any potential acquisition candidates, we are
routinely pursuing and evaluating acquisition opportunities that
would enable us to expand our insurance services operations.
Customers
Our insurance services revenues for the nine months ended
September 30, 2009 were derived principally from Guarantee
Insurance Company, segregated portfolio captives, our quota
share reinsurers and our BPO client. Our insurance services
revenues for the years ended December 31, 2008, 2007 and
2006 were derived principally from Guarantee Insurance,
segregated portfolio captives and our quota share reinsurers.
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Products
and Services
PRS and PUI earn insurance services income for the following
services:
Claims
Services
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Nurse Case Management. PRS provides nurse case
management services for the benefit of Guarantee Insurance,
segregated portfolio captives, our quota share reinsurers and
our BPO client. PRS has been awarded Case Management
Accreditation by the Utilization Review Accreditation Committee
(URAC), a nationally recognized leader in promoting health care
quality through its accreditation and certification programs.
PRSs nurse case managers have nationally recognized
credentials accepted by workers compensation insurers,
including the following: Registered Nurse, Certified
Rehabilitation Registered Nurse and State Qualified
Rehabilitation Provider. Upon receipt of the notice of injury,
claims are assigned to a nurse case manager. PRSs nurse
case managers do not provide health care services to the
claimant. The nurse case managers role is to assist in
resolving the claim and returning the injured worker to work as
efficiently as possible. PRS nurse case managers actively
monitor each file pursuant to a process that includes peer
review and utilization guidelines for treatment. PRSs
nurse case managers contact the injured worker within
24 hours after claim filing to assess and assist in the
early-intervention process. We believe that early intervention
is essential for medical management and early return to work.
PRSs nurse case managers remain active on the claim from
inception until claim resolution. The nurse case manager and the
claims adjuster work together to achieve the overall goal of
helping the injured employee return to work and closing the
claim. The case management process remains active during the
course of treatment to help ensure there is medically necessary
treatment towards resolution and the injured worker returns to
work or pre-injury status. PRS provides these nurse case
management services for a flat monthly fee over the life of the
claim. For the nine months ended September 30, 2009 and the
year ended December 31, 2008, fees earned by PRS for nurse
case management services represented approximately 32% and 47%
of insurance services income, respectively.
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Cost Containment Services. PRS provides cost
containment services for the benefit of Guarantee Insurance,
segregated portfolio captives and our quota share reinsurers. In
the second quarter of 2009, PRS also began providing cost
containment services for the benefit of our BPO client. PRS has
developed an extensive preferred provider network of physicians,
clinics, hospitals, pharmacies and the like. Participating in
PPO networks allows access to discounted services, which yield
medical costs savings. For the years ended December 31,
2008 and 2007, PRS cost containment activities reduced medical
bills by an average of 54% and 45%, resulting in a total savings
in medical costs of $20.5 million and $10.6 million,
respectively. PRS provides these bill review services on a
percentage of savings basis. For the nine months ended
September 30, 2009 and the year ended December 31,
2008, fees earned by PRS for cost containment services
represented approximately 31% and 43% of insurance services
income, respectively.
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Claims Administration and Adjudication
Services. In the second quarter of 2009, PRS
began providing workers compensation claims administration
and adjudication services for the benefit of our BPO client.
Claims administration and adjudication services are provided
pursuant to and in compliance with state rules and regulations
as well as client-specific process guidelines. For the nine
months ended September 30, 2009, fees earned by PRS for
claims administration and adjudication services represented 1%
of insurance services income. No fees were earned by PRS for
claims administration for the year ended December 31, 2008.
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General
Agency, Underwriting and Captive Management Services
PRS began acting as a general agent for other insurance
companies in late 2007. Through its subsidiary, Patriot General
Agency, Inc., PUI replaced PRS as the provider of general agency
and underwriting services in 2009. We facilitate the placement
of workers compensation submissions on behalf of
independent retail agents throughout the country, and receive
commission income as a percentage of premiums written. PRS and
PUI
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have never taken underwriting risk. During the second quarter
of 2009, we also began offering general agency services to our
BPO client and plan to further expand our general agency
services through additional business processing relationships
and carrier appointments.
Through PUI, we provide workers compensation general
underwriting and captive management services to our BPO client.
This customer, which does not specialize in workers
compensation coverage, contracted with us to source, underwrite,
process and service workers compensation insurance
business on its behalf. We earn insurance services fee income
for providing these services. Our BPO client benefits from a
specialty book of workers compensation insurance business,
written on its insurance policies, without the need for it to
build the necessary infrastructure and distribution network. For
the nine months ended September 30, 2009 and the year ended
December 31, 2008, fees earned by us for general agency,
underwriting and captive management services provided to our BPO
clients represented approximately 36% and 10% of insurance
services income, respectively.
Captive management services include the formation and management
of the segregated portfolio captive. Formation of the segregated
portfolio captive involves the submission of an application for
regulatory approval by the captive domiciliary regulatory body,
together with supporting financial information and a business
plan, and the creation and execution of participation
agreements, subscription agreements and reinsurance agreements
pertaining to the segregated portfolio cell. Management of the
segregated portfolio captive includes compliance monitoring,
segregated cell financial reporting and investment portfolio
management services.
Reinsurance
Intermediary Services
Through a reinsurance co-brokerage agreement that we entered
into in 2008 with an independent third-party reinsurance
intermediary, PRS placed excess of loss reinsurance and quota
share reinsurance for Guarantee Insurance. This reinsurance
co-brokerage agreement was terminated in the second quarter of
2009, and we do not expect reinsurance intermediary services to
be a material component of our future insurance services income.
For the nine months ended September 30, 2009 and the year
ended December 31, 2008, fees earned by us for reinsurance
intermediary services represented approximately 1% and 6% of
insurance services segment income, respectively.
Marketing
In addition to Guarantee Insurance, the segregated portfolio
cell captives and our quota share reinsurers, PRS and PUI market
their claims services and general agency, underwriting and
captive management services, respectively, through direct
contact with insurance companies, reinsurance intermediaries and
other insurance and claims service providers. Additionally, PRS
and PUI participate in insurance conventions and industry
activities and advertise in insurance industry publications.
108
The following table sets forth the total premiums produced for
our BPO client for the nine months ended September 30,
2009. PRS and PUI provide their claims services and general
agency, underwriting and captive management services on this
business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009
|
|
|
|
Alternative Market
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
Traditional Business
|
|
|
Total
|
|
|
|
Premium
|
|
|
Percentage
|
|
|
Premium
|
|
|
Percentage
|
|
|
Premium
|
|
|
Percentage
|
|
|
|
$ in thousands
|
|
|
California
|
|
$
|
6,630
|
|
|
|
34.1
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
6,630
|
|
|
|
34.1
|
%
|
Texas
|
|
|
2,211
|
|
|
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
2,211
|
|
|
|
11.4
|
|
Illinois
|
|
|
1,419
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
1,419
|
|
|
|
7.3
|
|
Michigan
|
|
|
1,240
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
1,240
|
|
|
|
6.4
|
|
South Carolina
|
|
|
1,138
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
1,138
|
|
|
|
5.9
|
|
Florida
|
|
|
686
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
686
|
|
|
|
3.5
|
|
North Carolina
|
|
|
685
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
685
|
|
|
|
3.5
|
|
Idaho
|
|
|
663
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
663
|
|
|
|
3.4
|
|
Tennessee
|
|
|
543
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
543
|
|
|
|
2.8
|
|
Oklahoma
|
|
|
532
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
532
|
|
|
|
2.7
|
|
Arizona
|
|
|
516
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
516
|
|
|
|
2.7
|
|
Other States
|
|
|
3,165
|
|
|
|
16.3
|
|
|
|
|
|
|
|
|
|
|
|
3,165
|
|
|
|
16.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,428
|
|
|
|
100.0
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
19,428
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Guarantee Insurances direct premiums written by state
for the nine months ended September 30, 2009 and the year
ended December 31, 2008, for which PRS provides its claims
services, see Business Insurance
Segment Products.
Insurance
Segment
Operating
Strategy
We are committed to individual account underwriting and to
selecting quality risks. Within our insurance segment, we have
two lines of business: alternative market insurance solutions
and traditional business. For alternative market insurance
solutions, our business is comprised of various risk
classifications and hazard levels. For higher risk
classifications and hazard levels, we seek to mitigate our risk
by retaining only a small portion of the exposure, securing
adequate collateral to protect our interests in the event of
adverse claims experience and charging an appropriate premium
for the underlying risks. For traditional business, we generally
write low to medium risk classifications and hazard levels, such
as clerical office, light manufacturing, artisan contractors and
the service industry.
Alternative Market Insurance
Solutions. Through Guarantee Insurance, we
provide alternative market workers compensation risk
transfer solutions, including workers compensation
policies or arrangements where the policyholder, an agent or
another party generally bears a substantial portion of the
underwriting risk.
The primary risk sharing arrangement we employ involves the use
of a segregated portfolio captive, which refers to a captive
reinsurance company that operates as a single legal entity with
segregated pools of assets, or segregated portfolio cells, the
assets and associated liabilities of which are solely for the
benefit of the segregated portfolio cell participants. We
sometimes refer to the segregated portfolio cell participants as
the owners of the cell. Arrangements for segregated portfolio
cells that are owned by the policyholder or another party
generally involve a single policy. For segregated portfolio
cells that are owned by the policyholder or another party, we
generally retain 10% of the underwriting risk. We typically
provide these solutions to larger and medium-sized employers
such as hospitality companies, construction companies,
professional employer organizations, clerical and professional
temporary staffing companies, industrial companies and car
dealerships in low, medium and, in certain cases, higher hazard
classes. At September 30, 2009,
109
Guarantee Insurance had 22 segregated portfolio captive
risk-sharing arrangements under which the segregated portfolio
cells are owned by the policyholder or another party, with an
average premium per segregated portfolio cell of approximately
$570,000.
Arrangements for segregated portfolio cells that are owned by an
insurance agency or group of insurance agencies generally
involve a number of policies for small to medium-sized employers
in a broad array of industries, which become part of the
segregated portfolio captive arrangement as the business is
written or renewed by the agency. For segregated portfolio cells
that are owned by an insurance agency or group of insurance
agencies, we retain between 10% and 90% of the underwriting
risk. At September 30, 2009, Guarantee Insurance had 12
segregated portfolio captive risk-sharing arrangements under
which the segregated portfolio cells are owned by an insurance
agency or group of insurance agencies. One agency-owned
segregated portfolio cell comprised 41% of our total alternative
market gross premiums written for the nine months ended
September 30, 2009. No other segregated portfolio cell
comprised more than 5% of our total alternative market gross
premiums written for the nine months ended September 30,
2009.
For the nine months ended September 30, 2009, we retained
approximately 14% of the underwriting risk under our segregated
portfolio captive arrangements. Under all of our segregated
portfolio captive arrangements, we earn a ceding commission from
the segregated portfolio captive, which is payment to Guarantee
Insurance by such captive of a commission as compensation for
providing underwriting, policy and claims administration,
captive management and investment portfolio management services
for the benefit of the segregated portfolio cell.
Our alternative market business also includes other arrangements
through which we share underwriting risk with our policyholders,
such as large deductible policies or policies for which the
final premium is based on the insureds actual loss
experience during the policy term, which we refer to as
retrospectively rated policies. Unlike our traditional
workers compensation policies, these arrangements align
our interests with those of the policyholders or other parties
participating in the risk-sharing arrangements, allowing them to
share in the underwriting profit or loss. In addition, our
alternative market business includes guaranteed cost policies
issued to certain professional employer organizations and
professional temporary staffing organizations on which we retain
the risk. The excess of loss reinsurance on these policies is
provided by the same reinsurer that covers our segregated
portfolio captive insurance plans, retrospectively rated plans
and large deductible plans, and these plans may be converted to
risk sharing arrangements in the future.
Many of our alternative market insurance solutions allow
policyholders to share in their own claims experience and be
rewarded for low claims costs rather than simply paying fixed
premiums. In other cases, agencies or other parties participate
in the risk. We believe that other insurers generally offer
alternative market insurance solutions to larger corporate
customers. We offer our alternative market solutions to small,
medium and larger sized companies, generally with stable
profitable claims experience.
Our renewal rates on alternative market business that we elected
to quote for renewal for the year ended December 31, 2008,
based on segregated portfolio cell counts and in-force premium,
were 100% and approximately 97%, respectively.
Traditional Business. We began writing
workers compensation policies through Guarantee Insurance
in the first quarter of 2004. We focus on servicing small to
mid-sized employers in a broad array of industries, including
clerical and professional services, food services, retail and
wholesale operations and industrial services located in Florida
and other states in the Southeast and Midwest United States that
generally have fewer than 300 employees. In certain
circumstances, we also write traditional policies for larger
employers. We typically write these policies for:
|
|
|
|
|
low to medium risk classifications and hazard levels; and
|
|
|
|
accounts with annual premiums below $250,000.
|
As of September 30, 2009, we had approximately 5,200
traditional workers compensation policyholders and an
average annual premium per policyholder of approximately
$11,400. Our policy renewal rates on
110
traditional business that we elected to quote for renewal for
the year ended December 31, 2008 were approximately 94% and
91%, based on policy counts and in-force premium, respectively.
Alternative
Market Segregated Portfolio Captives and Traditional Business
Policyholders
Products
All states require employers to provide workers
compensation benefits to their employees for injuries and
occupational diseases arising out of employment, regardless of
whether such injuries or disease result from the employers
or the employees negligence. Employers may either insure
their workers compensation obligations or, subject to
regulatory approval, self-insure their liabilities.
Workers compensation statutes require that a policy cover
three types of benefits: medical expenses, disability benefits
and death benefits. Our workers compensation insurance
policies also provide employers liability coverage, which
provides coverage for an employer if an injured employee sues
the employer for damages as a result of the employees
injury.
Through Guarantee Insurance, we offer a range of workers
compensation products and a variety of payment options designed
to fit the needs of our policyholders and employer groups.
Working closely with our independent agents, our underwriting
staff helps determine which type of workers compensation
insurance solution is appropriate for each risk.
Alternative Market Insurance Solutions. We
provide a variety of services to employers, insurance agencies
or other parties who wish to bear a substantial portion of the
underwriting risk with respect to workers compensation
exposures, including fronting, claims adjusting, claims
administration and investment management services. We earn a
ceding commission as compensation for these services. Our
alternative market customers are subject to, at a minimum,
monthly self-reporting of payroll figures. Our alternative
market insurance solutions include the following:
|
|
|
|
|
Segregated portfolio captive insurance
plans. We offer segregated portfolio captive
plans to small, medium and larger-sized employers in a broad
array of industries, including hospitality companies,
construction companies, professional employer organizations,
clerical and professional temporary staffing companies,
industrial companies, car dealerships, food services and retail
and wholesale operations, using both onshore and offshore
captive facilities. Prior to the advent of segregated portfolio
captive programs, only very large risks could afford the
capitalization and administrative costs associated with captive
insurance company formation. Our approach utilizes standardized
agreements and processes that allow employers, insurance
agencies and other parties with annual premiums as low as
$200,000 to participate. Through our captive insurance plans, we
write a workers compensation policy for the employer and
facilitate the establishment of a segregated portfolio cell
within a segregated portfolio captive by coordinating the
necessary interactions among the party controlling the cell, the
insurance agency, the segregated portfolio captive, our manager
and insurance regulators in the jurisdiction where the captive
is domiciled. These segregated portfolio cells may be controlled
by policyholders, insurance agencies, parties related to
policyholders or other parties.
|
Once the segregated portfolio cell is established, Guarantee
Insurance enters into a captive reinsurance agreement with the
segregated portfolio captive acting on behalf of the segregated
portfolio cell. Guarantee Insurance generally retains 10% of the
underwriting risk under arrangements for segregated portfolio
cells owned by the policyholder or another party, and cedes the
balance of such risk on a quota share basis to the segregated
portfolio captive. Guarantee Insurance retains between 10% and
90% of the underwriting risk under arrangements for segregated
portfolio cells that are owned by an insurance agency or group
of insurance agencies, and cedes the balance of the risk to the
segregated portfolio cell captives. For the nine months ended
September 30, 2009, we retained approximately 14% of the
underwriting under risk under our segregated portfolio captive
arrangements. Any amount of losses in excess of
$1.0 million per occurrence is not covered by the captive
reinsurance agreement. If the aggregate covered losses for the
segregated portfolio cell exceed the level specified in the
reinsurance agreement, the segregated portfolio captive
reinsures the entire amount of the excess losses up to the
aggregate liability limit specified in the captive reinsurance
agreement. If the aggregate losses for the segregated portfolio
cell exceed the aggregate liability limit, Guarantee Insurance
retains 100%
111
of those excess losses, except to the extent that any loss
exceeds $1.0 million per occurrence, in which case the
amount of such loss in excess of $1.0 million is reinsured
under Guarantee Insurances excess of loss reinsurance
program.
Because reinsurance does not relieve Guarantee Insurance of
liability under the underlying workers compensation
policies and Guarantee Insurances ability to collect for
losses incurred is limited to the assets of the segregated
portfolio cell, we generally protect ourselves from potential
credit risk related to a segregated portfolio cell by holding
collateral, including funds withheld for the account of the
cell, to provide for payment of the reinsurance obligations
incurred by the segregated portfolio captive on behalf of the
cell. Funds withheld consists of ceded premiums net of ceding
commissions, less claims paid on behalf of the segregated
portfolio cell, together with collateral that the segregated
portfolio captive posts on behalf of the cell in the form of
cash. Funds withheld also include interest credited to the funds
withheld account. In certain cases, the segregated portfolio
cell captive also provides letters of credit or other financial
instruments acceptable to Guarantee Insurance as collateral. In
addition, we generally require the party controlling the
segregated portfolio cell to guarantee the payment to Guarantee
Insurance of all liabilities and obligations related to the cell
that are owed under the captive reinsurance agreement and
related agreements.
Segregated portfolio captives are generally required to provide
collateral to us with respect to a cell in an amount that is
greater than or equal to the ceded reserves that Guarantee
Insurance initially estimates will be required on the underlying
workers compensation policies relating to such cell. On an
ongoing basis, we evaluate the adequacy of the collateralization
of the segregated portfolio cell reserves. If we determine that
the amount of collateral is inadequate, we seek additional
collateral or otherwise evaluate the likelihood, based on
available information, that the full amount of the reinsurance
recoverable balance from the cell is collectible. If we deem it
probable, based on available information, that all or a portion
of a cells uncollateralized reinsurance recoverable
balance is not collectible, we establish an allowance for such
uncollectible reinsurance recoverable.
In order for the party controlling a segregate portfolio cell to
receive any funds withheld attributable to our segregated
portfolio captive insurance program, that party must formally
request a dividend. However, dividends may only be declared by
the board of the segregated portfolio captive out of the profits
of the segregated portfolio cell under the captive reinsurance
agreement or out of monies otherwise available for distribution
in accordance with applicable law. In practice, upon receipt of
a dividend request, Guarantee Insurance determines whether all
expenses and liabilities with respect to the cell have been
reasonably provided for or paid. If Guarantee Insurance approves
the dividend request, we will submit a formal request to the
domiciliary captive manager, supported with relevant financial
justification for final approval. If approved by applicable
regulatory authorities and the board of the segregated portfolio
captive, Guarantee Insurance will remit the remaining funds
attributable to the cell to the captive for payment to the party
controlling the cell.
For the nine months ended September 30, 2009 and the year
ended December 31, 2008, approximately 80% and 78% of our
direct premiums written on alternative market business were
derived from captive insurance arrangements, respectively. For
the nine months ended September 30, 2009 and the year ended
December 31, 2008, we ceded approximately 86% and 88%,
respectively, of our segregated portfolio captive alternative
market gross premiums written under quota share reinsurance
agreements with segregated portfolio captives.
112
The following schematic illustrates the basic elements of a
segregated portfolio captive arrangement, with our subsidiaries
shaded:
|
|
|
* |
|
Ceded premiums, net of ceding commission, are held by
Guarantee Insurance for the account of the segregated portfolio
cell and, along with the collateral, constitute the loss fund
for payment of reinsured claims. |
|
|
|
|
|
Large deductible plans. In 2008, we began
offering large deductible plans as an alternative market
insurance solution. Under these plans, we generally receive a
lower premium than we would for a traditional plan, but the
insured retains a greater share of the underwriting risk through
a higher per-occurrence deductible. This gives the policyholder
greater incentive to exercise effective loss controls. The
per-occurrence deductibles on these plans range from $100,000 to
$1,000,000, with various levels of aggregate protection. Under
these plans, the policyholder is responsible for payments of
claims that fall below the deductible. Guarantee Insurance pays
the
below-the-deductible
portion of the claim and bills the policyholder for
reimbursement. These types of programs require collateral from
the policyholder based upon its individual loss profile and the
loss development factors in the states where it is insured. For
the nine months ended September 30, 2009 and the year ended
December 31, 2008, approximately 7% and 6% of our direct
premiums written on alternative market business were derived
from large deductible plans, respectively.
|
|
|
|
Retrospectively rated plans. Under
retrospectively rated plans, we charge an initial premium that
is subject to adjustment at the end of the policy period.
Retrospectively rated policies use formulae to adjust premiums
based on the policyholders actual losses and loss
adjustment expenses incurred and paid during the policy period,
subject to a minimum and maximum premium. These policies are
typically subject to annual adjustments until claims are closed.
Unlike policyholder dividend plans in our traditional business
(described below), retrospective premium adjustments are
established contractually and are not determined at the
discretion of the board of directors of Guarantee Insurance.
Guarantee Insurance generally offers retrospectively rated
policies to employers with minimum annual premiums of $100,000.
For the nine months ended September 30, 2009 and the year
ended December 31, 2008, approximately 2% and 4% of our
direct premiums written on alternative market business were
derived from retrospectively rated policies, respectively.
|
|
|
|
Guaranteed cost policies with no risk sharing features.
Our alternative market business also includes policies issued to
certain professional employer organizations and professional
temporary staffing organizations on which we retain the risk.
The excess of loss reinsurance on these policies is provided
|
113
|
|
|
|
|
by the same reinsurer that covers our segregated portfolio
captive insurance plans, retrospectively rated plans and large
deductible plans, and these plans may be converted to risk
sharing arrangements in the future. For the nine months ended
September 30, 2009 and the year ended December 31,
2008, approximately 11% and 12% of our direct premiums written
on alternative market business were derived from these
guaranteed cost policies issued to certain professional employer
organizations and professional temporary staffing organizations.
|
Traditional Business. Through Guarantee
Insurance, we also provide traditional workers
compensation insurance coverage, under which Guarantee Insurance
bears substantially all of the underwriting risk, subject to
reinsurance arrangements. We manage that risk through the use of
quota share and excess of loss reinsurance. Quota share
reinsurance is a form of proportional reinsurance in which the
reinsurer assumes an agreed upon percentage of each risk being
insured and shares all premiums and losses with us in that
proportion. Excess of loss reinsurance covers all or a specified
portion of losses on underlying insurance policies in excess of
a specified amount, or retention. We typically provide
traditional workers compensation insurance coverage to
small to medium-sized employers in a broad array of industries,
including clerical and professional services, food services,
retail and wholesale operations and industrial services,
generally in low to medium risk classifications and hazard
levels.
We write the following types of traditional workers
compensation insurance business:
|
|
|
|
|
Guaranteed cost plans. Our basic traditional
product is a guaranteed cost policy, under which the premium for
a policyholder is set in advance based upon rate filings
approved by the insurance regulator and varies based only upon
changes in the policyholders employee class codes and
payroll. The premium does not increase or decrease based upon an
updated participating employee census during the policy period.
We regularly audit the payroll records of our policyholders to
help ensure that appropriate premiums are being charged and paid
and adjust premiums as appropriate. For the nine months ended
September 30, 2009 and the year ended December 31,
2008, approximately 73% and 76% of our direct premiums written
on traditional business were derived from guaranteed cost
products, respectively.
|
|
|
|
Pay-as-you-go plans. We offer a monthly
self-reporting option, under which a policyholders monthly
premium payments are calculated by the policyholder using actual
monthly payroll figures. We refer to these as pay-as-you-go
plans. Pay-as-you-go plans are a relatively recent innovation in
the workers compensation industry. With pay-as-you-go
plans, the insured works with a payroll vendor to collect
accurate payrolls and corresponding premiums to be remitted to
us. Pay-as-you-go plans have become popular with insureds, and
as a result some payroll companies now own their own insurance
agency and some traditional insurance agencies now own their own
payroll company. We believe that pay-as-you-go plans are a more
efficient method of underwriting and administering workers
compensation. These plans reduce our credit exposure for
additional premiums that we determine we are owed based on
payroll audits. Furthermore, the plans create a more precise
ongoing workers compensation insurance expense and more
predictable ongoing cash flow expectations for our
policyholders. We began offering pay-as-you-go plans in late
2006. For the nine months ended September 30, 2009 and the
year ended December 31, 2008, approximately 17% and 18% of
our direct premiums written on traditional business were derived
from pay-as-you-go plans, respectively.
|
|
|
|
Policyholder dividend plans. Generally, under
a policyholder dividend plan a fixed premium is charged based
upon rate filings approved by the insurance regulator, but the
insured may receive a dividend based upon favorable loss
experience during the policy period. We began offering
policyholder dividend plans in Florida and other states in 2007.
Eligibility for these plans varies based upon the nature of the
policyholders operations, value of premium generated, loss
experience and existing controls intended to minimize
workers compensation claims and costs. Policyholder
dividends, which are to be paid at the discretion of the board
of directors of Guarantee Insurance and in accordance with law,
cannot be guaranteed and are generally based upon the
policyholders loss experience and other terms stipulated
in the policyholder dividend plan filed with the appropriate
insurance regulators and policy terms, including the applicable
dividend endorsements. We plan to pay dividends, if any,
|
114
|
|
|
|
|
18 months after policy expiration. For the nine months
ended September 30, 2009 and the year ended
December 31, 2008, approximately 10% and 6% of our direct
premiums written on traditional business were derived from
policyholder dividend plans, respectively.
|
The following table sets forth gross premiums written and net
premiums earned for alternative market and traditional business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
In thousands
|
|
|
Gross premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alternative market
|
|
$
|
42,163
|
|
|
$
|
42,168
|
|
|
$
|
47,374
|
|
|
$
|
34,316
|
|
|
$
|
33,921
|
|
Traditional business
|
|
|
44,378
|
|
|
|
51,912
|
|
|
|
69,182
|
|
|
|
50,599
|
|
|
|
26,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct business
|
|
|
86,541
|
|
|
|
94,080
|
|
|
|
116,566
|
|
|
|
84,915
|
|
|
|
60,557
|
|
Assumed business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BPO Client
|
|
$
|
7,824
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
NCCI National Workers Compensation Pool
|
|
|
1,607
|
|
|
|
798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assumed business
|
|
|
9,431
|
|
|
|
798
|
|
|
|
1,007
|
|
|
|
895
|
|
|
|
1,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
95,972
|
|
|
$
|
94,878
|
|
|
$
|
117,563
|
|
|
$
|
85,810
|
|
|
$
|
62,372
|
|
Net premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alternative market
|
|
$
|
8,444
|
|
|
$
|
8,110
|
|
|
$
|
15,733
|
|
|
$
|
3,054
|
|
|
$
|
2,852
|
|
Traditional business
|
|
|
16,971
|
|
|
|
23,350
|
|
|
|
32,456
|
|
|
|
20,490
|
|
|
|
16,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct business
|
|
|
25,415
|
|
|
|
31,460
|
|
|
|
48,189
|
|
|
|
23,544
|
|
|
|
19,436
|
|
Assumed business(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BPO Client
|
|
$
|
1,538
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
NCCI National Workers Compensation Pool
|
|
|
1,416
|
|
|
|
816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assumed business
|
|
|
2,954
|
|
|
|
816
|
|
|
|
1,031
|
|
|
|
1,069
|
|
|
|
1,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,369
|
|
|
$
|
32,276
|
|
|
$
|
49,220
|
|
|
$
|
24,613
|
|
|
$
|
21,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
The following tables set forth the total direct premiums written
for the nine months ended September 30, 2009 and year ended
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009
|
|
|
|
Alternative Market
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
Traditional Business
|
|
|
Total
|
|
|
|
Premium
|
|
|
Percentage
|
|
|
Premium
|
|
|
Percentage
|
|
|
Premium
|
|
|
Percentage
|
|
|
|
In thousands (other than percentages)
|
|
|
Florida
|
|
|
14,112
|
|
|
|
33.5
|
%
|
|
|
9,911
|
|
|
|
22.3
|
%
|
|
|
24,023
|
|
|
|
27.8
|
%
|
New Jersey
|
|
|
8,530
|
|
|
|
20.2
|
%
|
|
|
9,078
|
|
|
|
20.5
|
%
|
|
|
17,608
|
|
|
|
20.3
|
%
|
New York
|
|
|
4,099
|
|
|
|
9.7
|
%
|
|
|
4,273
|
|
|
|
9.6
|
%
|
|
|
8,372
|
|
|
|
9.7
|
%
|
Georgia
|
|
|
5,297
|
|
|
|
12.6
|
%
|
|
|
3,049
|
|
|
|
6.9
|
%
|
|
|
8,346
|
|
|
|
9.6
|
%
|
Missouri
|
|
|
1,629
|
|
|
|
3.9
|
%
|
|
|
3,686
|
|
|
|
8.3
|
%
|
|
|
5,315
|
|
|
|
6.1
|
%
|
Arkansas
|
|
|
873
|
|
|
|
2.1
|
%
|
|
|
2,568
|
|
|
|
5.8
|
%
|
|
|
3,441
|
|
|
|
4.0
|
%
|
Oklahoma
|
|
|
1,745
|
|
|
|
4.1
|
%
|
|
|
1,569
|
|
|
|
3.5
|
%
|
|
|
3,314
|
|
|
|
3.8
|
%
|
Indiana
|
|
|
407
|
|
|
|
1.0
|
%
|
|
|
2,738
|
|
|
|
6.2
|
%
|
|
|
3,145
|
|
|
|
3.6
|
%
|
Virginia
|
|
|
875
|
|
|
|
2.1
|
%
|
|
|
1,806
|
|
|
|
4.1
|
%
|
|
|
2,681
|
|
|
|
3.1
|
%
|
Other States
|
|
|
4,596
|
|
|
|
10.9
|
%
|
|
|
5,700
|
|
|
|
12.8
|
%
|
|
|
10,296
|
|
|
|
11.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
42,163
|
|
|
|
100.0
|
%
|
|
|
44,378
|
|
|
|
100.0
|
%
|
|
|
86,541
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
Alternative Market
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
Traditional Business
|
|
|
Total
|
|
|
|
Premium
|
|
|
Percentage
|
|
|
Premium
|
|
|
Percentage
|
|
|
Premium
|
|
|
Percentage
|
|
|
|
In thousands (other than percentages)s
|
|
|
Florida
|
|
$
|
32,977
|
|
|
|
69.6
|
%
|
|
$
|
20,658
|
|
|
|
29.9
|
%
|
|
$
|
53,635
|
|
|
|
46.0
|
%
|
New Jersey
|
|
|
1,792
|
|
|
|
3.8
|
|
|
|
9,681
|
|
|
|
14.0
|
|
|
|
11,473
|
|
|
|
9.8
|
|
Missouri
|
|
|
981
|
|
|
|
2.1
|
|
|
|
8,590
|
|
|
|
12.4
|
|
|
|
9,571
|
|
|
|
8.2
|
|
Georgia
|
|
|
4,097
|
|
|
|
8.6
|
|
|
|
4,508
|
|
|
|
6.5
|
|
|
|
8,605
|
|
|
|
7.4
|
|
Indiana
|
|
|
255
|
|
|
|
0.5
|
|
|
|
6,330
|
|
|
|
9.1
|
|
|
|
6,585
|
|
|
|
5.6
|
|
New York
|
|
|
2,586
|
|
|
|
5.5
|
|
|
|
3,510
|
|
|
|
5.1
|
|
|
|
6,096
|
|
|
|
5.2
|
|
Arkansas
|
|
|
474
|
|
|
|
1.0
|
|
|
|
4,523
|
|
|
|
6.5
|
|
|
|
4,997
|
|
|
|
4.3
|
|
Alabama
|
|
|
1,465
|
|
|
|
3.1
|
|
|
|
1,068
|
|
|
|
1.5
|
|
|
|
2,533
|
|
|
|
2.2
|
|
Oklahoma
|
|
|
492
|
|
|
|
1.0
|
|
|
|
1,834
|
|
|
|
2.7
|
|
|
|
2,326
|
|
|
|
2.0
|
|
Other States
|
|
|
2,255
|
|
|
|
4.8
|
|
|
|
8,480
|
|
|
|
12.3
|
|
|
|
10,735
|
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,374
|
|
|
|
100.0
|
%
|
|
$
|
69,182
|
|
|
|
100.0
|
%
|
|
$
|
116,556
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
and Distribution
We distribute our alternative market solutions and traditional
workers compensation plans exclusively through a network
of independent agencies. We select agencies based on several key
factors, such as size and scope of the agencys operations,
loss ratio of its existing business, targeted classes of
business, reputation of the agency and our principals, producers
and business philosophy. We target agencies that we believe
share our service philosophy and are likely to send us the
quality of business we are seeking. We invest a substantial
amount of time in developing relationships with our agents, and
we believe that this gives us the opportunity to underwrite the
most profitable business in each state in which we write
premiums. As of September 30, 2009, Guarantee Insurance had
direct contracts with more than 570 independent non-exclusive
agencies, with approximately 235 in the Midwest and 60 in the
Northeast and 275 in the Southeast, including approximately 220
in Florida. As we seek to expand geographically, we plan to
continue to devote considerable time developing strong
relationships with quality agents that share our service
philosophy.
116
Working in conjunction with our agents, we evaluate whether a
given risk is appropriate for the traditional or alternative
market. Our alternative market insurance solutions are
attractive to our agents larger employer customers with
favorable loss profiles because they are able to share in the
risk and reduce their workers compensation insurance costs
if they continue to realize favorable loss experience.
We assign marketing representatives and underwriters based on
relationships with agents and not necessarily based on
geographic area. Our marketing efforts directed at agencies are
implemented by our field underwriters, marketing staff and
client services personnel. These personnel are assigned to
specific agencies and work with these agencies in making sales
presentations to potential policyholders.
We hold annual planning meetings with our agents to discuss the
prior years results and to determine financial goals for
the coming year. It is imperative to our success that we
understand the goals and objectives of our agents. To date, this
understanding has been an integral factor in our success. The
relationships with our agencies are managed primarily through
our field marketing and underwriting staff. However, key
management personnel also maintain strong relationships with
most of our agencies principals.
With our focus on workers compensation insurance, our
range of workers compensation insurance solutions and
products and our quality of service, we believe we are able to
compete with larger, better capitalized and highly rated
insurance company competitors by forming close relationships
with our agents and focusing on small to mid-sized businesses.
We strive to provide excellent customer service to our agents
and policyholders, including fast turnaround of policy
submissions, in order to attract and retain business. Our
pay-as-you-go plan, pursuant to which we partner
with payroll service companies and their clients to collect
premiums and payroll information on a monthly basis, is
attractive to our agents smaller business customers. Using
this program, we are able to underwrite smaller businesses
without requiring a large premium down payment, which eases the
cash flow burden for these companies.
We also take an active role in several program and trade
associations. These marketing efforts include print advertising
in trade magazines as well as involvement in associations. We
target the trade organizations that service the classes of
business that we seek to write. This involvement helps to build
client loyalty not only at the agency level, but at the insured
level as well.
Underwriting
We do not use a class underwriting approach that targets
specific classes of business or industries in which the
acceptability of a risk is determined by the entire class or
industry. Our underwriting strategy is to identify and target
individual risks based on the individual characteristics of a
prospective insured. However, we do not underwrite exposures
involving occupational disease or exposures that are excluded
from our reinsurance agreements. See
Reinsurance.
Our underwriters develop close relationships with our
independent agency network through telephone and Internet
contact and personal visits. Underwriters personal
interaction with agents provides an enhanced understanding of
the businesses we underwrite and the needs of both the agents
and prospective insureds. Our underwriters have authority to
underwrite individual risks both in the field and in the office.
The extent of their authority is based on their personal
industry experience and the individual risk characteristics of
the prospective business. Risks outside of an underwriters
authority are referred to underwriting management for
underwriting approval. None of our agents has authority to bind
Guarantee Insurance on policies for either alternative market or
traditional business.
In assessing a risk, the underwriter and underwriting management
review the individual exposures and consider many factors,
including an employers prior loss experience, risk
environment, commitment to loss prevention, willingness to offer
modified duty or return to work to injured employees, safety
record and operations.
In addition, the underwriters also evaluate losses in the
employers specific industry, geographic area and other
non-employer specific conditions. These and other factors are
documented on our underwriting risk worksheet. Our underwriting
risk worksheet was created as a way to document the decision
process, the factors that went into making the decision to write
the business and any information pertinent to the risk itself.
117
We apply experience modification factors to a
policyholders rate either to increase the policy premium
due to a history of prior losses or to reduce the policy premium
due to a favorable prior claims history.
Our underwriting strategy focuses on developing a relationship
with the insured and the agent to promote account safety,
long-term loyalty and continued profitability. Our loss
prevention professionals visit many policyholders to ascertain
the policyholders willingness to comply with our
underwriting and loss prevention philosophy.
Our underwriting process and risk management techniques are
substantially similar for our alternative market insurance
solutions and our traditional business, except that we employ
two additional underwriting criteria on alternative market
business. Using an actuarial loss development model, we trend
past losses and develop pricing for the prospective policy year.
We also conduct a financial review of the prospective insured.
We may write higher risk classifications and hazard levels in
the alternative market than we do in our traditional business
due to the fact that alternative market plans are generally
either largely reinsured to a segregated portfolio captive or
written on a large deductible or retrospectively rated policy,
reducing our underwriting exposure. In addition, we believe that
most of our alternative market insurance solutions provide an
incentive for the policyholder to achieve favorable loss
experience, which helps mitigate the exposures typically
associated with higher risk classifications and hazard levels.
Loss
Control
Our loss control process begins with a request from our
underwriting department to perform an inspection. Our
inspections focus on a policyholders operations, loss
exposures and existing safety controls designed to prevent
potential loss. The factors considered in our inspections
include employee experience, employee turnover, employee
training, previous loss history and corrective actions, and
workplace conditions, including equipment condition and, where
appropriate, use of fall protection, respiratory protection or
other safety devices. Our inspectors travel to employers
worksites to perform these safety inspections.
During our relationship with our policyholders, we seek to
emphasize workplace safety by periodically visiting the
workplace, assisting the policyholder in designing and
implementing enhanced safety management programs, providing
current industry-specific safety-related information and
conducting rigorous post-accident management.
Our loss control department is comprised of two loss control
representatives. Outside of Florida, we utilize third-party
vendors to provide inspection services.
Our loss control procedures support our loss reduction and
prevention philosophy, which involves adhering to the
early-return-to-work programs and implementing recommended
safety practices. To the extent we are permitted by law, we will
cancel or not renew the policy of a policyholder that is not
willing to comply with our loss control procedures and risk
reduction and prevention philosophy.
Pricing
Generally, premiums for our alternative market workers
compensation insurance solutions and our traditional
workers compensation insurance business are a function of
the state regulatory environment, the amount of the insured
employers payroll, the insured employers risk class
code, and factors reflecting the insured employers
historical loss experience.
We write business in both administered pricing and
competitive rating states. In administered pricing
states, insurance rates are set by the state insurance
regulators and are adjusted periodically. Rate competition
generally is not permitted in these states and, consequently,
our alternative market insurance solutions can be an important
competitive factor. For example, by adjusting the amount of
collateral required from a segregated portfolio captive or
through the use of high deductible or retrospectively rated
policies, we seek to maintain appropriate pricing in
administered pricing states for business that would be difficult
to insure through a traditional guaranteed cost plan. Florida,
Indiana and New Jersey are administered pricing states, while
the rest of the states in which we operate are competitive
rating states. In both administrative pricing and competitive
rating states, we strive to achieve proper risk selection
through disciplined underwriting. In competitive rating
118
states, we have more flexibility to charge premium rates that
reflect the risk we are taking based on each employers
profile. In administered pricing states, we are able to maintain
appropriate pricing by adjusting collateral requirements, using
consent-to-rate
programs and applying experience modification factors to our
rates.
Through our
consent-to-rate
program, the Florida OIR allows insurers to charge a rate that
exceeds the state-established rate when deemed necessary by the
insurer. Use of this program is limited to 10% of the number of
an insurers policies written in Florida. The insurer is
responsible for determining the additional premium based on the
specific characteristics of a policyholder that result in the
need for additional premium, such as poor loss history, lack of
prior experience, inadequate rate for exposure and specific lack
of safety programs and procedures. The goal of the
consent-to-rate
program in Florida is for policyholders to be able to obtain
coverage while working to improve their risk profile and to
realize premium reductions over time and ultimately eliminate
the
consent-to-rate
factor as improvements are achieved. This program enables us to
maintain appropriate pricing in Floridas administered
pricing environment. We look for strong partnerships with, and
commitments from, our policyholders and agents with respect to
participation in this program. We use the
consent-to-rate
program primarily when rehabilitation of a policyholder is
required or the exposures of a policyholder warrant additional
premium. Approximately 1% of our Florida policies written in
2008 were written pursuant to the
consent-to-rate
program, which represented approximately 3% of our direct
premiums written in Florida in 2008. Through this program, we
have been able to underwrite otherwise uncertain accounts that
exhibited a strong commitment to improve their working
conditions and risk profile.
In competitive rating states, the state approves a set of
competitive prices that provides for expected payments.
Regulators then permit pricing flexibility primarily through two
variables: (1) the selection of the competitive pricing
multiplier insurers apply to competitive prices to determine
their insurance rates and (2) schedule rating modifications
that allow insurers to adjust premiums upwards or downwards for
specific risk characteristics of the policyholder, such as type
of work conducted,
on-site
medical facilities, level of employee safety, use of safety
equipment and policyholder management practices. In competitive
pricing states, we use both variables to calculate a policy
premium that we believe will cover the claims costs and policy
acquisition and underwriting expenses and produce an acceptable
underwriting profit for it.
Claims
We believe that the claims management process is an integral
part of our success. Establishing claims benchmarks, reviewing
outcomes and conducting routine random audits help us achieve
our claims adjudication goals and objectives. Our claims
management program strives to ensure that the injured
workers medical care restores health in an effective and
efficient manner, promotes the early return to work and provides
appropriate and prompt payment of benefits while producing an
economical net claim cost.
We have established claims controls and a claims adjudication
infrastructure to assist us in meeting these goals. The
foundation of our claims quality and service excellence is built
on the following set of goals and initiatives, which we
collectively refer to as best practices:
|
|
|
|
|
Coverage Verification. Immediate analysis and
documentation of confirmation of coverage.
|
|
|
|
Contact. Contact with the parties involved in
the loss within 24 hours of the receipt of a claim. When
the claim is received, the adjuster and a telephonic case
manager registered nurse will make contact with the injured
worker, employer
and/or
medical provider. We believe that having both an adjuster and
nurse case manager make these contacts and assist in
establishing the most appropriate and efficient medical
treatment helps restore health and return the injured party to
work as soon as practical.
|
|
|
|
Investigation. Within 14 days of receipt
of a claim, a claim adjudication and management strategy is
developed, including the identification and communication of
what we believe to be the most appropriate medical treatment and
indemnity benefits to be paid.
|
|
|
|
Recovery and Cost Offsets. Effective
recognition, investigation and pursuit of recovery and cost
offsets. Recoveries can be for a third-party claim and, in
certain states (e.g., South Carolina and Georgia), for second
injury fund claims. In some jurisdictions, such as Florida,
where the claimant may
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also be eligible for social security disability benefits, the
amount of such benefits received can be offset from the weekly
workers compensation rate using a prescribed formula.
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Evaluation. Appropriate analysis of claim
exposure to probable ultimate cost. The claim file should
reflect the action plan necessary to resolve the claim, while
complying with applicable state laws, rules and regulations and
corporate, insurer, reinsurer and employer reporting
requirements.
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Medical/Disability/Rehabilitation
Management. Appropriate assistance in managing
medical care and treatment, utilizing a broad range of
techniques designed to return the injured worker to work as
quickly as practical. We believe that the most successful
technique in returning injured workers back to work as soon as
possible is ongoing communication with the injured worker,
medical provider and employer. Consistent contact with the
medical provider, including requests for light duty restrictions
as appropriate, can hasten an injured workers return to
work. In many cases, the medical provider does not know the
employer is able to make reasonable accommodations or offer the
injured worker alternative work during recuperation. We
reinforce the value of a working employee with the employer and
assist in the identification of suitable light duty work when
appropriate. Securing an employers cooperation to identify
suitable jobs and assisting in promptly returning employees to
work can substantially reduce overall claim costs.
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Negotiation and Disposition. Timely claim
negotiation and disposition to achieve an equitable,
cost-effective result.
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Litigation Management. A proactive initiative
by claims staff to manage litigation and, where necessary,
involve defense counsel who are committed to providing
aggressive, high quality, efficient representation under the
direction of the claims management team.
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Supervision. Consistent supervision of the
claim by our claims staff with precise, documented guidance and
coaching throughout the life of the claim that clearly pursues
resolution and strives to ensure best practices of claims
handling.
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Data Quality. Clear understanding of the
importance of data quality, reflected through prompt, accurate
and thorough maintenance of claims data, resulting in timely and
accurate reporting.
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Customer Service. Prompt initial contact and
ongoing contact with insured employers, including thorough and
prompt responses to requests.
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Privacy. An ongoing commitment to maintaining
the integrity of claimant data and safeguarding medical and
other information pertaining to injured workers and healthcare
providers.
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To help execute these initiatives and achieve these goals, we
target experienced claims adjusters with a minimum of
5 years of experience handling workers compensation
claims within their jurisdictions of assignment. Our claims
department employees average more than 12 years of
workers compensation insurance industry experience, and
members of our claims management team average more than
24 years of workers compensation experience. To
facilitate effective claims handling, we seek to limit the
average number of claims handled at a time to approximately 125
per lost time adjuster and approximately 250 per medical-only
adjuster.
Once a policy is bound, we send a claims kit to the insured
outlining the policy provisions, mandated posting notices,
information on how to report a claim and the importance of
reporting all claims on a timely basis and answers to frequently
asked questions. We make available a toll-free reporting line
for insureds or employers to report injuries, available
24 hours a day, seven days a week, and can receive notices
of injury via the Internet as well.
We use preferred provider organization networks and bill review
services to reduce our overall claim costs. We assign authority
levels for settlement authority and reserve placement to
adjusters based upon their level of experience and position.
Management must approve any changes of reserves that fall above
the adjusters authority to help ensure proper action plans
are current in the claim. Claims that are reserved at $50,000 or
more must have a large loss report created that outlines the
facts of the claim, as well as the
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reasons for the reserve requested. This report is reviewed by
senior management. In addition, our claims adjusters coordinate
with our underwriters and loss control personnel when it appears
that there may be safety issues at the insureds location
or if the work conducted by the injured employee at the time of
the accident does not match the class codes on the policy.
We monitor open claims for potential subrogation, which is the
recovery of a portion of paid medical and indemnity losses from
a third party that has liability for the losses suffered. We
review new reported claims daily to help ensure timely
identification of potential subrogation recoveries. We seek to
place third parties on notice and keep them apprised of the
status of the subject claim at regular intervals, including
amounts paid by us for medical and indemnity benefits. We keep
claims referred for subrogation open until a recovery has been
received or a determination made that no subrogation is
available.
Florida and many of the other states in which we operate require
that all insurance carriers establish a special investigative
unit to investigate and report fraudulent activities. Our
in-house special investigations unit, or SIU, has established
guidelines for fraud investigation that exceed minimum SIU
standards in each jurisdiction in which we operate and have been
approved by the State of Florida.
Our SIU operates in conjunction with the claims, audit,
collections, loss prevention and underwriting departments to
determine whether an allegation of fraud is valid. We
investigate allegations of fraud on the part of both
policyholders and injured workers. Files referred to our SIU are
reviewed to determine whether an investigation should be opened.
If an investigation is opened, SIU gathers the information
necessary to submit to the appropriate division of insurance
fraud for further investigation.
We also utilize an internal control specialist, or ICS, to
monitor the adjusters compliance with best practices for
claims handling. The ICS reviews specific areas of performance
such as timely contact, proper coverage determination,
investigations, litigation management, reserve integrity,
documentation, supervision and direction, resolution and case
closure action plans. On a monthly basis, the ICS reviews a
certain number of claims by adjuster and evaluates our
adjusters performance. We have utilized these reviews to
assist in the development of additional training programs and
coaching points with our adjusters. The use of these ICS reviews
assists us in determining that our claims procedures and
protocols are being carried out by our claims staff and our
performance standards and goals are being consistently met.
Claims administration for our alternative market business is
handled in a manner substantially similar to our traditional
business. We have dedicated adjusters assigned to alternative
market plans, both for the medical only and lost time claims, to
help ensure a smooth working relationship. Our alternative
market insurance solutions tend to involve higher risk
classifications and hazard levels than our traditional policies.
However, we generally retain little underwriting risk on our
alternative market business, and we generally maintain a higher
level of contact and communication with our alternative market
customers as they have a shared incentive to resolve claims as
effectively as possible and to assist employees to return to
work. As a result, the claims closure rates for the alternative
market tend to be slightly higher than the traditional market.
As with claims in our traditional business, we review reserve
adequacy on our alternative market business on a regular basis
until claims are closed.
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We strive for rapid closure of claims in order to reduce the
cost of medical and indemnity expenses. The table below sets
forth our open claim counts by accident year and our open claims
as a percentage of reported claims for alternative market and
traditional business, in the aggregate, as of December 31,
2008, together with industry average open claims as a percent of
reported claims:
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Workers
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Compensation
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Patriot
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Industry Average
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As of December 31, 2008
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Open Claims as a
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Open Claims as a
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Percent of
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Number of
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Percentage of
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Reported Claims as of
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Open Claims
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Reported Claims
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December 31, 2008
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Current accident year
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1,745
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25.8
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%
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30.0
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%
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Prior accident year
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314
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6.3
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%
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8.6
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%
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Second prior accident year
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85
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1.8
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%
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4.3
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%
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Third prior accident year
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38
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1.0
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%
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2.6
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%
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Fourth prior accident year
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4
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0.4
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1.8
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%
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Industry data from Highline Data, an affiliate of The National
Underwriter Company and a provider of insurance industry
financial performance data.
Policyholder
Audits
We conduct premium audits on our alternative market and
traditional business policyholders annually upon the expiration
of each policy, including when the policy is renewed. The
purpose of these audits is to verify that policyholders have
accurately reported their payroll expenses and employee job
classifications, and therefore have paid the premium required
under the terms of their policies. In addition to annual audits,
we selectively perform interim audits on certain classes of
business if significant or unusual claims are filed or if the
monthly reports submitted by a policyholder reflect a payroll
pattern or any aberrations that cause underwriting, safety or
fraud concerns.
Reinsurance
Reinsurance is a transaction between insurance companies in
which an original insurer, or ceding company, remits a portion
of its premiums to a reinsurer, or assuming company, as payment
for the reinsurers commitment to indemnify the original
insurer for a portion of its insurance liability. Reinsurance
agreements may be proportional in nature, under which the
assuming company shares proportionally in the premiums and
losses of the ceding company. This arrangement is known as quota
share reinsurance. Reinsurance agreements may also be structured
so that the assuming company indemnifies the ceding company
against all or a specified portion of losses on underlying
insurance policies in excess of a specified amount, which is
called an attachment level or retention, in return for a
premium, usually determined as a percentage of the ceding
companys primary insurance premiums. This arrangement is
known as excess of loss reinsurance. Excess of loss reinsurance
may be written in layers, in which a reinsurer or group of
reinsurers accepts a band of coverage up to a specified amount.
One form of excess of loss reinsurance is so-called clash
cover reinsurance which only covers occurrences resulting
in losses involving more than one reinsured policy or, in the
case of workers compensation insurance, more than one
injured worker. Any liability exceeding the outer limit of a
reinsurance program is retained by the ceding company. The
ceding company also bears the credit risk of a reinsurers
insolvency.
Reinsurance can be facultative reinsurance or treaty
reinsurance. Under facultative reinsurance, each policy or
portion of a risk is reinsured individually. Under treaty
reinsurance, an
agreed-upon
portion of a class of business is automatically reinsured.
Reinsurance is very important to our business. Guarantee
Insurance reinsures a portion of its exposures and pays to the
reinsurers a portion of the premiums received on all policies
reinsured. Insurance policies written by Guarantee Insurance are
reinsured with other insurance companies principally to:
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reduce net liability on individual risks;
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mitigate the effect of individual loss occurrence (including
catastrophic losses);
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stabilize underwriting results;
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decrease underwriting leverage; and
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increase its underwriting capacity.
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We determine the amount and scope of reinsurance coverage to
purchase each year based on a number of factors. These factors
include the evaluation of the risks accepted, consultations with
reinsurance representatives and a review of market conditions,
including the availability and pricing of reinsurance.
The cost and limits of the reinsurance coverage we purchase vary
from year to year based upon the availability of reinsurance at
an acceptable price, our catastrophe exposure and our desired
level of retention. Retention refers to the amount of risk that
we retain for our own account.
We regularly monitor our reinsurance requirements and review the
availability, the amount and cost of reinsurance and our
experience with insured losses. The availability, amount and
cost of reinsurance are subject to market conditions and to our
experience with insured losses. There can be no assurance that
our reinsurance agreements can be renewed or replaced prior to
expiration upon terms as favorable as those currently in effect.
If we are unable to renew or replace our reinsurance agreements,
or elect to reduce or eliminate our quota share reinsurance, our
net liability on individual risks would increase, we would have
greater exposure to catastrophic losses, our underwriting
results would be subject to greater variability, and our
underwriting capacity would be reduced.
Guarantee Insurance purchases both quota share and excess of
loss reinsurance. The protection afforded by such reinsurance is
subject to various limitations and restrictions. For example, it
excludes coverage for certain high-risk occupations, such as
tunnel construction, mining and the handling of explosives. In
addition, the majority of this reinsurance either excludes or
limits coverage for occupational diseases or excludes coverage
for risks with known occupational disease exposures. The
majority of this reinsurance also excludes or limits coverage
for extra contractual damages, including punitive, exemplary,
compensatory and consequential damages, as well as for losses
paid in excess of policy limits. It also includes sunset
clauses, which limit reinsurance coverage to claims reported to
reinsurers within 84 months of the inception of the
contract period for the reinsurance. In addition, many of our
reinsurance policies include commutation clauses, which permit
the reinsurers to terminate their obligations by making a final
payment to us based on an estimate of their remaining
reinsurance liabilities, which may ultimately prove to be
inadequate. Also, certain reinsurance purchased by us excludes
all coverage for terrorism losses, while other reinsurance
excludes coverage for terrorism losses involving nuclear,
biological or chemical explosion, pollution or contamination,
applies an aggregate limit on the recovery of terrorism losses
and/or
otherwise limits coverage for terrorism losses.
Alternative
Market Business
Combined Quota Share and Aggregate Excess of Loss
Reinsurance. In the alternative market, Guarantee
Insurance issues workers compensation and employers
liability coverage to employers that share in the income and
losses associated with this insurance, including the loss
experience and expenses under such policies, primarily through
the employers participation in a segregated portfolio
captive reinsurance facility. Each segregated portfolio captive
reinsures, on a quota share basis, a percentage (typically 50%
to 90%) of the premiums and losses on the insurance that
Guarantee Insurance issues for participating employers. If
aggregate covered losses exceed the level specified in the
reinsurance agreement, the segregated portfolio captive
reinsures the entire amount of the excess losses up to the
aggregate liability limit specified in the agreement. If the
aggregate losses for the segregated portfolio cell exceed the
aggregate liability limit, Guarantee Insurance retains 100% of
those excess losses. Losses in excess of $1.0 million per
occurrence are not covered by this reinsurance agreement. To the
extent that any loss exceeds $1.0 million per occurrence,
the amount of such loss in excess of $1.0 million is
reinsured subject to certain limitations under Guaranteed
Insurances excess of loss reinsurance program. In
addition, the segregated portfolio captives liability with
respect to the underlying workers compensation policies is
limited to the assets held in the segregated portfolio cell for
that employers benefit.
Excess of Loss Reinsurance. Guarantee
Insurance has purchased excess of loss reinsurance for
alternative market workers compensation losses in excess
of $1.0 million per occurrence. Guarantee Insurance
generally cedes between 50% and 90% of the losses falling within
this $1.0 million retention under the
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segregated cell captive reinsurance agreements as described
above. Some of the excess of loss reinsurance purchased by
Guarantee Insurance applies solely to our alternative market
business, while other excess of loss reinsurance applies to both
the alternative market and the traditional business.
July 1, 2005 through June 30,
2006. For alternative market workers
compensation policies that commence during the period from
July 1, 2005 through June 30, 2006, Guarantee
Insurance retains $1.0 million per occurrence and cedes
losses greater than this $1.0 million retention subject to
certain limitations. This reinsurance applied to both
traditional and alternative market business and is described
below in the section describing excess of loss reinsurance for
traditional business.
July 1, 2006 through April 30,
2007. For alternative market workers
compensation policies that commenced during the period
July 1, 2006 through April 30, 2007, Guarantee
Insurance retains $1.0 million per occurrence. We purchased
excess of loss reinsurance in the amount of $4.0 million
per occurrence for this alternative market business, but
commuted this reinsurance effective May 1, 2007. Depending
on the date of the loss occurrence, additional reinsurance
protection was provided by excess of loss and clash cover
reinsurance attaching over $5.0 million per occurrence,
which is described below in the section relating to excess of
loss reinsurance for traditional business.
May 1, 2007 through June 30,
2008. For alternative market workers
compensation policies that commence during the period from
May 1, 2007 through June 30, 2008, Guarantee Insurance
retains $1.0 million per occurrence and cedes losses
greater than this $1.0 million retention. Pursuant to the
reinsurance agreement, which is with National Indemnity Company,
a subsidiary of Berkshire Hathaway, Inc. rated A++ (Superior) by
A.M. Best Company, the first layer excess of loss
reinsurance for such claims and for losses occurring after
May 1, 2007 under alternative market policies in force
prior to that date provides $4.0 million of coverage per
occurrence excess of Guarantee Insurances
$1.0 million retention. The agreement reinsures losses in
excess of $1.0 million up to $5.0 million per
occurrence and has an aggregate limit of $16.0 million
during the contract period. In addition, depending on the date
of the loss occurrence, additional reinsurance protection is
provided by excess of loss and clash cover reinsurance attaching
over $5.0 million per occurrence, which is described below
in the section dealing with excess of loss reinsurance for
traditional business.
July 1, 2008 through June 30,
2009. Guarantee Insurance obtained excess of loss
reinsurance for our alternative market policies from National
Indemnity Company effective July 1, 2008 in an amount of
$4.0 million per occurrence in excess of a
$1.0 million retention. This reinsurance applies to losses
occurring during the period July 1, 2008 through
June 30, 2009 and has an aggregate limit of
$16.0 million during the contract period. It excludes
coverage for participation in assigned risk pools. The
reinsurance for the period ended June 30, 2008 was written
on a risk attaching basis. Coverage incepting
July 1, 2008 is written on a losses occurring
basis and applies to losses occurring during the period
July 1, 2008 through June 30, 2009. Additional
reinsurance is provided by excess of loss and clash cover
reinsurance attaching over $5.0 million per occurrence,
which is described below in the section dealing with excess of
loss reinsurance for traditional business. In addition, certain
alternative market insurance policies, commencing during the
period July 1, 2008 through June 30, 2009, for which
Guarantee Insurance typically cedes 50% to 90% of losses to a
segregated portfolio captive controlled by an insurance agency,
are not reinsured under the excess of loss reinsurance purchased
for Guarantee Insurances alternative market business but
instead are reinsured under the first layer of excess of loss
reinsurance purchased for Guarantee Insurances traditional
business, which is also described in the section below under the
heading Traditional Business Excess of
Loss Reinsurance.
July 1, 2009 through June 30,
2010. Guarantee Insurance has obtained excess of
loss reinsurance for our alternative market policies from two
reinsurers National Liability and Fire
Insurance Company, a subsidiary of Berkshire Hathaway, Inc.
rated A+ (Superior) by A.M. Best Company, and from ULLICO
Casualty Company effective July 1, 2009, in an amount of
$4.0 million per occurrence in excess of a
$1.0 million retention. This reinsurance, under which 90%
of the coverage is provided by National Liability and Fire
Insurance Company, and the remaining 10% is provided by ULLICO
Casualty Company, applies to losses occurring during the period
July 1, 2009 through June 30, 2010, reinsures losses
in excess of $1.0 million up to $5.0 million per
occurrence, and has an aggregate limit of $16.0 million
during the contract
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period. It excludes coverage for participation in assigned risk
pools and has other limitations. For example, it reinsures
employers liability losses at lower limits than those
applicable to Guarantee Insurances statutory workers
compensation liabilities and has a lower aggregate limit for
employers liability losses. Additional reinsurance is
provided by excess of loss and clash cover reinsurance attaching
over $5.0 million per occurrence, which is described in the
section below under the heading Traditional
Business Excess of Loss Reinsurance. In
addition, certain alternative market insurance policies,
commencing during the period July 1, 2009 through
June 30, 2010, for which Guarantee Insurance typically
cedes 50% to 90% of losses to a segregated portfolio captive
controlled by an insurance agency, are not reinsured under the
excess of loss reinsurance purchased for Guarantee
Insurances alternative market business but instead are
reinsured under the first layer of excess of loss reinsurance
purchased for Guarantee Insurances traditional business,
which is also described in the section below under the heading
Traditional Business Excess of Loss
Reinsurance.
Traditional
Business
Quota Share Reinsurance. Effective
July 1, 2006, Guarantee Insurance entered into a quota
share reinsurance agreement with National Indemnity Company.
Pursuant to this agreement, Guarantee Insurance ceded 50% of our
traditional business, excluding South Carolina, Georgia and
Indiana, in force on July 1, 2006 and 50% of our new and
renewal traditional business, excluding these states, effective
during the period from July 1, 2006 through June 30,
2007. Effective July 1, 2007, Guarantee Insurance entered
into a second quota share reinsurance agreement with National
Indemnity Company pursuant to which we ceded 50% of our new and
renewal traditional business, excluding South Carolina, Georgia
and Indiana, effective during the period from July 1, 2007
through June 30, 2008. Both of these quota share agreements
covered all losses up to $500,000 per occurrence, subject to
various restrictions and exclusions. Under these agreements,
Guarantee Insurance ceded premiums and received a ceding
commission in return.
Effective July 1, 2008, Guarantee Insurance entered into a
third quota share reinsurance agreement with both National
Indemnity Company, which is rated A++ (Superior) by A.M. Best
Company, and Swiss Reinsurance America Corporation, which is
rated A+ (Superior) by A.M. Best Company. Pursuant to this
agreement, Guarantee Insurance again ceded 50% of our new and
renewal traditional business, excluding South Carolina, Georgia
and Indiana, effective on or after July 1, 2008. National
Indemnity Company provided 75% of this reinsurance coverage,
while Swiss Reinsurance America Corporation provided the
remaining 25%. The agreement covered 50% of net retained
liabilities for losses up to $500,000 per occurrence arising
from all subject traditional business. The agreement was written
on a losses occurring basis and applies to losses
occurring during the contract period, which extends from
July 1, 2008 through January 1, 2009 for National
Indemnity Companys share of the reinsured risks and from
July 1, 2008 through June 30, 2009 for Swiss
Reinsurance America Corporations share of the reinsured
risks. The quota share reinsurance for prior periods was written
on a risk attaching basis to cover all losses
insured under policies commencing during the reinsurance
contract period, including losses that occur after the end of
that period. This prior reinsurance has been cut off with an
adjustment of reinsurance premium for all losses occurring after
June 30, 2008. These losses are covered by the reinsurance
incepting July 1, 2008. The change from reinsurance written
on a risk attaching basis to reinsurance written on
a losses occurring basis will facilitate early
termination of the reinsurance at the option of Guarantee
Insurance. Guarantee Insurance has the option of terminating the
reinsurance upon 15 days prior notice. Effective
January 1, 2009, coverage from National Indemnity Company
expired, coverage from Swiss Reinsurance America Corporation was
increased from 12.5% to 25.0% and previously excluded stated
were added to the coverage.
Guarantee Insurance entered into an additional quota share
agreement with Harco National Insurance Company pursuant to
which we ceded 37.83% of Guarantee Insurances traditional
business gross unearned premium reserves as of December 31,
2008 and 37.83% of the first $500,000 of losses and certain loss
adjustment expenses incurred on all subject business in force at
December 31, 2008, subject to various restrictions and
exclusions. Under this agreement, Guarantee Insurance ceded
unearned premium reserves and received a ceding commission,
which varies based on loss experience. In return, Harco National
Insurance Company is obligated to pay its pro rata share of
losses and loss adjustment expenses.
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Effective January 1, 2009, Guarantee Insurance entered into
a quota share agreement with ULLICO Casualty Company, an
insurance company from which we borrowed approximately
$5.5 million on December 31, 2008. Pursuant to the
quota share agreement, Guarantee Insurance ceded 68% of
traditional new and renewal business in the states of Georgia,
New Jersey and Florida on the first $1.0 million of
incurred losses and certain loss adjustment expenses, subject to
various restrictions and exclusions. The quota share agreement
covers losses occurring during the contract period of
January 1, 2009 to December 31, 2009, under
traditional new and renewal policies issued during that period.
ULLICO is obligated to pay its pro rata share of losses and
certain loss adjustment expenses, subject to an aggregate cap of
90% of the gross earned premium income on the subject policies.
Excess of Loss Reinsurance. In addition to
quota share reinsurance, Guarantee Insurance purchases excess of
loss reinsurance. Effective July 1, 2007, Guarantee
Insurances retention for its reinsured statutory
workers compensation liabilities is $1.0 million per
occurrence. All of Guarantee Insurances excess of loss
agreements are subject to various restrictions and exclusions.
The following description of Guarantee Insurances excess
of loss reinsurance for its statutory workers compensation
liabilities covers the period from July 1, 2005 through
June 30, 2010. Different layers of this excess of loss
reinsurance were renewed at different times during the
applicable calendar year. All of the layers in the 2009/2010
program are scheduled to expire on June 30, 2010. In
addition, until July 1, 2008, the first layer of this
reinsurance was written on a risk attaching basis,
while certain upper layers of this reinsurance apply only to
losses occurring during the reinsurance contract period. Thus,
for periods prior to July 1, 2008, a single loss may be
reinsured under first layer reinsurance covering a particular
period based on the date of policy issuance and under upper
layer reinsurance covering a later period based on the date of
the loss occurrence. Effective July 1, 2008, all layers of
this excess of loss reinsurance are written on a losses
occurring basis.
Guarantee Insurance purchases first layer excess of loss
reinsurance that applies solely to its traditional business. It
purchases upper layers of excess of loss reinsurance (including
clash cover reinsurance that only applies if an occurrence
involves injuries to multiple employees) that apply to both our
traditional and alternative market business. As a result, losses
from both business segments would be applied against any
aggregate limits for such upper layers.
July 1, 2005 through June 30,
2006. For workers compensation claims
covered under policies for its traditional business that
commence during the period July 1, 2005 through
June 30, 2006, Guarantee Insurance retains $750,000 per
occurrence. Guarantee Insurance cedes losses greater than this
$750,000 retention. Subject to certain limitations, the excess
of loss reinsurance for such claims provides coverage up to
$19.3 million per occurrence provided in four layers,
including in the two upper layers, certain clash covers that
only apply if an occurrence involves injuries to multiple
employees.
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For losses incurred under policies commencing during the period
July 1, 2005 through June 30, 2006, the first layer of
excess of loss reinsurance provides $250,000 of coverage per
occurrence excess of Guarantee Insurances $750,000
retention. This layer reinsures losses in excess of the $750,000
retention up to $1.0 million and only applies to our
traditional business.
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For losses incurred under policies commencing during the period
July 1, 2005 through June 30, 2006, the second layer
of excess of loss reinsurance provides $4.0 million of
coverage per occurrence excess of $1.0 million. This layer
reinsures losses in excess of $1.0 million up to
$5.0 million, subject to a maximum amount of recovery under
this layer equal to 225% of the total reinsurance premiums paid
by Guarantee Insurance for the layer. However, in the event of a
loss falling within this layer, reinsurance premiums payable by
Guarantee Insurance are based on a 3% minimum reinsurance
premium rate applied to the subject premium base of
$70 million plus 110% of paid losses falling within the
layer, all subject to a maximum premium amount of
$8.75 million. This means that regardless of the number of
occurrences covered by this reinsurance with incurred losses in
excess of $1.0 million, no net income statement benefit is
received for the first $6.65 million of aggregate losses
falling within this layer. The aggregate amount of reinsurance
recoveries paid under this layer will never exceed
$19.69 million. This reinsurance applies to both
traditional and alternative market business.
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The third layer of excess of loss reinsurance consists of two
separate clash cover treaties. Each of these treaties provides
$5.0 million of coverage per occurrence in excess of
$5.0 million. Each reinsures losses in excess of
$5.0 million up to $10.0 million. The first of these
treaties, which applied to losses incurred under policies
commencing during the period from July 1, 2005 through
June 30, 2006, was commuted in 2006 and no longer is in
force. The second of these treaties, which has not been commuted
and remains in force, applies to losses occurring from
January 1, 2006 through December 31, 2006. This second
treaty covers both traditional and alternative market business
but excludes coverage for participation in assigned risk pools.
|
|
|
|
The fourth layer of excess of loss reinsurance also consists of
two separate clash cover treaties. Each of these treaties
provides $10.0 million of coverage per occurrence in excess
of $10.0 million. Each reinsures losses in excess of
$10.0 million up to $20.0 million. The first of these
treaties, which applied to losses incurred under policies
commencing from July 1, 2005 through June 30, 2006,
was commuted in 2006 and no longer is in force. The second of
these treaties, which has not been commuted and remains in
force, applies to losses occurring from January 1, 2006
through December 31, 2006. This second treaty covers both
traditional and alternative market business but excludes
coverage for participation in assigned risk pools.
|
July 1, 2006 through June 30,
2007. For workers compensation claims
covered under traditional policies that commence during the
period July 1, 2006 through June 30, 2007, Guarantee
Insurance retains $750,000 per occurrence and cedes losses
greater than this $750,000 retention. The amount of the excess
of loss reinsurance that applies to such claims totals
$19.3 million per occurrence provided in three layers,
including in the two upper layers certain clash covers.
|
|
|
|
|
For losses incurred under policies commencing during the period
July 1, 2006 through June 30, 2007, the first layer of
excess of loss reinsurance provides $4.3 million of
coverage per occurrence excess of Guarantee Insurances
$750,000 retention. This layer has an annual aggregate
deductible of $250,000 and reinsures losses in excess of the
$750,000 retention up to $5.0 million. Pursuant to these
deductible provisions, Guarantee Insurance must pay $250,000 in
combined statutory workers compensation and
employers liability losses incurred in the twelve-month
contract period in addition to its $750,000 retention before it
is entitled to any excess of loss reinsurance recovery under
this layer.
|
|
|
|
The second layer of excess of loss reinsurance consists of two
separate treaties. Each of these treaties provides
$5.0 million of coverage per occurrence in excess of
$5.0 million. Each reinsures losses in excess of
$5.0 million up to $10.0 million. The first of these
treaties is a clash cover, which applies to losses occurring
from January 1, 2006 through December 31, 2006. The
second is not a clash cover and applies to losses occurring from
January 1, 2007 through June 30, 2008, subject to an
aggregate limit of $10.0 million. This aggregate limit
means that regardless of the number of occurrences during the
18-month
contract period with incurred losses in excess of
$5.0 million, the aggregate amount paid under this treaty
would not exceed $10.0 million. Both of these treaties
cover traditional and alternative market business but exclude
coverage for participation in assigned risk pools.
|
|
|
|
The third layer of excess of loss reinsurance consists of two
separate clash cover treaties. Each of these treaties provides
$10.0 million of coverage per occurrence in excess of
$10.0 million. Each reinsures losses in excess of
$10.0 million up to $20.0 million. The first of these
treaties applies to losses occurring from January 1, 2006
through December 31, 2006. The second applies to losses
occurring from January 1, 2007 through June 30, 2008,
subject to an aggregate limit of $20.0 million. Both of
these treaties cover traditional and alternative market business
but exclude coverage for participation in assigned risk pools.
|
July 1, 2007 through June 30,
2008. For workers compensation claims
covered under traditional insurance policies that commence
during the period from July 1, 2007 through June 30,
2008, Guarantee Insurance retains $1.0 million per
occurrence and cedes losses greater than this $1.0 million
retention. The amount of the excess of loss reinsurance that
applies to such claims totals $19.0 million per occurrence,
provided in three layers, including a clash cover treaty in the
highest layer.
127
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|
|
Pursuant to a workers compensation excess of loss
reinsurance agreement between Guarantee Insurance and Midwest
Employers Casualty Company, the first layer of the excess of
loss reinsurance provides $4.0 million of coverage per
occurrence excess of Guarantee Insurances
$1.0 million retention for losses insured under policies
commencing during the period July 1, 2007 through
June 30, 2008. It reinsures losses in excess of
$1.0 million up to $5.0 million.
|
|
|
|
Pursuant to a workers compensation excess of loss
reinsurance agreement between Guarantee Insurance and reinsurers
Max Re, Ltd., Aspen Insurance UK Limited and various
underwriters at Lloyds London, the second layer of excess
of loss reinsurance provides $5.0 million of coverage per
occurrence in excess of $5.0 million for losses occurring
on or after January 1, 2007 and prior to July 1, 2008.
This second layer reinsures losses in excess of
$5.0 million up to $10.0 million and has an aggregate
limit of $10.0 million. The second layer covers both
traditional and alternative market business and excludes
coverage for participation in assigned risk pools.
|
|
|
|
The third layer of excess of loss reinsurance is a clash cover
provided pursuant to a workers compensation excess of loss
reinsurance agreement between Guarantee Insurance and the
reinsurers Aspen Insurance UK Limited and various underwriters
at Lloyds London. This reinsurance applies to losses
occurring from January 1, 2007 through June 30, 2008
and provides $10.0 million of coverage per occurrence in
excess of $10.0 million, subject to an aggregate limit of
$20.0 million. This third layer reinsures losses in excess
of $10.0 million up to $20.0 million. The third layer
covers both traditional and alternative market business and
excludes coverage for participation in assigned risk pools.
|
July 1, 2008 through June 30,
2009. Guarantee Insurance obtained excess of loss
reinsurance, effective July 1, 2008, in the same three
layers ($4.0 million excess of a $1.0 million
retention, $5.0 million excess of $5.0 million and
$10.0 million excess of $10.0 million) as were in
place for the prior period ended June 30, 2008. The first
layer of this coverage, provided by Midwest Employers Casualty
Company, applies only to traditional insurance policies. The
second layer, provided by Max Bermuda, Ltd., Aspen Insurance UK
Limited and various underwriters at Lloyds London, applies
to both traditional and alternative market insurance policies.
The third layer, provided by Max Bermuda, Ltd., Tokio Millennium
Reinsurance Limited, Aspen Insurance UK Limited and various
underwriters at Lloyds London, applies to both traditional
and alternative market insurance policies and is a clash cover.
The first layer of coverage for the prior period ended
June 30, 2008 was written on a risk attaching
basis. Coverage under all layers of excess of loss reinsurance
incepting July 1, 2008 is written on a losses
occurring basis and applies to losses occurring during the
period July 1, 2008 through June 30, 2009. Coverage
under the first layer of this new reinsurance is subject to an
annual deductible of $1.0 million such that this
reinsurance only applies to losses in excess of
$1.0 million per occurrence during the period July 1,
2008 through June 30, 2009 to the extent that such losses
exceed $1.0 million in the aggregate. Coverage under the
second layer is subject to an aggregate limit of
$10.0 million, while coverage under the third layer is
subject to an annual limit of $20.0 million. All three
layers exclude coverage for participation in assigned risk pools.
July 1, 2009 through June 30,
2010. Guarantee Insurance has obtained excess of
loss reinsurance, effective July 1, 2009, in four layers
($4.0 million excess of a $1.0 million retention,
$5.0 million excess of $5.0 million,
$10.0 million excess of $10.0 million and
$30 million excess of $20 million). The first layer of
this coverage, which is provided by a group of reinsurers led by
Maiden Re and applies only to traditional insurance policies, is
subject to an annual aggregate deductible of $1.0 million.
The second layer, provided by a group of reinsurers led by the
Amlin Syndicate at Lloyds, applies to both traditional and
alternative market insurance policies. The third layer, provided
by a group of reinsurers led by Amlin Syndicate, applies to both
traditional and alternative market insurance policies and is a
clash cover. The fourth layer provided by a group of reinsurers
led by Amlin Syndicate Re is also a clash cover.
Coverage under all layers of excess of loss reinsurance
incepting July 1, 2009 is written on a losses
occurring basis and applies to losses occurring during the
period July 1, 2009 through June 30, 2010. Coverage
under the first layer of this reinsurance is subject to an
annual deductible of $1.0 million such that
128
this reinsurance applies only to losses in excess of
$1.0 million per occurrence during the period July 1,
2009 through June 30, 2010, and then only to the extent
that these excess loss amounts (amounts over $1 million per
occurrence) exceed $1.0 million in the aggregate during the
coverage period. Coverage under the first layer is subject to an
annual aggregate limit of $20.0 million; coverage under the
second layer is subject to an annual aggregate limit of
$10.0 million; coverage under the third layer is subject to
an annual aggregate limit of $20.0 million; and coverage
under the fourth layer is subject to an annual aggregate limit
of $60.0 million.
Recoverability of reinsurance. Reinsurance
does not discharge or diminish our obligation to pay claims
covered under insurance policies we issue. However, it does
permit us to recover losses on such risks from our reinsurers.
We would be obligated to pay claims in the event these
reinsurers were unable to meet their obligations. Therefore, we
are subject to credit risk with respect to the obligations of
our reinsurers. A reinsurers ability to perform its
obligations may be adversely affected by events unrelated to
workers compensation insurance losses.
We have reinsurance agreements with both authorized and
unauthorized reinsurers. Authorized reinsurers are licensed or
otherwise authorized to conduct business in the state of Florida
(Guarantee Insurances state of domicile). Under statutory
accounting principles, Guarantee Insurance receives credit on
its statutory financial statements for all paid and unpaid
losses ceded to authorized reinsurers. Unauthorized reinsurers
are not licensed or otherwise authorized to conduct business in
the state of Florida. Under statutory accounting principles,
Guarantee Insurance receives credit for paid and unpaid losses
ceded to unauthorized reinsurers to the extent these liabilities
are secured by funds held, letters of credit or other forms of
acceptable collateral.
On a routine basis, we review the financial strength of our
authorized and unauthorized reinsurers, monitor the aging of
reinsurance recoverables on paid losses and assess the adequacy
of collateral underlying reinsurance recoverable balances. If a
reinsurer is unable to meet any of its obligations under the
reinsurance agreements, we would be responsible for the payment
of all claims and claims expenses that we have ceded to such
reinsurer. The collateral Guarantee Insurance maintains from
certain reinsurers serves to mitigate this risk.
129
As of December 31, 2008, approximately 87% of our
reinsurance recoverable balances on paid and unpaid losses and
loss adjustment expenses are either due from authorized
reinsurers or are fully secured with collateral provided by
unauthorized reinsurers. To date, we have not, in the aggregate,
experienced difficulties in collecting balances from our
reinsurers. However, we have historically maintained an
allowance for the potential uncollectibility of reinsurance
balances on paid and unpaid losses and loss adjustment expenses
by authorized and unauthorized reinsurers. The table below sets
forth our reinsurance recoverable balances as of
December 31, 2008:
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Recoverable Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid Losses
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Loss
|
|
|
and Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
A.M.
|
|
|
Adjustment
|
|
|
Adjustment
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Best Rating
|
|
|
Expenses
|
|
|
Expenses
|
|
|
Total
|
|
|
Collateral(1)
|
|
|
Exposures
|
|
|
|
In thousands
|
|
|
Authorized reinsurers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National Indemnity Company (a subsidiary of Berkshire Hathaway,
Inc.)
|
|
|
A++
|
|
|
$
|
2,301
|
|
|
$
|
13,435
|
|
|
$
|
15,736
|
|
|
$
|
|
|
|
$
|
15,736
|
|
Swiss Reinsurance America Corporation
|
|
|
A+
|
|
|
|
293
|
|
|
|
1,643
|
|
|
|
1,936
|
|
|
|
|
|
|
|
1,936
|
|
Midwest Employers Casualty Company
|
|
|
A+
|
|
|
|
1,474
|
|
|
|
1,674
|
|
|
|
3,148
|
|
|
|
|
|
|
|
3,148
|
|
Other authorized reinsurers
|
|
|
|
|
|
|
441
|
|
|
|
2,468
|
|
|
|
2,909
|
|
|
|
238
|
|
|
|
2,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total authorized reinsurers
|
|
|
|
|
|
|
4,509
|
|
|
|
19,220
|
|
|
|
23,729
|
|
|
|
238
|
|
|
|
23,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unauthorized reinsurers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of loss reinsurers:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With net exposures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no net exposures
|
|
|
|
|
|
|
|
|
|
|
537
|
|
|
|
537
|
|
|
|
1,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total excess of loss reinsurers
|
|
|
|
|
|
|
|
|
|
|
537
|
|
|
|
537
|
|
|
|
1,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segregated portfolio cell captives:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With net exposures
|
|
|
|
|
|
|
|
|
|
|
3,011
|
|
|
|
3,011
|
|
|
|
1,574
|
|
|
|
1,437
|
|
With no net exposures
|
|
|
|
|
|
|
|
|
|
|
11,340
|
|
|
|
11,340
|
|
|
|
22,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segregated portfolio cell captives
|
|
|
|
|
|
|
|
|
|
|
14,351
|
|
|
|
14,351
|
|
|
|
23,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy exposure reinsurers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With net exposures
|
|
|
|
|
|
|
340
|
|
|
|
2,111
|
|
|
|
2,451
|
|
|
|
1,303
|
|
|
|
1,148
|
|
With no net exposures
|
|
|
|
|
|
|
93
|
|
|
|
1,273
|
|
|
|
1,366
|
|
|
|
2,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total legacy exposure reinsurers
|
|
|
|
|
|
|
433
|
|
|
|
3,384
|
|
|
|
3,817
|
|
|
|
3,653
|
|
|
|
1,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unauthorized reinsurers
|
|
|
|
|
|
|
433
|
|
|
|
18,272
|
|
|
|
18,705
|
|
|
|
29,146
|
|
|
|
2,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
4,942
|
|
|
|
37,492
|
|
|
|
42,434
|
|
|
$
|
29,384
|
|
|
$
|
26,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less allowance
|
|
|
|
|
|
|
(300
|
)
|
|
|
|
|
|
|
(300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
$
|
4,642
|
|
|
$
|
37,492
|
|
|
$
|
42,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Collateral is principally comprised of funds held by Guarantee
Insurance under reinsurance treaties and letters of credit. |
As of December 31, 2008, Guarantee Insurance had net
exposures from five segregated portfolio captive cells totaling
approximately $1.4 million. Individually, net exposures
from these five segregated portfolio captive cells ranged from
approximately $23,000 to approximately $498,000.
As of December 31, 2008, Guarantee Insurance had net
exposures from six unauthorized reinsurers totaling
approximately $1.1 million attributable to its legacy
asbestos and environmental claims and
130
commercial general liability claims which arose from the sale of
general liability insurance and participations in reinsurance
assumed through underwriting management organizations. See
Legacy Claims. Individually, net
exposures from these six reinsurers ranged from approximately
$44,000 to approximately $598,000.
Reserves
for Losses and Loss Adjustment Expenses
We record reserves for estimated losses under insurance policies
that we write and assume and for loss adjustment expenses
related to the investigation and settlement of policy claims.
Our reserves for losses and loss adjustment expenses represent
the estimated cost of all reported and unreported losses and
loss adjustment expenses incurred and unpaid at a given point in
time. We do not discount loss and loss adjustment expense
reserves for the time value of money attributable to the period
that elapses from the date of loss to claim payment dates.
We seek to provide estimates of loss and loss adjustment expense
reserves that equal ultimate incurred losses and loss adjustment
expenses. Maintaining the adequacy of loss and loss adjustment
reserve estimates is an inherent risk of the workers
compensation insurance business. We use an independent actuarial
consulting firm to assist in the evaluation of the adequacy of
our loss and loss adjustment reserves. Workers
compensation claims may be paid over a long period of time.
Estimating reserves for these claims may be more uncertain than
estimating reserves for other lines of insurance with shorter or
more definite periods between occurrence of the claim and final
determination of the loss. We endeavor to minimize this risk by
closing claims promptly and by relying on the estimates of our
professional claims adjusting staff, supplemented by actuarial
estimation techniques.
The three main components of loss and loss adjustment expense
reserves are (1) case reserves for reported claims and
associated adjustment costs, (2) aggregate reserves for
claims incurred but not reported and associated adjustment costs
(IBNR reserves) and (3) aggregate reserves for adjusting
and other claims administration costs, which includes expenses
such as claims-related salaries and associated overhead.
Case reserves are estimates of future claim payments based upon
periodic
case-by-case
evaluation and the judgment of our claims adjusting staff. When
a claim is reported, we establish an initial case reserve for
the estimated amount of our losses and loss adjustment expenses
based on our estimate of the most likely outcome of the claim at
that time. Generally, a case reserve is established within
14 days after the claim is reported and consists of
anticipated medical costs, indemnity costs and specific
adjustment expenses, which we refer to as defense and cost
containment expenses, or DCC expenses. At any point in time, the
amount paid on a claim, plus the reserve for future amounts to
be paid represents the estimated total cost of the claim, or the
case incurred loss and loss adjustment expense amount. The
estimated amount of loss for a reported claim is based upon
various factors, including:
|
|
|
|
|
type of loss;
|
|
|
|
severity of the injury or damage;
|
|
|
|
age and occupation of the injured employee;
|
|
|
|
estimated length of temporary disability;
|
|
|
|
anticipated permanent disability;
|
|
|
|
expected medical procedures, costs and duration;
|
|
|
|
our knowledge of the circumstances surrounding the claim;
|
|
|
|
insurance policy provisions, including coverage, related to the
claim;
|
|
|
|
jurisdiction of the occurrence; and
|
|
|
|
other benefits defined by applicable statute.
|
The case incurred loss and loss adjustment expense amount can
vary due to uncertainties with respect to medical treatment and
outcome, length and degree of disability, employment
availability and wage levels and
131
judicial determinations. As changes occur, the case incurred
loss and loss adjustment expense amount is adjusted. The initial
estimate of the case incurred amount can vary significantly from
the amount ultimately paid, especially in circumstances
involving severe injuries with comprehensive medical treatment.
Changes in case incurred amounts, or case development, are an
important component of our historical claim data. Adjustments
for inflationary effects are included as part of our review of
loss reserve estimates, but our reserving system does not make
explicit provision for the effects of inflation.
In addition to case reserves, we establish IBNR reserves, which
are intended to provide for losses and loss adjustment expenses
that have been incurred but not reported, aggregate changes in
case incurred losses and loss adjustment expenses and recently
reported claims for which an initial case reserve has not yet
been established. In establishing our IBNR reserves, we project
ultimate losses by accident year both through use of our
historical experience and the use of industry experience by
state. We project ultimate losses using 3 accepted actuarial
methods and evaluate statistical information to determine which
methods are most appropriate and whether adjustments are needed
within the particular methods. This supplementary information
may include open and closed claim counts, statistics related to
open and closed claim count percentages, claim closure rates,
average case reserves and average losses and loss adjustment
expenses incurred on open claims, reported and ultimate claim
severity, reported and projected ultimate loss ratios and loss
payment patterns.
The third component of our reserves for losses and loss
adjustment expenses is our adjusting and other expense reserves,
which represent an estimate of the future aggregate costs of
administering all known and unknown claims.
An additional component of our reserves for losses and loss
adjustment expenses is the reserve for mandatory participation
in pooling arrangements. We record reserves for mandatory
pooling arrangements as those reserves are reported to us by the
pool administrators.
The statistical and actuarial analysis we employ in estimating
our loss and loss adjustment expense reserves uses 3 methods to
project ultimate losses. Claims are grouped by accident year and
adjusted by (1) state-specific NCCI loss development
factors, modified as we deem appropriate; (2) development
factors derived from our historical annual experience; and
(3) development factors derived from our historical
quarterly experience. NCCI loss development factors are measures
over time of industry-wide claims reported, average case
incurred amounts, case development, duration, severity and
payment patterns. However, NCCI loss development factors do not
take into consideration differences in our own claims reserving
and claims management practices, the employment and wage
patterns of our policyholders relative to the industry as a
whole or other subjective factors. As a result, we modify the
NCCI loss development factors to reflect these differences and
the differences between ultimate benefits that serve as the
basis of the NCCI factors and our excess of loss reinsurance per
occurrence retentions. We also supplement the modified NCCI loss
development factors with factors derived from our own quarterly
and annual historical experience. We average the results from
the use of modified NCCI factors, the results from the use of
our own quarterly experience and the results from our own annual
historical experience to arrive at our estimates for our
reserves for losses and loss adjustment expenses.
We calculate the amount of our total losses and loss adjustment
expenses that we estimate will ultimately be paid by our
reinsurers, and subtract this amount from our estimated total
gross reserves to produce our estimated total net reserves.
As of December 31, 2008, our estimate of our ultimate
liability for losses and loss adjustment expenses was
approximately $74.6 million and our estimate of amounts
recoverable from reinsurers for unpaid losses and loss
adjustment expenses was approximately $37.5 million.
Accordingly, our reserves for losses and loss adjustments
expenses, net of amounts recoverable from reinsurers, was
approximately $37.1 million. This amount included
approximately $1.8 million associated with our mandatory
participation in the assumption of workers compensation
business from NCCI, for which reserves are maintained as
reported by NCCI. This amount also included approximately
$4.5 million in net reserves for legacy asbestos and
environmental and commercial general liability claims,
approximately $525,000 of which related to 30 direct claims for
which we maintain reserves, and approximately $4.0 million
of which related to pooling arrangements, for which reserves are
maintained as reported by the pool administrators.
132
Our best estimate of our ultimate liability for losses and loss
adjustment expenses was derived from the process and methodology
described above, which relies on substantial judgment. There is
inherent uncertainty in estimating our reserves for losses and
loss adjustment expenses. It is possible that our actual losses
and loss adjustment expenses incurred may vary significantly
from our estimates. Accordingly, the ultimate settlement of
losses and loss adjustment expenses may vary significantly from
estimates included in our financial statements.
We have prepared a sensitivity analysis of our net reserves for
losses and loss adjustment expenses as of December 31, 2008
by analyzing the effect of reasonably likely changes to the
percentage weighting assigned to the modified NCCI loss
development factors in deriving our estimates. We believe the
results of this sensitivity analysis, which are summarized in
the table below, constitute a reasonable range of the expected
outcomes of our reserves for net losses and loss adjustment
expenses.
For traditional and alternative market business, the low end of
the range of our sensitivity analysis was derived from the
assumption that the percentage weighting assigned to the
modified NCCI factors was reduced to 25.0% rather than 33.3%,
with the 75% remaining weight assigned to our quarterly and
annual historical experience. The high end of the range of our
sensitivity analysis was derived from the assumption that the
percentage weighting assigned to the modified NCCI factors was
increased from 33.0% to 50%, with the 50% remaining weight
assigned to our quarterly and annual historical experience.
For assumed business, which was attributable to our mandatory
participation in the assumption of workers compensation
business from NCCI as of December 31, 2008, net reserves
are maintained as reported by the NCCI. For legacy asbestos and
environmental and commercial general liability claims, referred
to as legacy business, net reserves are maintained
based on (i) gross reserves reported by pool
administrators, reduced by ceded reserves pursuant to our
reinsurance arrangements on this business, and
(ii) case-by-case
reserve estimates made by us totaling approximately $525,000 on
30 direct claims. We believe that reserves reported by third
parties for assumed business and the majority of legacy asbestos
and environmental and commercial general liability claims
represent the best estimate of our obligation for these claims,
and we do not believe that it would be meaningful to prepare a
sensitivity analysis on these net reserves. See Risk
Factors Guarantee Insurance has legacy commercial
general liability claims, including asbestos and environmental
liability claims.
For unallocated loss adjustment expenses, net reserves are
maintained based on managements estimate of the future
aggregate costs of administering all known and unknown claims,
and the low and high end of the range of our sensitivity
analysis are reflected in proportion to the low and high end of
the range of reserves on traditional and alternative market
business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
|
|
|
|
|
|
|
Alternative
|
|
|
|
|
|
Loss
|
|
|
|
|
Traditional
|
|
Market
|
|
Assumed
|
|
Legacy
|
|
Adjustment
|
|
|
|
|
Business
|
|
Business
|
|
Business
|
|
Business
|
|
Expenses
|
|
Total
|
|
|
In thousands
|
|
Low end of the range
|
|
$
|
19,410
|
|
|
$
|
8,521
|
|
|
$
|
1,767
|
|
|
$
|
4,523
|
|
|
$
|
1,683
|
|
|
$
|
35,904
|
|
Net reserves, as reported
|
|
|
20,001
|
|
|
|
9,018
|
|
|
|
1,767
|
|
|
|
4,523
|
|
|
|
1,749
|
|
|
|
37,058
|
|
High end of the range
|
|
|
21,181
|
|
|
|
10,022
|
|
|
|
1,767
|
|
|
|
4,523
|
|
|
|
1,881
|
|
|
|
39,374
|
|
The resulting range derived from this sensitivity analysis would
have increased net reserves by approximately $2.3 million
or decreased net reserves by approximately $1.2 million, at
December 31, 2008. The increase would have reduced net
income and stockholders equity by approximately
$1.5 million. The decrease would have increased net income
and stockholders equity by approximately $760,000. Because we
rely heavily on reinsurance, the range derived from this
sensitivity analysis is not as wide as it would likely be if we
ceded a lower proportion of losses to reinsurers. If we reduce
our use of reinsurance, we expect that the range between the
high and low end of the sensitivity analysis would increase. A
change in our reserves for net losses and loss adjustment
expenses would not have an immediate impact on our liquidity,
but would affect cash flow in future periods as the losses are
paid.
133
Given the numerous factors and assumptions used in our estimates
of net reserves for losses and loss adjustment expenses, and
consequently this sensitivity analysis, we do not believe that
it would be meaningful to provide more detailed disclosure
regarding specific factors and assumptions and the individual
effects of these factors and assumptions on our net reserves.
Furthermore, there is no precise method for subsequently
reevaluating the impact of any specific factor or assumption on
the adequacy of reserves because the eventual deficiency or
redundancy is affected by multiple interdependent factors.
Reconciliation
of Reserves for Losses and Loss Adjustment
Expenses
The following table provides a reconciliation of our aggregate
beginning and ending reserves for losses and loss adjustment
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
In thousands
|
|
|
Balances, January 1
|
|
$
|
69,881
|
|
|
$
|
65,953
|
|
|
$
|
39,084
|
|
Less reinsurance recoverable
|
|
|
(43,317
|
)
|
|
|
(41,103
|
)
|
|
|
(21,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances, January 1
|
|
|
26,564
|
|
|
|
24,850
|
|
|
|
17,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
27,422
|
|
|
|
18,642
|
|
|
|
15,328
|
|
Prior years
|
|
|
1,294
|
|
|
|
(3,460
|
)
|
|
|
2,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
28,716
|
|
|
|
15,182
|
|
|
|
17,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
6,171
|
|
|
|
4,668
|
|
|
|
3,290
|
|
Prior years
|
|
|
12,051
|
|
|
|
8,800
|
|
|
|
7,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
18,222
|
|
|
|
13,468
|
|
|
|
10,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances, December 31
|
|
|
37,058
|
|
|
|
26,564
|
|
|
|
24,850
|
|
Plus reinsurance recoverable
|
|
|
37,492
|
|
|
|
43,317
|
|
|
|
41,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31
|
|
$
|
74,550
|
|
|
$
|
69,881
|
|
|
$
|
65,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no significant changes in the key assumptions
utilized in the analysis and calculations of our loss reserves
during the years ended December 31, 2008, 2007 or 2006.
As a result of unfavorable development on prior accident year
reserves, incurred losses and loss adjustment expenses increased
by approximately $1.3 million for the year ended
December 31, 2008, reflecting approximately $600,000 of
unfavorable development in 2008 on workers compensation
reserves for prior accident years and approximately $700,000 of
unfavorable development in 2008 on legacy asbestos and
environmental exposures and commercial general liability
exposures, the latter as discussed more fully below.
As a result of favorable development on prior accident year
reserves, incurred losses and loss adjustment expenses decreased
by approximately $3.5 million for the year ended
December 31, 2007. Of this $3.5 million, approximately
$2.2 million relates to favorable development on
workers compensation reserves attributable to the fact
that 165 claims incurred in 2004 and 2005 were ultimately
settled in 2007 for approximately $600,000 less than the
specific case reserves that had been established for these
exposures at December 31, 2006. In addition, as a result of
this favorable case reserve development during 2007, we reduced
our loss development factors utilized in estimating claims
incurred but not yet reported resulting in a reduction of
estimated incurred but not reported reserves as of
December 31, 2007. The $3.5 million of favorable
development in 2007 also reflects approximately
$1.3 million of favorable development on legacy asbestos
and environmental exposures and commercial general liability
exposures as a result of the further run-off of this business
and additional information received from pool administrators on
pooled business that we participate in. See
Legacy Claims.
134
As a result of adverse development on prior accident year
reserves, incurred losses and loss adjustment expenses increased
by approximately $2.5 million for the year ended
December 31, 2006. Of the $2.5 million, approximately
$2.0 million relates to workers compensation claims
and approximately $500,000 to legacy asbestos and environmental
exposures and commercial general liability exposures. The
adverse development on workers compensation claims
primarily resulted from approximately $1.5 million of
unallocated loss adjustment expenses paid in 2006 related to the
2004 and 2005 accident years in excess of amounts reserved for
these expenses as of December 31, 2005. In addition, based
upon additional information that became available on known
claims during 2006, we strengthened our reserves by
approximately $500,000 for the 2004 and 2005 accident years. The
reserves for legacy claims were increased due to information
received from pool administrators as well as additional
consideration of specific outstanding claims.
Our gross reserves for losses and loss adjustment expenses of
$74.6 million as of December 31, 2008 are expected to
cover all unpaid losses and loss adjustment expenses related to
open claims as of that date, as well as gross claims incurred
but not reported. Our gross IBNR reserves represented
approximately 40% of our total gross reserves as of
December 31, 2008. At December 31, 2008, we had 2,186
open workers compensation claims with average gross case
reserves for known losses and loss adjustment expenses of
approximately $21,000. During 2008, approximately 7,000 new
claims were reported, and approximately 6,400 claims were closed.
Legacy
Claims
In addition to workers compensation insurance claims,
Guarantee Insurance has exposure to certain legacy asbestos and
environmental claims and commercial general liability claims
which arose from the sale of general liability insurance and
participations in reinsurance assumed through underwriting
management organizations (Pools). Guarantee
Insurance ceased offering direct general liability coverage in
1983. Participation with underwriting management organizations
ended with the 1982 underwriting year.
As industry experience in dealing with these exposures has
accumulated, various industry-related parties have evaluated
newly emerging methods for estimating asbestos-related and
environmental pollution liabilities, and these methods have
attained growing credibility. In addition, outside actuarial
firms and others have developed databases to supplement the
information that can be derived from a companys claim
files.
The Pools estimate the full impact of the asbestos-related and
environmental pollution liability by establishing full cost
basis reserves for all known losses and computing incurred but
not reported on previous experience and available industry data.
Nonetheless, these liabilities are subject to greater than
normal variation and uncertainty, and an indeterminable amount
of additional liability may develop over time.
We estimate the full impact of the asbestos and environmental
exposure by establishing full case basis reserves for all known
losses and computing incurred but not reported losses based on
previous experience and available industry data. These reserves
are attributable to approximately 22 direct claims, Guarantee
Insurances participation in two reinsurance pools and our
estimate of the impact of unreported claims. Our reserves for
direct asbestos and environmental liability exposures are based
on a detailed review of each case. Our reserves for pooled
asbestos and environmental liability exposures are based on our
share of aggregate reserves established by pool administrators
through their consultation with independent actuarial
consultants.
We believe that our reserve methodology results in net reserves
for asbestos and environmental claims that are adequate to cover
the ultimate cost of losses and loss adjustment expenses
thereon. However, we believe that adopting the survival ratio
reserve methodology for asbestos and environmental exposures
would make our reserve methodology for these exposures generally
consistent with our publicly held insurance company peers.
Accordingly, we are evaluating the possibility of adopting this
methodology. Under the survival ratio reserve methodology, our
net reserve for asbestos and environmental liability exposures
would be estimated based on a multiple of approximately
15 times our average net paid asbestos and environmental
claims the three most recent years. If we had adopted the
survival ratio reserve methodology as of December 31, 2008,
our net reserve for asbestos and environmental exposures would
have been approximately $5.1 million, representing an
increase in net losses and loss adjustment expenses of
approximately $2.1 million.
135
We expect to make a decision with respect to the adoption of the
survival ratio reserve methodology in connection with the
preparation of our financial statements for the fourth quarter
of 2009. If we adopt this methodology, our pre-tax income for
the period in which we increase our reserves will decrease by a
corresponding amount.
The following table provides a reconciliation of our beginning
and ending reserves for losses and loss adjustment expenses
associated with legacy asbestos and environmental exposures
which are included in the reconciliation of our aggregate
beginning and ending reserves for losses and loss adjustment
expenses above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
In thousands
|
|
|
Balances, January 1
|
|
$
|
6,789
|
|
|
$
|
6,999
|
|
|
$
|
7,302
|
|
Less reinsurance recoverable
|
|
|
(3,758
|
)
|
|
|
(3,402
|
)
|
|
|
(3,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances, January 1
|
|
|
3,031
|
|
|
|
3,597
|
|
|
|
3,522
|
|
Incurred related to claims in prior years
|
|
|
285
|
|
|
|
(169
|
)
|
|
|
363
|
|
Paid related to prior years
|
|
|
(323
|
)
|
|
|
(397
|
)
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances, December 31
|
|
|
2,993
|
|
|
|
3,031
|
|
|
|
3,597
|
|
Plus reinsurance recoverable
|
|
|
3,785
|
|
|
|
3,758
|
|
|
|
3,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31
|
|
$
|
6,778
|
|
|
$
|
6,789
|
|
|
$
|
6,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of our beginning
and ending reserves for losses and loss adjustment expenses
associated with legacy commercial general liability exposures,
which are included in the reconciliation of our aggregate
beginning and ending reserves for losses and loss adjustment
expenses above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
In thousands
|
|
|
Balances, January 1
|
|
$
|
3,742
|
|
|
$
|
6,050
|
|
|
$
|
6,006
|
|
Less reinsurance recoverable
|
|
|
(1,996
|
)
|
|
|
(2,974
|
)
|
|
|
(2,949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances, January 1
|
|
|
1,746
|
|
|
|
3,056
|
|
|
|
3,057
|
|
Incurred related to claims in prior years
|
|
|
424
|
|
|
|
(1,154
|
)
|
|
|
153
|
|
Paid related to prior years
|
|
|
(640
|
)
|
|
|
(176
|
)
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances, December 31
|
|
|
1,530
|
|
|
|
1,746
|
|
|
|
3,076
|
|
Plus reinsurance recoverable
|
|
|
2,076
|
|
|
|
1,996
|
|
|
|
2,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31
|
|
$
|
3,606
|
|
|
$
|
3,742
|
|
|
$
|
6,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
and Loss Adjustment Expense Development
Accounting for workers compensation insurance requires us
to estimate the liability for the expected ultimate cost of
unpaid losses and loss adjustment expenses, referred to as loss
and loss adjustment expense reserves, as of a balance sheet
date. The amount by which estimated losses and loss adjustment
expenses, measured subsequently by reference to payments and
additional estimates, differ from those previously estimated for
a time period is known as loss and loss adjustment expense
development. Development is unfavorable when losses close
for more than the levels at which they were reserved or when
subsequent estimates indicate a basis for reserve increases on
open claims. Loss and loss adjustment expense development,
whether due to an increase in estimated losses, or a decrease in
estimated losses, is reflected currently in earnings through an
adjustment to incurred losses and loss adjustment expenses for
the period in which the development is recognized. If the loss
and loss adjustment expense development is due to an increase in
estimated losses and loss adjustment expenses, the previously
estimated losses and loss adjustment expenses are considered
deficient, if the loss and loss adjustment expense
development is due to a decrease in
136
estimated losses and loss adjustment expenses, the previously
estimated losses and loss adjustment expenses are considered
redundant. When there is no loss and loss adjustment
expense development, the previously estimated losses and loss
adjustment expenses are considered adequate.
At September 30, 2009, our net reserves as of
December 31, 2008 were indicated as deficient, resulting in
the recognition of unfavorable development on prior accident
years of approximately $1.7 million for the nine months
ended September 30, 2009. For the nine months ended
September 30, 2009, we recorded unfavorable development of
approximately $1.5 million on our workers
compensation business, primarily attributable to the 2007
accident year and, more specifically, two individual losses
incurred in 2007 for which case reserves were increased by a
total of approximately $700,000 during the nine months ended
September 30, 2009 in connection with our reassessment of
the life care plans on these claims. Additionally, we recorded
unfavorable development of approximately $248,000 on our legacy
asbestos and environmental exposures and commercial general
liability exposures from prior accident years. At
December 31, 2008, our net reserves as of December 31,
2007 were indicated as deficient, resulting in the recognition
of unfavorable development on prior accident years of
approximately $1.3 million for the year ended
December 31, 2008. At December 31, 2008, our net
reserves as of December 31, 2006, 2005 and 2004 were
indicated as redundant, resulting in favorable development on
prior accident years of approximately $3.6 million,
$697,000 and $429,000, respectively.
The following table shows the development of our net reserves
for losses and loss adjustment expenses and cumulative net paid
losses and loss adjustment expenses for our insurance segment
from 2004 (the year we commenced writing workers
compensation business) through 2008. The table shows the changes
in our reserves for losses and loss adjustment expenses in
subsequent years from the prior estimates based on experience as
of the end of each succeeding year on a GAAP basis. The
principal difference between our GAAP basis and statutory basis
loss reserves is that our statutory basis loss reserves are
determined net of reinsurance recoverables on unpaid losses and
loss adjustment expenses. The bottom portion of the table
reconciles net reserves shown in the upper portion of the table
to gross reserves shown on our balance sheet, together with
development thereon.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
In thousands
|
|
|
Net reserves for losses and loss adjustment expenses at end of
year
|
|
$
|
11,800
|
|
|
$
|
17,385
|
|
|
$
|
24,850
|
|
|
$
|
26,564
|
|
|
$
|
37,058
|
|
Reserves re-estimated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
12,383
|
|
|
|
19,896
|
|
|
|
21,390
|
|
|
|
27,858
|
|
|
|
|
|
Two years later
|
|
|
13,506
|
|
|
|
16,887
|
|
|
|
21,255
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
10,973
|
|
|
|
16,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
11,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cumulative redundancy (deficiency):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
$
|
429
|
|
|
$
|
697
|
|
|
$
|
3,595
|
|
|
$
|
(1,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
3.6
|
%
|
|
|
4.0
|
%
|
|
|
14.5
|
%
|
|
|
(4.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
In thousands
|
|
|
Cumulative net paid losses and loss adjustment expenses at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of current year
|
|
$
|
203
|
|
|
$
|
3,996
|
|
|
$
|
3,290
|
|
|
$
|
4,668
|
|
|
$
|
6,279
|
|
One year later
|
|
|
1,966
|
|
|
|
10,159
|
|
|
|
12,124
|
|
|
|
13,329
|
|
|
|
|
|
Two years later
|
|
|
3,308
|
|
|
|
13,312
|
|
|
|
14,740
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
4,048
|
|
|
|
13,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
4,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves at end of year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for losses and loss adjustment expenses
|
|
$
|
11,800
|
|
|
$
|
17,385
|
|
|
$
|
24,850
|
|
|
$
|
26,564
|
|
|
$
|
37,058
|
|
Reinsurance recoverables on unpaid losses and loss adjustment
expenses
|
|
|
8,085
|
|
|
|
22,093
|
|
|
|
41,103
|
|
|
|
43,317
|
|
|
|
37,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses
|
|
$
|
19,885
|
|
|
$
|
39,478
|
|
|
$
|
65,953
|
|
|
$
|
69,881
|
|
|
$
|
74,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves re-estimated at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for losses and loss adjustment expenses
|
|
$
|
11,371
|
|
|
$
|
16,688
|
|
|
$
|
21,255
|
|
|
$
|
27,858
|
|
|
|
|
|
Reinsurance recoverables on unpaid losses and loss adjustment
expenses
|
|
|
8,969
|
|
|
|
16,160
|
|
|
|
29,310
|
|
|
|
41,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses
|
|
$
|
20,340
|
|
|
$
|
32,848
|
|
|
$
|
50,565
|
|
|
$
|
68,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cumulative redundancy (deficiency):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
$
|
(351
|
)
|
|
$
|
657
|
|
|
$
|
15,388
|
|
|
$
|
918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
(1.8
|
)%
|
|
|
1.7
|
%
|
|
|
23.3
|
%
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have a limited history and therefore future development
patterns may differ substantially from this data.
From the inception of our workers compensation insurance
business in 2004 through December 31, 2008, in our
traditional business, we have closed approximately 19,000
reported claims.
A.M. Best
Ratings
Many insurance buyers, agents and brokers use the ratings
assigned by A.M. Best and other rating agencies to assist
them in assessing the financial strength and overall quality of
the companies from which they are considering purchasing
insurance. In evaluating a companys financial and
operating performance, A.M. Best reviews the companys
profitability, indebtedness and liquidity, as well as our book
of business, the adequacy and soundness of our reinsurance, the
quality and estimated market value of our assets, the adequacy
of our unpaid losses and loss adjustment expenses, the adequacy
of our surplus, our capital structure, the experience and
competence of our management and our market presence. This
rating is intended to provide an independent opinion of an
insurers ability to meet our obligations to policyholders
and is not an evaluation directed at investors.
We have been informed by A.M. Best that after completion of
this offering, we may expect Guarantee Insurance to receive a
financial strength rating of A− (Excellent),
which is the fourth highest of fifteen A.M. Best rating
levels. This indicative rating assignment is subject to the
capitalization of Guarantee Insurance (and PF&C if we
acquire it) at a level that A.M. Best requires to support
the assignment of the A− rating through 2012.
We expect that the contribution of $155 million of the net
proceeds of this offering to Guarantee Insurance (and PF&C
if we acquire it) on or prior to March 4, 2010 will be
sufficient to satisfy this requirement. If we acquire PF&C
as described elsewhere in this prospectus, this rating
assignment is also
138
conditioned upon regulatory approval of a pooling agreement
between Guarantee Insurance and PF&C. Pooling is a
risk-sharing arrangement under which premiums and losses are
shared between the pool members. We expect to make the
contemplated capital contributions when we purchase PF&C or
conclude not to proceed with that transaction, in either event
prior to March 4, 2010. The prospective rating indication
we received from A.M. Best is not a guarantee of final
rating outcome. In addition, in order to maintain this rating,
Guarantee Insurance (as well as PF&C if it is acquired)
must maintain capitalization at a level that A.M. Best
requires to support the assignment of the A−
rating, and any material negative developments in our
operations, including in terms of management, earnings,
capitalization or risk profile could result in negative rating
pressure and possibly a rating downgrade. While we have expanded
our business profitably without an A.M. Best rating and we
believe that we can continue to do so with the net proceeds from
this offering, we believe that an A− rating
from A.M. Best would increase our ability to market to
large employers and create new opportunities for our products
and services in rating sensitive markets. A.M. Bests
ratings reflect its opinion of an insurance companys
financial strength and ability to meet ongoing obligations to
policyholders and are not intended for the protection of
investors.
A.M. Best ratings tend to be more important to our
alternative market customers than our traditional business
customers. Although we have expanded our business profitability
without an A.M. Best rating and we believe that we can
continue to do so with the net proceeds form this offering a
favorable rating would increase our ability to sell our
alternative market products to larger employers. We believe that
a favorable rating will open significant new markets for our
products and services. Our failure to obtain a favorable rating
could adversely affect our plans to expand into new markets.
We expect to apply to A.M. Best for a rating as soon as
practicable. We may not be given a favorable rating or if we are
given a favorable rating such rating may be downgraded, which
may adversely affect our ability to obtain business and may
adversely affect the price we can charge for the insurance
policies we write. The ratings of A.M. Best are subject to
periodic review using, among other things, proprietary capital
adequacy models, and are subject to revision or withdrawal at
any time. Other companies in our industry that have been rated
and have had their ratings downgraded have experienced negative
effects. A.M. Best ratings are directed toward the concerns
of policyholders and insurance agencies and are not intended for
the protection of investors or as a recommendation to buy, hold
or sell securities. Although we are not currently rated by
A.M. Best, if we obtain an A.M. Best rating after the
offering, our competitive position relative to other companies
will be determined in part by our A.M. Best rating.
Competition
The market for workers compensation insurance products and
risk management services is highly competitive. Competition in
our business is based on many factors, including pricing (with
respect to insurance products, either through premiums charged
or policyholder dividends), services provided, underwriting
practices, financial ratings assigned by independent rating
agencies, capitalization levels, quality of care management
services, speed of claims payments, reputation, perceived
financial strength, effective loss prevention, ability to reduce
claims expenses and general experience. In some cases, our
competitors offer lower priced products and services than we do.
If our competitors offer more competitive prices, payment plans,
services or commissions to independent agencies, we could lose
market share or have to reduce our prices in order to maintain
market share, which would adversely affect our profitability.
Our competitors are insurance companies, self-insurance funds,
state insurance pools and workers compensation insurance
service providers, many of which are significantly larger and
possess considerably greater financial, marketing, management
and other resources than we do. Consequently, they can offer a
broader range of products, provide their services nationwide and
capitalize on lower expenses to offer more competitive pricing.
We believe our principal competitors in the workers
compensation nurse case management and cost containment services
market are CorVel Corporation, GENEX Services, Inc. and various
other smaller managed care providers. In the wholesale brokerage
market, we believe PRS competes with numerous national wholesale
brokers.
139
Our main competitors for our insurance business are usually
those companies that offer a full range of services in
workers compensation underwriting, loss prevention and
claims. In the alternative market, we believe our principal
competitors are American International Group, Inc., Liberty
Mutual Insurance Company and Hartford Insurance Company, as well
as smaller regional carriers. Many of our competitors are
substantially larger and have substantially greater market share
and capital resources than we have.
State insurance regulations require maintenance of minimum
levels of surplus and of ratios of net premiums written to
surplus. Accordingly, competitors with more surplus than we
possess have the potential to expand in our markets more quickly
and to a greater extent than we can. Additionally, greater
financial resources permit a carrier to gain market share
through more competitive pricing, even if that pricing results
in reduced underwriting margins or an underwriting loss. Many of
our competitors are multi-line carriers that can price the
workers compensation insurance that they offer at a loss
in order to obtain other lines of business at a profit. If we
are unable to compete effectively, our business, financial
condition and results of operations could be materially
adversely affected. We believe that our alternative market and
traditional workers compensation insurance products and
services are competitively priced. In Florida, Indiana and New
Jersey, premium rates are fixed by the states insurance
regulators and are not a competitive factor. Insurers in those
states compete principally on policyholder dividends, the
availability of premium payment plans and service and selection
of risks to underwrite.
We also believe that our level of service, loss prevention
programs, and ability to reduce claims through our claims
management strategy are strong competitive factors that have
enabled us to retain existing policyholders and attract new
policyholders. Also, over the long run, our services provide
employers the opportunity to reduce their experience
modification factors and therefore their long-term workers
compensation costs. We believe our ability to offer alternative
market solutions to our policyholders and other parties also
provides us with a competitive advantage. Our alternative market
solutions, particularly our segregated portfolio captive plans,
permit policyholders to lower their workers compensation
insurance costs if they have favorable loss experience by
participating in the underwriting risk on the policy.
Investments
The first priority of our investment strategy is capital
preservation, with a secondary focus on achieving an appropriate
risk adjusted return. We seek to manage our investment portfolio
such that the security maturities provide adequate liquidity
relative to our expected claims payout pattern. We expect to
maintain sufficient liquidity from funds generated from
operations to meet our anticipated insurance obligations and
operating and capital expenditure needs, with excess funds
invested in accordance with our investment guidelines. Our fixed
maturity investment portfolio is managed by General
Re New England Asset Management, Inc., a registered
investment advisory firm that is wholly-owned by General Re
Corporation, a subsidiary of Berkshire Hathaway, Inc. General
Re New England Asset Management, Inc. operates under
written investment guidelines approved by Guarantee
Insurances board of directors. We pay General
Re New England Asset Management, Inc. an investment
management fee based on the market value of assets under
management.
At December 31, 2008, we allocated our portfolio into four
categories: debt securities available for sale, short-term
investments, real estate held for the production of income and
cash and cash equivalents. Cash and cash equivalents include
cash on deposit, commercial paper, short-term municipal
securities, pooled short-term money market funds and
certificates of deposit. Our debt securities available for sale
include obligations of the U.S. Treasury or
U.S. agencies, obligations of states and their
subdivisions, long-term certificates,
U.S. dollar-denominated obligations of
U.S. corporations, mortgage-backed securities,
collateralized mortgage obligations, mortgages guaranteed by the
Federal National Mortgage Association and the Government
National Mortgage Association, and asset-backed securities.
At December 31, 2006, we did not anticipate that our debt
securities would be available to be sold in response to changes
in interest rates or changes in the availability of and yields
on alternative investments and, accordingly, these securities
were classified as held to maturity and stated at amortized cost.
140
In 2007, we purchased state and political subdivision debt
securities with the intent that such securities would be
available to be sold in response to changes in interest rates or
changes in the availability of and yields on alternative
investments. Accordingly, we classified these state and
political subdivision debt securities as available for sale and
stated them at fair value, with net unrealized gains and losses
included in accumulated other comprehensive income net of
deferred income taxes.
At December 31, 2007, the increased volatility in the debt
securities market substantially increased the likelihood that we
would, on a routine basis, desire to sell debt securities and
redeploy the proceeds into alternative asset classes or into
alternative securities with better yields or lower exposure to
decreases in fair value. We anticipated that all of our debt
securities would be available to be sold in response to changes
in interest rates or changes in the availability of and yields
on alternative investments. Accordingly, we transferred all of
our debt securities that were not already classified as
available for sale from held to maturity to available for sale
and stated them at fair value, with net unrealized gains and
losses included in accumulated other comprehensive income net of
deferred income taxes. In connection with the transfer of debt
securities from held to maturity to available for sale, we
recognized a net unrealized gain of approximately $215,000,
which is included in other comprehensive income for the year
ended December 31, 2007.
Our short-term investments, which are comprised of certain debt
securities with initial maturities of one year or less, are
stated at cost, which approximates fair value. Our real estate
held for the production of income, which consists of one
residential property, is stated at amortized cost.
We employ diversification techniques and seek to balance
investment credit risk and related underwriting risks to reduce
our total potential exposure to any one business sector or
security. Our investments, including cash and cash equivalents,
had a carrying value of approximately $54.5 million as of
September 30 2009, and are summarized by type of investment
below.
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
Percentage of
|
|
|
|
Value
|
|
|
Portfolio
|
|
|
|
In thousands
|
|
Debt securities available for sale:
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
$
|
3,598
|
|
|
|
6.6
|
%
|
U.S. government agencies
|
|
|
308
|
|
|
|
0.6
|
|
Asset-backed and mortgage-backed securities
|
|
|
11,965
|
|
|
|
22.0
|
|
State and political subdivisions
|
|
|
16,376
|
|
|
|
30.0
|
|
Corporate securities
|
|
|
13,887
|
|
|
|
25.5
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
|
46,134
|
|
|
|
84.7
|
|
Short-term investments
|
|
|
671
|
|
|
|
1.2
|
|
Real estate held for the production of income
|
|
|
246
|
|
|
|
0.5
|
|
Cash and cash equivalents
|
|
|
7,452
|
|
|
|
13.6
|
|
|
|
|
|
|
|
|
|
|
Total investments, including cash and cash equivalents
|
|
$
|
54,503
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
We regularly evaluate our investment portfolio to identify
other-than-temporary
impairments in the fair values of the securities held in our
investment portfolio. None of our debt securities available for
sale in an unrealized loss position as of September 30,
2009 had a fair value of less than 90% of amortized cost. We do
not intend to sell, nor are we more likely than not to be
required to sell, these debt securities. In addition, we expect
to fully recover the amortized cost of these securities when
they mature or are called. All but one of our debt securities
available for sale in an unrealized loss position as of
September 30, 2009 were considered investment grade, which
we define as having a Standard & Poors credit rating
of BBB- or above. Our only non-investment grade security had a
fair value and amortized cost of approximately $61,000 and
$62,000, respectively, at September 30, 2009. A write-down
for
other-than-temporary
impairments would be recognized as a realized investment loss.
For the nine months ended September 30, 2009, we did not
recognize any
other-than-temporary
impairments. For 2008, we recognized an
other-than-temporary
impairment charge of approximately $875,000 related to
investments in certain equity securities purchased in 2005.
Additionally, during 2008, we recognized an
other-than-temporary-impairment
charge of approximately $350,000 on our
141
approximately $400,000 investment in certain Lehman Brothers
Holdings, Inc. bonds. On September 15, 2008, Lehman
Brothers Holdings Inc. filed a voluntary petition for relief
under Chapter 11 of Title 11 of the United States Code
in the United States Bankruptcy Court. For 2007, we did not
recognize any
other-than-temporary
impairments. We do not believe that our investment portfolio
contains any material exposure to subprime mortgage securities.
The following table shows the distribution of our fixed maturity
securities available for sale as of September 30, 2009 as
rated by S&P. Actual ratings do not differ from ratings
exclusive of guarantees by third parties as of
September 30, 2009.
|
|
|
|
|
S&P Credit Rating
|
|
|
|
|
AAA
|
|
|
50.9
|
%
|
AA
|
|
|
24.5
|
|
A
|
|
|
21.4
|
|
BBB
|
|
|
3.0
|
|
Below BBB
|
|
|
0.2
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
|
|
|
Approximately 44% of the fair value of our state and political
subdivision debt securities were guaranteed by third parties as
of September 30, 2009, as follows. We have no direct
investments in these financial guarantee companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
Total State
|
|
|
|
|
|
|
and Political
|
|
|
|
|
|
|
Subdivision
|
|
Guarantor
|
|
Fair Value
|
|
|
Securities
|
|
|
|
(In thousands)
|
|
|
|
|
|
Ambac Assurance Corporation
|
|
$
|
1,676
|
|
|
|
10.2
|
%
|
Financial Guaranty Insurance Company
|
|
|
2,682
|
|
|
|
16.4
|
|
Financial Security Assurance, Inc
|
|
|
1,675
|
|
|
|
10.2
|
|
MBIA, Inc
|
|
|
1,146
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,179
|
|
|
|
43.8
|
%
|
|
|
|
|
|
|
|
|
|
We seek to manage our investment portfolio such that the
security maturities provide adequate liquidity relative to our
expected claims payout pattern. A summary of the carrying value
of our fixed maturity securities available for sale as of
September 30, 2009, by contractual maturity, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Fair Value
|
|
|
Portfolio
|
|
|
|
(In thousands)
|
|
|
|
|
|
Due in one year or less
|
|
$
|
5,171
|
|
|
|
11.2
|
%
|
Due after one year through five years
|
|
|
15,312
|
|
|
|
33.2
|
|
Due after five years
|
|
|
11,764
|
|
|
|
25.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,247
|
|
|
|
69.9
|
|
Asset-backed and mortgage-backed securities
|
|
|
13,887
|
|
|
|
30.1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,134
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Technology
Information
Technology Environment
Our information technology department services all of our
companies, providing support and access to the information
systems infrastructure, including software applications,
hardware and communications. Our
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production data center is in a colocation facility in Boca
Raton, Florida, and our disaster recovery data center is located
in Norcross, Georgia. Our offices are connected to the two data
centers via private network. We have sought to design our data
and telecommunication infrastructure for security and
scaleability. All external data connections via the Internet go
through our data centers, which are protected by a firewall and
an intrusion detection application.
Workers
Compensation Information System
Our workers compensation policy and claims administration
platform is licensed through StoneRiver (formerly Fiserv
Solutions, Inc.). The policy module enables functionality for
new business, renewals, endorsements, cancellations and
reinstatements. The claims module utilizes workflow rules to
automate certain procedures and help ensure proper claims
adjudication compliance with jurisdictional requirements.
The software platform includes a web-based quoting system that
enables agents to rate their own applications and obtain
estimates for potential policy submissions, and a web-based
inquiry that provides secured access for agents and customers to
view their policy and billing information.
We predominately operate in a paperless environment for policy
and claims administration. The system provides electronic policy
output and unit statistical data required for reporting with
NCCI and other state reporting bureaus.
Business
Continuity/Disaster Recovery
In an effort to reduce downtime, if any, in the event of a
circumstance ranging from total loss of the production data
center to loss of individual systems, we have established a
disaster recovery data center in Norcross, Georgia. To promote
recoverability, backups are performed daily and stored locally
on network-attached storage, which is rotated off site monthly.
Employees
As of December 31, 2009, we had over 210 employees. We
have entered into employment agreements with Steven M. Mariano
and certain other executive officers. None of our employees is
subject to any collective bargaining agreement. We believe that
our employee relations are good.
Properties
Our principal executive offices are located in approximately
23,000 square feet of leased office space in three
locations in Fort Lauderdale, Florida. We also lease branch
offices consisting of approximately 7,000 square feet in
Chesterfield, Missouri, 5,450 square feet in Lake Mary,
Florida, 6,000 square feet in Sarasota, Florida and
3,000 square feet in West Conshohocken, Pennsylvania. We do
not own any real property other than for investment purposes. We
consider our leased facilities to be adequate for our current
operations. Our insurance services business and insurance
business are generally integrated throughout our offices.
Legal
Proceedings
The following is a description of certain litigation matters in
which we are either a plaintiff, a defendant or both:
Actions
Involving Progressive Employer Services, et al.
Guarantee Insurance issued certain workers compensation
insurance policies to Progressive Employer Services, LLC and
related entities (PES) during the 2006, 2007 and
2008 period. On October 24, 2008, Guarantee Insurance filed
a complaint in the Circuit Court of the 17th Judicial
Circuit, in and for Broward County, Florida, against PES and
Elite Insurance Services, Inc. On November 20, 2009, the
court granted Guarantee Insurances motion to file a third
amended complaint against those same entities and against Steven
Herrig (collectively Progressive). At the time the
original complaint was filed, Mr. Herrig was our second
largest stockholder, beneficially owning approximately 15% of
our common stock and a primary officer of
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each of the Progressive entities. The third amended complaint
seeks the recovery of more than $3.3 million in allegedly
unpaid premium and unreimbursed deductibles, along with a
statutory penalty of $6.3 million related to PESs
alleged underreporting of payroll, misclassification of
employees and underpayment of premium. Guarantee Insurance
further alleges that PES failed to allow statutorily required
audits, and if Guarantee Insurance prevails on those claims, it
may be entitled to more than $80 million for unpaid premium
and associated penalties. Guarantee Insurance has further claims
for PESs failure to provide loss control services.
Progressive asserted a seven-count counterclaim, seeking a
declaratory judgment relating to its alleged rights under a
Collateral Agreement, an accounting and damages related to
alleged collateral overages, damages for various alleged fee
payments and commissions, an offset for alleged refunds due
Progressive, and damages for alleged reporting failures to the
NCCI.
In March 2009, Guarantee Insurance exercised a call option on
all 215,263 shares of our common stock owned by Westwind Holding
Company, or Westwind, and beneficially owned by Mr. Herrig,
to offset deficits in the segregated portfolio cell created to
reinsure the policy issued to PES as we believe is permitted in
an agreement between the parties. On May 11, 2009, Westwind
filed a complaint in the Circuit Court of the 17th Judicial
Circuit in and for Broward County, Florida related to the
exercise of the call option claiming breach of contract and
conversion, seeking damages of $2.2 million and other
damages as determined by the court. These actions remain largely
in the discovery phase, although our August 2009 motions to
dismiss and for partial summary judgment are pending.
On February 1, 2009, Guarantee Insurance filed a complaint
in the Circuit Court of the 17th Judicial Circuit, in and
for Broward County, Florida for declaratory judgment against
SUNZ Insurance Company, amended by stipulation of the parties on
May 5, 2009 to include PES, Westwind, Elite Insurance
Agency and Mr. Herrig as additional defendants. The
declaratory judgment actions seek reimbursement of claims paid
by Guarantee Insurance under the insurance policy issued to PES.
Guarantee Insurance cancelled PESs master policy on
November 13, 2008, due to PESs failure to pay
premium. However, on October 20, 2008, without notifying or
otherwise informing Guarantee Insurance, PES obtained duplicate
insurance coverage under a master workers compensation
insurance policy from SUNZ Insurance Company, which we believe
is an affiliate of Westwind. This resulted in PES having
duplicate coverage under two insurance policies for the period
of October 20, 2008 through November 13, 2008.
Pursuant to Florida law, where there is duplicate coverage, the
policy with the earlier effective date is automatically
cancelled and the second policy becomes the only effective
policy. On May 27, 2009, SUNZ and PES filed a counterclaim
alleging that Guarantee Insurance breached its insurance
policies with PES in connection with certain workers
compensation claims. The counterclaim seeks declaratory relief
as to Guarantee Insurances obligations under these
insurance policies, and also seeks unspecified damages for
expenses incurred in covering the disputed claims. This case is
currently in the discovery phase.
If we prevail in any or all of these actions, it is uncertain
whether Progressive will have sufficient assets to satisfy any
judgment.
Matrix
Employee Leasing, Inc. v. Guarantee Insurance
On September 18, 2009, Matrix Employee Leasing, or Matrix,
filed suit in the Circuit Court of the 4th Judicial Circuit
in and for Duval County Florida, against Guarantee Insurance for
breach of contract and declaratory relief. Matrix was a
policyholder of Guarantee Insurance under a large deductible
policy until Matrix moved to another carrier on October 1,
2009. Matrixs complaint alleges bad faith notice of
cancellation of its policy and that Guarantee Insurance paid
excessive nurse case management and bill review fees to PRS and
that PRS and Guarantee Insurances relationship presented a
conflict of interest. Matrix seeks recovery of
approximately $700,000. On October 20, 2009, we filed a
motion to dismiss the complaint for failure to state a claim
upon which relief can be granted that is pending.
Guarantee
Insurance v. CRL Management, LLC, et al.
On November 9, 2005, Guarantee Insurance filed suit in the
Circuit Court of the 17th Judicial Circuit, in and for
Broward County, Florida, against CRL Management, LLC and its
principal, C.R. Langston III, alleging
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that CRL Management, Guarantee Insurances former
investment manager, and Langston caused a loss in Guarantee
Insurances investment account. Our claim is based on the
allegation that Langston was not licensed as an investment
advisor under Florida or federal law. CRL Management and
Langston filed a counterclaim against Guarantee Insurance and
Steven M. Mariano, our Chairman, President and Chief Executive
Officer, seeking payment of a promissory note in the amount of
$118,500 purportedly executed by Mr. Mariano, plus
interest, and payment of lost investment management fees and
other charges due to CRL Management under an investment
management agreement. In our response to the counterclaims we
denied all allegations. This case is still in discovery, and no
trial date has been set. If we prevail in this litigation, it is
uncertain whether CRL Management or Langston will have
sufficient assets to satisfy any judgment.
American
Insurance Managers, et al. v. Guarantee Insurance et
al.
American Insurance Managers, Inc., or AIM, filed suit on
May 4, 2007 in the Second Judicial Circuit of South
Carolina against Guarantee Insurance, Steven M. Mariano and
others alleging fraud, breach of contract and misappropriation
of trade secret claims. These claims arise out of a producer
agreement and related confidentially agreement which Guarantee
Insurance entered into in March 2004. The producer agreement
gave AIM the exclusive right to market and sell Guarantee
Insurances products to professional employer
organizations, or PEOs. AIM alleges that we breached this
agreement in late 2004 and that we have used and continue to use
their proprietary ideas and methods in offering insurance
products to PEOs. AIM is seeking damages for lost commissions in
the amount of $8 million and is also seeking exemplary
damages of up to two-times actual damages as provided under
South Carolina law. We removed this case to federal court in
South Carolina and have denied all of AIMs allegations. In
July 2007 the parties agreed to stay the litigation and submit
to binding arbitration. The arbitration is currently scheduled
for December 7, 2009.
While it is difficult to ascertain the ultimate outcome of any
of the matters described above at this time, we believe, based
upon facts known to date, that our positions are meritorious and
that the claims and counterclaims against us have no merit. We
are vigorously disputing liability and vigorously asserting our
positions in the pending litigation and arbitration.
We are party to numerous other claims and lawsuits that arise in
the normal course of our business, most of which involve claims
under policies that we underwrite as an insurer. We believe that
the resolution of these claims and lawsuits will not have a
material adverse effect on our business, financial condition or
results of operations.
Regulation
We are subject to regulation by government agencies in the
states in which we do business. The nature and extent of such
regulation varies by jurisdiction but typically involve the
following: standards of solvency, including risk-based capital
requirements, restrictions on the nature, quality and
concentration of investments, restrictions on the types of terms
that Guarantee Insurance can include in its insurance policies,
mandates that may affect wage replacement and medical care
benefits paid, restrictions on the way rates are developed and
premiums are determined, limitations on the manner in which
general agencies may be appointed, required methods of
accounting, establishment of reserves for unearned premiums,
losses and other purposes, limitations on our ability to
transact business with affiliates, requirements pertaining to
mergers, acquisitions and divestitures involving insurance
companies, licensing requirements and approvals that affect
insurance companies ability to do business, compliance
with financial and medical privacy laws, potential assessments
for the satisfaction of claims under insurance policies issued
by impaired, insolvent or failed insurance companies; and
limitations on the amount of dividends that insurance
subsidiaries may pay to the parent holding company.
In addition, state regulatory examiners perform periodic
examinations of insurance companies. Insurance regulations are
generally intended for the protection of policyholders, not
insurance companies or their stockholders.
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Changes in individual state regulation of workers
compensation may create a greater or lesser demand for some or
all of our products and services or require us to develop new or
modified products or services in order to meet the needs of the
marketplace and to compete effectively in the marketplace.
Premium
Rate Restrictions and Administered Pricing States
Among other matters, state laws regulate not only the amounts
and types of workers compensation benefits that must be
paid to injured workers, but in some instances, the premium
rates that may be charged to insure employers for those
liabilities.
The regulatory agencies in Florida, Indiana and New Jersey set
the premium rates we may charge for our insurance products. The
Florida OIR approves manual premium rates for each of the
employment classification codes prepared and filed by NCCI, the
authorized state rating organization. In accordance with
Floridas
consent-to-rate
program, Guarantee Insurance is authorized by law to deviate
from these approved rates for up to 10% of the policies we write
in Florida. The Florida Department of Financial Services
Division of Workers Compensation regulates levels of
benefit payments to insured employees. Similar agencies set
standard rates for workers compensation insurance in the
other administered pricing states.
Holding
Company Regulation
Nearly all states have enacted legislation that regulates
insurance holding company systems. Each insurance company in a
holding company system is required to register with the
insurance supervisory agency of its state of domicile and
furnish information concerning the operations of companies
within the holding company system that may materially affect the
operations, management or financial condition of the insurers
within the system. Under these laws, the respective state
insurance departments may examine Guarantee Insurance at any
time, require disclosure of material transactions with its
affiliates and require prior notice of or approval for certain
transactions. Under these laws, all material transactions among
companies within the holding company system, including sales,
loans, reinsurance agreements and service agreements, generally
must be fair and reasonable and, if material or of a specified
category, require prior notice and approval or non-disapproval
by the chief insurance regulator of the state of domicile of the
insurance company.
Change
of Control and Stock Ownership Restrictions
The insurance holding company laws of nearly all states require
advance approval by the respective state insurance departments
of any change of control of an insurer domiciled in that state.
In the state of Florida, where Guarantee Insurance is domiciled,
advance regulatory approval is required for an acquisition of 5%
or more of the voting securities of a domestic insurance company
or any entity that controls a domestic insurance company.
However, a party may acquire less than 10% of such voting
securities without prior approval if the party files a
disclaimer of affiliation and control. In addition, insurance
laws in some states contain provisions that require
pre-notification to the insurance commissioners of a change of
control of a non-domestic insurance company licensed in those
states.
Any future transactions that would constitute a change of
control of Guarantee Insurance, including a change of control of
Patriot Risk Management would generally require the party
acquiring control to obtain the prior approval of the Florida
OIR and may require pre-notification in the states where
pre-notification provisions have been adopted. Obtaining these
approvals may result in the material delay of, or deter, any
such transaction. Additionally, these laws may discourage
potential acquisition proposals and may delay, deter or prevent
a change of control of Patriot or its subsidiaries, including
through transactions, and in particular unsolicited
transactions, that some or all of the stockholders of Patriot
might consider to be desirable.
State
Insurance Regulation
Insurance companies are subject to regulation and supervision by
the department of insurance in the state in which they are
domiciled and, to a lesser extent, other states in which they
conduct business. As a Florida domestic insurer, Guarantee
Insurance is primarily subject to regulation and supervision by
the Florida OIR. The Florida OIR and other state insurance
departments have broad regulatory, supervisory and
administrative
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powers, including among other things, the power to grant and
revoke licenses to transact business, impose fines or other
penalties, license agencies, set the standards of solvency to be
met and maintained, regulate trade and claim practices,
determine the nature of, and limitations on, investments and
dividends, approve policy forms and rates in some states,
periodically examine financial statements, determine the form
and content of required financial statements, and periodically
examine market conduct and trade practices.
Guarantee Insurance contracts with Perr & Knight,
Inc., for the performance of specific insurer functions, such as
regulatory filings of new rates, and, when applicable, changes
in insurance policy forms. Perr & Knight, Inc. also
provides competitor analysis for Guarantee Insurance through
market rate comparisons and general actuarial analysis on the
impact of regulatory changes on Guarantee Insurance.
Perr & Knight, Inc. also provides Guarantee Insurance
with regulatory monitoring services, providing daily updates on
regulatory pronouncements by states where Guarantee Insurance is
licensed, and assisting with the implementation of changes
required by these pronouncements.
Detailed annual and quarterly financial statements and other
reports are required to be filed with the department of
insurance in all states in which Guarantee Insurance is licensed
to transact business. The financial statements of Guarantee
Insurance are subject to periodic examination by the department
of insurance in each state in which it is licensed to do
business.
In addition, many states have laws and regulations that limit an
insurers ability to withdraw from a particular market. For
example, states may limit an insurers ability to cancel or
not renew policies. Furthermore, certain states prohibit an
insurer from withdrawing from one or more lines of business in
the state, except pursuant to a plan that is approved by the
state insurance department. The state insurance department may
disapprove a plan that may lead to market disruption. Laws and
regulations that limit cancellation and non-renewal and that
subject program withdrawals to prior approval requirements may
restrict our ability to exit unprofitable markets.
Stock insurance companies are subject to Florida statutes
related to excess profits for workers compensation
insurance companies. Excess profits are calculated based upon a
complex statutory formula, which is applied over rolling
three-year periods. Companies are required to file annual excess
profits forms, and they are required to return so-called
excess profits to policyholders in the form of a
cash refund or credit toward the future purchase of insurance.
To date, we have not been required to return any excess profits,
and we have not made any provision for the return of excess
profits.
Insurance producers are subject to regulation and supervision by
the department of insurance in each state in which they are
licensed. Patriot Risk Services, Inc. is currently licensed as
an insurance agent or producer in 19 jurisdictions. Patriot
Insurance Management Company is currently licensed as an
insurance agent or producer in 34 jurisdictions. Patriot
Underwriters, Inc. is licensed as an insurance producer in 39
jurisdictions. Patriot General Agency, Inc. is licensed as an
insurance producer in 39 jurisdictions. We plan to utilize
Patriot Underwriters, Inc. and Patriot General Agency, Inc. to
provide general agency and general underwriting services to
third parties and cease providing general agency services
through Patriot Risk Services, Inc. and Patriot Insurance
Management Company. In each jurisdiction, these subsidiaries are
subject to regulations relating to licensing, sales and
marketing practices, premium collection and safekeeping, and
other market conduct practices.
State
Insurance Department Examinations
Guarantee Insurance is subject to periodic examinations by state
insurance departments in the states in which it is licensed. In
February 2008, the Florida OIR completed its financial
examination of Guarantee Insurance as of and for the year ended
December 31, 2006. In its examination report, the Florida
OIR made a number of findings relating to Guarantee
Insurances failure to comply with corrective comments made
in earlier examination reports by the Florida OIR as of the year
ended December 31, 2004 and by the South Carolina
Department of Insurance as of the year ended December 31,
2005. The Florida OIR also made a number of proposed adjustments
to the statutory financial statements of Guarantee Insurance for
the year ended December 31, 2006, attributable to, among
other things, corrections of a series of accounting errors and
an upward adjustment in Guarantee Insurances reserves for
unpaid losses and loss adjustment expenses. These
147
proposed adjustments, which resulted in a $119,000 net
decrease in Guarantee Insurances reported policyholders
surplus, did not cause Guarantee Insurance to be in violation of
a consent order issued by the Florida OIR in 2006 in connection
with the redomestication of Guarantee Insurance from South
Carolina to Florida that requires Guarantee Insurance to
maintain a statutory policyholders surplus of the greater of
$9.0 million or 10% of total liabilities excluding taxes,
expenses and other obligations due or accrued, and Guarantee
Insurance was not required to file an amended 2006 annual
statement with the Florida OIR reflecting these adjustments.
In connection with the Florida OIR examination report for the
year ended December 31, 2006, the Florida OIR issued a
consent order requiring Guarantee Insurance to pay a penalty of
$50,000, pay $25,000 to cover administrative costs and undergo
an examination prior to June 1, 2008 to verify that it has
addressed all of the matters raised in the examination report.
In addition, the consent order requires Guarantee Insurance to
hold annual stockholder meetings, maintain complete and accurate
minutes of all stockholder and board of director meetings,
implement additional controls and review procedures for its
reinsurance accounting, perform accurate and timely
reconciliations for certain accounts, establish additional
procedures in accordance with Florida OIR information technology
specialist recommendations, correctly report all annual
statement amounts, continue to maintain adequate loss and loss
adjustment reserves and continue to maintain a minimum statutory
policyholders surplus of the greater of $9.0 million or 10%
of total liabilities excluding taxes, expenses and other
obligations due or accrued. The consent order required Guarantee
Insurance to provide documentation of compliance with these
requirements. In March 2008, the Florida OIR engaged a third
party to conduct a target financial condition examination of
Guarantee Insurance, the scope of which was to review our
compliance with the findings in the Florida OIR exam report and
related consent order for the year ended December 31, 2006.
The target financial condition examination was performed as of
August 20, 2008, and the report was issued on
August 26, 2008. Except for certain exceptions which
management believes to be immaterial and subsequently mitigated
or otherwise remedied, the target financial condition
examination found that Guarantee Insurance was in compliance
with all findings in the Florida OIR exam report and related
consent order for the year ended December 31, 2006.
In May 2009 in connection with a Florida OIR targeted
examination, we advised the Florida OIR that all intercompany
receivables would be settled within 30 days. As of
September 30, 2009, Guarantee Insurance had approximately
$2.1 million in intercompany receivables that had been
outstanding for more than 30 days, and approximately
$1.0 million that had been outstanding for more than
90 days. Because some of the intercompany receivables have
been outstanding for more than 30 days, the Florida OIR may
object to these transactions or take other regulatory action
against us. In addition, under statutory accounting rules,
Guarantee Insurance is required to record the amount of any
intercompany receivables that have been outstanding for more
than 90 days as a nonadmitted asset. Therefore, to the
extent that any intercompany receivables have been outstanding
for more than 90 days, Guarantee Insurance will be required
to nonadmit the amount of such receivables, which will result in
a corresponding decrease in the surplus of Guarantee Insurance.
If the decrease in Guarantee Insurances surplus were to
cause Guarantee Insurance to be out of compliance with certain
ratios or minimum surplus levels as required by the Florida OIR,
we would be required to reduce our insurance writings or add
capital to Guarantee Insurance, or face possible regulatory
action.
Guaranty
Fund Assessments
In most of the states where Guarantee Insurance is licensed to
transact business, there is a requirement that property and
casualty insurers doing business within each such state
participate in a guaranty association, which is organized to pay
contractual benefits owed pursuant to insurance policies issued
by impaired, insolvent or failed insurers. These associations
levy assessments, up to prescribed limits, on all member
insurers in a particular state on the basis of the proportionate
share of the written premium in the state by member insurers in
the lines of business in which the impaired, insolvent or failed
insurer is engaged. Some states permit member insurers to
recover assessments paid through full or partial premium tax
offsets.
Property and casualty insurance company insolvencies or failures
may result in additional guaranty association assessments
against Guarantee Insurance in the future. At this time, we are
unable to determine the impact, if any, that such assessments
may have on our business, financial condition or results of
operations.
148
We are not aware of any liabilities for guaranty fund
assessments with respect to insurers that are currently subject
to insolvency proceedings.
Residual
Market Programs
Many of the states in which we conduct business or intend to
conduct business require that all licensed insurers participate
in a program to provide workers compensation insurance to
those employers who have not or cannot procure coverage from a
carrier on a negotiated basis. Our level of required
participation in such programs is generally determined by
calculating the volume of our voluntary business in that state
as a percentage of all voluntary business in that state by all
insurers. The resulting factor is the proportion of premium we
must accept as a percentage of all of premiums for all policies
written in that states residual market program.
Companies generally can fulfill their residual market
obligations by either issuing insurance policies to employers
assigned to them, or participating in a reinsurance pool where
the results of all policies provided through the pool are shared
by the participating companies. Currently, Guarantee Insurance
participates in a reinsurance pooling arrangement with NCCI. For
the year ended December 31, 2008, Guarantee Insurance had
assumed premiums written from the NCCI pool of approximately
$1.0 million.
Second
Injury Funds
A number of states operate trust funds that reimburse insurers
and employers for claims paid to injured employees for
aggravation of prior conditions or injuries. The state-managed
trust funds are funded through assessments against insurers and
self-insurers providing workers compensation coverage in
the specific state. The aggregate amount of cash paid by
Guarantee Insurance for assessments by state-managed second
injury trust funds for the years ended December 31, 2008,
2007 and 2006 were approximately $579,000, $708,000 and
$354,000, respectively. Guarantee Insurance has not received any
recoveries from state-managed trust funds.
Dividend
Limitations
At the time we acquired Guarantee Insurance, it had a large
statutory unassigned deficit. See Note 13 to our
Consolidated Financial Statements. As of December 31, 2008,
Guarantee Insurances statutory unassigned deficit was
$94.3 million. Under Florida law, insurance companies may
only pay dividends out of available and accumulated surplus
funds derived from realized net operating profits on their
business and net realized capital gains, except under limited
circumstances with the prior approval of the Florida OIR.
Moreover, Florida law has several different tests that limit the
payment of dividends, without the prior approval of the Florida
OIR, to an amount generally equal to 10% of the surplus or gain
from operations, with additional restrictions. However, pursuant
to a consent order issued by the Florida OIR on
December 29, 2006 in connection with the redomestication of
Guarantee Insurance from South Carolina to Florida, Guarantee
Insurance is prohibited from paying dividends, without approval
of the Florida OIR, until December 29, 2009. Therefore, it
is unlikely that Guarantee Insurance will be able to pay
dividends for the foreseeable future without prior approval of
the Florida OIR.
Privacy
Regulations
In 1999, Congress enacted the Gramm-Leach-Bliley Act, which,
among other things, protects consumers from the unauthorized
dissemination of certain personal information. Subsequently, a
majority of states have implemented additional regulations to
address privacy issues. These laws and regulations apply to all
financial institutions, including insurance and finance
companies, and require us to maintain appropriate policies and
procedures for managing and protecting certain personal
information of our policyholders and to fully disclose our
privacy practices to our policyholders. We may also be subject
to future privacy laws and regulations, which could impose
additional costs and impact our business, financial condition
and results of operations.
In 2000, the National Association of Insurance Commissioners, or
the NAIC, adopted the Privacy of Consumer Financial and Health
Information Model Regulation, which assisted states in
promulgating
149
regulations to comply with the Gramm-Leach-Bliley Act. In 2002,
to further facilitate the implementation of the
Gramm-Leach-Bliley Act, the NAIC adopted the Standards for
Safeguarding Customer Information Model Regulation. Several
states have now adopted similar provisions regarding the
safeguarding of policyholder information. We have established
policies and procedures to comply with the Gramm-Leach-Bliley
Act and other similar privacy laws and regulations.
Federal
and State Legislative and Regulatory Changes
From time to time, various regulatory and legislative changes
have been proposed in the insurance industry. Among the
proposals that have in the past been or are at present being
considered are the possible introduction of federal regulation
in addition to, or in lieu of, the current system of state
regulation of insurers and proposals in various state
legislatures (some of which proposals have been enacted) to
conform portions of their insurance laws and regulations to
various model acts adopted by the NAIC. We are unable to predict
whether any of these laws and regulations will be adopted, the
form in which any such laws and regulations would be adopted or
the effect, if any, these developments would have on our
business, financial condition and results of operations.
On November 26, 2002, in response to the tightening of
supply in certain insurance and reinsurance markets resulting
from, among other things, the September 11, 2001 terrorist
attacks, the Terrorism Risk Insurance Act of 2002, or TRIA, was
enacted. TRIA is designed to ensure the availability of
commercial insurance coverage for losses resulting from acts of
terrorism in the United States. This law established a federal
assistance program to help the property and casualty insurance
industry cover claims related to future terrorism-related losses
and requires such companies to offer coverage for certain acts
of terrorism. The assistance provided to insurers under TRIA is
subject to certain deductibles and other limitations and
restrictions. The Terrorism Risk Insurance Extension Act of 2005
extended the federal assistance program through
December 31, 2007 and also established a per-event
threshold that must be met before the federal program becomes
applicable and increased insurers deductibles. The
Terrorism Risk Insurance Program Reauthorization Act of 2007
extended the federal assistance program through
December 31, 2014 and removed the restriction that formerly
limited the program to the coverage of acts of terrorism
committed on behalf of foreign persons or interests.
The
National Association of Insurance Commissioners, or
NAIC
The NAIC is a group formed by state insurance commissioners to
discuss issues and formulate policy with respect to regulation,
reporting and accounting of insurance companies. Although the
NAIC has no legislative authority and insurance companies are at
all times subject to the laws of their respective domiciliary
states and, to a lesser extent, other states in which they
conduct business, the NAIC is influential in determining the
form in which such laws are enacted. Model insurance laws,
regulations and guidelines, referred to herein generically as
Model Laws, have been promulgated by the NAIC as a
minimum standard by which state regulatory systems and
regulations are measured.
Adoption of state laws that provide for substantially similar
regulations to those described in the Model Laws is a
requirement for accreditation by the NAIC. The NAIC provides
authoritative guidance to insurance regulators on current
statutory accounting issues by promulgating and updating a
codified set of statutory accounting principles in its
Accounting Practices and Procedures manual. The Florida OIR has
adopted these codified statutory accounting principles.
The key financial ratios of NAICs Insurance Regulatory
Information System, or IRIS, which ratios were developed to
assist insurance departments in overseeing the financial
condition of insurance companies, are reviewed by experienced
financial examiners of the NAIC and state insurance departments
to select those companies that merit highest priority in the
allocation of the regulators resources. IRIS identifies 13
financial ratios and specifies usual values for each
ratio. Departure from the usual values on four or more of the
ratios can lead to inquiries from individual state insurance
commissioners as to certain aspects of an insurers
business. A ratio that falls outside the usual range is not
considered a failing result. Rather, unusual values are
150
regarded as part of an early warning monitoring system.
Financially sound companies may have several ratios outside the
usual ranges because of specific transactions that have the
effect of producing unusual results.
As of December 31, 2008 and for the year then ended,
Guarantee Insurance had three IRIS ratios outside the usual
range, as set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
|
Ratio
|
|
Usual Range
|
|
Results
|
|
|
Reasons for Unusual Results
|
|
Change in Net Premiums Written
|
|
Less than 33%, greater than -33%
|
|
|
58.0
|
%
|
|
Our gross premiums written increased by 37% in 2008 compared to
2007. In addition, the portion of our gross premiums written
subject to quota share reinsurance was lower in 2008 compared to
2007 due to (i) an increase in traditional business, which
generally has a higher retention than alternative market
business and (ii) the commutation of certain alternative
market segregated portfolio captive cell treaties in 2008. We
believe that the premium growth in 2008 was prudent and did not
reflect any material pricing inadequacy or any deterioration in
underwriting discipline.
|
Surplus Aid to Policyholders Surplus
|
|
Less than 15%
|
|
|
57.0
|
%
|
|
Under statutory accounting principles, direct policy acquisition
costs are recognized as an expense at the inception of the
policy year rather than deferred over the life of the underlying
insurance contracts. Likewise, ceding commissions are recognized
as an offset to expenses at the inception of the policy year.
The ratio of surplus aid to policyholders surplus measures
the degree to which statutory surplus benefits from the
recognition of ceding commissions in advance of the emergence of
underlying ceded earned premium. Because of the nature of our
alternative market business, whereby segregated portfolio
captives generally assume between 50% and 90% of the risk, our
results typically generate a surplus aid unusual value relative
to the industry as a whole. In addition, this ratio was higher
in 2008 in connection with a quota share reinsurance agreement
pursuant to which we ceded 37.83% of our gross unearned premium
reserves as of December 31, 2008.
|
Estimated Current Reserve Deficiency to Policyholders
Surplus
|
|
Less than 25%
|
|
|
73.0
|
%
|
|
The estimated current reserve deficiency to policyholders
surplus ratio compares the ratio of (i) current year-end
reserves for losses and loss adjustment expenses to current year
net premiums earned to (ii) the prior two-year average
ratio of year end reserves, developed to current year end, to
prior two year average net premiums earned. We believe that this
ratio fell outside the usual range in connection with favorable
accident year 2008 loss experience, together with additional net
premiums earned in 2008 attributable to audit adjustments on
prior year policy years.
|
151
Statutory
Accounting Principles
Statutory accounting principles, or SAP, are a basis of
accounting developed to assist insurance regulators in
monitoring and regulating the solvency of insurance companies.
SAP is primarily concerned with measuring an insurers
surplus to policyholders. Accordingly, statutory accounting
focuses on valuing assets and liabilities of insurers at
financial reporting dates in accordance with applicable
insurance laws and regulations in each insurers
domiciliary state.
Generally accepted accounting principles, or GAAP, are concerned
with a companys solvency, but are also concerned with
other financial measurements, principally income and cash flows.
Accordingly, GAAP gives more consideration to appropriate
matching of revenue and expenses and accounting for
managements stewardship of assets than does SAP. As a
direct result, different assets and liabilities and different
amounts of assets and liabilities will be reflected in financial
statements prepared in accordance with GAAP as opposed to SAP.
Statutory accounting principles established by the NAIC and
adopted by the Florida OIR determine, among other things, the
amount of statutory surplus and statutory net income of
Guarantee Insurance.
Risk-Based
Capital Regulations and Requirements
Insurance operations are subject to various leverage tests,
which are evaluated by regulators and rating agencies. Florida
law prohibits workers compensation insurance companies
from exceeding a gross premiums
written-to-surplus
ratio of 8.0 to 1 and a net premiums
written-to-surplus
ratio of 3.2 to 1. Guarantee Insurances gross premiums
written-to-surplus
ratio and net premiums
written-to-surplus
ratios were 6.4 to 1 and 2.5 to 1, respectively.
Under Florida law, domestic property and casualty insurers must
report their risk-based capital based on a formula developed and
adopted by the NAIC that attempts to measure statutory capital
and surplus needs based on the risks in the insurers mix
of products and investment portfolio. Risk-based capital is a
method of measuring the amount of capital appropriate for an
insurance company to support its overall business operations in
light of its size and risk profile. Risk-based capital standards
are used by regulators to determine appropriate regulatory
actions for insurers that show signs of weak or deteriorating
conditions. Under the formula, a company determines its
risk-based capital by taking into account certain
risks related to the insurers assets (including risks
related to its investment portfolio and ceded reinsurance) and
the insurers liabilities (including underwriting risks
related to the nature and experience of its insurance business).
The Risk-Based Capital Model Act provides for four different
levels of regulatory attention depending on the ratio of an
insurance companys total adjusted capital to its
risk-based capital.
The Company Action Level is triggered if a
companys total adjusted capital is less than 200% but
greater than or equal to 150% of its risk-based capital. At the
Company Action Level, a company must submit a
comprehensive plan to the regulatory authority that discusses
proposed corrective actions to improve its capital position. A
company whose total adjusted capital is between 250% and 200% of
its risk-based capital is subject to a trend test. A trend test
calculates the greater of any decrease in the margin (i.e., the
amount in dollars by which an insurance companys adjusted
capital exceeds its risk-based capital) between the current year
and the prior year and between the current year and the average
of the past three years, and assumes that the decrease could
occur again in the coming year.
The Regulatory Action Level is triggered if an
insurance companys total adjusted capital is less than
150% but greater than or equal to 100% of its risk-based
capital. At the Regulatory Action Level, the
regulatory authority will perform a special examination of the
insurance company and issue an order specifying corrective
actions that must be followed.
The Authorized Control Level is triggered if an
insurance companys total adjusted capital is less than
100% but greater than or equal to 70% of its risk-based capital,
at which level the regulatory authority may take any action it
deems necessary, including placing the insurance company under
regulatory control.
152
The Mandatory Control Level is triggered if an
insurance companys total adjusted capital is less than 70%
of its risk-based capital, at which level regulatory authority
is mandated to place the insurance company under its control.
At December 31, 2008, Guarantee Insurances risk-based
capital level exceeded the minimum level that would trigger
regulatory attention. Guarantee Insurance is subject to a
consent order issued by the Florida OIR in 2006 that requires
Guarantee Insurance to maintain a minimum statutory
policyholders surplus of the greater of $9.0 million or 10%
of total liabilities excluding taxes, expenses and other
obligations due or accrued. At December 31, 2008, Guarantee
Insurances statutory surplus was approximately
$18.3 million. At December 31, 2008, 10% of total
liabilities excluding taxes, expenses and other obligations due
or accrued were approximately $10.2 million.
PUI
and PRS Licensing
Patriot Underwriters, Inc., Patriot General Agency, Inc. and
certain subsidiaries of PRS Group, Inc. are authorized to act as
insurance producers under firm licenses or licenses held by
their officers in 46 jurisdictions. In each state where
these subsidiaries transact insurance services business, they
are generally subject to regulation relating to licensing, sales
and marketing practices, premium collection and safekeeping, and
other market conduct practices. Their business depends on the
validity of, and continued good standing under, the licenses and
approvals pursuant to which they operate, as well as compliance
with pertinent regulations. We devote significant effort toward
maintaining licenses for these subsidiaries and managing their
operations and practices to help ensure compliance with a
diverse and complex regulatory structure. In some instances,
these subsidiaries follow practices based on interpretations of
laws and regulations generally followed by the industry, which
may prove to be different from the interpretations of regulatory
authorities.
Third-party administration services which we provide through PUI
and PRS are subject to licensing requirements and regulation
under the laws of each of the jurisdictions in which they
operate.
In order to expand our services, certain of the PUI and PRS
entities will need to obtain additional licenses to allow us to
provide insurance services. Licensing laws and regulations vary
from state to state. In all states, the applicable licensing
laws and regulations are subject to amendment or interpretation
by regulatory authorities. Generally such authorities are vested
with relatively broad and general discretion as to the granting,
renewing and revoking of licenses and approvals. Licenses may be
denied or revoked for various reasons, including the violation
of regulations and conviction of crimes. Possible sanctions
which may be imposed by regulatory authorities include the
suspension of individual employees, limitations on engaging in a
particular business for specified periods of time, revocation of
licenses, censures, redress to clients and fines.
153
MANAGEMENT
Directors,
Executive Officers and Key Employees
The table below provides information about our directors,
executive officers and key employees. Our directors are divided
into three classes with the number of directors in each class as
nearly equal as possible. Each director serves for a three-year
term and until their successors are elected and qualified.
Executive officers serve at the request of our board of
directors.
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Name
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|
Age
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|
Position
|
|
Executive Officer and Directors
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|
|
|
|
|
|
Steven M. Mariano(1)
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|
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45
|
|
|
Chairman of the Board, President and Chief Executive Officer
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Michael W. Grandstaff
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|
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50
|
|
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Senior Vice President and Chief Financial Officer
|
Charles K. Schuver
|
|
|
53
|
|
|
Senior Vice President and Chief Underwriting Officer, Guarantee
Insurance
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Timothy J. Ermatinger
|
|
|
60
|
|
|
Chief Executive Officer, PRS
|
Richard G. Turner
|
|
|
59
|
|
|
Senior Vice President of Alternative Markets
|
Theodore G. Bryant
|
|
|
39
|
|
|
Senior Vice President, Counsel and Secretary
|
Richard F. Allen(3)
|
|
|
76
|
|
|
Director
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Robert P. Cuthbert(2)
|
|
|
62
|
|
|
Director
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Robert E. Dean(2)
|
|
|
58
|
|
|
Director
|
John R. Del Pizzo(3)
|
|
|
62
|
|
|
Director
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Ronald P. Formento Sr.(2)
|
|
|
66
|
|
|
Director
|
Raymond C. Groth(1)
|
|
|
62
|
|
|
Director
|
C. Timothy Morris(2)
|
|
|
59
|
|
|
Director
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Austin J. Shanfelter(3)
|
|
|
52
|
|
|
Director
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Timothy J. Tompkins(1)
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|
|
48
|
|
|
Director
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|
|
|
|
|
|
|
Key Employees
|
|
|
|
|
|
|
Dean D. Watters
|
|
|
53
|
|
|
Senior Vice President of Business Development
|
Maria C. Allen
|
|
|
57
|
|
|
Vice President Client Services/Corporate
Claims, Guarantee Insurance
|
Gary W. Roche
|
|
|
45
|
|
|
Vice President Operations
|
Robert G. Zamary, Jr.
|
|
|
43
|
|
|
Vice President Claims Management, PRS
|
Josephine L. Graves
|
|
|
44
|
|
|
President, Patriot Risk Services, Inc.
|
John J. Rearer
|
|
|
51
|
|
|
Vice President Chief Underwriting Officer, PUI
|
Michael J. Sluka
|
|
|
57
|
|
|
Vice President and Chief Accounting Officer
|
|
|
|
(1) |
|
Term expires in 2009. |
|
(2) |
|
Term expires in 2010. |
|
(3) |
|
Term expires in 2011. |
Set forth below is certain background information relating to
our executive officers.
Steven M. Mariano Chairman of the Board,
President and Chief Executive Officer of Patriot Risk
Management. Mr. Mariano, our founder, is an entrepreneur
and businessman with 20 years of experience in the
insurance industry. Mr. Mariano founded Strategic
Outsourcing Inc., a professional staffing company, which was
sold to Union Planters Bank (Regions Bank, NYSE) in 2000.
Mr. Mariano formed Patriot Risk Management during 2003 to
acquire Guarantee Insurance. Shortly thereafter he formed PRS to
provide fee-based care management, captive consulting, bill
review, network development and other claims related services
154
to Guarantee Insurance and other clients. Mr. Mariano has
served as Chairman of the Board and Chief Executive Officer of
Guarantee Insurance since 2003. He is responsible for the
overall direction and management of our operations and financial
and strategic planning.
Michael W. Grandstaff, CPA Senior Vice
President and Chief Financial Officer of Patriot Risk
Management. Mr. Grandstaff is the principal financial
officer for Patriot. He joined Patriot as a financial consultant
in December 2007 and became Senior Vice President and Chief
Financial Officer in February 2008. From October 2006 until he
joined us, Mr. Grandstaff was President and Chief Executive
Officer of Precedent Insurance Company, a wholly-owned
subsidiary of American Community Mutual Insurance Company. From
June 2002 until November 2006, Mr. Grandstaff served as
Senior Vice President, Chief Financial Officer and Treasurer of
American Community Mutual Insurance Company, a mutual health
insurance company. From February 2001 until June 2002,
Mr. Grandstaff served as Treasurer and Vice President of
Finance of Meadowbrook Insurance Group, Inc.
Charles K. Schuver Senior Vice President and
Chief Underwriting Officer of Guarantee Insurance.
Mr. Schuver directs Guarantee Insurances underwriting
activities. He joined us in June 2008. Prior to joining Patriot,
Mr. Schuver was Senior Vice President, Corporate
Underwriting Executive for Arch Insurance Group, a specialty
insurer based in New York with over $2.5 billion in gross
written premiums in 2007. Mr. Schuver served in that role
from May 2004 until May 2008. He was Vice President, Strategic
Development Executive for Royal & Sun Alliance
Insurance Group PLC, from 1998 until 2004.
Timothy J. Ermatinger, CPA Chief Executive
Officer of PRS Group, Inc. Mr. Ermatinger joined Patriot in
June 2006 where he served as Senior Vice President of Strategic
Planning. In October 2006 he became Patriots Chief
Operating Officer. Mr. Ermatinger joined PRS Group, Inc. as
its Chief Executive Officer in September, 2007.
Mr. Ermatinger was a Principal in the Merger &
Acquisitions department of Rachlin, Cohen & Holtz LLP,
a Miami public accounting firm, from December 2005 until June
2006. He served as Senior Vice President of Client Services and
Chief Financial Officer of Broadspire Services, Inc., a national
third-party administrator in Plantation, Florida from July 2003
to December 2005. Mr. Ermatinger served as Chief Financial
Officer of Kemper National Services, a provider of insurance
services from September 2000 to July 2003.
Richard G. Turner Senior Vice President of
Alternative Markets. Mr. Turners primary
responsibility is to direct our alternative markets business
development. Mr. Turner joined Patriot in September 2008.
Before joining Patriot, he was Senior Vice President in charge
of captive and alternative market risk divisions at Lexington
Insurance Company, a subsidiary of American International Group,
from November 2007 until August 2008. From 2003 until 2007,
Mr. Turner was Managing Director in charge of sales and
distribution for the alternative market risk subsidiary of
Liberty Mutual Group, Inc. For eighteen years prior to that,
Mr. Turner was President of Commonwealth Risk Services, a
company Mr. Turner founded in 1984 that was a pioneer in
providing services to the alternative risk market.
Theodore G. Bryant Senior Vice President,
Counsel and Secretary of Patriot Risk Management.
Mr. Bryant serves as the senior legal officer and corporate
secretary for Patriot and its subsidiaries. He also has
principal oversight for regulatory and compliance matters on
behalf of Patriot and its subsidiaries. Prior to joining
Patriot, as Senior Vice President Director Business
Development in December 2006, Mr. Bryant practiced law in
Seattle, Washington with the law firm of Cozen OConnor
LLP, which he joined in 2000. From 2004 through 2006,
Mr. Bryant was a member of the firms commercial and
insurance litigation departments.
Set forth below is certain background information relating to
our current directors.
Richard F. Allen Mr. Allen is Office
Managing Partner of the London office of Cozen OConnor. He
has served in that position since 2002. Mr. Allen joined
Cozen OConner as a partner in 1999. He is a member of the
Federation of Insurance Counsel and a fellow of the American
College of Trial Lawyers. Mr. Allen joined the our board of
directors in 2007.
Robert P. Cuthbert, CPA From October 2008
until June 2009, Mr. Cuthbert served as the Senior Vice
President, Chief Financial Officer and Assistant Secretary of
Seabright Insurance Holdings, Inc., a workers compensation
insurance provider (NYSE SBX). From 2007 to 2008,
Mr. Cuthbert served as Senior Vice President
Finance for Quanta U.S. Holdings, Inc., a provider of
specialty insurance and reinsurance services and products. From
2000 to 2007, Mr. Cuthbert served
155
as Chief Financial Officer of Wells Fargo Insurance Services,
Inc., a national brokerage firm. Mr. Cuthbert joined our
board of directors in January 2010.
Robert E. Dean Mr. Dean is a private
investor. Mr. Dean currently is a member of the board of
directors of NBH Holdings Corp., a startup company that intends
to apply to become a bank holding company. From 2004 until 2009,
Mr. Dean served as a director, Chairman of the Compensation
Committee and a member of the Audit Committee and Strategic
Review Committee (2009) of Specialty Underwriters
Alliance, Inc., a specialty commercial property and casualty
insurance company. From 2000 until 2003, Mr. Dean was a
managing director of Ernst and Young Corporate Finance LLC, a
wholly owned broker-dealer subsidiary of Ernst & Young
LLP. Prior to that, Mr. Dean was a partner with Gibson,
Dunn & Crutcher LLP, where he practiced corporate and
securities law and served on the firms executive
committee. Mr. Dean joined our board of directors in
December 2009.
John R. Del Pizzo, CPA Since 1997,
Mr. Del Pizzo has served as President, Secretary and
Treasurer of Del Pizzo & Associates, P.C., an
accounting and business advisory firm. Mr. Del Pizzo joined
our board of directors in 2003.
Ronald P. Formento Sr. Mr. Formento
serves as the President and Chairman of Transport Driver, Inc.,
a driver leasing company primarily servicing private
manufacturing companies. He has served in that position since
1976. Mr. Formento also served as Chairman of the Board of
Optimum Staffing, a provider of staffing services from 1992
until January 2005, and serves as Chairman of the Board of Mount
Mansfield Insurance Group, a captive insurance company sponsored
by American International Group that is engaged in reinsuring
workers compensation insurance for truck drivers.
Mr. Formento joined our board of directors in 2008.
Raymond C. Groth Since March 2001, Mr. Groth
has been an Adjunct Professor of Business Administration at The
Fuqua School of Business, Duke University. Mr. Groth also
served on the boards of directors of Specialty
Underwriters Alliance, Inc., a specialty commercial
property and casualtly insurance company, from May 2004 to
November 2009 and CT Communications, Inc., a telecommunications
company, from August 2001 until August 2007. Mr. Groth
joined our board of directors in January 2010.
C. Timothy Morris Mr. Morris is
currently Managing Director of National Capital Advisors, Inc.,
an insurance consulting firm located in Charleston, South
Carolina. He has served in that position since 2002. From 1997
to 2002, Mr. Morris was Senior Vice President and Chief
Executive Officer, National Accounts, for Travelers Property and
Casualty. Mr. Morris joined our board of directors in 2008.
Austin J. Shanfelter Since October 2009, Mr.
Shanfelter has been the chairman and majority shareholder of
Global HR Research LLC, an employee life cycle management
company. He has served on the board of directors of Orion Marine
Group (NYSE ORN), a civil marine contractor, since May 2007.
From August 2001 until December 2008, he served as a member of
the board of directors and as a special consultant of MasTec,
Inc. (NYSE: MTZ), a publicly traded specialty contractor,
Mr. Shanfelter served as Chief Executive Officer and
President of MasTec from August 2001 until March 2007, and prior
to that had served in various other capacities with MasTec since
1997. Mr. Shanfelter is a member of the board of directors
of the Power and Communications Contractors Association, an
industry trade group. Mr. Shanfelter also serves as a
director of Lock Haven University Foundation.
Mr. Shanfelter joined our board of directors in
December 2009.
Timothy J. Tompkins Mr. Tompkins is
General Counsel of The Hagerty Group in Traverse City, Michigan.
The Hagerty Group is a leading insurance agency for collector
cars and boats in the United States. Mr. Tompkins joined
the Hagerty Group, as its General Counsel in June 2005. Prior to
joining the Hagerty Group, Mr. Tompkins was a senior member
of the international insurance practice group at Cozen
OConner LLP in Seattle, Washington from June 1999 until
June 2004. From June 2004 until June 2005, Mr. Tompkins was
of counsel at Cozen OConner. Mr. Tompkins joined our
board of directors in 2007.
Set forth below is certain background information relating to
our key employees.
Dean D. Watters Senior Vice President of
Business Development. Mr. Watters directs our business
development activities. He joined us in May 2008. Prior to
joining our team, Mr. Watters was Division Vice
President, Insurance Services for the Added Value Services
Division of Automatic Data Processing, Inc., a
156
provider of technology-based outsourcing solutions to employers,
vehicle retailers and manufacturers. He served in that role from
2000 until 2007.
Maria C. Allen Vice President
Client Services/Corporate Claims. Ms. Allen directs our
claims handling operation. Ms. Allen joined us in July 2003.
Gary W. Roche Vice President
Operations. Mr. Roche joined Guarantee Insurance Company in
April of 2009. Prior to joining us he was Senior Vice President
of Operations for the Legion group of companies, a
U.S. domiciled insurance company that is a subsidiary of
Mutual Risk Management. LTD, from 1999 to 2009.
Robert G. Zamary, Jr. Vice
President Claims Management, PRS. Mr. Zamary
joined Patriot Risk Services in May 2009 as the Vice President
of Claims Management. He served as Executive Vice President and
Chief Operating Officer and Senior Vice President at Avizent/The
Frank Gates Service Company, a provider of claims management
services, from 2000 through 2009.
Josephine L. Graves President of Patriot Risk
Services, Inc. Ms. Graves joined us in October 2006. From
May 2006 until joining Patriot Risk Services, she was Risk
Manager for Interim Healthcare, Inc., a home health agency
company based in Sunrise, Florida. From September 2004 until May
2006, Ms. Graves served as Workers Compensation
Manager for Aequicap Claims Services, a provider of insurance
claims services, located in Fort Lauderdale, Florida. From
March 1993 until September 2004, she was Director of Tenet
DirectComp of South Florida, a third party administrator.
John J. Rearer Vice President
Chief Underwriting Officer of PUI. Mr. Rearer leads the
underwriting efforts at PRS. He joined us in September 2007.
From 1994 until September 2007, Mr. Rearer was Vice
President of Preferred Employers Group, a managing general agent
based in Miami, Florida that wrote workers compensation
insurance to franchised restaurant chains.
Michael J. Sluka, CPA Vice President
and Chief Accounting Officer of Patriot. Mr. Sluka is our
principal accounting officer. Mr. Sluka joined Patriot in
April 2008. From December 1999 until he joined us,
Mr. Sluka served as the Chief Financial Officer, Senior
Vice President and Treasurer of TRG Holding Corporation and TIG
Insurance Company, subsidiaries of Fairfax Financial Holdings
Limited (NYSE), a financial services company engaged in property
and casualty insurance, reinsurance and investment management.
Board
Composition
We are managed under the direction of our board of directors.
Our board currently consists of 10 directors. We expect that one
of our directors, Mr. Del Pizzo, will resign effective upon
the completion of this offering. Accordingly, upon completion of
this offering, we expect our board to consist of
9 directors, 8 of whom are not current or former employees
of our company and do not have any other relations with us that
would result in their being considered other than independent
under applicable U.S. federal securities laws and the
current listing requirements of the New York Stock Exchange.
There are no family relationships among any of our current
directors or executive officers.
Following the completion of this offering, copies of our
Corporate Governance Guidelines and Code of Business Conduct and
Ethics for all of our directors, officers and employees will be
available on our website (www.prmigroup.com) and upon written
request by our stockholders at no cost.
Number of
Directors; Removal; Vacancies
Our amended and restated certificate of incorporation (our
certificate of incorporation) and our amended and
restated bylaws (our bylaws) provide that the number
of directors shall be fixed from time to time by our board of
directors, provided that the board shall consist of at least
three and no more than thirteen members. Our board of directors
will be divided into three classes with the number of directors
in each class as nearly equal as possible. Each director will
serve a three-year term. The classification and term of office
for each of our current directors is noted above in the table
listing our directors and executive officers under
Directors, Executive Officers and Key
Employees. Pursuant to our bylaws, each director will
serve until
157
such directors successor is elected and qualified or until
such directors earlier death, resignation,
disqualification or removal. Our certificate of incorporation
and bylaws also provide that any director may be removed for
cause, at any meeting of stockholders called for that purpose,
by the affirmative vote of the holders of at least two-thirds of
the shares of our stock entitled to vote for the election of
directors.
Our bylaws further provide that vacancies and newly created
directorships in our board may be filled only by an affirmative
vote of the majority of the directors then in office, although
less than a quorum, or by a sole remaining director.
Board
Committees
Our board has an audit committee, a compensation committee and,
a nominating and corporate governance committee. All of the
members of our audit committee, compensation committee and
nominating and corporate governance committee are
independent as defined by the rules of the New York
Stock Exchange, and, in the case of the audit committee, by the
rules of the New York Stock Exchange and the SEC.
Audit Committee. The audit committee is
comprised of five directors: Robert P. Cuthbert (Chair), Robert
E. Dean, Ronald P. Formento Sr., Raymond C. Groth and C. Timothy
Morris. The audit committee oversees our accounting and
financial reporting processes and the audits of our financial
statements. The functions and responsibilities of the audit
committee include:
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|
|
|
|
establishing, monitoring and assessing our policies and
procedures with respect to business practices, including the
adequacy of our internal controls over accounting and financial
reporting;
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|
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|
retaining our independent auditors and conducting an annual
review of the independence of our independent auditors;
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|
|
|
pre-approving any non-audit services to be performed by our
independent auditors;
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|
|
|
reviewing the annual audited financial statements and quarterly
financial information with management and the independent
auditors;
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|
|
|
reviewing with the independent auditors the scope and the
planning of the annual audit;
|
|
|
|
reviewing the findings and recommendations of the independent
auditors and managements response to the recommendations
of the independent auditors;
|
|
|
|
overseeing compliance with applicable legal and regulatory
requirements, including ethical business standards;
|
|
|
|
approve related party transactions;
|
|
|
|
preparing the audit committee report to be included in our
annual proxy statement;
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|
|
|
establishing procedures for the receipt, retention and treatment
of complaints received by us regarding accounting, internal
accounting controls or auditing matters;
|
|
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establishing procedures for the confidential, anonymous
submission by our employees of concerns regarding questionable
accounting or auditing matters; and
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reviewing the adequacy of the audit committee charter on an
annual basis.
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Our independent auditors report directly to the audit committee.
Each member of the audit committee has the ability to read and
understand fundamental financial statements. Our board has
determined that Mr. Cuthbert meets the requirements of an
audit committee financial expert as defined by the
rules of the SEC.
We will provide for appropriate funding, as determined by the
audit committee, for payment of compensation to our independent
auditors, any independent counsel or other advisors engaged by
the audit committee and for administrative expenses of the audit
committee that are necessary or appropriate in carrying out its
duties.
Compensation Committee. The compensation
committee is comprised of four directors: Robert E. Dean
(Chair), Timothy J. Tompkins, Austin J. Shanfelter and C.
Timothy Morris. The compensation committee
158
establishes, administers and reviews our policies, programs and
procedures for compensating our executive officers and
directors. The functions and responsibilities of the
compensation committee include:
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evaluating the performance of and determining the compensation
for our executive officers, including our chief executive
officer;
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administering and making recommendations to our board with
respect to our equity incentive plans;
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overseeing regulatory compliance with respect to compensation
matters;
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reviewing and approving employment or severance arrangements
with senior management;
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reviewing our director compensation policies and making
recommendations to our board;
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taking the required actions with respect to the compensation
discussion and analysis to be included in our annual proxy
statement;
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preparing the compensation committee report to be included in
our annual proxy statement; and
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reviewing the adequacy of the compensation committee charter.
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Nominating and Corporate Governance
Committee. The nominating and corporate
governance committee is comprised of three directors: Raymond
C. Groth (Chair), Richard F. Allen and Austin J. Shanfelter. The
functions and responsibilities of the nominating and corporate
governance committee include:
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developing and recommending corporate governance principles and
procedures applicable to our board and employees;
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recommending committee composition and assignments;
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identifying individuals qualified to become directors;
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recommending director nominees;
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assist in succession planning;
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recommending whether incumbent directors should be nominated for
re-election to our board; and
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reviewing the adequacy of the nominating and corporate
governance committee charter.
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Compensation
Committee Interlocks and Insider Participation
None of the members of our compensation committee will be, or
will have been, employed by us. None of our executive officers
currently serves, or in the past three years has served, as a
member of the board of directors, compensation committee or
other board committee performing equivalent functions of another
entity that has one or more executive officers serving on our
board or compensation committee. See Board
Composition.
159
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Overview
This Compensation Discussion and Analysis describes the key
elements of our executive compensation program. Historically,
our board of directors has been responsible for the design,
implementation and administration of our executive compensation
program. Mr. Mariano, our Chief Executive Officer, is the
Chairman of our board of directors. Our board of directors
frequently relied on the recommendations of Mr. Mariano and
the compensation committee of the board in fulfilling these
responsibilities.
The primary goal of our compensation program is to reward
performance and retain talented executives who will help us
achieve our goals. Historically, the principal components of our
executive compensation program have been base salary,
discretionary annual bonus, stock options and welfare benefits.
This Compensation Discussion and Analysis, as well as the
compensation tables and accompanying narratives below, contain
forward-looking statements that are based on our current plans
and expectations regarding our future compensation programs.
Actual compensation programs that we adopt may differ materially
from the programs summarized below and we undertake no duty to
update these forward-looking statements.
Compensation
Objectives
The primary objectives of our compensation programs and policies
are:
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To attract and retain talented and experienced insurance and
risk management executives who will help us achieve our
financial and strategic goals and objectives;
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To motivate and reward executives whose knowledge, skills and
performance are critical to our success;
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To encourage executives to manage our business to meet our
long-term objectives by aligning an element of compensation to
those objectives so as to be consistent with our
strategy; and
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To align the interests of our executive officers and
stockholders by motivating executive officers to increase
stockholder value and reward executive officers when appropriate.
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Our board of directors believes that compensation is unique to
each individual and should be determined based on discretionary
and subjective factors relevant to the particular named
executive officer based on the objectives listed above. It is
the intention of the compensation committee of our board of
directors to perform an annual review of compensation policies,
including the appropriate mix of base salary, bonuses and
long-term incentive compensation.
Compensation
Process
Each year, our board of directors, at the recommendation of the
compensation committee, reviews the compensation of our named
executive officers regarding annual base salary increases,
annual bonuses and equity compensation. Our Chief Executive
Officer recuses himself from discussions concerning his own
compensation. Our Chief Executive Officer reviews all other
named executive officers compensation annually and makes
recommendations to our board of directors regarding annual base
salaries, annual bonuses and option grants. Our board of
directors takes into consideration the recommendations of our
Chief Executive Officer and compensation committee in making its
determination. When setting our Chief Executive Officers
compensation, the compensation committee and our board of
directors consider the following factors: his personal financial
commitment to Patriot, the time spent on company business, his
contributions to our growth over the last 12 months and the
overall performance of our business. We have no formal or
informal policy or target for allocating compensation between
long-term and short-term compensation, between cash and non-cash
compensation, or among the different forms of non-cash
compensation. Our board of directors, upon recommendation from
the compensation committee, determines what it believes to be
the appropriate level and combination of the various
compensation components on an individual basis. The board of
directors grants all equity awards based on the recommendation
of the compensation committee.
160
Salaries and annual bonuses for our other officers are
determined by their respective direct managers with input and
final approval by our Chief Executive Officer. While we identify
below particular compensation objectives that each element of
executive compensation serves, we believe each element of
compensation, to a greater or lesser extent, serves each of the
objectives of our executive compensation program.
Compensation
Components
In 2009, our compensation program for our named executive
officers consisted of three primary elements: base salary, a
discretionary annual bonus and equity awards. The compensation
program for certain executive officers also includes retirement
and severance benefits as set forth below.
Base Salary. Base salary is used to recognize
the experience, skills, knowledge and responsibilities of our
named executive officers. Our board of directors establishes
each individuals initial base salary through negotiation
with the individual and considers the persons level of
experience, accomplishments and areas of responsibilities. We do
not attempt to target our named executive officers
compensation to any particular percentile relative to peer group
companies. In determining annual increases to base salaries, our
board of directors, upon the recommendation of our Chief
Executive Officer and the compensation committee, takes into
account overall company performance, premium growth, return on
equity, the satisfaction of profitability objectives and the
completion of other initiatives established by our board of
directors. The annual review is specific to the individual
performance of each named executive officer. Any increase in
base salary is also based on prevailing market compensation
practices, which typically account for, among other factors,
increases in the cost of living in the applicable market and
economic conditions. In determining prevailing market
compensation practices, our board of directors generally relies
on the experience and industry knowledge of its members along
with generally available market data. Each of our named
executive officers has an employment agreement that provides for
a minimum base salary that may be increased annually at the
discretion of our board of directors.
During 2009, as part of its annual review of
Mr. Marianos base salary as required under his
employment agreement, the compensation committee engaged Towers
Perrin, a nationally recognized executive compensation
consulting firm, to review a possible increase in
Mr. Marianos base salary. The compensation committee
also discussed its consideration of increasing
Mr. Marianos base salary with Mr. Mariano.
Following these discussions with Mr. Mariano, the
compensation committee determined not to make any changes to
Mr. Marianos base salary at that time in order to
best position our company for this offering.
Discretionary Annual Bonus. Each of our named
executive officers is eligible to receive a discretionary annual
bonus with a maximum payment generally equal to 50% of such
executive officers base salary, as provided in such named
executive officers employment agreement. The discretionary
annual bonus is intended to compensate executive officers for
their efforts in achieving our strategic, operational and
financial goals and objectives in addition to rewarding the
individual performance of the executive officer. It is possible
for discretionary bonuses to exceed the 50% maximum target in
exceptional cases. The employment agreements with our named
executive officers provide that our board will set criteria on
which annual bonuses are based.
During 2009, we awarded Mr. Mariano, our Chief Executive
Officer, bonuses totaling $375,000. For 2009, our board of
directors was focused on continuing to grow our companys
insurance and insurance services businesses and also raising
capital through an offering of our capital stock or through a
business combination with another company in order to continue
funding our growth. In June, in recognition of
Mr. Marianos efforts on behalf of Guarantee Insurance
and PRS, and in particular in developing our BPO business, our
board of directors awarded Mr. Mariano a $100,000 bonus.
During 2009, Mr. Mariano was very active in pursuing
capital raising alternatives for our company, including
negotiating a definitive agreement for Patriot to be acquired by
a special purpose acquisition company in a transaction designed
to provide us with approximately $35 million in capital
(which transaction was ultimately not consummated), and resuming
our efforts to raise capital through this offering. In December,
in recognition of these efforts, our board of directors awarded
Mr. Mariano an additional bonus of $275,000.
In May 2009, we awarded bonuses to our other named executive
officers. We awarded a bonus of $50,000 to Mr. Grandstaff,
$75,000 to Mr. Schuver, $25,000 to Mr. Ermatinger and
$50,000 to Mr. Bryant. These bonuses were awarded to these
named executive officers at the recommendation of the Chief
Executive Officer due to the efforts of these named executive
officers in assisting with our capital raising efforts during
161
2008 and 2009. Under their employment agreements, each of these
named executive officers is eligible to receive additional bonus
amounts for 2009. Following completion of this offering, the
compensation committee may consider awarding additional
discretionary bonuses to these named executive officers.
Equity Awards. No named executive officer
received equity awards for the year ended December 31, 2009.
We intend for equity awards to become an integral part of our
overall executive compensation program, because we believe our
long-term performance will be enhanced through the use of equity
awards that reward our executives for maximizing stockholder
value over time. In determining the number of stock options to
be granted to our named executive officers, our board of
directors, upon recommendation from the compensation committee
and our Chief Executive Officer, expects to take into account
the individuals position, scope of responsibility, ability
to affect profits, the value of the stock options in relation to
other elements of the individual named executive officers
total compensation, our overall performance, specifically our
top-line growth and completion of our prior years
initiatives, and the named executive officers contribution
to our performance.
We intend to make equity grants to our named executive officers
upon completion of this offering. These grants are principally
as required under the terms of employment agreements previously
entered into with our named executive officers. See Stock
Option Plans 2010 Stock Incentive Plan.
However, due to the limited number of shares available for
future grants under the 2010 Stock Plan, we would not expect to
make new grants to current named executive officers in the near
term. See Risk Factors Risks Related to Our
Business Our business is dependent on the efforts of
our senior management and other key employees because of their
industry expertise, knowledge of our markets and relationships
with the independent agencies that sell our insurance.
Retirement Benefits. We currently offer a
401(k) plan to all of our employees, including our executive
officers. This plan allows employees to defer current earnings
and recognize them later, in accordance with statutory
regulations, when their marginal income tax rates may be lower.
We do not have any benefit pension plans, and there are no
alternative plans in place for our named executive officers.
Employment Agreements. In 2008, we entered
into employment agreements with each of our named executive
officers. These employment agreements establish key employment
terms (including reporting responsibilities, base salary and
discretionary bonus and other benefits), provide for severance
and change in control benefits and contain non-competition and
non-solicitation covenants. The employment agreements modified
certain elements of compensation of some of our executive
officers. Under his employment agreement,
Mr. Marianos base salary was set at $550,000, a 38%
increase over his 2007 base salary of $400,000. Under his
employment agreement, Mr. Bryants base salary was set
at $250,000, a 39% increase over his 2007 base salary of
$180,000. Mr. Ermatingers base salary was set at
$225,000, a 10% increase over his 2007 base salary of $205,000.
In determining the base salaries, the compensation committee
considered the salary levels of a peer group consisting of
property and casualty insurance companies that recently
completed an initial public offering and, in the case of
Messrs. Mariano, Bryant and Ermatinger, their increased
responsibilities in growing the company and transitioning it to
a publicly-held company. The peer group of companies consisted
of SeaBright Insurance Holdings, Inc., Specialty Underwriters
Alliance, Inc., Tower Group, Inc., AmTrust Financial Services,
Inc., AmCOMP, Inc., Amerisafe, Inc., and James River Group, Inc.
The employment agreements provide for stock option grants in the
following amounts to be made concurrently with the consummation
of this offering, with an exercise price equal to the offering
price and vesting in equal amounts over three years:
Mr. Mariano, 800,000 shares, Mr. Grandstaff,
100,000 shares, Mr. Schuver, 50,000 shares,
Mr. Ermatinger, 30,000 shares, and Mr. Bryant,
70,000 shares. In determining the size of these option
awards when entering into these employment agreements, the
compensation committee considered the peer group data referenced
above. See Employment Agreements.
Severance and Change in Control Payments. The
employment agreements provide for certain payments, or
termination benefits, to our named executive officers subsequent
to, or in connection with, the termination of their employment
by us without cause or by the named executive officers for good
reason or upon a change in control of our company. Payment and
benefit levels were determined based on a variety of factors
including the position held by the individual receiving the
termination benefits and current trends in the marketplace
regarding such benefits. For a description of the potential
termination benefits included in the employment agreements, see
Potential Payments Upon Termination or Change
in Control.
162
Other Benefits. Our named executive officers
are eligible to participate in all of our employee benefit
plans, such as medical, dental, vision, long and short-term
disability and life insurance, in each case on the same basis as
our other employees. Additionally, certain of our named
executive officers receive an automobile allowance and certain
other consideration for their performance in their respective
roles with us.
Accounting
and Tax Implications
The accounting and tax treatment of particular forms of
compensation do not materially affect our compensation
decisions. However, we evaluate the effect of such accounting
and tax treatment on an ongoing basis and will make appropriate
modifications to compensation policies where appropriate. For
instance, Section 162(m) of the Internal Revenue Code of
1986, as amended, or the Code, generally disallows a tax
deduction to public companies for certain compensation in excess
of $1.0 million paid in any taxable year to our chief
executive officer or any of our three other most highly
compensated executive officers. However, certain compensation,
including qualified performance-based compensation, is not
subject to the deduction limitation if certain requirements are
met. In addition, under a transition rule for new public
companies, the deduction limits under Section 162(m) do not
apply to any compensation paid pursuant to a compensation plan
or agreement that existed during the period in which the
securities of the corporation were not publicly held, to the
extent that the prospectus relating to the initial public
offering disclosed information concerning these plans or
agreements that satisfied all applicable securities laws then in
effect. We believe that we can rely on this transition rule
until our 2013 annual meeting of stockholders. The board of
directors intends to review the potential effect of
Section 162(m) of the Code periodically and use its
judgment to authorize compensation payments that may be subject
to the limit when the board of directors believes such payments
are appropriate and in Patriots best interests after
taking into consideration changing business conditions and the
performance of our executive officers.
Summary
Compensation Table
The following table sets forth certain summary information
regarding the compensation awarded or paid by us to or for the
account of our Chief Executive Officer, our Chief Financial
Officer and three other executive officers for the fiscal years
ended December 31, 2008 and 2009 and for our Chief
Executive Officer and two other executive officers for the
fiscal year ended December 31, 2007. We refer to these
officers as the named executive officers.
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Stock
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Option
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All Other
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Salary
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Bonus
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Awards
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Awards(1)
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Compensation
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Total
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Name and Principal Position
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Year
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($)
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($)
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($)
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($)
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($)
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($)
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Steven M. Mariano
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2009
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550,000
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375,000
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10,000
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(2)
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935,000
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President and Chief Executive
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2008
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492,308
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22,926
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(2)
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515,234
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Officer
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2007
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400,000
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500,000
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240,600
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(3)
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65,380
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(4)
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54,648
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(5)
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1,260,628
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Michael W. Grandstaff
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2009
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350,000
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50,000(7
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24,037
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(8)
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424,037
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Senior Vice President and Chief Financial Officer(6)
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2008
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312,885
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73,976
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(9)
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386,861
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Charles K. Schuver
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2009
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310,000
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75,000
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(11)
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8,164
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(2)
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393,164
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Senior Vice President and Chief Underwriting Officer of
Guarantee Insurance(10)
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2008
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172,885
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30,000
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202,885
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Timothy J. Ermatinger
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2009
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225,000
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25,000
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(12)
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150
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250,150
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Chief Executive Officer of PRS
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2008
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217,308
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217,308
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2007
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205,000
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205,000
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Theodore G. Bryant
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2009
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250,000
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50,000
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(13)
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25,432
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(14)
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325,432
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Senior Vice President, Counsel
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2008
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230,000
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7,105
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(15)
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237,105
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and Secretary
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2007
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180,000
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47,500
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14,003
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(16)
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269,861
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(1) |
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The fair value of each stock option grant is established on the
grant date using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for options granted
in 2007. The expected volatility is 32% for options, based on
historical volatility of similar entities that are publicly |
163
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traded. The estimated term of the options, all of which expire
ten years after the grant date, is six years based on expected
behavior of the group of option holders. The assumed risk-free
interest rate is 4-5%, based on yields on five to seven year
U.S. Treasury Bills, which term approximates the estimated term
of the options. The expected forfeiture rate is 18%. There was
no expected dividend yield. |
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(2) |
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Represents payment of annual club dues. |
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(3) |
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Represents an unrestricted grant of 36,355 shares of our
common stock for Mr. Marianos service on our Board of
Directors. Pursuant to our current director compensation policy,
directors who are also our full-time employees do not receive
additional compensation for their service as directors. The
value of this unrestricted grant of shares was determined by
multiplying the number of shares granted by the per-share price
of $8.02, which was the fair value of our common stock as
established by our board of directors at the time of grant. |
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(4) |
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Represents an award of options to purchase 24,237 shares of
our common stock for Mr. Marianos service on our
Board of Directors. |
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(5) |
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Consists of a car allowance of $42,000 (representing a $1,000
per month allowance that had not been paid to Mr. Mariano
for 42 months), and payment of dues and assessments for
Mr. Marianos homeowners association. |
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(6) |
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Mr. Grandstaff joined our company in February 2008. |
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(7) |
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Mr. Grandstaff received a bonus payment of $50,000 in May
2009 and is eligible to receive an additional discretionary
bonus of up to $125,000. |
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(8) |
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Includes a car allowance of $14,000 and club dues of $9,887. |
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(9) |
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Consists of relocation expenses related to
Mr. Grandstaffs move to Florida of $63,976 and a car
allowance of $10,000. |
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(10) |
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Mr. Schuver joined our company in June 2008. |
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(11) |
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Mr. Schuver received a bonus payment of $75,000 in May 2009
and is eligible to receive an additional discretionary bonus of
up to $80,000. |
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(12) |
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Mr. Ermatinger received a bonus payment of $25,000 in May
2009 and is eligible to receive an additional discretionary
bonus of up to $87,500. |
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(13) |
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Mr. Bryant received a bonus payment of $50,000 in May 2009
and is eligible to receive an additional discretionary bonus of
up to $75,000. |
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(14) |
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Includes a car allowance of $17,693 and club dues of $7,589. |
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(15) |
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Represents a car allowance. |
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(16) |
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Represents relocation expenses related to Mr. Bryants
move to Florida. |
Grants of
Plan-Based Awards
No executive officers received grants of plan-based awards in
2009.
Outstanding
Equity Awards at Fiscal Year End
The following table sets forth certain information regarding the
outstanding equity awards of the named executive officers at
December 31, 2008.
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Option Awards
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Number of
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Number of
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Securities
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Securities
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Underlying
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Underlying
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Unexercised
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Unexercised
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Option
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Options
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Options
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Exercise
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Option Expiration
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Name
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(#) Exercisable
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(#) Unexercisable
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Price ($)
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Date
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Steven M. Mariano
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25,000
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5.00
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February 10, 2015
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10,000
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8.02
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February 22, 2016
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20,000
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8.02
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May 19, 2017
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Timothy J. Ermatinger
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|
|
5,000
|
|
|
|
|
|
|
|
8.02
|
|
|
June 1, 2016
|
|
|
|
10,000
|
|
|
|
|
|
|
|
8.02
|
|
|
October 11, 2016
|
Theodore G. Bryant
|
|
|
5,000
|
|
|
|
|
|
|
|
8.02
|
|
|
December 17, 2016
|
164
Option
Exercises and Stock Vested
No options were exercised by our named executive officers in
2009, and no unvested restricted stock held by any of its named
executive officers vested in 2009.
Potential
Payments Upon Termination or Change of Control
The following table provides information with respect to
potential termination benefit payments to our named executive
officers upon termination of their employment by us, or by the
named executive officers for good reason, whether or not
following a change of control, as these terms are defined in
their respective employment agreements described under
Employment Agreements below. The table assumes a
date of termination of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary
|
|
|
|
Voluntary
|
|
|
Termination for
|
|
|
|
Termination for
|
|
|
Good Reason or
|
|
|
|
Good Reason or
|
|
|
involuntary
|
|
|
|
Involuntary
|
|
|
Termination without
|
|
|
|
Termination without
|
|
|
Cause Following a
|
|
Named executive officer
|
|
Cause
|
|
|
Change of Control
|
|
|
Steven M. Mariano
|
|
|
|
|
|
|
|
|
Cash Severance Payment
|
|
$
|
2,162,442
|
|
|
$
|
2,162,442
|
|
Present value of continuing benefits as of December 31, 2008
|
|
|
12,442
|
|
|
|
12,442
|
|
Excise tax
gross-up
|
|
|
|
|
|
|
692,303
|
|
|
|
|
|
|
|
|
|
|
Total termination benefits
|
|
$
|
2,174,884
|
|
|
$
|
2,867,187
|
|
|
|
|
|
|
|
|
|
|
Michael W. Grandstaff
|
|
|
|
|
|
|
|
|
Cash Severance Payment
|
|
$
|
350,000
|
|
|
$
|
700,000
|
|
Present value of continuing benefits as of December 31,
2008
|
|
|
|
|
|
|
|
|
Excise tax
gross-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total termination benefits
|
|
$
|
350,000
|
|
|
$
|
700,000
|
|
|
|
|
|
|
|
|
|
|
Charles K. Schuver
|
|
|
|
|
|
|
|
|
Cash Severance Payment
|
|
$
|
310,000
|
|
|
$
|
620,000
|
|
Present value of continuing benefits as of December 31,
2008
|
|
|
|
|
|
|
|
|
Excise tax
gross-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total termination benefits
|
|
$
|
310,000
|
|
|
$
|
620,000
|
|
|
|
|
|
|
|
|
|
|
Timothy J. Ermatinger
|
|
|
|
|
|
|
|
|
Cash Severance Payment
|
|
$
|
225,000
|
|
|
$
|
225,000
|
|
Present value of continuing benefits as of December 31,
2008
|
|
|
|
|
|
|
|
|
Excise tax
gross-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total termination benefits
|
|
$
|
225,000
|
|
|
$
|
225,000
|
|
|
|
|
|
|
|
|
|
|
Theodore G. Bryant
|
|
|
|
|
|
|
|
|
Cash Severance Payment
|
|
$
|
252,550
|
|
|
$
|
505,100
|
|
Present value of continuing benefits as of December 31, 2008
|
|
|
|
|
|
|
|
|
Excise tax
gross-up
|
|
|
16,467
|
|
|
|
16,467
|
|
|
|
|
|
|
|
|
|
|
Total termination benefits
|
|
$
|
269,017
|
|
|
$
|
521,567
|
|
|
|
|
|
|
|
|
|
|
165
Director
Compensation
The following table sets forth certain information regarding
compensation paid to our non-employee directors for 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
Stock
|
|
Option
|
|
|
|
|
or Paid in Cash
|
|
Awards
|
|
Awards
|
|
Total
|
Name
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Richard F. Allen
|
|
|
47,500
|
|
|
|
|
|
|
|
|
|
|
|
47,500
|
|
Ronald P. Formento, Sr.
|
|
|
48,500
|
|
|
|
|
|
|
|
|
|
|
|
48,500
|
|
C. Timothy Morris
|
|
|
58,500
|
|
|
|
|
|
|
|
|
|
|
|
58,500
|
|
John R. Del Pizzo
|
|
|
62,500
|
|
|
|
|
|
|
|
|
|
|
|
62,500
|
|
Timothy J. Tompkins
|
|
|
65,000
|
|
|
|
|
|
|
|
|
|
|
|
65,000
|
|
Pursuant to our director compensation program, we generally use
a combination of cash and equity-based compensation to attract
and retain non-employee directors and to compensate directors
for their service on our board of directors commensurate with
their role and involvement. In setting director compensation, we
consider the significant amount of time our directors expend in
fulfilling their duties as well as their skill level.
Our non-employee directors currently receive an annual cash
retainer of $24,000. The chair of the audit committee currently
receives an additional annual cash retainer of $7,500 and each
other member of the audit committee currently receives an
additional annual cash retainer of $3,500. The chairs of the
compensation committee and nominating and corporate governance
committee each currently receive an additional annual cash
retainer of $5,000, and each other member of these committees
currently receive an annual cash retainer of $2,000. Our
non-employee directors also currently receive meeting
participation fees. Each non-employee director currently
receives $1,500 per meeting and each committee member currently
receives $1,000 per meeting. We reimburse our directors for
reasonable
out-of-pocket
expenses they incur in connection with their service as
directors. Directors who are also our full-time employees do not
receive additional compensation for their service as directors.
We expect that our board compensation structure for non-employee
directors, which was set in 2006, will be reviewed by our new
compensation committee following completion of this offering and
revised as considered appropriate for a public company board of
directors.
Employment
Agreements
The following information summarizes the employment agreements
for each of our executive officers.
Steven
M. Mariano
Under Mr. Marianos employment agreement, dated
May 9, 2008, Mr. Mariano has agreed to serve as
Patriot Risk Managements Chairman, Chief Executive Officer
and President. Mr. Marianos employment agreement has
an initial term ending on December 31, 2011, at which time
the employment agreement will automatically renew for successive
one-year terms, unless Mr. Mariano or Patriot provides
90 days written notice of non-renewal. The agreement
requires Patriot Risk Management to nominate Mr. Mariano as
a director for stockholder approval at each annual meeting
during the term of the agreement in which his term as a director
is due to expire. In the event of a change of control event
after January 1, 2011, Mr. Marianos employment
agreement shall be extended until at least the second
anniversary of the change of control event. Mr. Mariano is
entitled to receive an annual base salary in the amount of
$550,000, subject to review at least annually, and he is
entitled to receive an annual bonus in an amount determined by
Patriot Risk Managements board of directors, subject to
the attainment of goals established by the board.
Mr. Marianos employment agreement also entitles him
to reimbursement of certain expenses including the club fees and
expenses associated with The Fisher Island Club and an
automobile allowance. Upon the consummation of this offering,
Mr. Mariano is eligible to receive a grant of options to
purchase 800,000 shares of our common stock at an exercise
price equal to the initial public offering price, which options
will vest ratably on the anniversary of the grant date over a
period of 3 years.
The employment agreement with Mr. Mariano is terminable by
Patriot in the event of his death, disability, a material breach
of duties and obligations under the agreement or other serious
misconduct. If the agreement
166
is terminated based on Mr. Marianos disability, he is
entitled to his annual base salary, reduced dollar for dollar by
the payments received under any long-term disability plan,
policy or program, for three years. The agreement is also
terminable by Patriot without cause or by Mr. Mariano for
good reason (as defined in the agreement); provided however,
that in such event, Mr. Mariano is entitled to his salary
up to the date of termination and a cash amount equal to three
times the sum of his annual salary at the time of termination
plus his average annual bonus, and continued health plan
coverage for a period of eighteen months (the Severance
Payment). If the agreement is terminated as a result of
Patriot giving notice of non-renewal, such termination is
considered a termination without cause and entitles
Mr. Mariano to the Severance Payment. The employment
agreement also provides that in the event of a change of control
of Patriot (as defined in the agreement) and the termination of
Mr. Marianos employment by Patriot without cause or
by him for good reason (as defined in the agreement) within
twenty-four months after such change in control, or within six
months before such change of control at the request or direction
of a participant in a potential acquisition, he is entitled to a
Severance Payment. Mr. Marianos employment agreement
provides for a tax
gross-up
payment in the event that any amounts or benefits due to him
would be subject to excise taxes under Section 4999 of the
Internal Revenue Code. The payment would be in an amount such
that after payment by Mr. Mariano of all taxes, including
any income taxes and excise tax imposed upon the
gross-up,
Mr. Mariano retains an amount equal to the excise tax
imposed. The employment agreement contains noncompetition and
nonsolicitation provisions restricting Mr. Mariano from
competing with Patriot for a period of one year following
termination of his employment.
Michael
W. Grandstaff
Under Mr. Grandstaffs employment agreement, dated as
of February 11, 2008, Mr. Grandstaff has agreed to
serve as Patriot Risk Managements Senior Vice President
and Chief Financial Officer. Mr. Grandstaffs
employment agreement has an initial three-year term, at which
time the employment agreement will automatically renew for
successive one-year terms, unless Mr. Grandstaff or Patriot
provides 90 days written notice of non-renewal.
Mr. Grandstaff is entitled to receive an annual base salary
in the amount of $350,000, subject to review at least annually,
and he is entitled to receive an annual bonus of up to 50% of
his then current salary in an amount determined by the board of
directors, subject to the attainment of goals established by the
board. Mr. Grandstaffs employment agreement also
entitled him to reimbursement of certain expenses in connection
with his hiring, including relocation expenses, up to $60,000
toward the initiation fee for a country club and a gross up for
taxes for these expenses. Upon the consummation of this
offering, Mr. Grandstaff is eligible to receive a grant of
options to purchase 100,000 shares of our common stock at
an exercise price equal to the initial public offering price,
which options will vest ratably on the anniversary of the grant
date over a period of 3 years.
The employment agreement with Mr. Grandstaff is terminable
by Patriot in the event of his death, absence over a period of
time due to incapacity, a material breach of duties and
obligations under the agreement or other serious misconduct. The
agreement is also terminable by Patriot without cause; provided
however, that in such event, Mr. Grandstaff is entitled to
his salary up to the date of termination and a cash amount equal
to his annual salary at the time of termination (the
Severance Payment). If Mr. Grandstaff
terminates the agreement for good reason (as defined in the
agreement), he will be entitled to receive the Severance
Payment. The employment agreement also provides that in the
event of a change of control of Patriot (as defined in the
agreement) and the termination of Mr. Grandstaffs
employment by Patriot without cause or by him for good reason
within twelve months of such change in control, he is entitled
to a cash amount equal to two times the Severance Payment. The
employment agreement contains noncompetition and nonsolicitation
provisions restricting Mr. Grandstaff from competing with
Patriot for a period of one year following termination of his
employment.
Charles
K. Schuver
Under Mr. Schuvers employment agreement, dated as of
September 29, 2008, Mr. Schuver has agreed to serve as
Senior Vice President of Patriot and Chief Underwriting Officer
of Guarantee Insurance Company. Mr. Schuvers
employment agreement has an initial three-year term, at which
time the employment agreement will automatically renew for
successive one-year terms, unless Mr. Schuver or Patriot
provides 90 days written notice of non-renewal.
Mr. Schuver is entitled to receive an annual base salary in
the amount of
167
$310,000, subject to review at least annually, and he is
entitled to receive an annual bonus of up to 50% of his then
current salary in an amount determined by the board of
directors, subject to the attainment of goals established by the
board. Upon the consummation of the offering, Mr. Schuver
is eligible to receive a grant of options to purchase
50,000 shares of our common stock at an exercise price
equal to the initial offering price, options will vest ratably
on the anniversary of the grant date over a period of
3 years.
The employment agreement with Mr. Schuver is terminable by
Patriot in the event of his death, absence over a period of time
due to incapacity, a material breach of duties and obligations
under the agreement or other serious misconduct. The agreement
is also terminable by Patriot without cause. However, in such
event, Mr. Schuver is entitled to his salary up to the date
of termination and a cash amount equal to his annual salary at
the time of termination (the Severance Payment). If
Mr. Schuver terminates the agreement for good reason (as
defined in the agreement), he will be entitled to receive the
Severance Payment. The employment agreement also provides that
in the event of a change of control of Patriot (as defined in
the agreement) and the termination of Mr. Schuvers
employment by Patriot without cause or by him for good reason
within twelve months of such change in control, he is entitled
to a cash amount equal to two times the Severance Payment. The
employment agreement contains noncompetition and nonsolicitation
provisions restricting Mr. Schuver from competing with
Patriot for a period of one year following termination of his
employment.
Timothy
J. Ermatinger
Under Mr. Ermatingers employment agreement, as
amended and restated as of May 9, 2008, Mr. Ermatinger
has agreed to serve as the Chief Executive of PRS Group.
Mr. Ermatingers employment agreement has an initial
three-year term, at which time the employment agreement will
automatically renew for successive one-year terms, unless
Mr. Ermatinger or Patriot provides 90 days
written notice of non-renewal. Mr. Ermatinger is entitled
to receive an annual base salary in the amount of $225,000,
subject to review annually, and he is entitled to receive an
annual bonus of up to 50% of his then current salary in an
amount determined by the board of directors, subject to the
attainment of goals established by us. Upon the consummation of
this offering, Mr. Ermatinger is eligible to receive a
grant of options to purchase 30,000 shares of our common
stock at an exercise price equal to the initial public offering
price and these options will vest ratably on the anniversary of
the grant date over a period of 3 years.
The employment agreement with Mr. Ermatinger is terminable
by Patriot in the event of his death, absence over a period of
time due to incapacity, a material breach of duties and
obligations under the agreement or other serious misconduct. The
agreement is also terminable by Patriot without cause; provided
however, that in such event, Mr. Ermatinger may be entitled
to his salary up to the date of termination and a cash amount
equal to his annual salary at the time of termination (the
Severance Payment). If Mr. Ermatinger
terminates the agreement for good reason (as defined in the
agreement), such termination is treated as a termination without
cause. The amended and restated employment agreement also
provides that in the event of a change of control of Patriot (as
defined in the agreement) and the termination of
Mr. Ermatingers employment by Patriot without cause
or by him for good reason (as defined in the agreement) within
twelve months of such change in control, he is entitled to a
cash amount equal to the Severance Payment. The employment
agreement contains noncompetition and nonsolicitation provisions
restricting Mr. Ermatinger from competing with Patriot for
a period of one year following termination of his employment.
Theodore
G. Bryant
Under Mr. Bryants employment agreement, as amended
and restated as of July 10, 2009, Mr. Bryant has
agreed to serve as Patriot Risk Managements Secretary,
Senior Vice President and Legal Officer and to serve as General
Counsel, Secretary and Senior Vice President of Patriot National
Insurance Group, Inc. and its subsidiaries.
Mr. Bryants employment agreement has an initial term
ending on December 31, 2011, at which time the employment
agreement will automatically renew for successive one-year
terms, unless Mr. Bryant or Patriot provides
90 days written notice of non-renewal.
Mr. Bryant is entitled to receive an annual base salary in
the amount of $250,000, subject to review at least annually, and
he is entitled to receive an annual bonus in an amount
determined by the board of directors, subject to the attainment
of goals established by the board. Additionally, Mr. Bryant
is entitled to a $50,000 bonus upon the successful completion of
Patriots initial public offering. Mr. Bryants
employment agreement also entitles him to reimbursement of
certain expenses
168
including the initiation fee and annual dues payments for a
country club, an automobile allowance of $1,000 a month and a
gross up for taxes for these expenses. Upon the consummation of
this offering. Mr. Bryant is eligible to receive a grant of
options to purchase 70,000 shares of our common stock at an
exercise price equal to the initial public offering price, which
options will vest ratably on the anniversary of the grant date
over a period of 3 years.
The employment agreement with Mr. Bryant is terminable by
Patriot in the event of his death, disability, a material breach
of duties and obligations under the agreement or other serious
misconduct. If the agreement is terminated based on
Mr. Bryants disability, he is entitled to his annual
base salary, reduced dollar for dollar by the payments received
under any long-term disability plan, policy or program, for
three years. The agreement is also terminable by Patriot without
cause; provided however, that in such event, Mr. Bryant is
entitled to his salary up to the date of termination and a cash
amount equal to his annual salary at the time of termination
plus his average annual bonus for the prior three years (the
Severance Payment). If the agreement is terminated
as a result of Patriot giving notice of non-renewal, such
termination is considered a termination without cause and
entitles Mr. Bryant to the Severance Payment. The
employment agreement also provides that in the event of a change
of control of Patriot (as defined in the agreement) and the
termination of Mr. Bryants employment by Patriot
without cause or by him for good reason within twelve months
after such change in control, or within six months before such
change of control at the request or direction of a participant
in a potential acquisition, he is entitled to payment equal to
two times the Severance Payment. The employment agreement
contains noncompetition and nonsolicitation provisions
restricting Mr. Bryant from competing with Patriot for a
period of one year following termination of his employment.
Stock
Option Plans
2010
Stock Incentive Plan
Prior to completion of this offering, we expect to adopt, and
expect our stockholders to approve, the Patriot Risk Management,
Inc. 2010 Stock Incentive Plan (the 2010 Plan). The following
description of the 2010 Plan is qualified in its entirety by the
full text of the 2010 Plan, which will be filed with the SEC as
an exhibit to the registration statement of which this
prospectus is a part.
Purpose of the Plan. The purpose of the 2010
Plan is to attract, retain and motivate participating employees
and to attract and retain well-qualified individuals to serve as
members of the board of directors, consultants and advisors
through the use of incentives based upon the value of our common
stock. Awards under the 2010 Plan will be determined by the
compensation committee of the board of directors, and may be
made to our or our subsidiaries employees, non-employee
directors, consultants and advisors.
Administration of the Plan. The 2010 Plan will
be administered by the compensation committee of the board of
directors. Each member of the compensation committee must be a
non-employee director, as defined by
Rule 16b-3
promulgated by the SEC under the Securities Exchange Act of
1934, as amended. Subject to the provisions of the 2010 Plan,
the compensation committee will have authority to select
employees, non-employee directors, consultants and advisors to
receive awards, to determine the time or times of receipt, to
determine the types of awards and the number of shares covered
by the awards, to establish the terms, conditions and provisions
of such awards, to determine the number and value of qualified
performance-based awards and to cancel or suspend awards.
The compensation committee is authorized to interpret the 2010
Plan, to establish, amend and rescind any rules and regulations
relating to the 2010 Plan, to determine the terms and provisions
of any award agreements and to make all other determinations
that may be necessary or advisable for the administration of the
2010 Plan.
Eligibility Under the Plan. The compensation
committee will determine the employees, non-employee directors,
consultants and advisors who receive awards under the 2010 Plan.
Duration of Plan. The 2010 Plan has a term of
ten years following its approval by our stockholders.
Types of Awards. Awards under the 2010 Plan
may be in the form of stock options (including incentive stock
options that meet the requirements of Section 422 of the
Internal Revenue Code and non-statutory stock options),
restricted stock, restricted stock units and stock appreciation
rights.
169
Authorized Shares Available for Awards Under the 2010
Plan. The 2010 Plan authorizes awards of up to
[ ]
shares of our common stock. In addition, if any award under the
2010 Plan otherwise distributable in shares of common stock
expires, terminates or is forfeited or canceled, or settled in
cash pursuant to the terms of the 2010 Plan, such shares will
again be available for award under the 2010 Plan.
Subject to completion of this offering, our board of directors
has approved grants of options to our executive officers,
certain employees and certain directors to purchase an aggregate
of [ ] shares of our common
stock. The option grants to our executive officers are
principally as required under the terms of employment agreements
previously entered into with our executive officers. Grants to
the directors represent compensation for their service as board
members and assistance in consummating this offering. The
following table sets forth certain information regarding these
stock option grants to our directors and executive officers:
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Options
|
|
|
Steven M. Mariano
|
|
President and Chief Executive Officer
|
|
|
800,000
|
|
Michael W. Grandstaff
|
|
Senior Vice President and Chief Financial Officer
|
|
|
100,000
|
|
Charles K. Schuver
|
|
Senior Vice President and Chief Underwriting Officer, Guarantee
Insurance
|
|
|
100,000
|
|
Timothy J. Ermatinger
|
|
Chief Executive Officer, PRS
|
|
|
30,000
|
|
Richard G. Turner
|
|
Senior Vice President of Alternative Markets
|
|
|
100,000
|
|
Theodore G. Bryant
|
|
Senior Vice President, Counsel and Secretary
|
|
|
100,000
|
|
John R, Del Pizzo
|
|
Director
|
|
|
[ ]
|
|
Timothy J. Tompkins
|
|
Director
|
|
|
[ ]
|
|
Richard F. Allen
|
|
Director
|
|
|
[ ]
|
|
Ronald P. Formento, Sr.
|
|
Director
|
|
|
[ ]
|
|
C. Timothy Morris
|
|
Director
|
|
|
[ ]
|
|
All of these options will have an exercise price equal to the
initial public offering price of our common stock in this
offering and will be subject to pro rata vesting over a
[ ]-year
period, in the case of the officers, and a
[ ]-year
period, in the case of the directors.
Stock options and stock appreciation rights covering more than
[ ]
shares of common stock may not be granted to any employee in any
calendar year. The number of incentive stock options awarded
under the 2010 Plan may not exceed
[ ]
shares. In no event may qualified performance-based
compensation within the meaning of section 162(m) of
the Internal Revenue Code of 1986, as amended, be awarded to a
single participant in any
12-month
period covering more than
[ ] shares
(if the award is denominated in shares), or having a maximum
payment with a value greater than
$[ ] (if the award is denominated
in other than shares).
If there is a change in our outstanding common stock by reason
of a stock dividend, split, spinoff, recapitalization, merger,
consolidation, combination, extraordinary dividend, exchange of
shares or other change affecting the outstanding shares of
common stock as a class without the receipt of consideration,
the aggregate number of shares with respect to which awards may
be made under the 2010 Plan, the terms and number of shares
outstanding under any award, the exercise or base price of a
stock option or a stock appreciation right, and the share
limitations set forth above shall be appropriately adjusted by
the compensation committee at its sole discretion.
Notwithstanding the foregoing, no adjustment shall be made to
the aggregate number of shares with respect to which awards can
be made under the 2010 Plan on account of any stock split in
connection with this offering. The compensation committee shall
also make appropriate adjustments as described in the event of
any distribution of assets to shareholders other than a normal
cash dividend. The committee may also, in its sole discretion,
make appropriate adjustment as to the kind of shares or other
securities deliverable with respect to outstanding awards under
the 2010 Plan.
Stock Options. The 2010 Plan authorizes the
award of both non-qualified stock options and incentive stock
options. Only our employees are eligible to receive awards of
incentive stock options. Incentive stock options may be awarded
under the 2010 Plan with an exercise price not less than 100% of
the fair market value of our common stock on the date of the
award. The aggregate value (determined at the time of the award)
of the common stock with respect to which incentive stock
options are exercisable for the first time by any employee
during any calendar year may not exceed $100,000. The term of
incentive stock options cannot exceed ten years.
170
Non-qualified options may be awarded under the 2010 Plan with an
exercise price of no less than the fair market value of our
common stock on the date of the award.
An optionee may pay the exercise price for options in cash, by
actual or constructive delivery of stock certificates for
previously-owned shares of our stock, and by means of a cashless
exercise arrangement with a qualifying broker-dealer. The 2010
Plan permits us to sell or withhold a sufficient number of
shares to cover the amount of taxes required to be withheld upon
exercise of an option.
The 2010 Plan permits recipients of non-qualified stock options
(including non-employee directors) to transfer their vested
options by gift to family members (or trusts or partnerships of
family members). After transfer of an option, the optionee will
remain responsible for taxes payable upon the exercise of the
option, and we retain the right to claim a deduction for
compensation upon the exercise of the option.
Restricted Stock. The 2010 Plan authorizes the
compensation committee to grant to employees, non-employee
directors, consultants and advisors shares of restricted stock.
A grantee will become the holder of shares of restricted stock
free of all restrictions if he or she completes a required
period of employment or service following the award and
satisfies any other conditions. The grantee will have the right
to vote the shares of restricted stock and, unless the committee
determines otherwise, the right to receive dividends on the
shares. The grantee may not sell or otherwise dispose of
restricted stock until the conditions imposed by the committee
have been satisfied.
Restricted Stock Units. The 2010 Plan
authorizes the compensation committee to award to participants
the right to receive shares of our stock in the future. These
awards may be contingent on completing a required period of
employment or service following the award or on our future
performance. The committee may provide in the applicable award
agreement whether a participant holding a restricted stock unit
shall receive dividend equivalents, either currently or on a
deferred basis.
Qualified Performance-Based Awards. The 2010
Plan authorizes the compensation committee to award restricted
stock and restricted stock units as qualified performance-based
awards. No later than 90 days following the commencement of
any fiscal year or other designated period of service, the
committee shall (a) designate in writing one or more
participants, (b) select the performance criteria
applicable to the performance period, (c) establish the
performance goals, and amounts of such awards, as applicable,
which may be earned for such performance period, and
(d) specify the relationship between performance criteria
and the performance goals and the amounts of such awards to be
earned by each participant for such performance period.
Following the completion of each performance period, the
committee shall certify in writing whether the applicable
performance goals have been achieved. No award or portion
thereof that is subject to the satisfaction of any condition
shall be earned or vested until the committee certifies in
writing that the conditions to which the earning or vesting of
such award is subject have been achieved. The committee may not
increase during a year the amount of a qualified
performance-based award that would otherwise be payable upon
satisfaction of the conditions but may reduce or eliminate the
payments as provided for in the award agreement.
Termination of Service Events. The committee
may specify in each award agreement the impact of termination of
service of a participant upon outstanding awards under the 2010
Plan. Unless provided otherwise in the award agreement, the
following provisions shall apply. Upon an employees
termination of service following age 65, death or
disability, or upon a directors termination of service for
any reason, all outstanding awards become fully vested. An
employees non-qualified options and stock appreciation
rights remain exercisable following his death or disability for
period of one year (or, if earlier, until the expiration of the
award). Upon an employees termination of service following
age 65, or upon a directors termination of service
for any reason, outstanding non-qualified options and stock
appreciation rights remain exercisable for one year (or if
earlier, until the expiration of the award). Upon termination of
an employees service for cause (as defined in the 2010
Plan), all outstanding awards are immediately forfeited. Upon
termination of an employees service for any other reason,
all outstanding options and stock appreciation rights remain
exercisable for three months (or if earlier, until the
expiration of the award).
If an option or stock appreciation right will expire as a result
of a participants termination of service, and the
participant is prohibited at that time from exercising the
option or right under federal securities laws, the expiration
date of the option or right is automatically extended for a
period ending 30 days following the date that it first
becomes exercisable (but not beyond the original expiration date
of the award).
171
Change of Control Events. In the event of a
change of control, as defined in the 2010 Plan, all outstanding
awards under the 2010 Plan become fully exercisable and vested.
The compensation committee may, in connection with a change of
control: (i) arrange for the cancellation of outstanding
awards in consideration of a payment in cash, property, or both,
with an aggregate value equal to each award;
(ii) substitute other securities of Patriot Risk Management
or another entity in exchange for our shares underlying
outstanding awards; (iii) arrange for the assumption of
outstanding awards by another entity or the replacement of
awards with other awards for securities of another entity; and
(iv) after providing notice to participants and an
opportunity to exercise outstanding options and rights, provide
that all unexercised options and rights will be cancelled upon
the date of the change of control or such other date as
specified by it.
Suspension or Forfeiture of Awards. In the
event that the committee determines that a participant, while
employed, engaged in misconduct, the participants right to
exercise stock options and stock appreciation rights under the
2010 Plan may be forfeited, and all restricted stock and
restricted stock units forfeited. With regard to executive
officers, if the committee determines that misconduct results in
a restatement of our financial statements, the officer may be
required to disgorge to us any profits made upon sale of our
shares received under awards.
2005
and 2006 Stock Option Plans
Our board of directors and stockholders have ratified and
approved our 2005 Stock Option Plan, or 2005 Plan, and our 2006
Stock Option Plan, or 2006 Plan (and together with our 2005
Plan, the Plans), and all of the awards granted under the Plans.
Shares Authorized for Award under the
Plans. The 2005 Plan authorized the award of up
to 350,000 shares of our common stock. There are currently
approximately 62,500 shares of our common stock underlying
outstanding stock options under the 2005 Plan. The 2006 Plan
authorized the award of up to 350,000 shares of our common
stock. There are currently approximately 106,000 shares of
our common stock underlying outstanding stock options under the
2006 Plan. Our board of directors has determined that no further
stock options will be awarded under either of the Plans, and the
number of shares previously authorized for grant under the Plans
has been reduced to 204,207. (Upon forfeiture or cancellation of
any outstanding stock options under the Plans, none of the
shares covered by such options will become available for awards
under the Plans.) Therefore, no shares remain available for
grant under the Plans. Shares delivered under the Plans may be
treasury stock or authorized but unissued shares not reserved
for any other purpose.
Each of the Plans provides that, if there is a change in Patriot
Risk Managements outstanding common stock by reason of a
stock split, recapitalization, merger, consolidation,
combination, spin-off, distribution of assets to stockholders,
exchange of shares or other similar change, the aggregate number
of shares with respect to which awards may be made under the
Plans, the terms and number of shares subject to outstanding
options, and the exercise price of outstanding options under the
Plans shall be equitably adjusted by the compensation committee
of our board of directors (the Compensation
Committee) at its sole discretion. The Compensation
Committee may also, in its sole discretion, make appropriate
adjustment as to the kind of shares or other securities
deliverable with respect to outstanding awards under the Plans.
Description of the Plans. The Plans provide
for the grant of incentive stock options and nonstatutory stock
options. Awards under the Plans may be made to employees,
including officers and directors who may be employees, and
non-employee directors.
The Plans are administered by the Compensation Committee. The
Compensation Committee has full authority, subject to the terms
of the Plans, to determine the individuals to whom awards are
made, the number of shares covered by each award, the time or
times at which options are granted and exercisable and the
exercise price of options.
The Plans may be amended by our board of directors or the
Compensation Committee. However, the Plans may not be amended
without the consent of the holders of a majority of the shares
of stock then outstanding if such approval is required by
Rule 16b-3
under the Securities Exchange Act of 1934, as amended, by the
Code, or by any securities exchange, market or other quotation
system on which our securities are listed or traded. Amendments
to the Plans may be made without the consent of our stockholders
or the holders of options outstanding under the Plans to the
extent necessary to avoid penalties arising under
Section 409A of the Code. The
172
Plans prohibit any re-pricing of stock options granted under the
Plans and prohibit the automatic grant of additional options in
connection with the exercise of any option granted under the
Plans.
Description of Options Granted under the
Plans. The Plans authorize the award of both
incentive stock options, for which option holders may receive
favorable tax treatment under the Code, and nonstatutory
options, for which option holders do not receive favorable tax
treatment.
Under the Plans, incentive stock options may be granted only to
employees. As of December 31, 2007, no incentive stock
options had been granted under the Plans. Under the Plans,
non-qualified stock options may be granted to employees and
nonemployee directors. The exercise price of each option must be
determined by the Compensation Committee, and may be equal to or
greater than the fair market value of a share of our common
stock on the date of grant of the option. However, the exercise
price of an incentive stock option granted to an employee who
owns more than 10% of the outstanding shares of our common stock
may not be less than 110% of the fair market value of the
underlying shares of our common stock on the date of grant.
The optionee may pay the exercise price:
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in cash;
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with the approval of the Compensation Committee, by delivering
or attesting to the ownership of shares of common stock held for
at least six months, having a fair market value on the date of
exercise equal to the exercise price of the option; or
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by such other method as the Compensation Committee shall
approve, including payment through a broker in accordance with
cashless exercise procedures permitted by Regulation T of the
Federal Reserve Board.
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Options vest according to the terms and conditions determined by
the Compensation Committee and specified in the applicable
option agreement. The Compensation Committee will determine the
term of each option up to a maximum of ten years from the date
of grant. However, the term of an incentive stock option granted
to an employee who owns more than 10% of the outstanding shares
of our common stock may not exceed five years from the date of
grant.
The Compensation Committee may cancel outstanding options by
notifying the optionee of its election to cash out the options
in exchange for a payment in cash, in shares of stock, or in a
combination thereof, in an amount equal to the difference
between the fair market value of the stock and the exercise
price of each cancelled option. However, no payment will be made
in respect of any option that is not exercisable when cancelled.
Stock options awarded under the Plans may become fully vested
and exercisable upon a change in control of Patriot to the
extent permitted by our board of directors through unanimous
consent of its members.
Withholding. We retain the right to deduct or
withhold, or require the optionee to remit to the us, an amount
sufficient to satisfy federal, state and local taxes required by
law or regulation to be withheld with respect to any taxable
event as a result of the Plans. The Plans permit us to withhold
a sufficient number of shares to cover the minimum amount of
taxes required to be withheld.
Transfer of Options. Incentive stock options
may not be transferred and may be exercisable only by the holder
or his legal representative or heirs. Nonstatutory options may
be transferred by gift to family members (or trusts or
partnerships of family members).
173
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following table shows the shares issuable under our 2005 and
2006 Plans as of December 31, 2008. No shares are issuable
under our 2010 Plan.
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Number of Securities
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Remaining for Future
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Number of
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Weighted-Average
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Issuance Under
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Securities to
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Exercise Price of
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Equity Compensation
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be Issued Upon
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Outstanding
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Plans (Excluding
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Exercise of
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Options,
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Securities
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Outstanding Options,
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Warrants and
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Reflected in
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Warrants and Rights
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Rights
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Column (a))
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Plan Category
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(a)
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(b)
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(c)
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Equity compensation plans approved by security holders
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163,500
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7.37
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186,500
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Equity compensation plans not approved by security holders
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Total
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163,500
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7.37
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186,500
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Limitations
of Liability and Indemnification of Directors and
Officers
Our certificate of incorporation contains provisions that limit
the personal liability of our directors for monetary damages for
a breach of fiduciary duty to the fullest extent permitted by
Delaware law. Consequently, our directors will not be personally
liable to us or our stockholders for monetary damages for any
breach of fiduciary duties as directors, except liability for
the following:
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any breach of their duty of loyalty to Patriot Risk Management
or our stockholders,
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acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
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unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware
General Corporation Law, or
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any transaction from which the director derived an improper
personal benefit.
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Our certificate of incorporation and our bylaws provide that we
are required to indemnify our directors and officers and may
indemnify our employees and other agents to the fullest extent
permitted by Delaware law. Our certificate of incorporation and
our bylaws also provide that we shall advance expenses incurred
by a director or officer in advance of the final disposition of
any action or proceeding, and permits us to secure insurance on
behalf of any officer, director, employee or other agent for any
liability arising out of his or her actions in that capacity,
regardless of whether Delaware General Corporation Law would
otherwise permit indemnification. We have entered into
agreements to indemnify our directors and executive officers.
These agreements provide for indemnification for related
expenses including attorneys fees, judgments, fines and
settlement amounts incurred by any of these individuals in any
action or proceeding. We believe that these provisions of our
certificate of incorporation, our bylaws and indemnification
agreements are necessary to attract and retain qualified persons
as directors and officers. We also maintain directors and
officers liability insurance.
The limitation of liability and indemnification provisions in
our certificate of incorporation may discourage stockholders
from bringing a lawsuit against our directors for breach of
fiduciary duty. These provisions may also reduce the likelihood
of derivative litigation against our directors and officers,
even though an action, if successful, might benefit us and other
stockholders. Furthermore, a stockholders investment may
be adversely affected to the extent that we pay the costs of
settlement and damage awards against directors and officers as
required by these indemnification provisions. At present, there
is no pending litigation or proceeding involving any of our
directors, officers or employees for which indemnification is
sought, and we are not aware of any threatened litigation that
may result in claims for indemnification.
Insofar as the provisions of our certificate of incorporation
provide for indemnification of directors or officers for
liabilities arising under the Securities Act, we have been
informed that in the opinion of the Securities and Exchange
Commission this indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
174
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Westwind
Holding Company, LLC and Progressive Employer Services
Prior to March 2009, Steven Herrig, through Westwind Holdings,
LLC, beneficially owned shares representing approximately 15.8%
of our outstanding common stock and 5.7% of the voting power of
our outstanding common stock. In 2004, Westwind established a
cell within a segregated portfolio captive. Acting on behalf of
this cell, the segregated portfolio captive reinsured 90% of the
liability of Guarantee Insurance arising from policies written
to cover employees of Progressive Employer Services, Inc., an
employee leasing company, or PES. PES is controlled by Steven
Herrig. As part of the arrangement to establish the cell,
Westwind was obligated to contribute additional capital to the
segregated portfolio cell in an amount up to 20% of the gross
premium written on the reinsured policies. On August 13,
2004, Westwind purchased a fully subordinated surplus note from
Guarantee Insurance in the amount of $500,000 with a stated
maturity of five years and an interest rate of 3%. No payment of
interest or principal could be made on this note unless either
(1) the total adjusted capital and surplus of Guarantee
Insurance exceeded 400% of the authorized control level
risk-based capital (calculated in accordance with the rules
promulgated by the NAIC) stated in Guarantee Insurances
most recent annual statement filed with the appropriate state
regulators, or (2) we obtained regulatory approval to make
such payments. We entered into a note offset and call agreement
which, should Westwind default on its obligation to contribute
additional capital to the segregated portfolio cell, allowed us
to offset the amount of any capital contribution due from
Westwind first against the accrued interest and outstanding
principal of the surplus note, and if that amount did not
satisfy the obligation, we had the right to repurchase a number
of shares of our common stock held by Westwind at a price of
$0.001 per share. The note offset and call agreement terminated
90 days after Westwinds obligation to make additional
capital contributions to the segregated portfolio cell
terminated.
As of December 31, 2008, 2007 and 2006, our policies with
PES accounted for approximately 14%, 15% and 16%, respectively,
of our direct premiums written. In October 2008, we filed suit
against PES and certain of its affiliates seeking recovery of
more than $89 million in underpaid premium, penalties and
other damages. In November 2008, we cancelled PESs master
policy due to PESs failure to pay premium. See
Business Legal Proceedings Actions
Involving Progressive Employer Services, et al. On
March 31, 2009, we notified Westwind that due to unresolved
underfunding of its segregated portfolio cell, we were
exercising our right under the note offset and call option
agreement to acquire all shares of our common stock held by
Westwind. Westwind subsequently filed suit against us for
damages from resulting from our exercise of the call option. See
Business Legal Proceedings Actions
Involving Progressive Employee Services, et al.
On January , 2010, we entered into an
indemnification and pledge agreement with Steven M. Mariano, our
Chairman, President, Chief Executive Officer and the beneficial
owner of a majority of our outstanding shares. Pursuant to this
indemnification and pledge agreement, Mr. Mariano agreed to
indemnify us against certain losses, if any, suffered as a
result of the litigation between us and Westwind, PES and other
related entities as described above. Mr. Marianos
obligation to indemnify us is limited to the after-tax effect of
losses in the amount of $6.9 million plus the cost of any
legal expenses we incur in connection with this litigation from
and after December 1, 2009. Mr. Mariano has agreed to
satisfy his indemnification obligations by transferring shares
or paying cash to us. As security for this indemnity,
Mr. Mariano has agreed to pledge 500,000 of his shares of
our common stock to us. If the value of the shares pledged is
insufficient to cover our losses, any additional amounts will be
paid in cash or other mutually agreed consideration. In the
event that we prevail in the litigation covered by the
indemnification and pledge agreement and as a result we recover
more than the $8.3 million in premiums receivable, plus the
$2.2 million that we have offset against the premiums
receivable, plus legal expenses incurred from and after
December 1, 2009, we have agreed to pay cash or issue
additional shares of our common stock to Mr. Mariano in the
amount of such excess recovery. The number of shares issuable to
Mr. Mariano or transferable to us, as applicable, will be
determined by dividing the amount of the excess recovery or the
amount of the after-tax effect of losses, as applicable, by the
volume-weighted average price per share of our common stock for
the 30 trading days immediately preceding the date of the
issuance or transfer of such shares, as applicable. In January
2010, this agreement was approved by the audit committee.
175
Stockholder
Loan and Guaranty
We borrowed $1.5 million from Mr. Mariano pursuant to
a promissory note dated June 26, 2008 and amended and
restated on June 16, 2009 that bears interest at the rate
of prime plus 3% (6.25% at September 30, 2009). The
proceeds of the loan, net of loan fees, totaled approximately
$1.3 million and were used to provide additional surplus to
Guarantee Insurance. The principal balance of the loan is
payable on demand by the lender, subject to Patriot Risk
Managements cash flow requirements of the Company. We make
monthly interest payments on the loan. As of December 31,
2008, the outstanding principal balance on the loan remained at
$1.5 million. As of September 30, 2009, the principal
balance and accrued interest associated with this loan were
approximately $363,000 and $1,000, respectively.
Concurrently with our signing of this note, Mr. Mariano
personally borrowed $1.5 million from Brooke Savings Bank
to fund his loan to us. The loan by Brooke Savings Bank to
Mr. Mariano contains terms similar to the terms contained
in the note between us and Mr. Mariano. Because
Mr. Mariano personally obtained this loan from Brooke
Savings Bank for the benefit of Patriot, we paid him a loan
origination fee of $187,000.
Mr. Mariano entered into a guaranty agreement with Brooke
Credit Corporation (Brooke) on March 30, 2006 in connection
with the financing provided to us by Brooke. Mr. Mariano
also entered into a guaranty agreement with ULLICO, Inc.
(ULLICO) on December 31, 2008 in connection with the
financing provided to us by ULLICO. Under these guaranty
agreements, Mr. Mariano guaranteed the payment and
performance of Patriot under the Brooke and ULLICO commercial
loan agreements. Mr. Mariano has pledged all of the shares
of our capital stock beneficially owned by him, and which may be
acquired by him in the future, as security for his guarantee of
the ULLICO loan. Mr. Mariano is paid a fee equal to 4% of
the outstanding balance on the applicable loan each year for
providing this service. The fee was set by the independent
members of our board of directors on terms that they believed
were comparable to those that could be obtained from
unaffiliated third parties. For the nine months ended
September 30, 2009 and years ended December 31, 2008,
2007 and 2006, we paid Mr. Mariano guaranty fees of
approximately $715,000, $601,000, $463,000 and $350,000,
respectively.
Residential
Lease
On June 10, 2009, Mr. Mariano entered into a
twelve-month lease for a house located in Fort Lauderdale,
Florida, for use as a personal residence. The lease provided for
monthly rent of $18,000. On August 1, 2009, Patriot Risk
Management entered into a new lease for the residence for a term
of eighteen months. On October 30, 2009, this lease was
amended to add Mr. Mariano as the tenant and to remove
Patriot Risk Management from any further obligation under the
lease. During the period from June 10, 2009 through
October 30, 2009, we made payments of rent and related
expenses on Mr. Marianos behalf of approximately
$133,000. The full amount of these payments has been applied
against the outstanding balance of our loan from
Mr. Mariano described above. In addition, we purchased a
vehicle on Mr. Marianos behalf for approximately
$60,000, the payment for which has also been applied against the
outstanding balance of our loan from Mr. Mariano. In
November 2009, all of these transactions were approved by the
audit committee.
Tarheel
Group, Inc.
Tarheel Group, Inc., or Tarheel, was a company organized in
November 2000 and was controlled by Steven M. Mariano. Through
its wholly-owned subsidiary, Tarheel Insurance Management
Company, or TIMCO, Tarheel provided underwriting, insurance
management services, bill review and case management services to
customers.
In May 2005, our board of directors determined that it would be
in the best interests of our stockholders to acquire the Tarheel
operations to consolidate the revenue generating aspects of our
business under Patriot. The board obtained an independent
appraisal of the value of Tarheel, and the independent directors
approved the purchase of the producer agreement, the managed
care agreement and the expense sharing agreement, or
collectively, the Tarheel Contracts. Accordingly, on
January 1, 2006, we entered into a purchase agreement with
Tarheel pursuant to which we acquired the rights and obligations
under the Tarheel Contracts for a total price of $1,355,380,
which we paid by issuing 204,801 shares of our common stock
valued at $6.62 per share
176
to Tarheel. All but 11,101 of these shares were distributed to
Tarheels stockholders. On April 25, 2006, the Tarheel
stockholders, other than Mr. Mariano, redeemed their
Tarheel shares in exchange for Patriot shares held by Tarheel,
leaving Mr. Mariano as the sole stockholder of Tarheel. All
the independent members of our board of directors approved the
purchase of the Tarheel Contracts, because at the time the
Tarheel Contracts were acquired, the contracts had no book value
and Mr. Mariano controlled Tarheel and Patriot. For
accounting purposes, the issuance of the shares to Tarheel was
treated as a dividend.
In April 2006, we indemnified Mr. Mariano against
liabilities with respect to certain litigation brought against
him and various other parties by Barclay Downs in March 2004 in
the State of North Carolina. This litigation arose out of a
lease for commercial property occupied by Tarheel. In April
2006, Mr. Mariano, Guarantee Insurance, TIMCO and various
other parties entered into a settlement agreement and release
with respect to this litigation. The settlement agreement called
for periodic payments totaling $525,000 beginning on
April 3, 2006. The final payment was made on June 2,
2007. A majority of the independent members of our board of
directors approved the settlement.
On June 13, 2006, we loaned $750,000 to Tarheel pursuant to
a promissory note. The proceeds of the loan were used to fund
the commutation of certain liabilities of Foundation Insurance
Company, a wholly-owned subsidiary of Tarheel that was declared
insolvent on March 24, 2006 and subsequently dissolved. The
note bore interest at 1% over the prime rate and matures on
June 13, 2011. Mr. Mariano personally guaranteed the
repayment of the note. All the independent members of our board
of directors approved the loan. Tarheel paid Mr. Mariano
for his guarantee by transferring 11,101 shares of our
common stock, owned by Tarheel, to Mr. Mariano, with a
total value of approximately $73,500.
On April 20, 2007, Mr. Mariano contributed all of the
outstanding capital stock of Tarheel and its subsidiary, TIMCO,
to Patriot. All of the independent members of our board of
directors approved the contribution. Prior to the contribution,
Tarheel paid a $450,000 dividend to Mr. Mariano. Upon the
contribution of Tarheel, the $750,000 note became an
inter-company obligation. The contribution was accounted for as
a combination of entities under common control using as-if
pooling-of-interests
accounting. Under this method of accounting, the assets and
liabilities of Tarheel and its subsidiary were carried forward
to Patriot at their historical costs. In addition, all prior
period financial statements were restated to include the
combined results of operations, financial position and cash
flows of Tarheel and its subsidiary.
Following the contribution of Tarheel to Patriot,
Mr. Mariano entered into a settlement stipulation and
release under which he settled a judgment entered against
Mr. Mariano, Foundation and others in the amount of
$585,000 arising from Mr. Marianos personal guarantee
of letters of credit supporting reinsurance obligations of
Foundation. The settlement stipulation called for two payments
of $75,000 to be made on or before July 27, 2007, and
29 monthly payments of $15,000 to be made beginning on
July 12, 2007. The obligation to make these payments has
been assumed by us and was approved by all of the independent
members of our board of directors.
Issuance
of Series A Convertible Preferred Stock
Our December 2008 loan agreement with ULLICO required us to
raise an additional $1 million in equity financing. To
satisfy such obligation, we issued 1,000 shares of
Series A convertible preferred stock in December 2008, at a
price of $1,000 per share, including 500 shares to
Mr. Mariano, our Chairman, President, Chief Executive
Officer and the beneficial owner of a majority of our
outstanding shares, 150 shares to Ronald P.
Formento, Sr., one of our directors, 100 shares to
Richard F. Allen, one of our directors, and 50 shares to C.
Timothy Morris, one of our directors. Since
Messrs. Formento and Morris were members of the audit
committee at the time of the issuance of the shares of
Series A convertible preferred stock, the transaction was
approved by a committee of disinterested directors in December
2008.
Holders of shares of Series A convertible preferred stock
are entitled to cumulative cash dividends at a rate of 4.5%
above the prime rate as reported in the Wall Street Journal
per share per annum, calculated based on the stated value of
each share, which is $1,000. In addition, upon the consummation
of a qualified offering (which includes this offering), each
outstanding share of Series A convertible preferred stock
will automatically convert into that number of shares of our
common stock determined by dividing the sum of $1,000 plus
177
any accrued but unpaid dividends on the date of conversion by
the price per share of common stock sold in such offering.
Because no dividends have been paid to the holders of shares of
Series A convertible preferred stock, each share of
Series A convertible preferred stock will convert into
[ ] shares
of our common stock upon the consummation of this offering,
assuming an initial public offering price of
$[ ]
per share, which is the mid-point of the price range set forth
on the cover page of this prospectus.
Prior to June 2008, it was our policy that all material
transactions with related parties be reviewed and approved by a
majority of our independent directors. In June 2008, we adopted
an audit committee charter pursuant to which all transactions
with related parties are to be approved by the audit committee.
178
PRINCIPAL
STOCKHOLDERS
The table below contains information about the beneficial
ownership of our common stock, Series B common stock and
Series A convertible preferred stock by each of our
directors, each of our named executive officers, all of our
directors and executive officers as a group, and each beneficial
owner of more than five percent of our common stock,
Series B common stock and Series A convertible
preferred stock.
The number of shares and percentage of shares beneficially owned
is based on 346,026 shares of common stock,
800,000 shares of Series B common stock and
1,000 shares of Series A convertible preferred stock
outstanding as of October 31, 2009. The number of shares in
the table under Beneficial Ownership After the Offering assumes
(i) the automatic conversion of each outstanding share of
Series B common stock into common stock on a
one-for-one
basis and (ii) the automatic conversion of each outstanding
share of Series A convertible preferred stock
into shares
of common stock. The table also lists the applicable percentage
of shares beneficially owned based on
[ ]
shares of common stock outstanding upon completion of this
offering, assuming no exercise of the underwriters
over-allotment option.
Beneficial ownership of our common stock, Series B common
stock and Series A convertible preferred stock is
determined in accordance with the rules of the SEC, and
generally includes voting power or investment power with respect
to securities held and also includes options to purchase shares
currently exercisable or exercisable within 60 days after
October 31, 2009. Except as indicated and subject to
applicable community property laws, to our knowledge the persons
named in the table below have sole voting and investment power
with respect to all shares of common stock, Series B common
stock and Series A convertible preferred stock shown as
beneficially owned by them.
Unless otherwise indicated, the address for all of our executive
officers, directors and 5% stockholders named below is
c/o Patriot
Risk Management, Inc., 401 East Las Olas Boulevard,
Suite 1540, Fort Lauderdale, Florida 33301.
179
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Beneficial Ownership Prior to the Offering
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Beneficial Ownership After the Offering
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Percentage of
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Percentage of
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Percentage of
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Number of
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Outstanding
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Total
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Number of
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Outstanding
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Percentage of
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Name of Beneficial Owner
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Shares
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Shares(1)
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Vote(2)
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Shares
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Shares
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Total Vote
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Common Stock:
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Steven M. Mariano(3)(14)
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219,161
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19.1
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%
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6.2
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%
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John R. Del Pizzo(4)
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55,000
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4.8
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%
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1.6
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%
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Timothy J. Tompkins(5)
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25,500
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2.2
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%
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*
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Ronald P. Formento Sr.(6)
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19,569
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1.7
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%
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*
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Michael W. Grandstaff
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Charles K. Schuver
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Timothy J. Ermatinger(7)
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15,000
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1.3
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*
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Richard G. Turner
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Theodore G. Bryant(8)
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5,000
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*
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*
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Richard F. Allen(9)
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C. Timothy Morris(10)
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Series B Common Stock:
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Steven M. Mariano(11)(14)
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800,000
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69.8
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90.2
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%
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All directors and executive officers as a group (11 persons)
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1,139,230
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99.4
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%
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Series A Convertible Preferred Stock: (12)
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Steven M. Mariano(14)
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500
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50.0
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%
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Key Payroll Solutions(13)
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200
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20.0
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Ronald P. Formento Sr.
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150
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15.0
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Richard F. Allen
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100
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10.0
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C. Timothy Morris
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50
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5.0
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100.0
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%
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* |
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Less than 1%. |
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(1) |
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Ownership of common stock and Series B common stock is
shown as the combined ownership of both those classes together.
Ownership of Series A convertible preferred stock is shown
as a percentage of that class. |
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(2) |
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Combined voting power of common stock and Series B common
stock. Each holder of Series B common stock is entitled to
four votes per share, and each holder of common stock is
entitled to one vote per share. At the closing of this offering,
all shares of Series B common stock will automatically be
converted into common stock on a
one-for-one
basis and no additional Series B common stock will be
issuable. Upon completion of this offering and based on an
assumed initial public offering price of
[ ] per share, which is the
mid-point of the price range set forth on the cover page of this
prospectus, each share of Series A convertible preferred
stock will be converted into
[ ]
shares of common stock. |
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(3) |
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Includes 100,000 shares held in the name of the Steven M.
Mariano Revocable Trust, an entity controlled by
Mr. Mariano. Mr. Mariano has sole dispositive and
voting control over the shares held by the Steven M. Mariano
Revocable Trust. Also includes 55,000 shares issuable upon
exercise of options that are currently exercisable. The number
of shares shown after the offering includes
[ ]
shares of common stock to be issued upon the automatic
conversion of 500 shares of Series A convertible
preferred stock at the closing of this offering. Excludes
[ ]
shares issuable upon the exercise of warrants that will become
exercisable upon the expiration of the
lock-up
agreements as described in Shares Eligible for Future
Sale
Lock-Up
Agreements. |
180
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(4) |
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Includes 27,500 shares issuable upon exercise of options
that are currently exercisable. Excludes
[ ]
shares issuable upon the exercise of warrants that will become
exercisable upon the expiration of the
lock-up
agreements as described in Shares Eligible for Future
Sale
Lock-Up
Agreements. |
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(5) |
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Includes 5,000 shares issuable upon exercise of options
that are currently exercisable. Excludes
[ ]
shares issuable upon the exercise of warrants that will become
exercisable upon the expiration of the
lock-up
agreements as described in Shares Eligible for Future
Sale
Lock-Up
Agreements. |
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(6) |
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These shares are held in the name of Exmoor, Inc., an entity
that is controlled by Mr. Formento. Mr. Formento has
sole dispositive and voting control over these shares. The
number of shares shown after the offering includes
[ ]
shares of common stock to be issued upon the automatic
conversion of 150 shares of Series A convertible
preferred stock at the closing of this offering. Excludes
[ ] shares
issuable upon the exercise of warrants that will become
exercisable upon the expiration of the
lock-up
agreements as described in Shares Eligible for Future
Sale
Lock-Up
Agreements. |
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(7) |
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Consists of 15,000 shares issuable upon exercise of options
that are currently exercisable. |
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(8) |
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Consists of 5,000 shares issuable upon exercise of options
that are exercisable within 60 days after October 31,
2009. |
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(9) |
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The number of shares shown after the offering consists of
[ ] shares
of common stock to be issued upon the automatic conversion of
100 shares of Series A convertible preferred stock at
the closing of this offering. |
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(10) |
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The number of shares shown after the offering consists of
[ ] shares
of common stock to be issued upon the automatic conversion of
50 shares of Series A convertible preferred stock at
the closing of this offering. |
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(11) |
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Consists of 800,000 shares held in the name of the Steven
M. Mariano Revocable Trust, an entity controlled by
Mr. Mariano. Mr. Mariano has sole dispositive and
voting control over the shares held by the Steven M. Mariano
Revocable Trust. |
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(12) |
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The shares of Series A convertible preferred stock are
non-voting. |
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(13) |
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Key Payroll Solutions address is 3622 Tamiami Trail, Port
Charlotte, Florida 33952. |
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(14) |
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Mr. Mariano has pledged all of the shares of our capital
stock beneficially owned by him, and which may be acquired by
him in the future, as security for his guarantee of the ULLICO
loan. |
181
DESCRIPTION
OF CAPITAL STOCK
General
The following is a summary of the rights of our common stock and
preferred stock and related provisions of our certificate of
incorporation and bylaws, as they will be in effect upon the
closing of this offering.
Our authorized capital stock consists of 40,000,000 shares
of common stock, par value $.001 per share,
4,000,000 shares of Series B common stock, par value
$0.001 per share, and 5,000,000 shares of preferred stock,
par value $.001 per share. As of October 30, 2009, there
were 15 record holders of our common stock and one record holder
of our Series B common stock. Holders of our common stock
and Series B common stock have the same rights, except that
holders of our common stock are entitled to one vote per share
and holders of our Series B common stock are entitled to
four votes per share. At the closing of this offering, all of
the outstanding shares of Series B common stock will
automatically convert into shares of common stock on a
one-for-one
basis, and thereafter no further shares of Series B common
stock may be issued. Upon completion of this offering,
[ ]
shares of common stock will be issued and outstanding and no
shares of Series B common stock or preferred stock will be
issued and outstanding.
The following summary of certain rights of holders of our common
stock and preferred stock does not purport to be complete and is
subject to, and qualified in its entirety by, the provisions of
our certificate of incorporation and bylaws, each of which is
included as an exhibit to the registration statement of which
this prospectus is a part, and by the provisions of applicable
law.
Common
Stock
Each holder of our common stock is entitled to one vote for each
share held by such holder on all matters to be voted upon by our
stockholders, and there are no cumulative voting rights. Subject
to preferences to which holders of preferred stock may be
entitled, holders of our common stock are entitled to receive
ratably the dividends, if any, as may be declared from time to
time by our board of directors out of funds legally available
therefor. See Dividend Policy. If there is a
liquidation, dissolution or winding up of Patriot, holders of
our common stock would be entitled to share in our assets
remaining after the payment of liabilities and the satisfaction
of any liquidation preference granted to the holders of any
outstanding shares of preferred stock. Holders of our common
stock have no preemptive or conversion rights or other
subscription rights, and there are no redemption or sinking fund
provisions applicable to our common stock. All shares of our
common stock to be issued in this offering will be, when issued,
fully paid and non-assessable. The rights, preferences and
privileges of the holders of our common stock are subject to,
and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock which we may designate
in the future.
Preferred
Stock
Our board of directors is authorized, without approval by our
stockholders, to issue up to a total of 5,000,000 shares of
preferred stock in one or more series. Our board of directors
may establish the number of shares to be included in each such
series and may fix the designations, preferences, powers and
other rights of the shares of a series of preferred stock. Our
board could authorize the issuance of preferred stock with
voting or conversion rights that could dilute the voting power
or rights of the holders of our common stock. The issuance of
preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could, among
other things, have the effect of delaying, deferring or
preventing a change in control of Patriot and might harm the
market price of our common stock. We have no current plans to
issue any shares of preferred stock.
Warrants
Prior to the completion of this offering, we expect our board of
directors will declare a dividend of warrants to purchase a
total of
[ ]
shares of our common stock payable to our stockholders at the
effective time of this offering. Each warrant would represent
the right to purchase one share of our common stock at the same
price as the common stock sold in this offering. The right to
purchase common stock under
182
the warrants would begin upon the expiration of the
lock-up
agreements as described in Shares Eligible for Future
Sale
Lock-Up
Agreements. The warrants would expire 10 years after
the date of issuance. The warrants also would contain a cashless
exercise provision. These warrants would be subject to the
restrictions contained in the
lock-up
agreements.
Anti-Takeover
Effects of Delaware Law and Our Certificate of Incorporation and
Bylaws
Certain provisions of Delaware law, our certificate of
incorporation and our bylaws contain provisions that could have
the effect of delaying, deferring or discouraging another party
from acquiring control of us. These provisions, which are
summarized below, are expected to discourage coercive takeover
practices and inadequate takeover bids. These provisions are
also designed to encourage persons seeking to acquire control of
us to first negotiate with our board of directors. We believe
that the benefits of increased protection of our potential
ability to negotiate with an unfriendly or unsolicited acquiror
outweigh the disadvantages of discouraging a proposal to acquire
us because negotiation of these proposals could result in an
improvement of their terms.
Limits on
Ability of Stockholders to Act by Written Consent
We have provided in our certificate of incorporation that our
stockholders may not act by written consent. This limit on the
ability of our stockholders to act by written consent may
lengthen the amount of time required to take stockholder
actions. As a result, a holder controlling a majority of our
capital stock would not be able to amend our bylaws or remove
directors without holding a stockholders meeting.
Limits on
Ability of Stockholders to Replace Members of the Board of
Directors
Our certificate of incorporation and our bylaws provide that the
number of directors shall be fixed from time to time by our
board of directors. Our board of directors will be divided into
three classes with the number of directors in each class being
as nearly equal as possible. Each director will serve a
three-year term. The classification and term of office for each
of our directors upon completion of this offering is noted in
the table listing our directors and executive officers under
Management Directors, Executive Officers and
Key Employees. Pursuant to our bylaws, each director will
serve until such directors successor is elected and
qualified or until such directors earlier death,
resignation, disqualification or removal. Our certificate of
incorporation and bylaws also provide that any director may be
removed for cause, at any meeting of stockholders called for
that purpose, by the affirmative vote of the holders of at least
two-thirds of the shares of our stock entitled to vote for the
election of directors.
Undesignated
Preferred Stock
The ability to authorize undesignated preferred stock makes it
possible for our board of directors to issue preferred stock
with voting or other rights or preferences that could impede the
success of any attempt to acquire us. These and other provisions
may have the effect of deferring hostile takeovers or delaying
changes in control or management of our company.
Requirements
for Advance Notification of Stockholder Nominations and
Proposals
Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for
election as directors, other than nominations made by or at the
direction of the board of directors or a committee of the board
of directors. The bylaws do not give the board of directors the
power to approve or disapprove stockholder nominations of
candidates or proposals regarding business to be conducted at a
special or annual meeting of the stockholders. However, our
bylaws may have the effect of precluding the conduct of certain
business at a meeting if the proper procedures are not followed.
These provisions may also discourage or deter a potential
acquiror from conducting a solicitation of proxies to elect the
acquirers own slate of directors or otherwise attempting
to obtain control of our company.
183
Delaware
Anti-Takeover Statute
We will be subject to the provisions of Section 203 of the
Delaware General Corporation Law regulating corporate takeovers.
We expect the existence of this provision to have an
anti-takeover effect with respect to transactions our board of
directors does not approve in advance. We also anticipate that
Section 203 may also discourage attempts that might result
in a premium over the market price for the shares of common
stock held by stockholders. In general, Section 203
prohibits a publicly-held Delaware corporation from engaging,
under certain circumstances, in a business combination with an
interested stockholder for a period of three years following the
date the person became an interested stockholder unless: prior
to the date of the transaction, the board of directors of the
corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an
interested stockholder upon completion of the transaction that
resulted in the stockholder becoming an interested stockholder;
the stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares
outstanding (1) shares owned by persons who are directors
and also officers and (2) shares owned by employee stock
plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or on or
subsequent to the date of the transaction, the business
combination is approved by the board and authorized at an annual
or special meeting of stockholders, and not by written consent,
by the affirmative vote of at least
662/3%
of the outstanding voting stock which is not owned by the
interested stockholder.
Generally, a business combination includes a merger, asset or
stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. An interested stockholder
is a person who, together with affiliates and associates, owns
or, within three years prior to the determination of interested
stockholder status, did own 15% or more of a corporations
outstanding voting securities.
The provisions of Delaware law, our certificate of incorporation
and our bylaws could have the effect of discouraging others from
attempting hostile takeovers and, as a consequence, they may
also inhibit temporary fluctuations in the market price of our
common stock that often result from actual or rumored hostile
takeover attempts. These provisions may also have the effect of
preventing changes in our management. It is possible that these
provisions could make it more difficult to accomplish
transactions that stockholders may otherwise deem to be in their
best interests.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is
American Stock Transfer and Trust Company.
Listing
We have applied to list our common stock on the New York Stock
Exchange under the symbol PMG.
SHARES ELIGIBLE
FOR FUTURE SALE
Upon completion of this offering, we will have approximately
[ ]
shares of common stock outstanding. Of these shares, the
[ ]
shares sold in this offering and any shares issued upon exercise
of the underwriters over-allotment option will be freely
tradable without restriction or further registration under the
Securities Act, unless the shares are held by any of our
affiliates as that term is defined in Rule 144
under the Securities Act, in which case they may only be sold in
compliance with the limitations described below. The remaining
shares were issued and sold by us in reliance on exemptions from
the registration requirements of the Securities Act and are
eligible for public sale if registered under the Securities Act
or sold in accordance with Rule 144 under the Securities
Act.
Upon completion of this offering,
[ ]
shares of common stock will be issuable upon the exercise of
options outstanding as of September 15, 2008 and
[ ]
shares will be issuable upon the exercise of outstanding options
that we intend to grant to our directors, executive officers and
other employees, at an exercise price equal to the initial
public offering price. In addition,
[ ] shares
of common stock will
184
be issuable pursuant to warrants that will become exercisable
upon the expiration of the
lock-up
agreements as described below.
Lock-up
Agreements
We, all of our current officers and directors and each of our
stockholders have agreed that, without the prior written consent
of FBR Capital Markets & Co. (FBR), we and they will
not, directly or indirectly:
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offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise
dispose of or transfer (or enter into any transaction or device
which is designed to, or could be expected to, result in the
disposition by any person at any time in the future of) any
share of our common stock or any security convertible into,
exercisable for or exchangeable for any share of our common
stock;
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enter into any swap or any other arrangement or transaction that
transfers to another person, in whole or in part, any of the
economic consequences of ownership of our common stock, whether
any such swap or transaction described above is to be settled by
delivery of shares of our common stock or other securities, in
cash or otherwise;
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make any demand for or exercise any right (or, in the case of
us, file) or cause to be filed a registration statement (other
than the registration statement on
Form S-8
that is described in this prospectus) under the Securities Act
including any amendment thereto, with respect to the
registration of any shares of our common stock or securities
convertible into, exercisable for or exchangeable for any share
of our common stock or any of our other securities; or
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publicly disclose the intention to do any of the foregoing,
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in each case, for a
lock-up
period of 180 days after the date of the final prospectus
relating to this offering. The
lock-up
period described in the preceding sentence will be extended if:
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during the last 17 days of the
lock-up
period, we issue an earnings release or material news or a
material event relating to us occurs; or
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prior to the expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period;
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in which case the restrictions described in the preceding
sentence will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
announcement of the material news or material event, unless such
extension is waived in writing by FBR.
Subject to applicable securities laws, our directors, executive
officers and stockholders may transfer their shares of our
common stock (i) as a bona fide gift or gifts, provided
that prior to such transfer the donee or donees thereof agree in
writing to be bound by the same restrictions or (ii) if
such transfer occurs by operation of law (e.g., pursuant
to the rules of descent and distribution, statutes governing the
effects of a merger or a qualified domestic relations order),
provided that prior to such transfer the transferee executes an
agreement stating that the transferee is receiving and holding
the shares subject to the same restrictions. In addition, our
directors, executive officers and stockholders may transfer
their shares of our common stock to any trust, partnership,
corporation or other entity formed for the direct or indirect
benefit of the director, executive officer or stockholder or the
immediate family of the director, executive officer or
stockholder, provided that prior to such transfer the transferee
agrees in writing to be bound by the same restrictions and
provided that such transfer does not involve a disposition for
value.
The restrictions contained in the
lock-up
agreements do not apply to any grant of options to purchase
shares of our common stock or issuances of shares of restricted
stock or other equity-based awards pursuant to the 2010 Plan.
185
Note
Offset and Call Option Agreements
Under a note offset and call option agreement entered into in
2004, we have the right under certain circumstances to
repurchase a portion of the 24,461 shares held by one of
our stockholders at a price determined pursuant to the agreement
to offset the obligation that affiliates of these stockholders
have to fund capital shortfalls related to cells they
established in a segregated portfolio captive in 2004. The note
offset and call agreements terminate 90 days after the
stockholders obligation to make additional capital
contributions terminates.
Rule 144
Sales by Affiliates
Affiliates of our company must comply with Rule 144 of the
Securities Act when they sell shares of our common stock. Under
Rule 144, affiliates who acquire shares of common stock,
other than in a public offering registered with the SEC, are
required to hold those shares for a period of (i) one year
if they desire to sell such shares 90 or fewer days after the
issuer becomes subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act or (ii) six
months if they desire to sell such shares more than 90 days
after the issuer becomes subject to the reporting requirements
of Section 13 or 15(d) of the Exchange Act. Shares acquired
in a registered public offering or held for more than the
applicable holding period may be sold by an affiliate subject to
certain conditions. An affiliate would generally be entitled to
sell within any three-month period a number of shares that does
not exceed the greater of:
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one percent of the number of shares of common stock then
outstanding (approximately [ ] shares immediately
after the offering); and
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the average weekly trading volume of the common stock on the New
York Stock Exchange during the four calendar weeks preceding the
filing with the SEC of a notice on Form 144 with respect to
the sale.
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Sales by affiliates under Rule 144 are also subject to
other requirements regarding the manner of sale, notice and the
availability of current public information about our company.
Rule 144(b)(1)
Under Rule 144(b)(1) of the Securities Act, a person who is
not, and has not been at any time during the three months
preceding a sale, one of our affiliates and who has beneficially
owned the shares proposed to be sold for at least one year is
entitled to sell the shares for such persons own account
without complying with any other requirements of Rule 144.
All of the 1,146,026 shares of common stock outstanding as of
the date of this prospectus, would be available to be sold
pursuant to Rule 144, including 133,865 shares of common
stock that could be sold pursuant to Rule 144(b)(1), in
each case subject to the terms of the
lock-up
agreements described above.
We intend to file a
Form S-8
registration statement following completion of this offering to
register shares of common stock issued or issuable under our
equity incentive plans. These shares will be
available-for-sale
in the public market, subject to Rule 144 volume
limitations applicable to affiliates.
186
UNDERWRITING
Subject to the terms and conditions set forth in the
underwriting agreement between us and the underwriters named
below, for whom FBR Capital Markets & Co.
(FBR) is acting as representative, we have agreed to
sell to the underwriters, and each underwriter has severally
agreed to purchase, at the public offering price less the
underwriting discounts and commissions shown on the cover page
of this prospectus, the number of shares of common stock listed
next to its name in the following table:
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Number of
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Underwriter
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Shares
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FBR Capital Markets & Co.
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Macquarie Capital (USA) Inc.
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Oppenheimer & Co. Inc.
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Total
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Under the terms and conditions of the underwriting agreement,
the underwriters are committed to purchase all of the shares
offered by this prospectus (other than the shares subject to the
underwriters option to purchase additional shares), if the
underwriters buy any of such shares. We have agreed to indemnify
the underwriters against certain liabilities, including certain
liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of
such liabilities.
The underwriters initially propose to offer the common stock
directly to the public at the public offering price set forth on
the cover page of this prospectus and to certain dealers at such
offering price less a concession not to exceed
$ per share. The underwriters may
allow, and such dealers may re-allow, a discount not to exceed
$ per share to certain other
dealers. After the public offering of the shares of common
stock, the offering price and other selling terms may be changed
by the underwriters.
Over-Allotment Option. We have granted to the
underwriters an option to purchase up to [ ]
additional shares of our common stock at the same price per
share as they are paying for the shares shown in the table
above. The underwriters may exercise this option in whole or in
part at any time within 30 days after the date of the
underwriting agreement. To the extent the underwriters exercise
this option, each underwriter will be committed, so long as the
conditions of the underwriting agreement are satisfied, to
purchase a number of additional shares proportionate to that
underwriters initial commitment as indicated in the table
at the beginning of this section plus, in the event that any
underwriter defaults in its obligation to purchase shares under
the underwriting agreement, certain additional shares.
Discounts and Commissions. The following table
shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are
shown assuming both no exercise and full exercise of the
underwriters option to purchase additional shares of our
common stock.
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No
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Full
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Paid by Us
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Exercise
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Exercise
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Per Share
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$
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$
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Total
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$
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$
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In addition to the underwriting discounts and commissions to be
paid by us, we have agreed to reimburse FBR for certain of its
out-of-pocket
expenses incurred in connection with this offering up to
$600,000. We have agreed to pay FBR a $150,000 advance against
these expenses, which advance is creditable against the
underwriting discounts and commissions to be paid by us. We
estimate that the total expenses of the offering payable by us,
excluding underwriting discounts and commissions, will be
approximately
[ ].
Listing. We have applied to have our common
stock approved for listing on the New York Stock Exchange, under
the symbol PMG. In order to meet the requirements
for listing on that exchange, the underwriters intend to sell at
least the minimum number of shares to at least the minimum
number of beneficial owners as required by that exchange.
187
Stabilization. In accordance with
Regulation M under the Exchange Act, the underwriters may
engage in activities that stabilize, maintain or otherwise
affect the price of our common stock, including short sales and
purchases to cover positions created by short positions,
stabilizing transactions, syndicate covering transactions,
penalty bids and passive market making.
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Short positions involve sales by the underwriters of shares in
excess of the number of shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short
position. In a covered short position, the number of shares
involved in the sales made by the underwriters in excess of the
number of shares they are obligated to purchase is not greater
than the number of shares that they may purchase by exercising
their option to purchase additional shares. In a naked short
position, the number of shares involved is greater than the
number of shares in their option to purchase additional shares.
The underwriters may close out any short position by either
exercising their option to purchase additional shares or
purchasing shares in the open market.
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Stabilizing transactions permit bids to purchase the underlying
security as long as the stabilizing bids do not exceed a
specific maximum price.
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Syndicate covering transactions involve purchases of our common
stock in the open market after the distribution has been
completed to cover syndicate short positions. In determining the
source of shares to close out the short position, the
underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to
the price at which they may purchase shares through the
underwriters option to purchase additional shares. If the
underwriters sell more shares than could be covered by
underwriters option to purchase additional shares, thereby
creating a naked short position, the position can only be closed
out by buying shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned
that there could be downward pressure on the price of the shares
in the open market after pricing that could adversely affect
investors who purchase in the offering.
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Penalty bids permit the representative to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
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In passive market marking, market makers in the common stock who
are underwriters or prospective underwriters may, subject to
limitations, make bids for or purchase shares of our common
stock until the time, if any, at which a stabilizing bid is made.
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These activities may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of our common stock. As a result
of these activities, the price of our common stock may be higher
than the price that might otherwise exist in the open market.
These transactions may be effected on the New York Stock
Exchange or otherwise and, if commenced, may be discontinued at
any time.
Neither we nor any of the underwriters make any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
our common stock. In addition, neither we nor any of the
underwriters make any representation that the representative of
the underwriters will engage in these stabilizing transactions
or that any transaction, once commenced, will not be
discontinued without notice.
Lock-up
Agreements. We, all of our current officers and
directors and each of our stockholders have agreed that, without
the prior written consent of FBR, we and they will not, directly
or indirectly:
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offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise
dispose of or transfer (or enter into any transaction or device
which is designed to, or could be expected to, result in the
disposition by any person at any time in the future of), any
share of our common stock or any security convertible into,
exercisable for or exchangeable for any share of our common
stock;
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188
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enter into any swap or any other arrangement or transaction that
transfers to another person, in whole or in part, any of the
economic consequences of ownership of our common stock, whether
any such swap or transaction described above is to be settled by
delivery of shares of our common stock or other securities, in
cash or otherwise;
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make any demand for or exercise any right (or, in the case of
us, file) or cause to be filed a registration statement (other
than the registration statement on Form S-8 that is
described in this prospectus) under the Securities Act,
including any amendment thereto, with respect to the
registration of any shares of our common stock or securities
convertible into, exercisable for or exchangeable for any share
of our common stock or any of our other securities; or
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publicly disclose the intention to do any of the foregoing,
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in each case, for a
lock-up
period of 180 days after the date of the final prospectus
relating to this offering. The
lock-up
period described in the preceding sentence will be extended if:
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during the last 17 days of the
lock-up
period, we issue an earnings release or material news or a
material event relating to us occurs; or
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prior to the expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period;
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in which case the restrictions described in the preceding
sentence will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
announcement of the material news or material event, unless such
extension is waived in writing by FBR.
Subject to applicable securities laws, our directors, executive
officers and stockholders may transfer their shares of our
common stock (i) as a bona fide gift or gifts, provided
that prior to such transfer the donee or donees thereof agree in
writing to be bound by the same restrictions or (ii) if
such transfer occurs by operation of law (e.g., pursuant
to the rules of descent and distribution, statutes governing the
effects of a merger or a qualified domestic relations order),
provided that prior to such transfer the transferee executes an
agreement stating that the transferee is receiving and holding
the shares subject to the same restrictions. In addition, our
directors, executive officers and stockholders may transfer
their shares of our common stock to any trust, partnership,
corporation or other entity formed for the direct or indirect
benefit of the director, executive officer or stockholder or the
immediate family of the director, executive officer or
stockholder, provided that prior to such transfer the transferee
agrees in writing to be bound by the same restrictions and
provided that such transfer does not involve a disposition for
value.
The restrictions contained in the
lock-up
agreements do not apply to any grant of options to purchase
shares of our common stock or issuances of shares of restricted
stock or other equity-based awards pursuant to the 2010 Plan.
FBR does not intend to release any portion of the common stock
subject to the foregoing
lock-up
agreements; however FBR, in its sole discretion, may release any
of the common stock from the
lock-up
agreements prior to expiration of the
lock-up
period without notice. In considering a request to release
shares from a
lock-up
agreement, FBR will consider a number of factors, including the
impact that such a release would have on this offering and the
market for our common stock and the equitable considerations
underlying the request for releases.
Directed Share Program. The underwriters have
reserved for sale, at the initial offering price, up to
100,000 shares of common stock for sale to our directors,
officers and employees and persons having business relationships
with us. The number of shares of common stock available to the
general public in the offering will be reduced to the extent
these persons purchase these reserved shares. We will not pay an
underwriting discount on any reserved shares sold to our
directors, officers and employees or persons having business
relationships with us. Any reserved shares not so purchased will
be offered by the underwriters to the general public on the same
terms as the other shares of common stock.
189
Discretionary Accounts. The underwriters have
informed us that they do not expect to make sales to accounts
over which they exercise discretionary authority in excess of 5%
of the shares of common stock being offered in this offering.
IPO Pricing. Prior to the completion of this
offering, there has been no public market for our common stock.
The initial public offering price has been negotiated between us
and the representative. Among the factors to be considered in
these negotiations were: the history of, and prospects for, us
and the industry in which we compete; our past and present
financial performance; an assessment of our management; the
present state of our development; the prospects for our future
earnings; the prevailing conditions of the applicable United
States securities market at the time of this offering; and
market valuations of publicly traded companies that we and the
representative believe to be comparable to us.
Certain Information and Fees. A prospectus in
electronic format may be made available on the websites
maintained by one or more of the underwriters or selling group
members, if any, participating in the offering. The
representative may allocate a number of shares to the
underwriters and selling group members, if any, for sale to
their online brokerage account holders. Any such allocations for
online distributions will be made by the representative on the
same basis as other allocations.
Other than the prospectus in electronic format, the information
on any underwriters or selling group members website
and any information contained in any other website maintained by
any underwriter or selling group member is not part of this
prospectus or the registration statement of which this
prospectus forms a part, has not been approved or endorsed by us
or any underwriter in its capacity as underwriter or selling
group member and should not be relied upon by investors.
If you purchase shares of common stock offered in this
prospectus, you may be required to pay stamp taxes and other
charges under the laws and practices of the country of purchase,
in addition to the offering price listed on the cover page of
this prospectus.
Other Relationships. FBR has in the past and
may in the future provide us and our affiliates with investment
banking and financial advisory services for which they have in
the past and may in the future receive customary fees. We have
granted FBR a right of first refusal under certain circumstances
to act as the sole book runner or sole placement agent in
connection with any subsequent public or private offering of
equity securities by us. This right of first refusal extends
until October 20, 2010 unless earlier terminated by either
party. We have also granted FBR a right of first refusal to act
as financial advisor in connection with any sale of all or
substantially all of our capital stock or assets during the same
period. The terms of any such engagement of FBR will be
determined by agreement between FBR and us on the basis of
compensation customarily paid to leading investment banks acting
as underwriters, placement agents or financial advisors in
similar transactions.
190
LEGAL
MATTERS
Locke Lord Bissell & Liddell LLP in Chicago, Illinois,
will pass upon the validity of the shares of common stock
offered by this prospectus and certain other legal matters for
us. Sidley Austin LLP in Chicago, Illinois, will pass upon
certain legal matters for the underwriters.
EXPERTS
The consolidated financial statements of Patriot and its
subsidiaries at December 31, 2008 and 2007 and for each of
the years ended December 31, 2008, 2007 and 2006 included
in this prospectus and in the related registration statement
have been audited by BDO Seidman, LLP, an independent registered
public accounting firm, as indicated in their report with
respect thereto, and are included in this prospectus in reliance
upon the authority of such firm as experts in auditing and
accounting.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act with respect to the shares of our
common stock to be sold in this offering. This prospectus does
not contain all the information contained in the registration
statement. For further information with respect to us and the
shares to be sold in this offering, we refer you to the
registration statement, including the agreements, other
documents and schedules filed as exhibits to the registration
statement. Statements contained in this prospectus as to the
contents of any agreement or other document to which we make
reference are not necessarily complete. In each instance, we
refer you to the copy of the agreement or other document filed
as an exhibit to the registration statement, each statement
being qualified in all respects by reference to the agreement or
document to which it refers.
After completion of this offering, we will file annual,
quarterly and current reports, proxy statements and other
information with the SEC. We intend to make these filings
available on our website at www.prmigroup.com. In addition, we
will provide copies of our filings free of charge to our
stockholders upon request. Our SEC filings, including the
registration statement of which this prospectus is a part, will
also be available to you on the SECs Internet site at
http://www.sec.gov.
You may read and copy all or any portion of the registration
statement or any reports, statements or other information we
file at the SECs public reference room at
100 F Street, N.E., Washington, D.C. 20549. You
may call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
room. You can receive copies of these documents upon payment of
a duplicating fee by writing to the SEC. We intend to furnish
our stockholders with annual reports containing consolidated
financial statements audited by an independent registered public
accounting firm.
191
INDEX TO
FINANCIAL STATEMENTS
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Page
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Audited Consolidated Financial Statements as of
December 31, 2008 and for the three years in the period
ended December 31, 2008 of Patriot Risk Management, Inc.
and its Wholly-Owned Subsidiaries
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F-2
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F-3
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F-4
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F-5
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F-6
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F-7
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Unaudited Interim Consolidated Financial Statements as of
September 30, 2009 and for the nine month periods ended
September 30, 2009 and 2008 of Patriot Risk Management,
Inc. Holdings, Inc. and its Wholly-Owned Subsidiaries
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F-35
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F-36
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F-37
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F-38
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F-39
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F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Patriot Risk Management, Inc. and its Wholly-Owned Subsidiaries
Fort Lauderdale, Florida
We have audited the accompanying consolidated balance sheets of
Patriot Risk Management, Inc and its Wholly-Owned Subsidiaries
as of December 31, 2008 and 2007, and the related
consolidated statements of income, stockholders equity and
cash flows for each of the three years in the period ended
December 31, 2008. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Patriot Risk Management, Inc. and its Wholly-Owned
Subsidiaries at December 31, 2008 and 2007, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2008 in conformity
with accounting principles generally accepted in the United
States of America.
/s/ BDO Seidman, LLP
Grand Rapids, Michigan
April 22, 2009
F-2
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
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December 31,
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2008
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2007
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(In thousands)
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ASSETS
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Investments
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Debt securities, available for sale, at fair value
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$
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54,373
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$
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55,688
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Equity securities, available for sale, at fair value
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|
222
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|
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634
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Short-term investments
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244
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238
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Real estate held for the production of income
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250
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256
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|
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Total investments
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55,089
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|
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56,816
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Cash and cash equivalents
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8,333
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|
4,943
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|
Premiums receivable, net
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|
|
58,826
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|
|
|
36,748
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|
Deferred policy acquisition costs, net of deferred ceding
commissions
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1,477
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|
Prepaid reinsurance premiums
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|
|
33,731
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|
|
|
14,963
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|
Reinsurance recoverable, net
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|
|
|
|
|
|
|
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Unpaid losses and loss adjustment expenses
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|
|
37,492
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|
|
|
43,317
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|
Paid losses and loss adjustment expenses
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|
|
4,642
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|
|
|
4,202
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|
Funds held by ceding companies and other amounts due from
reinsurers
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|
|
2,507
|
|
|
|
2,550
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|
Net deferred tax assets
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|
|
3,967
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|
|
|
3,022
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Fixed assets, net
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|
|
733
|
|
|
|
1,165
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Receivable from related party
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500
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Federal income taxes recoverable
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|
110
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|
|
|
391
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|
Intangible assets
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1,287
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1,287
|
|
Other assets, net
|
|
|
4,075
|
|
|
|
4,356
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
211,292
|
|
|
$
|
175,237
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities
|
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses
|
|
$
|
74,550
|
|
|
$
|
69,881
|
|
Reinsurance payable on paid losses and loss adjustment expenses
|
|
|
756
|
|
|
|
404
|
|
Unearned and advanced premium reserves
|
|
|
44,613
|
|
|
|
29,160
|
|
Deferred ceding commissions, net of deferred policy acquisition
costs
|
|
|
83
|
|
|
|
|
|
Reinsurance funds withheld and balances payable
|
|
|
47,449
|
|
|
|
44,073
|
|
Notes payable, including $1.5 million of related party
notes payable, and accrued interest of $224,000 and $180,000
|
|
|
20,783
|
|
|
|
15,108
|
|
Subordinated debentures, including accrued interest of $175,000
and $139,000
|
|
|
1,809
|
|
|
|
1,799
|
|
Accounts payable and accrued expenses
|
|
|
14,112
|
|
|
|
9,376
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
204,155
|
|
|
|
169,801
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock
|
|
|
1,000
|
|
|
|
|
|
Common stock
|
|
|
1
|
|
|
|
|
|
Series A common stock
|
|
|
|
|
|
|
1
|
|
Series B common stock
|
|
|
1
|
|
|
|
1
|
|
Paid-in capital
|
|
|
5,456
|
|
|
|
5,363
|
|
Retained earnings
|
|
|
72
|
|
|
|
196
|
|
Accumulated other comprehensive income (loss), net of deferred
income taxes
|
|
|
607
|
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
7,137
|
|
|
|
5,436
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
211,292
|
|
|
$
|
175,237
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
49,220
|
|
|
$
|
24,613
|
|
|
$
|
21,053
|
|
Insurance services income
|
|
|
5,657
|
|
|
|
7,027
|
|
|
|
7,175
|
|
Net investment income
|
|
|
2,028
|
|
|
|
1,326
|
|
|
|
1,321
|
|
Net realized losses on investments
|
|
|
(1,037
|
)
|
|
|
(5
|
)
|
|
|
(1,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
55,868
|
|
|
|
32,961
|
|
|
|
28,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
28,716
|
|
|
|
15,182
|
|
|
|
17,839
|
|
Net policy acquisition and underwriting expenses
|
|
|
13,535
|
|
|
|
6,023
|
|
|
|
3,834
|
|
Other operating expenses
|
|
|
10,930
|
|
|
|
8,519
|
|
|
|
9,704
|
|
Interest expense
|
|
|
1,437
|
|
|
|
1,290
|
|
|
|
1,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
54,618
|
|
|
|
31,014
|
|
|
|
32,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
1,469
|
|
|
|
|
|
|
|
796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Write-off of Deferred Equity Offering Costs
|
|
|
(3,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on Early Extinguishment of Debt
|
|
|
|
|
|
|
|
|
|
|
6,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
(767
|
)
|
|
|
1,947
|
|
|
|
3,099
|
|
Income Tax Expense (Benefit)
|
|
|
(643
|
)
|
|
|
(432
|
)
|
|
|
1,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(124
|
)
|
|
$
|
2,379
|
|
|
$
|
1,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(.09
|
)
|
|
$
|
1.77
|
|
|
$
|
1.16
|
|
Diluted
|
|
|
(.09
|
)
|
|
|
1.76
|
|
|
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,361
|
|
|
|
1,342
|
|
|
|
1,392
|
|
Diluted
|
|
|
1,370
|
|
|
|
1,351
|
|
|
|
1,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
Series A Convertible
|
|
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
Earnings
|
|
|
Other
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balance, January 1, 2006
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
384
|
|
|
$
|
|
|
|
|
800
|
|
|
$
|
1
|
|
|
$
|
3,666
|
|
|
$
|
(3,023
|
)
|
|
$
|
(328
|
)
|
|
$
|
316
|
|
Redemption of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(812
|
)
|
|
|
(170
|
)
|
|
|
|
|
|
|
(982
|
)
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(600
|
)
|
|
|
|
|
|
|
(600
|
)
|
Issuance of common stock and paid in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1,355
|
|
|
|
|
|
|
|
|
|
|
|
1,356
|
|
Unrestricted common stock grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
502
|
|
|
|
|
|
|
|
|
|
|
|
502
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance before comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
521
|
|
|
|
1
|
|
|
|
800
|
|
|
|
1
|
|
|
|
4,901
|
|
|
|
(3,793
|
)
|
|
|
(328
|
)
|
|
|
782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,610
|
|
|
|
|
|
|
|
1,610
|
|
Net unrealized appreciation in available for sale securities,
net of deferred taxes of $255,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
579
|
|
|
|
579
|
|
Reclassification adjustment for net gains realized in net income
during the year, net of tax effect of $143,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(277
|
)
|
|
|
(277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,610
|
|
|
|
302
|
|
|
|
1,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
521
|
|
|
|
1
|
|
|
|
800
|
|
|
|
1
|
|
|
|
4,901
|
|
|
|
(2,183
|
)
|
|
|
(26
|
)
|
|
|
2,694
|
|
Redemption of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
Unrestricted common stock grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
425
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance before comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
561
|
|
|
|
1
|
|
|
|
800
|
|
|
|
1
|
|
|
|
5,363
|
|
|
|
(2,183
|
)
|
|
|
(26
|
)
|
|
|
3,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,379
|
|
|
|
|
|
|
|
2,379
|
|
Net unrealized depreciation in available for sale securities,
net of deferred taxes of $51,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99
|
)
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,379
|
|
|
|
(99
|
)
|
|
|
2,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
561
|
|
|
|
1
|
|
|
|
800
|
|
|
|
1
|
|
|
|
5,363
|
|
|
|
196
|
|
|
|
(125
|
)
|
|
|
5,436
|
|
Conversion of all outstanding shares of Series A common
stock into common stock
|
|
|
|
|
|
|
|
|
|
|
561
|
|
|
|
1
|
|
|
|
(561
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of preferred stock
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance before comprehensive income
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
561
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
800
|
|
|
|
1
|
|
|
|
5,456
|
|
|
|
196
|
|
|
|
(125
|
)
|
|
|
6,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(124
|
)
|
|
|
|
|
|
|
(124
|
)
|
Net unrealized appreciation in available for sale securities,
net of deferred taxes of $374,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
732
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(124
|
)
|
|
|
732
|
|
|
|
608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
1,000
|
|
|
$
|
1,000
|
|
|
|
561
|
|
|
$
|
1
|
|
|
|
|
|
|
$
|
|
|
|
|
800
|
|
|
$
|
1
|
|
|
$
|
5,456
|
|
|
$
|
72
|
|
|
$
|
607
|
|
|
$
|
7,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(124
|
)
|
|
$
|
2,379
|
|
|
$
|
1,610
|
|
Adjustments to reconcile net income to net cash from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(6,586
|
)
|
Forgiveness of debt in connection with commutation of reinsurance
|
|
|
(231
|
)
|
|
|
|
|
|
|
|
|
Net realized losses on investments
|
|
|
1,037
|
|
|
|
5
|
|
|
|
1,346
|
|
Depreciation and amortization
|
|
|
844
|
|
|
|
1,030
|
|
|
|
396
|
|
Stock compensation expense
|
|
|
93
|
|
|
|
561
|
|
|
|
692
|
|
Amortization (accretion) of debt securities
|
|
|
263
|
|
|
|
(63
|
)
|
|
|
(76
|
)
|
Deferred income tax expense (benefit)
|
|
|
(1,318
|
)
|
|
|
(1,331
|
)
|
|
|
69
|
|
Changes in certain assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums receivable
|
|
|
(22,078
|
)
|
|
|
(17,298
|
)
|
|
|
2,493
|
|
Deferred policy acquisition costs
|
|
|
1,477
|
|
|
|
(703
|
)
|
|
|
636
|
|
Prepaid reinsurance premiums
|
|
|
(18,768
|
)
|
|
|
(7,497
|
)
|
|
|
(3,064
|
)
|
Reinsurance recoverable on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses
|
|
|
5,825
|
|
|
|
(2,214
|
)
|
|
|
(19,404
|
)
|
Paid losses and loss adjustment expenses
|
|
|
(440
|
)
|
|
|
(3,774
|
)
|
|
|
828
|
|
Funds held by ceding companies and other amounts due from
reinsurers
|
|
|
43
|
|
|
|
(131
|
)
|
|
|
(36
|
)
|
Federal income taxes recoverable
|
|
|
281
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
42
|
|
|
|
(193
|
)
|
|
|
(3,001
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses
|
|
|
4,669
|
|
|
|
3,928
|
|
|
|
26,475
|
|
Reinsurance payable on paid loss and loss adjustment expenses
|
|
|
352
|
|
|
|
(243
|
)
|
|
|
(627
|
)
|
Unearned and advanced premium reserves
|
|
|
15,453
|
|
|
|
13,517
|
|
|
|
2,429
|
|
Net deferred ceding commissions
|
|
|
83
|
|
|
|
|
|
|
|
|
|
Reinsurance funds withheld and balances payable
|
|
|
3,376
|
|
|
|
17,286
|
|
|
|
1,592
|
|
Federal income taxes payable
|
|
|
|
|
|
|
(1,829
|
)
|
|
|
178
|
|
Accounts payable and accrued expenses
|
|
|
4,736
|
|
|
|
3,697
|
|
|
|
(961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By (Used In) Operating Activities
|
|
|
(4,385
|
)
|
|
|
7,127
|
|
|
|
4,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales and maturities of debt securities
|
|
|
19,076
|
|
|
|
20,817
|
|
|
|
6,899
|
|
Purchases of debt securities
|
|
|
(17,544
|
)
|
|
|
(45,224
|
)
|
|
|
(22,168
|
)
|
Proceeds from sales of equity securities
|
|
|
|
|
|
|
280
|
|
|
|
2,457
|
|
Purchases of equity securities
|
|
|
|
|
|
|
|
|
|
|
(1,766
|
)
|
Net sales (purchases) of short-term investments
|
|
|
(6
|
)
|
|
|
(238
|
)
|
|
|
2,142
|
|
Purchases of fixed assets
|
|
|
(87
|
)
|
|
|
(639
|
)
|
|
|
(1,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used In) Investment Activities
|
|
|
1,439
|
|
|
|
(25,004
|
)
|
|
|
(13,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
6,950
|
|
|
|
5,665
|
|
|
|
8,652
|
|
Repayment of notes payable
|
|
|
(1,114
|
)
|
|
|
(586
|
)
|
|
|
(2,320
|
)
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
1,355
|
|
Net disbursements for redemption of common stock
|
|
|
|
|
|
|
(100
|
)
|
|
|
(984
|
)
|
Common stock dividends paid
|
|
|
|
|
|
|
|
|
|
|
(600
|
)
|
Proceeds from issuance of preferred stock, net of receivable
from related party
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By Financing Activities
|
|
|
6,336
|
|
|
|
4,979
|
|
|
|
6,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
3,390
|
|
|
|
(12,898
|
)
|
|
|
(2,579
|
)
|
Cash and Cash Equivalents, beginning of period
|
|
|
4,943
|
|
|
|
17,841
|
|
|
|
20,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, end of period
|
|
$
|
8,333
|
|
|
$
|
4,943
|
|
|
$
|
17,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,324
|
|
|
$
|
1,188
|
|
|
$
|
1,538
|
|
Income taxes
|
|
|
1,065
|
|
|
|
850
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
|
|
1.
|
Nature of
Operations and Significant Accounting Policies
|
The accompanying consolidated financial statements of Patriot
Risk Management, Inc. and its wholly-owned subsidiaries
(Company) include the accounts of Patriot Risk Management, Inc.,
a holding company, and its wholly-owned subsidiaries, which
include (i) Guarantee Insurance Group, Inc. and its
wholly-owned subsidiary, Guarantee Insurance Company (Guarantee
Insurance), a property/casualty insurance company and
(ii) PRS Group, Inc. and its wholly-owned subsidiaries,
Patriot Risk Services, Inc., Patriot Re International, Inc.,
Patriot Risk Management of Florida, Inc. and Patriot Insurance
Management Company, Inc.
Through PRS Group, Inc. and its subsidiaries, the Company
provides a range of insurance services, currently almost
entirely to Guarantee Insurance, the segregated portfolio
captives organized by Guarantee Insurances alternative
market customers and its quota share reinsurers. The fees earned
by PRS from Guarantee Insurance, attributable to the portion of
the insurance risk it retains, are eliminated upon
consolidation. The fees earned by PRS associated with the
portion of the insurance risk assumed by the segregated
portfolio captives and Guarantee Insurances quota share
reinsurer are reimbursed through a ceding commission. For
financial reporting purposes, ceding commissions are treated as
a reduction in underwriting expenses. The principal services
provided by PRS include nurse case management and cost
containment services for workers compensation claims.
Patriot Risk Services, Inc. is currently licensed as an
insurance agent or producer in 19 jurisdictions. Patriot
Insurance Management Company is currently licensed as an
insurance agent or producer in 34 jurisdictions, and Patriot Re
International, Inc. is licensed as a reinsurance intermediary
broker in 2 jurisdictions.
At the time that Guarantee Insurance was purchased in 2003, it
had not written business since 1987 and held legacy net loss and
loss adjustment expense reserves of approximately
$3.2 million. Guarantee Insurance, which is domiciled in
Florida, is actively licensed in 31 states and the District
of Columbia and holds inactive licenses in an additional
9 states. Guarantee Insurance began writing both
alternative market and traditional workers compensation
business in 2004 and wrote workers compensation insurance
in 22 states and the District of Columbia in 2008, with
approximately 46% concentrated in Florida. Through alternative
market business, the policyholder, agent or other party
generally bears a substantial portion of the underwriting risk
through the reinsurance of the risk by a captive reinsurer or
through a high deductible or retrospectively rated policy.
Through traditional business, the Company bears the underwriting
risk, ceding a portion during certain periods to third-party
reinsurers.
On April 1, 2007 the Companys majority stockholder
contributed all the outstanding capital stock of The Tarheel
Group, Inc., or Tarheel, to PRS Group, Inc. with the result that
Tarheel and its subsidiary, Tarheel Insurance Management
Company, or TIMCO, became wholly-owned indirect subsidiaries of
Patriot Risk Management, Inc. As the companies were under common
control, the contribution of Tarheel to PRS Group, Inc. was
accounted for similar to a pooling of interests pursuant to the
Financial Accounting Standards Board (FASB) Statement of
Financial Standards (SFAS) No. 141 Business
Combinations. Consequently, the accompanying consolidated
financial statements have been retroactively restated, as if the
combining companies had been consolidated for all periods.
On November 26, 2007, the directors of the Company deemed
it advisable and in the Companys best interests to proceed
with the steps necessary to effectuate an initial public
offering and take such actions necessary to file a Registration
Statement on
Form S-1
relating to the issuance and sale by the Company of its common
stock, including the prospectus contained therein and all
required exhibits thereto with the United States Securities
and Exchange Commission. An initial public offering has not yet
been consummated due to the prevailing conditions of the capital
markets. In 2008, the Company wrote off approximately
$3.5 million of deferred equity offering costs incurred in
connection with its efforts to consummate an initial public
offering.
F-7
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Basis
of Presentation
The accompanying consolidated financial statements include the
accounts of Patriot Risk Management, Inc. and its wholly-owned
subsidiaries. All significant intercompany balances have been
eliminated in consolidation. The accompanying financial
statements have been prepared in conformity with accounting
principles generally accepted in the United States of America
(GAAP). GAAP differs in certain respects from Statutory
Accounting Principles (SAP) prescribed or permitted by insurance
regulatory authorities.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
The most significant estimates that are susceptible to
significant change in the near-term relate to the determination
of reserves for losses and loss adjustment expenses. Although
considerable variability is inherent in these estimates,
management believes that the current estimates are reasonable in
all material respects. The estimates are reviewed regularly and
adjusted as necessary. Adjustments related to changes in
estimates are reflected in the Companys results of
operations in the period in which those estimates changed.
Significant
Accounting Policies
Investments
Debt and equity securities are classified as available for sale
and stated at fair value, with net unrealized gains and losses
included in accumulated other comprehensive income (loss), net
of deferred income taxes. Short-term investments are carried at
cost, which approximates fair value, and represent investments
with initial maturities of one year or less. Real estate held
for the production of income is stated at cost net of
accumulated depreciation of $22,000 and $16,000 at
December 31, 2008 and 2007, respectively.
Dividend and interest income are recognized when earned.
Amortization of premiums and accrual of discounts on investments
in debt securities are reflected in earnings over the
contractual terms of the investments in a manner that produces a
constant effective yield. Realized gains and losses on
dispositions of securities are determined by the
specific-identification method.
The Companys investments are evaluated for
other-than-temporary
impairment using both quantitative and qualitative methods that
include, but are not limited to (a) an evaluation of the
Companys ability and intent to retain the investment for a
period of time sufficient to allow for an anticipated recovery
in value, (b) the recoverability of principal and interest
related to the security, (c) the duration and extent to
which the fair value has been less than the amortized cost,
(d) the financial condition, near-term and long-term
earnings and cash flow prospects of the issuer, including
relevant industry conditions and trends, and implications of
rating agency actions and (e) the specific reasons that a
security is in a significant unrealized loss position, including
market conditions that could affect access to liquidity. A
decline in the market value of an
available-for-sale
security below its amortized cost that is deemed to be other
than temporary, results in a write-down of the cost basis of
that security to fair value and a realized investment loss.
The Company adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standard (SFAS) No. 157,
Fair Value Measurements effective
January 1, 2008. The adoption of SFAS No. 157 did
not result in any material changes in valuation techniques we
previously used to measure fair values but resulted in expanded
disclosures about securities measured at fair value, as
discussed below.
SFAS No. 157 establishes a three-level hierarchy for
fair value measurements that distinguishes between market
participant assumptions based on market data obtained from
sources independent of the reporting entity
F-8
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
(Observable Units) and the reporting entitys own
assumptions about market participants assumptions
(Unobservable Units). The hierarchy level assigned to each
security in the Companys
available-for-sale
debt and equity securities portfolio is based upon its
assessment of the transparency and reliability of the inputs
used in the valuation as of the measurement date.
The Company adopted SFAS No. 159, The Fair
Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115, effective January 1, 2008. The
Company did not elect the fair value option for existing
eligible items under SFAS No. 159 and, accordingly, the
provisions of SFAS No. 159 had no effect on our
consolidated financial condition or results of operations at or
for the year ended December 31, 2008.
Cash and
Cash Equivalents
The Company classifies highly liquid investments with maturities
of three months or less when purchased, including money market
funds with no restrictions on redemptions, as cash equivalents.
Premiums
Receivable
Premiums receivable are uncollateralized policyholder
obligations due under normal policy terms requiring payment
within a specified period from the invoice date. Premium
receivable balances are reviewed by management for
collectability and management provides an allowance for doubtful
accounts, as deemed necessary, which reduces premiums
receivable. The allowance for doubtful accounts was $800,000 and
$700,000 at December 31, 2008 and 2007, respectively.
Deferred
Policy Acquisition Costs and Deferred Ceding
Commissions
To the extent recoverable from future policy revenues, costs
that vary with and are primarily related to the production of
new and renewal business have been deferred and amortized over
the effective period of the related insurance policies. The
Company does not include investment income in its determination
of future policy revenues. Commissions received from reinsurers
on ceded premiums have been deferred and amortized over the
effective period of the related insurance policies.
Fixed
Assets
Fixed assets consist primarily of software, personal computers
and computer-related equipment. Fixed assets are stated at cost,
less accumulated depreciation. Expenditures for acquisitions are
capitalized, and depreciation is computed on the straight-line
method over the estimated useful lives of the assets, ranging
from three to five years.
Intangible
Assets
Intangible assets represent the value of the Companys
insurance licenses. The carrying value of intangible assets is
reviewed annually for indications of value impairment. There was
no impairment at December 31, 2008 or 2007.
Loan
Costs
Fees paid in connection with the issuance of the notes payable,
which are capitalized and amortized over the term of the notes,
total $1.9 million and $1.6 million at
December 31, 2008 and 2007, respectively, are included in
other assets.
F-9
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Loss and
Loss Adjustment Expense Reserves
Loss and loss adjustment expense reserves represent the
estimated ultimate cost of all reported and unreported losses
incurred through December 31. The reserves for unpaid
losses and loss adjustment expenses are estimated using
individual case-basis valuations and statistical analyses.
Management believes that the reserves for losses and loss
adjustment expenses are adequate to cover the ultimate cost of
losses and loss adjustment expenses thereon. However, because of
the uncertainty from various sources, including changes in
reporting patterns, claims settlement patterns, judicial
decisions, legislation and economic condition, actual loss
experience may not conform to the assumptions used in
determining the estimated amounts for such liability at the
balance sheet date. Loss and loss adjustment expense reserve
estimates are periodically reviewed and adjusted as necessary as
experience develops or new information becomes known. As
adjustments to these estimates become necessary, such
adjustments are reflected in current operations.
Estimating liabilities for unpaid claims and reinsurance
recoveries for asbestos and environmental claims is subject to
significant uncertainties that are generally not present for
other types of claims. The ultimate cost of these claims cannot
be reasonably estimated using traditional loss estimating
techniques. The Company establishes liabilities for reported
asbestos and environmental claims, including cost of litigation,
as information permits. This information includes the status of
current law and coverage litigation, whether an insurable event
has occurred, which policies and policy years might be
applicable and which insurers may be liable, if any. In
addition, incurred but not reported liabilities have been
established by management to cover potential additional exposure
on both known and unasserted claims. Given the expansion of
coverage and liability by the courts and legislatures in the
past and the possibilities of similar interpretation in the
future, there is significant uncertainty regarding the extent of
the insurers liability.
In managements judgment, information currently available
has been adequately considered in estimating the Companys
ultimate cost of insured events. However, future changes in
these estimates could have a material adverse effect on the
Companys financial condition.
Reinsurance
Reinsurance premiums, losses, and loss adjustment expenses are
accounted for on bases consistent with those used in accounting
for the underlying policies issued and the terms of the
reinsurance contracts.
Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the
reinsured policy. Reinsurance contracts do not relieve the
Company from its primary obligations to policyholders. Failure
of reinsurers to honor their obligations could result in losses
to the Company. The Company evaluates the financial condition of
its reinsurers and monitors concentrations of credit risk with
respect to the individual reinsurer that participates in its
ceded programs to minimize its exposure to significant losses
from reinsurer insolvencies. The Company holds collateral as
deemed appropriate to secure amounts recoverable from reinsurers.
Revenue
Recognition
Premiums are earned pro rata over the terms of the policies,
which are typically annual. The portion of premiums that will be
earned in the future are deferred and reported as unearned
premiums.
Through PRS Group, Inc., the Company earns insurance services
income by providing a range of insurance services almost
exclusively to Guarantee Insurance, both on its behalf and on
behalf of the segregated portfolio captives and its quota share
reinsurers. Insurance services income is earned in the period
that the services are provided. Insurance services include nurse
case management, cost containment and captive management
services. Insurance service income for nurse case management
services is based on a monthly charge per claimant. Insurance
service income for cost containment services is based on a
percent of claim savings. Insurance services income for captive
management services is based on a percentage of earned
F-10
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
premium ceded to captive reinsurers in the alternative market.
Insurance services segment income includes all insurance
services income earned by PRS Group, Inc. However, the insurance
services income earned by PRS Group, Inc. from Guarantee
Insurance that is attributable to the portion of the insurance
risk that Guarantee Insurance retains is eliminated upon
consolidation. Therefore, the Companys consolidated
insurance services income consists of the fees earned by PRS
Group, Inc. that are attributable to the portion of the
insurance risk assumed by the segregated portfolio captives and
Guarantee Insurances quota share reinsurers, which
represent the fees paid by the segregated portfolio captives and
Guarantee Insurances quota share reinsurers for services
performed on their behalf and for which Guarantee Insurance is
reimbursed through a ceding commission. For financial reporting
purposes, the Company treats ceding commissions as a reduction
in underwriting expenses.
State
Guaranty Fund and Other Assessments
The Company is subject to state guaranty funds and other
assessments. Such assessments are accrued when they are
reasonably estimable. Premium-based assessments are accrued at
the time the premiums are written and loss-based assessments are
accrued at the time the losses are incurred. Other assessments
are accrued upon notification of the assessment.
Income
Taxes
The Company files a consolidated federal income tax return. The
tax liability of the group is apportioned among the members of
the group in accordance with the portion of the consolidated
taxable income attributable to each member of the group, as if
computed on a separate return. To the extent that the losses of
any member of the group are utilized to offset taxable income of
another member of the group, the Company takes the appropriate
corporate action to purchase such losses. To the
extent that a member of the group generates any tax credits,
such tax credits are allocated to the member generating such tax
credits. Deferred income taxes are recorded on the differences
between the tax bases of assets and liabilities and the amounts
at which they are reported in the financial statements. Deferred
income taxes are also recorded for operating loss and tax credit
carryforwards. Recorded amounts are adjusted to reflect changes
in income tax rates and other tax law provisions as they become
enacted and represent managements best estimate of future
income tax expenses or benefits that will ultimately be incurred
or recovered. The Company maintains a valuation allowance for
any portion of deferred tax assets which management believes it
is more likely than not that the Company will be unable to
utilize to offset future taxes.
Stock-Based
Compensation
In accordance with SFAS No. 123(R),
Share-Based Payment
(SFAS 123(R)), a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123), the Company
measures the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair
value of the award. That cost will be recognized over the period
during which an employee is required to provide service in
exchange for the award (i.e., the requisite service period),
which is usually equal to the vesting period.
Earnings
Per Common Share
Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number
of common shares outstanding. Diluted earnings per share
reflect, in periods in which they have a dilutive effect, the
impact of common shares issuable upon exercise of the
Companys outstanding stock options, common shares released
from restriction upon the vesting of the Companys
outstanding restricted stock and the impact of common shares
issuable upon conversion of preferred stock outstanding.
F-11
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Segment
Information
The Company operates two segments: Insurance and Insurance
Services. These segments have been established in a manner that
is consistent with the way results are regularly evaluated by
management in deciding how to allocate resources and in
assessing performance.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements.
SFAS No. 157 does not require any new fair value
measurements but applies whenever other standards require or
permit assets or liabilities to be measured by fair value. The
Company adopted SFAS No. 157 for its financial assets
and financial liabilities effective January 1, 2008. The
adoption of SFAS No. 157 did not have a material
impact on the Companys consolidated financial statements.
In February 2008, the FASB approved the issuance of FASB Staff
Position (FSP)
FAS 157-2,
Effective Date of FASB Statement No. 157. FSP
FAS 157-2
defers the effective date of SFAS No. 157 until
January 1, 2009 for non-financial assets and non-financial
liabilities except those items recognized or disclosed at fair
value on an annual or more frequently recurring basis. The
implementation of this FSP is not expected to have a material
impact on the Companys results of operation or financial
position.
In October 2008, the FASB issued FSP
FAS 157-3,
Determining the Fair Value of a Financial Asset when the
Market for That Asset is Not Active. This FSP clarifies
the application of SFAS No. 157 in a market that is
not active and provides an example to illustrate key
considerations in determining the fair value of a financial
asset when the market for that financial asset is not active.
This FSP is effective from October 10, 2008, including
prior periods for which financial statements have not been
issued. The implementation of this FSP did not have a material
impact on the Companys results of operation or financial
position.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 permits entities to
choose to measure eligible items at fair value at specified
election dates. For items for which the fair value option has
been elected, unrealized gains and losses are to be reported in
earnings at each subsequent reporting date. The fair value
option is irrevocable unless a new election date occurs, may be
applied instrument by instrument, with a few exceptions, and
applies only to entire instruments and not to portions of
instruments. SFAS No. 159 provides an opportunity to
mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to
apply complex hedge accounting. The Companys adoption of
SFAS No. 159 effective January 1, 2008 did not
have a material impact on the Companys consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations. SFAS No. 141R is
effective for acquisitions during the fiscal years beginning
after December 15, 2008 and early adoption is prohibited.
This statement establishes principles and requirements for how
the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the
acquired entity. The statement also provides guidance for
recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to
enable users of the financial statements to evaluate the nature
and financial effects of the business combination. Management is
reviewing this guidance; however, the effect of the
statements implementation will depend upon the extent and
magnitude of acquisitions, if any, after December 31, 2008.
In December 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial
Statements an amendment of ARB No. 51.
SFAS No. 160 is effective for fiscal years beginning
on or after December 15, 2008 and early adoption is
prohibited. This statement establishes accounting and reporting
standards for the non-controlling interest in a subsidiary and
for the deconsolidation of a subsidiary.
F-12
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Management is reviewing this guidance; however, the effect of
the statements implementation is not expected to be
material to the Companys results of operations or
financial position.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133. SFAS No. 161 is effective for
financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application
encouraged. This statement changes the disclosure requirements
for derivative instruments and hedging activities by requiring
enhanced disclosures about how and why an entity uses derivative
instruments, how an entity accounts for the derivatives and
hedged items, and how derivatives and hedged items affect an
entitys financial position, performance and cash flows.
Management is reviewing this guidance; however, the effect of
the statements implementation is not expected to be
material to the Companys disclosures.
In March 2008, the FASB issued SFAS No. 163,
Accounting for Financial Guarantee Insurance
Contracts an interpretation of FASB Statement
No. 60. SFAS No. 163 is effective for
financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods within those
fiscal years. Earlier application is not permitted except for
disclosures about the risk-management activities of the
insurance enterprise, which is effective for the first interim
period beginning after the issuance of SFAS No. 163.
This statement requires an insurance enterprise to recognize a
claim liability prior to an insured event when there is evidence
that credit deterioration has occurred in an insured financial
obligation. This statement also clarifies how FASB Statement
No. 60 applies to financial guarantee insurance contracts,
including the recognition and measurement to be used to account
for premium revenue and claim liabilities. Finally, this
statement requires expanded disclosures about financial
guarantee contracts focusing on the insurance enterprises
risk-management activities in evaluating credit deterioration in
its insured financial obligations. The effect of the
statements implementation is not expected to be material
to the Companys results of operations or financial
position. As of December 31, 2008, the Company had no
financial guarantee contracts that required expanded disclosures
under this statement.
Debt
Securities
The Company considers all of its debt securities as available
for sale in response to changes in interest rates or changes in
the availability of and yields on alternative investments. In
accordance with SFAS No. 115 (As Amended)
Accounting for Certain Investments in Debt and Equity
Securities, the Companys debt securities at
December 31, 2008 and 2007 are stated at fair value, with
net unrealized gains and losses included in accumulated other
comprehensive income net of deferred income taxes.
The amortized cost, gross unrealized gains, gross unrealized
losses and fair values of debt securities at December 31,
2008 and 2007 are as follows:
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
U.S. government securities
|
|
$
|
3,981
|
|
|
$
|
247
|
|
|
$
|
|
|
|
$
|
4,228
|
|
U.S. government agencies
|
|
|
300
|
|
|
|
11
|
|
|
|
|
|
|
|
311
|
|
Asset-backed and mortgage-backed securities
|
|
|
16,128
|
|
|
|
806
|
|
|
|
617
|
|
|
|
16,317
|
|
State and political subdivisions
|
|
|
23,058
|
|
|
|
867
|
|
|
|
11
|
|
|
|
23,914
|
|
Corporate securities
|
|
|
9,745
|
|
|
|
72
|
|
|
|
214
|
|
|
|
9,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,212
|
|
|
$
|
2,003
|
|
|
$
|
842
|
|
|
$
|
54,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
U.S. government securities
|
|
$
|
3,997
|
|
|
$
|
36
|
|
|
$
|
|
|
|
$
|
4,033
|
|
U.S. government agencies
|
|
|
2,742
|
|
|
|
8
|
|
|
|
1
|
|
|
|
2,749
|
|
Asset-backed and mortgage-backed securities
|
|
|
15,994
|
|
|
|
130
|
|
|
|
11
|
|
|
|
16,113
|
|
State and political subdivisions
|
|
|
22,212
|
|
|
|
303
|
|
|
|
|
|
|
|
22,515
|
|
Corporate securities
|
|
|
10,225
|
|
|
|
87
|
|
|
|
34
|
|
|
|
10,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,170
|
|
|
$
|
564
|
|
|
$
|
46
|
|
|
$
|
55,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated fair value and gross unrealized losses on debt
securities, aggregated by investment category and length of time
that individual investment securities have been in a continuous
unrealized loss position, as of December 31, 2008 and 2007
are as follows:
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Available for Sale
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In thousands, except numbers of securities data)
|
|
|
U.S. government securities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
U.S. government agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed and mortgage-backed securities
|
|
|
3,598
|
|
|
|
518
|
|
|
|
359
|
|
|
|
99
|
|
|
|
3,957
|
|
|
|
617
|
|
State and political subdivisions
|
|
|
745
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
745
|
|
|
|
11
|
|
Corporate securities
|
|
|
6,882
|
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
6,882
|
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,224
|
|
|
$
|
742
|
|
|
$
|
359
|
|
|
$
|
99
|
|
|
$
|
11,583
|
|
|
$
|
842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Securities in an Unrealized Loss Position
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Gross
|
|
Available for Sale
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In thousands, except numbers of securities data)
|
|
|
U.S. government securities
|
|
$
|
651
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
651
|
|
|
$
|
1
|
|
U.S. government agencies
|
|
|
|
|
|
|
|
|
|
|
1,059
|
|
|
|
1
|
|
|
|
1,059
|
|
|
|
1
|
|
Asset-backed and mortgage-backed securities
|
|
|
882
|
|
|
|
3
|
|
|
|
1,454
|
|
|
|
8
|
|
|
|
2,336
|
|
|
|
11
|
|
Corporate securities
|
|
|
2,427
|
|
|
|
30
|
|
|
|
2,742
|
|
|
|
3
|
|
|
|
5,169
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,960
|
|
|
$
|
34
|
|
|
$
|
5,255
|
|
|
$
|
12
|
|
|
$
|
9,215
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Securities in an Unrealized Loss Position
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
In reaching the conclusion that the investments in an unrealized
loss position are not other than temporarily impaired, the
Company considered the fact that there were no specific events
which caused concerns, there were no past due interest payments,
the Company has the ability and intent to retain the investment
for a sufficient amount of time to allow an anticipated recovery
in value and the changes in market value were considered normal
in relation to overall fluctuations in interest rates. In 2008,
the Company recognized an
other-than-temporary
impairment charge of approximately $350,000 related to
investments in certain bonds issued by Lehman Brothers Holdings,
Inc., which filed a voluntary petition for relief under
Chapter 11 of Title 11 of the United States Code in
the United States Bankruptcy Court.
Amortized cost and estimated fair value of the Companys
debt securities available for sale at December 31, 2008, by
contractual maturity, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Due in one year or less
|
|
$
|
1,511
|
|
|
$
|
1,527
|
|
Due after one year through five years
|
|
|
22,442
|
|
|
|
22,886
|
|
Due after five years
|
|
|
13,131
|
|
|
|
13,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,084
|
|
|
|
38,056
|
|
Asset-backed and mortgage-backed securities
|
|
|
16,128
|
|
|
|
16,317
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,212
|
|
|
$
|
54,373
|
|
|
|
|
|
|
|
|
|
|
The actual maturities in the foregoing table may differ from
contractual maturities because certain borrowers have the right
to call or prepay obligations with or without call or prepayment
penalties. Expected maturities of asset-backed and
mortgage-backed securities may differ from contractual
maturities because borrowers may have the right to call or
prepay the obligations and are, therefore, classified separately
with no specific contractual maturity dates.
Equity
Securities
The cost, gross unrealized gains, gross unrealized losses and
fair values of equity securities available for sale as of
December 31, 2008 and 2007 are as follows:
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Common stock
|
|
$
|
466
|
|
|
$
|
|
|
|
$
|
244
|
|
|
$
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Common stock
|
|
$
|
1,341
|
|
|
$
|
|
|
|
$
|
707
|
|
|
$
|
634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2008, the Company recognized an
other-than-temporary
impairment charge of approximately $875,000 related to
investments in certain equity securities.
F-15
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The estimated fair value and gross unrealized losses on equity
securities available for sale, aggregated by investment category
and length of time that individual investment securities have
been in a continuous unrealized loss position, as of
December 31, 2008 and 2007 are as follows:
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In thousands, except numbers of securities data)
|
|
|
Stocks common stocks
|
|
$
|
|
|
|
$
|
|
|
|
$
|
222
|
|
|
$
|
244
|
|
|
$
|
222
|
|
|
$
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Securities in an Unrealized Loss Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In thousands, except numbers of securities data)
|
|
|
Stocks common stocks
|
|
$
|
407
|
|
|
$
|
286
|
|
|
$
|
227
|
|
|
$
|
421
|
|
|
$
|
634
|
|
|
$
|
707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Securities in an Unrealized Loss Position
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurements
The Company adopted the SFAS No. 157, Fair
Value Measurements, effective January 1, 2008.
The adoption of SFAS No. 157 did not have any impact
on the Companys consolidated financial condition or
results of operations, but resulted in expanded disclosures
about securities measured at fair value, as discussed below.
The Company adopted SFAS No. 159, The Fair
Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115, effective January 1, 2008. The
Company did not elect the fair value option for existing
eligible items under SFAS No. 159 and, accordingly, the
provisions of SFAS No. 159 had no effect on our
consolidated financial condition as of December 31, 2008 or
the year then ended.
SFAS No. 157 establishes a three-level hierarchy for
fair value measurements that distinguishes between market
participant assumptions based on market data obtained from
sources independent of the reporting entity (Observable Units)
and the reporting entitys own assumptions about market
participants assumptions (Unobservable Units). The
hierarchy level assigned to each security in the Companys
available-for-sale
debt
F-16
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
and equity securities portfolio is based upon its assessment of
the transparency and reliability of the inputs used in the
valuation as of the measurement date. The three hierarchy levels
are as follows:
|
|
|
|
|
Definition
|
|
Level 1
|
|
Observable unadjusted quoted prices in active markets for
identical securities
|
Level 2
|
|
Observable inputs other than quoted prices in active markets for
identical securities, including:
|
|
|
(i) quoted prices in active markets for
similar securities,
|
|
|
(ii) quoted prices for identical or
similar securities in markets that are not active,
|
|
|
(iii) inputs other than quoted prices that are
observable for the security (e.g. interest rates, yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, credit risks and default rates, and
|
|
|
(iv) inputs derived from or corroborated by
observable market data by correlation or other means
|
|
|
|
Level 3
|
|
Unobservable inputs, including the reporting entitys own
data, as long as there is no contrary data indicating market
participants would use different assumptions
|
At December 31, 2008, all of our debt securities were
classified as Level 1 or Level 2. If securities are
traded in active markets, quoted prices are used to measure fair
value (Level 1). All of our Level 2 securities are
priced based on observable inputs, including (i) quoted
prices in active markets for similar securities,
(ii) quoted prices for identical or similar securities in
markets that are not active or (iii) other observable
inputs, including interest rates, volatilities, prepayment
speeds, credit risks and default rates for the security. Our
management is responsible for the valuation process and uses
data from outside sources to assist with establishing fair
value. As part of our process of reviewing the reasonableness of
data obtained from outside sources, we review, in consultation
with our investment portfolio manager, pricing changes that
differ from those expected in relation to overall market
conditions.
The following table presents our debt securities available for
sale, classified by valuation hierarchy, as of December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement, Using
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Securities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Debt securities
|
|
$
|
3,968
|
|
|
$
|
50,405
|
|
|
$
|
|
|
|
$
|
54,373
|
|
Equity securities
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,190
|
|
|
$
|
50,405
|
|
|
$
|
|
|
|
$
|
54,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Net
Investment Income
The details of net investment income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Debt securities
|
|
$
|
2,377
|
|
|
$
|
2,088
|
|
|
$
|
764
|
|
Equity securities
|
|
|
8
|
|
|
|
8
|
|
|
|
15
|
|
Cash, cash equivalents, short-term and other investment income
|
|
|
117
|
|
|
|
412
|
|
|
|
1,264
|
|
Rent income
|
|
|
4
|
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment income
|
|
|
2,506
|
|
|
|
2,518
|
|
|
|
2,053
|
|
Investment expenses, primarily interest credited to reinsurance
funds withheld balances
|
|
|
(478
|
)
|
|
|
(1,192
|
)
|
|
|
(732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
2,028
|
|
|
$
|
1,326
|
|
|
$
|
1,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
Gains and Losses on Investments and
Other-Than-Temporary
Impairments
Gross realized gains and losses on the sale of debt securities
were approximately $199,000 and $6,000, respectively, for the
year ended December 31, 2008. Proceeds from the sale,
maturity or repayment of debt securities were approximately
$19.1 million. There were no sales of equity securities for
the year ended December 31, 2008. The Company recognized a
realized loss of approximately $355,000 for the year ended
December 31, 2008 in connection with the
other-than-temporary
impairment of certain bonds issued by Lehman Brothers Holdings,
Inc., which filed a voluntary petition for relief under
Chapter 11 of Title 11 of the United States Bankruptcy
Code in September 2008. In addition, the Company recognized a
realized loss of approximately $875,000 for the year ended
December 31, 2008 in connection with the
other-than-temporary
impairment of certain equity securities.
Gross realized gains and losses on the sale of debt securities
were approximately $3,000 and $0 for the year ended
December 31, 2007. Proceeds from the sale, maturity or
repayment of debt securities were approximately
$20.8 million. Gross realized gains and losses on the sale
of equity securities were approximately $0 and $8,000,
respectively, for the year ended December 31, 2007.
Proceeds from the sale of equity securities were approximately
$280,000. There were no
other-than-temporary
impairment charges for the year ended December 31, 2007.
The Company had no gross realized gains or losses on the sale of
debt securities for the year ended December 31, 2006.
Proceeds from the sale, maturity or repayment of debt securities
were $6.9 million. Gross realized gains and losses on the
sale of equity securities were approximately $587,000 and
$194,000, respectively, for the year ended December 31,
2006. Proceeds from the sales of equity securities were
approximately $1.8 million. In addition, the Company
recognized a realized loss of approximately $1.7 million
for the year ended December 31, 2006 in connection with the
other-than-temporary
impairment of the balance of its investment in Foundation
Insurance Company, a limited purpose captive insurance
subsidiary of Tarheel that reinsured workers compensation
program business.
At December 31, 2008, cash and invested assets with a fair
value of $5.2 million were on deposit with state
departments of insurance to satisfy regulatory requirements.
F-18
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
3.
|
Deferred
Policy Acquisition Costs and Deferred Ceding
Commissions
|
Policy acquisition costs that the Company has capitalized, net
of ceding commissions that the Company has deferred, together
with the net amounts amortized over the effective period of the
related policies, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net deferred policy acquisition costs, January 1
|
|
$
|
1,477
|
|
|
$
|
774
|
|
|
$
|
1,410
|
|
Amounts capitalized:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct and assumed
|
|
|
27,039
|
|
|
|
19,852
|
|
|
|
14,582
|
|
Ceded
|
|
|
(20,692
|
)
|
|
|
(18,492
|
)
|
|
|
(15,253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts capitalized
|
|
|
6,347
|
|
|
|
1,360
|
|
|
|
(671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts amortized
|
|
|
(7,907
|
)
|
|
|
(657
|
)
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred policy acquisition costs (net deferred ceding
commissions), December 31
|
|
$
|
(83
|
)
|
|
$
|
1,477
|
|
|
$
|
774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets as of December 31, 2008 and 2007 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Software
|
|
$
|
2,061
|
|
|
$
|
1,857
|
|
Furniture, equipment and leasehold improvements
|
|
|
589
|
|
|
|
706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,650
|
|
|
|
2,563
|
|
Accumulated depreciation and amortization
|
|
|
(1,917
|
)
|
|
|
(1,398
|
)
|
|
|
|
|
|
|
|
|
|
Fixed assets, net of accumulated depreciation and amortization
|
|
$
|
733
|
|
|
$
|
1,165
|
|
|
|
|
|
|
|
|
|
|
The Company recorded fixed asset depreciation and amortization
expense of $519,000, $884,000 and $364,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.
To reduce the Companys exposure to losses from events that
cause unfavorable underwriting results, the Company reinsures
certain levels of risk in various areas of exposure with other
insurance enterprises or reinsurers under quota share and excess
of loss agreements. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability
associated with the reinsured policies.
Quota
Share Reinsurance
With respect to traditional business, effective July 1,
2007 the Company entered into a quota share agreement pursuant
to which it cedes 50.0% of premiums, losses and certain loss
adjustment expenses , excluding business written in South
Carolina, Georgia, and Indiana. This quota share agreement
covers all losses less than $500,000. The quota share agreement
was renewed effective July 1, 2008 under substantially
similar terms, except that the renewal period for one of the
participating quota share reinsurers, to whom the Company ceded
37.5%, expires on January 1, 2009.
F-19
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
In addition, with respect to traditional business, the Company
entered into a quota share agreement pursuant to which it ceded
approximately $12.9 million of gross unearned premium
reserves as of December 31, 2008.
With respect to alternative market business involving a
segregated portfolio captive risk sharing mechanism, the Company
generally cedes 90% of premiums and losses and loss adjustment
expenses to the segregated portfolios captive reinsurer.
Excess
of Loss Reinsurance
Pursuant to separate excess of loss reinsurance agreements for
the Companys traditional and alternative market business,
Guarantee Insurance cedes 100% of losses up to $4.0 million
in excess of $1.0 million per occurrence. Pursuant to
excess of loss reinsurance agreements covering both traditional
and alternative market business, Guarantee Insurance cedes 100%
of losses up to $15 million in excess of $5 million
per occurrence.
Effects
of Reinsurance
Reinsurance contracts do not relieve the Company from its
obligations to policyholders. Failure of reinsurers to honor
their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed
uncollectible. Charges for uncollectible reinsurance are
included in other income or expenses in the consolidated
statements of income. The Company maintained an allowance for
uncollectible reinsurance recoverable balances of $300,000 at
December 31, 2008 and 2007. The Company evaluates the
financial condition of its reinsurers and monitors
concentrations of credit risks arising from similar geographic
regions, activities, or economic characteristics of the
reinsurers to minimize its exposure to significant losses from
reinsurer insolvencies.
The effects of reinsurance on premiums written and earned are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
|
(In thousands)
|
|
|
Direct and assumed premiums
|
|
$
|
117,563
|
|
|
$
|
100,070
|
|
|
$
|
85,810
|
|
|
$
|
73,714
|
|
|
$
|
62,372
|
|
|
$
|
60,672
|
|
Ceded premiums
|
|
|
71,725
|
|
|
|
50,850
|
|
|
|
54,849
|
|
|
|
49,101
|
|
|
|
42,986
|
|
|
|
39,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums
|
|
$
|
45,838
|
|
|
$
|
49,220
|
|
|
$
|
30,961
|
|
|
$
|
24,613
|
|
|
$
|
19,386
|
|
|
$
|
21,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of recoveries pertaining to reinsurance contracts
that were deducted from losses incurred for the years ended
December 31, 2008, 2007 and 2006 was approximately
$18.8 million, $17.5 million and $26.1 million,
respectively.
Reinsurance
Contract Commutations
During the year ended December 31, 2008, the Company
commuted six quota share reinsurance contracts with segregated
portfolio captives, resulting in an aggregate gain of
approximately $1.4 million, which is reflected in the
accompanying consolidated statement of income for the year ended
December 31, 2008. In connection with such commutations,
ceded written and earned premiums and ceded unearned premium
reserves, net of ceding commissions, were reduced by
approximately $4.8 million, ceded losses and loss
adjustment expenses and ceded reserves for losses and loss
adjustment expenses were reduced by approximately
$5.0 million and reinsurance funds withheld were reduced by
approximately $1.2 million.
In October 2008, the Company cancelled its policy with its then
largest policyholder, Progressive Employer Services (PES), for
non-payment of premium and duplicate coverage. PES is a company
controlled
F-20
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
by Steve Herrig, an individual who, as of December 31,
2008, beneficially owned shares of the Company through Westwind
Holding Company, LLC, a company controlled and operated by
Mr. Herrig. Westwinds stock ownership represented
approximately 15.8% of the Companys outstanding common
stock. Most of PES employees are located in Florida, where
workers compensation insurance premium rates are established by
the state. Premiums receivable from PES totaled approximately
$8.3 million, as of December 31, 2008. This amount is
comprised of approximately $1.1 million for billed but
unpaid premium audits for the 2006 policy year, approximately
$2.0 million for a billed but unpaid experience rate
modification as determined by the National Council on
Compensation Insurance, approximately $300,000 for billed but
unpaid premium installments for the 2008 policy year and
approximately $4.9 million of estimated but unbilled
premium audits for the 2007 and 2008 policy years. The Company
has filed a lawsuit against PES to collect these amounts due and
owing.
Management believes these amounts are collectible based upon the
following factors: (i) billed amounts due from PES are
based on statutorily mandated experience rate modifications
promulgated by the National Council on Compensation Insurance
and actual premium audit findings; (ii) estimated unbilled
amounts due from PES have been accrued in a manner consistent
with industry practice; (iii) Florida statutes impose
significant fines on employers and employer organizations for
inappropriate reporting of payroll information or failing to
provide reasonable access to payroll records for payroll
verification audits; (iv) the Company has the right to
access certain collateral pledged by Westwind as security for
premium and other amounts owed by PES and Westwind, including
funds held by Guarantee Insurance under reinsurance treaties,
which totaled approximately $3.3 million as of
December 31, 2008 and (v) the Company believes PES has
sufficient financial resources to repay its unsecured
obligations.
The Company and its subsidiaries file a consolidated federal
income tax return. In June 2006, the FASB issued FASB
Interpretation No. 48, Accounting for Uncertainty
in Income Taxes an interpretation of FASB Statement
No. 109 (FIN 48), which clarifies the
accounting and financial reporting for uncertain tax positions.
FIN 48 prescribes a recognition threshold and measurement
attributes for the financial statement recognition, measurement
and presentation of uncertain tax positions taken or expected to
be taken in an income tax return. The Company adopted the
provisions of FIN 48 effective January 1, 2007.
Reserves for uncertain tax positions as of December 31,
2008 and 2007 associated with FIN 48 were approximately
$421,000 and $711,000, respectively. The Company had no accrued
interest or penalties related to uncertain tax positions as of
December 31, 2008 or 2007.
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Current income tax expense
|
|
$
|
675
|
|
|
$
|
899
|
|
|
$
|
1,419
|
|
Deferred income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit on temporary differences
|
|
|
(1,318
|
)
|
|
|
(130
|
)
|
|
|
(387
|
)
|
Increase (decrease) in valuation allowance
|
|
|
|
|
|
|
(1,201
|
)
|
|
|
457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense (benefit)
|
|
|
(1,318
|
)
|
|
|
(1,331
|
)
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
(643
|
)
|
|
$
|
(432
|
)
|
|
$
|
1,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company maintains a valuation allowance for any portion of
deferred tax assets which management believes it is more likely
than not that the Company will be unable to utilize to offset
future taxes. At December 31, 2006 and 2007, the Company
provided a full valuation allowance on the deferred tax asset
attributable to net operating loss carryforwards generated by
Tarheel. On April 1, 2007, when the Companys
F-21
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
majority stockholder contributed all the outstanding capital
stock of Tarheel to Patriot Risk Management, Inc., management
determined that its operating performance, coupled with its
expectations to generate future taxable income, indicated that
it was more likely than not that the Company will be able to
utilize this asset to offset future taxes and, accordingly, the
Company recognized the reversal of this valuation allowance. The
utilization of net operating loss carryforwards generated by
Tarheel is subject to annual limitations. Management believes
that all or a substantial portion of these net operating loss
carryforwards will be utilized in 2009. However, because these
net operating loss carryforwards originated as a result of a
business combination between two entities under common control,
management believes that the balance, if any, upon the
consummation of the Companys planned initial public
offering as discussed in Note 1 will be subject to
additional limitations and, accordingly, may not be available
for utilization.
The Companys actual income tax rates, expressed as a
percent of net income before income tax expense, vary from
statutory federal income tax rates due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
(Amounts in thousands)
|
|
|
Income (loss) before income tax expense
|
|
$
|
(767
|
)
|
|
|
|
|
|
$
|
1,947
|
|
|
|
|
|
|
$
|
3,099
|
|
|
|
|
|
Income tax expense (benefit) at statutory rate
|
|
$
|
(261
|
)
|
|
|
34.0
|
%
|
|
$
|
662
|
|
|
|
34.0
|
%
|
|
|
1,054
|
|
|
|
34.0
|
%
|
Tax effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt investment income
|
|
|
(238
|
)
|
|
|
31.0
|
|
|
|
(85
|
)
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
Other items, net
|
|
|
101
|
|
|
|
(13.2
|
)
|
|
|
127
|
|
|
|
6.5
|
|
|
|
(22
|
)
|
|
|
(0.7
|
)
|
Change in reserve for uncertain tax positions
|
|
|
(290
|
)
|
|
|
37.9
|
|
|
|
711
|
|
|
|
36.5
|
|
|
|
|
|
|
|
|
|
True up related to prior years
|
|
|
45
|
|
|
|
(5.9
|
)
|
|
|
65
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(643
|
)
|
|
|
83.8
|
|
|
|
1,480
|
|
|
|
76.0
|
|
|
|
1,032
|
|
|
|
33.3
|
|
Increase (decrease) in valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(1,912
|
)
|
|
|
(98.2
|
)
|
|
|
457
|
|
|
|
14.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual income tax expense (benefit)
|
|
$
|
(643
|
)
|
|
|
83.8
|
%
|
|
$
|
(432
|
)
|
|
|
(22.2
|
)%
|
|
$
|
1,489
|
|
|
|
48.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The tax effects of temporary differences and carryforwards that
give rise to significant portions of the deferred tax assets and
liabilities as of December 31, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
Loss reserve adjustments
|
|
$
|
1,847
|
|
|
$
|
1,174
|
|
Unearned premium adjustments
|
|
|
740
|
|
|
|
965
|
|
Net operating loss carryforward
|
|
|
529
|
|
|
|
1,318
|
|
Unrealized capital losses
|
|
|
|
|
|
|
64
|
|
Other than temporary impairment on investments
|
|
|
852
|
|
|
|
431
|
|
Stock option compensation
|
|
|
143
|
|
|
|
111
|
|
Bad debt allowance
|
|
|
323
|
|
|
|
340
|
|
Deferred equity offering costs written off
|
|
|
1,185
|
|
|
|
|
|
Other
|
|
|
63
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
5,682
|
|
|
|
4,528
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
Deferred acquisition costs
|
|
|
1,113
|
|
|
|
1,110
|
|
Purchase price adjustment
|
|
|
293
|
|
|
|
293
|
|
Unrealized capital gains
|
|
|
309
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
1,715
|
|
|
|
1,506
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
3,967
|
|
|
$
|
3,022
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, the Company had $1.5 million of
net operating loss carryforwards, which expire as follows:
approximately $100,000 in 2024, $400,000 in 2025 and
$1.0 million in 2026.
F-23
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
8.
|
Losses
and Loss Adjustment Expenses
|
The following table provides a reconciliation of the
Companys aggregate beginning and ending reserves for
losses and loss adjustment expenses, net of reinsurance
recoverables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Balances, January 1
|
|
$
|
69,881
|
|
|
$
|
65,953
|
|
|
$
|
39,084
|
|
Less reinsurance recoverable
|
|
|
(43,317
|
)
|
|
|
(41,103
|
)
|
|
|
(21,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances, January 1
|
|
|
26,564
|
|
|
|
24,850
|
|
|
|
17,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred related to
|
|
|
|
|
|
|
|
|
|
|
|
|
Current years
|
|
|
27,422
|
|
|
|
18,642
|
|
|
|
15,328
|
|
Prior years
|
|
|
1,294
|
|
|
|
(3,460
|
)
|
|
|
2,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
28,716
|
|
|
|
15,182
|
|
|
|
17,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid related to
|
|
|
|
|
|
|
|
|
|
|
|
|
Current years
|
|
|
6,171
|
|
|
|
4,668
|
|
|
|
3,290
|
|
Prior years
|
|
|
12,051
|
|
|
|
8,800
|
|
|
|
7,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
18,222
|
|
|
|
13,468
|
|
|
|
10,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances, December 31
|
|
|
37,058
|
|
|
|
26,564
|
|
|
|
24,850
|
|
Plus reinsurance recoverable
|
|
|
37,492
|
|
|
|
43,317
|
|
|
|
41,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31
|
|
$
|
74,550
|
|
|
$
|
69,881
|
|
|
$
|
65,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no significant changes in the key assumptions
utilized in the analysis and calculations of the Companys
reserves during the years ended December 31, 2008, 2007 or
2006.
As a result of unfavorable development on prior accident year
reserves, incurred losses and loss adjustment expenses increased
by approximately $1.3 million for the year ended
December 31, 2008, reflecting approximately $600,000 of
unfavorable development in 2008 on workers compensation
reserves for prior accident years and $700,000 of unfavorable
development in 2008 on legacy asbestos and environmental
exposures and commercial general liability exposures, the latter
as discussed more fully below.
As a result of favorable development on prior accident year
reserves, incurred losses and loss adjustment expenses decreased
by approximately $3.5 million for the year ended
December 31, 2007. The $3.5 million of favorable
development reflects approximately $2.2 million of
favorable development in 2007 on workers compensation
reserves for prior accident years and $1.3 million of
favorable development in 2007 on legacy asbestos and
environmental exposures and commercial general liability
exposures, the latter as discussed more fully below.
As a result of adverse development on prior accident year
reserves, incurred losses and loss adjustment expenses increased
by approximately $2.5 million for the year ended
December 31, 2006. The $2.5 million of adverse
development in 2006 reflects approximately $2.0 million of
adverse development in 2006 on workers compensation
reserves for prior accident years. Of the $2.0 million,
approximately $1.3 million was subsequently reduced in 2007
and included in the $3.5 million of total favorable
development in 2007 as discussed above. The $2.5 million of
adverse development in 2006 also reflects approximately $516,000
of adverse development in 2006 on legacy asbestos and
environmental exposures and commercial general liability
exposures, the latter as discussed more fully below. The
$516,000, together with an additional amount totaling
approximately $1.7 million, was subsequently reduced in
2007 and included in the $3.5 million of total favorable
development in 2007 as discussed above.
F-24
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The Company has exposure to these legacy claims incurred prior
to 1984 arising from the sale of general liability insurance and
participation in reinsurance pools administered by certain
underwriting management organizations. As industry experience in
dealing with these exposures has accumulated, various
industry-related parties have evaluated newly emerging methods
for estimating asbestos-related and environmental pollution
liabilities, and these methods have attained growing
credibility. In addition, outside actuarial firms and others
have developed databases to supplement the information that can
be derived from a companys claim files. The Company
estimates the full impact of these legacy claims by establishing
full cost basis reserves for all known losses and computing
incurred but not reported losses based on previous experience
and available industry data. These liabilities are subject to
greater than normal variation and uncertainty, and an
indeterminable amount of additional liability may develop over
time.
The following table provides a reconciliation between the
beginning and ending reserves for losses and loss adjustment
expenses, net of reinsurance recoverables, for legacy asbestos
and environmental exposures which are included in the
reconciliation of the Companys aggregate beginning and
ending reserves for losses and loss adjustment expenses above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Balances, January 1
|
|
$
|
6,789
|
|
|
$
|
6,999
|
|
|
$
|
7,302
|
|
Less reinsurance recoverable
|
|
|
(3,758
|
)
|
|
|
(3,402
|
)
|
|
|
(3,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances, January 1
|
|
|
3,031
|
|
|
|
3,597
|
|
|
|
3,522
|
|
Incurred related to claims in prior years
|
|
|
285
|
|
|
|
(169
|
)
|
|
|
363
|
|
Paid related to prior years
|
|
|
(323
|
)
|
|
|
(397
|
)
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances, December 31
|
|
|
2,993
|
|
|
|
3,031
|
|
|
|
3,597
|
|
Plus reinsurance recoverable
|
|
|
3,785
|
|
|
|
3,758
|
|
|
|
3,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31
|
|
$
|
6,778
|
|
|
$
|
6,789
|
|
|
$
|
6,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation between the
beginning and ending reserves for losses and loss adjustment
expenses, net of reinsurance recoverables, for legacy commercial
general liability exposures which are included in the
reconciliation of the Companys aggregate beginning and
ending reserves for losses and loss adjustment expenses above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Balances, January 1
|
|
$
|
3,742
|
|
|
$
|
6,050
|
|
|
$
|
6,006
|
|
Less reinsurance recoverable
|
|
|
(1,996
|
)
|
|
|
(2,974
|
)
|
|
|
(2,949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances, January 1
|
|
|
1,746
|
|
|
|
3,076
|
|
|
|
3,057
|
|
Incurred related to claims in prior years
|
|
|
424
|
|
|
|
(1,154
|
)
|
|
|
153
|
|
Paid related to prior years
|
|
|
(640
|
)
|
|
|
(176
|
)
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances, December 31
|
|
|
1,530
|
|
|
|
1,746
|
|
|
|
3,076
|
|
Plus reinsurance recoverable
|
|
|
2,076
|
|
|
|
1,996
|
|
|
|
2,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31
|
|
$
|
3,606
|
|
|
$
|
3,742
|
|
|
$
|
6,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had a note payable to the former owner of Guarantee
Insurance, with a principal balance of $8.8 million as of
March 30, 2006. On that date, the Company entered into a
settlement and termination agreement with the former owner of
Guarantee Insurance that allowed for the early extinguishment of
the
F-25
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
$8.8 million note payable for $2.2 million in cash and
release of the indemnification agreement previously entered into
by the parties. Accordingly, the Company recognized a gain on
the early extinguishment of debt of $6.6 million in 2006.
Effective March 30, 2006, the Company entered into a loan
agreement for $8.7 million with an interest rate of prime
plus 4.5% (effectively 7.75% at December 31, 2008). The
proceeds of the loan, net of loan and guaranty fees, totaled
approximately $7.2 million and were used to provide
$3.0 million of additional surplus to Guarantee Insurance,
pay the $2.2 million early extinguishment of debt noted
above, loan $750,000 to Tarheel which was invested in Foundation
to enable it to settle certain obligations, redeem common stock
for approximately $1.0 million and for general corporate
purposes. In September 2007, the Company borrowed an additional
$5.7 million from the same lender under the same interest
rate terms as the loan taken in 2006. The proceeds of the
additional borrowing, net of loan and guaranty fees, totaled
approximately $4.9 million and were used to provide
$3.0 million of additional surplus to Guarantee Insurance
and to pay federal income taxes of approximately
$1.9 million on the 2006 gain on early extinguishment of
debt. The principal balance and accrued interest associated with
this loan at December 31, 2008 were approximately
$12.4 million and $43,000, respectively. Principal and
interest payments, which are made monthly, were approximately
$185,000 at December 31, 2008. Due to the variable rate,
the principal and interest payment may change. The loan is
secured by a first lien on all of the assets of Patriot Risk
Management, Inc., PRS Group, Inc., Guarantee Insurance Group,
Inc., Patriot Risk Services, Inc., Suncoast Capital, Inc. and
Patriot Risk Management of Florida, Inc. Additionally, the loan
is guaranteed by the Companys Chairman, President, Chief
Executive Officer and the beneficial owner of a majority of the
Companys outstanding shares. The loan has financial
covenants requiring that the Company maintain consolidated GAAP
stockholders equity of at least $5.5 million and that
Guarantee Insurance maintain GAAP equity of at least
$14.5 million. The Company was in compliance with these
covenants at December 31, 2008.
Effective June 26, 2008, the Company entered into a loan
agreement for $1.5 million from its Chairman, President,
Chief Executive Officer and the beneficial owner of a majority
of the Companys outstanding shares with an interest rate
of prime plus 3% (6.25% at December 31, 2008). The proceeds
of the loan, net of loan fees, totaled approximately
$1.3 million and were used to provide additional surplus to
Guarantee Insurance. The principal balance and accrued interest
associated with this loan at December 31, 2008 were
approximately $1.5 million and $27,000, respectively.
Interest payments on the loan, which were payable monthly, were
approximately $8,000 at December 31, 2008. Due to the
variable rate, the interest payment may change. The principal
balance of the loan was originally due on December 26,
2008, but has been extended by amendment to June 27, 2009.
Pursuant to the due date extension, the Company began making
$25,000 monthly principal payments on the loan beginning in
January 2009.
Effective December 31, 2008, the Company entered into a
loan agreement for approximately $5.5 million with an
interest rate of prime plus 4.5% (effectively 7.75% at
December 31, 2008). The proceeds of the loan, net of loan
fees, totaled approximately $5.0 million and were used to
provide $2.1 million of additional surplus to Guarantee
Insurance and settle an intercompany payable to Guarantee
Insurance of $2.9 million. The principal balance and
accrued interest associated with this loan at December 31,
2008 were approximately $5.4 million and $0, respectively.
Principal and interest payments will be made monthly beginning
in January 2009 and are approximately $81,000 at
December 31, 2008. Due to the variable rate, the principal
and interest payment may change. The loan is secured by a first
lien on all of the assets of Patriot Risk Management, Inc., PRS
Group, Inc., Guarantee Insurance Group, Inc., Patriot Risk
Services, Inc., Suncoast Capital, Inc. and Patriot Risk
Management of Florida, Inc. Additionally, the loan is guaranteed
by the Companys Chairman, President, Chief Executive
Officer and the beneficial owner of a majority of the
Companys outstanding shares. The loan has financial
covenants requiring that the Company maintain consolidated GAAP
stockholders equity of at least $5.5 million and that
Guarantee Insurance maintain GAAP equity of at least
$14.5 million. The Company was in compliance with these
covenants at December 31, 2008.
F-26
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Notes payable and subordinated debentures, including accrued
interest, at December 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
Rate at
|
|
|
and
|
|
Year of
|
|
|
|
Years
|
|
Interest Rate
|
|
December 31,
|
|
|
Accrued
|
|
Issuance
|
|
Description
|
|
Due
|
|
Terms
|
|
2008
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
2006/7
|
|
Notes payable to Brooke Capital Corp.
|
|
2009-2016
|
|
Prime rate plus 4.5%
|
|
|
7.75
|
%
|
|
$
|
12,465
|
|
2008
|
|
Note payable to Steven Mariano
|
|
2009
|
|
Prime rate plus 3.0%
|
|
|
6.25
|
|
|
|
1,527
|
|
2008
|
|
Note payable to Ullico Inc.
|
|
2009-2016
|
|
Prime rate plus 4.5%
|
|
|
7.75
|
|
|
|
5,450
|
|
2004
|
|
Surplus notes payable
|
|
2009
|
|
3.0%
|
|
|
3.00
|
|
|
|
1,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
|
|
|
|
|
|
|
|
20,783
|
|
2005
|
|
Subordinated debentures
|
|
2009
|
|
3.0%
|
|
|
3.00
|
|
|
|
1,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, the Companys obligation for
future payments on notes payable, based on the rates in effect
at December 31, 2008, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty
|
|
|
|
|
|
|
Principal
|
|
|
Interest
|
|
|
Fees
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
2009
|
|
$
|
3,408
|
|
|
$
|
1,343
|
|
|
$
|
715
|
|
|
$
|
5,466
|
|
2010
|
|
|
2,042
|
|
|
|
1,166
|
|
|
|
639
|
|
|
|
3,847
|
|
2011
|
|
|
2,206
|
|
|
|
1,002
|
|
|
|
557
|
|
|
|
3,765
|
|
2012
|
|
|
2,380
|
|
|
|
827
|
|
|
|
469
|
|
|
|
3,676
|
|
2013
|
|
|
2,574
|
|
|
|
633
|
|
|
|
373
|
|
|
|
3,580
|
|
Thereafter
|
|
|
6,762
|
|
|
|
644
|
|
|
|
468
|
|
|
|
7,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,372
|
|
|
$
|
5,615
|
|
|
$
|
3,221
|
|
|
$
|
28,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has outstanding surplus notes with aggregate
principal and accrued interest of approximately
$1.2 million and $154,000, respectively, at
December 31, 2008 and approximately $1.3 million and
$115,000, respectively, at December 31, 2007. The notes
call for the Company to pay, on or before sixty months from the
issue date, the principal amount of the notes and interest
quarterly at the rate of 3%, compounded annually. Any payments
of principal and interest are subject to the written
authorization of the Florida Office of Insurance Regulations
(Florida OIR). Certain surplus notes and accrued interest
thereon, totaling approximately $66,000, were forgiven in 2008
in connection with the commutation of reinsurance. The principal
balance of the surplus notes and accrued interest thereon are
due in 2009. Repayment is subject to Florida OIR authorization.
|
|
10.
|
Subordinated
Debentures
|
During 2005, the Company issued subordinated debentures totaling
$2.0 million. The debentures have a
3-year term
and bear interest at the rate of 3% compounded annually. The
debentures are subject to renewal on the same terms and
conditions at the end of the term. Certain subordinated
debentures and accrued interest thereon, totaling approximately
$165,000, were forgiven in 2008 in connection with the
commutation of reinsurance. The principal balance and accrued
interest on these debentures was approximately $1.6 million
and $175,000, respectively, at December 31, 2008 and
approximately $1.8 million and $139,000, respectively, at
December 31, 2007.
F-27
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
11.
|
Common
and Preferred Stock
|
The Companys authorized stock consists of
40,000,000 shares of common stock, par value $0.001 per
share, 4,000,000 shares of Series B common stock, par
value $0.001 per share and 5,000,000 shares of preferred
stock, par value $.001 per share. During 2008, the Company
converted its Series A common stock to common stock on a
one-for-one
basis, with no change in the terms. Common stock shares have the
right to one vote per share and Series B common stock
shares have the right to four votes per share.
During 2008, the Company designated 1,200 shares of its
authorized but unissued preferred stock, par value $.001 per
share, as Series A convertible preferred stock and issued
1,000 shares of Series A convertible preferred stock
at a stated value of $1,000 per share, resulting in cash
proceeds of $1.0 million. The holders of shares of
Series A convertible preferred stock are entitled to
receive cumulative cash dividends at a rate of 4.5% above the
prime rate per share per annum. Shares of Series A
convertible preferred stock shall automatically convert into
shares of common stock upon the completion of an offering of the
Companys common stock to third-party investors with
aggregate proceeds of at least $20 million at a price of no
less than $10.22 per share. All terms associated with the Series
A convertible preferred stock, including its per share value,
dividend rate and conversion parameters, were determined by the
Companys board of directors. Shares of Series A
convertible preferred stock do not have any voting powers.
As of December 31, 2008, the Company had
561,289 shares of common stock, 800,000 shares of
Series B common stock and 1,000 shares of
Series A convertible preferred stock issued and
outstanding. As of December 31, 2007, the Company had
561,289 shares of Series A common stock,
800,000 shares of Series B common stock and no shares
of preferred stock issued and outstanding.
The Company issues common and preferred stock, grants
unrestricted common stock and redeems common stock based on the
estimated fair values per share, which have ranged from $8.01 to
$10.44. Fair values per share are established by the board of
directors based on an evaluation of the Companys financial
condition and results of operations.
|
|
12.
|
Share-Based
Compensation Plan
|
In 2005, the Company approved a share-based compensation plan.
The plan authorized a company stock option plan, pursuant to
which stock options may be granted to executive management to
purchase up to 240,000 shares of common stock and to the
board of directors to purchase up to 75,000 shares of
common stock. On February 11, 2005, the Company granted
stock options to members of the board of directors to purchase
75,000 shares on or before February 11, 2015. These
options, which have an exercise price of $8.02 per share,
vested ratably over two years from the grant date, and would
otherwise fully vest in the event of a change in control. All of
these options remain outstanding at December 31, 2008.
On December 30, 2005, the Company granted stock options to
members of executive management to purchase 57,500 shares
on or before December 30, 2015. These options, which have
an exercise price of $8.02 per share, vest ratably over
three years from the grant date, and otherwise fully vest in the
event of a change in control.
In December 2004, the FASB issued SFAS No. 123
(revised 2004), Share-Based Payment. SFAS No. 123R
requires the compensation cost relating to stock options granted
or modified after December 31, 2005 to be recognized in
financial statements using the fair value of the equity
instruments issued on the grant date of such instruments, and
will be recognized as compensation expense over the period
during which an individual is required to provide service in
exchange for the award (typically the vesting period). The
Company adopted SFAS No. 123R effective January 1,
2007, and the impact of the adoption was not significant to the
Companys financial statements.
F-28
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The fair value of each stock option grant is established on the
grant date using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 2007
and 2006. There were no stock options granted in 2008. The
expected volatility is 32% for options granted in 2007 and 2006,
based on historical volatility of similar entities that are
publicly traded. The estimated term of the options, all of which
expire ten years after the grant date, is six years based on
expected behavior of the group of option holders. The assumed
risk-free interest rate is 4-5% for options granted in 2007 and
2006, based on yields on five to seven year U.S. Treasury
Bills, which term approximates the estimated term of the
options. The expected forfeiture rate is 18% on options granted
in 2007 and 11% on options granted in 2006. There was no
expected dividend yield for the options granted in 2007 or 2006.
The following table summarizes stock options granted, exercised
and canceled.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
|
(In thousands)
|
|
|
|
|
|
Options Outstanding, January 1, 2006
|
|
|
148
|
|
|
$
|
6.18
|
|
Options granted
|
|
|
72
|
|
|
|
8.02
|
|
Options exercised
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
(55
|
)
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding, December 31, 2006
|
|
|
165
|
|
|
|
7.38
|
|
Options granted
|
|
|
58
|
|
|
|
8.02
|
|
Options exercised
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
(50
|
)
|
|
|
8.02
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding, December 31, 2007
|
|
|
173
|
|
|
|
7.39
|
|
Options granted
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
(10
|
)
|
|
|
8.02
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding, December 31, 2008
|
|
|
163
|
|
|
$
|
7.37
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable, December 31, 2008
|
|
|
125
|
|
|
$
|
7.17
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercisable at
December 31, 2008 was approximately $106,000.
The weighted-average grant-date fair value of options granted
during 2007 and 2006 was $3.27 and $3.26, respectively. No
options were granted in 2008. No options were exercised during
the year ended December 31, 2008, 2007 or 2006. The range
of exercise prices for options outstanding at December 31,
2008 was $5.00 to $8.02.
F-29
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
A summary of the status of the Companys unvested options
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Options
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
Unvested options, January 1, 2006
|
|
|
148
|
|
|
$
|
2.44
|
|
Options granted
|
|
|
72
|
|
|
|
3.27
|
|
Options vested
|
|
|
(38
|
)
|
|
|
2.62
|
|
Options canceled or forfeited
|
|
|
(55
|
)
|
|
|
1.94
|
|
|
|
|
|
|
|
|
|
|
Unvested options, December 31, 2006
|
|
|
127
|
|
|
|
3.07
|
|
Options granted
|
|
|
58
|
|
|
|
3.27
|
|
Options vested
|
|
|
(47
|
)
|
|
|
2.78
|
|
Options canceled or forfeited
|
|
|
(40
|
)
|
|
|
3.25
|
|
|
|
|
|
|
|
|
|
|
Unvested options, December 31, 2007
|
|
|
98
|
|
|
|
3.26
|
|
Options granted
|
|
|
|
|
|
|
|
|
Options vested
|
|
|
(55
|
)
|
|
|
3.26
|
|
Options canceled or forfeited
|
|
|
(4
|
)
|
|
|
3.32
|
|
|
|
|
|
|
|
|
|
|
Unvested options, December 31, 2008
|
|
|
39
|
|
|
$
|
3.26
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, there was approximately $82,000 of
total unrecognized compensation cost related to unvested
stock-based compensation awards granted under the plan. That
cost is expected to be recognized over a weighted average period
of 1.1 years.
The plan also authorizes the board, in its sole discretion, to
grant stock awards to members of the board of directors. During
2006, 62,500 shares of stock awards were granted to members
of the board of directors with a value of $8.02 per share and a
total value of approximately $502,000. During 2007, 53,000 of
stock awards were granted to members of the board of directors
with a per-share value of $8.02 and a total value of
approximately $425,000. There were no stock awards granted in
2008.
|
|
13.
|
Capital,
Surplus and Dividend Restrictions
|
At the time the Company acquired Guarantee Insurance, it had a
large statutory accumulated deficit. At December 31, 2008,
the statutory accumulated deficit was approximately
$94.3 million. Under Florida law, insurance companies may
only pay dividends out of available and accumulated surplus
funds derived from realized net operating profits on their
business and net realized capital gains, except under limited
circumstances with the prior approval of the Florida OIR.
Moreover, pursuant to a consent order issued by Florida OIR on
December 29, 2007 in connection with the redomestication of
Guarantee Insurance from South Carolina to Florida, the Company
is prohibited from paying dividends, without Florida OIR
approval, until December 29, 2009. Therefore, it is
unlikely that Guarantee Insurance will be able to pay dividends
for the foreseeable future without the prior approval of the
Florida OIR. No dividends were paid in 2008, 2007 or 2006.
The Company is required to periodically submit financial
statements prepared in accordance with prescribed or permitted
statutory accounting practices (SAP) to the Florida OIR.
Prescribed SAP includes state laws, regulations and general
administrative rules, as well as a variety of publications of
the National Association of Insurance Commissioners (NAIC).
Permitted SAP encompasses all accounting practices that are not
prescribed; such practices may differ from company to company
and may not necessarily be permitted in subsequent reporting
periods. The Company has no permitted accounting practices. SAP
varies from GAAP.
F-30
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Guarantee Insurance Company reported a SAP net income (losses)
of approximately $521,000, ($802,000) and $457,000 for the years
ended December 31, 2008, 2007 and 2006, respectively. SAP
surplus as regards policyholders was $17.8 million and
$14.4 million at December 31, 2008 and 2007,
respectively. Pursuant to the Florida OIR December 29, 2007
consent order, Guarantee Insurance is required to maintain a
minimum capital and surplus of $9.0 million or 10% of its
total liabilities excluding taxes, expenses and other
obligations due or accrued. At December 31, 2008 and 2007,
10% of Guarantee Insurances total liabilities excluding
taxes, expenses and other obligations due or accrued were
approximately $10.2 million and $8.8 million,
respectively.
The Companys business is regulated at federal, state and
local levels. The laws and rules governing the Companys
business are subject to broad interpretations and frequent
change. Regulators have significant discretion as to how these
laws and rules are administered. Workers compensation
insurance is subject to significant regulation. Changes to
existing laws and the introduction of future laws may change the
Companys concentration of premiums as well as liabilities
associated with claims, administrative expenses, taxes, benefit
interpretations and other actions.
The Company strives to conduct its operations in accordance with
standards, rules and guidelines established by the NAIC. These
standards, rules and guidelines are interpreted by the insurance
department of each state against the background of
state-specific legislation.
Insurance companies are subject to certain Risk-Based Capital
(RBC) requirements as specified by the Florida insurance laws.
Under RBC requirements, the amount of capital and surplus
maintained by a property/casualty insurance company is
determined based on the various risk factors related to it. At
December 31, 2008 the Companys adjusted statutory
capital and surplus was 236% of authorized control level risk
based capital.
The Company is subject to various regulatory examinations,
investigations, audits and reviews that are required by statute.
Such actions can result in assessment of damages, civil or
criminal fines or penalties or other sanctions, including
restrictions or changes in the way the Company conducts
business. The Company records liabilities to estimate the costs
resulting from these matters.
|
|
14.
|
Other
Contingencies and Commitments
|
The Company provided letters of credit for approximately
$846,000 as of December 31, 2008 in connection with certain
business assumed. The Company pledged assets of approximately
$956,000 as collateral for these letters of credit as of
December 31, 2008.
The Company entered into employment agreements with four
executive officers. The agreements have an initial three-year
term, at which time the agreements will automatically renew for
successive one year terms, unless the executive officers or the
Company provide 90 days written notice of non-renewal. The
agreements terminate in the event of death, absence over a
period of time due to incapacity, a material breach of duties
and obligations under the agreement or other serious misconduct.
The agreements may also be terminated upon a change of control
of Patriot (as defined in the agreements) or by the Company
without cause; provided however, that in such event, the
executive officers are entitled to cash severance amounts
ranging from one to three years of annual salary as of the date
of termination. The Companys contingent obligation for
severance payments pursuant to these provisions totals
approximately $2.5 million.
In the normal course of business, the Company may be party to
various legal actions. The Company does not believe that these
actions will result in any material effect on the Companys
financial position or results of operations. The Company is
named as a defendant in various legal actions arising
principally from claims made under insurance policies and
contracts. Those actions are considered by the Company in
estimating the losses and loss adjustment expense reserves.
Management believes that the resolution of those actions will
not have a material effect on the Companys financial
position or results of operations.
F-31
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
As of December 31, 2008, the Companys commitment for
future rent payments is as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2009
|
|
$
|
1,139
|
|
2010
|
|
|
875
|
|
2011
|
|
|
|
|
2012
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,014
|
|
|
|
|
|
|
Rental expense was $1.0 million, $840,000 and $591,000 for
the years ended December 31, 2008, 2007 and 2006,
respectively.
|
|
15.
|
Information
About Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentrations of Credit
Risk
|
The Company is exposed to credit-related losses in the event
that a bond issuer defaults on its obligation. The Company
mitigates its exposure to these credit-related losses by
maintaining bonds with high credit ratings.
Reinsurance does not discharge the Companys obligations
under its insurance policies. The Company remains liable to its
policyholders even if it is unable to make recoveries that it
believes it is entitled to receive under reinsurance contracts.
As a result, the Company is subject to credit risk with respect
to its reinsurers. As of December 31, 2008, the Company had
approximately $42.1 million of gross exposures to
reinsurers for reinsurance recoverables on paid and unpaid
losses and loss adjustment expenses. The Company has reinsurance
agreements with both authorized and unauthorized reinsurers.
Authorized reinsurers are licensed or otherwise authorized to
conduct business in the state of Florida (Guarantee
Insurances state of domicile). Under statutory accounting
principles, Guarantee Insurance receives credit on its statutory
financial statements for all paid and unpaid losses ceded to
authorized reinsurers. Unauthorized reinsurers are not licensed
or otherwise authorized to conduct business in the state of
Florida. Under statutory accounting principles, Guarantee
Insurance receives credit for paid and unpaid losses ceded to
unauthorized reinsurers to the extent these liabilities are
secured by funds held, letters of credit or other forms of
acceptable collateral. As of December 31, 2008, the Company
had approximately $26.1 million of net unsecured
reinsurance exposures consisting of $23.5 million from
authorized reinsurers and $2.6 million from unauthorized
reinsurers. The Company reviews the financial strength of all of
its authorized and unauthorized reinsurers, monitors the aging
of reinsurance recoverables on paid losses and assesses the
adequacy of collateral underlying reinsurance recoverable
balances on a regular basis. At December 31, 2008, the
Company maintained an allowance for doubtful accounts on
reinsurance recoverable balances of $300,000.
The Company has a defined contribution plan. Employees are
allowed to contribute up to a maximum of 15% of their salary.
Discretionary employer matching contributions may be contributed
at the option of the Companys Board of Directors.
Contributions are subject to certain limitations. No Company
contributions were made to the defined contribution plan during
the years ended December 31, 2008, 2007 or 2006.
The Company operates two business segments insurance
services and insurance. Intersegment revenue is eliminated upon
consolidation. The accounting policies of the segments are the
same as those described in the summary of significant accounting
policies.
F-32
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
In the insurance services segment, the Company principally
provides nurse case management and cost containment services,
currently to Guarantee Insurance, the segregated portfolio
captives and its quota share reinsurer. The fees earned in the
insurance services segment from Guarantee Insurance,
attributable to the portion of the insurance risk it retains,
are eliminated upon consolidation.
In the insurance segment, the Company provides workers
compensation policies to businesses. These products include
alternative market workers compensation insurance
solutions principally, segregated portfolio cell
captive insurance arrangements and high deductible and
retrospectively rated plans and traditional
guaranteed cost workers compensation plans.
Certain other operating expenses incurred by Patriot Risk
Management, Inc. are allocated to the insurance services and
insurance segments based on managements estimate of the
applicability of these expenses to the segments operating
results. It would be impracticable for the Company to determine
the allocation of assets between the two segments.
Business segment results are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance services segment insurance services income
|
|
$
|
12,308
|
|
|
$
|
11,325
|
|
|
$
|
10,208
|
|
Insurance segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
|
49,220
|
|
|
|
24,613
|
|
|
|
21,053
|
|
Net investment income
|
|
|
2,028
|
|
|
|
1,326
|
|
|
|
1,321
|
|
Net realized gains (losses) on investments
|
|
|
(1,037
|
)
|
|
|
(5
|
)
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance segment revenues
|
|
|
50,211
|
|
|
|
25,934
|
|
|
|
22,767
|
|
Intersegment revenues
|
|
|
(6,651
|
)
|
|
|
(4,298
|
)
|
|
|
(3,033
|
)
|
Non-allocated items
|
|
|
|
|
|
|
|
|
|
|
(1,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$
|
55,868
|
|
|
$
|
32,961
|
|
|
$
|
28,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance services segment
|
|
$
|
4,452
|
|
|
$
|
4,201
|
|
|
$
|
3,764
|
|
Insurance segment
|
|
|
2,773
|
|
|
|
431
|
|
|
|
(1,939
|
)
|
Non-allocated items
|
|
|
(7,992
|
)
|
|
|
(2,685
|
)
|
|
|
1,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated pre-tax net income (loss)
|
|
$
|
(767
|
)
|
|
$
|
1,947
|
|
|
$
|
3,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance services segment
|
|
$
|
2,939
|
|
|
$
|
4,682
|
|
|
$
|
2,020
|
|
Insurance segment
|
|
|
2,278
|
|
|
|
(520
|
)
|
|
|
(1,250
|
)
|
Non-allocated items
|
|
|
(5,341
|
)
|
|
|
(1,783
|
)
|
|
|
840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss)
|
|
$
|
(124
|
)
|
|
$
|
2,379
|
|
|
$
|
1,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
Patriot
Risk Management, Inc. and its Wholly-Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Items not allocated to segments pre-tax net income include
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Holding company expenses
|
|
$
|
(3,068
|
)
|
|
$
|
(1,395
|
)
|
|
$
|
(3,260
|
)
|
Interest expense
|
|
|
(1,438
|
)
|
|
|
(1,290
|
)
|
|
|
(1,109
|
)
|
Loss from write-off of deferred equity offering costs
|
|
|
(3,486
|
)
|
|
|
|
|
|
|
|
|
Gain on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
6,586
|
|
Other income forgiveness of interest due on
extinguished debt
|
|
|
|
|
|
|
|
|
|
|
796
|
|
Other than temporary impairment of Tarheel investment in
Foundation
|
|
|
|
|
|
|
|
|
|
|
(1,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unallocated items before income tax expense (benefit)
|
|
|
(7,992
|
)
|
|
|
(2,685
|
)
|
|
|
1,274
|
|
Income tax expense (benefit) on unallocated items
|
|
|
(2,651
|
)
|
|
|
(905
|
)
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unallocated items
|
|
$
|
(5,341
|
)
|
|
$
|
(1,783
|
)
|
|
$
|
840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.
|
Related
Party Transactions
|
The Companys Chairman, President and Chief Executive
Officer provided a personal guaranty in connection with the
notes payable described in Note 9. The Company pays the
Chairman, President and Chief Executive Officer a guaranty fee
equal to 4% of the outstanding balance on the loan each year for
providing this service. The fee was set by the independent
members of Patriot Risk Management, Inc.s board of
directors on terms that they believe are comparable to those
that could be obtained from unaffiliated third parties. In 2008
and 2007, the Company paid its Chairman, President and Chief
Executive Officer approximately $601,000 and $444,000,
respectively, in guaranty fees.
On April 1, 2007 the Companys majority stockholder
contributed all of the outstanding capital stock of Tarheel to
Patriot Risk Management, Inc. with the result that Tarheel and
its subsidiary, TIMCO, became wholly-owned indirect subsidiaries
of Patriot Risk Management, Inc. The Company subsequently
changed the name of Tarheel to Patriot Risk Management of
Florida, Inc. and changed the name of TIMCO to Patriot Insurance
Management Company, Inc. As the companies were under common
control, the contribution of Tarheel to PRS Group, Inc. was
accounted for similar to a pooling of interests pursuant to the
Financial Accounting Standards Board Statement of Financial
Standards No. 141 Business Combinations.
Consequently, the accompanying consolidated financial statements
have been retroactively restated, as if the combining companies
had been consolidated for all periods. Foundation, a limited
purpose captive insurance subsidiary of Tarheel, reinsured
workers compensation program business. Foundation was
declared insolvent and management control of Foundation was
assumed by the South Carolina Department of Insurance in 2004.
Accordingly, the retroactively- restated consolidated financial
statements do not include the accounts of Foundation. On
March 24, 2006, Foundation was placed into receivership and
was ultimately dissolved. The revenues and pre-tax net income
(loss) attributable to Tarheel that are included in the
accompanying consolidated financial statements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2005
|
|
|
(In thousands)
|
|
Revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
283
|
|
Pre-tax net loss
|
|
|
|
|
|
|
(343
|
)
|
|
|
(326
|
)
|
F-34
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Investments
|
|
|
|
|
|
|
|
|
Debt securities, available for sale, at fair value
|
|
$
|
46,134
|
|
|
$
|
54,373
|
|
Equity securities, available for sale, at fair value
|
|
|
|
|
|
|
222
|
|
Short-term investments
|
|
|
671
|
|
|
|
244
|
|
Real estate
|
|
|
246
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
47,051
|
|
|
|
55,089
|
|
Cash and cash equivalents
|
|
|
7,452
|
|
|
|
8,333
|
|
Insurance services income receivable
|
|
|
3,892
|
|
|
|
|
|
Premiums receivable, net
|
|
|
83,040
|
|
|
|
58,826
|
|
Deferred policy acquisition costs, net of deferred ceding
commissions
|
|
|
478
|
|
|
|
|
|
Prepaid reinsurance premiums
|
|
|
42,010
|
|
|
|
33,731
|
|
Reinsurance recoverable, net
|
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses
|
|
|
49,970
|
|
|
|
37,492
|
|
Paid losses and loss adjustment expenses
|
|
|
8,358
|
|
|
|
4,642
|
|
Funds held by ceding companies and other amounts due from
reinsurers
|
|
|
3,116
|
|
|
|
2,507
|
|
Net deferred tax assets
|
|
|
2,250
|
|
|
|
3,967
|
|
Fixed assets, net
|
|
|
766
|
|
|
|
733
|
|
Receivable from related party
|
|
|
|
|
|
|
500
|
|
Income taxes recoverable
|
|
|
927
|
|
|
|
110
|
|
Intangible assets
|
|
|
1,287
|
|
|
|
1,287
|
|
Other assets, net
|
|
|
7,194
|
|
|
|
4,075
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
257,791
|
|
|
$
|
211,292
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities
|
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses
|
|
$
|
83,210
|
|
|
$
|
74,550
|
|
Reinsurance payable on paid losses and loss adjustment expenses
|
|
|
1,073
|
|
|
|
756
|
|
Unearned and advanced premium reserves
|
|
|
63,702
|
|
|
|
44,613
|
|
Deferred ceding commissions, net of deferred policy acquisition
costs
|
|
|
|
|
|
|
83
|
|
Reinsurance funds withheld and balances payable
|
|
|
56,458
|
|
|
|
47,449
|
|
Notes payable, including $363,000 of related party notes
payable, and accrued interest of $242,000 and $224,000
|
|
|
18,244
|
|
|
|
20,783
|
|
Subordinated debentures, including accrued interest of $211,000
and $175,000
|
|
|
1,845
|
|
|
|
1,809
|
|
Accounts payable and accrued expenses
|
|
|
23,130
|
|
|
|
14,112
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
247,662
|
|
|
|
204,155
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock
|
|
|
1,000
|
|
|
|
1,000
|
|
Common stock
|
|
|
1
|
|
|
|
1
|
|
Series B common stock
|
|
|
1
|
|
|
|
1
|
|
Paid-in capital
|
|
|
5,521
|
|
|
|
5,456
|
|
Retained earnings
|
|
|
2.390
|
|
|
|
72
|
|
Accumulated other comprehensive income, net of deferred income
taxes
|
|
|
1,216
|
|
|
|
607
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
10,129
|
|
|
|
7,137
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
257,791
|
|
|
$
|
211,292
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-35
Patriot
Risk Management, Inc. and its Wholly Owned Subsidiaries
Consolidated
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Unaudited
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
28,369
|
|
|
$
|
32,276
|
|
Insurance services income
|
|
|
9,753
|
|
|
|
4,706
|
|
Investment income, net
|
|
|
1,354
|
|
|
|
1,487
|
|
Net realized gains (losses) on investments
|
|
|
903
|
|
|
|
(253
|
)
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
40,379
|
|
|
|
38,216
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
15,864
|
|
|
|
20,719
|
|
Net policy acquisition and underwriting expenses
|
|
|
8,498
|
|
|
|
8,176
|
|
Other operating expenses
|
|
|
11,100
|
|
|
|
8,055
|
|
Interest expense
|
|
|
1,119
|
|
|
|
1,102
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
36,581
|
|
|
|
38,052
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense (benefit)
|
|
|
3,798
|
|
|
|
383
|
|
Income Tax Expense (Benefit)
|
|
|
1,422
|
|
|
|
(217
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,376
|
|
|
$
|
600
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Common Share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.95
|
|
|
$
|
.44
|
|
Diluted
|
|
|
1.94
|
|
|
|
.44
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,216
|
|
|
|
1,361
|
|
Diluted
|
|
|
1,225
|
|
|
|
1,370
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-36
Patriot
Risk Management, Inc. and its Wholly Owned Subsidiaries
Consolidated
Statements of Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
Total
|
|
|
|
Series A Convertible Preferred Stock
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Income
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
(Loss)
|
|
|
Equity
|
|
|
|
Unaudited
|
|
|
|
(In thousands)
|
|
|
Balance, December 31, 2008
|
|
|
1,000
|
|
|
$
|
1,000
|
|
|
|
561
|
|
|
$
|
1
|
|
|
|
|
|
|
$
|
|
|
|
|
800
|
|
|
$
|
1
|
|
|
$
|
5,456
|
|
|
$
|
72
|
|
|
$
|
607
|
|
|
$
|
7,137
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
Repurchase and retirement of 215,263 shares of common
stock at par value
|
|
|
|
|
|
|
|
|
|
|
(215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance before comprehensive income
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
346
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
800
|
|
|
|
1
|
|
|
|
5,521
|
|
|
|
14
|
|
|
|
607
|
|
|
|
7,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,376
|
|
|
|
|
|
|
|
2,376
|
|
Net unrealized appreciation in available for sale securities,
net of deferred taxes of $316,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
609
|
|
|
|
609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,376
|
|
|
|
609
|
|
|
|
2,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009
|
|
|
1,000
|
|
|
$
|
1,000
|
|
|
|
346
|
|
|
$
|
1
|
|
|
|
|
|
|
$
|
|
|
|
|
800
|
|
|
$
|
1
|
|
|
$
|
5,521
|
|
|
$
|
2,390
|
|
|
$
|
1,216
|
|
|
$
|
10,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
561
|
|
|
$
|
1
|
|
|
|
800
|
|
|
$
|
1
|
|
|
$
|
5,363
|
|
|
$
|
196
|
|
|
$
|
(125
|
)
|
|
$
|
5,436
|
|
Reclassification of all outstanding shares of Series A
common stock into common stock on a one-for-one basis
|
|
|
|
|
|
|
|
|
|
|
561
|
|
|
|
1
|
|
|
|
(561
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance before comprehensive income
|
|
|
|
|
|
|
|
|
|
|
561
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
800
|
|
|
|
1
|
|
|
|
5,420
|
|
|
|
196
|
|
|
|
(125
|
)
|
|
|
5,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600
|
|
|
|
|
|
|
|
600
|
|
Net unrealized depreciation in available for sale securities,
net of deferred tax benefit of $490,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(952
|
)
|
|
|
(952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600
|
|
|
|
(952
|
)
|
|
|
(352
|
)
|
Balance, September 30, 2008
|
|
|
|
|
|
$
|
|
|
|
|
561
|
|
|
$
|
1
|
|
|
|
|
|
|
$
|
|
|
|
|
800
|
|
|
$
|
1
|
|
|
$
|
5,420
|
|
|
$
|
796
|
|
|
$
|
(1,077
|
)
|
|
$
|
5,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-37
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Unaudited
|
|
|
|
(In thousands)
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,376
|
|
|
$
|
600
|
|
Adjustments to reconcile net income to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Net realized (gains) losses on investments
|
|
|
(903
|
)
|
|
|
253
|
|
Other income
|
|
|
|
|
|
|
(219
|
)
|
Depreciation and amortization
|
|
|
579
|
|
|
|
599
|
|
Share-based compensation expense
|
|
|
65
|
|
|
|
57
|
|
Amortization of debt securities
|
|
|
224
|
|
|
|
197
|
|
Deferred income tax expense (benefit)
|
|
|
1,400
|
|
|
|
(50
|
)
|
Changes in certain assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease (increase) in:
|
|
|
|
|
|
|
|
|
Insurance services income receivable
|
|
|
(3,892
|
)
|
|
|
|
|
Premiums receivable
|
|
|
(24,214
|
)
|
|
|
(22,801
|
)
|
Deferred policy acquisition costs, net of deferred ceding
commissions
|
|
|
(561
|
)
|
|
|
(1,015
|
)
|
Prepaid reinsurance premiums
|
|
|
(8,279
|
)
|
|
|
(12,996
|
)
|
Reinsurance recoverable on:
|
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses
|
|
|
(12,478
|
)
|
|
|
(7,669
|
)
|
Paid losses and loss adjustment expenses
|
|
|
(3,716
|
)
|
|
|
244
|
|
Funds held by ceding companies and other amounts due from
reinsurers
|
|
|
(609
|
)
|
|
|
(366
|
)
|
Income taxes recoverable
|
|
|
(817
|
)
|
|
|
(1,087
|
)
|
Other assets
|
|
|
(3,321
|
)
|
|
|
(5,705
|
)
|
Increase in:
|
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses
|
|
|
8,660
|
|
|
|
15,248
|
|
Reinsurance payable on paid loss and loss adjustment expenses
|
|
|
317
|
|
|
|
43
|
|
Unearned and advanced premium reserves
|
|
|
19,089
|
|
|
|
22,282
|
|
Reinsurance funds withheld and balances payable
|
|
|
9,009
|
|
|
|
2,224
|
|
Accounts payable and accrued expenses
|
|
|
9,015
|
|
|
|
5,636
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(8,056
|
)
|
|
|
(4,525
|
)
|
|
|
|
|
|
|
|
|
|
Investment Activities
|
|
|
|
|
|
|
|
|
Proceeds from sales and maturities of debt securities
|
|
|
20,515
|
|
|
|
14,960
|
|
Proceeds from sales of equity securities
|
|
|
329
|
|
|
|
|
|
Purchases of debt securities
|
|
|
(10,778
|
)
|
|
|
(15,689
|
)
|
Net purchases of short-term investments
|
|
|
(427
|
)
|
|
|
(144
|
)
|
Purchases of fixed assets
|
|
|
(407
|
)
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investment activities
|
|
|
9,232
|
|
|
|
(960
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
|
|
|
|
1,500
|
|
Repayments of notes payable
|
|
|
(2,557
|
)
|
|
|
(761
|
)
|
Change in receivable from related party for Series A
convertible preferred stock
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(2,057
|
)
|
|
|
739
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(881
|
)
|
|
|
(4,746
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
8,333
|
|
|
|
4,943
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
7,452
|
|
|
$
|
197
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-38
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
|
|
(1)
|
Summary
of Significant Accounting Policies
|
Nature
of Business and Basis of Presentation
Patriot Risk Management, Inc. and its wholly owned subsidiaries
(the Company) produce, underwrite and administer alternative
market and traditional workers compensation insurance
plans and provide claims services for insurance companies,
segregated portfolio captives and reinsurers. Through its wholly
owned insurance company subsidiary, Guarantee Insurance Company
(Guarantee Insurance), the Company may also participate in a
portion of the insurance underwriting risk. In its insurance
services segment, the Company generates fee income by providing
workers compensation claims services as well as agency and
underwriting services. Workers compensation claims
services include nurse case management, cost containment
services and, beginning in 2009, claims administration and
adjudication services. Workers compensation agency and
underwriting services include general agency services and,
beginning in 2009, specialty underwriting, policy administration
and captive management services. Claims services and agency and
underwriting services are performed for the benefit of Guarantee
Insurance, segregated portfolio captives, Guarantee
Insurances traditional business quota share reinsurers
under the Patriot Risk Services brand and for the benefit of
other insurance companies under their brand. In its insurance
segment, the Company generates underwriting income and
investment income by providing alternative market workers
compensation risk transfer solutions and traditional
workers compensation insurance coverage.
The accompanying consolidated financial statements of the
Company include the accounts of Patriot Risk Management, Inc., a
holding company, and its wholly-owned subsidiaries, which
include (i) Guarantee Insurance Group, Inc. and its
wholly-owned subsidiary, Guarantee Insurance, a property and
casualty insurance company and (ii) PRS Group, Inc. and its
wholly-owned subsidiaries, Patriot Risk Services, Inc., Patriot
Re International, Inc., Patriot Risk Management of Florida, Inc.
and Patriot Insurance Management Company, Inc. Such statements
have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for
interim financial information. Accordingly, they do not include
all of the information and notes required by GAAP for complete
financial statements. The Company has evaluated subsequent
events through January 7, 2010, the date the financial
statements were filed with the United States Securities and
Exchange Commission.
On November 26, 2007, the directors of the Company deemed
it advisable and in the Companys best interests to proceed
with the steps necessary to effectuate an initial public
offering and take such actions necessary to file a Registration
Statement on
Form S-1
relating to the issuance and sale by the Company of its common
stock, including the prospectus contained therein and all
required exhibits thereto with the United States Securities and
Exchange Commission. An initial public offering has not yet been
consummated due to the prevailing conditions of the capital
markets. In 2008, the Company wrote off approximately
$3.5 million of deferred equity offering costs incurred in
connection with its efforts to consummate an initial public
offering at that time.
On April 23, 2009, Inter-Atlantic Financial, Inc., a
Delaware corporation (IAN), entered into a Stock
Purchase Agreement (the Agreement) with the Company
and its shareholders, pursuant to which IAN agreed to acquire
all of the Companys issued and outstanding capital stock.
This transaction was to be accounted for as a reverse
acquisition, equivalent to a recapitalization through the
issuance of stock by the Company for the net monetary assets of
IAN. Among other things, the transaction was conditioned on
(i) holders of not more than 29.99% of the shares of common
stock issued in IANs initial public offering electing to
exercise their right to convert their shares into cash and
(ii) IAN having a minimum of $35 million in cash at
closing, net of capped transaction expenses and IAN share and
warrant redemptions. These conditions were not satisfied, the
reverse acquisition transaction was not consummated and
IANs corporate existence ceased on October 9, 2009.
In the fourth quarter of 2009, the Company plans to write off
approximately $600,000 of deferred transaction costs incurred in
connection with its efforts to consummate this reverse
acquisition transaction.
F-39
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
On October 1, 2009, the directors of the Company deemed it
once again advisable and in the Companys best interests to
proceed with the steps necessary to effectuate an initial public
offering and take such actions necessary to file an amended
Registration Statement on
Form S-1
relating to the issuance and sale by the Company of its common
stock, including the prospectus contained therein and all
required exhibits thereto with the United States Securities and
Exchange Commission.
The accompanying unaudited consolidated financial statements for
the interim periods included herein are unaudited; however, such
information reflects all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position,
results of operations, and cash flows for the interim periods.
The results of operations for the nine months ended
September 30, 2009 are not necessarily indicative of the
results expected for the full year. These financial statements
and the notes thereto should be read in conjunction with the
Companys audited financial statements for the year ended
December 31, 2008 and accompanying notes included herein.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
The most significant estimates that are susceptible to
significant change in the near-term relate to the determination
of reserves for losses and loss adjustment expenses. Although
considerable variability is inherent in these estimates,
management believes that the current estimates are reasonable in
all material respects. The estimates are reviewed regularly and
adjusted as necessary. Adjustments related to changes in
estimates are reflected in the Companys results of
operations in the period in which those estimates changed.
Revenue
Recognition
Premiums are earned pro rata over the terms of the policies,
which are typically annual. The portion of premiums that will be
earned in the future are deferred and reported as unearned
premiums. The Company estimates earned but unbilled premiums at
the end of each period by analyzing historical earned premium
adjustments made and applying an adjustment percentage to
premiums earned for the period.
Through PRS Group, Inc., the Company earns insurance services
income by providing nurse case management and cost containment
services to Guarantee Insurance, both on its behalf and on
behalf of the segregated portfolio captives and its quota share
reinsurers. Through PRS Group, Inc. and Patriot Underwriters,
Inc., the Company also earns insurance services income by
providing nurse case management, cost containment, claims
administration, sales, underwriting, policy administration and,
in certain cases, segregated portfolio cell captive management
services to ULLICO Casualty Company, which it refers to as its
business process outsourcing or BPO client.
Insurance services income for nurse case management services is
based on a monthly charge per claimant. Insurance services
income for cost containment services is based on a percentage of
claim savings. Insurance services income for claims
administration is based on a percentage of reference premiums
produced for the Companys BPO client (recognized on a pro
rata basis over the period of time the Company is contractually
obligated to administer the claims). Reference premiums produced
refers to premiums produced for large deductible policies.
Premiums on large deductible policies are substantially reduced,
through premium rate credits, due to the fact that the insurer
has no exposure to losses below the per occurrence deductible.
Reference premiums produced equal the premiums produced for
large deductible policies, grossed up to
F-40
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
include the premium credits applicable to the large deductible
policy, as if the policy did not feature a per occurrence
deductible. Insurance services income for sales, underwriting
and segregated portfolio cell captive setup, policy
administration and captive management services is based on a
percentage of premiums produced for the Companys BPO
client, reduced by an allowance for estimated insurance services
income that will not be received due to the cancellation of
policies prior to expiration and reductions in payrolls.
Insurance services income for policy administration and captive
management is based on a percentage of premium produced for the
Companys BPO client, recognized on a pro rata basis over
the lives of the policies produced.
Insurance services segment income includes all insurance
services income earned by PRS Group, Inc. and Patriot
Underwriters, Inc. However, the insurance services income earned
by PRS Group, Inc. from Guarantee Insurance that is attributable
to the portion of the insurance risk that Guarantee Insurance
retains or assumes from its BPO client is eliminated upon
consolidation. Therefore, the Companys consolidated
insurance services income consists of the fees earned by Patriot
Underwriters, Inc. and the portion of fees earned by PRS Group,
Inc. that are attributable to the portion of the insurance risk
assumed by the segregated portfolio captives and Guarantee
Insurances quota share reinsurers and retained by its BPO
client.
Dividend and interest income are recognized when earned.
Amortization of premiums and accrual of discounts on investments
in debt securities are reflected in earnings over the
contractual terms of the investments in a manner that produces a
constant effective yield. Realized gains and losses on
dispositions of securities are determined by the
specific-identification method.
Reserves
for Losses and Loss Adjustment Expenses
Loss and loss adjustment expense reserves represent the
estimated ultimate cost of all reported and unreported losses
incurred through the end of the period. The reserves for unpaid
losses and loss adjustment expenses are estimated using
individual case-basis valuations and statistical analyses.
Management believes that the reserves for losses and loss
adjustment expenses are adequate to cover the ultimate cost of
losses and loss adjustment expenses thereon. However, because of
the uncertainty from various sources, including changes in
reporting patterns, claims settlement patterns, judicial
decisions, legislation and economic condition, actual loss
experience may not conform to the assumptions used in
determining the estimated amounts for such liability at the
balance sheet date. Loss and loss adjustment expense reserve
estimates are periodically reviewed and adjusted as necessary as
experience develops or new information becomes known. As
adjustments to these estimates become necessary, such
adjustments are reflected in current operations.
Estimating liabilities for unpaid claims and reinsurance
recoveries for asbestos and environmental claims is subject to
significant uncertainties that are generally not present for
other types of claims. The ultimate cost of these claims cannot
be reasonably estimated using traditional loss estimating
techniques. The Company establishes liabilities for reported
asbestos and environmental claims, including cost of litigation,
as information permits. This information includes the status of
current law and coverage litigation, whether an insurable event
has occurred, which policies and policy years might be
applicable and which insurers may be liable, if any. In
addition, incurred but not reported liabilities have been
established by management to cover potential additional exposure
on both known and unasserted claims. Given the expansion of
coverage and liability by the courts and legislatures in the
past and the possibilities of similar interpretation in the
future, there is significant uncertainty regarding the extent of
the insurers liability.
In managements judgment, information currently available
has been adequately considered in estimating the Companys
ultimate cost of insured events. However, future changes in
these estimates could have a material adverse effect on the
Companys financial condition.
F-41
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Reinsurance
Reinsurance premiums, losses, and loss adjustment expenses are
accounted for on bases consistent with those used in accounting
for the underlying policies issued and the terms of the
reinsurance contracts.
Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the
reinsured policy. Reinsurance contracts do not relieve the
Company from its primary obligations to policyholders. Failure
of reinsurers to honor their obligations could result in losses
to the Company. The Company evaluates the financial condition of
its reinsurers and monitors concentrations of credit risk with
respect to the individual reinsurer that participates in its
ceded programs to minimize its exposure to significant losses
from reinsurer insolvencies. The Company holds collateral as
deemed appropriate to secure amounts recoverable from reinsurers.
Income
Taxes
The Company files a consolidated federal income tax return. The
tax liability of the group is apportioned among the members of
the group in accordance with the portion of the consolidated
taxable income attributable to each member of the group, as if
computed on a separate return. To the extent that the losses of
any member of the group are utilized to offset taxable income of
another member of the group, the Company takes the appropriate
corporate action to purchase such losses. To the
extent that a member of the group generates any tax credits,
such tax credits are allocated to the member generating such tax
credits. Deferred income taxes are recorded on the differences
between the tax bases of assets and liabilities and the amounts
at which they are reported in the financial statements. Deferred
income taxes are also recorded for operating loss and tax credit
carryforwards. Recorded amounts are adjusted to reflect changes
in income tax rates and other tax law provisions as they become
enacted and represent managements best estimate of future
income tax expenses or benefits that will ultimately be incurred
or recovered. The Company maintains a valuation allowance for
any portion of deferred tax assets which management believes it
is more likely than not that the Company will be unable to
utilize to offset future taxes.
Earnings
Per Share
Basic earnings per common share is computed by dividing income
available to common stockholders by the weighted average number
of common shares outstanding. Diluted earnings per common share
reflect, in periods in which they have a dilutive effect, the
impact of common shares issuable upon exercise of the
Companys outstanding stock options, common shares released
from restriction upon the vesting of the Companys
outstanding restricted stock and the impact of common shares
issuable upon conversion of preferred stock outstanding.
Recent
Accounting Pronouncements
Accounting
Standards Codification
In June 2009, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS)
No. 168. The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles, a replacement of FASB Statement No. 162
(the Codification). The Codification reorganized existing
U.S. accounting and reporting standards issued by the FASB
and other related private sector standard setters into a single
source of authoritative accounting principles arranged by topic.
The Codification supersedes all existing U.S. accounting
standards. All other accounting literature not included in the
Codification, other than Securities and Exchange Commission
guidance for publicly traded companies, is considered
non-authoritative. The Codification was effective on a
prospective basis for interim and annual reporting periods
ending after September 15, 2009. The adoption of the
Codification changed the Companys
F-42
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
references to U.S. GAAP accounting standards, but did not
impact the Companys results of operations or financial
position.
Business
Combinations
In December 2007, the FASB issued revised guidance for the
accounting for business combinations. The revised guidance,
which is now part of Accounting Standards Codification (ASC)
805, Business Combinations, is effective for acquisitions
during the fiscal years beginning after December 15, 2008
and early adoption is prohibited. This revised guidance
establishes principles and requirements for how the acquirer of
a business recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and
any non-controlling interest in the acquired entity. The revised
guidance also provides guidance for recognizing and measuring
the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the
business combination. The adoption of this revised guidance on
January 1, 2009 did not have an impact on the
Companys results of operations or financial position. The
future impact of the adoption of this revised guidance will
depend upon the extent and magnitude of future acquisitions, if
any.
Additional
Fair Value Measurement Guidance
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. The new guidance, which is
now part of ASC 820, Fair Value Measurements and
Disclosures, is effective for periods ending after
June 15, 2009 with early adoption permitted for periods
ending after March 15, 2009. Retrospective application is
not permitted. This new guidance requires disclosure of the
inputs and valuation techniques used, as well as any changes in
valuation techniques and inputs used during the period, to
measure fair value in interim and annual periods. In addition,
the presentation of the fair value hierarchy is required to be
presented by major security type as described in ASC 320. The
adoption of this new guidance on June 30, 2009 did not have
a material impact on the Companys results of operations or
financial position.
Disclosure
about 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, was effective for periods ending after
June 15, 2009 with early adoption permitted for periods
ending after March 15, 2009. The new guidance requires
disclosure of the fair value of financial instruments whenever a
publicly traded company issues financial information in interim
reporting periods in addition to the annual disclosure required
at yearend. The adoption of this new guidance on June 30,
2009 did not have a material impact on the Companys
disclosures since all of its material financial instruments are
carried at fair value.
Other-Than-Temporary
Impairments
In April 2009, the FASB issued new guidance for the accounting
for other-than-temporary impairments. The new guidance, which is
now part of ASC 320, Investments Debt and Equity
Securities, was effective for periods ending after
June 15, 2009 with early adoption permitted for periods
ending after March 15, 2009. Under the new guidance, an
other-than temporary impairment is recognized when an entity has
the intent to sell a debt security or when it is more likely
than not that an entity will be required to sell the debt
security before its anticipated recovery in value. The new
guidance also changes the presentation and amount of
other-than-temporary impairment losses recognized in the income
statement for instances in which the Company does not intend to
sell a debt security, or it is more likely than not that the
Company will not be required to sell a debt security prior to
the anticipated recovery of its remaining cost basis. The
Company separates the
F-43
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
credit loss component of the impairment from the amount related
to all other factors and reports the credit loss component in
net realized investment gains (losses). The impairment related
to all other factors is reported in accumulated other
comprehensive income, net of deferred income taxes. In addition,
the new guidance expands disclosures related to
other-than-temporary impairments related to debt securities and
requires such disclosures in both interim and annual periods.
The adoption of the new guidance on June 30, 2009 did not
have any impact on the Companys results of operations or
financial position.
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, was effective for interim and
annual periods ending after June 15, 2009.. The new
guidance establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but
before the financial statements are issued or are available to
be issued. Additionally, the new guidance requires the
disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date. The adoption of
the new guidance on June 30, 2009 did not have any impact
on the Companys results of operations or financial
position.
Fair
Value Measurement of Liabilities
In August 2009, the FASB issued new guidance for the accounting
for the fair value measurement of liabilities. The new guidance,
which is now part of ASC 820, Fair Value Measurements and
Disclosures, is effective for interim and annual periods
beginning after August 27, 2009. The new guidance provides
clarification that in certain circumstances in which a quoted
price in an active market for an identical liability is not
available, an entity is required to measure fair value using one
or more of the following valuation techniques: The quoted price
of the identical when traded as an asset, the quoted price for
similar liabilities or similar liabilities when traded as an
asset or another valuation technique that is consistent with the
principles of fair value measurements. The Company does not
expect that the provisions of the new guidance will have a
material effect on its results of operations or financial
position.
The Company classifies its debt securities as available for
sale. Debt securities as of September 30, 2009 were stated
at estimated fair value, with net unrealized gains and losses
included in accumulated other comprehensive income net of
deferred income taxes.
The amortized cost, gross unrealized gains, gross unrealized
losses and estimated fair value of debt securities available for
sale as of September 30, 2009 and December 31, 2008
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
September 30, 2009
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
|
U.S. government securities
|
|
$
|
3,444
|
|
|
$
|
155
|
|
|
$
|
|
|
|
$
|
3,599
|
|
U.S. government agencies
|
|
|
300
|
|
|
|
8
|
|
|
|
|
|
|
|
308
|
|
Asset-backed and mortgage-backed securities
|
|
|
13,709
|
|
|
|
335
|
|
|
|
157
|
|
|
|
13,887
|
|
State and political subdivisions
|
|
|
15,346
|
|
|
|
1,030
|
|
|
|
|
|
|
|
16,376
|
|
Corporate securities
|
|
|
11,492
|
|
|
|
473
|
|
|
|
1
|
|
|
|
11,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,291
|
|
|
$
|
2,001
|
|
|
$
|
158
|
|
|
$
|
46,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
December 31, 2008
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
U.S. government securities
|
|
$
|
3,981
|
|
|
$
|
247
|
|
|
$
|
|
|
|
$
|
4,228
|
|
U.S. government agencies
|
|
|
300
|
|
|
|
11
|
|
|
|
|
|
|
|
311
|
|
Asset-backed and mortgage-backed securities
|
|
|
16,128
|
|
|
|
806
|
|
|
|
617
|
|
|
|
16,317
|
|
State and political subdivisions
|
|
|
23,058
|
|
|
|
867
|
|
|
|
11
|
|
|
|
23,914
|
|
Corporate securities
|
|
|
9,745
|
|
|
|
72
|
|
|
|
214
|
|
|
|
9,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,212
|
|
|
$
|
2,003
|
|
|
$
|
842
|
|
|
$
|
54,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated fair value and gross unrealized losses on debt
securities available for sale, aggregated by investment category
and length of time that individual investment securities have
been in a continuous unrealized loss position, as of
September 30, 2009 and December 31, 2008 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
September 30, 2009
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In thousands, except numbers of securities data)
|
|
|
|
(Unaudited)
|
|
|
U.S. government securities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
U.S. government agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed and mortgage-backed securities
|
|
|
357
|
|
|
|
1
|
|
|
|
1,943
|
|
|
|
156
|
|
|
|
2,300
|
|
|
|
157
|
|
State and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
|
250
|
|
|
|
|
|
|
|
699
|
|
|
|
1
|
|
|
|
949
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
607
|
|
|
$
|
1
|
|
|
$
|
2,642
|
|
|
$
|
157
|
|
|
$
|
3,249
|
|
|
$
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of securities in an unrealized loss position
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
December 31, 2008
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In thousands, except numbers of securities data)
|
|
|
U.S. government securities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
U.S. government agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed and mortgage-backed securities
|
|
|
3,598
|
|
|
|
518
|
|
|
|
359
|
|
|
|
99
|
|
|
|
3,957
|
|
|
|
617
|
|
State and political subdivisions
|
|
|
745
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
745
|
|
|
|
11
|
|
Corporate securities
|
|
|
6,882
|
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
6,882
|
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,224
|
|
|
$
|
742
|
|
|
$
|
359
|
|
|
$
|
99
|
|
|
$
|
11,583
|
|
|
$
|
842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of securities in an unrealized loss position
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None of the Companys debt securities available for sale in
an unrealized loss position as of September 30, 2009 had a
fair value of less than 90% of amortized cost. The Company does
not intend to sell, nor is it more likely than not to be
required to sell, these debt securities. In addition, the
Company expects to fully recover the amortized cost of these
securities when they mature or are called. All but one of the
Companys debt
F-45
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
securities available for sale in an unrealized loss position as
of September 30, 2009 were considered investment grade,
which the Company defines as having a Standard &
Poors credit rating of BBB- or above. The Companys
only non-investment grade security had a fair value and
amortized cost of approximately $61,000 and $62,000,
respectively, as of September 30, 2009.
The estimated fair value of debt securities available for sale
as of September 30, 2009 by contractual maturity were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Estimated
|
|
Unaudited
|
|
Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Due in one year or less
|
|
$
|
5,098
|
|
|
$
|
5,171
|
|
Due after one year through five years
|
|
|
14,485
|
|
|
|
15,312
|
|
Due after five years
|
|
|
10,999
|
|
|
|
11,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,582
|
|
|
|
32,247
|
|
Asset-backed and mortgage-backed securities
|
|
|
13,709
|
|
|
|
13,887
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,291
|
|
|
$
|
46,134
|
|
|
|
|
|
|
|
|
|
|
Short-term investments, which represent certain debt securities
with initial maturities of one year or less, are carried at
cost, which approximates fair value. Real estate is carried at
cost net of accumulated depreciation of $26,000 and $22,000 as
of September 30, 2009 and December 31, 2008,
respectively.
|
|
(3)
|
Fair
Value Measurements
|
The Company adopted FASB guidance, now part of ASC 820, Fair
Value Measurements and Disclosure, effective January 1,
2008. The adoption of this guidance did not have any impact on
the Companys consolidated financial condition or results
of operations, but resulted in expanded disclosures about
securities measured at fair value, as discussed below.
The Company adopted FASB guidance related to the disclosure of
the fair value of financial instruments, now part of ASC 825,
Financial Instruments, effective January 1, 2008.
The Company did not elect the fair value option for existing
eligible items under this FASB guidance and, accordingly,
adoption of the provisions had no effect on our consolidated
financial condition or results of operations.
FASB guidance establishes a three-level hierarchy for fair value
measurements that distinguishes between market participant
assumptions based on market data obtained from sources
independent of the reporting entity (Observable Units) and the
reporting entitys own assumptions about market
participants assumptions (Unobservable Units). The
hierarchy level assigned to each security in the Companys
available-for-sale debt
F-46
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
and equity securities portfolio is based upon the Companys
assessment of the transparency and reliability of the inputs
used in the valuation as of the measurement date. The three
hierarchy levels are as follows:
|
|
|
|
|
Definition
|
|
Level 1
|
|
Observable unadjusted quoted prices in active markets for
identical securities
|
Level 2
|
|
Observable inputs other than quoted prices in active markets for
identical securities, including:
|
|
|
(i) quoted prices in active markets for similar securities,
|
|
|
(ii) quoted prices for identical or similar securities in
markets that are not active,
|
|
|
(iii) inputs other than quoted prices that are observable
for the security (e.g. interest rates, yield curves observable
at commonly quoted intervals, volatilities, prepayment speeds,
credit risks and default rates, and
|
|
|
(iv) inputs derived from or corroborated by observable
market data by correlation or other means
|
Level 3
|
|
Unobservable inputs, including the reporting entitys own
data, as long as there is no contrary data indicating market
participants would use different assumptions
|
At December 31, 2008, all of our debt securities were
classified as Level 1 or Level 2. If securities are
traded in active markets, quoted prices are used to measure fair
value (Level 1). All of our Level 2 securities are
priced based on observable inputs, including (i) quoted
prices in active markets for similar securities,
(ii) quoted prices for identical or similar securities in
markets that are not active or (iii) other observable
inputs, including interest rates, volatilities, prepayment
speeds, credit risks and default rates for the security. Our
management is responsible for the valuation process and uses
data from outside sources to assist with establishing fair
value. As part of our process of reviewing the reasonableness of
data obtained from outside sources, we review, in consultation
with our investment portfolio manager, pricing changes that
differ from those expected in relation to overall market
conditions.
The Companys debt and equity securities available for
sale, short-term investments, real estate, premiums receivable,
reinsurance recoverable on paid losses, notes payable and
subordinated debentures constitute financial instruments. The
carrying amounts of all financial instruments approximated their
fair values as of September 30, 2009 and December 31,
2008. The Companys debt securities available for sale,
classified by valuation hierarchy, as of September 30, 2009
and December 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement, Using
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
In Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Securities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
September 30, 2009
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
|
U.S. government securities
|
|
$
|
3,339
|
|
|
$
|
260
|
|
|
$
|
|
|
|
$
|
3,599
|
|
U.S. government agencies
|
|
|
|
|
|
|
308
|
|
|
|
|
|
|
|
308
|
|
Asset-backed and mortgage-backed securities
|
|
|
|
|
|
|
11,964
|
|
|
|
|
|
|
|
11,964
|
|
State and political subdivisions
|
|
|
|
|
|
|
16,376
|
|
|
|
|
|
|
|
16,376
|
|
Corporate securities
|
|
|
|
|
|
|
13,887
|
|
|
|
|
|
|
|
13,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,339
|
|
|
$
|
42,795
|
|
|
$
|
|
|
|
$
|
46,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-47
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement, Using
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
In Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Securities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
December 31, 2008
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
U.S. government securities
|
|
$
|
3,968
|
|
|
$
|
260
|
|
|
$
|
|
|
|
$
|
4,228
|
|
U.S. government agencies
|
|
|
|
|
|
|
311
|
|
|
|
|
|
|
|
311
|
|
Asset-backed and mortgage-backed securities
|
|
|
|
|
|
|
16,317
|
|
|
|
|
|
|
|
16,317
|
|
State and political subdivisions
|
|
|
|
|
|
|
23,914
|
|
|
|
|
|
|
|
23,914
|
|
Corporate securities
|
|
|
|
|
|
|
9,603
|
|
|
|
|
|
|
|
9,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
$
|
3,968
|
|
|
$
|
50,405
|
|
|
$
|
|
|
|
$
|
54,373
|
|
Equity securities
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,190
|
|
|
$
|
50,405
|
|
|
$
|
|
|
|
$
|
54,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For all other financial instruments, carrying value approximated
fair value as of September 30, 2009 and December 31,
2008.
|
|
(4)
|
Notes
Payable and Subordinated Debentures
|
Effective March 30, 2006, the Company entered into a loan
agreement for $8.7 million with an interest rate of prime
plus 4.5% (effectively 7.75% as of September 30, 2009). In
September 2007, the Company borrowed an additional
$5.7 million from the same lender under the same interest
rate terms as the loan taken in 2006. The principal balance and
accrued interest associated with this loan as of
September 30, 2009 were approximately $11.4 million
and $36,000, respectively. Principal and interest payments,
which are made monthly, were approximately $186,000 as of
September 30, 2009.
Effective December 31, 2008, the Company entered into a
loan agreement for $5.4 million with an interest rate of
prime plus 4.5% (effectively 7.75% as of September 30,
2009). The proceeds of the loan, net of loan fees, totaled
approximately $5.0 million and were used to provide
$2.1 million of additional surplus to Guarantee Insurance
and settle an intercompany payable to Guarantee Insurance of
$2.9 million. The principal balance and accrued interest
associated with this loan as of September 30, 2009 were
approximately $5.0 million and $16,000, respectively.
Principal and interest payments are made monthly and are
approximately $81,000 as of September 30, 2009.
Due to the variable rate, the principal and interest payment on
these loans may change. These loans are secured by a first lien
on all of the assets of Patriot Risk Management, Inc., PRS
Group, Inc., Guarantee Insurance Group, Inc., Patriot Risk
Services, Inc., Patriot Underwriters, Inc. and Patriot Risk
Management of Florida, Inc. Additionally, these loans are
guaranteed by the Companys Chairman, President, Chief
Executive Officer and the beneficial owner of a majority of the
Companys outstanding shares. The loans have financial
covenants requiring that the Company maintain consolidated GAAP
stockholders equity of at least $5.5 million and that
Guarantee Insurance maintain GAAP equity of at least
$14.5 million. The Company was in compliance with these
covenants as of September 30, 2009.
Effective June 26, 2008, the Company entered into a loan
agreement for $1.5 million from its Chairman, President,
Chief Executive Officer and the beneficial owner of a majority
of the Companys outstanding shares with an interest rate
of prime plus 3% (6.25% as of September 30, 2009). The
proceeds of the loan, net of loan fees, totaled approximately
$1.3 million and were used to provide additional surplus to
Guarantee Insurance. The principal balance of the loan is
payable on demand by the lender, subject to the cash flow
F-48
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
requirements of the Company. The principal balance associated
with this loan as of September 30, 2009 was approximately
$363,000. There was no accrued interest on the loan as of
September 30, 2009.
Between July and August 2004, Guarantee Insurance issued five
fully subordinated surplus notes totaling $1.3 million. The
surplus notes have stated maturities of five years and an
interest rate of 3%. No payments of principal or interest may be
made on these surplus notes unless either (i) the total
adjusted capital and surplus of Guarantee Insurance exceeds 400%
of the authorized control level risk-based capital stated in
Guarantee Insurances most recent annual statement filed
with the appropriate state regulators or (ii) the Company
obtains regulatory approval to make such payments. The principal
balance and accrued interest on these surplus notes as of
September 30, 2009 were approximately $1.2 million and
$190,000, respectively.
During 2005, the Company issued subordinated debentures totaling
$2.0 million. The debentures had an original term of three
years and bear interest at the rate of 3% compounded annually.
The debentures are subject to renewal on the same terms and
conditions at the end of the term. Debentures with an aggregate
principal balance of approximately $1.6 million were
renewed upon the expiration of their original term. The
principal balance and accrued interest on these debentures as of
September 30, 2009 were approximately $1.6 million and
$211,000, respectively.
|
|
(5)
|
Business
Process Outsourcing
|
During the second quarter of 2009, the Company entered into an
agreement with its BPO client to gain access to workers
compensation insurance business in certain additional states.
Under this agreement, the Company earns commission income and
insurance services fee income, which are included in insurance
services income in the Companys consolidated statements of
income, for producing, underwriting and administering the
policies, administering the claims, providing nurse case
management and cost containment services and, in certain cases,
managing segregated portfolio captives.
For certain services, the Company earns insurance services
income based on a percentage of premiums produced or reference
premiums produced. For the nine months ended September 30,
2009, premiums produced for the Companys BPO client were
approximately $19.4 million, and reference premiums
produced were approximately $36.5 million.
Expenses incurred in connection with this agreement with the
Companys BPO client are principally comprised of
(i) commissions to producing agencies and sales and
underwriting costs, which are recognized in the period incurred,
net of an allowance for estimated commissions that will not be
paid due to the cancellation of policies prior to expiration and
reductions in payroll, and (ii) policy administration and
claims costs, which are expensed as incurred. All such expenses
are included in other operating expenses in the Companys
consolidated statements of income.
The Company collects fronting fees from policyholders, and
remits such fees to its BPO client, on business produced for its
BPO client. Additionally, the Company assumes a portion of the
premium and associated losses and loss adjustment expenses on
the business it produces for its BPO client as described in
Note 6.
Assumed
Reinsurance
During the second quarter of 2009, the Company began providing
general agency, underwriting and claims services to its BPO
client. The Company assumes a portion of the risk on these
policies, determined by
F-49
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
the parties for each policy. For the nine months ended
September 30, 2009, the Company assumed approximately
$7.8 million, or 40%, of the business produced for its BPO
client. In connection with business assumed under this
arrangement, the Company provides collateral in the form of
cash, letters of credit or other forms of acceptable collateral,
as required by the agreement. No collateral was required as of
September 30, 2009. Additionally, the Company assumed
certain business in connection with its participation in the
National Council on Compensation Insurance, Inc. National
Workers Compensation Insurance Pool for the nine months
ended September 30, 2009 and 2008.
Ceded
Reinsurance
To reduce the Companys exposure to losses from events that
cause unfavorable underwriting results, the Company reinsures
certain levels of risk in various areas of exposure with other
insurance enterprises or reinsurers under quota share and excess
of loss agreements. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability
associated with the reinsured policies.
Quota
Share Reinsurance
With respect to traditional business, quota share reinsurance
agreements in effect for the nine months ended
September 30, 2009 were comprised of (i) an agreement
to cede 25.0% of premiums written in all states and (ii) an
agreement to cede 68.0% of premiums written in Florida, New
Jersey and Georgia, which together comprised approximately 58%
of the Companys total traditional business gross premiums
written for the nine months ended September 30, 2009. In
addition, the Company entered into a quota share agreement
pursuant to which it ceded approximately $12.9 million of
gross unearned premium reserves as of December 31, 2008, a
pro rata portion of which were earned during the nine months
ended September 30, 2009. The Company had one quota share
reinsurance agreement in effect for the nine months ended
September 30, 2008 to cede 50.0% of premiums written in all
states except South Carolina, Georgia and Indiana. Pursuant to
its traditional business quota share agreements for both
periods, the Company ceded a pro rata portion of losses and
certain loss adjustment expenses up to $500,000 per occurrence.
With respect to alternative market business involving a
segregated portfolio captive risk sharing arrangement, the
Company ceded approximately 86% of premiums and losses and loss
adjustment expenses to the segregated portfolios captive
reinsurers for both the nine months ended September 30,
2009 and 2008, with individual cession rates ranging from 10% to
90%.
Excess
of Loss Reinsurance
Pursuant to separate excess of loss reinsurance agreements for
the Companys traditional and alternative market business,
Guarantee Insurance cedes 100% of losses up to $4.0 million
in excess of $1.0 million per occurrence. Pursuant to
excess of loss reinsurance agreements covering both traditional
and alternative market business, Guarantee Insurance cedes 100%
of losses up to $50 million in excess of $5 million
per occurrence.
Effects
of Reinsurance
Reinsurance contracts do not relieve the Company from its
obligations to policyholders. Failure of reinsurers to honor
their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed
uncollectible. The Company maintained an allowance for
uncollectible reinsurance recoverable balances of $300,000 as of
September 30, 2009 and December 31, 2008. The Company
evaluates the financial condition of its reinsurers and monitors
concentrations of credit risks arising from similar geographic
regions, activities, or economic characteristics of the
reinsurers to minimize its exposure to significant losses from
reinsurer insolvencies.
F-50
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The effects of reinsurance on premiums written and earned are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
|
Unaudited
|
|
|
Direct premiums
|
|
$
|
86,541
|
|
|
$
|
74,199
|
|
|
$
|
94,080
|
|
|
$
|
70,013
|
|
Assumed premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BPO client
|
|
|
7,824
|
|
|
|
1,539
|
|
|
|
|
|
|
|
|
|
NCCI National Workers Compensation Insurance Pool
|
|
|
1,607
|
|
|
|
1,416
|
|
|
|
798
|
|
|
|
816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assumed premiums
|
|
|
9,431
|
|
|
|
2,955
|
|
|
|
798
|
|
|
|
816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums
|
|
|
95,972
|
|
|
|
77,154
|
|
|
|
94,878
|
|
|
|
70,829
|
|
Ceded premiums
|
|
|
(56,573
|
)
|
|
|
(48,785
|
)
|
|
|
(52,926
|
)
|
|
|
(38,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums
|
|
$
|
39,399
|
|
|
$
|
28,369
|
|
|
$
|
41,952
|
|
|
$
|
32,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to reinsurance, the Company also reduces its
exposure to losses from events that cause unfavorable
underwriting results through the use of large deductible
policies, which it defines as policies with a deductible of at
least $250,000 per occurrence. Premiums on large deductible
policies are substantially reduced, through premium rate
credits, due to the fact that the Company has no exposure to
losses below the per occurrence deductible. However, through PRS
Group, Inc., the Company earns certain insurance services income
from Guarantee Insurance, both on its behalf and on behalf of
the segregated portfolio captives and its quota share
reinsurers, on all managed claims irrespective of deductible.
For the nine months ended September 30, 2009 and 2008,
direct premiums written were net of premium rate credits
attributable to large deductible policies of approximately
$7.2 million and $9.2 million, respectively.
|
|
(7)
|
Net
Losses and Loss Adjustment Expenses
|
For the nine months ended September 30, 2009, the Company
recorded unfavorable development of approximately
$1.5 million on its workers compensation business,
primarily attributable to the 2007 accident year and, more
specifically, two individual losses incurred in 2007 for which
case reserves were increased by a total of approximately
$700,000 during the nine months ended September 30, 2009 in
connection with the Companys reassessment of the life care
plans on these claims. Additionally, for the nine months ended
September 30, 2009, the Company recorded unfavorable
development of approximately $248,000 on its legacy asbestos and
environmental exposures and commercial general liability
exposures from prior accident years. For the nine months ended
September 30, 2008, the Company recorded unfavorable
development of approximately $2.2 million on its
workers compensation business and approximately $745,000
on its legacy asbestos and environmental exposures and
commercial general liability exposures from prior accident years.
|
|
(8)
|
Share-Based
Compensation Plan
|
In 2005, the Company approved a share-based compensation plan
(Plan). The Plan authorized a company stock option plan,
pursuant to which stock options may be granted to executive
management to purchase up to 240,000 shares of Series A
common stock and to the board of directors to purchase up to
75,000 shares of Series A common stock.
F-51
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The following is a summary of the Companys stock option
activity and related information for the nine months ended
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
Unaudited
|
|
|
Options outstanding, December 31, 2008
|
|
|
163
|
|
|
$
|
7.37
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, September 30, 2009
|
|
|
163
|
|
|
$
|
7.37
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, September 30, 2009
|
|
|
149
|
|
|
$
|
7.31
|
|
|
|
|
|
|
|
|
|
|
In connection with its share-based compensation plan, the
Company recognized compensation expense of $65,000 and $57,000
for the nine months ended September 30, 2009 and 2008,
respectively.
The Companys actual income tax rates, expressed as a
percent of net income before income tax expense, vary from
statutory federal income tax rates due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
Unaudited
|
|
|
Income before income tax expense
|
|
$
|
3,798
|
|
|
|
|
|
|
$
|
383
|
|
|
|
|
|
Income tax at statutory rate
|
|
$
|
1,291
|
|
|
|
34.0
|
%
|
|
$
|
130
|
|
|
|
34.0
|
%
|
Tax effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt investment income
|
|
|
(155
|
)
|
|
|
(4.1
|
)
|
|
|
(178
|
)
|
|
|
(46.5
|
)
|
Change in reserve for uncertain tax positions
|
|
|
(131
|
)
|
|
|
(3.4
|
)
|
|
|
(290
|
)
|
|
|
(75.8
|
)
|
True-up of
prior year tax provision
|
|
|
204
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
Other items, net
|
|
|
213
|
|
|
|
5.6
|
|
|
|
121
|
|
|
|
31.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual income tax rate
|
|
$
|
1,422
|
|
|
|
37.4
|
%
|
|
$
|
(217
|
)
|
|
|
(56.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In June 2006, the FASB issued guidance, now part of ASC 740,
Income Taxes, which clarifies the accounting and
financial reporting for uncertain tax positions. The FASB
guidance prescribes a recognition threshold and measurement
attributes for the financial statement recognition, measurement
and presentation of uncertain tax positions taken or expected to
be taken in an income tax return. The Company adopted the
provisions of this guidance effective January 1, 2007.
Reserves for uncertain tax positions as of September 30,
2009 and December 31, 2008 were approximately $290,000 and
$421,000, respectively. The Company had no accrued interest or
penalties related to uncertain tax positions as of
September 30, 2009 or December 31, 2008.
|
|
(10)
|
Capital,
Surplus and Dividend Restrictions
|
At the time the Company acquired Guarantee Insurance, it had a
large statutory accumulated deficit. As of September 30,
2009, Guarantee Insurances statutory accumulated deficit
was approximately $95.5 million. Under Florida law,
insurance companies may only pay dividends out of available and
accumulated surplus funds derived from realized net operating
profits on their business and net realized capital gains, except
under limited circumstances with the prior approval of the
Florida OIR. Moreover, pursuant to a consent order issued by
Florida OIR on December 29, 2007 in connection with the
redomestication of Guarantee Insurance from
F-52
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
South Carolina to Florida, the Company is prohibited from paying
dividends, without Florida OIR approval, until December 29,
2009. Therefore, it is unlikely that Guarantee Insurance will be
able to pay dividends for the foreseeable future without the
prior approval of the Florida OIR. No dividends were paid for
the nine months ended September 30, 2009 and 2008.
Guarantee Insurance is required to periodically submit financial
statements prepared in accordance with prescribed or permitted
statutory accounting practices (SAP) to the Florida OIR.
Prescribed SAP includes state laws, regulations and general
administrative rules, as well as a variety of publications of
the National Association of Insurance Commissioners (NAIC).
Permitted SAP encompasses all accounting practices that are not
prescribed; such practices may differ from company to company
and may not necessarily be permitted in subsequent reporting
periods. Guarantee Insurance has no permitted accounting
practices. SAP varies from GAAP. Guarantee Insurances SAP
surplus as regards policyholders was $16.6 million as of
September 30, 2009. Pursuant to the Florida OIR
December 29, 2007 consent order, Guarantee Insurance is
required to maintain a minimum capital and surplus of
$9.0 million or 10% of its total liabilities excluding
taxes, expenses and other obligations due or accrued. As of
September 30, 2009, 10% of Guarantee Insurances total
liabilities excluding taxes, expenses and other obligations due
or accrued were approximately $11.6 million.
Insurance companies are subject to certain Risk-Based Capital
(RBC) requirements as specified by the Florida insurance laws.
Under RBC requirements, the amount of capital and surplus
maintained by a property/casualty insurance company is
determined based on the various risk factors related to it. At
December 31, 2008 the Companys adjusted statutory
capital and surplus exceeded authorized control level risk based
capital.
The Company operates two business segments insurance
services and insurance. Intersegment revenue is eliminated upon
consolidation. The accounting policies of the segments are the
same as those described in the summary of significant accounting
policies.
In the insurance services segment, the Company provides general
agency, underwriting and claims services to its BPO client and
nurse case management and cost containment services to its BPO
client, Guarantee Insurance, the segregated portfolio captives
and Guarantee Insurances quota share reinsurer. The fees
earned in the insurance services segment from Guarantee
Insurance attributable to the portion of the insurance risk it
retains and from the Companys BPO client attributable to
the portion of the insurance risk Guarantee Insurance assumes
are eliminated upon consolidation.
In the insurance segment, the Company provides workers
compensation policies to businesses. These products include
alternative market workers compensation insurance
solutions principally, segregated portfolio cell
captive insurance arrangements and high deductible and
retrospectively rated plans and traditional
guaranteed cost workers compensation plans.
F-53
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Certain other operating expenses incurred by Patriot Risk
Management, Inc. are allocated to the insurance services and
insurance segments based on the portion of resources devoted to
each segments operations pursuant to intercompany expense
sharing agreements. It would be impracticable for the Company to
determine the allocation of assets between the two segments.
Business segment results are as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Unaudited
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Insurance services segment insurance services income
|
|
$
|
14,448
|
|
|
$
|
9,031
|
|
Insurance segment:
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
|
28,369
|
|
|
|
32,276
|
|
Net investment income
|
|
|
1,354
|
|
|
|
1,487
|
|
Net realized gains (losses) on investments
|
|
|
903
|
|
|
|
(253
|
)
|
|
|
|
|
|
|
|
|
|
Insurance segment revenues
|
|
|
30,626
|
|
|
|
33,510
|
|
Intersegment revenues
|
|
|
(4,695
|
)
|
|
|
(4,325
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$
|
40,379
|
|
|
$
|
38,216
|
|
|
|
|
|
|
|
|
|
|
Pre-tax net income (loss)
|
|
|
|
|
|
|
|
|
Insurance services segment
|
|
$
|
5,041
|
|
|
$
|
3,666
|
|
Insurance segment
|
|
|
1,568
|
|
|
|
509
|
|
Non-allocated items
|
|
|
(2,811
|
)
|
|
|
(3,792
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated pre-tax net income
|
|
$
|
3,798
|
|
|
$
|
383
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
Insurance services segment
|
|
$
|
3,328
|
|
|
$
|
2,420
|
|
Insurance segment
|
|
|
817
|
|
|
|
683
|
|
Non-allocated items
|
|
|
(1,769
|
)
|
|
|
(2,503
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated net income
|
|
$
|
2,376
|
|
|
$
|
600
|
|
|
|
|
|
|
|
|
|
|
Items not allocated to segments pre-tax net income and net
income include the following:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Unaudited
|
|
|
Holding company expenses
|
|
$
|
(1,692
|
)
|
|
$
|
(2,690
|
)
|
Interest expense
|
|
|
(1,119
|
)
|
|
|
(1,102
|
)
|
|
|
|
|
|
|
|
|
|
Total unallocated items before income tax benefit
|
|
|
(2,811
|
)
|
|
|
(3,792
|
)
|
Income tax benefit on unallocated items
|
|
|
(1,042
|
)
|
|
|
(1,289
|
)
|
|
|
|
|
|
|
|
|
|
Total unallocated items
|
|
$
|
(1,769
|
)
|
|
$
|
(2,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(12)
|
Commitments
and Contingencies
|
In October 2008, the Company cancelled its policy with its then
largest policyholder, Progressive Employer Services (PES), for
non-payment of premium and duplicate coverage. For the nine
months ended September 30, 2008 and the year ended
December 31, 2007, approximately 16% and 15% of
Patriots direct
F-54
Patriot
Risk Management, Inc. and Its Wholly Owned Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
premiums written, respectively, were attributable to PES. PES is
a company controlled by Steve Herrig, an individual who, as of
December 31, 2008, beneficially owned shares of the Company
through Westwind Holding Company, LLC (Westwind), a company
controlled and operated by Mr. Herrig. Westwinds
stock ownership represented approximately 15.8% of the
Companys outstanding common stock. Most of PES
employees are located in Florida, where workers compensation
insurance premium rates are established by the state. Premiums
owing from PES totaled approximately $8.3 million as of
September 30, 2009. The Company has filed a lawsuit against
PES to collect these amounts due and owing. Additionally, in
March 2009, Guarantee Insurance exercised a call option on all
215,263 shares of the Companys common stock previously
owned by Westwind to offset deficits in the segregated portfolio
cell created to reinsure the policy issued to PES, as the
Company believes is permitted in an agreement between the
parties.
On November 8, 2008, PES asserted a series of
counter-claims against the Company alleging that it owes PES a
dividend from its segregated portfolio cell captive, that it did
not properly provide reports to PES, various breach of contract
claims and allegations that the Company paid too much money to
contain claim costs or otherwise resolve claims. On May 11,
2009, Westwind filed a lawsuit against the Company seeking
damages of $2.2 million and other damages as determined by the
court, under causes of action of conversion and breach of
contract to unwind or otherwise recover the stock obtained by
the Company when it exercised its rights under the Note Offset
and Call Option Agreement.
The Company has not accrued any allowance for uncollectible
premiums owing from PES, nor has it accrued any liabilities
related to the counter claims or lawsuit against it. The outcome
of these matters cannot be determined with any reasonable
certainty, and the Company intends to vigorously pursue
collection of premiums owing from PES and defend itself against
the counter claims and lawsuit.
Management believes these amounts are collectible based upon the
following factors: (i) billed amounts due from PES are
based on statutorily mandated experience rate modifications
promulgated by the National Council on Compensation Insurance
and actual premium audit findings; (ii) estimated unbilled
amounts due from PES have been accrued in a manner consistent
with industry practice; (iii) Florida statutes impose
significant fines on employers and employer organizations for
inappropriate reporting of payroll information or failing to
provide reasonable access to payroll records for payroll
verification audits; (iv) the Company has the right to
access certain collateral pledged by Westwind as security for
premium and other amounts owed by PES and Westwind, including
funds held by Guarantee Insurance under reinsurance treaties,
which totaled approximately $3.3 million as of
September 30, 2009 and (v) the Company believes PES
has sufficient financial resources to repay its unsecured
obligations.
In connection with business assumed by the Company from another
insurance company as discussed in Note 6, the Company will
provide collateral, in the form of cash, letters of credit or
other forms of acceptable collateral, as required by the
reinsurance agreement No collateral was required as of
September 30, 2009.
In the normal course of business, the Company may be party to
various legal actions, which the Company believes will not
result in any material effect on the Companys financial
position or results of operations. The Company is named as a
defendant in various legal actions arising principally from
claims made under insurance policies and contracts. Those
actions are considered by the Company in estimating the losses
and loss adjustment expense reserves. Management believes that
the resolution of those actions will not have a material effect
on the Companys financial position or results of
operations.
F-55
Until ,
2010 (25 days after the date of this prospectus), all
dealers that buy, sell or trade shares of our common stock,
whether or not participating in this offering, may be required
to deliver a prospectus. This requirement is in addition to the
dealers obligation to deliver a prospectus when acting as
underwriters and with respect to unsold allotments or
subscriptions.
You may rely only on the information contained in this
prospectus or to which we have referred you. We have not
authorized anyone to provide you with different information. If
anyone provides you with different or inconsistent information,
you should not rely on it. We are not making an offer to sell,
or soliciting an offer to buy, these securities in any
circumstances in which such offer or solicitation is unlawful.
The information appearing in this prospectus is accurate only as
of the date of this prospectus. Our business, financial
condition, results of operations and prospects may have changed
since that date, and neither the delivery of this prospectus nor
any sale made in connection with this prospectus shall, under
any circumstances, create any implication that the information
contained in this prospectus is correct as of any time after its
date.
[ ]
Shares
Common Stock
PROSPECTUS
, 2010.
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
The table below sets forth the costs and expenses payable by
Patriot in connection with the issuance and distribution of the
securities being registered (other than underwriting discounts
and commissions). All amounts are estimated except the SEC
registration fee. All costs and expenses are payable by Patriot.
|
|
|
|
|
SEC Registration Fee
|
|
$
|
10,588
|
|
FINRA Filing Fees
|
|
|
12,000.00
|
|
New York Stock Exchange Listing Fee
|
|
|
125,000
|
|
Legal Fees and Expenses
|
|
|
*
|
|
Accounting Fees and Expenses
|
|
|
*
|
|
Transfer Agent and Registrar Fees
|
|
|
*
|
|
Printing and Engraving Expenses
|
|
|
*
|
|
Blue Sky Fees and Expenses
|
|
|
*
|
|
Miscellaneous Expenses
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
* |
|
To be supplied by amendment. |
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Section 145 of the Delaware General Corporation Law
authorizes a court to award, or a corporations board of
directors to grant, indemnity to officers, directors and other
corporate agents in terms sufficiently broad to permit such
indemnification under certain circumstances and subject to
certain limitations.
The registrants certificate of incorporation and bylaws
provide that the registrant shall indemnify its directors and
officers, and may indemnify its employees and agents, to the
fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise
discretionary under Delaware law.
In addition, the registrant has entered into separate
indemnification agreements with its directors and executive
officers which require the registrant, among other things, to
indemnify them against certain liabilities which may arise by
reason of their status as directors or officers. The registrant
also maintains director and officer liability insurance.
These indemnification provisions may be sufficiently broad to
permit indemnification of the registrants officers and
directors for liabilities (including reimbursement of expenses
incurred) arising under the Securities Act.
The underwriting agreement filed as Exhibit 1.1 to this
registration statement provides for indemnification by the
underwriters of the registrant and its officers and directors
for certain liabilities, including certain liabilities under the
Securities Act.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
The following sets forth information regarding securities sold
by the registrant during the past three years:
1. During 2006 and 2007, the registrant issued to
directors, officers and employees options to purchase 141,000
shares of common stock with a per share exercise price of $8.02,
and issued 65,500 shares of common stock in stock grants to
directors with an aggregate value of $525,310.
II-1
2. In December 2008, the registrant issued a total of
1,000 shares of Series A convertible preferred stock
to four directors and one stockholder of the registrant for
total cash consideration of $1 million.
The issuance of securities described above were deemed to be
exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act or, in the case of the
options referenced in Paragraph 1 above, Rule 701
under the Securities Act. The recipients of securities in each
transaction exempt under Section 4(2) of the Securities Act
represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were
affixed to the share certificates and other instruments issued
in each such transaction. The sales of these securities were
made without general solicitation or advertising and without the
involvement of any underwriter.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) Exhibits.
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement*
|
|
2
|
.1
|
|
Stock Purchase Agreement dated December 18, 2009, between
Argonaut Insurance Company and Patriot National Insurance Group,
Inc.*
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of the
Registrant**
|
|
3
|
.2
|
|
Amended and Restated Bylaws of the Registrant**
|
|
3
|
.3
|
|
Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock**
|
|
4
|
.3
|
|
Form of Guarantee Insurance Companys Surplus Notes**
|
|
4
|
.4
|
|
Form of Registrants Subordinated Debentures**
|
|
4
|
.5
|
|
Form of Registrants Warrant to Purchase Common Stock**
|
|
5
|
.1
|
|
Opinion of Locke Lord Bissell & Liddell LLP*
|
|
10
|
.1
|
|
Employment Agreement between the Registrant and Steven M.
Mariano**
|
|
10
|
.2
|
|
Offer Letter to Theodore G. Bryant dated November 17, 2006**
|
|
10
|
.3
|
|
Second Amended and Restated Employment Agreement dated as of
July 10, 2009 between the Registrant and Theodore G. Bryant**
|
|
10
|
.4
|
|
Offer Letter to Timothy J. Ermatinger dated August 1, 2007**
|
|
10
|
.5
|
|
Employment Agreement between the Registrant and Timothy J.
Ermatinger**
|
|
10
|
.6
|
|
Employment Agreement, dated as of February 11, 2008,
between the Registrant and Michael W. Grandstaff**
|
|
10
|
.7
|
|
2005 Stock Option Plan**
|
|
10
|
.8
|
|
Form of Option Award Agreement for 2005 Stock Option Plan**
|
|
10
|
.9
|
|
2006 Stock Option Plan**
|
|
10
|
.10
|
|
Form of Option Award Agreement for 2006 Stock Option Plan**
|
|
10
|
.11
|
|
2010 Stock Incentive Plan*
|
|
10
|
.12
|
|
Form of Option Award Agreement for 2010 Stock Incentive Plan*
|
|
10
|
.13
|
|
Commercial Loan Agreement, Addendum to Commercial Loan Agreement
and Consent in relation to Addendum to Commercial Loan Agreement
dated March 30, 2006 among Brooke Credit Corporation, the
Registrant, Brandywine Insurance Holdings, Inc. and Patriot Risk
Services, Inc.**
|
|
10
|
.14
|
|
Commercial Promissory Note and Addendum A to Promissory Note
dated March 30, 2006 among Brooke Credit Corporation, the
Registrant, Brandywine Insurance Holdings, Inc. and Patriot Risk
Services, Inc.**
|
|
10
|
.15
|
|
Commercial Security Agreement and Addendum A to Commercial
Security Agreement dated March 30, 2006 among Brooke Credit
Corporation, the Registrant, Brandywine Insurance Holdings, Inc.
and Patriot Risk Services, Inc.**
|
II-2
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
10
|
.16
|
|
Extension of Security Agreement dated March 30, 2006 among
Brooke Credit Corporation, the Registrant, Brandywine Insurance
Holdings, Inc. and Patriot Risk Services, Inc.**
|
|
10
|
.17
|
|
Stock Pledge Agreement dated March 30, 2006 between Brooke
Credit Corporation and Brandywine Insurance Holdings, Inc.**
|
|
10
|
.18
|
|
Irrevocable Proxy undated by Brandywine Insurance Holdings, Inc.
appointing Brooke Credit Corporation**
|
|
10
|
.19
|
|
Irrevocable Proxy undated by Registrant appointing Brooke Credit
Corporation**
|
|
10
|
.20
|
|
Guaranty and Addendum A to Guaranty dated March 30, 2006
between Brooke Credit Corporation and Steven M. Mariano**
|
|
10
|
.21
|
|
Amendment to Commercial Loan Agreement (Including Joinder of
Additional Borrowers) dated September 27, 2006 among Brooke
Credit Corporation, the Registrant, Brandywine Insurance
Holdings, Inc., Patriot Risk Services, SunCoast Capital, Inc.,
Patriot Risk Management, Inc. and Patriot Risk Management of
Florida, Inc.**
|
|
10
|
.22
|
|
Commercial Promissory Note dated September 27, 2006 among
Brooke Credit Corporation, the Registrant, Brandywine Insurance
Holdings, Inc., Patriot Risk Services, SunCoast Capital, Inc.,
Patriot Risk Management, Inc. and Patriot Risk Management of
Florida, Inc.**
|
|
10
|
.23
|
|
Form of Commercial Security Agreement dated September 27,
2006 between Brooke Credit Corporation and SunCoast Capital,
Inc., Patriot Risk Management, Inc. and Patriot Risk Management
of Florida, Inc.**
|
|
10
|
.24
|
|
Form of Extension of Security Agreement dated September 27,
2006 between Brooke Credit Corporation and SunCoast Capital,
Inc., Patriot Risk Management, Inc. and Patriot Risk Management
of Florida, Inc.**
|
|
10
|
.25
|
|
Second Amendment to Commercial Loan Agreement dated
November 16, 2006, among Brooke Credit Corporation, the
Registrant, Brandywine Insurance Holdings, Inc., Patriot Risk
Services, SunCoast Capital, Inc., Patriot Risk Management, Inc.
and Patriot Risk Management of Florida, Inc.**
|
|
10
|
.26
|
|
Third Amendment to Commercial Loan Agreement dated
February 19, 2008, among Brooke Credit Corporation, the
Registrant, Brandywine Insurance Holdings, Inc., Patriot Risk
Services, SunCoast Capital, Inc., Patriot Risk Management, Inc.
and Patriot Risk Management of Florida, Inc.**
|
|
10
|
.27
|
|
Fourth Amendment to Commercial Loan Agreement dated
October 1, 2008, among Aleritas Capital Corporation, the
Registrant, Guarantee Insurance Group, Patriot Risk Services,
SunCoast Capital, Inc., PRS Group, Inc. and Patriot Risk
Management of Florida, Inc.**
|
|
10
|
.28
|
|
Workers Compensation Excess of Loss Reinsurance Agreement
GIC-001/2007 between Guarantee Insurance Company and National
Indemnity Insurance Company**
|
|
10
|
.29
|
|
Workers Compensation Excess of Loss Reinsurance Agreement
GIC-002/2007 between Guarantee Insurance Company and Midwest
Employers Casualty Company**
|
|
10
|
.30
|
|
Workers Compensation Excess of Loss Reinsurance Agreement
GIC-003/2007 between Guarantee Insurance Company, as Cedent, and
Max Re, Ltd., Aspen Insurance UK Limited and Various
Underwriters at Lloyds, as Reinsurers**
|
|
10
|
.31
|
|
Workers Compensation Excess of Loss Reinsurance Agreement
between Guarantee Insurance Company, as Cedent, and Aspen
Insurance UK Limited and Various Underwriters at Lloyds, as
Reinsurers**
|
|
10
|
.32
|
|
Quota Share Reinsurance Agreement GIC-005/2007 between Guarantee
Insurance Company and National Indemnity Insurance Company**
|
|
10
|
.40
|
|
Third Workers Compensation Excess of Loss Reinsurance
Contract, effective July 1, 2008, between Guarantee
Insurance Company as Cedent and Max Bermuda, Ltd., Tokio
Millennium Reinsurance Limited, Aspen Insurance UK Limited and
Various Underwriters at Lloyds London as Reinsurers**
|
|
10
|
.41
|
|
Purchase and Sale Agreement dated January 1, 2006 between
The Tarheel Group, Inc., Tarheel Insurance Management Company
and the Registrant**
|
|
10
|
.42
|
|
Promissory Note dated June 13, 2006 between The Tarheel
Group, Inc. and the Registrant**
|
II-3
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
10
|
.43
|
|
Personal Guaranty of Promissory Note dated June 13, 2006
between the Registrant and Steven M. Mariano**
|
|
10
|
.44
|
|
Contribution Agreement dated April 20, 2007 between Steven
M. Mariano and the Registrant**
|
|
10
|
.45
|
|
Form of Director and Officer Indemnification Agreement**
|
|
10
|
.46
|
|
Settlement Stipulation and Release dated June 28, 2007
among Foundation Insurance Company, Steven M. Mariano, New
Pacific International, Inc. and Peterson, Goldman &
Villani, Inc.**
|
|
10
|
.47
|
|
Stock Pledge Agreement between Brooke Credit Corporation and the
Registrant**
|
|
10
|
.48
|
|
Promissory Note dated June 26, 2008, as amended and
restated on June 16, 2009 between the Registrant and Steven
M. Mariano**
|
|
10
|
.49
|
|
Workers Compensation Quota Share Reinsurance Contract,
effective July 1, 2008, between Guarantee Insurance Company
as Cedent and National Indemnity Company and Swiss Reinsurance
America Corporation as Reinsurers**
|
|
10
|
.50
|
|
Traditional Workers Compensation Excess of Loss
Reinsurance Contract, effective July 1, 2008, between
Guarantee Insurance Company as Cedent and Midwest Employers
Casualty Company as Reinsurer**
|
|
10
|
.51
|
|
Alternative Market Workers Compensation Excess of Loss
Reinsurance Contract, effective July 1, 2008, between
Guarantee Insurance Company as Cedent and National Indemnity
Company as Reinsurer**
|
|
10
|
.52
|
|
Second Workers Compensation Excess of Loss Reinsurance
Contract, effective July 1, 2008, between Guarantee
Insurance Company as Cedent and Max Bermuda, Ltd., Aspen
Insurance UK Limited and Various Underwriters at Lloyds
London as Reinsurers**
|
|
10
|
.53
|
|
Employment Agreement, dated September 29, 2008, between the
Registrant and Richard G. Turner**
|
|
10
|
.54
|
|
Employment Agreement, dated September 29, 2008, between the
Registrant and Charles K. Schuver**
|
|
10
|
.55
|
|
First Amendment to Employment Agreement, dated
September 26, 2008, between the Registrant and Steven M.
Mariano**
|
|
10
|
.57
|
|
Amendment No. 1 to the 2005 Stock Option Plan**
|
|
10
|
.58
|
|
Amendment No. 2 to the 2005 Stock Option Plan**
|
|
10
|
.59
|
|
Amendment No. 1 to the 2006 Stock Option Plan**
|
|
10
|
.60
|
|
Amendment No. 2 to the 2006 Stock Option Plan**
|
|
10
|
.61
|
|
Workers Compensation Quota Share Reinsurance Contract,
effective December 31, 2008, between Guarantee Insurance
Company and Harco National Insurance Company*
|
|
10
|
.62
|
|
Traditional Workers Compensation Excess of Loss
Reinsurance Contract, effective July 1, 2009, between
Guarantee Insurance Company as cedant and Maiden Re, Max Re,
Ullico Casualty and various underwriters at Lloyds London
as reinsurers**
|
|
10
|
.63
|
|
Alternative Market Workers Compensation Excess of Loss
Reinsurance Contract, effective July 1, 2009, between
Guarantee Insurance Company as cedant and National
Fire & Liability and Ullico Casualty as reinsurers**
|
|
10
|
.64
|
|
Second Workers Compensation Excess of Loss Reinsurance
Contract, effective July 1, 2009, between Guarantee
Insurance Company and Aspen Insurance UK Limited, Hannover Re,
and certain other reinsurers**
|
|
10
|
.65
|
|
Workers Compensation Catastrophe Excess of Loss
Reinsurance Contract, effective July 1, 2009, between
Guarantee Insurance Company as cedant and Max Re Bermuda, Tokio
Millennium Re, Aspen Re UK, Hannover Re and various underwriters
at Lloyds London as reinsurers**
|
|
10
|
.66
|
|
Traditional Workers Compensation Quota Share Reinsurance
Contract, effective July 1, 2009, between Guarantee
Insurance Company and Swiss Re**
|
|
10
|
.67
|
|
Traditional Workers Compensation Quota Share Reinsurance
Contract for Florida, Georgia and New Jersey, between Guarantee
Insurance Company as cedant and ULLICO Casualty Company as
reinsurer**
|
II-4
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
10
|
.68
|
|
Commercial Loan Agreement dated December 31, 2008 among the
Registrant, PRS Group, Inc., Guarantee Insurance Group, Inc.,
Patriot Risk Services, Inc., Patriot Risk Management of Florida,
Inc., SunCoast Capital, Inc. and Ullico Inc.**
|
|
10
|
.69
|
|
Commercial Security Agreement dated December 31, 2008 among
the Registrant, PRS Group, Inc., Guarantee Insurance Group,
Inc., Patriot Risk Services, Inc., Patriot Risk Management of
Florida, Inc., SunCoast Capital, Inc. and Ullico Inc.**
|
|
10
|
.70
|
|
Stock Pledge Agreement dated December 31, 2008 among Steven
M. Mariano, Steven M. Mariano Revocable Trust, the Registrant,
PRS Group, Inc., Guarantee Insurance Group, Inc. and Ullico
Inc.**
|
|
10
|
.71
|
|
Irrevocable Proxy dated December 31, 2008 among Steven M.
Mariano, Steven M. Mariano Revocable Trust and Ullico Inc.**
|
|
10
|
.72
|
|
Guaranty dated December 31, 2008 between Steven M. Mariano
and Ullico Inc.**
|
|
10
|
.73
|
|
Intercreditor Agreement dated December 31, 2008 among the
Existing Lenders identified therein, PRS Group, Inc., Guarantee
Insurance Group, Inc., Patriot Risk Services, Inc., Patriot Risk
Management of Florida, Inc., SunCoast Capital, Inc., Registrant
and Ullico, Inc.**
|
|
10
|
.74
|
|
Promissory Note from Registrant, PRS Group, Inc., Guarantee
Insurance Group, Inc., Patriot Risk Services, Inc., Patriot Risk
Management of Florida, Inc. and SunCoast Capital, Inc. to
Ullico, Inc., dated December 31, 2008**
|
|
10
|
.75
|
|
Side Letter Agreement dated December 31, 2008 among Steven
M. Mariano, the Registrant and Ullico Inc.**
|
|
10
|
.76
|
|
Post-Closing Letter Agreement dated December 31, 2008 among the
Registrant, PRS Group, Inc., Guarantee Insurance Group, Inc.,
Patriot Risk Services, Inc., Patriot Risk Management of Florida,
Inc. and Ullico Inc.**
|
|
10
|
.77
|
|
Indemnification and Pledge Agreement between Steven M. Mariano
and the Registrant*
|
|
21
|
.1
|
|
Subsidiaries of the Registrant**
|
|
23
|
.1
|
|
Consent of Locke Lord Bissell & Liddell LLP (included
as part of its opinion filed as Exhibit 5.1 hereto)*
|
|
23
|
.2
|
|
Consent of BDO Seidman, LLP
|
|
24
|
.1
|
|
Power of Attorney**
|
|
24
|
.2
|
|
Power of Attorney
|
|
|
|
* |
|
To be filed by amendment |
|
** |
|
Previously filed |
(b) Financial Statement Schedules.
|
|
|
|
|
Index to Financial Statement Schedules
|
|
Schedule
|
|
|
|
|
|
|
|
|
|
I
|
|
|
|
|
II
|
|
|
|
|
III
|
|
|
|
|
IV
|
|
|
|
|
V
|
|
|
|
|
VI
|
|
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
II-5
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the Securities Act) may be
permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise,
the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was
declared effective.
(2) For purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 9 to the
registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of
Fort Lauderdale, State of Florida, on January 11, 2010.
Patriot Risk Management, Inc.
|
|
|
|
By:
|
/s/ Steven
M. Mariano
|
Steven M. Mariano
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 9 to the registration statement has been
signed below by the following persons in the capacities and on
the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Steven
M. Mariano
Steven
M. Mariano
|
|
Principal Executive Officer and Director
|
|
January 11, 2010
|
|
|
|
|
|
/s/ Michael
W. Grandstaff
Michael
W. Grandstaff
|
|
Principal Financial Officer
|
|
January 11, 2010
|
|
|
|
|
|
/s/ Michael
J. Sluka
Michael
J. Sluka
|
|
Principal Accounting Officer
|
|
January 11, 2010
|
|
|
|
|
|
*
Richard
F. Allen
|
|
Director
|
|
January 11, 2010
|
|
|
|
|
|
*
John
R. Del Pizzo
|
|
Director
|
|
January 11, 2010
|
|
|
|
|
|
*
Timothy
J. Tompkins
|
|
Director
|
|
January 11, 2010
|
|
|
|
|
|
*
Ronald
P. Formento Sr.
|
|
Director
|
|
January 11, 2010
|
|
|
|
|
|
*
C.
Timothy Morris
|
|
Director
|
|
January 11, 2010
|
|
|
|
|
|
*
Robert
P. Cuthbert
|
|
Director
|
|
January 11, 2010
|
|
|
|
|
|
*
Robert
E. Dean
|
|
Director
|
|
January 11, 2010
|
|
|
|
|
|
*
Raymond
C. Groth
|
|
Director
|
|
January 11, 2010
|
II-7
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
*
Austin
J. Shanfelter
|
|
Director
|
|
January 11, 2010
|
|
|
|
|
|
*
/s/ Steven
M. Mariano
Steven
M. Mariano
* Attorney in Fact
|
|
|
|
January 11, 2010
|
II-8
Report of
Independent Registered Public Accounting Firm
Patriot Risk Management, Inc.
Fort Lauderdale, Florida
The audits referred to in our report to Patriot Risk Management,
Inc., dated April 22, 2009, which is contained in the
Prospectus constituting part of this Registration Statement also
included the audit of the financial statement schedules listed
under Item 16(b) for each of the three years in the period
ended December 31, 2008. These financial statement
schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
Grand Rapids, Michigan
April 22, 2009
S-1
PATRIOT
RISK MANAGEMENT, INC.
SCHEDULE I
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN
RELATED PARTIES
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
Shown on
|
|
|
|
Amortized
|
|
|
|
|
|
Balance
|
|
|
|
Cost
|
|
|
Value
|
|
|
Sheet
|
|
|
|
In thousands
|
|
|
Debt securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
$
|
3,981
|
|
|
$
|
4,228
|
|
|
$
|
4,228
|
|
U.S. government agencies
|
|
|
300
|
|
|
|
311
|
|
|
|
311
|
|
Asset-backed and mortgage-backed securities
|
|
|
16,128
|
|
|
|
16,317
|
|
|
|
16,317
|
|
State and political subdivisions
|
|
|
23,058
|
|
|
|
23,914
|
|
|
|
23,914
|
|
Corporate securities
|
|
|
9,745
|
|
|
|
9,603
|
|
|
|
9,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities available for sale
|
|
|
53,212
|
|
|
|
54,373
|
|
|
|
54,373
|
|
Equity securities available for sale
|
|
|
466
|
|
|
|
222
|
|
|
|
222
|
|
Short-term investments
|
|
|
244
|
|
|
|
244
|
|
|
|
244
|
|
Real estate held for the production of income
|
|
|
250
|
|
|
|
250
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
54,172
|
|
|
$
|
55,089
|
|
|
$
|
55,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-2
PATRIOT
RISK MANAGEMENT, INC.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
In thousands
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
453
|
|
|
$
|
10
|
|
Investments in subsidiaries
|
|
|
24,106
|
|
|
|
18,137
|
|
Receivable from subsidiaries
|
|
|
550
|
|
|
|
|
|
Other assets
|
|
|
5,183
|
|
|
|
3,336
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
30,292
|
|
|
$
|
21,483
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities
|
|
|
|
|
|
|
|
|
Notes payable and accrued interest
|
|
$
|
19,442
|
|
|
$
|
13,601
|
|
Subordinated debentures and accrued interest
|
|
|
1,809
|
|
|
|
1,938
|
|
Other liabilities
|
|
|
1,904
|
|
|
|
508
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
23,155
|
|
|
|
16,047
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock
|
|
|
1,000
|
|
|
|
|
|
Common stock
|
|
|
1
|
|
|
|
1
|
|
Series B common stock
|
|
|
1
|
|
|
|
1
|
|
Paid-in capital
|
|
|
5,456
|
|
|
|
5,363
|
|
Retained earnings
|
|
|
72
|
|
|
|
196
|
|
Accumulated other comprehensive income (loss), net of deferred
income taxes
|
|
|
607
|
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
7,137
|
|
|
|
5,436
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
30,292
|
|
|
$
|
21,483
|
|
|
|
|
|
|
|
|
|
|
S-3
PATRIOT
RISK MANAGEMENT, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
In thousands
|
|
|
Revenue
|
|
$
|
170
|
|
|
$
|
69
|
|
|
$
|
57
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
2,779
|
|
|
|
1,394
|
|
|
|
1,187
|
|
Interest expense
|
|
|
1,378
|
|
|
|
1,262
|
|
|
|
878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
4,157
|
|
|
|
2,656
|
|
|
|
2,065
|
|
Loss from write-off of deferred equity offering costs
|
|
|
( 3,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and subsidiary equity earnings
|
|
|
(7,473
|
)
|
|
|
(2,587
|
)
|
|
|
(2,008
|
)
|
Income tax benefit
|
|
|
(2,842
|
)
|
|
|
(805
|
)
|
|
|
(1,157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before subsidiary equity earnings
|
|
|
(4,631
|
)
|
|
|
(1,782
|
)
|
|
|
(851
|
)
|
Subsidiary equity earnings
|
|
|
4,507
|
|
|
|
4,161
|
|
|
|
2,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
(124
|
)
|
|
$
|
2,379
|
|
|
$
|
1,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-4
PATRIOT
RISK MANAGEMENT, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
In thousands
|
|
|
Net income (loss)
|
|
$
|
(124
|
)
|
|
$
|
2,379
|
|
|
$
|
1,610
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation) in available for sale
securities, net of deferred taxes of $374,000, ($51,000) and
$255,000
|
|
|
732
|
|
|
|
(99
|
)
|
|
|
579
|
|
Reclassification adjustment for net gains (losses) realized in
net income during the year, net of tax effect of $0, $0 and
($143,000)
|
|
|
|
|
|
|
|
|
|
|
(277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
732
|
|
|
|
(99
|
)
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
608
|
|
|
$
|
2,280
|
|
|
$
|
1,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-5
PATRIOT
RISK MANAGEMENT, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
In thousands
|
|
|
Net cash used in operating activities
|
|
$
|
(5,135
|
)
|
|
$
|
(2,055
|
)
|
|
$
|
(3,013
|
)
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in subsidiaries
|
|
|
(3,082
|
)
|
|
|
(3,000
|
)
|
|
|
(3,000
|
)
|
Other
|
|
|
(43
|
)
|
|
|
(113
|
)
|
|
|
(392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(3,125
|
)
|
|
|
(3,113
|
)
|
|
|
(3,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
6,950
|
|
|
|
5,665
|
|
|
|
8,652
|
|
Net proceeds from issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
1,355
|
|
Net disbursements for redemption of common stock
|
|
|
|
|
|
|
(100
|
)
|
|
|
(984
|
)
|
Repayment of debt
|
|
|
(1,113
|
)
|
|
|
(677
|
)
|
|
|
(2,320
|
)
|
Proceeds from issuance of preferred stock, net of receivable
from related party
|
|
|
500
|
|
|
|
|
|
|
|
|
|
Dividends received from subsidiaries
|
|
|
2,366
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
(600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
8,703
|
|
|
|
4,888
|
|
|
|
6,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
443
|
|
|
|
(280
|
)
|
|
|
(302
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
10
|
|
|
|
290
|
|
|
|
592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
453
|
|
|
$
|
10
|
|
|
$
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-6
PATRIOT
RISK MANAGEMENT, INC.
SCHEDULE III
SUPPLEMENTAL INSURANCE INFORMATION
As of and for the Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceding
|
|
|
Future
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions,
|
|
|
Policy
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of
|
|
|
Benefits,
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Deferred
|
|
|
Losses,
|
|
|
|
|
|
Policy
|
|
|
|
|
|
|
Policy
|
|
|
Claims
|
|
|
|
|
|
Claims and
|
|
|
|
|
|
|
Acquisition
|
|
|
and Loss
|
|
|
Unearned
|
|
|
Benefits
|
|
|
Premium
|
|
|
|
Costs
|
|
|
Expenses
|
|
|
Premium
|
|
|
Payable
|
|
|
Revenue
|
|
|
|
In thousands
|
|
|
Insurance
|
|
$
|
83
|
|
|
$
|
74,550
|
|
|
$
|
44,613
|
|
|
$
|
|
|
|
$
|
49,220
|
|
Insurance services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
83
|
|
|
$
|
74,550
|
|
|
$
|
44,613
|
|
|
$
|
|
|
|
$
|
49,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims,
|
|
|
Amortization of
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Losses and
|
|
|
Deferred Policy
|
|
|
Other
|
|
|
|
|
|
|
Investment
|
|
|
Settlement
|
|
|
Acquisition
|
|
|
Operating
|
|
|
Premiums
|
|
|
|
Income
|
|
|
Expenses
|
|
|
Costs
|
|
|
Expenses(1)
|
|
|
Written
|
|
|
Insurance
|
|
$
|
2,028
|
|
|
$
|
28,716
|
|
|
$
|
(7,907
|
)
|
|
$
|
21,442
|
|
|
$
|
45,838
|
|
Insurance services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,930
|
|
|
|
|
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,028
|
|
|
$
|
28,716
|
|
|
$
|
(7,907
|
)
|
|
$
|
32,372
|
|
|
$
|
45,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other operating expenses are identified by segment based on the
direct identification method. |
S-7
PATRIOT
RISK MANAGEMENT, INC.
SUPPLEMENTAL
INSURANCE INFORMATION
As of and
for the Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Future
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy
|
|
|
Policy
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
Benefits,
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Costs, Net of
|
|
|
Losses,
|
|
|
|
|
|
Policy
|
|
|
|
|
|
|
Deferred
|
|
|
Claims
|
|
|
|
|
|
Claims and
|
|
|
|
|
|
|
Ceding
|
|
|
and Loss
|
|
|
Unearned
|
|
|
Benefits
|
|
|
Premium
|
|
|
|
Commissions
|
|
|
Expenses
|
|
|
Premium
|
|
|
Payable
|
|
|
Revenue
|
|
|
|
In thousands
|
|
|
Insurance
|
|
$
|
1,477
|
|
|
$
|
69,881
|
|
|
$
|
29,160
|
|
|
$
|
|
|
|
$
|
24,613
|
|
Insurance services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,477
|
|
|
$
|
69,881
|
|
|
$
|
29,160
|
|
|
$
|
|
|
|
$
|
24,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits,
|
|
|
of
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims,
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Losses and
|
|
|
Policy
|
|
|
Other
|
|
|
|
|
|
|
Investment
|
|
|
Settlement
|
|
|
Acquisition
|
|
|
Operating
|
|
|
Premiums
|
|
|
|
Income
|
|
|
Expenses
|
|
|
Costs
|
|
|
Expenses
|
|
|
Written
|
|
|
Insurance
|
|
$
|
1,326
|
|
|
$
|
15,182
|
|
|
$
|
(657
|
)
|
|
$
|
6,680
|
|
|
$
|
30,961
|
|
Insurance services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,519
|
|
|
|
|
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,326
|
|
|
$
|
15,182
|
|
|
$
|
(657
|
)
|
|
$
|
15,199
|
|
|
$
|
30,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other operating expenses are identified by segment based on the
direct identification method. |
S-8
PATRIOT
RISK MANAGEMENT, INC.
SUPPLEMENTAL INSURANCE INFORMATION
As of and for the Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Future
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy
|
|
|
Policy
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
Benefits,
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Costs, Net of
|
|
|
Losses,
|
|
|
|
|
|
Policy
|
|
|
|
|
|
|
Deferred
|
|
|
Claims
|
|
|
|
|
|
Claims and
|
|
|
|
|
|
|
Ceding
|
|
|
and Loss
|
|
|
Unearned
|
|
|
Benefits
|
|
|
Premium
|
|
|
|
Commissions
|
|
|
Expenses
|
|
|
Premium
|
|
|
Payable
|
|
|
Revenue
|
|
|
|
In thousands
|
|
|
Insurance
|
|
$
|
774
|
|
|
$
|
65,953
|
|
|
$
|
15,643
|
|
|
$
|
|
|
|
$
|
21,053
|
|
Insurance services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
774
|
|
|
$
|
65,953
|
|
|
$
|
15,643
|
|
|
$
|
|
|
|
$
|
21,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims,
|
|
|
Amortization of
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Losses and
|
|
|
Deferred Policy
|
|
|
Other
|
|
|
|
|
|
|
Investment
|
|
|
Settlement
|
|
|
Acquisition
|
|
|
Operating
|
|
|
Premiums
|
|
|
|
Income
|
|
|
Expenses
|
|
|
Costs
|
|
|
Expenses
|
|
|
Written
|
|
|
Insurance
|
|
$
|
1,321
|
|
|
$
|
17,839
|
|
|
$
|
35
|
|
|
$
|
3,799
|
|
|
$
|
19,386
|
|
Insurance services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,704
|
|
|
|
|
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,321
|
|
|
$
|
17,839
|
|
|
$
|
35
|
|
|
$
|
13,503
|
|
|
$
|
19,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other operating expenses are identified by segment based on the
direct identification method. |
S-9
PATRIOT
RISK MANAGEMENT, INC.
SCHEDULE IV
PROPERTY AND LIABILITY REINSURANCE
For the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
|
|
|
|
Percentage of
|
|
|
|
|
Ceded to
|
|
From
|
|
|
|
Amount
|
|
|
Gross
|
|
Other
|
|
Other
|
|
Net
|
|
Assumed to
|
|
|
Amount
|
|
Companies
|
|
Companies
|
|
Amount
|
|
Net
|
|
|
In thousands
|
|
2008
|
|
$
|
99,039
|
|
|
$
|
50,850
|
|
|
$
|
1,031
|
|
|
$
|
49,220
|
|
|
|
2.1
|
%
|
2007
|
|
|
72,645
|
|
|
|
49,101
|
|
|
|
1,069
|
|
|
|
24,613
|
|
|
|
4.3
|
%
|
2006
|
|
|
58,659
|
|
|
|
39,619
|
|
|
|
2,013
|
|
|
|
21,053
|
|
|
|
9.6
|
%
|
S-10
PATRIOT
RISK MANAGEMENT, INC.
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
Additions
|
|
Deductions
|
|
|
|
|
Balance,
|
|
Charged to
|
|
Charged to
|
|
from
|
|
Balance,
|
|
|
Beginning of
|
|
Costs and
|
|
Other
|
|
Allowance
|
|
End of
|
|
|
Period
|
|
Expense
|
|
Accounts
|
|
Account
|
|
Period
|
|
|
In thousands
|
|
Allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
1,000
|
|
|
$
|
100
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,100
|
|
2007
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
2006
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
S-11
PATRIOT
RISK MANAGEMENT, INC.
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY
INSURANCE OPERATIONS
As of and For the Years Ended December 31, 2008, 2007
and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Policy
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
Reserves
|
|
|
|
|
|
|
|
|
Costs, Net of
|
|
for Losses
|
|
|
|
|
|
|
|
|
Deferred
|
|
and Loss
|
|
|
|
Net
|
|
Net
|
|
|
Ceding
|
|
Adjustment
|
|
Unearned
|
|
Premiums
|
|
Investment
|
|
|
Commissions
|
|
Expenses(1)(2)
|
|
Premiums(2)
|
|
Earned
|
|
Income
|
|
|
In thousands
|
|
(a) Property and casualty subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
(83
|
)
|
|
$
|
74,550
|
|
|
$
|
44,613
|
|
|
$
|
49,220
|
|
|
$
|
2,028
|
|
2007
|
|
|
1,477
|
|
|
|
69,881
|
|
|
|
29,160
|
|
|
|
24,613
|
|
|
|
1,326
|
|
2006
|
|
|
774
|
|
|
|
65,953
|
|
|
|
15,643
|
|
|
|
21,053
|
|
|
|
1,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
Loss and
|
|
|
|
|
|
|
|
|
Adjustment
|
|
Loss
|
|
Amortization of
|
|
Paid Losses
|
|
|
|
|
Expenses-
|
|
Adjustment
|
|
Deferred Policy
|
|
and Loss
|
|
Net
|
|
|
Current
|
|
Expenses-
|
|
Acquisition
|
|
Adjustment
|
|
Premiums
|
|
|
Year
|
|
Prior Years
|
|
Expenses
|
|
Expenses
|
|
Written
|
|
2008
|
|
$
|
27,422
|
|
|
$
|
1,294
|
|
|
$
|
(7,907
|
)
|
|
$
|
18,222
|
|
|
$
|
45,838
|
|
2007
|
|
|
18,642
|
|
|
|
(3,460
|
)
|
|
|
(657
|
)
|
|
|
13,468
|
|
|
|
30,961
|
|
2006
|
|
|
15,328
|
|
|
|
2,511
|
|
|
|
35
|
|
|
|
10,374
|
|
|
|
19,386
|
|
|
|
|
(1) |
|
The Company does not apply discounting factors to reserves for
losses and loss adjustment expenses. |
|
(2) |
|
Reserves for losses and loss adjustment expenses are shown gross
of reinsurance recoverables on unpaid losses and loss adjustment
expenses of $37.5 million, $43.3 million and
$41.1 million as of December 31, 2008, 2007 and 2006,
respectively. Unearned premiums are shown gross of ceded
unearned premiums of $33.7 million, $15.0 million and
$8.3 million as of December 31, 2008, 2007 and 2006,
respectively. |
S-12
Exhibit List
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement*
|
|
2
|
.1
|
|
Stock Purchase Agreement dated December 18, 2009, between
Argonaut Insurance Company and Patriot National Insurance Group,
Inc.*
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of the
Registrant**
|
|
3
|
.2
|
|
Amended and Restated Bylaws of the Registrant**
|
|
3
|
.3
|
|
Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock**
|
|
4
|
.3
|
|
Form of Guarantee Insurance Companys Surplus Notes**
|
|
4
|
.4
|
|
Form of Registrants Subordinated Debentures**
|
|
4
|
.5
|
|
Form of Registrants Warrant to Purchase Common Stock**
|
|
5
|
.1
|
|
Opinion of Locke Lord Bissell & Liddell LLP*
|
|
10
|
.1
|
|
Employment Agreement between the Registrant and Steven M.
Mariano**
|
|
10
|
.2
|
|
Offer Letter to Theodore G. Bryant dated November 17, 2006**
|
|
10
|
.3
|
|
Second Amended and Restated Employment Agreement dated as of
July 10, 2009 between the Registrant and Theodore G. Bryant**
|
|
10
|
.4
|
|
Offer Letter to Timothy J. Ermatinger dated August 1, 2007**
|
|
10
|
.5
|
|
Employment Agreement between the Registrant and Timothy J.
Ermatinger**
|
|
10
|
.6
|
|
Employment Agreement, dated as of February 11, 2008,
between the Registrant and Michael W. Grandstaff**
|
|
10
|
.7
|
|
2005 Stock Option Plan**
|
|
10
|
.8
|
|
Form of Option Award Agreement for 2005 Stock Option Plan**
|
|
10
|
.9
|
|
2006 Stock Option Plan**
|
|
10
|
.10
|
|
Form of Option Award Agreement for 2006 Stock Option Plan**
|
|
10
|
.11
|
|
2010 Stock Incentive Plan*
|
|
10
|
.12
|
|
Form of Option Award Agreement for 2010 Stock Incentive Plan*
|
|
10
|
.13
|
|
Commercial Loan Agreement, Addendum to Commercial Loan Agreement
and Consent in relation to Addendum to Commercial Loan Agreement
dated March 30, 2006 among Brooke Credit Corporation, the
Registrant, Brandywine Insurance Holdings, Inc. and Patriot Risk
Services, Inc.**
|
|
10
|
.14
|
|
Commercial Promissory Note and Addendum A to Promissory Note
dated March 30, 2006 among Brooke Credit Corporation, the
Registrant, Brandywine Insurance Holdings, Inc. and Patriot Risk
Services, Inc.**
|
|
10
|
.15
|
|
Commercial Security Agreement and Addendum A to Commercial
Security Agreement dated March 30, 2006 among Brooke Credit
Corporation, the Registrant, Brandywine Insurance Holdings, Inc.
and Patriot Risk Services, Inc.**
|
|
10
|
.16
|
|
Extension of Security Agreement dated March 30, 2006 among
Brooke Credit Corporation, the Registrant, Brandywine Insurance
Holdings, Inc. and Patriot Risk Services, Inc.**
|
|
10
|
.17
|
|
Stock Pledge Agreement dated March 30, 2006 between Brooke
Credit Corporation and Brandywine Insurance Holdings, Inc.**
|
|
10
|
.18
|
|
Irrevocable Proxy undated by Brandywine Insurance Holdings, Inc.
appointing Brooke Credit Corporation**
|
|
10
|
.19
|
|
Irrevocable Proxy undated by Registrant appointing Brooke Credit
Corporation**
|
|
10
|
.20
|
|
Guaranty and Addendum A to Guaranty dated March 30, 2006
between Brooke Credit Corporation and Steven M. Mariano**
|
|
10
|
.21
|
|
Amendment to Commercial Loan Agreement (Including Joinder of
Additional Borrowers) dated September 27, 2006 among Brooke
Credit Corporation, the Registrant, Brandywine Insurance
Holdings, Inc., Patriot Risk Services, SunCoast Capital, Inc.,
Patriot Risk Management, Inc. and Patriot Risk Management of
Florida, Inc.**
|
|
10
|
.22
|
|
Commercial Promissory Note dated September 27, 2006 among
Brooke Credit Corporation, the Registrant, Brandywine Insurance
Holdings, Inc., Patriot Risk Services, SunCoast Capital, Inc.,
Patriot Risk Management, Inc. and Patriot Risk Management of
Florida, Inc.**
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
10
|
.23
|
|
Form of Commercial Security Agreement dated September 27,
2006 between Brooke Credit Corporation and SunCoast Capital,
Inc., Patriot Risk Management, Inc. and Patriot Risk Management
of Florida, Inc.**
|
|
10
|
.24
|
|
Form of Extension of Security Agreement dated September 27,
2006 between Brooke Credit Corporation and SunCoast Capital,
Inc., Patriot Risk Management, Inc. and Patriot Risk Management
of Florida, Inc.**
|
|
10
|
.25
|
|
Second Amendment to Commercial Loan Agreement dated
November 16, 2006, among Brooke Credit Corporation, the
Registrant, Brandywine Insurance Holdings, Inc., Patriot Risk
Services, SunCoast Capital, Inc., Patriot Risk Management, Inc.
and Patriot Risk Management of Florida, Inc.**
|
|
10
|
.26
|
|
Third Amendment to Commercial Loan Agreement dated
February 19, 2008, among Brooke Credit Corporation, the
Registrant, Brandywine Insurance Holdings, Inc., Patriot Risk
Services, SunCoast Capital, Inc., Patriot Risk Management, Inc.
and Patriot Risk Management of Florida, Inc.**
|
|
10
|
.27
|
|
Fourth Amendment to Commercial Loan Agreement dated
October 1, 2008, among Aleritas Capital Corporation, the
Registrant, Guarantee Insurance Group, Patriot Risk Services,
SunCoast Capital, Inc., PRS Group, Inc. and Patriot Risk
Management of Florida, Inc.**
|
|
10
|
.28
|
|
Workers Compensation Excess of Loss Reinsurance Agreement
GIC-001/2007 between Guarantee Insurance Company and National
Indemnity Insurance Company**
|
|
10
|
.29
|
|
Workers Compensation Excess of Loss Reinsurance Agreement
GIC-002/2007 between Guarantee Insurance Company and Midwest
Employers Casualty Company**
|
|
10
|
.30
|
|
Workers Compensation Excess of Loss Reinsurance Agreement
GIC-003/2007 between Guarantee Insurance Company, as Cedent, and
Max Re, Ltd., Aspen Insurance UK Limited and Various
Underwriters at Lloyds, as Reinsurers**
|
|
10
|
.31
|
|
Workers Compensation Excess of Loss Reinsurance Agreement
between Guarantee Insurance Company, as Cedent, and Aspen
Insurance UK Limited and Various Underwriters at Lloyds, as
Reinsurers**
|
|
10
|
.32
|
|
Quota Share Reinsurance Agreement GIC-005/2007 between Guarantee
Insurance Company and National Indemnity Insurance Company**
|
|
10
|
.40
|
|
Third Workers Compensation Excess of Loss Reinsurance
Contract, effective July 1, 2008, between Guarantee
Insurance Company as Cedent and Max Bermuda, Ltd., Tokio
Millennium Reinsurance Limited, Aspen Insurance UK Limited and
Various Underwriters at Lloyds London as Reinsurers**
|
|
10
|
.41
|
|
Purchase and Sale Agreement dated January 1, 2006 between
The Tarheel Group, Inc., Tarheel Insurance Management Company
and the Registrant**
|
|
10
|
.42
|
|
Promissory Note dated June 13, 2006 between The Tarheel
Group, Inc. and the Registrant**
|
|
10
|
.43
|
|
Personal Guaranty of Promissory Note dated June 13, 2006
between the Registrant and Steven M. Mariano**
|
|
10
|
.44
|
|
Contribution Agreement dated April 20, 2007 between Steven
M. Mariano and the Registrant**
|
|
10
|
.45
|
|
Form of Director and Officer Indemnification Agreement**
|
|
10
|
.46
|
|
Settlement Stipulation and Release dated June 28, 2007
among Foundation Insurance Company, Steven M. Mariano, New
Pacific International, Inc. and Peterson, Goldman &
Villani, Inc.**
|
|
10
|
.47
|
|
Stock Pledge Agreement between Brooke Credit Corporation and the
Registrant**
|
|
10
|
.48
|
|
Promissory Note dated June 26, 2008, as amended and
restated on June 16, 2009 between the Registrant and Steven
M. Mariano**
|
|
10
|
.49
|
|
Workers Compensation Quota Share Reinsurance Contract,
effective July 1, 2008, between Guarantee Insurance Company
as Cedent and National Indemnity Company and Swiss Reinsurance
America Corporation as Reinsurers**
|
|
10
|
.50
|
|
Traditional Workers Compensation Excess of Loss
Reinsurance Contract, effective July 1, 2008, between
Guarantee Insurance Company as Cedent and Midwest Employers
Casualty Company as Reinsurer**
|
|
10
|
.51
|
|
Alternative Market Workers Compensation Excess of Loss
Reinsurance Contract, effective July 1, 2008, between
Guarantee Insurance Company as Cedent and National Indemnity
Company as Reinsurer**
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
10
|
.52
|
|
Second Workers Compensation Excess of Loss Reinsurance
Contract, effective July 1, 2008, between Guarantee
Insurance Company as Cedent and Max Bermuda, Ltd., Aspen
Insurance UK Limited and Various Underwriters at Lloyds
London as Reinsurers**
|
|
10
|
.53
|
|
Employment Agreement, dated September 29, 2008, between the
Registrant and Richard G. Turner**
|
|
10
|
.54
|
|
Employment Agreement, dated September 29, 2008, between the
Registrant and Charles K. Schuver**
|
|
10
|
.55
|
|
First Amendment to Employment Agreement, dated
September 26, 2008, between the Registrant and Steven M.
Mariano**
|
|
10
|
.57
|
|
Amendment No. 1 to the 2005 Stock Option Plan**
|
|
10
|
.58
|
|
Amendment No. 2 to the 2005 Stock Option Plan**
|
|
10
|
.59
|
|
Amendment No. 1 to the 2006 Stock Option Plan**
|
|
10
|
.60
|
|
Amendment No. 2 to the 2006 Stock Option Plan**
|
|
10
|
.61
|
|
Workers Compensation Quota Share Reinsurance Contract,
effective December 31, 2008, between Guarantee Insurance
Company and Harco National Insurance Company*
|
|
10
|
.62
|
|
Traditional Workers Compensation Excess of Loss
Reinsurance Contract, effective July 1, 2009, between
Guarantee Insurance Company as cedant and Maiden Re, Max Re,
Ullico Casualty and various underwriters at Lloyds London
as reinsurers**
|
|
10
|
.63
|
|
Alternative Market Workers Compensation Excess of Loss
Reinsurance Contract, effective July 1, 2009, between
Guarantee Insurance Company as cedant and National
Fire & Liability and Ullico Casualty as reinsurers**
|
|
10
|
.64
|
|
Second Workers Compensation Excess of Loss Reinsurance
Contract, effective July 1, 2009, between Guarantee
Insurance Company and Aspen Insurance UK Limited, Hannover Re,
and certain other reinsurers**
|
|
10
|
.65
|
|
Workers Compensation Catastrophe Excess of Loss
Reinsurance Contract, effective July 1, 2009, between
Guarantee Insurance Company as cedant and Max Re Bermuda, Tokio
Millennium Re, Aspen Re UK, Hannover Re and various underwriters
at Lloyds London as reinsurers**
|
|
10
|
.66
|
|
Traditional Workers Compensation Quota Share Reinsurance
Contract, effective July 1, 2009, between Guarantee
Insurance Company and Swiss Re**
|
|
10
|
.67
|
|
Traditional Workers Compensation Quota Share Reinsurance
Contract for Florida, Georgia and New Jersey, between Guarantee
Insurance Company as cedant and ULLICO Casualty Company as
reinsurer**
|
|
10
|
.68
|
|
Commercial Loan Agreement dated December 31, 2008 among the
Registrant, PRS Group, Inc., Guarantee Insurance Group, Inc.,
Patriot Risk Services, Inc., Patriot Risk Management of Florida,
Inc., SunCoast Capital, Inc. and Ullico Inc.**
|
|
10
|
.69
|
|
Commercial Security Agreement dated December 31, 2008 among
the Registrant, PRS Group, Inc., Guarantee Insurance Group,
Inc., Patriot Risk Services, Inc., Patriot Risk Management of
Florida, Inc., SunCoast Capital, Inc. and Ullico Inc.**
|
|
10
|
.70
|
|
Stock Pledge Agreement dated December 31, 2008 among Steven
M. Mariano, Steven M. Mariano Revocable Trust, the Registrant,
PRS Group, Inc., Guarantee Insurance Group, Inc. and Ullico
Inc.**
|
|
10
|
.71
|
|
Irrevocable Proxy dated December 31, 2008 among Steven M.
Mariano, Steven M. Mariano Revocable Trust and Ullico Inc.**
|
|
10
|
.72
|
|
Guaranty dated December 31, 2008 between Steven M. Mariano
and Ullico Inc.**
|
|
10
|
.73
|
|
Intercreditor Agreement dated December 31, 2008 among the
Existing Lenders identified therein, PRS Group, Inc., Guarantee
Insurance Group, Inc., Patriot Risk Services, Inc., Patriot Risk
Management of Florida, Inc., SunCoast Capital, Inc., Registrant
and Ullico Inc.**
|
|
10
|
.74
|
|
Promissory Note from Registrant, PRS Group, Inc., Guarantee
Insurance Group, Inc., Patriot Risk Services, Inc., Patriot Risk
Management of Florida, Inc. and SunCoast Capital, Inc. to
Ullico, Inc., dated December 31, 2008**
|
|
10
|
.75
|
|
Side Letter Agreement dated December 31, 2008 among Steven
M. Mariano, the Registrant and Ullico Inc.**
|
|
10
|
.76
|
|
Post-Closing Letter Agreement dated December 31, 2008 among the
Registrant, PRS Group, Inc., Guarantee Insurance Group, Inc.,
Patriot Risk Services, Inc., Patriot Risk Management of Florida,
Inc. and Ullico Inc.**
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
10
|
.77
|
|
Indemnification and Pledge Agreement between Steven M. Mariano
and the Registrant*
|
|
21
|
.1
|
|
Subsidiaries of the Registrant**
|
|
23
|
.1
|
|
Consent of Locke Lord Bissell & Liddell LLP (included
as part of its opinion filed as Exhibit 5.1 hereto)*
|
|
23
|
.2
|
|
Consent of BDO Seidman, LLP
|
|
24
|
.1
|
|
Power of Attorney**
|
|
24
|
.2
|
|
Power of Attorney
|
|
|
|
* |
|
To be filed by amendment |
|
** |
|
Previously filed |