UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31,
2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period From
to
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000-50511
Commission File Number
United America Indemnity,
Ltd.
(Exact name of registrant as
specified in its charter)
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Cayman Islands
(State or other
jurisdiction
of incorporation or organization)
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98-0417107
(I.R.S. Employer
Identification No.)
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WALKER HOUSE, 87 MARY STREET
KYI 9002
GEORGE TOWN, GRAND CAYMAN
CAYMAN ISLANDS
(Address of principal executive
office including zip code)
Registrants telephone number, including area code:
(345) 949-0100
Securities Registered Pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Exchange on Which Registered
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Common A Common Shares,
$0.0001 Par Value
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The Nasdaq Stock Market LLC
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Securities Registered Pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
YES o NO þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
YES o NO þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was
required to submit and post such files). YES
o NO o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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 þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Act). YES
o NO þ
The aggregate market value of the common equity held by
non-affiliates of the registrant, computed by reference to the
price of the registrants Class A Common shares as of
the last business day of the registrants most recently
completed second fiscal quarter (based on the last reported sale
price on the Nasdaq Global Market as of such date), was
$161,824,608. Class A common shares held by each executive
officer and director and by each person who is known by the
registrant to beneficially own 5% or more of the
registrants outstanding Class A common shares have
been excluded in that such persons may be deemed affiliates. The
determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of February 25, 2010, the registrant had outstanding
36,525,278 Class A Common Shares and 24,122,744
Class B Common Shares.
TABLE OF
CONTENTS
As used in this annual report, unless the context requires
otherwise: 1) United America Indemnity,
we, us, and our refer to
United America Indemnity, Ltd., an exempted company incorporated
with limited liability under the laws of the Cayman Islands, and
its U.S. and
Non-U.S. Subsidiaries;
2) our U.S. Subsidiaries refers to United
America Indemnity Group, Inc., AIS, Emerald Insurance Company,
which was dissolved on March 24, 2008,
Penn-America
Group, Inc., our Insurance Operations and our Agency Operations;
3) our U.S. Insurance Operations refers to
the insurance and related operations conducted by AIS
subsidiaries, including American Insurance Adjustment Agency,
Inc., United America Insurance Services, LLC, J.H.
Ferguson & Associates, LLC, the United National
Insurance Companies and the
Penn-America
Insurance Companies; 4) our U.S. Insurance
Companies refers to the United National Insurance
Companies and the
Penn-America
Insurance Companies; 5) our Predecessor Insurance
Operations refers to Wind River Investment Corporation,
which was dissolved on May 31, 2006, AIS, American
Insurance Adjustment Agency, Inc., Emerald Insurance Company,
which was dissolved on March 24, 2008, the United National
Insurance Companies, United America Insurance Services, LLC, and
J.H. Ferguson & Associates, LLC; 6) the
United National Insurance Companies refers to the
insurance and related operations conducted by United National
Insurance Company and its subsidiaries, including Diamond State
Insurance Company, United National Casualty Insurance Company,
and United National Specialty Insurance
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Company; 7) the
Penn-America
Insurance Companies refers to the insurance and related
operations of
Penn-America
Insurance Company, Penn-Star Insurance Company, and Penn-Patriot
Insurance Company; 8) our Insurance Operations
refers to the U.S. Insurance Operations; 9) our
Non-U.S. Insurance
Operations refers to the insurance related operations of
Wind River Insurance Company (Barbados), Ltd. and Wind River
Insurance Company, Ltd. prior to the amalgamation, which
occurred on September 30, 2006; 10) Wind River
Reinsurance refers to Wind River Reinsurance Company,;
11) our Agency Operations refers to the
operations of Penn Independent Corporation and its subsidiaries,
which were classified as discontinued operations as of
September 30, 2006; 12) our
Non-U.S. Subsidiaries
refers to Wind River Reinsurance, U.A.I. (Gibraltar) Limited,
which was liquidated on May 30, 2006, U.A.I. (Gibraltar) II
Limited, which was liquidated on May 30, 2006, the
Luxembourg Companies, U.A.I. (Ireland) Limited, and Wind River
Services, Ltd., which was dissolved on August 17, 2007.;
13) our Reinsurance Operations refers to the
reinsurance and related operations of Wind River Reinsurance;
14) the Luxembourg Companies refers to U.A.I.
(Luxembourg) I S.à r.l., U.A.I. (Luxembourg) II S.à
r.l., U.A.I. (Luxembourg) III S.à r.l., U.A.I. (Luxembourg)
IV S.à r.l., U.A.I. (Luxembourg) Investment S.à r.l.,
and Wind River (Luxembourg) S.à r.l.; 15) United
America Indemnity Group refers to United America Indemnity
Group, Inc.; 16) AIS refers to American
Insurance Service, Inc.; 17) United National
Group refers to the United National Insurance Companies
and Emerald Insurance Company, which was dissolved on
March 24, 2008;
18) Penn-America
Group refers to
Penn-America
Group, Inc. and the
Penn-America
Insurance Companies;
19) Penn-America
refers to our product classification that includes property and
general liability products for small commercial businesses
distributed through a select network of wholesale general agents
with specific binding authority; 20) United
National refers to our product classification that
includes property, general liability, and professional lines
products distributed through program administrators with
specific binding authority; 21) Diamond State
refers to our product classification that includes property,
casualty, and professional lines products distributed through
wholesale brokers and program administrators with specific
binding authority; 22) the Statutory Trusts
refers to United National Group Capital Trust I, United
National Group Capital Statutory Trust II,
Penn-America
Statutory Trust I, whose registration was cancelled
effective January 15, 2008, and
Penn-America
Statutory Trust II, whose registration was cancelled
effective February 2, 2009; 23) Fox
Paine & Company refers to Fox Paine &
Company, LLC and affiliated investment funds;
24) GAAP refers to accounting principles
generally accepted in the United States of America; and
25) $ or dollars refers to
U.S. dollars.
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PART I
Some of the information contained in this Item 1 or set
forth elsewhere in this report, including information with
respect to our plans and strategy, constitutes forward-looking
statements that involve risks and uncertainties. Please see
Cautionary Note Regarding Forward-Looking Statements
at the end of Item 7 of Part II and Risk
Factors in Item 1A of Part I for a discussion of
important factors that could cause actual results to differ
materially from the results described in or implied by the
forward-looking statements contained herein.
Recent
Developments
Redomestication
to Ireland
On February 16, 2010, we announced that our Board of
Directors has unanimously approved a plan for us to re-domicile
from the Cayman Islands to Ireland. Our shareholders will be
asked to vote in favor of completing the reorganization proposal
at a special shareholders meeting. If the proposal is accepted,
we will become a wholly-owned subsidiary of Global Indemnity
plc, an Irish company.
If the move to Ireland is approved, our Class A common
shares will be exchanged for Global Indemnity plcs
Class A ordinary shares on a
two-for-one
basis, which will trade on The NASDAQ Global Select Market under
the ticker symbol GBLI. Global Indemnity plc will be
subject to U.S. Securities and Exchange Commission
reporting requirements, the mandates of the
U.S. Sarbanes-Oxley Act, and the corporate governance rules
of Nasdaq. Global Indemnity plc will report consolidated
financial results in U.S. dollars and under
U.S. generally accepted accounting principles. If required
by Irish law, audited consolidated annual financial statements
prepared in accordance with Irish generally accepted accounting
principles will also be made available to shareholders. In
addition to shareholder approval, the move to Ireland is subject
to an order from the Grand Court of the Cayman Islands
sanctioning the transaction.
Haiti
Earthquake
In January 2010, a massive earthquake struck the Republic of
Haiti that devastated the capital city Port-au-Prince and
resulted in widespread damage. We do not expect much, if any,
catastrophe loss exposure as insurance penetration in Haiti has
historically been low. Any exposure that may develop would be as
a result of tsunami activity that affected neighboring islands
where we have exposure. At this time, however, we do not expect
any significant exposure.
California
Mudslides and Flooding
In January 2010, the southern California coast was battered by
multiple heavy rainstorms that caused mudslides and flooding
which resulted in significant property losses. We do not expect
much, if any, catastrophe loss exposure since we expect losses
to be within the retention limits of our property catastrophe
reinsurance coverage.
Chile
Earthquake
In February 2010, a massive earthquake struck the Republic of
Chile that resulted in widespread damage. We do not anticipate
any catastrophe loss exposure as our current exposures do not
include Chilean risks. Any exposure that may develop would be as
a result of tsunami activity that affected the Australian,
Asian, or Pacific island regions where we have exposure. At this
time, however, we do not expect any significant exposure.
Europe
Winter Storm
In February 2010, a late winter storm with fierce rain and
hurricane strength winds hit western Europe. At this time, we do
not know the extent of our catastrophe loss exposure, if any.
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Appointment
of Thomas M. McGeehan
On December 8, 2009, we announced the appointment of Thomas
M. McGeehan as Senior Vice President and Chief Financial
Officer, effective as of that day. Mr. McGeehan had been
serving as Interim Chief Financial Officer since May 2008.
Our
History
We are a holding company formed on August 26, 2003 under
the laws of the Cayman Islands to acquire our Predecessor
Insurance Operations.
Acquisition
of Our Predecessor Insurance Operations
On September 5, 2003, Fox Paine & Company made a
capital contribution of $240.0 million to us, in exchange
for 10.0 million Class B common shares and
14.0 million Series A preferred shares, and we
acquired Wind River Investment Corporation, the holding company
for our Predecessor Insurance Operations, from a group of family
trusts affiliated with the Ball family of Philadelphia,
Pennsylvania (the Wind River Acquisition).
To effect this acquisition, we used $100.0 million of the
$240.0 million capital contribution to purchase a portion
of the common stock of Wind River Investment Corporation held by
the Ball family trusts. We then purchased the remainder of the
common stock of Wind River Investment Corporation that was also
held by the Ball family trusts, paying consideration consisting
of 2.5 million Class A common shares, 3.5 million
Series A preferred shares and senior notes issued by Wind
River Investment Corporation having an aggregate principal
amount of approximately $72.8 million, which have since
been retired.
Of the remaining $140.0 million contributed to us, we then
contributed $80.0 million to United National Group, used
$42.4 million to capitalize our
Non-U.S. Insurance
Operations and used $17.6 million to pay fees and expenses
incurred in connection with the acquisition.
Initial
Public Offering of Class A Common Shares
(IPO)
In December 2003, we consummated our IPO of 10,750,000
Class A common shares, including 1,000,000 Class A
common shares issued in connection with the exercise of a
portion of the underwriters overallotment option, at a
price of $17.00 per share. Proceeds of the offering less
underwriting discounts of $12.8 million were
$170.0 million. Expenses for the IPO totaled
$4.4 million, resulting in net proceeds to us of
$165.6 million (the IPO Proceeds). We used
$150.0 million of the IPO Proceeds to fund the redemption
of all our Series A preferred shares. We contributed the
remaining proceeds of $15.6 million to our
Non-U.S. Insurance
Operations. In January 2004, we issued an additional 462,500
Class A common shares in connection with the exercise of
the underwriters remaining overallotment option at a price
of $17.00 per share. Proceeds to us, net of underwriting
discounts of $0.5 million, were $7.3 million, which we
contributed to our
Non-U.S. Insurance
Operations.
Acquisition
of
Penn-America
Group, Inc. and Penn Independent Corporation
On January 24, 2005, we completed our merger with
Penn-America
Group, Inc. (NYSE: PNG) for $249.4 million, which was
comprised of $15.3 million in cash and approximately
7.9 million of our Class A common shares, and our
acquisition of Penn Independent Corporation for
$98.5 million in cash. These transactions resulted in
goodwill of $102.0 million and intangible assets of
$32.5 million. In connection with these transactions, our
shareholders approved our change in name from United
National Group, Ltd. to United America Indemnity, Ltd.
Our results of operations include the results of
Penn-America
Group, Inc. and Penn Independent Corporation from the date of
their merger and acquisition, respectively.
In 2008, we impaired all of the goodwill and $12.2 million
of intangible assets associated with our merger with
Penn-America
Group, Inc. This resulted in an after-tax loss of
$92.2 million. See Note 5 of the notes to the
consolidated financial statements for details concerning this
impairment.
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Sale
of Agency Operations
On September 30, 2006, we sold substantially all of the
assets of our Agency Operations to Brown & Brown,
Inc., an unrelated third party. The gain on the sale was
$9.4 million, net of applicable taxes of $4.5 million.
We had acquired our Agency Operations through the acquisition of
Penn Independent Corporation on January 24, 2005. With the
divestiture of our Agency Operations complete, we are focused on
our core competency, providing excess and surplus lines and
specialty property and casualty insurance and reinsurance
products. As a result of this sale, we terminated our Agency
Operations segment and have classified the results of this
segment as discontinued operations; however, due to
immateriality, the results of our discontinued operations for
all years subsequent to 2006 are included in income from
continuing operations in the Corporate and other operating
expenses line item.
Rights
Offering
In May 2009, we received gross proceeds of $100.1 million
from the issuance of 17.2 million and 11.4 million of
our Class A and Class B common shares, respectively,
in conjunction with the Rights Offering that was announced in
March 2009. The net proceeds of $91.8 million were used to
support strategic initiatives, enhance liquidity and financial
flexibility, and for other general corporate purposes. See
Note 10 to the consolidated financial statements in
Item 8 of Part II of this report for details
concerning the Rights Offering.
General
United America Indemnity, one of the leading specialty property
and casualty insurers in the industry, provides its insurance
products across a full distribution network binding
authority, program, brokerage, and reinsurance. We manage the
distribution of these products in two segments:
(a) Insurance Operations and (b) Reinsurance
Operations.
Our
Insurance Operations
The United National Insurance Companies and the
Penn-America
Insurance Companies distribute property and casualty insurance
products and operate predominantly in the excess and surplus
lines marketplace. To manage our operations, we differentiate
them by product classification. These product classifications
are:
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Penn-America
distributes property and general liability products for small
commercial businesses distributed through a select network of
wholesale general agents with specific binding authority;
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United National distributes property, general liability, and
professional lines products distributed through program
administrators with specific binding authority; and
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Diamond State distributes property, casualty, and professional
lines products distributed through wholesale brokers that are
underwritten by our personnel and selected brokers with specific
binding authority.
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See Marketing and Distribution below for a
discussion on how our insurance products are underwritten.
These product classifications comprise our Insurance Operations
business segment and are not considered individual business
segments because each product has similar economic
characteristics, distribution, and coverages. Our Insurance
Operations provide property, casualty, and professional
liability products utilizing customized guidelines, rates, and
forms tailored to our risk and underwriting philosophy. Our
Insurance Operations are licensed to write on a surplus lines
(non-admitted) basis and an admitted basis in all 50
U.S. States, the District of Columbia, Puerto Rico, and the
U.S. Virgin Islands, which provides us with flexibility in
designing products, programs, and in determining rates to meet
emerging risks and discontinuities in the marketplace.
We distribute our insurance products through a group of
approximately 110 professional wholesale general agencies that
have specific quoting and binding authority, as well as a number
of wholesale insurance brokers who in turn sell our insurance
products to insureds through retail insurance brokers.
Our United National Insurance Companies and
Penn-America
Insurance Companies are rated A (Excellent) by
A.M. Best, which assigns credit ratings to insurance
companies transacting business in the United States.
A (Excellent) is the third highest rating of sixteen
rating categories. These ratings are based upon factors of
concern to
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policyholders, such as capital adequacy, loss reserve adequacy,
and overall operating performance, and are not directed to the
protection of investors.
Our
Reinsurance Operations
We provide third party treaty and facultative reinsurance for
writers of excess and surplus and specialty lines of property
and casualty insurance through Wind River Reinsurance. Wind
River Reinsurance began offering third party reinsurance in the
third quarter of 2006 and entered into its initial third party
reinsurance treaty effective January 1, 2007. Wind River
Reinsurance also provides reinsurance to our Insurance
Operations.
Wind River Reinsurance is rated A (Excellent) by
A.M. Best.
Available
Information
We maintain a website at www.uai.ky. We will make available,
free of charge on our website, our most recent annual report on
Form 10-K
and subsequently filed quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after we
file such material with, or furnish it to, the
U.S. Securities and Exchange Commission.
Recent
Trends in Our Industry
The property and casualty insurance industry has historically
been a cyclical industry. During periods of reduced underwriting
capacity, which is characterized by a shortage of capital and
reduced competition, underwriting results are generally more
favorable for insurers due to more favorable policy terms and
conditions and higher rate levels. During periods of excess
underwriting capacity, which is characterized by an abundance of
capital and increased competition, underwriting results are
generally less favorable for insurers due to an expansion of
policy terms and conditions and lower rate levels. Historically,
several factors have affected the level of underwriting
capacity, including industry losses, catastrophes, changes in
legal and regulatory guidelines, investment results, and the
ratings and financial strength of competitors. As underwriting
capacity increases, the standard insurance markets begin to
expand their risk selection criteria to include risks that have
typically been placed in the non-standard excess and surplus
lines market. This tends to shrink the demand for insurance
coverage from insurers that are focused on writing in the excess
and surplus line marketplace, such as United America Indemnity.
Currently we are in a period of excess underwriting capacity,
and we continued to see rate decreases throughout 2009.
Reinsurers 2009 growth, if any, became very selective as
new business prices remained competitive and renewals saw little
overall price increases. The 2009 market proved to be a positive
risk selection, capacity management, and pricing environment for
the catastrophe underwriters. Non-catastrophe segments of the
reinsurance market continued to be strained further as the many
opposing market forces failed to allow the upward rate pressures
to take root. Reinsurers and carriers alike clearly observed
that competition has caused the adequacy in underlying prices,
terms, and conditions to be eroded over the past several years
calling for a flight to improved pricing, terms, and conditions
adequacy.
In order for property and casualty reinsurance and insurance
companies to generate an acceptable return on capital in the
current interest rate environment, companies are focusing on
generating acceptable underwriting returns. The industry is
making increased use of risk management tools to adequately
compensate for the risks being written. The industry continues
to focus on investment yields and the credit-worthiness of
investment portfolios.
Although the discount rate was recently raised 0.25 points in
February 2010, the Federal Funds rate remained at extremely low
levels of 0.0% to 0.25% during 2009 causing investment yields on
short-term and overnight investments to be low. Given low
interest rates for Fed funds and current yields on investment
grade fixed income securities, our investment portfolio has been
positioned to protect against a rising interest rate environment
by including fixed maturity investments with low durations. The
fixed income portfolio continues to be biased toward high
quality assets with an average quality of AA.
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In addition, developments in the regulatory environment could
have some impact on our industry. In December 2009, the
U.S. House of Representatives passed the Wall Street Reform
and Consumer Protection Act of 2009. This bill includes a number
of provisions having a direct impact on the insurance industry,
most notably, the creation of a Federal Insurance Office to
monitor the insurance industry, streamlining of surplus lines
insurance, credit for reinsurance, reinsurance insolvency
regulation, and systemic risk regulation. This bill will be
assigned to the Senate Banking Committee. We are continuing to
monitor this development and the impact that it may have on our
operations.
Excess
and Surplus Lines Market
Our Insurance Operations operate in the excess and surplus lines
market. The excess and surplus lines market differs
significantly from the standard property and casualty insurance
market. In the standard property and casualty insurance market,
insurance rates and forms are highly regulated, products and
coverages are largely uniform and have relatively predictable
exposures. In the standard market, policies must be written by
insurance companies that are admitted to transact business in
the state in which the policy is issued. As a result, in the
standard property and casualty insurance market, insurance
companies tend to compete for customers primarily on the basis
of price, coverage, value-added service, and financial strength.
In contrast, the excess and surplus lines market provides
coverage for businesses that often do not fit the underwriting
criteria of an insurance company operating in the standard
market due to their relatively greater unpredictable loss
patterns and unique niches of exposure requiring rate and policy
form freedom. Without the excess and surplus lines market,
certain businesses would have to self insure their exposures, or
seek coverage outside the U.S. market.
Competition in the excess and surplus lines market tends to
focus less on price and more on availability, service, and other
considerations. While excess and surplus lines market exposures
may have higher perceived insurance risk than their standard
market counterparts, excess and surplus lines market
underwriters historically have been able to generate
underwriting profitability superior to standard market
underwriters.
According to A.M. Best, direct premiums written of the
excess and surplus lines market shrank 11.2% the past two years,
but from 1988 through 2008, it grew from an estimated
$6.3 billion to $34.4 billion. In contrast, the
U.S. property and casualty industry grew more moderately
during this period from $211.3 billion in direct premiums
written to $492.9 billion. During this period, the excess
and surplus lines market as a percentage of the total property
and casualty industry grew from approximately 3.0% to 7.0%.
Within the excess and surplus lines market, we write business on
both a specialty admitted and surplus lines basis. Surplus lines
business accounts for approximately 81.3% of the business that
our Insurance Operations writes, while specialty admitted
business accounts for the remaining 18.7%.
When writing on a specialty admitted basis, our focus is on
writing insurance for insureds that engage in similar but often
highly specialized types of activities. The specialty admitted
market is subject to greater state regulation than the surplus
lines market, particularly with regard to rate and form filing
requirements and the ability to enter and exit lines of
business. Insureds purchasing coverage from specialty admitted
insurance companies do so because the insurance product is not
otherwise available from standard market insurers. Yet, for
regulatory or marketing reasons, these insureds require products
that are written by an admitted insurance company.
Business
Segments
We operate and manage our business through two business
segments: Insurance Operations and Reinsurance Operations.
Insurance
Operations
Our Insurance Operations segment includes the operations of the
United National Insurance Companies and the
Penn-America
Insurance Companies which distribute property and casualty
products through three product classifications:
1) Penn-America;
2) United National; and 3) Diamond State. See
Our Insurance Operations above for a description of
these product classifications. Our insurance products target
specific, defined groups of insureds with customized coverages
to meet their needs. Our products include customized guidelines,
rates, and forms
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tailored to our risk and underwriting philosophy. In 2009, gross
premiums written were $268.0 million compared to
$353.1 million for 2008.
Reinsurance
Operations
Our Reinsurance Operations segment provides third party treaty
and facultative reinsurance for writers of excess, surplus, and
specialty property and casualty insurance and consists solely of
the operations of Wind River Reinsurance. Wind River Reinsurance
also provides quota share reinsurance to our Insurance
Operations. In 2009, gross premiums written were
$73.0 million compared to $25.6 million for 2008. Wind
River Reinsurance is listed with the International Insurers
Department (IID) of the National Association of
Insurance Commissioners (NAIC). Although Wind River
Reinsurance does not currently offer direct third party excess
and surplus lines insurance products, it is eligible to write on
a surplus lines basis in 31 U.S. states and the District of
Columbia.
Wind River Reinsurance conducts business in Bermuda. While many
reinsurers in Bermuda continue to focus on catastrophe oriented
reinsurance solutions, Wind River Reinsurance is part of a
smaller group of companies looking to write niche and casualty
oriented treaty and facultative opportunities. While Wind River
Reinsurance will consider unique catastrophe oriented
placements, this is a very selective process and is not its
primary focus. Given the pricing environment of the larger
casualty oriented organizations, Wind River Reinsurance
continues to cautiously deploy and manage its capital while
seeking to position itself as niche reinsurance solution
provider. The current market dictates that growth will be very
measured.
As part of the aforementioned quota share reinsurance that Wind
River Reinsurance provides to our Insurance Operations, our
Insurance Operations cede 50% of their net unearned premiums,
plus 50% of the net retained insurance liability of all new and
renewal business to Wind River Reinsurance.
Products
and Product Development
Our Insurance Operations distribute property and casualty
insurance products and operate predominantly in the excess and
surplus lines marketplace. To manage our operations, we
differentiate our products by product classification. See
Our Insurance Operations above for a description of
these product classifications. We have significant flexibility
in designing products, programs, and in determining rates to
meet the needs of the marketplace.
Our Reinsurance Operations offer third party treaty and
facultative reinsurance for writers of excess, surplus, and
specialty lines of property and casualty insurance. Our
Reinsurance Operations also provide reinsurance to our Insurance
Operations.
The following table sets forth an analysis of United America
Indemnitys gross premiums written, which is the sum of
direct and assumed premiums written, by product classification
within our Insurance Operations and Reinsurance Operations
segments during the periods indicated:
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For the Years Ended December 31,
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|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penn-America
|
|
$
|
124,914
|
|
|
|
36.6
|
%
|
|
$
|
172,869
|
|
|
|
45.6
|
%
|
|
$
|
286,439
|
|
|
|
50.8
|
%
|
United National
|
|
|
62,059
|
|
|
|
18.2
|
|
|
|
88,884
|
|
|
|
23.5
|
|
|
|
132,311
|
|
|
|
23.5
|
|
Diamond State
|
|
|
81,019
|
|
|
|
23.8
|
|
|
|
91,377
|
|
|
|
24.1
|
|
|
|
118,085
|
|
|
|
21.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Operations
|
|
|
267,992
|
|
|
|
78.6
|
|
|
|
353,130
|
|
|
|
93.2
|
|
|
|
536,835
|
|
|
|
95.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wind River Reinsurance
|
|
|
73,007
|
|
|
|
21.4
|
|
|
|
25,570
|
|
|
|
6.8
|
|
|
|
26,277
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
340,999
|
|
|
|
100.0
|
%
|
|
$
|
378,700
|
|
|
|
100.0
|
%
|
|
$
|
563,112
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a discussion of the variances between years, see
Results of Operations in Item 7 of Part II
of this report.
8
The following table sets forth an analysis of United America
Indemnitys net premiums written, which is gross premiums
written less ceded premiums written, by product classification
within our Insurance Operations and Reinsurance Operations
segments during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penn-America
|
|
$
|
101,320
|
|
|
|
34.8
|
%
|
|
$
|
158,136
|
|
|
|
51.1
|
%
|
|
$
|
266,874
|
|
|
|
54.4
|
%
|
United National
|
|
|
50,036
|
|
|
|
17.2
|
|
|
|
74,964
|
|
|
|
24.3
|
|
|
|
110,649
|
|
|
|
22.6
|
|
Diamond State
|
|
|
66,908
|
|
|
|
23.0
|
|
|
|
72,379
|
|
|
|
23.4
|
|
|
|
100,751
|
|
|
|
20.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Operations
|
|
|
218,264
|
|
|
|
75.0
|
|
|
|
305,479
|
|
|
|
98.8
|
|
|
|
478,274
|
|
|
|
97.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wind River Reinsurance
|
|
|
72,731
|
|
|
|
25.0
|
|
|
|
3,601
|
|
|
|
1.2
|
|
|
|
12,261
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
290,995
|
|
|
|
100.0
|
%
|
|
$
|
309,080
|
|
|
|
100.0
|
%
|
|
$
|
490,535
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a discussion of the variances between years, see
Results of Operations in Item 7 of Part II
of this report.
Geographic
Concentration
The following table sets forth the geographic distribution of
United America Indemnitys gross premiums written by its
Insurance and Reinsurance Operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
$
|
34,061
|
|
|
|
10.0
|
%
|
|
$
|
41,893
|
|
|
|
11.0
|
%
|
|
$
|
65,610
|
|
|
|
11.6
|
%
|
California
|
|
|
28,264
|
|
|
|
8.3
|
|
|
|
39,793
|
|
|
|
10.5
|
|
|
|
67,578
|
|
|
|
12.0
|
|
Texas
|
|
|
24,292
|
|
|
|
7.1
|
|
|
|
26,029
|
|
|
|
6.9
|
|
|
|
37,252
|
|
|
|
6.6
|
|
New York
|
|
|
17,224
|
|
|
|
5.1
|
|
|
|
26,045
|
|
|
|
6.9
|
|
|
|
55,627
|
|
|
|
9.9
|
|
Louisiana
|
|
|
12,339
|
|
|
|
3.6
|
|
|
|
13,214
|
|
|
|
3.5
|
|
|
|
14,447
|
|
|
|
2.6
|
|
Massachusetts
|
|
|
11,948
|
|
|
|
3.5
|
|
|
|
16,956
|
|
|
|
4.5
|
|
|
|
24,054
|
|
|
|
4.3
|
|
Pennsylvania
|
|
|
9,506
|
|
|
|
2.8
|
|
|
|
12,446
|
|
|
|
3.3
|
|
|
|
17,527
|
|
|
|
3.1
|
|
New Jersey
|
|
|
8,918
|
|
|
|
2.6
|
|
|
|
13,617
|
|
|
|
3.6
|
|
|
|
26,767
|
|
|
|
4.7
|
|
Illinois
|
|
|
8,630
|
|
|
|
2.5
|
|
|
|
11,766
|
|
|
|
3.1
|
|
|
|
16,633
|
|
|
|
3.0
|
|
Michigan
|
|
|
6,927
|
|
|
|
2.0
|
|
|
|
8,467
|
|
|
|
2.2
|
|
|
|
9,257
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
162,109
|
|
|
|
47.5
|
|
|
|
210,226
|
|
|
|
55.5
|
|
|
|
334,752
|
|
|
|
59.4
|
|
Reinsurance Operations
|
|
|
73,007
|
|
|
|
21.4
|
|
|
|
25,570
|
|
|
|
6.8
|
|
|
|
26,277
|
|
|
|
4.7
|
|
All others
|
|
|
105,883
|
|
|
|
31.1
|
|
|
|
142,904
|
|
|
|
37.7
|
|
|
|
202,083
|
|
|
|
35.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
340,999
|
|
|
|
100.0
|
%
|
|
$
|
378,700
|
|
|
|
100.0
|
%
|
|
$
|
563,112
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
and Distribution
We provide our insurance products across a full distribution
network binding authority, program, brokerage, and
reinsurance. For our binding authority and program product
classifications, we distribute our insurance products through a
group of approximately 110 wholesale general agents and program
administrators that have specific quoting and binding authority.
For our brokerage business, we distribute our insurance products
through wholesale insurance brokers who in turn sell our
insurance products to insureds through retail insurance brokers.
9
For our reinsurance business, we distribute our products through
reinsurance brokers and directly through reinsurers.
Of our non-affiliated professional wholesale general agents and
program administrators, the top five accounted for 34.1% of our
gross premiums written for the year ended December 31,
2009. No one agency accounted for more than 12.9% of our gross
premiums written.
Our distribution strategy is to maintain strong relationships
with a limited number of high-quality wholesale professional
general agents and wholesale insurance brokers. We carefully
select our distribution sources based on their experience and
reputation. We believe that our distribution strategy enables us
to effectively access numerous markets at a relatively low cost
structure through the marketing, underwriting, and
administrative support of our professional general agencies and
wholesale insurance brokers. These wholesale general agents and
wholesale insurance brokers have local market knowledge and
expertise that enables us to access business in these markets
more effectively.
Underwriting
Our insurance products are underwritten in two ways:
(1) specific binding authority in which we grant
underwriting authority to our wholesale general agents and
program administrators, and (2) brokerage in which our
internal personnel underwrites business submitted by our
wholesale insurance brokers.
Specific Binding Authority Our
wholesale general agents and program administrators have
specific quoting and binding authority with respect to a single
insurance product and some have limited quoting and binding
authority with respect to multiple products.
We provide our wholesale general agents and program
administrators with a comprehensive, regularly updated
underwriting manual that specifically outlines risk eligibility,
which is developed based on the type of insured, nature of
exposure and overall expected profitability. This manual also
outlines (a) premium pricing, (b) underwriting
guidelines, including but not limited to policy forms, terms and
conditions, and (c) policy issuance instructions.
Our wholesale general agents and program administrators are
appointed to underwrite submissions received from their retail
agents in accordance with our underwriting manual. Risks that
are not within the specific binding authority must be submitted
to our underwriting personnel directly for underwriting review
and approval or denial of the application of the insured. Our
wholesale general agents provide all policy issuance services in
accordance with our underwriting manuals.
We regularly monitor the underwriting quality of our wholesale
general agents and program administrators through disciplined
system of controls, which includes the following:
|
|
|
|
|
automated system criteria edits and exception reports;
|
|
|
|
individual policy reviews to measure general agents adherence to
underwriting manual including, risk selection, underwriting
compliance, policy issuance and pricing.
|
|
|
|
periodic
on-site
comprehensive general agency audits to evaluate processes,
controls, profitability and adherence to all aspects of our
underwriting manual including, risk selection, underwriting
compliance, policy issuance and pricing; and
|
|
|
|
internal quarterly actuarial analysis of loss ratios produced by
business underwritten by our wholesale general agents and
program administrators
|
|
|
|
internal quarterly analysis of financial results, including
premium growth and overall profitability of business produced by
our wholesale general agents and program administrators
|
We provide incentives to certain of our wholesale general agents
and program administrators to produce profitable business
through contingent profit commission structures that are tied
directly to the achievement of profitability targets.
10
Brokerage Our wholesale insurance
brokers do not have specific binding authority, therefore, these
risks are submitted to our underwriting personnel for review and
processing.
We provide our underwriters with a comprehensive, regularly
updated underwriting manual that specifically outlines risk
eligibility, which is developed based on the type of insured,
nature of exposure and overall expected profitability. This
manual also outlines (a) premium pricing,
(b) underwriting guidelines, including but not limited to
policy forms, terms and conditions, and (c) policy issuance
instructions.
Our underwriting personnel review submissions, issue all quotes
and perform all policy issuance functions. We regularly monitor
the underwriting quality of our underwriters through disciplined
system of controls, which includes the following:
|
|
|
|
|
individual policy reviews to measure our underwriters
adherence to underwriting manual including, risk selection,
underwriting compliance, policy issuance and pricing.
|
|
|
|
periodic underwriting review to evaluate adherence to all
aspects of our underwriting manual including, risk selection,
underwriting compliance, policy issuance and pricing; and
|
|
|
|
internal quarterly actuarial analysis of loss ratios produced by
business underwritten by our underwriters
|
|
|
|
internal quarterly analysis of financial results, including
premium growth and overall profitability of business produced by
our underwriters
|
Contingent
Commissions
Certain professional general agencies of the Insurance
Operations are paid special incentives, referred to as
commissions, when loss results of business produced by these
agencies are more favorable than predetermined thresholds.
Similarly, in some circumstances, insurance companies that cede
business to our Reinsurance Operations are paid ceding or profit
commissions based on the profitability of the ceded portfolio.
These commissions are charged to other underwriting expenses
when incurred. The liability for the unpaid portion of these
commissions is stated separately on the face of the consolidated
balance sheet as contingent commissions.
The amount of contingent commissions for 2009 has increased from
the prior year primarily due to several reinsurance treaties
that were entered into by our Reinsurance Operations during the
first quarter of 2009 that have generated profitable business
and therefore resulted in increased commissions.
Pricing
We use our pricing actuaries to establish pricing tailored to
each specific product we underwrite, taking into account
historical loss experience and individual risk and coverage
characteristics. We generally use the actuarial loss costs
promulgated by the Insurance Services Office as a benchmark in
the development of pricing for most of our products. We will
only write business if we believe we can achieve an adequate
rate of return.
Rates have generally declined over the last several years.
During 2004 and the first eight months of 2005 the ability to
achieve significant rate increases lessened with increased
competition and additional industry capacity. This trend
subsided, however, during the last four months of 2005 primarily
as a result of the impact of Hurricanes Katrina, Rita, and Wilma
on the United States. The underwriting capacity for writing
property insurance in several wind-prone areas of the United
States was reduced immediately, which led to dramatic increases
in rate levels in many of the territories affected by these
storms. Since 2005, the trend has reversed and prices have been
steadily declining. Casualty rates have declined faster than
property rates. Our market is facing competition from standard
line companies who are writing risks that they had not insured
previously, Bermuda companies who are establishing relationships
with wholesale brokers, and excess and surplus competitors. New
competition is driving much of the price decline. Although
market prices have dropped, we have continued to maintain our
underwriting discipline, and have therefore exited many
programs. Renewal pricing on our book decreased approximately
2.2% in 2007, approximately 3.8% in 2008, and approximately 2.3%
in 2009, on average.
11
Reinsurance
of Underwriting Risk
Our philosophy is to purchase reinsurance from third parties to
limit our liability on individual risks and to protect against
property catastrophe and casualty clash losses. Reinsurance
assists us in controlling exposure to severe losses, and
protecting capital resources. We purchase reinsurance on both an
excess of loss and proportional basis. The type, cost and limits
of reinsurance we purchase can vary from year to year based upon
our desired retention levels and the availability of quality
reinsurance at an acceptable price. Although reinsurance does
not legally discharge an insurer from its primary liability for
the full amount of the policies it has written, it does make the
assuming reinsurer liable to the insurer to the extent of the
insurance ceded. Our reinsurance contracts renew throughout the
year, and all of our reinsurance is purchased following
guidelines established by our management. We primarily utilize
treaty reinsurance products, including proportional reinsurance,
excess of loss reinsurance, casualty clash reinsurance, and
property catastrophic excess of loss reinsurance. Additionally,
we may purchase facultative reinsurance protection on single
risks when deemed necessary.
We purchase specific types and structures of reinsurance
depending upon the specific characteristics of the lines of
business and specialty products we underwrite. We will typically
seek to place proportional reinsurance for our umbrella and
excess products, some of our specific specialty products, or in
the development stages of a new product. We believe that this
approach allows us to control our net exposure in these product
areas more cost effectively.
We purchase reinsurance on an excess of loss basis to cover
individual risk severity. These structures are utilized to
protect our primary positions on property, casualty, and
professional liability products. The excess of loss structures
allow us to maximize our underwriting profits over time by
retaining a greater portion of the risk in these products, while
helping to protect against the possibility of unforeseen
volatility.
We analyze our reinsurance contracts to ensure that they meet
the risk transfer requirements of applicable accounting
guidance, which requires that the reinsurer must assume
significant insurance risk under the reinsured portions of the
underlying insurance contracts and that there must be a
reasonably possible chance that the reinsurer may realize a
significant loss from the transaction. See Note 6 of the
notes to consolidated financial statements in Item 8 of
Part II of this report for details concerning our current
reinsurance contracts.
We continually evaluate our retention levels across the entire
line of business and specialty product portfolio to ensure that
the ultimate reinsurance structures are aligned with the
corporate risk tolerance levels associated with such lines of
business products. Any decision to decrease our reliance upon
proportional reinsurance or to increase our excess of loss
retentions could increase our earnings volatility. In cases
where we decide to increase our excess of loss retentions, such
decisions will be a result of a change or progression in our
risk tolerance level and will be supported by an actuarial
analysis. We endeavor to purchase reinsurance from financially
strong reinsurers with which we have long-standing
relationships. In addition, in certain circumstances, we hold
collateral, including letters of credit, under reinsurance
agreements.
12
The following table sets forth the ten reinsurers for which we
have the largest reinsurance receivables, as of
December 31, 2009. Also shown are the amounts of premiums
ceded by us to these reinsurers during the year ended
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A.M.
|
|
Gross
|
|
|
Prepaid
|
|
|
Total
|
|
|
Percent
|
|
|
Ceded
|
|
|
Percent
|
|
|
|
Best
|
|
Reinsurance
|
|
|
Reinsurance
|
|
|
Reinsurance
|
|
|
of
|
|
|
Premiums
|
|
|
of
|
|
|
|
Rating
|
|
Receivables
|
|
|
Premium
|
|
|
Assets
|
|
|
Total
|
|
|
Written
|
|
|
Total
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Munich Re America, Inc.
|
|
A+
|
|
$
|
256.5
|
|
|
$
|
6.5
|
|
|
$
|
263.0
|
|
|
|
44.5
|
%
|
|
$
|
20.2
|
|
|
|
40.4
|
%
|
Westport Insurance Corp.
|
|
A
|
|
|
130.1
|
|
|
|
|
|
|
|
130.1
|
|
|
|
22.0
|
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
General Reinsurance Corp.
|
|
A++
|
|
|
27.3
|
|
|
|
0.6
|
|
|
|
27.9
|
|
|
|
4.7
|
|
|
|
1.8
|
|
|
|
3.6
|
|
Hartford Fire Insurance Co.
|
|
A
|
|
|
21.7
|
|
|
|
|
|
|
|
21.7
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
Transatlantic Reinsurance
|
|
A
|
|
|
16.9
|
|
|
|
3.6
|
|
|
|
20.5
|
|
|
|
3.5
|
|
|
|
8.2
|
|
|
|
16.4
|
|
GE Reinsurance Corporation (Swiss Re)
|
|
A
|
|
|
14.8
|
|
|
|
|
|
|
|
14.8
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
Finial Reinsurance Company
|
|
A−
|
|
|
11.1
|
|
|
|
|
|
|
|
11.1
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
Converium AG, Zurich
|
|
A−
|
|
|
10.1
|
|
|
|
|
|
|
|
10.1
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
Swiss Reinsurance America Corp
|
|
A
|
|
|
9.2
|
|
|
|
|
|
|
|
9.2
|
|
|
|
1.6
|
|
|
|
0.1
|
|
|
|
0.2
|
|
Clearwater Insurance Company
|
|
A−
|
|
|
7.8
|
|
|
|
|
|
|
|
7.8
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
505.5
|
|
|
|
10.7
|
|
|
|
516.2
|
|
|
|
87.4
|
|
|
|
30.2
|
|
|
|
60.4
|
|
All other reinsurers
|
|
|
|
|
68.3
|
|
|
|
5.8
|
|
|
|
74.1
|
|
|
|
12.6
|
|
|
|
19.8
|
|
|
|
39.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reinsurance receivables before purchase accounting
adjustments
|
|
|
|
|
573.8
|
|
|
|
16.5
|
|
|
|
590.3
|
|
|
|
100.0
|
%
|
|
$
|
50.0
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase accounting adjustments, including uncollectible
reinsurance reserve
|
|
|
|
|
(30.4
|
)
|
|
|
|
|
|
|
(30.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables, net of purchase accounting adjustments and
uncollectible reinsurance reserve
|
|
|
|
|
543.4
|
|
|
|
16.5
|
|
|
|
559.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral held in trust from reinsurers
|
|
|
|
|
(378.1
|
)
|
|
|
(5.4
|
)
|
|
|
(383.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net receivables
|
|
|
|
$
|
165.3
|
|
|
$
|
11.1
|
|
|
$
|
176.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 and 2008, we carried reinsurance
receivables of $543.4 million and $679.3 million,
respectively. These amounts are net of a purchase accounting
adjustment and an allowance for uncollectible reinsurance
receivables. The purchase accounting adjustment resulted from
our acquisition of Wind River Investment Corporation on
September 5, 2003 and is related to discounting the
acquired loss reserves to their present value and applying a
risk margin to the discounted reserves. This adjustment was
$17.5 million at December 31, 2009 and 2008. The
allowance for uncollectible reinsurance receivables was
$12.9 million and $13.7 million at December 31,
2009 and 2008, respectively. The change is primarily due to a
decrease in the amount of our carried reinsurance receivables.
Historically, there have been insolvencies following a period of
competitive pricing in the industry. While we have recorded
allowances for reinsurance receivables based on currently
available information, conditions may change or additional
information might be obtained that may require us to record
additional allowances. On a quarterly basis, we review our
financial exposure to the reinsurance market and assess the
adequacy of our collateral and allowance for uncollectible
reinsurance and continue to take actions to mitigate our
exposure to possible loss.
13
Claims
Management and Administration
Our approach to claims management is designed to investigate
reported incidents at the earliest juncture, to select, manage,
and supervise all legal and adjustment aspects of claims,
including settlement, for the mutual benefit of us, our
professional general agents, wholesale brokers, reinsurers and
insureds. Our professional general agents and wholesale brokers
have no authority to settle claims or otherwise exercise control
over the claims process, with the exception of one statutory
managing general agent. Our claims management staff supervises
or processes all claims. We have a formal claims review process,
and all claims greater than $100,000, gross of reinsurance, are
reviewed by our senior claims management and certain of our
senior executives.
To handle claims, we utilize our own in-house claims department
as well as third-party claims administrators (TPAs)
and assuming reinsurers, to whom we delegate limited claims
handling authority. Our experienced in-house staff of claims
management professionals are assigned to one of five dedicated
claim units: casualty claims, latent exposure claims, property
claims, TPA oversight, and a wholly owned subsidiary that
administers construction defect claims. The dedicated claims
units meet regularly to communicate current developments within
their assigned areas of specialty.
As of December 31, 2009, we had $431.0 million of
gross outstanding loss and loss adjustment expense case
reserves. Claims relating to approximately 80.0% of those
reserves are handled by our in-house claims management
professionals, while claims relating to approximately 5.0% of
those reserves are handled by our TPAs, which send us detailed
financial and claims information on a monthly basis. We also
individually supervise in-house any significant or complicated
TPA handled claims, and conduct two to five day
on-site
audits of our material TPAs at least twice a year. Approximately
15.0% of our reserves are handled by our assuming reinsurers. We
diligently review and supervise the claims handled by our
reinsurers to protect our reputation and minimize exposure.
Reserves
for Unpaid Losses and Loss Adjustment Expenses
Applicable insurance laws require us to maintain reserves to
cover our estimated ultimate losses under insurance policies
that we write and for loss adjustment expenses relating to the
investigation and settlement of policy claims.
We establish loss and loss adjustment expense reserves for
individual claims by evaluating reported claims on the basis of:
|
|
|
|
|
our knowledge of the circumstances surrounding the claim;
|
|
|
|
the severity of injury or damage;
|
|
|
|
jurisdiction of the occurrence;
|
|
|
|
the potential for ultimate exposure;
|
|
|
|
litigation related developments;
|
|
|
|
the type of loss; and
|
|
|
|
our experience with the insured and the line of business and
policy provisions relating to the particular type of claim.
|
We generally estimate such losses and claims costs through an
evaluation of individual reported claims. We also establish
reserves for incurred but not reported losses
(IBNR). IBNR reserves are based in part on
statistical information and in part on industry experience with
respect to the expected number and nature of claims arising from
occurrences that have not been reported. We also establish our
reserves based on our estimates of future trends in claims
severity and other subjective factors. Insurance companies are
not permitted to reserve for a catastrophe until it has
occurred. Reserves are recorded on an undiscounted basis other
than fair value adjustments recorded under purchase accounting.
The reserves are reviewed quarterly by the in-house actuarial
staff. In 2009, the internal workpapers supporting our reserves
were reviewed by independent actuaries for the third quarter of
2009, and our reserves were reviewed in detail by independent
actuaries for the second and fourth quarters of 2009. We do not
rely
14
upon the review by the independent actuaries to develop our
reserves; however, the data is used to corroborate the analysis
performed by the in-house actuarial staff.
With respect to some classes of risks, the period of time
between the occurrence of an insured event and the final
resolution of a claim may be many years, and during this period
it often becomes necessary to adjust the claim estimates either
upward or downward. Certain classes of umbrella and excess
liability that we underwrite have historically had longer
intervals between the occurrence of an insured event, reporting
of the claim and final resolution. In such cases, we must
estimate reserves over long periods of time with the possibility
of several adjustments to reserves. Other classes of insurance
that we underwrite, such as most property insurance,
historically have shorter intervals between the occurrence of an
insured event, reporting of the claim and final resolution.
Reserves with respect to these classes are therefore inherently
less likely to be adjusted.
The loss and loss expense reserving process is intended to
reflect the impact of inflation and other factors affecting loss
payments by taking into account changes in historical payment
patterns and perceived trends. However, there is no precise
method for the subsequent evaluation of the adequacy of the
consideration given to inflation, or to any other specific
factor, or to the way one factor may affect another.
The loss and loss expense development table below shows changes
in our reserves in subsequent years from the prior loss and loss
expense estimates based on experience as of the end of each
succeeding year and in conformity with GAAP. The estimate is
increased or decreased as more information becomes known about
the frequency and severity of losses for individual years. A
redundancy means the original estimate was higher than the
current estimate; a deficiency means that the current estimate
is higher than the original estimate.
The first line of the loss and loss expense development table
shows, for the years indicated, our net reserve liability
including the reserve for incurred but not reported losses. The
first section of the table shows, by year, the cumulative
amounts of losses and loss adjustment expenses paid as of the
end of each succeeding year. The second section sets forth the
re-estimates in later years of incurred losses and loss
expenses, including payments, for the years indicated. The
cumulative redundancy (deficiency) represents, as of
the date indicated, the difference between the latest
re-estimated liability and the reserves as originally estimated.
In 2005, $235.2 million of loss reserves were acquired as a
result of the merger with
Penn-America
Group, Inc. that took place on January 24, 2005. As such,
there are no loss reserves in our loss development table related
to the
Penn-America
Insurance Companies for any years prior to 2005.
15
This loss development table shows development in United America
Indemnitys loss and loss expense reserves on a net basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet reserves:
|
|
$
|
167,868
|
|
|
$
|
131,128
|
|
|
$
|
156,784
|
|
|
$
|
260,820
|
|
|
$
|
314,023
|
|
|
$
|
344,614
|
|
|
$
|
639,291
|
|
|
$
|
735,342
|
|
|
$
|
800,884
|
|
|
$
|
835,838
|
|
|
$
|
730,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative paid as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
$
|
64,139
|
|
|
$
|
26,163
|
|
|
$
|
63,667
|
|
|
$
|
42,779
|
|
|
$
|
76,048
|
|
|
$
|
85,960
|
|
|
$
|
154,069
|
|
|
|
169,899
|
|
|
|
190,723
|
|
|
|
215,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two years later
|
|
|
82,119
|
|
|
|
72,579
|
|
|
|
82,970
|
|
|
|
96,623
|
|
|
|
136,133
|
|
|
|
139,822
|
|
|
|
268,827
|
|
|
|
300,041
|
|
|
|
360,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
118,318
|
|
|
|
75,661
|
|
|
|
118,401
|
|
|
|
141,545
|
|
|
|
171,659
|
|
|
|
180,801
|
|
|
|
355,987
|
|
|
|
413,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
110,640
|
|
|
|
98,654
|
|
|
|
150,062
|
|
|
|
164,181
|
|
|
|
197,596
|
|
|
|
209,938
|
|
|
|
414,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
126,119
|
|
|
|
121,407
|
|
|
|
164,023
|
|
|
|
182,043
|
|
|
|
214,376
|
|
|
|
237,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
143,782
|
|
|
|
129,371
|
|
|
|
177,682
|
|
|
|
193,536
|
|
|
|
235,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
149,413
|
|
|
|
139,090
|
|
|
|
186,173
|
|
|
|
211,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
157,431
|
|
|
|
143,435
|
|
|
|
201,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
162,218
|
|
|
|
156,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
174,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Re-estimated liability as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
167,868
|
|
|
$
|
131,128
|
|
|
$
|
156,784
|
|
|
$
|
260,820
|
|
|
$
|
314,023
|
|
|
$
|
344,614
|
|
|
$
|
639,291
|
|
|
$
|
735,342
|
|
|
$
|
800,884
|
|
|
$
|
835,838
|
|
|
$
|
730,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
157,602
|
|
|
|
124,896
|
|
|
|
228,207
|
|
|
|
261,465
|
|
|
|
313,213
|
|
|
|
343,332
|
|
|
|
632,327
|
|
|
|
716,361
|
|
|
|
832,733
|
|
|
|
827,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two years later
|
|
|
155,324
|
|
|
|
180,044
|
|
|
|
228,391
|
|
|
|
263,995
|
|
|
|
315,230
|
|
|
|
326,031
|
|
|
|
629,859
|
|
|
|
732,056
|
|
|
|
812,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
192,675
|
|
|
|
180,202
|
|
|
|
231,133
|
|
|
|
268,149
|
|
|
|
298,989
|
|
|
|
323,696
|
|
|
|
635,504
|
|
|
|
707,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
192,714
|
|
|
|
175,198
|
|
|
|
236,271
|
|
|
|
252,078
|
|
|
|
301,660
|
|
|
|
332,302
|
|
|
|
622,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
175,478
|
|
|
|
179,727
|
|
|
|
226,116
|
|
|
|
264,058
|
|
|
|
308,775
|
|
|
|
323,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
180,735
|
|
|
|
173,424
|
|
|
|
242,666
|
|
|
|
272,806
|
|
|
|
303,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
177,025
|
|
|
|
187,441
|
|
|
|
254,110
|
|
|
|
266,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
193,337
|
|
|
|
198,999
|
|
|
|
249,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
201,812
|
|
|
|
196,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
201,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative redundancy/(deficiency)
|
|
$
|
(33,556
|
)
|
|
$
|
(65,295
|
)
|
|
$
|
(93,077
|
)
|
|
$
|
(6,060
|
)
|
|
$
|
10,877
|
|
|
$
|
21,067
|
|
|
$
|
17,169
|
|
|
$
|
27,817
|
|
|
$
|
(11,848
|
)
|
|
$
|
8,396
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Liability end of year
|
|
|
805,717
|
|
|
|
800,630
|
|
|
|
907,357
|
|
|
|
2,004,422
|
|
|
|
2,059,760
|
|
|
|
1,876,510
|
|
|
|
1,914,224
|
|
|
|
1,702,010
|
|
|
|
1,503,237
|
|
|
|
1,506,429
|
|
|
|
1,257,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Reinsurance recoverables
|
|
|
637,849
|
|
|
|
669,502
|
|
|
|
750,573
|
|
|
|
1,743,602
|
|
|
|
1,745,737
|
|
|
|
1,531,896
|
|
|
|
1,274,933
|
|
|
|
966,668
|
|
|
|
702,353
|
|
|
|
670,591
|
|
|
|
527,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability-end of year
|
|
|
167,868
|
|
|
|
131,128
|
|
|
|
156,784
|
|
|
|
260,820
|
|
|
|
314,023
|
|
|
|
344,614
|
|
|
|
639,291
|
|
|
|
735,342
|
|
|
|
800,884
|
|
|
|
835,838
|
|
|
|
730,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross re-estimated liability
|
|
|
1,167,929
|
|
|
|
1,284,806
|
|
|
|
1,604,977
|
|
|
|
1,707,488
|
|
|
|
1,594,873
|
|
|
|
1,369,457
|
|
|
|
1,500,971
|
|
|
|
1,324,044
|
|
|
|
1,490,514
|
|
|
|
1,461,854
|
|
|
|
1,257,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Re-estimated recoverables at December 31, 2009
|
|
|
966,505
|
|
|
|
1,088,383
|
|
|
|
1,355,116
|
|
|
|
1,440,608
|
|
|
|
1,291,727
|
|
|
|
1,045,910
|
|
|
|
878,849
|
|
|
|
616,519
|
|
|
|
677,782
|
|
|
|
634,412
|
|
|
|
527,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-estimated liability at December 31, 2009
|
|
$
|
201,424
|
|
|
$
|
196,423
|
|
|
$
|
249,861
|
|
|
$
|
266,880
|
|
|
$
|
303,146
|
|
|
$
|
323,547
|
|
|
$
|
622,122
|
|
|
$
|
707,525
|
|
|
$
|
812,732
|
|
|
$
|
827,442
|
|
|
$
|
730,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cumulative
redundancy/(deficiency)
|
|
$
|
(362,212
|
)
|
|
$
|
(484,176
|
)
|
|
$
|
(697,620
|
)
|
|
$
|
296,934
|
|
|
$
|
464,887
|
|
|
$
|
507,053
|
|
|
$
|
413,253
|
|
|
$
|
377,966
|
|
|
$
|
12,723
|
|
|
$
|
44,575
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2009, we experienced a decrease in prior accident year
net loss and loss adjustment expenses of $9.1 million,
which includes a decrease in our allowance for reinsurance
recoverables of $0.7 million due to a decrease in the
amount of our carried insurance receivables. The remaining
$8.4 million represents decreases to loss and loss
adjustment expense reserves related to accident years 2008 and
prior.
The loss reserves decrease of $8.4 million consisted a
$5.5 million reduction in property lines, a
$2.9 million reduction in general liability lines, and a
$4.7 million reduction in umbrella lines, partially offset
by a $4.7 million increase in professional liability lines:
|
|
|
|
|
The reduction in the property lines primarily consisted of
reductions related to accident year 2006 through 2008 due to
better than expected loss emergence in brokerage.
|
|
|
|
The reduction in the general liability lines primarily consisted
of reductions of $13.5 million related to accident years
2006 and prior due to loss emergence that had been consistently
lower than expected during the year, partially offset by
increases of $10.6 million to accident years 2007 and 2008
that were driven by a large claim and an increase in our
construction defect provisions for Penn America.
|
|
|
|
The reduction in the umbrella lines primarily consisted of net
reductions of $5.1 million related to accident years 2007
and prior that were driven by loss emergence throughout the year
that was consistently better than expected, partially offset by
increases of $0.4 million related to accident year 2008.
|
16
|
|
|
|
|
The increase to the professional liability lines primarily
consisted of increases of $10.1 million related to accident
years 2007 and 2008 due to an increase in severity, partially
offset by net reductions of $5.4 million primarily related
to accident years 2006 and prior.
|
See Note 8 of the notes to consolidated financial
statements in Item 8 of Part II of this report for a
reconciliation of United America Indemnitys liability for
losses and loss adjustment expenses, net of reinsurance ceded.
The adverse development noted from 1999 through 2002 is
primarily related to increasing asbestos and environmental
(A&E) reserves. The insurance industry
continues to receive a substantial number of asbestos-related
bodily injury claims, with an increasing focus being directed
toward installers of products containing asbestos rather than
against asbestos manufacturers. This shift has resulted in
significant insurance coverage litigation implicating applicable
coverage defenses or determinations, if any, including but not
limited to, determinations as to whether or not an asbestos
related bodily injury claim is subject to aggregate limits of
liability found in most comprehensive general liability
policies. In response to these developments, management
increased gross and net A&E reserves during 2008 to reflect
its best estimate of A&E exposures.
Asbestos
and Environmental Exposure
Our environmental exposure arises from the sale of general
liability and commercial multi-peril insurance. Currently, our
policies continue to exclude classic environmental contamination
claims. In some states we are required, however, depending on
the circumstances, to provide coverage for certain bodily injury
claims, such as an individuals exposure to a release of
chemicals. We have also issued policies that were intended to
provide limited pollution and environmental coverage. These
policies were specific to certain types of products underwritten
by us. We have also received a number of asbestos-related
claims, the majority of which are declined based on
well-established exclusions. In establishing the liability for
unpaid losses and loss adjustment expenses related to A&E
exposures, management considers facts currently known and the
current state of the law and coverage litigations. Estimates of
these liabilities are reviewed and updated continually.
Significant uncertainty remains as to our ultimate liability for
asbestos-related claims due to such factors as the long latency
period between asbestos exposure and disease manifestation and
the resulting potential for involvement of multiple policy
periods for individual claims, the increase in the volume of
claims made by plaintiffs who claim exposure but who have no
symptoms of asbestos-related disease, and an increase in claims
subject to coverages under general liability policies that do
not contain aggregate limits of liability. There is also the
possibility of federal legislation that would address asbestos
litigation.
The liability for unpaid losses and loss adjustment expenses,
inclusive of A&E reserves, reflects our best estimates for
future amounts needed to pay losses and related adjustment
expenses as of each of the balance sheet dates reflected in the
financial statements herein in accordance with GAAP. As of
December 31, 2009, we had $21.1 million of net loss
reserves for asbestos-related claims and $10.5 million for
environmental claims. We attempt to estimate the full impact of
the A&E exposures by establishing specific case reserves on
all known losses. See Note 8 of the notes to the
consolidated financial statements in Item 8 of Part II
of this report for tables showing our gross and net reserves for
A&E losses.
In addition to the factors referenced above, establishing
reserves for A&E and other mass tort claims involves more
judgment than other types of claims due to, among other things,
inconsistent court decisions, an increase in bankruptcy filings
as a result of asbestos-related liabilities, and judicial
interpretations that often expand theories of recovery and
broaden the scope of coverage. The insurance industry continues
to receive a substantial number of asbestos-related bodily
injury claims, with an increasing focus being directed toward
other parties, including installers of products containing
asbestos rather than against asbestos manufacturers. This shift
has resulted in significant insurance coverage litigation
implicating applicable coverage defenses or determinations, if
any, including but not limited to, determinations as to whether
or not an asbestos related bodily injury claim is subject to
aggregate limits of liability found in most comprehensive
general liability policies. In response to these developments,
management increased gross and net A&E reserves during the
third quarter of 2007 to reflect its best estimate of A&E
exposures. In 2009, one of our insurance companies was dismissed
from a lawsuit seeking coverage from it and other unrelated
insurance companies. The suit involved issues related to
approximately 3,900 existing asbestos related bodily injury
claims and future claims. The dismissal was the result of a
settlement of a
17
disputed claim related to accident year 1984. The settlement is
conditioned upon certain legal events occurring which will
trigger financial obligations by the insurance company.
Management will continue to monitor the developments of the
litigation to determine if any additional financial exposure is
present.
See Note 8 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for the
survival ratios on a gross basis for our open A&E claims.
Investments
Our investment policy is determined by the Investment Committee
of our Board of Directors. We have engaged third-party
investment advisors to oversee our investments and to make
recommendations to the Investment Committee of our Board of
Directors. Our investment policy allows us to invest in taxable
and tax-exempt fixed income investments including corporate
loans and as well as publicly traded and private equity
investments. With respect to fixed income investments, the
maximum exposure per issuer varies as a function of the credit
quality of the security. For our corporate loan portfolio, the
maximum exposure per issuer is limited to 5% of the market value
of the corporate loan portfolio. The allocation between taxable
and tax-exempt bonds is determined based on market conditions
and tax considerations, including the applicability of the
alternative minimum tax. The maximum allowable investment in
equity securities under our investment policy is 30% of our GAAP
equity, or $250.0 million at December 31, 2009. As of
December 31, 2009, we had $1,694.1 million of
investments and cash and cash equivalent assets, including
$73.7 million of equity and limited partnership investments
and $138.9 million in corporate loans, less a
$37.3 million payable for securities purchased.
Insurance company investments must comply with applicable
statutory regulations that prescribe the type, quality and
concentration of investments. These regulations permit
investments, within specified limits and subject to certain
qualifications, in federal, state, and municipal obligations,
corporate bonds, and preferred and common equity securities.
The following table summarizes by type the estimated fair value
of United America Indemnitys investments and cash and cash
equivalents as of December 31, 2009, 2008, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Estimated
|
|
|
Percent
|
|
|
Estimated
|
|
|
Percent
|
|
|
Estimated
|
|
|
Percent
|
|
|
|
Fair Value
|
|
|
of Total
|
|
|
Fair Value
|
|
|
of Total
|
|
|
Fair Value
|
|
|
of Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
186,087
|
|
|
|
10.8
|
%
|
|
$
|
292,604
|
|
|
|
18.3
|
%
|
|
$
|
244,321
|
|
|
|
13.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency obligations
|
|
|
236,088
|
|
|
|
13.6
|
|
|
|
152,777
|
|
|
|
9.6
|
|
|
|
186,808
|
|
|
|
10.6
|
|
Obligations of states and political subdivisions
|
|
|
225,598
|
|
|
|
13.0
|
|
|
|
243,030
|
|
|
|
15.2
|
|
|
|
213,074
|
|
|
|
12.1
|
|
Mortgage-backed securities(1)
|
|
|
364,000
|
|
|
|
21.0
|
|
|
|
384,069
|
|
|
|
24.0
|
|
|
|
456,932
|
|
|
|
25.9
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
144,457
|
|
|
|
9.0
|
|
|
|
175,160
|
|
|
|
9.9
|
|
Asset-backed securities
|
|
|
114,163
|
|
|
|
6.6
|
|
|
|
16,553
|
|
|
|
1.0
|
|
|
|
28,827
|
|
|
|
1.6
|
|
Corporate notes and loans
|
|
|
460,730
|
|
|
|
26.6
|
|
|
|
213,655
|
|
|
|
13.4
|
|
|
|
248,410
|
|
|
|
14.0
|
|
Foreign corporate bonds
|
|
|
70,993
|
|
|
|
4.1
|
|
|
|
29,150
|
|
|
|
1.8
|
|
|
|
32,107
|
|
|
|
1.8
|
|
Other bonds
|
|
|
|
|
|
|
|
|
|
|
21,283
|
|
|
|
1.3
|
|
|
|
29,248
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
1,471,572
|
|
|
|
84.9
|
|
|
|
1,204,974
|
|
|
|
75.3
|
|
|
|
1,370,566
|
|
|
|
77.6
|
|
Equity securities
|
|
|
65,656
|
|
|
|
3.8
|
|
|
|
55,278
|
|
|
|
3.5
|
|
|
|
85,677
|
|
|
|
4.9
|
|
Other investments
|
|
|
7,999
|
|
|
|
0.5
|
|
|
|
46,672
|
|
|
|
2.9
|
|
|
|
64,539
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments and cash and cash equivalents(2)
|
|
$
|
1,731,314
|
|
|
|
100.0
|
%
|
|
$
|
1,599,528
|
|
|
|
100.0
|
%
|
|
$
|
1,765,103
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
(1) |
|
Includes collateralized mortgage obligations of $21,959,
$34,395, and $50,210 for 2009, 2008, and 2007, respectively. |
|
(2) |
|
Does not include payable for securities purchased of $37,258 and
$710 for 2009 and 2008, respectively. |
Although we generally intend to hold fixed maturities to
recovery
and/or
maturity, we regularly reevaluate our position based upon market
conditions. As of December 31, 2009, our fixed maturities
had a weighted average maturity of 8.69 years and a
weighted average duration, including cash and short-term
investments, of 2.5 years. Our financial statements reflect
a net unrealized gain on fixed maturities available for sale as
of December 31, 2009 of $48.5 million on a pre-tax
basis.
The following table shows the average amount of fixed
maturities, income earned on fixed maturities, and the book
yield thereon for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Average fixed maturities at book value
|
|
$
|
1,307,718
|
|
|
$
|
1,275,700
|
|
|
$
|
1,311,033
|
|
Gross income on fixed maturities(1)
|
|
|
62,099
|
|
|
|
63,268
|
|
|
|
65,908
|
|
Book yield
|
|
|
4.75
|
%
|
|
|
4.96
|
%
|
|
|
5.03
|
%
|
|
|
|
(1) |
|
Represents income earned by fixed maturities, gross of
investment expenses and excluding realized gains and losses. |
We expect that default rates on collateralized commercial real
estate obligations and asset-backed securities may continue to
rise. To protect ourselves against this, we have structured our
portfolio to reduce the risk of default. Of the
$364.0 million of residential mortgage-backed securities,
$342.0 million is invested in U.S. agency paper and
$22.0 million is invested in collateralized mortgage
obligations, of which $20.0 million, or 91.1%, are rated
AAA. Of the $114.2 million in asset-backed securities,
87.1% are rated AAA. The weighted average credit enhancement for
our asset-backed securities is 20.8. In addition, in order to
minimize the risk of commercial mortgage backed securities
(CMBS) defaults due to falling commercial property
values, we sold all of our CMBS in the fourth quarter of 2009
and currently do not have any direct exposure to this sector. We
also face liquidity risk. Liquidity risk is when the fair value
of an investment is not able to be realized due to lack of
interest by outside parties in the marketplace. We attempt to
diversify our investment holdings to minimize this risk. Our
investment managers run periodic analysis of liquidity costs to
the fixed income portfolio. We also face credit risk. 90.6% of
our bonds are investment grade securities. 50.4% of our bonds
are rated AAA. See Quantitative and Qualitative
Disclosures About Market Risk in Item 7A of
Part II of this report for a more detailed discussion of
the credit market and our investment strategy.
19
The following table summarizes, by Standard &
Poors rating classifications, the estimated fair value of
United America Indemnitys investments in fixed
maturities, as of December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Estimated
|
|
|
Percent
|
|
|
Estimated
|
|
|
Percent
|
|
|
|
Fair Value
|
|
|
of Total
|
|
|
Fair Value
|
|
|
of Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
$
|
740,658
|
|
|
|
50.4
|
%
|
|
$
|
812,659
|
|
|
|
67.4
|
%
|
AA
|
|
|
231,403
|
|
|
|
15.7
|
|
|
|
139,906
|
|
|
|
11.6
|
|
A
|
|
|
299,703
|
|
|
|
20.4
|
|
|
|
197,345
|
|
|
|
16.4
|
|
BBB
|
|
|
60,439
|
|
|
|
4.1
|
|
|
|
48,388
|
|
|
|
4.0
|
|
BB
|
|
|
47,816
|
|
|
|
3.2
|
|
|
|
3,696
|
|
|
|
0.3
|
|
B
|
|
|
78,212
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
CCC
|
|
|
5,856
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
C
|
|
|
|
|
|
|
|
|
|
|
299
|
|
|
|
0.1
|
|
Not rated
|
|
|
7,485
|
|
|
|
0.5
|
|
|
|
2,681
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
1,471,572
|
|
|
|
100.0
|
%
|
|
$
|
1,204,974
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the expected maturity
distribution of United America Indemnitys fixed maturities
portfolio at their estimated market value as of
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Estimated
|
|
|
Percent of
|
|
|
Estimated
|
|
|
Percent of
|
|
|
|
Market Value
|
|
|
Total
|
|
|
Market Value
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
59,587
|
|
|
|
4.0
|
%
|
|
$
|
49,303
|
|
|
|
4.1
|
%
|
More than one year to five years
|
|
|
718,081
|
|
|
|
48.8
|
|
|
|
287,273
|
|
|
|
23.8
|
|
More than five years to ten years
|
|
|
149,785
|
|
|
|
10.2
|
|
|
|
202,482
|
|
|
|
16.8
|
|
More than ten years to fifteen years
|
|
|
26,679
|
|
|
|
1.8
|
|
|
|
73,108
|
|
|
|
6.1
|
|
More than fifteen years
|
|
|
39,277
|
|
|
|
2.7
|
|
|
|
47,729
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with fixed maturities
|
|
|
993,409
|
|
|
|
67.5
|
|
|
|
659,895
|
|
|
|
54.8
|
|
Mortgaged-backed securities
|
|
|
364,000
|
|
|
|
24.7
|
|
|
|
384,069
|
|
|
|
31.9
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
144,457
|
|
|
|
12.0
|
|
Asset-backed securities
|
|
|
114,163
|
|
|
|
7.8
|
|
|
|
16,553
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
1,471,572
|
|
|
|
100.0
|
%
|
|
$
|
1,204,974
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected weighted average duration of our asset-backed and
mortgage-backed securities is 2.5 years.
The value of our portfolio of bonds is inversely correlated to
changes in market interest rates. In addition, some of our bonds
have call or prepayment options. This could subject us to
reinvestment risk should interest rates fall and issuers call
their securities and we are forced to invest the proceeds at
lower interest rates. We seek to mitigate our reinvestment risk
by investing in securities with varied maturity dates, so that
only a portion of the portfolio will mature, be called, or be
prepaid at any point in time.
Our investments in corporate loans were valued at
$138.9 million at December 31, 2009. Corporate loans,
a new investment vehicle in 2009, sometimes also referred to as
leveraged loans, are primarily investments in senior secured
floating rate loans that banks have made to corporations. The
loans are generally priced at an interest rate spread over LIBOR
that resets every 60 to 90 days. As a result, this asset
class provides protection against rising interest rates.
However, this asset class is subject to default risk since these
investments are typically below investment grade. To mitigate
this risk, our investment managers perform an in-depth
structural analysis. As part of this analysis, they focus on the
strength of any security granted to the lenders, the position of
the loan in the companys capital structure and the
appropriate covenant protection. In addition, as part of our
risk control, our investment managers maintain appropriate
portfolio diversification by limiting issuer and industry
exposure.
20
As of December 31, 2009, we had aggregate equity securities
of $65.6 million that consisted of $63.0 million in
common stocks and $2.6 million in preferred stocks.
Our investments in other invested assets are comprised primarily
of limited liability partnerships, and were valued at
$8.0 million at December 31, 2009. Of this amount,
$6.9 million was comprised of securities for which there is
no readily available independent market price, and the remaining
$1.1 million was related to a limited partnership which
holds convertible preferred securities of a privately held
company. These securities are subject to an appraisal action in
Delaware State Court. Until the appraisal action is resolved,
our ownership interest in this limited partnership is wholly
illiquid. The estimated fair value of these limited partnerships
is determined by the general partner of each limited partnership
based on comparisons to transactions involving similar
investments. Material assumptions and factors utilized in
pricing these securities include future cash flows, constant
default rates, recovery rates, and any market clearing activity
that may have occurred since the prior month-end pricing period.
We obtain the value of the partnerships at the end of each
reporting period; however, we are not provided with a detailed
listing of the investments held by these partnerships. We
receive annual audited financial statements from each of the
partnerships we own.
Realized gains and (losses), including other than temporary
impairments, for the years ended December 31, 2009, 2008,
and 2007 were $15.9 million, $(50.3) million, and
$1.0 million, respectively.
Competition
We compete with numerous domestic and international insurance
companies and reinsurers, mutual companies, specialty insurance
companies, underwriting agencies, diversified financial services
companies, Lloyds syndicates, risk retention groups,
insurance buying groups, risk securitization products and
alternative self-insurance mechanisms. In particular, we compete
against insurance subsidiaries of the groups in the specialty
insurance market noted below, insurance companies, and others:
|
|
|
|
|
American International Group;
|
|
|
|
Argo Group International Holdings, Ltd.;
|
|
|
|
Berkshire Hathaway;
|
|
|
|
Everest Re Group, Ltd.;
|
|
|
|
Great American Insurance Group;
|
|
|
|
HCC Insurance Holdings, Inc.;
|
|
|
|
IFG Companies;
|
|
|
|
JRG Reinsurance Company, Ltd.;
|
|
|
|
Maiden Holdings, Ltd.;
|
|
|
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Markel Corporation;
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Max Capital Group, Ltd.;
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Nationwide Insurance;
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Navigators Insurance Group;
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RLI Corporation;
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Torus Insurance Holdings, Ltd.;
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W.R. Berkley Corporation;
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Western World Insurance Group.
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21
In addition to the companies mentioned above, we are facing
competition from standard line companies who are continuing to
write risks that traditionally had been written by excess and
surplus lines carriers, Bermuda companies who are establishing
relationships with wholesale brokers, and other excess and
surplus competitors.
Competition may also take the form of lower prices, broader
coverages, greater product flexibility, higher quality services,
reputation and financial strength or higher ratings by
independent rating agencies. In all of our markets, we compete
by developing insurance products to satisfy well-defined market
needs and by maintaining relationships with brokers and insureds
that rely on our expertise. For our program and specialty
wholesale products, offering and underwriting products that are
not readily available is our principal means of differentiating
ourselves from our competition. Each of our products has its own
distinct competitive environment. We seek to compete through
innovative products, appropriate pricing, niche underwriting
expertise, and quality service to policyholders, general
agencies and brokers.
A number of recent, proposed, or potential legislative or
marketplace developments could further increase competition in
our industry. These developments include an influx of new
capital that resulted from the formation of new insurers in the
marketplace and existing companies that have attempted to expand
their business as a result of better pricing or terms,
legislative mandates for insurers to provide certain types of
coverage in areas where existing insurers do business which
could eliminate the opportunities to write those coverages, and
proposed federal legislation which would establish national
standards for state insurance regulation.
These developments are making the property and casualty
insurance marketplace more competitive by increasing the supply
of insurance capacity.
Employees
We have approximately 390 employees, most of whom are
located at our Bala Cynwyd, Pennsylvania office. This includes
two individuals who operate out of our Bermuda office and 67
individuals who operate out of our field offices that are
located in Arizona, California, Georgia, Illinois, New York,
North Carolina, and Texas. In addition, we have contracts with
international insurance service providers based in Bermuda to
provide services to our Reinsurance Operations.
Our Bermuda employees are either permanent residents of Bermuda
who possess Bermuda status or are considered residents by the
applicable employment visas issued by the Bermuda immigration
authorities.
None of our employees are covered by collective bargaining
agreements, and our management believes that our relationship
with our employees is excellent.
Ratings
A.M. Best ratings for the industry range from
A++ (Superior) to F (In Liquidation)
with some companies not being rated. The United National
Insurance Companies,
Penn-America
Insurance Companies, and Wind River Reinsurance are currently
rated A (Excellent) by A.M. Best, the third
highest of sixteen rating categories.
Publications of A.M. Best indicate that A
(Excellent) ratings are assigned to those companies that, in
A.M. Bests opinion, have an excellent ability to meet
their ongoing obligations to policyholders. In evaluating a
companys financial and operating performance,
A.M. Best reviews its profitability, leverage and
liquidity, as well as its spread of risk, the quality and
appropriateness of its reinsurance, the quality and
diversification of its assets, the adequacy of its policy and
loss reserves, the adequacy of its surplus, its capital
structure and the experience and objectives of its management.
These ratings are based on factors relevant to policyholders,
general agencies, insurance brokers and intermediaries and are
not directed to the protection of investors.
Regulation
General
The business of insurance is regulated in most countries,
although the degree and type of regulation varies significantly
from one jurisdiction to another. In Bermuda, we operate under a
relatively less intensive regulatory
22
framework than exists in the United States, where we are subject
to extensive regulation, primarily by the various State
departments of insurance.
As a holding company, United America Indemnity is not subject to
any insurance regulation by any authority in the Cayman Islands.
U.S.
Regulation
We have seven operating insurance subsidiaries domiciled in the
United States; United National Insurance Company,
Penn-America
Insurance Company, and Penn-Star Insurance Company, which are
domiciled in Pennsylvania; Diamond State Insurance Company and
United National Casualty Insurance Company, which are domiciled
in Indiana; United National Specialty Insurance Company, which
is domiciled in Wisconsin; and Penn-Patriot Insurance Company,
which is domiciled in Virginia. We refer to these companies
collectively as our U.S. Insurance Subsidiaries.
As the indirect parent of the U.S. Insurance Subsidiaries,
we are subject to the insurance holding company laws of Indiana,
Pennsylvania, Virginia, and Wisconsin. These laws generally
require each company of our U.S. Insurance Subsidiaries to
register with its respective domestic state insurance department
and to furnish annually financial and other information about
the operations of the companies within our insurance holding
company system. Generally, all material transactions among
affiliated companies in the holding company system to which any
of the U.S. Insurance Subsidiaries is a party must be fair,
and, if material or of a specified category, require prior
notice and approval or absence of disapproval by the insurance
department where the subsidiary is domiciled. Material
transactions include sales, loans, reinsurance agreements, and
service agreements with the non-insurance companies within our
family of companies, our Insurance Operations, or our
Reinsurance Operations.
Changes
of Control
Before a person can acquire control of a U.S. insurance
company, prior written approval must be obtained from the
insurance commissioner of the state where the domestic insurer
is domiciled. Prior to granting approval of an application to
acquire control of a domestic insurer, the state insurance
commissioner will consider factors such as the financial
strength of the applicant, the integrity and management of the
applicants Board of Directors and executive officers, the
acquirers plans for the management, Board of Directors and
executive officers of the company being acquired, the
acquirers plans for the future operations of the domestic
insurer and any anti-competitive results that may arise from the
consummation of the acquisition of control. Generally, state
statutes provide that control over a domestic insurer is
presumed to exist if any person, directly or indirectly, owns,
controls, holds with the power to vote, or holds proxies
representing, 10% or more of the voting securities of the
domestic insurer. Because a person acquiring 10% or more of our
common shares would indirectly control the same percentage of
the stock of the U.S. Insurance Subsidiaries, the insurance
change of control laws of Indiana, Pennsylvania, Virginia, and
Wisconsin would likely apply to such a transaction. While our
articles of association limit the voting power of any
U.S. shareholder to less than 9.5%, there can be no
assurance that the applicable state insurance regulator would
agree that such shareholder did not control the applicable
Insurance Operations company.
These laws may discourage potential acquisition proposals and
may delay, deter or prevent a change of control of United
America Indemnity, including through transactions, and in
particular unsolicited transactions, that some or all of the
shareholders of United America Indemnity might consider
desirable.
Notice must also be provided to the IID after a person acquires
10% or more of the voting securities of Wind River Reinsurance.
Failure to do so may cause Wind River Reinsurance to be removed
from the IID listing. In the event of a change in control
and/or
merger of Wind River Reinsurance, a complete application must be
filed with the IID, including all documents that are necessary
for the IID to determine if Wind River Reinsurance continues to
be in compliance for listing with the IID. The IID may determine
after a change in control
and/or
merger that Wind River Reinsurance is not in compliance and may
remove it from continued listing.
23
State
Insurance Regulation
State insurance authorities have broad regulatory powers with
respect to various aspects of the business of
U.S. insurance companies, including but not limited to
licensing companies to transact admitted business or determining
eligibility to write surplus lines business, accreditation of
reinsurers, admittance of assets to statutory surplus,
regulating unfair trade and claims practices, establishing
reserve requirements and solvency standards, regulating
investments and dividends, approving policy forms and related
materials in certain instances and approving premium rates in
certain instances. State insurance laws and regulations may
require the U.S. Insurance Subsidiaries to file financial
statements with insurance departments everywhere they will be
licensed or eligible or accredited to conduct insurance
business, and their operations are subject to review by those
departments at any time. The U.S. Insurance Subsidiaries
prepare statutory financial statements in accordance with
statutory accounting principles, or SAP, and
procedures prescribed or permitted by these departments. State
insurance departments also conduct periodic examinations of the
books and records, financial reporting, policy filings and
market conduct of insurance companies domiciled in their states,
generally once every three to five years, although market
conduct examinations may take place at any time. These
examinations are generally carried out in cooperation with the
insurance departments of other states under guidelines
promulgated by the NAIC. In addition, admitted insurers are
subject to targeted market conduct examinations involving
specific insurers by state insurance regulators in any state in
which the insurer is admitted. The insurance departments for the
states of Pennsylvania, Indiana, Wisconsin, and Virginia
completed their financial examinations of our
U.S. Insurance Subsidiaries for the periods ended
December 31, 2007. Their final reports were issued in 2009,
and there were no materially adverse findings.
Insurance
Regulatory Information System Ratios
The NAIC Insurance Regulatory Information System, or
IRIS, was developed by a committee of the state
insurance regulators and is intended primarily to assist state
insurance departments in executing their statutory mandates to
oversee the financial condition of insurance companies operating
in their respective states. IRIS identifies twelve industry
ratios and specifies usual values for each ratio.
Departure from the usual values of the ratios can lead to
inquiries from individual state insurance commissioners as to
certain aspects of an insurers business. Insurers that
report four or more ratios that fall outside the range of usual
values are generally targeted for increased regulatory review.
The following summarizes the 2009 IRIS ratio results for our
insurance companies in our Insurance Operations:
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Except for United National Insurance Company, our insurance
companies had an unusual value for the change in net written
premiums resulting from the decline in gross written premiums
during 2009 and the result of an unearned premium transfer
within the group.
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Penn-America
Insurance Company and United National Insurance Company had an
unusual value for investment yield. The investment yield for
each company exceeded the high end of the range due to dividend
income received from its wholly-owned insurance subsidiaries.
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Diamond State Insurance Company had an unusual value for a
liquidity ratio, equal to the ratio of liabilities, adjusted for
deferred agents balances, to liquid assets. The unusual
value results from a high concentration of investments in
wholly-owned insurance subsidiaries which are excluded from the
value of liquid assets. Diamond State Insurance Company is a
participant in a pooling arrangement with our other
U.S. insurance subsidiaries and has proportional surplus to
meet its share of current and long-term obligations.
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We do not believe that the above departures from the usual
values will subject us to further regulatory review.
Risk-Based
Capital Regulations
The state insurance departments of Indiana, Pennsylvania,
Virginia, and Wisconsin require that each domestic insurer
report its risk-based capital based on a formula calculated by
applying factors to various asset, premium and reserve items.
The formula takes into account the risk characteristics of the
insurer, including asset risk, insurance risk, interest rate
risk and business risk. The respective state insurance
regulators use the formula as an early warning regulatory tool
to identify possible inadequately capitalized insurers for
purposes of initiating regulatory
24
action, and generally not as a means to rank insurers. State
insurance laws impose broad confidentiality requirements on
those engaged in the insurance business (including insurers,
general agencies, brokers and others) and on state insurance
departments as to the use and publication of risk-based capital
data. The respective state insurance regulators have explicit
regulatory authority to require various actions by, or to take
various actions against, insurers whose total adjusted capital
does not exceed certain company action level risk-based capital
levels.
Based on the standards currently adopted, we reported in our
2009 statutory filings that the capital and surplus of our
U.S. Insurance Companies are above the prescribed Company
Action
Level Risk-based
Capital requirements.
Statutory
Accounting Principles (SAP)
SAP is 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. Accordingly, statutory accounting
focuses on valuing assets and liabilities of insurers at
financial reporting dates in accordance with appropriate
insurance laws, regulatory provisions, and practices prescribed
or permitted by each insurers domiciliary state.
GAAP is concerned with a companys solvency, but it is also
concerned with other financial measurements, such as income and
cash flows. Accordingly, GAAP gives more consideration to
appropriate matching of revenue and expenses. As a direct
result, different line item groupings of assets and liabilities
and different amounts of assets and liabilities are reflected in
financial statements prepared in accordance with GAAP than
financial statements prepared in accordance with SAP.
Statutory accounting practices established by the NAIC and
adopted in part by the Indiana, Pennsylvania, Virginia, and
Wisconsin regulators determine, among other things, the amount
of statutory surplus and statutory net income of the United
National Insurance Companies and
Penn-America
Insurance Companies and thus determine, in part, the amount of
funds these subsidiaries have available to pay dividends.
State
Dividend Limitations
Under Indiana law, Diamond State Insurance Company and United
National Casualty Insurance Company may not pay any dividend or
make any distribution of cash or other property, the fair market
value of which, together with that of any other dividends or
distributions made within the 12 consecutive months ending on
the date on which the proposed dividend or distribution is
scheduled to be made, exceeds the greater of (1) 10% of its
surplus as of the 31st day of December of the last
preceding year, or (2) its net income for the 12 month
period ending on the 31st day of December of the last
preceding year, unless the commissioner approves the proposed
payment or fails to disapprove such payment within 30 days
after receiving notice of such payment. An additional limitation
is that Indiana does not permit a domestic insurer to declare or
pay a dividend except out of earned surplus unless otherwise
approved by the commissioner before the dividend is paid. See
Note 16 of the notes to consolidated financial statements
in Item 8 of Part II of this report for the dividends
declared and paid by the United National Insurance Companies and
the
Penn-America
Insurance Companies in 2009.
Under Pennsylvania law, United National Insurance Company,
Penn-America
Insurance Company, and Penn-Star Insurance Company may not pay
any dividend or make any distribution that, together with other
dividends or distributions made within the preceding 12
consecutive months, exceeds the greater of (1) 10% of its
surplus as shown on its last annual statement on file with the
commissioner or (2) its net income for the period covered
by such statement, not including pro rata distributions of any
class of its own securities, unless the commissioner has
received notice from the insurer of the declaration of the
dividend and the commissioner approves the proposed payment or
fails to disapprove such payment within 30 days after
receiving notice of such payment. An additional limitation is
that Pennsylvania does not permit a domestic insurer to declare
or pay a dividend except out of unassigned funds (surplus)
unless otherwise approved by the commissioner before the
dividend is paid. Furthermore, no dividend or other distribution
may be declared or paid by a Pennsylvania insurance company that
would reduce its total capital and surplus to an amount that is
less than the amount required by the Insurance Department for
the kind or kinds of business that it is authorized to transact.
25
Under Virginia law, Penn-Patriot Insurance Company may not pay
any dividend or make any distribution of cash or other property,
the fair market value of which, together with that of any other
dividends or distributions made within the preceding 12
consecutive months exceeds the lesser of either (1) 10% of
its surplus as of the 31st day of December of the last
preceding year, or (2) its net income, not including net
realized capital gains, for the 12 month period ending on
the 31st day of December of the last preceding year, not
including pro rata distributions of any class of its securities,
unless the commissioner approves the proposed payment or fails
to disapprove such payment within 30 days after receiving
notice of such payment. In determining whether the dividend must
be approved, undistributed net income from the second and third
preceding years, not including net realized capital gains, may
be carried forward.
Under Wisconsin law, United National Specialty Insurance Company
may not pay any dividend or make any distribution of cash or
other property, other than a proportional distribution of its
stock, the fair market value of which, together with that of
other dividends paid or credited and distributions made within
the preceding 12 months, exceeds the lesser of (1) 10%
of its surplus as of the preceding 31st day of December, or
(2) the greater of (a) its net income for the calendar
year preceding the date of the dividend or distribution, minus
realized capital gains for that calendar year or (b) the
aggregate of its net income for the three calendar years
preceding the date of the dividend or distribution, minus
realized capital gains for those calendar years and minus
dividends paid or credited and distributions made within the
first two of the preceding three calendar years, unless it
reports the extraordinary dividend to the commissioner at least
30 days before payment and the commissioner does not
disapprove the extraordinary dividend within that period.
Additionally, under Wisconsin law, all authorizations of
distributions to shareholders, other than stock dividends, shall
be reported to the commissioner in writing and no payment may be
made until at least 30 days after such report.
The dividend limitations imposed by the state laws are based on
the statutory financial results of each company within our
Insurance Operations that are determined by using statutory
accounting practices that differ in various respects from
accounting principles used in financial statements prepared in
conformity with GAAP. See Regulation Statutory
Accounting Principles. Key differences relate to among
other items, deferred acquisition costs, limitations on deferred
income taxes, and reserve calculation assumptions and surplus
notes.
See Note 16 of the notes to consolidated financial
statements in Item 8 of Part II of this report for the
dividends declared and paid by the United National Insurance
Companies and the
Penn-America
Insurance Companies in 2009 and the maximum amount of
distributions that they could pay as dividends in 2010.
Guaranty
Associations and Similar Arrangements
Most of the jurisdictions in which our U.S. Insurance
Subsidiaries are admitted to transact business require property
and casualty insurers doing business within that jurisdiction to
participate in guaranty associations. These organizations are
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 premiums written by member insurers
in the lines of business in which the impaired, insolvent, or
failed insurer is engaged. Some states permit member insurers to
recover assessments paid through full or partial premium tax
offsets or in limited circumstances by surcharging policyholders.
Operations
of Wind River Reinsurance
The insurance laws of each of the United States and of many
other countries regulate or prohibit the sale of insurance and
reinsurance within their jurisdictions by
non-U.S. insurers
and reinsurers that are not admitted to do business within such
jurisdictions. Wind River Reinsurance is not admitted to do
business in the United States. We do not intend for Wind River
Reinsurance to maintain offices or solicit, advertise, settle
claims or conduct other insurance and reinsurance underwriting
activities in any jurisdiction in the United States where the
conduct of such activities would require that Wind River
Reinsurance be admitted or authorized.
As a reinsurer that is not licensed, accredited, or approved in
any state in the United States, Wind River Reinsurance is
required to post collateral security with respect to the
reinsurance liabilities it assumes from our Insurance Operations
as well as other U.S. ceding companies. The posting of
collateral security is generally
26
required in order for U.S. ceding companies to obtain
credit on their U.S. statutory financial statements with
respect to reinsurance liabilities ceded to unlicensed or
unaccredited reinsurers. Under applicable United States
credit for reinsurance statutory provisions, the
security arrangements generally may be in the form of letters of
credit, reinsurance trusts maintained by third-party trustees or
funds-withheld arrangements whereby the ceded premium is held by
the ceding company. If credit for reinsurance laws
or regulations are made more stringent in Indiana, Pennsylvania,
Virginia, Wisconsin or other applicable states or any of the
Insurance Operations redomesticates to one of the few states
that do not allow credit for reinsurance ceded to non-licensed
reinsurers, we may be unable to realize some of the benefits we
expect from our business plan. Accordingly, our Reinsurance
Operations could be adversely affected. Even though Wind River
Reinsurance does not currently offer third party excess and
surplus lines insurance products, it maintains a
U.S. surplus lines trust fund with a U.S. bank to
secure its U.S. surplus lines policyholders. The amount
held in trust at December 31, 2009 was $6.2 million.
Outstanding reserves at December 31, 2009 were
$0.1 million. The current minimum amount that Wind River
Reinsurance needs to maintain in the trust fund is
$5.4 million. In subsequent years, if Wind River
Reinsurance were to write third party excess and surplus lines
insurance, it would need to maintain in the trust fund an amount
equal to 30% of any amount up to the first $200.0 million
plus further graduated amounts of its U.S. surplus lines
liabilities, as at each year end, as certified by an actuary,
but subject to a current maximum of $100.0 million. The
trust fund is irrevocable and must remain in force for a period
of five years from the date of written notice to the trustee of
the termination of the trust unless the liabilities with respect
to all risks covered by the trust fund have been transferred to
an insurer licensed to do business in all states where insurance
is in force.
Apart from the financial and related filings required to
maintain Wind River Reinsurances place on the IIDs
Non-Admitted Insurers Quarterly Listing and its
jurisdiction-specific approvals and eligibilities, Wind River
Reinsurance generally is not subject to regulation by
U.S. jurisdictions. Specifically, rate and form regulations
otherwise applicable to authorized insurers generally do not
apply to Wind River Reinsurances surplus lines
transactions.
Bermuda
Insurance Regulation
The Bermuda Insurance Act 1978 and related regulations, as
amended (the Insurance Act), regulates the insurance
business of Wind River Reinsurance and provides that no person
may carry on any insurance business in or from within Bermuda
unless registered as an insurer by the Bermuda Monetary
Authority (the BMA) under the Insurance Act. Wind
River Reinsurance has been registered as a Class 3B insurer
by the BMA. A body corporate is registrable as a Class 3B
insurer if it intends to carry on insurance business in
circumstances where 50% or more of the net premiums written or
50% or more of the loss and loss expense provisions represent
unrelated business, or its total net premiums written from
unrelated business are $50.0 million or more. The continued
registration of an applicant as an insurer is subject to it
complying with the terms of its registration and such other
conditions as the BMA may impose from time to time.
The Insurance Act also imposes on Bermuda insurance companies
solvency and liquidity standards and auditing and reporting
requirements. Certain significant aspects of the Bermuda
insurance regulatory framework are set forth below.
Classification
of Insurers
Wind River Reinsurance, which is incorporated to carry on
general insurance and reinsurance business, is registered as a
Class 3B insurer in Bermuda.
Cancellation
of Insurers Registration
An insurers registration may be canceled by the Supervisor
of Insurance of the BMA on certain grounds specified in the
Insurance Act, including failure of the insurer to comply with
its obligations under the Insurance Act.
27
Principal
Representative
An insurer is required to maintain a principal office in Bermuda
and to appoint and maintain a principal representative in
Bermuda. Wind River Reinsurances principal office is its
executive offices in Hamilton, Bermuda, and Wind River
Reinsurances principal representative is its Chief
Executive Officer.
Independent
Approved Auditor
Every registered insurer, such as Wind River Reinsurance, must
appoint an independent auditor who will audit and report
annually on the statutory financial statements and the statutory
financial return of the insurer, both of which are required to
be filed annually with the BMA.
Loss
Reserve Specialist
As a registered Class 3B insurer, Wind River Reinsurance is
required to submit an opinion of its approved loss reserve
specialist in respect of its losses and loss expense provisions
with its statutory financial return.
Statutory
Financial Statements
Wind River Reinsurance must prepare annual statutory financial
statements. The Insurance Act prescribes rules for the
preparation and substance of these statutory financial
statements (which include, in statutory form, a balance sheet,
an income statement, a statement of capital and surplus and
notes thereto). Wind River Reinsurance is required to give
detailed information and analyses regarding premiums, claims,
reinsurance, and investments. The statutory financial statements
are not prepared in accordance with GAAP or SAP and are distinct
from the financial statements prepared for presentation to Wind
River Reinsurances shareholders and under the Bermuda
Companies Act 1981 (the Companies Act), which
financial statements will be prepared in accordance with GAAP.
Annual
Statutory Financial Return
Wind River Reinsurance is required to file with the BMA a
statutory financial return no later than four months after its
financial year end (unless specifically extended upon
application to the BMA). The statutory financial return for a
Class 3B insurer includes, among other matters, a report of
the approved independent auditor on the statutory financial
statements of the insurer, solvency certificates, the statutory
financial statements, a declaration of statutory ratios and the
opinion of the loss reserve specialist.
Minimum
Margin of Solvency and Restrictions on Dividends and
Distributions
The Insurance Act provides a minimum margin of solvency for
Class 3B general business insurers, such as Wind River
Reinsurance. A Class 3B insurer engaged in general business
is required to maintain the amount by which the value of its
assets exceed its liabilities at the greater of:
(1) $1.0 million; (2) where net premiums written
exceed $6.0 million: $1.2 million plus 15% of the
excess over $6.0 million; or (3) 15% of loss and loss
expenses provisions plus other insurance reserves, as such terms
are defined in the Insurance Act.
Additionally, under the Companies Act, Wind River Reinsurance
may only declare or pay a dividend if Wind River Reinsurance has
no reasonable grounds for believing that it is, or would after
the payment be, unable to pay its liabilities as they become
due, or if the realizable value of its assets would not be less
than the aggregate of its liabilities and its issued share
capital and share premium accounts.
Minimum
Liquidity Ratio
The Insurance Act provides a minimum liquidity ratio for general
business insurers, such as Wind River Reinsurance. An insurer
engaged in general business is required to maintain the value of
its relevant assets at not less than 75% of the amount of its
relevant liabilities, as such terms are defined in the Insurance
Act.
28
Restrictions
on Dividends and Distributions
Wind River Reinsurance is prohibited from declaring or paying
any dividends during any financial year if it is in breach of
its minimum solvency margin or minimum liquidity ratio or if the
declaration or payment of such dividends would cause it to fail
to meet such margin or ratio. In addition, if it has failed to
meet its minimum solvency margin or minimum liquidity ratio on
the last day of any financial year, Wind River Reinsurance will
be prohibited, without the approval of the BMA, from declaring
or paying any dividends during the next financial year.
Wind River Reinsurance is prohibited, without the approval of
the BMA, from reducing by 15% or more its total statutory
capital as set out in its previous years financial
statements, and any application for such approval must include
such information as the BMA may require. In addition, at any
time it fails to meet its minimum margin of solvency, Wind River
Reinsurance is required within 30 days after becoming aware
of such failure or having reason to believe that such failure
has occurred, to file with the BMA a written report containing
certain information.
Additionally, under the Companies Act, Wind River Reinsurance
may not declare or pay a dividend, or make a distribution from
contributed surplus, if there are reasonable grounds for
believing that it is, or would after the payment, be unable to
pay its liabilities as they become due, or if the realizable
value of its assets would be less than the aggregate of its
liabilities and its issued share capital and share premium
accounts.
Supervision,
Investigation and Intervention
The BMA has wide powers of investigation and document production
in relation to Bermuda insurers under the Insurance Act. For
example, the BMA may appoint an inspector with extensive powers
to investigate the affairs of Wind River Reinsurance if the BMA
believes that such an investigation is in the best interests of
its policyholders or persons who may become policyholders.
Disclosure
of Information
The BMA may assist other regulatory authorities, including
foreign insurance regulatory authorities, with their
investigations involving insurance and reinsurance companies in
Bermuda, but subject to restrictions. For example, the BMA must
be satisfied that the assistance being requested is in
connection with the discharge of regulatory responsibilities of
the foreign regulatory authority. Further, the BMA must consider
whether cooperation is in the public interest. The grounds for
disclosure are limited and the Insurance Act provides sanctions
for breach of the statutory duty of confidentiality.
Under the Companies Act, the Minister of Finance may assist a
foreign regulatory authority that has requested assistance in
connection with inquiries being carried out by it in the
performance of its regulatory functions. The Minster of
Finances powers include requiring a person to furnish
information to the Minister of Finance, to produce documents to
the Minister of Finance, to attend and answer questions and to
give assistance to the Minister of Finance in relation to
inquiries. The Minister of Finance must be satisfied that the
assistance requested by the foreign regulatory authority is for
the purpose of its regulatory functions and that the request is
in relation to information in Bermuda that a person has in his
possession or under his control. The Minister of Finance must
consider, among other things, whether it is in the public
interest to give the information sought.
Certain
Other Bermuda Law Considerations
Although Wind River Reinsurance is incorporated in Bermuda, it
is classified as a non-resident of Bermuda for exchange control
purposes by the BMA. Pursuant to the non-resident status, Wind
River Reinsurance may engage in transactions in currencies other
than Bermuda dollars, and there are no restrictions on its
ability to transfer funds (other than funds denominated in
Bermuda dollars) in and out of Bermuda or to pay dividends to
United States residents that are holders of its common shares.
Under Bermuda law, exempted companies are companies formed for
the purpose of conducting business outside Bermuda from a
principal place of business in Bermuda. As an
exempted company, Wind River Reinsurance may not,
without the express authorization of the Bermuda legislature or
under a license or consent granted by the Minister of Finance,
participate in certain business transactions, including
transactions involving Bermuda landholding rights and the
carrying on of business of any kind for which it is not licensed
in Bermuda.
29
Taxation
of United America Indemnity and Subsidiaries
Cayman
Islands
Under current Cayman Islands law, we are not required to pay any
taxes in the Cayman Islands on our income or capital gains. We
have received an undertaking that, in the event of any taxes
being imposed, we will be exempted from taxation in the Cayman
Islands until the year 2023. We are incorporated under the laws
of the Cayman Islands as an exempted company and, as such, we
obtained an undertaking on September 2, 2003 from the
Governor in Council of the Cayman Islands substantially that,
for a period of 20 years from the date of such undertaking,
no law that is enacted in the Cayman Islands imposing any tax to
be levied on profit or income or gains or appreciation shall
apply to us and no such tax and no tax in the nature of estate
duty or inheritance tax will be payable, either directly or by
way of withholding, on our common shares. Given the limited
duration of the undertaking, we cannot be certain that we will
not be subject to Cayman Islands tax after the expiration of the
20-year
period.
Bermuda
Under current Bermuda law, we and our Bermuda subsidiaries are
not required to pay any taxes in Bermuda on our income or
capital gains. We have received an undertaking from Bermuda
that, in the event of any taxes being imposed, we will be exempt
from taxation until March 2016. Currently, there is no Bermuda
income, corporation or profits tax, withholding tax, capital
gains tax, capital transfer tax, estate duty or inheritance tax
payable by Wind River Reinsurance or its shareholders, other
than shareholders ordinarily resident in Bermuda, if any.
Currently, there is no Bermuda withholding or other tax on
principal, interest, or dividends paid to holders of the common
shares of Wind River Reinsurance, other than holders ordinarily
resident in Bermuda, if any. There can be no assurance that Wind
River Reinsurance or its shareholders will not be subject to any
such tax in the future.
We have received a written assurance from the Bermuda Minister
of Finance under the Exempted Undertakings Tax Protection Act
1966 of Bermuda, that if any legislation is enacted in Bermuda
that would impose tax computed on profits or income, or computed
on any capital asset, gain or appreciation, or any tax in the
nature of estate duty or inheritance tax, then the imposition of
that tax would not be applicable to Wind River Reinsurance or to
any of its operations, shares, debentures or obligations through
March 28, 2016; provided that such assurance is subject to
the condition that it will not be construed to prevent the
application of such tax to people ordinarily resident in
Bermuda, or to prevent the application of any taxes payable by
Wind River Reinsurance in respect of real property or leasehold
interests in Bermuda held by them. Given the limited duration of
the assurance, we cannot be certain that we will not be subject
to any Bermuda tax after March 28, 2016.
Luxembourg
The Luxembourg Companies are all private limited liability
companies, incorporated under the laws of Luxembourg. The
Luxembourg Companies are all taxable companies, which may carry
out any activities that fall within the scope of their corporate
object clause. The Luxembourg Companies are resident taxpayers
fully subject to Luxembourg corporate income tax at a rate of
28.59% and net worth tax at a rate of 0.5%. The Luxembourg
Companies are entitled to benefits of the tax treaties concluded
between Luxembourg and other countries and European Union
Directives.
Profit distributions (not in respect to liquidations) by the
Luxembourg Companies are generally subject to Luxembourg
dividend withholding tax at a rate of 15% in 2008, unless a
domestic law exemption or a lower tax treaty rate applies. There
is no Luxembourg dividend withholding tax in 2008. Dividends
paid by any of the Luxembourg Companies to their Luxembourg
resident parent company are exempt from Luxembourg dividend
withholding tax, provided that at the time of the dividend
distribution, the resident parent company has held (or commits
itself to continue to hold) 10% or more of the nominal paid up
capital of the distributing entity or, in the event of a lower
percentage participation, a participation having an acquisition
price of Euro 1.2 million or more for a period of at
least 12 months.
The Luxembourg Companies have obtained a confirmation from the
Luxembourg Administration des Contributions Directes
(Luxembourg Tax Administration) that the current
financing activities of the Luxembourg Companies under the
application of at arms length principles will not lead to
any material taxation in Luxembourg.
30
The confirmation from the Luxembourg Tax Administration covers
the current financing operations of the Luxembourg Companies
through September 15, 2018. Given the limited duration of
the confirmation and the possibility of a change in the relevant
tax laws or the administrative policy of the Luxembourg Tax
Administration, we cannot be certain that we will not be subject
to greater Luxembourg taxes in the future.
Ireland
U.A.I. (Ireland) Limited, an indirect wholly-owned subsidiary,
is a private limited liability company incorporated under the
laws of Ireland. The company is a resident taxpayer fully
subject to Ireland corporate income tax of 12.5% on trading
income and 25.0% on non-trading income, including interest and
dividends from foreign companies. Currently, U.A.I. (Ireland)
Limited only has non-trading income, so it is subject to
corporate income tax of 25.0%.
In February 2010, we announced that our Board of Directors has
unanimously approved a plan for us to re-domicile from the
Cayman Islands to Ireland. (See Recent Developments
above for details.) If the proposal is accepted, we will become
a wholly-owned subsidiary of Global Indemnity plc, a newly
formed Irish company, which will be a resident taxpayer similar
to U.A.I. (Ireland) Limited. It is anticipated that Global
Indemnity plc will only have non-trading income, so it will be
subject to corporate income tax of 25.0%.
United
States
The following discussion is a summary of all material
U.S. federal income tax considerations relating to our
operations. We manage our business in a manner designed to
mitigate the risk that either United America Indemnity or Wind
River Reinsurance will be treated as engaged in a
U.S. trade or business for U.S. federal income tax
purposes. However, whether business is being conducted in the
United States is an inherently factual determination. Because
the United States Internal Revenue Code (the Code),
regulations and court decisions fail to identify definitively
activities that constitute being engaged in a trade or business
in the United States, we cannot be certain that the IRS will not
contend successfully that United America Indemnity or Wind River
Reinsurance is or will be engaged in a trade or business in the
United States. A
non-U.S. corporation
deemed to be so engaged would be subject to U.S. income tax
at regular corporate rates, as well as the branch profits tax,
on its income that is treated as effectively connected with the
conduct of that trade or business unless the corporation is
entitled to relief under the permanent establishment provision
of an applicable tax treaty, as discussed below. Such income
tax, if imposed, would be based on effectively connected income
computed in a manner generally analogous to that applied to the
income of a U.S. corporation, except that a
non-U.S. corporation
is generally entitled to deductions and credits only if it
timely files a U.S. federal income tax return. Wind River
Reinsurance is filing protective U.S. federal income tax
returns on a timely basis in order to preserve the right to
claim income tax deductions and credits if it is ever determined
that it is subject to U.S. federal income tax. The highest
marginal federal income tax rates currently are 35% for a
corporations effectively connected income and 30% for the
branch profits tax.
United America Indemnity Group, Inc. is a Delaware corporation
wholly owned by U.A.I. (Luxembourg) Investment S.à r.l.
Under U.S. federal income tax law, dividends and interest
paid by a U.S. corporation to a
non-U.S. shareholder
are generally subject to a 30% withholding tax, unless reduced
by treaty. The income tax treaty between Luxembourg and the
United States (the Luxembourg Treaty) reduces the
rate of withholding tax on interest payments to 0% and on
dividends to 15%, or 5% (if the shareholder owns 10% or more of
the companys voting stock).
If Wind River Reinsurance is entitled to the benefits under the
income tax treaty between Bermuda and the United States (the
Bermuda Treaty), Wind River Reinsurance would not be
subject to U.S. income tax on any business profits of its
insurance enterprise found to be effectively connected with a
U.S. trade or business, unless that trade or business is
conducted through a permanent establishment in the United
States. No regulations interpreting the Bermuda Treaty have been
issued. Wind River Reinsurance currently conducts its activities
to reduce the risk that it will have a permanent establishment
in the United States, although we cannot be certain that we will
achieve this result.
An insurance enterprise resident in Bermuda generally will be
entitled to the benefits of the Bermuda Treaty if (1) more
than 50% of its shares are owned beneficially, directly or
indirectly, by individual residents of the
31
United States or Bermuda or U.S. citizens and
(2) its income is not used in substantial part, directly or
indirectly, to make disproportionate distributions to, or to
meet certain liabilities to, persons who are neither residents
of either the United States or Bermuda nor U.S. citizens.
We cannot be certain that Wind River Reinsurance will be
eligible for Bermuda Treaty benefits in the future because of
factual and legal uncertainties regarding the residency and
citizenship of our shareholders.
Foreign insurance companies carrying on an insurance business
within the United States have a certain minimum amount of
effectively connected net investment income, determined in
accordance with a formula that depends, in part, on the amount
of U.S. risk insured or reinsured by such companies. If
Wind River Reinsurance is considered to be engaged in the
conduct of an insurance business in the United States and it is
not entitled to the benefits of the Bermuda Treaty in general
(because it fails to satisfy one of the limitations on treaty
benefits discussed above), the Code could subject a significant
portion of Wind River Reinsurances investment income to
U.S. income tax. In addition, while the Bermuda Treaty
clearly applies to premium income, it is uncertain whether the
Bermuda Treaty applies to other income such as investment
income. If Wind River Reinsurance is considered engaged in the
conduct of an insurance business in the United States and is
entitled to the benefits of the Bermuda Treaty in general, but
the Bermuda Treaty is interpreted to not apply to investment
income, a significant portion of Wind River Reinsurances
investment income could be subject to U.S. federal income
tax.
Foreign corporations not engaged in a trade or business in the
United States are subject to 30% U.S. income tax imposed by
withholding on the gross amount of certain fixed or
determinable annual or periodic gains, profits and income
derived from sources within the United States (such as dividends
and certain interest on investments), subject to exemption under
the Code or reduction by applicable treaties. The Bermuda Treaty
does not reduce the rate of tax in such circumstances. The
United States also imposes an excise tax on insurance and
reinsurance premiums paid to foreign insurers or reinsurers with
respect to risks located in the United States. The rates of tax
applicable to premiums paid to Wind River Reinsurance on such
business are 4% for direct insurance premiums and 1% for
reinsurance premiums.
Our U.S. Subsidiaries are each subject to taxation in the
United States at regular corporate rates.
For purposes of this Risk Factors section, the use of
we, us, and our refer to
United America Indemnity.
The risks and uncertainties described below are those we believe
to be material, but they are not the only ones we face. If any
of the following risks, or other risks and uncertainties that we
have not yet identified or that we currently consider not to be
material, actually occur, our business, prospects, financial
condition, results of operations and cash flows could be
materially and adversely affected.
Some of the statements regarding risk factors below and
elsewhere in this report may include forward-looking statements
that reflect our current views with respect to future events and
financial performance. Such statements include forward-looking
statements both with respect to us specifically and the
insurance and reinsurance sectors in general, both as to
underwriting and investment matters. Statements that include
words such as expect, intend,
plan, believe, project,
anticipate, seek, will and
similar statements of a future or forward-looking nature
identify forward-looking statements for purposes of the federal
securities laws or otherwise. All forward-looking statements
address matters that involve risks and uncertainties.
Accordingly, there are or will be important factors that could
cause actual results to differ materially from those indicated
in such statements. We assume no obligation to update our
forward-looking statements to reflect actual results or changes
in or additions to such forward-looking statements.
Risks
Related to our Business
We Are
Dependent on Our Senior Executives and the Loss of Any of These
Executives or Our Inability to Attract and Retain Other Key
Personnel Could Adversely Affect Our Business.
Our success substantially depends upon our ability to attract
and retain qualified employees and upon the ability of our
senior management and other key employees to implement our
business strategy. We believe there are a limited number of
available, qualified executives in the business lines in which
we compete. The success of our
32
initiatives and our future performance depend, in significant
part, upon the continued service of our senior management team,
including Larry A. Frakes, our President and Chief Executive
Officer, Thomas M. McGeehan, our Chief Financial Officer,
Matthew B. Scott, President of
Penn-America
Group, J. Scott Reynolds, President of United National Group,
David J. Myers, President of Diamond State Group, Troy W.
Santora, President of Wind River Reinsurance Company, Limited,
and Edward M. Rafter, Senior Vice President and Chief
Information / Administrative Officer of the United
National Insurance Companies and the
Penn-America
Insurance Companies. Messrs. Frakes, McGeehan, Scott,
Reynolds, Myers, and Rafter have employment agreements with us,
although these agreements cannot assure us of the continued
service of these individuals. We do not currently maintain key
man life insurance policies with respect to any of our employees.
The future loss of any of the services of other members of our
senior management team or the inability to attract and retain
other talented personnel could impede the further implementation
of our business strategy, which could have a material adverse
effect on our business.
If
Actual Claims Payments Exceed Our Reserves for Losses and Loss
Adjustment Expenses, Our Financial Condition and Results of
Operations Could Be Adversely Affected.
Our success depends upon our ability to accurately assess the
risks associated with the insurance and reinsurance policies
that we write. We establish reserves on an undiscounted basis to
cover our estimated liability for the payment of all losses and
loss adjustment expenses incurred with respect to premiums
earned on the insurance policies that we write. Reserves do not
represent an exact calculation of liability. Rather, reserves
are estimates of what we expect to be the ultimate cost of
resolution and administration of claims under the insurance
policies that we write. These estimates are based upon actuarial
and statistical projections, our assessment of currently
available data, as well as estimates and assumptions as to
future trends in claims severity and frequency, judicial
theories of liability and other factors. We continually refine
our reserve estimates in an ongoing process as experience
develops and claims are reported and settled. Our insurance
subsidiaries obtain an annual statement of opinion from an
independent actuarial firm on the reasonableness of these
reserves.
Establishing an appropriate level of reserves is an inherently
uncertain process. The following factors may have a substantial
impact on our future actual losses and loss adjustment
experience:
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claim and expense payments;
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severity of claims;
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legislative and judicial developments; and
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changes in economic conditions, including the effect of
inflation.
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For example, as industry practices and legal, judicial, social
and other conditions change, unexpected and unintended exposures
related to claims and coverage may emerge. Recent examples
include claims relating to mold, asbestos and construction
defects, as well as larger settlements and jury awards against
professionals and corporate directors and officers. In addition,
there is a growing trend of plaintiffs targeting property and
casualty insurers in purported class action litigations relating
to claims-handling, insurance sales practices and other
practices. These exposures may either extend coverage beyond our
underwriting intent or increase the frequency or severity of
claims. As a result, such developments could cause our level of
reserves to be inadequate.
Actual losses and loss adjustment expenses we incur under
insurance policies that we write may be different from the
amount of reserves we establish, and to the extent that actual
losses and loss adjustment expenses exceed our expectations and
the reserves reflected on our financial statements, we will be
required to immediately reflect those changes by increasing our
reserves. In addition, regulators could require that we increase
our reserves if they determine that our reserves were
understated in the past. When we increase reserves, our pre-tax
income for the period in which we do so will decrease by a
corresponding amount. In addition to having an effect on
reserves and pre-tax income, increasing or
strengthening reserves causes a reduction in our
insurance companies surplus and could cause the rating of
our insurance company subsidiaries to be downgraded or placed on
credit watch. Such a downgrade could, in turn, adversely affect
our ability to sell insurance policies.
33
Catastrophic
Events Can Have a Significant Impact on Our Financial and
Operational Condition.
Results of operations of property and casualty insurers are
subject to man-made and natural catastrophes. While there were
no individual catastrophic events that generated significant
losses for us in 2009, we have experienced, and expect to
experience in the future, catastrophe losses. It is possible
that a catastrophic event or a series of multiple catastrophic
events could have a material adverse effect on our operating
results and financial condition. Our operating results could be
negatively impacted if we experience losses from catastrophes
that are in excess of the catastrophe reinsurance coverage of
our Insurance Operations. In 2009, our Reinsurance Operations
began to participate as a retrocessionaire on a global property
catastrophe treaty. Our operating results could be negatively
impacted if losses and expenses related to the property
catastrophe treaty exceed premiums assumed from that treaty.
Catastrophes include windstorms, hurricanes, earthquakes,
tornadoes, hail, severe winter weather, fires and may include
terrorist events such as the attacks on the World Trade Center
and Pentagon on September 11, 2001. We cannot predict how
severe a particular catastrophe may be until after it occurs.
The extent of losses from catastrophes is a function of the
total amount and type of losses incurred, the number of insureds
affected, the frequency of the events and the severity of the
particular catastrophe. Most catastrophes occur in small
geographic areas. However, some catastrophes may produce
significant damage in large, heavily populated areas.
A
Decline in Rating for Any of Our Insurance or Reinsurance
Subsidiaries Could Adversely Affect Our Position in the
Insurance Market, Make It More Difficult To Market Our Insurance
Products and Cause Our Premiums and Earnings To
Decrease.
Ratings have become an increasingly important factor in
establishing the competitive position for insurance companies.
A.M. Best ratings currently range from A++
(Superior) to F (In Liquidation), with a total of 16
separate ratings categories. A.M. Best currently assigns
the companies in our Insurance Operations and Reinsurance
Operations a financial strength rating of A
(Excellent), the third highest of their 16 rating categories.
The objective of A.M. Bests rating system is to
provide potential policyholders an opinion of an insurers
financial strength and its ability to meet ongoing obligations,
including paying claims. In evaluating a companys
financial and operating performance, A.M. Best reviews its
profitability, leverage and liquidity, its spread of risk, the
quality and appropriateness of its reinsurance, the quality and
diversification of its assets, the adequacy of its policy and
loss reserves, the adequacy of its surplus, its capital
structure, and the experience and objectives of its management.
These ratings are based on factors relevant to policyholders,
general agencies, insurance brokers, reinsurers, and
intermediaries and are not directed to the protection of
investors. These ratings are not an evaluation of, nor are they
directed to, investors in our Class A common shares and are
not a recommendation to buy, sell or hold our Class A
common shares. Publications of A.M. Best indicate that
companies are assigned A (Excellent) ratings if, in
A.M. Bests opinion, they have an excellent ability to
meet their ongoing obligations to policyholders. These ratings
are subject to periodic review by, and may be revised downward
or revoked at the sole discretion of, A.M. Best.
If the rating of any of the companies in our Insurance
Operations or Reinsurance Operations is reduced from its current
level of A by A.M. Best, our competitive
position in the insurance industry could suffer, and it could be
more difficult for us to market our insurance products. A
downgrade could result in a significant reduction in the number
of insurance contracts we write and in a substantial loss of
business, as such business could move to other competitors with
higher ratings, thus causing premiums and earnings to decrease.
We
Cannot Guarantee that Our Reinsurers Will Pay in a Timely
Fashion, if At All, and as a Result, We Could Experience
Losses.
We cede a portion of gross premiums written to third party
reinsurers under reinsurance contracts. Although reinsurance
makes the reinsurer liable to us to the extent the risk is
transferred, it does not relieve us of our liability to our
policyholders. Upon payment of claims, we will bill our
reinsurers for their share of such claims. Our reinsurers may
not pay the reinsurance receivables that they owe to us or they
may not pay such receivables on a timely basis. If our
reinsurers fail to pay us or fail to pay us on a timely basis,
our financial results would be adversely affected. Lack of
reinsurer liquidity, perceived improper underwriting, or claim
handling by us, and other factors could cause a reinsurer not to
pay.
34
As of December 31, 2009, we had $543.4 million of
reinsurance receivables, and $378.1 million of collateral
was held in trust to support our reinsurance receivables. Our
reinsurance receivables, net of collateral held, were
$165.3 million. We also had $11.1 million of prepaid
reinsurance premiums, net of collateral held. As of
December 31, 2009, our largest reinsurer represented
approximately 44.7% of our reinsurance receivables, or
$256.5 million, and our second largest reinsurer
represented approximately 22.7% of our reinsurance receivables,
or $130.1 million. As of December 31, 2009, we had
collateral of $207.6 million and $123.3 million from
our largest reinsurer and second largest reinsurer,
respectively. See Business Reinsurance of
Underwriting Risk in Item 1 of Part I of this
report.
Our
Investment Performance May Suffer as a Result of Adverse Capital
Market Developments or Other Factors, Which Would In Turn
Adversely Affect Our Financial Condition and Results of
Operations.
We derive a significant portion of our income from our invested
assets. As a result, our operating results depend in part on the
performance of our investment portfolio. For 2009, our income
derived from invested assets, was $86.1 million, net of
investment expenses, including net realized gains of
$15.9 million. Of this amount, $5.6 million were other
than temporary impairments. For 2008, our income derived from
invested assets, was $17.6 million, net of investment
expenses, including net realized losses of $50.3 million.
Of this amount, $32.1 million were other than temporary
impairments. Our operating results are subject to a variety of
investment risks, including risks relating to general economic
conditions, market volatility, interest rate fluctuations,
liquidity risk and credit and default risk. The fair value of
fixed income investments can fluctuate depending on changes in
interest rates and the credit quality of underlying issuers.
Generally, the fair market value of these investments has an
inverse relationship with changes in interest rates, while net
investment income earned by us from future investments in fixed
maturities will generally increase or decrease with changes in
interest rates. Additionally, with respect to certain of our
investments, we are subject to pre-payment or reinvestment risk.
Credit tightening could negatively impact our future investment
returns and limit the ability to invest in certain classes of
investments. Credit tightening may cause opportunities that are
marginally attractive to not be financed, which could cause a
decrease in the number of bond issuances. If marginally
attractive opportunities are financed, they may be at higher
interest rates, which would cause credit risk of such
opportunities to increase. If new debt supply is curtailed, it
could cause interest rates on securities that are deemed to be
credit-worthy to decline. Funds generated by operations, sales,
and maturities will need to be invested. If we invest during a
tight credit market, our investment returns could be lower than
the returns we are currently realizing
and/or we
may have to invest in higher risk securities.
With respect to our longer-term liabilities, we strive to
structure our investments in a manner that recognizes our
liquidity needs for our future liabilities. In that regard, we
attempt to correlate the maturity and duration of our investment
portfolio to our liability for insurance reserves. However, if
our liquidity needs or general and specific liability profile
unexpectedly changes, we may not be successful in continuing to
structure our investment portfolio in that manner. To the extent
that we are unsuccessful in correlating our investment portfolio
with our expected liabilities, we may be forced to liquidate our
investments at times and prices that are not optimal, which
could have a material adverse affect on the performance of our
investment portfolio. We refer to this risk as liquidity risk,
which is when the fair value of an investment is not able to be
realized due to low demand by outside parties in the marketplace.
We are also subject to credit risk due to non-payment of
principal or interest. Current market conditions increase the
risk that companies may default on their credit obligations.
Several classes of securities that we hold, including our
corporate notes and loan securities, have default risk. As
interest rates rise for companies that are deemed to be less
creditworthy, there is a greater risk that they will be unable
to pay contractual interest or principal on their debt
obligations.
Interest rates are highly sensitive to many factors, including
governmental monetary policies, domestic and international
economic and political conditions and other factors beyond our
control. Although we attempt to take measures to manage the
risks of investing in a changing interest rate environment, we
may not be able to mitigate interest rate sensitivity
effectively. A significant increase in interest rates could have
a material adverse effect on the
35
market value of our fixed maturities securities. Our mitigation
efforts include maintaining a high-quality portfolio with a
relatively short duration to reduce the effect of interest rate
changes on market value.
We also have an equity portfolio that represented approximately
3.9% of our total investments and cash and cash equivalents
portfolio, net of payable for securities purchased of
$37.3 million, as of December 31, 2009. The
performance of our equity portfolio is dependent upon a number
of factors, including many of the same factors that affect the
performance of our fixed income investments, although those
factors sometimes have the opposite effect on the performance of
the equity portfolio. Individual equity securities have
unsystematic risk. We could experience market declines on these
investments. We also have systematic risk, which is the risk
inherent in the general market due to broad macroeconomic
factors that affect all companies in the market. If the market
indexes were to decline, we anticipate that the value of our
portfolio would be negatively affected.
We have $138.9 million of investments in corporate loans.
Corporate loans are primarily investments in senior secured
floating rate loans that banks have made to corporations. The
loans are generally priced at an interest rate spread over LIBOR
that resets every 60 to 90 days. As a result, this asset
class provides protection against rising interest rates.
However, this asset class is subject to default risk since these
investments are typically below investment grade.
We have $8.0 million of investments in limited
partnerships. Material assumptions and factors utilized in
pricing these securities include future cash flows, constant
default rates, recovery rates, and any market clearing activity
that may have occurred since the prior month-end pricing period.
Our limited partnership investments are not liquid. Several of
the investment contracts state that we need to provide advance
notice to the partnerships of up to three months if we wished to
liquidate part or all of the investment. Several of the
contracts have provisions that allow the general partner to
delay distribution of funds if it would negatively impact the
partnership. Our returns could be negatively affected if the
market value of the partnership declines. We may miss the
opportunity to reinvest proceeds from a partnership at
attractive rates. If the general partner exercised a provision
to not distribute funds, and we needed liquidity, we might be
forced to liquidate other investments at a time when prices are
not optimal.
As of December 31, 2009, we had approximately
$2.5 million worth of investment exposure to subprime
investments and Alt-A investments. Of that amount, approximately
$0.8 million of those investments have been rated AAA by
Standard & Poors, $1.6 million were rated
BBB- to AA, and $0.1 million were rated CCC. Impairments on
these investments were $0.9 million during 2009.
Since
We Depend On Professional General Agencies For a Significant
Portion of Our Revenue, a Loss of Any One of Them Could
Adversely Affect Us.
We market and distribute our insurance products through a group
of approximately 110 professional general agencies that have
specific quoting and binding authority and that in turn sell our
insurance products to insureds through retail insurance brokers.
For the year ended December 31, 2009, our top five
non-affiliated agencies, all of which market more than one
specific product, represented 34.1% of our gross premiums
written. No one agency accounted for more that 12.9% of our
gross premiums written. A loss of all or substantially all of
the business produced by any more of these general agencies
could have an adverse effect on our results of operations.
If
Market Conditions Cause Reinsurance To Be More Costly or
Unavailable, We May Be Required To Bear Increased Risks or
Reduce the Level of Our Underwriting Commitments.
As part of our overall strategy of risk and capacity management,
we purchase reinsurance for a portion of the risk underwritten
by our insurance subsidiaries. Market conditions beyond our
control determine the availability and cost of the reinsurance
we purchase, which may affect the level of our business and
profitability. Our third party reinsurance facilities are
generally subject to annual renewal. We may be unable to
maintain our current reinsurance facilities or obtain other
reinsurance facilities in adequate amounts and at favorable
rates. If we are unable to renew our expiring facilities or
obtain new reinsurance facilities, either our net exposure to
risk would increase or, if we are unwilling to bear an increase
in net risk exposures, we would have to reduce the amount of
risk we underwrite.
36
Our
Results May Fluctuate as a Result of Many Factors, Including
Cyclical Changes in the Insurance Industry.
Historically, the results of companies in the property and
casualty insurance industry have been subject to significant
fluctuations and uncertainties. The industrys
profitability can be affected significantly by:
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competition;
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capital capacity;
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rising levels of actual costs that are not foreseen by companies
at the time they price their products;
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volatile and unpredictable developments, including man-made,
weather-related and other natural catastrophes or terrorist
attacks;
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changes in loss reserves resulting from the general claims and
legal environments as different types of claims arise and
judicial interpretations relating to the scope of insurers
liability develop; and
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fluctuations in interest rates, inflationary pressures and other
changes in the investment environment, which affect returns on
invested assets and may affect the ultimate payout of losses.
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The demand for property and casualty insurance and reinsurance
can also vary significantly, rising as the overall level of
economic activity increases and falling as that activity
decreases. The property and casualty insurance industry
historically is cyclical in nature. These fluctuations in demand
and competition could produce underwriting results that would
have a negative impact on our consolidated results of operations
and financial condition.
We
Face Significant Competitive Pressures in Our Business that
Could Cause Demand for Our Products to Fall and Adversely Affect
Our Profitability.
We compete with a large number of other companies in our
selected lines of business. We compete, and will continue to
compete, with major U.S. and
Non-U.S. insurers
and other regional companies, as well as mutual companies,
specialty insurance companies, reinsurance companies,
underwriting agencies and diversified financial services
companies. Our competitors include, among others: American
International Group, Argo Group International Holdings, Ltd.,
Berkshire Hathaway, Everest Re Group, Ltd., Great American
Insurance Group, HCC Insurance Holdings, Inc., IFG Companies,
JRG Reinsurance Company, Ltd., Maiden Holdings, Ltd., Markel
Corporation, Max Capital Group, Ltd., Nationwide Insurance,
Navigators Insurance Group, RLI Corporation, Torus Insurance
Holdings, Ltd., W.R. Berkley Corporation, and Western World
Insurance Group. Some of our competitors have greater financial
and marketing resources than we do. Our profitability could be
adversely affected if we lose business to competitors offering
similar or better products at or below our prices.
Our
General Agencies Typically Pay the Insurance Premiums On
Business They Have Bound To Us On a Monthly Basis. This
Accumulation of Balances Due To Us Exposes Us To a Credit
Risk.
Insurance premiums generally flow from the insured to their
retail broker, then into a trust account controlled by our
professional general agencies. Our general agencies are
typically required to forward funds, net of commissions, to us
following the end of each month. Consequently, we assume a
degree of credit risk on the aggregate amount of these balances
that have been paid by the insured but have yet to reach us.
Because
We Provide Our General Agencies with Specific Quoting and
Binding Authority, If Any of Them Fail To Comply With Our
Pre-Established Guidelines, Our Results of Operations Could Be
Adversely Affected.
We market and distribute our insurance products through
professional general agencies that have limited quoting and
binding authority and that in turn sell our insurance products
to insureds through retail insurance brokers. These agencies can
bind certain risks without our initial approval. If any of these
wholesale professional general agencies fail to comply with our
underwriting guidelines and the terms of their appointment, we
could be
37
bound on a particular risk or number of risks that were not
anticipated when we developed the insurance products or
estimated loss and loss adjustment expenses. Such actions could
adversely affect our results of operations.
As a
Property and Casualty Insurer and Reinsurer, We Could Face
Losses from Terrorism and Political Unrest.
We may have exposure to losses resulting from acts of terrorism
and political instability. Even if reinsurers are able to
exclude coverage for terrorist acts or price that coverage at
rates that we consider unattractive, direct insurers, like our
insurance company subsidiaries, might not be able to likewise
exclude terrorist acts because of regulatory constraints. If
this does occur, we, in our capacity as a primary insurer, would
have a significant gap in our reinsurance protection and would
be exposed to potential losses as a result of any terrorist
acts. These risks are inherently unpredictable, although recent
events may lead to increased frequency and severity. It is
difficult to predict occurrence of such events with statistical
certainty or to estimate the amount of loss per occurrence they
will generate.
Our
Holding Company Structure and Regulatory Constraints Limit Our
Ability to Receive Dividends from Our Subsidiaries in Order to
Meet Our Cash Requirements.
United America Indemnity is a holding company and, as such, has
no substantial operations of its own, and its assets primarily
consist of cash and invested assets and its ownership of the
shares of its direct and indirect subsidiaries. Dividends and
other permitted distributions from insurance subsidiaries, which
include payment for equity awards granted by United America
Indemnity to employees of such subsidiaries, are expected to be
United America Indemnitys sole source of funds to
meet ongoing cash requirements, including debt service payments
and other expenses.
Due to our corporate structure, any dividends that United
America Indemnity receives from its subsidiaries must pass
through Wind River Reinsurance. The inability of Wind River
Reinsurance to pay dividends to United America Indemnity in
an amount sufficient to enable United America Indemnity to meet
its cash requirements at the holding company level could have a
material adverse effect on its operations.
Bermuda law does not permit payment of dividends or
distributions of contributed surplus by a company if there are
reasonable grounds for believing that the company, after the
payment is made, would be unable to pay its liabilities as they
become due, or the realizable value of the companys assets
would be less, as a result of the payment, than the aggregate of
its liabilities and its issued share capital and share premium
accounts. Furthermore, pursuant to the Bermuda Insurance Act
1978, an insurance company is prohibited from declaring or
paying a dividend during the financial year if it is in breach
of its minimum solvency margin or minimum liquidity ratio or if
the declaration or payment of such dividends would cause it to
fail to meet such margin or ratio. See
Regulation Bermuda Insurance Regulation
in Item 1 of Part I of this report.
In addition, the United National Insurance Companies and the
Penn-America
Insurance Companies, which are indirect subsidiaries of Wind
River Reinsurance, are subject to significant regulatory
restrictions limiting their ability to declare and pay
dividends, which must first pass through Wind River Reinsurance
before being paid to United America Indemnity. See
Regulation U.S. Regulation of United
America Indemnity in Item 1 of Part I of this
report. Also, see Note 16 of the notes to consolidated
financial statements in Item 8 of Part II of this
report for the maximum amount of distributions that could be
paid by the United National Insurance Companies and the
Penn-America
Insurance Companies in 2009.
Because
We Are Heavily Regulated by the U.S. States in Which We Operate,
We May Be Limited in the Way We Operate.
We are subject to extensive supervision and regulation in the
U.S. states in which our Insurance Operations operate. This
is particularly true in those states in which our insurance
subsidiaries are licensed, as opposed to those states where our
insurance subsidiaries write business on a surplus lines basis.
The supervision and regulation relate to numerous aspects of our
business and financial condition. The primary purpose of the
supervision and regulation is the protection of our insurance
policyholders and not our investors. The extent of regulation
varies, but generally
38
is governed by state statutes. These statutes delegate
regulatory, supervisory, and administrative authority to state
insurance departments. This system of regulation covers, among
other things:
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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 types of terms that we can include or
exclude in the insurance policies we offer;
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restrictions on the way rates are developed and the premiums we
may charge;
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standards for the manner in which general agencies may be
appointed or terminated;
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certain required methods of accounting;
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reserves for unearned premiums, losses and other
purposes; and
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potential assessments for the provision of funds necessary for
the settlement of covered claims under certain insurance
policies provided by impaired, insolvent or failed insurance
companies.
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The statutes or the state insurance department regulations may
affect the cost or demand for our products and may impede us
from obtaining rate increases or taking other actions we might
wish to take to increase our profitability. Further, we may be
unable to maintain all required licenses and approvals and our
business may not fully comply with the wide variety of
applicable laws and regulations or the relevant authoritys
interpretation of the laws and regulations. Also, regulatory
authorities have discretion to grant, renew or revoke licenses
and approvals subject to the applicable state statutes and
appeal process. If we do not have the requisite licenses and
approvals (including in some states the requisite secretary of
state registration) or do not comply with applicable regulatory
requirements, the insurance regulatory authorities could stop or
temporarily suspend us from carrying on some or all of our
activities or monetarily penalize us.
In recent years, the U.S. insurance regulatory framework
has come under increased federal scrutiny, and some state
legislators have considered or enacted laws that may alter or
increase state regulation of insurance and reinsurance companies
and holding companies. Moreover, the NAIC, which is an
association of the insurance commissioners of all 50 states
and the District of Columbia, and state insurance regulators
regularly reexamine existing laws and regulations. Changes in
these laws and regulations or the interpretation of these laws
and regulations could have a material adverse effect on our
business.
We May
Require Additional Capital in the Future That May Not Be
Available or Only Available On Unfavorable Terms.
Our future capital requirements depend on many factors,
including the incurring of significant net catastrophe losses,
our ability to write new business successfully and to establish
premium rates and reserves at levels sufficient to cover losses.
To the extent that we need to raise additional funds, any equity
or debt financing for this purpose, if available at all, may be
on terms that are not favorable to us. If we cannot obtain
adequate capital, our business, results of operations and
financial condition could be adversely affected.
Interests
of Holders of Class A Common Shares May Conflict with
the Interests of Our Controlling Shareholder.
Fox Paine & Company beneficially owns shares having
approximately 89.6% of our total voting power. The percentage of
our total voting power that Fox Paine & Company may
exercise is greater than the percentage of our total shares that
Fox Paine & Company beneficially owns because Fox
Paine & Company beneficially owns a large number of
Class B common shares, which have ten votes per share as
opposed to Class A common shares, which have one vote per
share. The Class A common shares and the Class B
common shares generally vote together as a single class on
matters presented to our shareholders. Based on the ownership
structure of the affiliates of Fox Paine & Company
that own these shares, these affiliates are subject to the
voting restriction contained in our articles
39
of association. As a result, Fox Paine & Company has
and will continue to have control over the outcome of certain
matters requiring shareholder approval, including the power to,
among other things:
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amend our memorandum or articles of association;
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prevent schemes of arrangement of our subsidiaries
assets; and
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approve redemption of the common shares.
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Fox Paine & Company will also be able to prevent or
cause a change of control. Fox Paine & Companys
control over us, and Fox Paine & Companys
ability to prevent or cause a change of control, may delay or
prevent a change of control, or cause a change of control to
occur at a time when it is not favored by other shareholders. As
a result, the trading price of our Class A common shares
could be adversely affected.
In addition, we have agreed to pay Fox Paine & Company
annual management fees of $1.5 million. Fox
Paine & Company may in the future make significant
investments in other insurance or reinsurance companies. Some of
these companies may compete with us or with our subsidiaries.
Fox Paine & Company is not obligated to advise us of
any investment or business opportunities of which they are
aware, and they are not prohibited or restricted from competing
with us or with our subsidiaries.
Our
Controlling Shareholder Has the Contractual Right to Nominate a
Majority of the Members of Our Board of Directors and Also
Otherwise Controls the Election of Directors Due to Its Majority
Ownership.
While Fox Paine & Company has the contractual right,
under the terms of a shareholders agreement between us, Fox
Paine & Company, and certain affiliates of Fox
Paine & Company, to nominate a majority of the members
of our Board of Directors, it also controls the election of all
directors to the Board of Directors due to its controlling share
ownership. Our Board of Directors currently consists of seven
directors, all of which other than Mr. Frakes were
identified and proposed for consideration for the Board of
Directors by Fox Paine & Company.
Our Board of Directors, in turn, and subject to its fiduciary
duties under Cayman Islands law, appoints the members of our
senior management, who also have fiduciary duties to the
Company. As a result, Fox Paine & Company effectively
has the ability to control the appointment of the members of our
senior management and to prevent any changes in senior
management that other shareholders, or that other members of our
Board of Directors, may deem advisable.
Because
We Rely on Certain Services Provided by Fox Paine &
Company, the Loss of Such Services Could Adversely Affect Our
Business.
During 2007, 2008, and 2009, Fox Paine & Company
provided certain management services to us. To the extent that
Fox Paine & Company is unable or unwilling to provide
similar services in the future, and we are unable to perform
those services ourselves or we are unable to secure replacement
services, our business could be adversely affected.
The
Current Recession and Other Adverse Consequences of the Recent
U.S. and Global Economic and Financial Industry Downturns Could
Harm Our Business, Our Liquidity and Financial Condition, and
Our Stock Price.
Global market and economic conditions have been severely
disrupted. These conditions may potentially affect (among other
aspects of our business) the demand for and claims made under
our products, the ability of customers, counterparties and
others to establish or maintain their relationships with us, our
ability to access and efficiently use internal and external
capital resources, the availability of reinsurance protection,
the risks we assume under reinsurance programs covering variable
annuity guarantees, and our investment performance. Continued
volatility in the U.S. and other securities markets may
adversely affect our stock price.
40
Risks
Related to Taxation
Legislative
and Regulatory Action by the U.S. Congress Could Materially and
Adversely Affect Us.
Our tax position could be adversely impacted by changes in tax
laws, tax treaties or tax regulations or the interpretation or
enforcement thereof. Legislative action may be taken by the
U.S. Congress which, if ultimately enacted, could override
tax treaties upon which we rely or could broaden the
circumstances under which we would be considered a
U.S. resident, each of which could materially and adversely
affect our effective tax rate and cash tax position.
In addition, there continues to be negative publicity regarding,
and criticism of, companies that conduct substantial business in
the U.S. but are domiciled in countries like the Cayman
Islands.
We May
Become Subject To Taxes in the Cayman Islands or Bermuda in the
Future, Which May Have a Material Adverse Effect on our Results
of Operations.
United America Indemnity has been incorporated under the laws of
the Cayman Islands as an exempted company and, as such, obtained
an undertaking on September 2, 2003 from the Governor in
Council of the Cayman Islands substantially that, for a period
of 20 years from the date of such undertaking, no law that
is enacted in the Cayman Islands imposing any tax to be levied
on profit or income or gains or appreciation shall apply to us
and no such tax and no tax in the nature of estate duty or
inheritance tax will be payable, either directly or by way of
withholding, on our common shares. This undertaking would not,
however, prevent the imposition of taxes on any person
ordinarily resident in the Cayman Islands or any company in
respect of its ownership of real property or leasehold interests
in the Cayman Islands. Given the limited duration of the
undertaking, we cannot be certain that we will not be subject to
Cayman Islands tax after the expiration of the
20-year
period.
Wind River Reinsurance was formed in 2006 through the
amalgamation of our
Non-U.S. Operations.
We received an assurance from the Bermuda Minister of Finance,
under the Bermuda Exempted Undertakings Tax Protection Act 1966,
as amended, that if any legislation is enacted in Bermuda that
would impose tax computed on profits or income, or computed on
any capital asset, gain or appreciation, or any tax in the
nature of estate duty or inheritance tax, then the imposition of
any such tax will not be applicable to Wind River Reinsurance or
any of its operations, shares, debentures or other obligations
through March 28, 2016. Given the limited duration of the
assurance, we cannot be certain that we will not be subject to
any Bermuda tax after March 28, 2016.
Following the expiration of the periods described above, we may
become subject to taxes in the Cayman Islands or Bermuda, which
may have a material adverse effect on our results of operations.
United
America Indemnity or Wind River Reinsurance May Be Subject to
U.S. Tax That May Have a Material Adverse Effect on United
America Indemnitys, or Wind River Reinsurances
Results of Operations.
United America Indemnity is a Cayman Islands company and Wind
River Reinsurance is a Bermuda company. We have managed our
business in a manner designed to reduce the risk that United
America Indemnity and Wind River Reinsurance will be treated as
being engaged in a U.S. trade or business for
U.S. federal income tax purposes. However, because there is
considerable uncertainty as to the activities that constitute
being engaged in a trade or business within the United States,
we cannot be certain that the U.S. Internal Revenue Service
will not contend successfully that United America Indemnity or
Wind River Reinsurance will be engaged in a trade or business in
the United States. If United America Indemnity or Wind River
Reinsurance were considered to be engaged in a business in the
United States, we could be subject to U.S. corporate income
and branch profits taxes on the portion of our earnings
effectively connected to such U.S. business, in which case
our results of operations could be materially adversely affected.
41
The
Impact of the Cayman Islands Letter of Commitment or Other
Concessions to the Organization for Economic Cooperation and
Development to Eliminate Harmful Tax Practices Is Uncertain and
Could Adversely Affect Our Tax Status in the Cayman Islands or
Bermuda.
The Organization for Economic Cooperation and Development, which
is commonly referred to as the OECD, has published reports and
launched a global dialogue among member and non-member countries
on measures to limit harmful tax competition. These measures are
largely directed at counteracting the effects of tax havens and
preferential tax regimes in countries around the world. In the
OECDs report dated February 22, 2010, the Cayman
Islands and Bermuda were not listed as uncooperative tax haven
jurisdictions because each had previously committed itself to
eliminate harmful tax practices and to embrace international tax
standards for transparency, exchange of information and the
elimination of any aspects of the regimes for financial and
other services that attract business with no substantial
domestic activity. We are not able to predict what changes will
arise from the commitment or whether such changes will subject
us to additional taxes.
There
Is A Risk That Interest Paid By Our U.S. Subsidiaries To a
Luxembourg Affiliate May Be Subject to 30% U.S. Withholding
Tax.
U.A.I. (Luxembourg) Investment, S.à r.l., an indirectly
owned Luxembourg subsidiary of Wind River Reinsurance, owns two
notes issued by United America Indemnity Group, Inc., a Delaware
corporation. Under U.S. federal income tax law, interest
paid by a U.S. corporation to a
non-U.S. shareholder
is generally subject to a 30% withholding tax, unless reduced by
treaty. The income tax treaty between the United States and
Luxembourg (the Luxembourg Treaty) generally
eliminates the withholding tax on interest paid to qualified
residents of Luxembourg. Were the IRS to contend successfully
that U.A.I. (Luxembourg) Investment, S.à r.l. is not
eligible for benefits under the Luxembourg Treaty, interest paid
to U.A.I. (Luxembourg) Investment, S.à r.l. by United
America Indemnity Group, Inc. would be subject to the 30%
withholding tax. Such tax may be applied retroactively to all
previous years for which the statute of limitations has not
expired, with interest and penalties. Such a result may have a
material adverse effect on our financial condition and results
of operation.
There
is a Risk That Interest Income Imputed to Our Irish Affiliate
May be Subject to 25% Irish Income Tax
U.A.I. (Ireland) Limited is a private limited liability company
incorporated under the laws of Ireland. The company is a
resident taxpayer fully subject to Ireland corporate income tax
of 12.5% on trading income and 25.0% on non-trading income,
including interest and dividends from foreign companies. The
company intends to manage its operations in such a way that
there will not be any material taxable income generated in
Ireland under Irish law. However, there can be no assurance from
the Irish authorities that a law may not be enacted that would
impute income to U.A.I. (Ireland) Limited in the future or
retroactively arising out of our current operations.
Risks
Related to Our Proposed Redomestication to Ireland
The
Rights of Our Shareholders Will Change as a Result of Our
Proposed Redomestication.
Because of differences between Irish law and Cayman Islands law
and differences between the governing documents of Global
Indemnity plc and United America Indemnity, the rights of
shareholder will change if the proposed redomestication
transaction (the Transaction) is completed.
Fox
Paine & Company and Affiliated Investment Funds of Fox
Paine & Company (collectively, the Fox Paine
Entities) Will Continue to Control a Substantial Interest
in Us and Thus May Exert Significant Influence on Corporate
Affairs and Actions, Including Those Submitted to a Shareholder
Vote.
Following the Transaction, the Fox Paine Entities will continue
to beneficially own approximately 17.8% of Global Indemnity plc
Class A ordinary shares and 100.0% of our issued and
outstanding Class B ordinary shares, together representing
approximately 89.6% of our total voting power. As a result of
their majority ownership, the
42
Fox Paine Entities have and will continue to have control over
the outcome of most matters requiring shareholder approval,
including the power to, among other things:
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elect all of our directors;
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amend our articles of association (as long as their voting power
is greater than 75%);
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elect our auditors;
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increase our share capital;
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resolve to pay dividends or distributions; and
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approve the annual report and the annual financial statements.
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Subject to certain exceptions, the Fox Paine Entities may also
be able to prevent or cause a change of control. The Fox Paine
Entities control over us, and Fox Paine &
Companys ability in certain circumstances to prevent or
cause a change of control, may delay or prevent a change of
control, or cause a change of control to occur at a time when it
is not favored by other shareholders. As a result, the trading
price of our Global Indemnity plc Class A ordinary shares
could be adversely affected.
Under the terms of an existing shareholders agreement between us
and certain Fox Paine Entities, the applicable Fox Paine
Entities have the contractual right to nominate a majority of
the members of our board of directors. Our board of directors
currently consists of seven directors, all of which, other than
Mr. Frakes, were identified and proposed for consideration
for the Board of Directors by such Fox Paine Entities. Global
Indemnity plc will assume the obligations of United America
Indemnity under the shareholders agreement. Following the
Transaction, the right of Fox Paine Entities to appoint
directors to the board will be included in Global Indemnity
plcs memorandum and articles of association, which will
permit certain Fox Paine affiliates to appoint by written notice
to the board a certain number of directors, dependent on their
percentage ownership of voting shares in Global Indemnity plc
for so long as Fox Paine & Company and its affiliates
hold an aggregate of 25% or more of the voting power in the
company.
Our board of directors, in turn, and subject to its fiduciary
duties under Cayman Islands law and Irish law, appoints or will
appoint, as applicable, the members of our senior management,
who also have fiduciary duties to the Company. As a result, the
Fox Paine Entities have the ability to control the appointment
of the members of our senior management and to prevent any
changes in senior management that other shareholders, or that
other members of our board of directors, may deem advisable.
Legislative
and Regulatory Action Could Materially and Adversely Affect Us
Regardless of Whether or Not We Complete the
Transaction.
Legislative action may be taken by the U.S. Congress which,
if ultimately enacted, could override tax treaties upon which we
rely or could broaden the circumstances under which we would be
considered a U.S. resident regardless of whether we
complete the Transaction, each of which could materially and
adversely affect our effective tax rate and cash tax position.
We cannot predict the outcome of any specific legislative
proposals. However, if proposals were enacted that had the
effect of disregarding the Transaction or limiting our ability
to take advantage of the tax treaties between Ireland and the
U.S., we could be subjected to increased taxation. In addition,
any future amendments to the current income tax treaty between
Ireland and the U.S. could subject us to increased taxation.
As a company incorporated in the European Union, Global
Indemnity plc is subject to European Union law and this could
impose regulatory burdens on Global Indemnity plc in the future.
Our
Effective Tax Rate May Increase After the
Transaction.
While the Transaction is not anticipated to have any material
impact on our effective tax rate, there is uncertainty regarding
the tax policies of the jurisdictions where we operate (which
include the potential legislative actions described above), and
our effective tax rate may increase and any such increase may be
material.
43
Additionally, the tax laws of Ireland and other jurisdictions
could change in the future, and such changes could cause a
material change in our effective tax rate.
The
Transaction Will Result In Additional Direct and Indirect Costs,
Even If It Is Not Completed.
Although we do not expect these costs to be material, we will
incur additional direct costs as a result of the Transaction. In
addition to Global Indemnity plc being incorporated in Ireland
and being governed by Irish law, we will expand our presence in
Ireland. In general, we will hold at least half of our board of
directors meetings in Ireland. We also expect to incur costs and
expenses, including professional fees, to comply with Irish
corporate and tax laws and financial reporting requirements. In
addition, we expect to incur attorneys fees,
accountants fees, filing fees, mailing expenses and
financial printing expenses in connection with the Transaction,
even if the scheme of arrangement, pursuant to which we will
effect the redomestication (the Scheme of
Arrangement) is not approved or completed. The Transaction
also may negatively affect us by diverting attention of our
management and employees from our operating business during the
period of implementation and by increasing other administrative
costs and expenses.
We May
Choose to Abandon or Delay the Transaction.
We may abandon or delay the Transaction at any time prior to the
Scheme of Arrangement becoming effective by action of our board
of directors, even after obtaining the necessary approval of
United America Indemnity common shareholders at the special
meeting of shareholders relating to this transaction and
sanction of the Grand Court of the Cayman Islands (the
Grand Court). While we currently expect to complete
the Transaction as soon as practicable after obtaining
shareholder approval of the Scheme of Arrangement at the Special
Meeting and sanction of the Grand Court, our board of directors
may delay the Transaction for a significant time or may abandon
the Transaction after the Special Meeting because, among other
reasons, of an increase in our estimated cost of the Transaction
or a determination by the board of directors that completing the
Transaction is no longer in our best interest or the best
interests of our shareholders or may not result in the benefits
we expect. Additionally, we may not be able to obtain the
requisite shareholder approval or court sanction.
If the
Shareholders of United America Indemnity Do Not Approve the
Proposal Relating to Global Indemnity plcs
Distributable Reserves Proposal, Global Indemnity Plc May Not
Have Sufficient Distributable Reserves to Pay Dividends (or to
Repurchase or Redeem Shares) Following the Transaction. In
Addition, There Is No Guarantee That Irish High Court Approval
of the Creation of Distributable Reserves Will Be
Forthcoming.
Under Irish law, dividends must be paid (and share repurchases
and redemptions must generally be funded) out of
distributable reserves, which Global Indemnity plc
will not have immediately following the Transaction. If the
Scheme of Arrangement is approved, shareholders of United
America Indemnity also will be asked at the special meeting of
shareholders to approve the reduction of share premium of Global
Indemnity plc to allow the creation of distributable reserves of
Global Indemnity plc (through the reduction of the share premium
account of Global Indemnity plc), so that we may pay dividends
and repurchase or redeem shares. The approval of the
distributable reserves proposal is not a condition to the
consummation of the Transaction. Accordingly, if the common
shareholders of United America Indemnity approve the Scheme of
Arrangement but do not approve the distributable reserves
proposal, and the Transaction is consummated, Global Indemnity
plc may not have sufficient distributable reserves to make
distributions or pay dividends (or to repurchase or redeem
shares) following the Transaction.
In addition, the creation of distributable reserves requires the
approval of the Irish High Court. Although we are not aware of
any reason why the Irish High Court would not approve the
creation of distributable reserves, the issuance of the required
order is a matter for the discretion of the Irish High Court and
there is no guarantee that such approval will be forthcoming.
Even if the Irish High Court does approve the creation of
distributable reserves, it may take substantially longer than we
anticipate.
44
As a
Result Of Different Shareholder Voting Requirements in Ireland
Relative to the Cayman Islands, We Will Have Less Flexibility
with Respect to Certain Aspects of Capital Management Than We
Now Have.
Under Cayman Islands law, our directors may issue, without
shareholder approval, any common shares authorized in our
memorandum of association that are not already issued. Irish law
allows shareholders to authorize share capital which then can be
issued by a board of directors without shareholder approval.
Additionally, subject to specified exceptions, Irish law grants
statutory pre-emptive rights to existing shareholders to
subscribe for new issuances of shares for cash, but allows
shareholders to authorize the waiver of the statutory
pre-emptive rights with respect to any particular allotment of
shares. These authorizations must be renewed by the shareholders
at least every five years and we cannot guarantee that these
authorizations will always be approved, which could limit our
ability to issue equity. While we do not believe that the
differences between Cayman Islands law and Irish law relating to
our capital management will have an adverse effect on us,
situations may arise where the flexibility we now have in the
Cayman Islands would have provided benefits to our shareholders.
After
The Transaction, A Future Transfer of Global Indemnity Plc
Ordinary Shares May Be Subject to Irish Stamp
Duty.
Transfers by shareholders who hold their Global Indemnity plc
ordinary shares beneficially through banks, brokers, trustees,
custodians or other nominees, which in turn hold those shares
through DTC, will not be subject to Irish stamp duty where such
transfers are to holders who also hold through DTC. If
shareholders hold their Global Indemnity plc ordinary shares
directly rather than beneficially, any purchase of their shares
will be subject to Irish stamp duty. Irish stamp duty is
currently at the rate of 1% of the price paid or, if higher, the
market value of the ordinary shares acquired. Any transfer of
Global Indemnity plc ordinary shares which is subject to Irish
stamp duty will not be registered in the name of the buyer
unless an instrument of transfer is executed by or on behalf of
the seller, is duly stamped and is provided to our transfer
agent. Only registered shareholders of Global Indemnity plc will
be entitled to receive dividends. Subject to certain exceptions,
only registered shareholders of Global Indemnity plc will be
entitled to vote in general meetings of Global Indemnity plc.
The potential for stamp duty could adversely affect the price of
Global Indemnity plc ordinary shares.
Dividends
Received by Shareholders May Be Subject to Irish Dividend
Withholding Tax.
In certain circumstances, as an Irish tax resident company, we
are required to deduct Irish dividend withholding tax (currently
at the rate of 20%) from dividends paid to our shareholders. In
the majority of cases, shareholders resident in the
U.S. will not be subject to Irish dividend withholding tax,
and shareholders resident in a number of other countries will
not be subject to Irish dividend withholding tax provided that
they complete certain Irish dividend withholding tax forms.
However, some shareholders may be subject to withholding tax,
which could adversely affect the price of our shares.
Dividends
Received by Shareholders Could Be Subject to Irish Income
Tax.
Dividends paid in respect of our shares will generally not be
subject to Irish income tax where the beneficial owner of these
dividends is exempt from dividend withholding tax, unless the
beneficial owner of the dividend has some connection with
Ireland other than his or her shareholding in Global Indemnity
plc.
Global Indemnity plc shareholders who receive their dividends
subject to Irish dividend withholding tax will generally have no
further liability to Irish income tax on the dividend unless the
beneficial owner of the dividend has some connection with
Ireland other than his or her shareholding in Global Indemnity
plc.
A
Change of Control Could Accelerate Certain of Our
Indebtedness.
We have $90.0 million principal amount of Notes outstanding
under the Note and Guarantee Agreement dated as of July 20,
2005. Pursuant to the terms of these Notes, if Global Indemnity
plc ceases to be an affiliate of the Fox Paine Entities, then
unless certain ratings of United America Indemnity or Global
Indemnity plc and its subsidiaries remain constant, we will be
required to offer to repurchase such indebtedness pursuant to a
change of control provision set forth therein.
45
The
Total Market Capitalization of Global Indemnity Plc Ordinary
Shares After the Transaction May Be Lower Than the Total
Market Capitalization of United America Indemnity Common
Shares Before the Transaction
Reducing the number of outstanding shares through the
one-for-two
exchange pursuant to the Transaction is intended, absent other
factors, to increase the per share market price of Global
Indemnity plc ordinary shares. However, other factors, such as
financial results, market conditions and the market perception
of our business and the
one-for-two
exchange may adversely affect the market price of Global
Indemnity plc ordinary shares. As a result, there can be no
assurance that the
one-for-two
exchange pursuant to the Transaction, if completed, will result
in the intended benefits, that the market price of Global
Indemnity plc will increase following the Transaction or that
the market price of Global Indemnity plc will not decrease in
the future. Additionally, we cannot assure our shareholders that
the market price per share of Global Indemnity plc after the
Transaction will increase in proportion to the reduction in the
number of United America Indemnity common shares outstanding
before the Transaction. Accordingly, the total market
capitalization of Global Indemnity plc ordinary shares after the
Transaction may be lower than the market capitalization of
United America Indemnity common shares before the Transaction.
The
Transaction May Result in Some Shareholders Owning Odd
Lots of Less Than 100 Shares of Global Indemnity Plc
Ordinary Shares
The Transaction may result in some shareholders owning odd
lots of less than 100 shares of Global Indemnity plc
ordinary shares because of the
one-for-two
exchange of Global Indemnity plc ordinary shares for United
America Indemnity common shares. Odd lot shares may be more
difficult to sell, and brokerage commissions and other costs of
transactions in odd lots are generally somewhat higher than the
costs of transactions in round lots of even
multiples of 100 shares.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
We lease approximately 71,150 square feet of office space
in Bala Cynwyd, Pennsylvania, which serves as the headquarters
location for our Insurance Operations, pursuant to a lease that
expires on December 31, 2013. In addition, we lease
approximately 29,800 square feet of additional office space
in Arizona, California, Georgia, Illinois, New York, North
Carolina, and Texas, which serve as office space for our field
offices, pursuant to various leases that expire at various times
from June 30, 2010 to March 31, 2016. Some of the
office space in California also serves as office space for our
claims operations. We also lease approximately 1,600 square
feet of office space in Hamilton, Bermuda, which is used by our
Reinsurance Operations, pursuant to a lease that expires on
December 31, 2013.
|
|
Item 3.
|
Legal
Proceedings
|
We are, from time to time, involved in various legal proceedings
in the ordinary course of business, including litigation
regarding claims. There is a greater potential for disputes with
reinsurers who are in a runoff of their reinsurance operations.
Some of our reinsurers are in a runoff of their reinsurance
operations, and therefore, we closely monitor those
relationships. We do not believe that the resolution of any
currently pending legal proceedings, either individually or
taken as a whole, will have a material adverse effect on our
business, consolidated financial position, results of
operations, or cash flows. We anticipate that, similar to the
rest of the insurance and reinsurance industry, we will continue
to be subject to litigation and arbitration proceedings in the
ordinary course of business.
On July 24, 2009, a federal judge from the
U.S. District Court for the Eastern District of
Pennsylvania (Philadelphia) upheld a jury verdict in favor of
United National Insurance Company, an indirect wholly owned
subsidiary of the Company, against AON Corp., an insurance and
reinsurance broker. See Note 12 of the notes to
consolidated financial statements in Item 8 of Part II
of this report for details concerning this legal proceeding.
46
|
|
Item 4.
|
Submission
Of Matters To A Vote Of Security Holders
|
The following matters were submitted to a vote of shareholders
at our Annual General Meeting of Shareholders on
October 27, 2009:
1. Election of the following nominees to our Board of
Directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nominee
|
|
Votes For
|
|
|
Votes Against
|
|
|
Votes Abstained
|
|
|
Saul A. Fox
|
|
|
261,715,487
|
|
|
|
14,129,278
|
|
|
|
656,439
|
|
Larry A. Frakes
|
|
|
267,661,688
|
|
|
|
8,186,080
|
|
|
|
653,436
|
|
Stephen A. Cozen
|
|
|
266,596,209
|
|
|
|
9,251,859
|
|
|
|
653,136
|
|
Seth J. Gersch
|
|
|
267,261,051
|
|
|
|
8,584,014
|
|
|
|
656,139
|
|
James R. Kroner
|
|
|
268,051,467
|
|
|
|
7,799,098
|
|
|
|
650,639
|
|
Chad A. Leat
|
|
|
268,294,198
|
|
|
|
7,779,636
|
|
|
|
427,370
|
|
Michael J. Marchio
|
|
|
268,059,572
|
|
|
|
7,791,293
|
|
|
|
650,339
|
|
2. Ratification of the appointment of
PricewaterhouseCoopers LLP as our independent auditor for 2009
and the authorization of our Board of Directors acting by its
Audit Committee to set the fees for the independent auditor.
|
|
|
|
|
Votes For
|
|
Votes Against
|
|
Votes Abstained
|
|
275,793,080
|
|
695,395
|
|
12,729
|
3. Election of the following nominees to the Wind River
Reinsurance Company, Ltd. Board of Directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nominee
|
|
Votes For
|
|
|
Votes Against
|
|
|
Votes Withheld
|
|
|
Alan Bossin
|
|
|
275,839,880
|
|
|
|
|
|
|
|
661,324
|
|
Larry A. Frakes
|
|
|
275,803,913
|
|
|
|
|
|
|
|
697,291
|
|
Troy W. Santora
|
|
|
275,841,819
|
|
|
|
|
|
|
|
659,385
|
|
Janita Burke Waldron (Alternate Director)
|
|
|
275,840,054
|
|
|
|
|
|
|
|
661,150
|
|
4. Approval of the appointment of PricewaterhouseCoopers,
Hamilton, Bermuda, as the independent auditor of Wind River
Reinsurance Company, Ltd. for 2009.
|
|
|
|
|
Votes For
|
|
Votes Against
|
|
Votes Abstained
|
|
275,870,510
|
|
608,155
|
|
22,539
|
5. Approval of the payment of an arrangement fee and a
backstop fee to Fox Paine & Company in connection with
the Rights Offering.
|
|
|
|
|
Votes For
|
|
Votes Against
|
|
Votes Abstained
|
|
150,399,810
|
|
6,276,258
|
|
119,825,136
|
6. Approval of the GAAP audited financial statements of
Wind River Reinsurance Company, Ltd. and the report of the
independent auditors on these financial statements.
|
|
|
|
|
Votes For
|
|
Votes Against
|
|
Votes Abstained
|
|
222,835,120
|
|
|
|
|
47
PART II
|
|
Item 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
for Our Class A Common Shares
Our Class A common shares, par value $0.0001 per share,
began trading on the Nasdaq Global Market, formerly the Nasdaq
National Market, under the symbol UNGL on
December 16, 2003. On March 14, 2005 we changed our
symbol to INDM. The following table sets forth, for
the periods indicated, the high and low sales prices of our
Class A common shares, as reported by the Nasdaq Global
Select Market:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
13.48
|
|
|
$
|
3.70
|
|
Second Quarter
|
|
|
6.47
|
|
|
|
3.73
|
|
Third Quarter
|
|
|
7.69
|
|
|
|
4.37
|
|
Fourth Quarter
|
|
|
8.91
|
|
|
|
6.62
|
|
Fiscal Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
21.44
|
|
|
$
|
17.52
|
|
Second Quarter
|
|
|
20.22
|
|
|
|
13.22
|
|
Third Quarter
|
|
|
17.64
|
|
|
|
11.75
|
|
Fourth Quarter
|
|
|
15.74
|
|
|
|
8.46
|
|
There is no established public trading market for our
Class B common shares, par value $0.0001 per share.
As of February 25, 2010, there were approximately 2,100
beneficial holders of record of our Class A common shares.
As of February 25, 2010, there were 10 holders of record of
our Class B common shares, all of whom are affiliates of
Fox Paine & Company.
48
Performance
of Our Class A Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/16/03
|
|
|
|
12/31/03
|
|
|
|
12/31/04
|
|
|
|
12/31/05
|
|
|
|
12/31/06
|
|
|
|
12/31/07
|
|
|
|
12/31/08
|
|
|
|
12/31/09
|
|
United America Indemnity, Ltd.
|
|
|
$
|
100.0
|
|
|
|
$
|
103.9
|
|
|
|
$
|
109.5
|
|
|
|
$
|
108.0
|
|
|
|
$
|
149.0
|
|
|
|
$
|
117.2
|
|
|
|
$
|
75.4
|
|
|
|
$
|
46.6
|
|
NASDAQ Insurance Index
|
|
|
|
100.0
|
|
|
|
|
103.1
|
|
|
|
|
123.4
|
|
|
|
|
134.9
|
|
|
|
|
151.2
|
|
|
|
|
150.0
|
|
|
|
|
132.5
|
|
|
|
|
133.2
|
|
NASDAQ Composite Index
|
|
|
|
100.0
|
|
|
|
|
104.1
|
|
|
|
|
113.1
|
|
|
|
|
114.6
|
|
|
|
|
125.5
|
|
|
|
|
137.8
|
|
|
|
|
82.0
|
|
|
|
|
117.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
|
We completed our Rights Offering on May 5, 2009, which
increased our total outstanding Class A common shares by
17.2 million shares. See Note 10 to the consolidated
financial statements in Item 8 of Part II of this
report for details concerning the Rights Offering.
|
49
Recent
Sales of Unregistered Securities
On May 5, 2009, we completed the Rights Offering in which a
total of 17,178,421 Class A common shares and 11,435,244
Class B common shares were issued. The issuance of the
Class A common shares included 41,588 Class A common
shares issued to an affiliate of Fox Paine & Company
in a private placement pursuant to Section 4(2) of the
Securities Act, as amended. The affiliate of Fox
Paine & Company purchased the 41,588 Class A
common shares for $3.50 per share, which was the subscription
price at which all Class A common shareholders and
Class B common shareholders were entitled to purchase
additional shares. All other shares issued in the Rights
Offering were issued pursuant to a registration statement. The
net proceeds of $91.8 million were used to support our
strategic initiatives, enhance liquidity and financial
flexibility, and for other general corporate purposes. See
Note 10 to the consolidated financial statements in
Item 8 of Part II of this report for details
concerning the Rights Offering.
Purchases
of Our Class A Common Shares
Our Share Incentive Plan allows employees to surrender shares of
our Class A common shares as payment for the tax liability
incurred upon the vesting of restricted stock that was issued
under our Share Incentive Plan. During 2009, we purchased an
aggregate of 27,057 of surrendered Class A common shares
from our employees for $0.2 million. All shares purchased from
employees are held as treasury stock and recorded at cost.
As part of the Rights Offering that was completed in May 2009,
we purchased 10,000 Class A common shares for
$0.04 million that had been purchased by a former employee
with the non-transferable Class A Rights that were
distributed to that former employee for Class A common
shares held of non-vested restricted stock. Since the restricted
stock was not vested, the former employee, upon leaving the
Company, had to forfeit those Class A common shares that
had been purchased with the non-transferable Class A Rights
that were distributed on that restricted stock. See Note 10
to the consolidated financial statements in Item 8 of
Part II of this report for details concerning the Rights
Offering.
Dividend
Policy
We did not declare or pay cash dividends on any class of our
common shares in 2009 or 2008, and we do not anticipate paying
any cash dividends on any class of our common shares in the
foreseeable future. However, this is subject to future
determinations by the Board of Directors based on our results,
financial conditions, amounts required to grow our business, and
other factors deemed relevant by the Board.
We are a holding company and have no direct operations. Our
ability to pay dividends depends, in part, on the ability of
Wind River Reinsurance, the Luxembourg Companies, the United
National Insurance Companies, and the
Penn-America
Insurance Companies to pay dividends. Wind River Reinsurance,
the United National Insurance Companies, and the
Penn-America
Insurance Companies are subject to significant regulatory
restrictions limiting their ability to declare and pay dividends.
See Note 16 of the notes to consolidated financial
statements in Item 8 of Part II of this report for the
dividends declared and paid by the United National Insurance
Companies and the
Penn-America
Insurance Companies in 2009 and the maximum amount of
distributions that they could pay as dividends in 2010.
For 2010, we believe that Wind River Reinsurance should have
sufficient liquidity and solvency to pay dividends. In the
future, we anticipate paying dividends from Wind River
Reinsurance to fund obligations of United America Indemnity.
Wind River Reinsurance is prohibited, without the approval of
the Bermuda Monetary Authority (BMA), from reducing
by 15% or more its total statutory capital as set out in its
previous years statutory financial statements, and any
application for such approval must include such information as
the BMA may require. Based upon the total statutory capital plus
the statutory surplus as set out in its 2009 statutory financial
statements that will be filed in 2010, Wind River Reinsurance
could pay a dividend of up to $175.8 million without
requesting BMA approval.
Under the Companies Act, Wind River Reinsurance may only declare
or pay a dividend if Wind River Reinsurance has no reasonable
grounds for believing that it is, or would after the payment be,
unable to pay its liabilities as they become due, or if the
realizable value of its assets would not be less than the
aggregate of its liabilities and its issued share capital and
share premium accounts.
50
In 2009, profit distributions (not in respect to liquidations)
by the Luxembourg Companies were generally subject to Luxembourg
dividend withholding tax at a rate of 15%, unless a domestic law
exemption or a lower tax treaty rate applies. There is no
Luxembourg dividend withholding tax in 2009. Dividends paid by
any of the Luxembourg Companies to their Luxembourg resident
parent company are exempt from Luxembourg dividend withholding
tax, provided that at the time of the dividend distribution, the
resident parent company has held (or commits itself to continue
to hold) 10% or more of the nominal paid up capital of the
distributing entity or, in the event of a lower percentage
participation, a participation having an acquisition price of
Euro 1.2 million or more for a period of at least
twelve months.
For a discussion of factors affecting our ability to pay
dividends, see Business Regulation in
Item 1 of Part I, Managements Discussion
and Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources Sources and Uses of Funds and
Capital Resources in Item 7 of Part II, and the
notes to the consolidated financial statements in Item 8 of
Part II of this report.
Our common shareholders are not subject to taxes, including
withholding provisions, under existing laws and regulations of
the Cayman Islands.
|
|
Item 6.
|
Selected
Financial Data
|
The following information presented in this Item 6 Selected
Financial Data includes historical financial data for United
America Indemnity only, and excludes information relating to the
business and operations of
Penn-America
Group and Penn Independent Group prior to our acquisition of
them on January 24, 2005. Prior data relating to
Penn-America
Group, Inc. and Penn Independent Corporation can be found in our
Current Report on
Form 8-K/A,
filed on April 7, 2005.
The following table sets forth selected consolidated historical
financial data for United America Indemnity and should be read
together with the consolidated financial statements and
accompanying notes and Managements Discussion and
Analysis of Financial Condition and Results of Operations
included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
340,999
|
|
|
$
|
378,700
|
|
|
$
|
563,112
|
|
|
$
|
652,965
|
|
|
$
|
622,878
|
|
Net premiums written
|
|
|
290,995
|
|
|
|
309,080
|
|
|
|
490,535
|
|
|
|
560,535
|
|
|
|
519,733
|
|
Net premiums earned
|
|
|
301,674
|
|
|
|
382,508
|
|
|
|
536,323
|
|
|
|
546,469
|
|
|
|
475,430
|
|
Net realized investment gains (losses)
|
|
|
15,862
|
|
|
|
(50,259
|
)
|
|
|
968
|
|
|
|
(570
|
)
|
|
|
554
|
|
Total revenues
|
|
|
387,750
|
|
|
|
400,079
|
|
|
|
614,632
|
|
|
|
612,437
|
|
|
|
523,102
|
|
Impairments of goodwill and intangible assets
|
|
|
|
|
|
|
(96,449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations(1)
|
|
|
75,437
|
|
|
|
(141,560
|
)
|
|
|
98,917
|
|
|
|
89,338
|
|
|
|
64,751
|
|
Net income (loss)
|
|
|
75,437
|
|
|
|
(141,560
|
)
|
|
|
98,917
|
|
|
|
99,418
|
|
|
|
65,593
|
|
Per share data:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations(1)
|
|
$
|
75,437
|
|
|
$
|
(141,560
|
)
|
|
$
|
98,917
|
|
|
$
|
89,338
|
|
|
$
|
64,751
|
|
Basic
|
|
|
1.46
|
|
|
|
(3.87
|
)
|
|
|
2.40
|
|
|
|
2.18
|
|
|
|
1.62
|
|
Diluted
|
|
|
1.46
|
|
|
|
(3.87
|
)
|
|
|
2.38
|
|
|
|
2.16
|
|
|
|
1.59
|
|
Net income (loss) available to common shareholders
|
|
$
|
75,437
|
|
|
$
|
(141,560
|
)
|
|
$
|
98,917
|
|
|
$
|
99,418
|
|
|
$
|
65,593
|
|
Basic
|
|
|
1.46
|
|
|
|
(3.87
|
)
|
|
|
2.40
|
|
|
|
2.43
|
|
|
|
1.64
|
|
Diluted
|
|
|
1.46
|
|
|
|
(3.87
|
)
|
|
|
2.38
|
|
|
|
2.41
|
|
|
|
1.61
|
|
Weighted-average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
51,712,098
|
|
|
|
36,556,189
|
|
|
|
41,258,027
|
|
|
|
40,957,109
|
|
|
|
39,983,638
|
|
Diluted
|
|
|
51,763,220
|
|
|
|
36,556,189
|
|
|
|
41,570,239
|
|
|
|
41,336,616
|
|
|
|
40,669,413
|
|
|
|
|
(1) |
|
The results of our discontinued operations for 2009, 2008, and
2007 relating to our Agency Operations that were sold in 2006
are included in income from continuing operations due to
immateriality. The results of discontinued operations continue
to be stated separately for 2006 and 2005. |
|
(2) |
|
In 2008, Diluted loss per share is the same as
Basic loss per share since there was a net loss for
that year. |
|
(3) |
|
In May 2009, we issued 17.2 million Class A common
shares and 11.4 million Class B common shares in
conjunction with the Rights Offering. In computing the basic and
diluted weighted share counts, the number of |
51
|
|
|
|
|
shares outstanding prior to May 5, 2009 (the date that the
common shares were issued in conjunction with the Rights
Offering) was adjusted by a factor of 1.114 to reflect the
impact of a bonus element associated with the Rights Offering in
accordance with appropriate accounting guidance. As a result,
share counts for the prior periods have been restated. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Insurance Operating Ratios based on our
GAAP Results:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before purchase accounting adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio(2)(3)
|
|
|
56.2
|
|
|
|
79.8
|
|
|
|
55.8
|
|
|
|
55.7
|
|
|
|
58.0
|
|
Expense ratio
|
|
|
39.8
|
|
|
|
37.3
|
|
|
|
32.5
|
|
|
|
31.8
|
|
|
|
33.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio(2)(3)
|
|
|
96.0
|
|
|
|
117.1
|
|
|
|
88.3
|
|
|
|
87.5
|
|
|
|
91.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of purchase accounting adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.6
|
|
Expense ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported, after purchase accounting adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio(2)(3)
|
|
|
56.2
|
|
|
|
79.8
|
|
|
|
55.8
|
|
|
|
55.7
|
|
|
|
60.6
|
|
Expense ratio
|
|
|
39.8
|
|
|
|
37.3
|
|
|
|
32.5
|
|
|
|
31.8
|
|
|
|
30.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio(2)(3)
|
|
|
96.0
|
|
|
|
117.1
|
|
|
|
88.3
|
|
|
|
87.5
|
|
|
|
90.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net/gross premiums written
|
|
|
85.3
|
|
|
|
81.6
|
|
|
|
87.1
|
|
|
|
85.8
|
|
|
|
83.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Position as of Last Day of Period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments and cash and cash equivalents
|
|
$
|
1,731,314
|
|
|
$
|
1,599,528
|
|
|
$
|
1,765,103
|
|
|
$
|
1,656,664
|
|
|
$
|
1,419,564
|
|
Reinsurance receivables, net of allowance
|
|
|
543,351
|
|
|
|
679,277
|
|
|
|
719,706
|
|
|
|
982,502
|
|
|
|
1,278,156
|
|
Total assets
|
|
|
2,445,780
|
|
|
|
2,477,059
|
|
|
|
2,775,172
|
|
|
|
2,984,616
|
|
|
|
3,102,002
|
|
Senior notes payable
|
|
|
90,000
|
|
|
|
90,000
|
|
|
|
90,000
|
|
|
|
90,000
|
|
|
|
90,000
|
|
Junior subordinated debentures
|
|
|
30,929
|
|
|
|
30,929
|
|
|
|
46,393
|
|
|
|
61,857
|
|
|
|
61,857
|
|
Unpaid losses and loss adjustment expenses
|
|
|
1,257,741
|
|
|
|
1,506,429
|
|
|
|
1,503,237
|
|
|
|
1,702,010
|
|
|
|
1,914,224
|
|
Total shareholders equity
|
|
|
831,976
|
|
|
|
631,993
|
|
|
|
836,276
|
|
|
|
763,270
|
|
|
|
639,927
|
|
|
|
|
(1) |
|
Our insurance operating ratios are non-GAAP financial measures
that are generally viewed in the insurance industry as
indicators of underwriting profitability. The loss ratio is the
ratio of net losses and loss adjustment expenses to net premiums
earned. The expense ratio is the ratio of acquisition costs and
other underwriting expenses to net premiums earned. The combined
ratio is the sum of the loss and expense ratios. The ratios
presented here represent the consolidated results of both our
Insurance Operations and Reinsurance Operations. |
|
(2) |
|
Our 2009 loss and combined ratios were impacted by a
$9.1 million reduction of net losses and loss adjustment
expenses for prior accident years. Our 2008 loss and combined
ratios were impacted by a $34.9 million increase of net
losses and loss adjustment expenses for prior accident years.
Our 2007 loss and combined ratios were impacted by a
$29.1 million reduction of net losses and loss adjustment
expenses for prior accident years. Our 2006 loss and combined
ratios were impacted by a $15.6 million reduction of net
losses and loss adjustment expenses for prior accident years.
See Results of Operations in Item 7 of
Part II of this report for details of these items and their
impact on the loss and combined ratios. |
|
(3) |
|
Our loss and combined ratios for 2009, 2008, 2007, 2006, and
2005 include $5.8 million, $21.5 million,
$1.7 million, $4.6 million, and $8.0 million,
respectively, of catastrophic losses. See Results of
Operations in Item 7 of Part II of this report
for a discussion of the impact of these losses on the loss and
combined ratios. |
No cash dividends were declared on common stock in any year
presented in the table.
52
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with the
consolidated financial statements and accompanying notes of
United America Indemnity included elsewhere in this report. Some
of the information contained in this discussion and analysis or
set forth elsewhere in this report, including information with
respect to our plans and strategy, constitutes forward-looking
statements that involve risks and uncertainties. Please see
Cautionary Note Regarding Forward-Looking Statements
at the end of this Item 7 and Risk Factors in
Item 1A above for more information. You should review
Risk Factors in Item 1A above for a discussion
of important factors that could cause actual results to differ
materially from the results described in or implied by the
forward-looking statements contained herein.
Recent
Developments
Redomestication
to Ireland
On February 16, 2010, we announced that our Board of
Directors has unanimously approved a plan for us to re-domicile
from the Cayman Islands to Ireland. Our shareholders will be
asked to vote in favor of completing the reorganization proposal
at a special shareholders meeting. If the proposal is accepted,
we will become a wholly-owned subsidiary of Global Indemnity
plc, an Irish company.
If the move to Ireland is approved, our Class A common
shares will be exchanged for Global Indemnity plcs
Class A ordinary shares on a
two-for-one
basis, which will trade on The NASDAQ Global Select Market under
the ticker symbol GBLI. Global Indemnity plc will be
subject to U.S. Securities and Exchange Commission
reporting requirements, the mandates of the
U.S. Sarbanes-Oxley Act, and the corporate governance rules
of Nasdaq. Global Indemnity plc will continue to report our
consolidated financial results in U.S. dollars and under
U.S. generally accepted accounting principles. If required
by Irish law, audited consolidated annual financial statements
prepared in accordance with Irish generally accepted accounting
principles will also be made available to shareholders. In
addition to shareholder approval, the move to Ireland is subject
to an order from the Grand Court of the Cayman Islands
sanctioning the transaction.
Haiti
Earthquake
On January 12, 2010, a massive earthquake struck the
Republic of Haiti that devastated the capital city
Port-au-Prince and resulted in widespread damage. We do not
expect much, if any, catastrophe loss exposure as insurance
penetration in Haiti has historically been low. Any exposure
that may develop would be as a result of tsunami activity that
affected neighboring islands where we have exposure. At this
time, however, we do not expect any significant exposure.
California
Mudslides and Flooding
In January 2010, the southern California coast was battered by
multiple heavy rainstorms that caused mudslides and flooding
which resulted in significant property losses. We do not expect
much, if any, catastrophe loss exposure since we expect losses
to be within the retention limits of our property catastrophe
reinsurance coverage.
Chile
Earthquake
In February 2010, a massive earthquake struck the Republic of
Chile that resulted in widespread damage. We do not anticipate
any catastrophe loss exposure as our current exposures do not
include Chilean risks. Any exposure that may develop would be as
a result of tsunami activity that affected the Australian,
Asian, or Pacific island regions where we have exposure. At this
time, however, we do not expect any significant exposure.
Europe
Winter Storm
In February 2010, a late winter storm with fierce rain and
hurricane strength winds hit western Europe. At this time, we do
not know the extent of our catastrophe loss exposure, if any.
53
Appointment
of Thomas M. McGeehan
On December 8, 2009, we announced the appointment of Thomas
M. McGeehan as Senior Vice President and Chief Financial
Officer, effective as of that day. Mr. McGeehan had been
serving as Interim Chief Financial Officer since May 2008.
Overview
Our Insurance Operations distribute property and casualty
insurance products through a group of approximately 110
professional general agencies that have limited quoting and
binding authority, as well as a number of wholesale insurance
brokers who in turn sell our insurance products to insureds
through retail insurance brokers. We operate predominantly in
the excess and surplus lines marketplace. To manage our
operations, we differentiate them by product classification.
These product classifications are:
1) Penn-America,
which includes property and general liability products for small
commercial businesses distributed through a select network of
wholesale general agents with specific binding authority;
2) United National, which includes property, general
liability, and professional lines products distributed through
program administrators with specific binding authority; and
3) Diamond State, which includes property, casualty, and
professional lines products distributed through wholesale
brokers and program administrators with specific binding
authority.
Our Reinsurance Operations are comprised of the operations of
Wind River Reinsurance, a Bermuda based treaty and facultative
reinsurer of excess and surplus lines and specialty property and
casualty insurance.
We derive our revenues primarily from premiums paid on insurance
policies that we write and from income generated by our
investment portfolio, net of fees paid for investment management
services. The amount of insurance premiums that we receive is a
function of the amount and type of policies we write, as well as
of prevailing market prices.
Our expenses include losses and loss adjustment expenses,
acquisition costs and other underwriting expenses, corporate and
other operating expenses, interest, other investment expenses,
and income taxes. Losses and loss adjustment expenses are
estimated by management and reflect our best estimate of
ultimate losses and costs arising during the reporting period
and revisions of prior period estimates. We record losses and
loss adjustment expenses based on an actuarial analysis of the
estimated losses we expect to incur on the insurance policies we
write. The ultimate losses and loss adjustment expenses will
depend on the actual costs to resolve claims. Acquisition costs
consist principally of commissions that are typically a
percentage of the premiums on the insurance policies we write,
net of ceding commissions earned from reinsurers and allocated
internal costs. Other underwriting expenses consist primarily of
personnel expenses and general operating expenses. Corporate and
other operating expenses are comprised primarily of outside
legal fees, other professional fees, including accounting fees,
directors fees, management fees, salaries and benefits for
company personnel whose services relate to the support of
corporate activities, and taxes incurred. Interest expense
consists primarily of interest on senior notes payable, junior
subordinated debentures, and funds held on behalf of others.
Critical
Accounting Estimates and Policies
Our consolidated financial statements are prepared in conformity
with GAAP, which requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. (See
Note 2 of the notes to consolidated financial statements
contained in Item 8 of Part II of this report.) Actual
results could differ from those estimates and assumptions. We
believe that of our significant accounting policies, the
following may involve a higher degree of judgment and estimation.
Liability
For Unpaid Losses And Loss Adjustment Expenses
Although variability is inherent in estimates, we believe that
the liability for unpaid losses and loss adjustment expenses
reflects our best estimate for future amounts needed to pay
losses and related loss adjustment expenses and the impact of
our reinsurance coverages with respect to insured events.
54
In developing loss and loss adjustment expense (loss
or losses) reserve estimates, our actuaries perform
detailed reserve analyses each quarter. To perform the analysis,
the data is organized at a reserve category level. A
reserve category can be a line of business such as commercial
automobile liability, or it can be a particular type of claim
such as construction defect. The reserves within a reserve
category level are characterized as either short-tail or
long-tail. Most of our business can be characterized as medium
to long-tail. For long-tail business, it will generally be
several years between the time the business is written and the
time when all claims are settled. Our long-tail exposures
include general liability, professional liability, products
liability, commercial automobile liability, and excess and
umbrella. Short-tail exposures include property, commercial
automobile physical damage, and equine mortality. To manage our
insurance operations, we differentiate them by product
classifications, which are
Penn-America,
United National, and Diamond State. For further discussion about
our product classifications, see General Our
Insurance Operations in Item 1 of Part I of this
report. Each of our product classifications contain both
long-tail and short-tail exposures. Every reserve category is
analyzed by our actuaries each quarter. The analyses generally
include reviews of losses gross of reinsurance and net of
reinsurance.
In 2009, the internal workpapers supporting our reserves were
reviewed by independent actuaries for the third quarter of 2009,
and our reserves were reviewed in detail by independent
actuaries for the second and fourth quarters of 2009. We do not
rely upon the review by the independent actuaries to develop our
reserves; however, the data is used to corroborate the analysis
performed by the in-house actuarial staff.
The methods that we use to project ultimate losses for both
long-tail and short-tail exposures include, but are not limited
to, the following:
|
|
|
|
|
Paid Development method;
|
|
|
|
Incurred Development method;
|
|
|
|
Expected Loss Ratio method;
|
|
|
|
Bornhuetter-Ferguson method using premiums and paid loss;
|
|
|
|
Bornhuetter-Ferguson method using premiums and incurred
loss; and
|
|
|
|
Average Loss method.
|
The Paid Development method estimates ultimate losses by
reviewing paid loss patterns and applying them to accident years
with further expected changes in paid loss. Selection of the
paid loss pattern requires analysis of several factors including
the impact of inflation on claims costs, the rate at which
claims professionals make claim payments and close claims, the
impact of judicial decisions, the impact of underwriting
changes, the impact of large claim payments and other factors.
Claim cost inflation itself requires evaluation of changes in
the cost of repairing or replacing property, changes in the cost
of medical care, changes in the cost of wage replacement,
judicial decisions, legislative changes and other factors.
Because this method assumes that losses are paid at a consistent
rate, changes in any of these factors can impact the results.
Since the method does not rely on case reserves, it is not
directly influenced by changes in the adequacy of case reserves.
For many reserve categories, paid loss data for recent periods
may be too immature or erratic for accurate predictions. This
situation often exists for long-tail exposures. In addition,
changes in the factors described above may result in
inconsistent payment patterns. Finally, estimating the paid loss
pattern subsequent to the most mature point available in the
data analyzed often involves considerable uncertainty for
long-tail reserve categories.
The Incurred Development method is similar to the Paid
Development method, but it uses case incurred losses instead of
paid losses. Since this method uses more data (case reserves in
addition to paid losses) than the Paid Development method, the
incurred development patterns may be less variable than paid
development patterns. However, selection of the incurred loss
pattern requires analysis of all of the factors listed in the
description of the Paid Development method. In addition, the
inclusion of case reserves can lead to distortions if changes in
case reserving practices have taken place and the use of case
incurred losses may not eliminate the issues associated with
estimating the incurred loss pattern subsequent to the most
mature point available.
The Expected Loss Ratio method multiplies premiums by an
expected loss ratio to produce ultimate loss estimates for each
accident year. This method may be useful if loss development
patterns are inconsistent, losses
55
emerge very slowly, or there is relatively little loss history
from which to estimate future losses. The selection of the
expected loss ratio requires analysis of loss ratios from
earlier accident years or pricing studies and analysis of
inflationary trends, frequency trends, rate changes,
underwriting changes, and other applicable factors.
The Bornhuetter-Ferguson method using premiums and paid losses
is a combination of the Paid Development method and the Expected
Loss Ratio method. This method normally determines expected loss
ratios similar to the method used for the Expected Loss Ratio
method and requires analysis of the same factors described
above. The method assumes that only future losses will develop
at the expected loss ratio level. The percent of paid loss to
ultimate loss implied from the Paid Development method is used
to determine what percentage of ultimate loss is yet to be paid.
The use of the pattern from the Paid Development method requires
consideration of all factors listed in the description of the
Paid Development method. The estimate of losses yet to be paid
is added to current paid losses to estimate the ultimate loss
for each year. This method will react very slowly if actual
ultimate loss ratios are different from expectations due to
changes not accounted for by the expected loss ratio calculation.
The Bornhuetter-Ferguson method using premiums and incurred
losses is similar to the Bornhuetter-Ferguson method using
premiums and paid losses except that it uses case incurred
losses. The use of case incurred losses instead of paid losses
can result in development patterns that are less variable than
paid development patterns. However, the inclusion of case
reserves can lead to distortions if changes in case reserving
practices have taken place, and the method requires analysis of
all the factors that need to be reviewed for the Expected Loss
Ratio and Incurred Development methods.
The Average Loss method multiplies a projected number of
ultimate claims by an estimated ultimate average loss for each
accident year to produce ultimate loss estimates. Since
projections of the ultimate number of claims are often less
variable than projections of ultimate loss, this method can
provide more reliable results for reserve categories where loss
development patterns are inconsistent or too variable to be
relied on exclusively. In addition, this method can more
directly account for changes in coverage that impact the number
and size of claims. However, this method can be difficult to
apply to situations where very large claims or a substantial
number of unusual claims result in volatile average claim sizes.
Projecting the ultimate number of claims requires analysis of
several factors including the rate at which policyholders report
claims to us, the impact of judicial decisions, the impact of
underwriting changes and other factors. Estimating the ultimate
average loss requires analysis of the impact of large losses and
claim cost trends based on changes in the cost of repairing or
replacing property, changes in the cost of medical care, changes
in the cost of wage replacement, judicial decisions, legislative
changes and other factors.
For many exposures, especially those that can be considered
long-tail, a particular accident year may not have a sufficient
volume of paid losses to produce a statistically reliable
estimate of ultimate losses. In such a case, our actuaries
typically assign more weight to the Incurred Development method
than to the Paid Development method. As claims continue to
settle and the volume of paid losses increases, the actuaries
may assign additional weight to the Paid Development method. For
most of our reserve categories, even the incurred losses for
accident years that are early in the claim settlement process
will not be of sufficient volume to produce a reliable estimate
of ultimate losses. In these cases, we will not assign any
weight to the Paid and Incurred Development methods and will use
the Bornhuetter-Ferguson and Expected Loss Ratio methods. For
short-tail exposures, the Paid and Incurred Development methods
can often be relied on sooner primarily because our history
includes a sufficient number of years to cover the entire period
over which paid and incurred losses are expected to change.
However, we may also use the Expected Loss Ratio,
Bornhuetter-Ferguson and Average Loss methods for short-tail
exposures.
Generally, reserves for long-tail lines use the Expected Loss
Ratio method for the most recent accident year, shift to the
Bornhuetter-Ferguson methods for the next two years, and then
shift to the Incurred
and/or Paid
Development method. Claims related to umbrella business are
usually reported later than claims for other long-tail lines.
For umbrella business, the Expected Loss Ratio and
Bornhuetter-Ferguson methods are used for as many as six years
before shifting to the Incurred Development method. Reserves for
short-tail lines use the Bornhuetter-Ferguson methods for the
most recent accident year and shift to the Incurred
and/or Paid
Development method in subsequent years.
For other more complex reserve categories where the above
methods may not produce reliable indications, we use additional
methods tailored to the characteristics of the specific
situation. Such reserve categories include losses from
construction defects and A&E.
56
For construction defect losses, our actuaries organize losses by
the year in which they were reported. To estimate losses from
claims that have not been reported, various extrapolation
techniques are applied to the pattern of claims that have been
reported to estimate the number of claims yet to be reported.
This process requires analysis of several factors including the
rate at which policyholders report claims to us, the impact of
judicial decisions, the impact of underwriting changes and other
factors. An average claim size is determined from past
experience and applied to the number of unreported claims to
estimate reserves for these claims.
Establishing reserves for A&E and other mass tort claims
involves considerably more judgment than other types of claims
due to, among other things, inconsistent court decisions, an
increase in bankruptcy filings as a result of asbestos-related
liabilities, and judicial interpretations that often expand
theories of recovery and broaden the scope of coverage. The
insurance industry continues to receive a substantial number of
asbestos-related bodily injury claims, with an increasing focus
being directed toward other parties, including installers of
products containing asbestos rather than against asbestos
manufacturers. This shift has resulted in significant insurance
coverage litigation implicating applicable coverage defenses or
determinations, if any, including but not limited to,
determinations as to whether or not an asbestos related bodily
injury claim is subject to aggregate limits of liability found
in most comprehensive general liability policies. In response to
these continuing developments, management increased gross and
net A&E reserves during the second quarter of 2008 to
reflect its best estimate of A&E exposures. In 2009, one of
our insurance companies was dismissed from a lawsuit seeking
coverage from it and other unrelated insurance companies. The
suit involved issues related to approximately 3,900 existing
asbestos related bodily injury claims and future claims. The
dismissal was the result of a settlement of a disputed claim
related to accident year 1984. The settlement is conditioned
upon certain legal events occurring which will trigger financial
obligations by the insurance company. Management will continue
to monitor the developments of the litigation to determine if
any additional financial exposure is present.
Reserve analyses performed by our actuaries result in actuarial
point estimates. The results of the detailed reserve reviews
were summarized and discussed with our senior management to
determine the best estimate of reserves. This group considered
many factors in making this decision. The factors included, but
were not limited to, the historical pattern and volatility of
the actuarial indications, the sensitivity of the actuarial
indications to changes in paid and incurred loss patterns, the
consistency of claims handling processes, the consistency of
case reserving practices, changes in our pricing and
underwriting, and overall pricing and underwriting trends in the
insurance market.
Managements best estimate at December 31, 2009 was
recorded as the loss reserve. Managements best estimate is
as of a particular point in time and is based upon known facts,
our actuarial analyses, current law, and our judgment. This
resulted in carried gross and net reserves of
$1,257.7 million and $730.3 million, respectively, as
of December 31, 2009. A breakout of our gross and net
reserves, excluding the effects of our intercompany pooling
arrangements and intercompany quota share reinsurance agreement,
as of December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Reserves
|
|
|
|
Case
|
|
|
IBNR(1)
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
$
|
412,395
|
|
|
$
|
809,121
|
|
|
$
|
1,221,516
|
|
Reinsurance Operations
|
|
|
8,633
|
|
|
|
27,592
|
|
|
|
36,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
421,028
|
|
|
$
|
836,713
|
|
|
$
|
1,257,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Reserves(2)
|
|
|
|
Case
|
|
|
IBNR(1)
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
$
|
240,242
|
|
|
$
|
454,718
|
|
|
$
|
694,960
|
|
Reinsurance Operations
|
|
|
8,228
|
|
|
|
27,140
|
|
|
|
35,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
248,470
|
|
|
$
|
481,858
|
|
|
$
|
730,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Losses incurred but not reported, including the expected future
emergence of case reserves. |
|
(2) |
|
Does not include reinsurance receivable on paid losses or
reserve for uncollectible reinsurance. |
57
We continually review these estimates and, based on new
developments and information, we include adjustments of the
estimated ultimate liability in the operating results for the
periods in which the adjustments are made. The establishment of
loss and loss adjustment expense reserves makes no provision for
the possible broadening of coverage by legislative action or
judicial interpretation, or the emergence of new types of losses
not sufficiently represented in our historical experience or
that cannot yet be quantified or estimated. We regularly analyze
our reserves and review pricing and reserving methodologies so
that future adjustments to prior year reserves can be minimized.
However, given the complexity of this process, reserves require
continual updates and the ultimate liability may be higher or
lower than previously indicated. Changes in estimates for loss
and loss adjustment expense reserves are recorded in the period
that the change in these estimates is made. See Note 8 to
the consolidated financial statements in Item 1 of
Part I of this report for details concerning the changes in
the estimate for incurred loss and loss adjustment expenses
related to prior accident years.
The detailed reserve analyses that our actuaries complete use a
variety of generally accepted actuarial methods and techniques
to produce a number of estimates of ultimate loss. We determine
our best estimate of ultimate loss by reviewing the various
estimates and assigning weight to each estimate given the
characteristics of the reserve category being reviewed. The
reserve estimate is the difference between the estimated
ultimate loss and the losses paid to date. The difference
between the estimated ultimate loss and the case incurred loss
(paid loss plus case reserve) is considered to be IBNR. IBNR
calculated as such includes a provision for development on known
cases (supplemental development) as well as a provision for
claims that have occurred but have not yet been reported (pure
IBNR).
In light of the many uncertainties associated with establishing
the estimates and making the assumptions necessary to establish
reserve levels, we review our reserve estimates on a regular
basis and make adjustments in the period that the need for such
adjustments is determined. The anticipated future loss emergence
continues to be reflective of historical patterns, and the
selected development patterns have not changed significantly
from those underlying our most recent analyses.
The key assumptions fundamental to the reserving process are
often different for various reserve categories and accident
years. Some of these assumptions are explicit assumptions that
are required of a particular method, but most of the assumptions
are implicit and cannot be precisely quantified. An example of
an explicit assumption is the pattern employed in the Paid
Development method. However, the assumed pattern is itself based
on several implicit assumptions such as the impact of inflation
on medical costs and the rate at which claim professionals close
claims. Loss frequency is a measure of the number of claims per
unit of insured exposure, and loss severity is a measure of the
average size of claims. Each reserve segment has an implicit
frequency and severity for each accident year as a result of the
various assumptions made.
Previous reserve analyses have resulted in our identification of
information and trends that have caused us to increase or
decrease our frequency and severity assumptions in prior periods
and could lead to the identification of a need for additional
material changes in loss and loss adjustment expense reserves,
which could materially affect our results of operations, equity,
business and insurer financial strength and debt ratings.
Factors affecting loss frequency include, among other things,
the effectiveness of loss controls and safety programs and
changes in economic activity or weather patterns. Factors
affecting loss severity include, among other things, changes in
policy limits and deductibles, rate of inflation and judicial
interpretations. Another factor affecting estimates of loss
frequency and severity is the loss reporting lag, which is the
period of time between the occurrence of a loss and the date the
loss is reported to us. The length of the loss reporting lag
affects our ability to accurately predict loss frequency (loss
frequencies are more predictable for short-tail lines) as well
as the amount of reserves needed for IBNR.
If the actual levels of loss frequency and severity are higher
or lower than expected, the ultimate losses will be different
than managements best estimate. For most of our reserving
classes, we believe that frequency can be predicted with greater
accuracy than severity. Therefore, we believe managements
best estimate is more sensitive to changes in severity than
frequency. The following table, which we believe reflects a
reasonable range of variability around our best estimate based
on our historical loss experience and managements
judgment, reflects
58
the impact of changes (which could be favorable or unfavorable)
in frequency and severity on our current accident year gross
loss estimate of $178.5 million for claims occurring during
the nine months ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severity Change
|
|
|
|
|
−10%
|
|
−5%
|
|
0%
|
|
5%
|
|
10%
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frequency Change
|
|
|
−5
|
%
|
|
$
|
(25,881
|
)
|
|
$
|
(17,403
|
)
|
|
$
|
(8,925
|
)
|
|
$
|
(446
|
)
|
|
$
|
8,032
|
|
|
|
|
−3
|
%
|
|
|
(22,668
|
)
|
|
|
(14,012
|
)
|
|
|
(5,355
|
)
|
|
|
3,302
|
|
|
|
11,959
|
|
|
|
|
−2
|
%
|
|
|
(21,062
|
)
|
|
|
(12,316
|
)
|
|
|
(3,570
|
)
|
|
|
5,176
|
|
|
|
13,922
|
|
|
|
|
−1
|
%
|
|
|
(19,456
|
)
|
|
|
(10,620
|
)
|
|
|
(1,785
|
)
|
|
|
7,050
|
|
|
|
15,886
|
|
|
|
|
0
|
%
|
|
|
(17,849
|
)
|
|
|
(8,925
|
)
|
|
|
|
|
|
|
8,925
|
|
|
|
17,849
|
|
|
|
|
1
|
%
|
|
|
(16,243
|
)
|
|
|
(7,229
|
)
|
|
|
1,785
|
|
|
|
10,799
|
|
|
|
19,813
|
|
|
|
|
2
|
%
|
|
|
(14,636
|
)
|
|
|
(5,533
|
)
|
|
|
3,570
|
|
|
|
12,673
|
|
|
|
21,776
|
|
|
|
|
3
|
%
|
|
|
(13,030
|
)
|
|
|
(3,838
|
)
|
|
|
5,355
|
|
|
|
14,547
|
|
|
|
23,739
|
|
|
|
|
5
|
%
|
|
|
(9,817
|
)
|
|
|
(446
|
)
|
|
|
8,925
|
|
|
|
18,295
|
|
|
|
27,666
|
|
Our net reserves for losses and loss expenses of
$725.3 million as of December 31, 2009 relate to
multiple accident years. Therefore, the impact of changes in
frequency and severity for more than one accident year could be
higher or lower than the amounts reflected above.
Recoverability
of Reinsurance Receivables
We regularly review the collectibility of our reinsurance
receivables, and we include adjustments resulting from this
review in earnings in the period in which the adjustment arises.
A.M. Best ratings, financial history, available collateral,
and payment history with the reinsurers are several of the
factors that we consider when judging collectibility. Changes in
loss reserves can also affect the valuation of reinsurance
receivables if the change is related to loss reserves that are
ceded to reinsurers. Certain amounts may be uncollectible if our
reinsurers dispute a loss or if the reinsurer is unable to pay.
If our reinsurers do not pay, we are still legally obligated to
pay the loss. At December 31, 2009, our reinsurance
receivables were $543.4 million, net of an allowance for
uncollectible reinsurance receivables of $12.9 million. For
a listing of the ten reinsurers for which we have the largest
reinsurance asset amounts as of December 31, 2009, see
Reinsurance of Underwriting Risk in Item 1 of
Part I of this report. See Note 6 of the notes to the
consolidated financial statements in Item 8 of Part II
of this report for more details concerning the collectibility of
our reinsurance receivables.
Investments
The carrying amount of our investments approximates their
estimated fair value. We regularly perform various analytical
valuation procedures with respect to investments, including
reviewing each fixed maturity security in an unrealized loss
position to determine the amount of unrealized loss related to
credit loss and the amount related to all other factors, such as
changes in interest rates. The credit loss represents the
portion of the amortized book value in excess of the net present
value of the projected future cash flows discounted at the
effective interest rate implicit in the debt security prior to
impairment. The credit loss component of the other than
temporary impairment is recorded through earnings, whereas the
amount relating to factors other than credit losses are recorded
in other comprehensive income, net of taxes. During our review,
we consider credit rating, market price, and issuer specific
financial information, among other factors, to assess the
likelihood of collection of all principal and interest as
contractually due. Securities for which we determine that a
credit loss is likely are subjected to further analysis to
estimate the credit loss to be recognized in earnings, if any.
See Note 2 of the notes to consolidated financial
statements in Item 8 of Part II of this report for the
specific methodologies and significant assumptions used by asset
class. Upon identification of such securities and periodically
thereafter, a detailed review is performed to determine whether
the decline is considered other than temporary. This review
includes an analysis of several factors, including but not
limited to, the credit ratings and cash flows of the securities,
and the magnitude and length of time that the fair value of such
securities is below cost.
For an analysis of our securities with gross unrealized losses
as of December 31, 2009 and 2008, and for other than
temporary losses that we recorded for the years ended
December 31, 2009, 2008, and 2007, please see Note 3
of the notes to the consolidated financial statements in
Item 8 of Part II of this report.
59
Fair
Value Measurements
We categorize our assets that are accounted for at fair value in
the consolidated statements into a fair value hierarchy. The
fair value hierarchy is directly related to the amount of
subjectivity associated with the inputs utilized to determine
the fair value of these assets. See Note 4 of the notes to
the consolidated financial statements in Item 8 of
Part II of this report for further information about the
fair value hierarchy and our assets that are accounted for at
fair value.
Goodwill
and Intangible Assets
In 2008, we impaired all of the goodwill and $12.2 million
of intangible assets associated with our merger with
Penn-America
Group, Inc. This resulted in an after-tax loss of
$92.2 million. See Note 5 of the notes to the
consolidated financial statements in Item 8 of Part II
of this report for details concerning this impairment and a
discussion of the results of our 2008 impairment testing of
goodwill and other definite and indefinite lived assets. As of
December 31, 2009, we had $9.2 million of remaining
intangible assets, net of accumulated amortization.
We use several techniques to value the recoverability of our
goodwill and intangible assets. Market capitalization and
discounted cash flow were used to value goodwill. Undiscounted
cash flow was used to value agency relationships. State licenses
were valued by comparing our licenses to comparable companies.
Software was evaluated based on the cost to build and the cost
to replace existing software.
Our intangible assets that are deemed to have an indefinite
useful life, which includes trade names and state insurance
licenses, are not amortized. Our intangible assets that are not
deemed to have an indefinite useful life, which includes
software technology, are amortized over their useful lives. Due
to the results of our 2008 impairment testing, we determined
that our remaining intangible assets that are not deemed to have
an indefinite useful life would be fully amortized by 2010. As a
result, we anticipate that amortization expense will be
$0.04 million in 2010. This amount is subject to change,
however, based upon subsequent reviews of recoverability and
useful lives that are performed at least annually.
Taxation
We provide for income taxes in accordance with applicable
accounting guidance. Our deferred tax assets and liabilities
primarily result from temporary differences between the amounts
recorded in our consolidated financial statements and the tax
basis of our assets and liabilities.
At each balance sheet date, management assesses the need to
establish a valuation allowance that reduces deferred tax assets
when it is more likely than not that all, or some portion, of
the deferred tax assets will not be realized. A valuation
allowance would be based on all available information including
our assessment of uncertain tax positions and projections of
future taxable income from each tax-paying component in each
jurisdiction, principally derived from business plans and
available tax planning strategies. There are no valuation
allowances as of December 31, 2009. The deferred tax asset
balance is analyzed regularly by management. Based on these
analyses, we have determined that our deferred tax asset is
recoverable. Projections of future taxable income incorporate
several assumptions of future business and operations that are
apt to differ from actual experience. If, in the future, our
assumptions and estimates that resulted in our forecast of
future taxable income for each tax-paying component prove to be
incorrect, a valuation allowance may be required. This could
have a material adverse effect on our financial condition,
results of operations, and liquidity.
In 2009, we recognized $8.6 million of investment income
related to the liquidation of investments in two limited
partnerships. Our 2009 tax provision includes federal income tax
expense of $3.0 million related to this investment income.
We apply a more likely than not recognition threshold for all
tax uncertainties, only allowing the recognition of those tax
benefits that have a greater than 50% likelihood of being
sustained upon examination by the taxing authorities. Please see
Note 7 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for a
discussion of our tax uncertainties.
60
Our
Business Segments
We manage our business through two business segments: Insurance
Operations, which includes the operations of the United National
Insurance Companies and the
Penn-America
Insurance Companies, and Reinsurance Operations, which are the
operations of Wind River Reinsurance.
We evaluate the performance of our Insurance Operations and
Reinsurance Operations segments based on gross and net premiums
written, revenues in the form of net premiums earned, and
expenses in the form of (1) net losses and loss adjustment
expenses, (2) acquisition costs, and (3) other
underwriting expenses.
See Business Segments in Item 1 of Part I
of this report for a description of our segments.
The following table sets forth an analysis of financial data for
our segments during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
267,992
|
|
|
$
|
353,130
|
|
|
$
|
536,835
|
|
Ceded premiums written
|
|
|
49,728
|
|
|
|
47,651
|
|
|
|
58,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
218,264
|
|
|
$
|
305,479
|
|
|
$
|
478,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Operations premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
73,007
|
|
|
$
|
25,570
|
|
|
$
|
26,277
|
|
Ceded premiums written
|
|
|
276
|
|
|
|
21,969
|
|
|
|
14,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
72,731
|
|
|
$
|
3,601
|
|
|
$
|
12,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
$
|
250,409
|
|
|
$
|
374,174
|
|
|
$
|
530,516
|
|
Reinsurance Operations
|
|
|
51,265
|
|
|
|
8,334
|
|
|
|
5,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
301,674
|
|
|
$
|
382,508
|
|
|
$
|
536,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
$
|
252,494
|
(3)
|
|
$
|
431,114
|
(3)
|
|
$
|
466,235
|
(3)
|
Reinsurance Operations
|
|
|
36,817
|
|
|
|
16,827
|
|
|
|
7,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
289,311
|
|
|
|
447,941
|
|
|
|
473,965
|
|
Intercompany eliminations
|
|
|
|
|
|
|
|
|
|
|
(543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net expenses
|
|
$
|
289,311
|
|
|
$
|
447,941
|
|
|
$
|
473,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
$
|
(2,085
|
)
|
|
$
|
(56,940
|
)
|
|
$
|
64,281
|
|
Reinsurance Operations
|
|
|
14,448
|
|
|
|
(8,493
|
)
|
|
|
(1,923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
12,363
|
|
|
|
(65,433
|
)
|
|
|
62,358
|
|
Intercompany eliminations
|
|
|
|
|
|
|
|
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) from segments
|
|
$
|
12,363
|
|
|
$
|
(65,433
|
)
|
|
$
|
62,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance combined ratio analysis:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
58.4
|
|
|
|
78.5
|
|
|
|
55.7
|
|
Expense ratio
|
|
|
42.4
|
|
|
|
36.7
|
|
|
|
32.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
100.8
|
|
|
|
115.2
|
|
|
|
87.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
45.2
|
|
|
|
136.2
|
|
|
|
62.3
|
|
Expense ratio
|
|
|
26.6
|
|
|
|
65.7
|
|
|
|
70.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
71.8
|
|
|
|
201.9
|
|
|
|
133.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
56.2
|
|
|
|
79.8
|
|
|
|
55.8
|
|
Expense ratio
|
|
|
39.8
|
|
|
|
37.3
|
|
|
|
32.5
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
96.0
|
|
|
|
117.1
|
|
|
|
88.3
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
(1) |
|
Excludes net investment income and net realized investment gains
(losses), which are not allocated to our segments |
|
(2) |
|
Excludes corporate and other operating expenses and interest
expense, which are not allocated to our segments. |
|
(3) |
|
Includes excise tax of $1,342, $1,871, and $2,390 related to
cessions from our U.S. Insurance Companies to Wind River
Reinsurance for 2009, 2008, and 2007, respectively. |
|
(4) |
|
Our insurance combined ratios are non-GAAP financial measures
that are generally viewed in the insurance industry as
indicators of underwriting profitability. The loss ratio is the
ratio of net losses and loss adjustment expenses to net premiums
earned. The expense ratio is the ratio of acquisition costs and
other underwriting expenses to net premiums earned. The combined
ratio is the sum of the loss and expense ratios. |
|
(5) |
|
Includes intercompany eliminations of $(543). |
Results
of Operations
All percentage changes included in the text below have been
calculated using the corresponding amounts from the applicable
tables.
Year
Ended December 31, 2009 Compared with the Year Ended
December 31, 2008
Insurance
Operations
The components of income (loss) from underwriting and
underwriting ratios of our Insurance Operations segment, with
premium by product classification, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penn-America
|
|
$
|
124,914
|
|
|
$
|
172,869
|
|
|
$
|
(47,955
|
)
|
|
|
(27.7
|
)%
|
United National
|
|
|
62,059
|
|
|
|
88,884
|
|
|
|
(26,825
|
)
|
|
|
(30.2
|
)%
|
Diamond State
|
|
|
81,019
|
|
|
|
91,377
|
|
|
|
(10,358
|
)
|
|
|
(11.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
267,992
|
|
|
$
|
353,130
|
|
|
$
|
(85,138
|
)
|
|
|
(24.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penn-America
|
|
$
|
101,320
|
|
|
$
|
158,136
|
|
|
$
|
(56,816
|
)
|
|
|
(35.9
|
)%
|
United National
|
|
|
50,036
|
|
|
|
74,964
|
|
|
|
(24,928
|
)
|
|
|
(33.3
|
)%
|
Diamond State
|
|
|
66,908
|
|
|
|
72,379
|
|
|
|
(5,471
|
)
|
|
|
(7.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
218,264
|
|
|
$
|
305,479
|
|
|
$
|
(87,215
|
)
|
|
|
(28.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penn-America
|
|
$
|
125,342
|
|
|
$
|
200,991
|
|
|
$
|
(75,649
|
)
|
|
|
(37.6
|
)%
|
United National
|
|
|
57,344
|
|
|
|
92,449
|
|
|
|
(35,105
|
)
|
|
|
(38.0
|
)%
|
Diamond State
|
|
|
67,723
|
|
|
|
80,734
|
|
|
|
(13,011
|
)
|
|
|
(16.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
250,409
|
|
|
|
374,174
|
|
|
|
(123,765
|
)
|
|
|
(33.1
|
)%
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
146,197
|
|
|
|
293,820
|
|
|
|
(147,623
|
)
|
|
|
(50.2
|
)%
|
Acquisition costs and other underwriting expenses(1)
|
|
|
106,297
|
|
|
|
137,294
|
|
|
|
(30,997
|
)
|
|
|
(22.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from underwriting
|
|
$
|
(2,085
|
)
|
|
$
|
(56,940
|
)
|
|
$
|
54,855
|
|
|
|
(96.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
|
|
62.0
|
|
|
|
69.7
|
|
|
|
(7.7
|
)
|
|
|
|
|
Prior accident year
|
|
|
(3.6
|
)
|
|
|
8.8
|
|
|
|
(12.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar year
|
|
|
58.4
|
|
|
|
78.5
|
|
|
|
(20.1
|
)
|
|
|
|
|
Expense ratio
|
|
|
42.4
|
|
|
|
36.7
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
100.8
|
|
|
|
115.2
|
|
|
|
(14.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
(1) |
|
Includes excise tax of $1,342 and $1,871 related to cessions
from our U.S. Insurance Companies to Wind River Reinsurance for
2009 and 2008, respectively. |
Premiums
Gross premiums written, which represent the amount received or
to be received for insurance policies written without reduction
for reinsurance costs or other deductions, were
$268.0 million for 2009, compared with $353.1 million
for 2008, a decrease of $85.1 million or 24.1%.
|
|
|
|
|
Penn-America
gross premiums written were $124.9 million for 2009,
compared with $172.9 million for 2008, a decrease of
$48.0 million, or 27.7%. The decrease was primarily due to
a reduction of $11.0 million due to terminated programs and
agents and a reduction of $37.0 million from price
decreases in the aggregate of approximately 2.9% and other
market factors.
|
|
|
|
United National gross premiums written were $62.1 million
for 2009, compared with $88.9 million for 2008, a decrease
of $26.8 million, or 30.2%. The decrease was primarily due
to a reduction of $19.7 million due to terminated programs
and agents and a reduction of $7.1 million from price
decreases in the aggregate of approximately 3.8% and from other
market factors.
|
|
|
|
Diamond State gross premiums written were $81.0 million for
2009, compared with $91.4 million for 2008, a decrease of
$10.4 million, or 11.3%. The decrease was primarily due to
a reduction of $4.5 million due to terminated programs and
agents and a reduction of $5.9 million from price decreases
in the aggregate of approximately 0.7% and other market factors.
|
Net premiums written, which equal gross premiums written less
ceded premiums written, was $218.3 million for 2009,
compared with $305.5 million for 2008, a decrease of
$87.2 million or 28.6%. The decrease was primarily due to
the reduction of gross premiums written noted above.
The ratio of net premiums written to gross premiums written was
81.4% for 2009 and 86.5% for 2008, a decline of 5.1 points,
which was primarily due to $11.5 million of ceded premiums
written to a new quota share treaty that we executed on
Penn-Americas
property lines of business effective January 1, 2009 and
changes in our mix of business.
Net premiums earned were $250.4 million for 2009, compared
with $374.2 million for 2008, a decrease of
$123.8 million or 33.1%. The decrease was primarily due to
the reduction of net premiums written noted above. Property net
premiums earned for 2009 and 2008 were $103.5 million and
$137.9 million, respectively. Casualty net premiums earned
for 2009 and 2008 were $146.9 million and
$236.3 million, respectively.
Net
Losses and Loss Adjustment Expenses
The loss ratio for our Insurance Operations was 58.4% for 2009
compared with 78.5% for 2008. The loss ratio is a non-GAAP
financial measure that is generally viewed in the insurance
industry as an indicator of underwriting profitability and is
calculated by dividing net losses and loss adjustment expenses
by net premiums earned.
The impact of changes to prior accident years is 12.4 points
resulting from a decrease of net losses and loss adjustment
expenses for prior accident years of $9.1 million in 2009
compared to an increase of net losses and loss adjustment
expenses for prior accident years of $33.0 million in 2008.
When analyzing loss reserves and prior year development, we
consider many factors, including the frequency and severity of
claims, loss credit trends, case reserve settlements that may
have resulted in significant development, and any other
additional or pertinent factors that may impact reserve
estimates.
|
|
|
|
|
In 2009, we reduced our prior accident year loss reserves by
$8.4 million and reduced our allowance for uncollectible
reinsurance by $0.7 million. The reduction of our prior
accident year loss reserves primarily consisted of a
$5.5 million reduction in our property lines, a
$2.9 million reduction in our general liability
|
63
|
|
|
|
|
lines, and a $4.7 million reduction in our umbrella lines,
offset by a $4.7 million increase in our professional
liability lines:
|
|
|
|
|
1.
|
The reduction in the property lines primarily consisted of
reductions related to accident year 2006 through 2008 due to
better than expected loss emergence in brokerage.
|
|
|
2.
|
The reduction in the general liability lines primarily consisted
of net reductions of $13.5 million related to accident
years 2006 and prior due to loss emergence that had been
consistently lower than expected during the year, partially
offset by increases of $10.6 million to accident years 2007
and 2008 that were driven by a large claim and an increase in
our construction defect provisions for Penn America.
|
|
|
3.
|
The reduction in the umbrella lines primarily consisted of net
reductions of $5.1 million related to accident years 2007
and prior that were driven by loss emergence throughout the year
that was consistently better than expected, partially offset by
increases of $0.4 million related to accident year 2008.
|
|
|
4.
|
The increase to the professional liability lines primarily
consisted of increases of $10.1 million related to accident
years 2007 and 2008 due to an increase in severity, partially
offset by net reductions of $5.4 million primarily related
to accident years 2006 and prior.
|
The reduction in our allowance for uncollectible reinsurance is
primarily due to the decrease in the amount of our carried
reinsurance receivables.
|
|
|
|
|
In 2008, we increased our prior accident year loss reserves by
$29.9 million and increased our allowance for uncollectible
reinsurance by $3.1 million. The loss reserves increase of
$29.9 million consisted of increases of $15.9 million
in our general liability lines and $15.7 million in our
professional liability lines, offset by reductions of
$1.2 million in our property lines and $0.5 million in
our umbrella lines.
|
|
|
|
|
1.
|
The increase to the general liability lines consisted of
increases of $20.5 million related to accident years 2006,
2007, and 2001 and prior, offset by reductions of
$4.6 million related to accident years 2002 through 2005.
The increases in 2006 and 2007 are primarily related to greater
severity.
|
|
|
2.
|
The increase to the professional liability lines consisted of
increases of $17.7 million related to accident years 2006
and 2007, offset by reductions of $2.0 million related to
accident years 2005 and prior. The increases in 2006 and 2007
are primarily related to greater severity.
|
|
|
3.
|
The reduction in property lines consisted of reductions of
$2.6 million related to accident years 2008 and 2003 and
prior, offset by increases of $1.4 million primarily
related to accident years 2004 through 2006.
|
|
|
4.
|
The reduction in umbrella lines was primarily related to
accident years 2004 and prior. The increases in 2006 and 2007 in
our professional and general liability lines are primarily
related to greater severity.
|
The current accident year loss ratio decreased 7.7 points in
2009 primarily due to a decrease in both the property and
casualty loss ratios:
|
|
|
|
|
The current accident year property loss ratio decreased 13.9
points from 69.2% in 2008 to 55.3% in 2009, which consists of an
11.4 point decrease in the catastrophe loss ratio from 15.3% in
2008 to 3.9% in 2009 and a 2.5 point decrease in the
non-catastrophe loss ratio from 53.9% in 2008 to 51.4% in 2009.
Catastrophe losses were $4.0 million and $21.1 million
in 2009 and 2008, respectively. Catastrophe losses in 2008
included net loss and loss adjustment expenses related to
Hurricanes Ike and Gustav, which occurred in September 2008, and
storms in the Midwest that occurred in the first half of 2008.
Property net premiums earned for 2009 and 2008 were
$103.5 million and $137.9 million, respectively.
|
|
|
|
The current accident year casualty loss ratio decreased 3.2
points from 70.0% in 2008 to 66.8% in 2009 primarily due to
changes in our mix of business. Casualty net premiums earned for
2009 and 2008 were $146.9 million and $236.3 million,
respectively.
|
64
Net losses and loss adjustment expenses were $146.2 million
for 2009, compared with $293.8 million for 2008, a decrease
of $147.6 million or 50.2%. Excluding the $9.1 million
reduction of net losses and loss adjustment expenses for prior
accident years in 2009 and the $33.0 million increase of
net losses and loss adjustment expenses for prior accident years
in 2008, the current accident year net losses and loss
adjustment expenses were $155.3 million and
$260.8 million for 2009 and 2008, respectively. This
decrease is primarily attributable to a decrease in net premiums
earned and the decline in the loss ratio as described above.
Acquisition
Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses were
$106.3 million for 2009, compared with $137.3 million
for 2008, a decrease of $31.0 million or 22.6%. The
decrease is due to a $32.5 million decrease in acquisition
costs, offset by a $1.5 million increase in other
underwriting expenses.
|
|
|
|
|
The decrease in acquisition costs is primarily due to a decrease
in commissions resulting from a decrease in net premiums earned.
|
|
|
|
The increase in other underwriting expenses is primarily due to
the incurrence of infrastructure costs related to new product
development, information technology upgrades, and additional
office locations.
|
Expense
and Combined Ratios
The expense ratio for our Insurance Operations was 42.4% for
2009, compared with 36.7% for 2008. The expense ratio is a
non-GAAP financial measure that is calculated by dividing the
sum of acquisition costs and other underwriting expenses by net
premiums earned. The increase in the expense ratio is primarily
due to the decrease in net premiums earned noted above.
The combined ratio for our Insurance Operations was 100.8% for
2009, compared with 115.2% for 2008. The combined ratio is a
non-GAAP financial measure and is the sum of our loss and
expense ratios. Excluding the impact of a $9.1 million
reduction of prior accident year loss reserves in 2009 and a
$33.0 million increase of prior accident year loss reserves
in 2008, the combined ratio decreased from 106.4% for 2008 to
104.4% for 2009. See discussion of loss ratio included in
Net Losses and Loss Adjustment Expenses above and
discussion of expense ratio in preceding paragraph above for an
explanation of this increase.
Income
(loss) from underwriting
The factors described above resulted in a loss from underwriting
for our Insurance Operations of $2.1 million for 2009,
compared with a loss from underwriting of $56.9 million for
2008, a decrease in the loss of $54.8 million.
65
Reinsurance
Operations
The components of income (loss) from underwriting and
underwriting ratios of our Reinsurance Operations segment are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
73,007
|
|
|
$
|
25,570
|
|
|
$
|
47,437
|
|
|
|
185.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
72,731
|
|
|
$
|
3,601
|
|
|
$
|
69,130
|
|
|
|
1,919.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
51,265
|
|
|
$
|
8,334
|
|
|
$
|
42,931
|
|
|
|
515.1
|
%
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
23,185
|
|
|
|
11,354
|
|
|
|
11,831
|
|
|
|
104.2
|
%
|
Acquisition costs and other underwriting expenses
|
|
|
13,632
|
|
|
|
5,473
|
|
|
|
8,159
|
|
|
|
149.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from underwriting
|
|
$
|
14,448
|
|
|
$
|
(8,493
|
)
|
|
$
|
22,941
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
|
|
45.2
|
|
|
|
112.8
|
|
|
|
(67.6
|
)
|
|
|
|
|
Prior accident year
|
|
|
|
|
|
|
23.4
|
|
|
|
(23.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar year loss ratio
|
|
|
45.2
|
|
|
|
136.2
|
|
|
|
(91.0
|
)
|
|
|
|
|
Expense ratio
|
|
|
26.6
|
|
|
|
65.7
|
|
|
|
(39.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
71.8
|
|
|
|
201.9
|
|
|
|
(130.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM Not meaningful.
Premiums
Gross premiums written, which represent the amount received or
to be received for reinsurance agreements written without
reduction for reinsurance costs or other deductions, were
$73.0 million for 2009, compared with $25.6 million
for 2008, an increase of $47.4 million or 185.5%. The
increase was primarily due to several new reinsurance treaties
that commenced during the first quarter of 2009. One of the
treaties we entered into during the first quarter was a
catastrophe book of business.
Net premiums written, which equal gross premiums written less
ceded premiums written, was $72.7 million for 2009,
compared with $3.6 million for 2008, an increase of
$69.1 million or 1,919.7%. The increase was primarily due
to several new reinsurance treaties that commenced during the
first quarter of 2009 and an increase in the amount of gross
premiums retroceded to our reinsurers in 2008.
The ratio of net premiums written to gross premiums written was
99.6% for 2009 and 14.1% for 2008, an increase of 85.5 points,
which was primarily due to changes in our mix of business. In
2008, one of the largest treaties was 95% retroceded.
Net premiums earned were $51.3 million for 2009, compared
with $8.3 million for 2008, an increase of
$43.0 million or 515.1%. The increase was primarily due to
several new reinsurance treaties that commenced during the first
quarter of 2009 and an increase in the amount of gross premiums
retroceded to our reinsurers in 2008. Property net premiums
earned for 2009 and 2008 were $23.5 million and
$0.6 million, respectively. Casualty net premiums earned
for 2009 and 2008 were $27.8 million and $7.7 million,
respectively.
Net
Losses and Loss Adjustment Expenses
The loss ratio for our Reinsurance Operations was 45.2% for 2009
compared with 136.2% for 2008. The loss ratio is a non-GAAP
financial measure that is generally viewed in the insurance
industry as an indicator of underwriting profitability and is
calculated by dividing net losses and loss adjustment expenses
by net premiums earned.
66
The impact of changes to prior accident years is a reduction of
23.4 points resulting from an increase of net losses and loss
adjustment expenses for prior accident years of
$0.03 million in 2009 and an increase of net losses and
loss adjustment expenses for prior accident years of
$1.9 million in 2008. When analyzing loss reserves and
prior year development, we consider many factors, including the
frequency and severity of claims, loss credit trends, case
reserve settlements that may have resulted in significant
development, and any other additional or pertinent factors that
may impact reserve estimates.
|
|
|
|
|
In 2009, we increased our prior accident year loss reserves by
$0.03 million, which primarily consisted of increases in
our general liability lines. The increase to the general
liability lines were related to accident years 2007 and 2008.
|
|
|
|
In 2008, we increased our prior accident year loss reserves by
$1.9 million, which primarily consisted of an increase of
$2.6 million in our professional liability lines, offset by
reductions of $0.6 million in our general liability lines
and $0.1 million in our property lines. The increase to the
professional liability lines was related to accident year 2008.
The reduction to the general liability lines was related to
accident years 2004 through 2006. The reduction in the property
lines was related to accident year 2007.
|
In 2009, the current accident year loss ratio decreased 67.6
points from 112.8% in 2008 to 45.2% in 2009. In 2008, our book
was primarily comprised of casualty business that included a
treaty that was not performing profitably and that has since
been terminated. In 2009, our book is primarily comprised of
approximately 50% casualty and 50% property business, based on
net earned premiums.
Net losses and loss adjustment expenses were $23.2 million
for 2009, compared with $11.3 million for 2008, an increase
of $11.9 million or 104.2%. Excluding the
$0.03 million increase of net losses and loss adjustment
expenses for prior accident years in 2009 and the
$1.9 million increase of net losses and loss adjustment
expenses for prior accident years in 2008, the current accident
year net losses and loss adjustment expenses were
$23.2 million and $9.4 million for 2009 and 2008,
respectively. This increase is primarily attributable to an
increase in net premiums earned, which increased from
$8.3 million in 2008 to $51.3 million in 2009, offset
partially by an improved loss ratio in 2009 compared with 2008
as described below.
Acquisition
Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses were
$13.6 million for 2009, compared with $5.5 million for
2008, an increase of $8.1 million or 149.1%. The increase
is due to a $7.8 million increase in acquisition costs and
a $0.3 million increase in other underwriting expenses.
|
|
|
|
|
The increase in acquisition costs is primarily due to an
increase in commissions resulting from an increase in net
premiums earned.
|
|
|
|
The increase in other underwriting expenses is primarily due to
an increase in property and office costs, legal fees, and
professional services, partially offset by reductions in total
compensation expenses.
|
Expense
and Combined Ratios
The expense ratio for our Reinsurance Operations was 26.6% for
2009, compared with 65.7% for 2008. The expense ratio is a
non-GAAP financial measure that is calculated by dividing the
sum of acquisition costs and other underwriting expenses by net
premiums earned. The decrease in the expense ratio is primarily
due to the increase in net premiums earned noted above.
The combined ratio for our Reinsurance Operations was 71.8% for
2009, compared with 201.9% for 2008. The combined ratio is a
non-GAAP financial measure and is the sum of our loss and
expense ratios. Excluding the impact of a $0.03 million
increase of prior accident year loss reserves in 2009 and a
$1.9 million increase of prior accident year loss reserves
in 2008, the combined ratio increased from 178.5% for 2008 to
71.8% for 2009. See discussion of loss ratio included in
Net Losses and Loss Adjustment Expenses above and
discussion of expense ratio in preceding paragraph above for an
explanation of this increase.
67
Income
(Loss) from underwriting
The factors described above resulted in income from underwriting
for our Reinsurance Operations of $14.4 million for 2009,
compared with a loss from underwriting of $8.5 million for
2008, an increase in income of $22.9 million.
Unallocated
Corporate Items
The following items are not allocated to our Insurance
Operations or Reinsurance Operations segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
70,214
|
|
|
$
|
67,830
|
|
|
$
|
2,384
|
|
|
|
3.5
|
%
|
Net realized investment gains (losses)
|
|
|
15,862
|
|
|
|
(50,259
|
)
|
|
|
66,121
|
|
|
|
NM
|
|
Corporate and other operating expenses
|
|
|
(16,752
|
)
|
|
|
(13,918
|
)
|
|
|
(2,834
|
)
|
|
|
20.4
|
%
|
Interest expense
|
|
|
(7,216
|
)
|
|
|
(8,657
|
)
|
|
|
1,441
|
|
|
|
(16.6
|
)%
|
Impairments of goodwill and intangible assets
|
|
|
|
|
|
|
(96,449
|
)
|
|
|
96,449
|
|
|
|
100.0
|
%
|
Income tax benefit (expense)
|
|
|
(4,310
|
)
|
|
|
29,216
|
|
|
|
(33,526
|
)
|
|
|
NM
|
|
Equity in net loss of partnership, net of tax
|
|
|
5,276
|
|
|
|
(3,890
|
)
|
|
|
9,166
|
|
|
|
NM
|
|
NM Not meaningful.
Net
Investment Income
Net investment income, which is gross investment income less
investment expenses, was $70.2 million for 2009, compared
with $67.8 million for 2008, an increase of
$2.4 million or 3.5%.
|
|
|
|
|
Gross investment income, excluding realized gains and losses,
was $74.9 million for 2009, compared with
$72.8 million for 2008, an increase of $2.1 million or
2.8%. The increase was primarily due to gross investment income
of $8.6 million generated from liquidating some of our
limited partnership investments offset by reductions due to
decreases in interest rates. There was no investment income
generated by our limited partnership investments for 2008.
Excluding distributions from our limited partnership
investments, gross investment income for 2009 decreased 9.0%
compared to 2008. This decrease is due to reductions in interest
rates. Cash and invested assets, net of payable for securities
purchased of $37.3 million, increased to
$1,694.1 million as of December 31, 2009 from
$1,598.8 million as of December 31, 2008, an increase
of $95.3 million or 6.0%. This increase was primarily due
to proceeds from the Rights Offering. A portion of these
proceeds was invested in a limited partnership which resulted in
$1.7 million of equity in net income of partnerships in the
consolidated statement of operations. This ownership was
redeemed in December 2009. The remaining portion of the proceeds
were invested short-term until later in the year at which time
they were invested in assets which are expected to produce
higher yields in 2010.
|
|
|
|
Investment expenses were $4.7 million for 2009, compared
with $5.0 million for 2008, a decrease of $0.3 million
or 6.3%. The decrease was primarily due to the decrease in trust
fees and a change in fee structure resulting from a change in
investment managers.
|
The average duration of our fixed maturities portfolios was
2.8 years as of December 31, 2009, compared with
3.1 years as of December 31, 2008. Including cash and
short-term investments, the average duration of our investments
as of December 31, 2009 and 2008 was 2.5 years. At
December 31, 2009, our book yield on our fixed maturities,
not including cash, was 4.34% compared with 4.95% at
December 31, 2008. The book yield on the
$194.0 million of municipal bonds in our portfolio was
3.88% at December 31, 2009.
Net
Realized Investment Gains (Losses)
Net realized investment gains were $15.9 million for 2009,
compared with net realized investment losses of
$50.3 million for 2008. The net realized investment gains
for 2009 consist primarily of net gains of $5.4 million
relative to market value changes in our convertible portfolio
and net gains of $16.1 million relative to our fixed
68
maturities and equity portfolios, offset by other than temporary
impairment losses of $5.6 million. The net realized
investment losses for 2008 consist primarily of net losses of
$5.2 million relative to market value declines in our
convertible portfolios, other than temporary impairment losses
of $32.1 million, net losses of $5.9 million from the
sale of Fannie Mae and Freddie Mac preferred stock, and net
losses of $6.8 million from the sale of Lehman Brothers
corporate bonds.
See Note 3 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for an
analysis of total investment return on an after-tax basis for
the years ended December 31, 2009 and 2008.
Corporate
and Other Operating Expenses
Corporate and other operating expenses consist of outside legal
fees, other professional fees, directors fees, management
fees, salaries and benefits for holding company personnel, and
taxes incurred which are not directly related to operations.
Corporate and other operating expenses were $16.8 million
for 2009, compared with $13.9 million for 2008, an increase
of $2.8 million or 20.4%. This increase is primarily due to
professional fees related to domestication and other corporate
initiatives.
Interest
Expense
Interest expense was $7.2 million and $8.7 million for
2009 and 2008, respectively. The reduction is due to retiring
$15.5 million of trust preferred debt in May 2008, as well
as a reduction in LIBOR rates during 2009, which is the basis
for interest paid on the trust preferred debt. See Note 9
of the notes to the consolidated financial statements in
Item 8 of Part II of this report for details on our
debt.
Impairments
of Goodwill and Intangible Assets
Impairments of goodwill and intangible assets were
$96.4 million for 2008. There were no impairments in 2009.
See Note 5 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for
details on our impairments.
Income
Tax Expense (Benefit)
Income tax expense was $4.3 million for 2009, compared with
income tax benefit of $29.3 million for 2008. See
Note 7 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for a
comparison of income tax expense between periods.
Equity
in Net Earnings (Loss) of Partnerships
Equity in net earnings of partnerships, net of tax was
$5.3 million for 2009, compared with equity in net loss of
partnerships, net of tax of $3.9 million for 2008, an
increase in income of $9.2 million. The change from a loss
in 2008 to income in 2009 was due to the performances of limited
partnership investments which invest mainly in high yield bonds
and corporate loans. The value of these investments was
$1.1 million as of December 31, 2009, so this
performance is not likely to repeat in future years.
Net
Income (Loss)
The factors described above resulted in net income of
$75.4 million for 2009, compared with net loss of
$141.6 million for 2008, an increase in income of
$217.0 million.
69
Year
Ended December 31, 2008 Compared with the Year Ended
December 31, 2007
Insurance
Operations
The components of income (loss) from underwriting and
underwriting ratios of our Insurance Operations segment, with
premium by product classification, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penn-America
|
|
$
|
172,869
|
|
|
$
|
286,439
|
|
|
$
|
(113,570
|
)
|
|
|
(39.6
|
)%
|
United National
|
|
|
88,884
|
|
|
|
132,311
|
|
|
|
(43,427
|
)
|
|
|
(32.8
|
)%
|
Diamond State
|
|
|
91,377
|
|
|
|
118,085
|
|
|
|
(26,708
|
)
|
|
|
(22.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
353,130
|
|
|
$
|
536,835
|
|
|
$
|
(183,705
|
)
|
|
|
(34.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penn-America
|
|
$
|
158,136
|
|
|
$
|
266,874
|
|
|
$
|
(108,738
|
)
|
|
|
(40.7
|
)%
|
United National
|
|
|
74,964
|
|
|
|
110,649
|
|
|
|
(35,685
|
)
|
|
|
(32.3
|
)%
|
Diamond State
|
|
|
72,379
|
|
|
|
100,751
|
|
|
|
(28,372
|
)
|
|
|
(28.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
305,479
|
|
|
$
|
478,274
|
|
|
$
|
(172,795
|
)
|
|
|
(36.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penn-America
|
|
$
|
200,991
|
|
|
$
|
317,826
|
|
|
$
|
(116,835
|
)
|
|
|
(36.8
|
)%
|
United National
|
|
|
92,449
|
|
|
|
115,118
|
|
|
|
(22,669
|
)
|
|
|
(19.7
|
)%
|
Diamond State
|
|
|
80,734
|
|
|
|
97,572
|
|
|
|
(16,838
|
)
|
|
|
(17.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
374,174
|
|
|
|
530,516
|
|
|
|
(156,342
|
)
|
|
|
(29.5
|
)%
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
293,820
|
|
|
|
295,624
|
|
|
|
(1,804
|
)
|
|
|
(0.6
|
)%
|
Acquisition costs and other underwriting expenses(1)
|
|
|
137,294
|
|
|
|
170,611
|
|
|
|
(33,317
|
)
|
|
|
(19.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from underwriting
|
|
$
|
(56,940
|
)
|
|
$
|
64,281
|
|
|
$
|
(121,221
|
)
|
|
|
(188.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
|
|
69.7
|
|
|
|
61.2
|
|
|
|
8.5
|
|
|
|
|
|
Prior accident year
|
|
|
8.8
|
|
|
|
(5.5
|
)
|
|
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar year
|
|
|
78.5
|
|
|
|
55.7
|
|
|
|
22.8
|
|
|
|
|
|
Expense ratio
|
|
|
36.7
|
|
|
|
32.2
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
115.2
|
|
|
|
87.9
|
|
|
|
27.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Includes excise tax of $1,871 and $2,390 related to cessions
from our U.S. Insurance Companies to Wind River Reinsurance for
2008 and 2007, respectively. |
Premiums
Gross premiums written, which represent the amount received or
to be received for insurance policies written without reduction
for reinsurance costs or other deductions, were
$353.1 million for 2008, compared with $536.8 million
for 2007, a decrease of $183.7 million or 34.2%.
|
|
|
|
|
Penn-America
gross premiums written were $172.9 million for 2008,
compared with $286.4 million for 2007, a decrease of
$113.5 million, or 39.6%. The decrease was primarily due to
a reduction of $41.6 million due to terminations of
business that did not meet our profitability requirements, a
reduction of $39.3 million from agents that write business
in coastal catastrophe prone areas, and a reduction of
$32.6 million from price decreases in the aggregate of
approximately 4.4% and other market factors.
|
|
|
|
United National gross premiums written were $88.9 million
for 2008, compared with $132.3 million for 2007, a decrease
of $43.4 million, or 32.8%. The decrease was primarily due
to a reduction of $24.9 million
|
70
|
|
|
|
|
due to terminations of business that did not meet our
profitability requirements and a reduction of $18.5 million
from price decreases in the aggregate of approximately 4.2% and
other market factors.
|
|
|
|
|
|
Diamond State gross premiums written were $91.4 million for
2008, compared with $118.1 million for 2007, a decrease of
$26.7 million, or 22.6%. The decrease was primarily due to
a reduction of $5.6 million due to terminations of business
that did not meet our profitability requirements and a reduction
of $21.1 million from price decreases in the aggregate of
approximately 2.1% and other market factors.
|
Net premiums written, which equal gross premiums written less
ceded premiums written, were $305.5 million for 2008,
compared with $478.3 million for 2007, a decrease of
$172.8 million or 36.1%. The decrease was primarily due to
the reduction of gross premiums written noted above.
The ratio of net premiums written to gross premiums written was
86.5% for 2008 and 89.1% for 2007, a decline of 2.6 points,
which was primarily due to changes in our mix of business, and
an additional $3.0 million of ceded written premiums under
our catastrophe reinsurance treaty resulting from the
reinstatement of limits related to losses from Hurricane Ike.
Net premiums earned were $374.2 million for 2008, compared
with $530.5 million for 2007, a decrease of
$156.3 million or 29.5%. The decrease was primarily due to
the reduction of gross premiums written noted above.
Net
Losses and Loss Adjustment Expenses
The loss ratio for our Insurance Operations was 78.5% for 2008
compared with 55.7% for 2007. The loss ratio is a non-GAAP
financial measure that is generally viewed in the insurance
industry as an indicator of underwriting profitability and is
calculated by dividing net losses and loss adjustment expenses
by net premiums earned.
The impact of changes to prior accident years is 14.3 points
resulting from an increase of net losses and loss adjustment
expenses for prior accident years of $33.0 million in 2008
compared to a $29.0 million reduction of net losses and
loss adjustment expenses for prior accident years in 2007. When
analyzing loss reserves and prior year development, we consider
many factors, including the frequency and severity of claims,
loss credit trends, case reserve settlements that may have
resulted in significant development, and any other additional or
pertinent factors that may impact reserve estimates.
|
|
|
|
|
In 2008, we increased our prior accident year loss reserves by
$29.9 million and increased our allowance for uncollectible
reinsurance by $3.1 million. The loss reserves increase of
$29.9 million consisted of increases of $15.9 million
in our general liability lines and $15.7 million in our
professional liability lines, offset by reductions of
$1.2 million in our property lines and $0.5 million in
our umbrella lines.
|
|
|
|
|
1.
|
The increase to the general liability lines consisted of
increases of $20.5 million related to accident years 2006,
2007, and 2001 and prior, offset by reductions of
$4.6 million related to accident years 2002 through 2005.
The increases in 2006 and 2007 are primarily related to greater
severity.
|
|
|
2.
|
The increase to the professional liability lines consisted of
increases of $17.7 million related to accident years 2006
and 2007, offset by reductions of $2.0 million related to
accident years 2005 and prior. The increases in 2006 and 2007 in
are primarily related to greater severity.
|
|
|
3.
|
The reduction in property lines consisted of reductions of
$2.6 million related to accident years 2007 and 2003 and
prior, offset by increases of $1.4 million primarily
related to accident years 2004 through 2006.
|
|
|
4.
|
The reduction in umbrella lines was primarily related to
accident years 2004 and prior. The increases in 2006 and 2007 in
our professional and general liability lines are primarily
related to greater severity.
|
|
|
|
|
|
In 2007, we reduced our prior accident year loss reserves by
$24.6 million and reduced our allowance for uncollectible
reinsurance by $4.4 million. The loss reserves reduction of
$24.6 million consisted of a net reduction of
$42.5 million for primary liability, umbrella and excess,
construction defect, and lines in run- off due to both lower
than expected frequency and severity emergence, offset by a
$17.8 million increase in net reserves for unallocated loss
adjustment expenses (ULAE) and A&E.
|
71
The current accident year loss ratio increased 8.5 points in
2008 primarily due to an increase in both the current property
and casualty loss ratios:
|
|
|
|
|
The current accident year property loss ratio increased 19.7
points from 49.4% in 2007 to 69.1% in 2008, which consists of a
14.3 point increase in the catastrophe loss ratio from 1.0% in
2007 to 15.3% in 2008 and a 5.3 point increase in the
non-catastrophe loss ratio from 46.0% in 2007 to 51.3% in 2008.
The increase in the catastrophe loss ratio is due to
$21.1 million of net loss and loss adjustment expenses
primarily related to Hurricanes Ike and Gustav, which occurred
in September 2008, and storms in the Midwest that occurred in
the first half of 2008, compared to $2.0 million of
catastrophe losses in 2007. Loss and loss adjustments related to
Hurricanes Ike and Gustav was $14.0 million in 2008. The
increase in the non-catastrophe loss ratio is primarily due to
higher frequency related to weather-related losses early in 2008.
|
|
|
|
The current accident year casualty loss ratio increased 2.5
points from 67.5% in 2007 to 70.0% in 2008 primarily due to
increased loss trends, higher severity on product lines that we
are exiting, and the impact of lower pricing.
|
Net losses and loss adjustment expenses were $293.8 million
for 2008, compared with $295.6 million for 2007, a decrease
of $1.8 million or 0.6%. Excluding the $33.0 million
increase of net losses and loss adjustment expenses for prior
accident years in 2008 and the $29.0 million reduction of
net losses and loss adjustment expenses for prior accident years
in 2007, the current accident year net losses and loss
adjustment expenses were $260.8 million and
$324.6 million for 2008 and 2007, respectively. This
decrease is primarily attributable to a decrease in net premiums
earned, partially offset by an increase in property losses due
to the factors noted above and casualty loss cost inflation.
Property net premiums earned for 2008 and 2007 were
$137.8 million and $186.7 million, respectively.
Casualty net premiums earned for 2008 and 2007 were
$236.3 million and $343.8 million, respectively.
Acquisition
Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses, excluding
intercompany eliminations, were $137.3 million for 2008,
compared with $170.6 million for 2007, a decrease of
$33.3 million or 19.5%. The decrease is due to a
$37.0 million decrease in acquisition costs, offset by a
$3.7 million increase in other underwriting expenses.
|
|
|
|
|
The decrease in acquisition costs is primarily due to a decrease
in commissions resulting from a decrease in net premiums earned.
|
|
|
|
The increase in other underwriting expenses is primarily due to
an increase in total compensation expenses and property and
office costs.
|
Expense
and Combined Ratios
The expense ratio for our Insurance Operations was 36.7% for
2008, compared with 32.2% for 2007. The expense ratio is a
non-GAAP financial measure that is calculated by dividing the
sum of acquisition costs and other underwriting expenses by net
premiums earned. The increase in the expense ratio is primarily
due to the decrease in net premiums earned noted above.
The combined ratio for our Insurance Operations was 115.2% for
2008, compared with 87.9% for 2007. The combined ratio is a
non-GAAP financial measure and is the sum of our loss and
expense ratios. Excluding the impact of a $33.0 million
increase of prior accident year loss reserves in 2008 and a
$29.0 million reduction of prior accident year loss
reserves in 2007, the combined ratio increased from 93.4% for
2007 to 106.4% for 2008. See discussion of loss ratio included
in Net Losses and Loss Adjustment Expenses above and
discussion of expense ratio in preceding paragraph above for an
explanation of this increase.
Income
(Loss) from underwriting
The factors described above resulted in loss from underwriting
for our Insurance Operations of $56.9 million for 2008,
compared with income from underwriting of $64.3 million for
2007, a decrease of $121.2 million.
72
Reinsurance
Operations
The components of income (loss) from underwriting and
underwriting ratios of our Reinsurance Operations segment are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
25,570
|
|
|
$
|
26,277
|
|
|
$
|
(707
|
)
|
|
|
(2.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
3,601
|
|
|
$
|
12,261
|
|
|
$
|
(8,660
|
)
|
|
|
(70.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
8,334
|
|
|
$
|
5,807
|
|
|
$
|
2,527
|
|
|
|
43.5
|
%
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
11,354
|
|
|
|
3,617
|
|
|
|
7,737
|
|
|
|
213.9
|
%
|
Acquisition costs and other underwriting expenses
|
|
|
5,473
|
|
|
|
4,113
|
|
|
|
1,360
|
|
|
|
33.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from underwriting
|
|
$
|
(8,493
|
)
|
|
$
|
(1,923
|
)
|
|
$
|
(6,570
|
)
|
|
|
341.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
|
|
112.8
|
|
|
|
64.5
|
|
|
|
48.3
|
|
|
|
|
|
Prior accident year
|
|
|
23.4
|
|
|
|
(2.2
|
)
|
|
|
25.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar year loss ratio
|
|
|
136.2
|
|
|
|
62.3
|
|
|
|
73.9
|
|
|
|
|
|
Expense ratio
|
|
|
65.7
|
|
|
|
70.8
|
|
|
|
(5.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
201.9
|
|
|
|
133.1
|
|
|
|
68.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
Gross premiums written, which represent the amount received or
to be received for reinsurance agreements written without
reduction for reinsurance costs or other deductions, were
$25.6 million for 2008, compared with $26.3 million
for 2007, a decrease of $0.7 million or 2.7%. The decrease
was primarily due to the non-renewal in 2008 of a treaty we had
written in 2007 that no longer met our profitability
requirements.
Net premiums written, which equal gross premiums written less
ceded premiums written, were $3.6 million for 2008,
compared with $12.3 million for 2007, a decrease of
$8.7 million or 70.6%. The decrease was due to an increase
in the amount of gross premiums retroceded to our reinsurers.
With respect to the non-renewed treaty referred to above, in
2007, we retroceded a smaller percentage of gross written
premiums under that treaty compared to other treaties we wrote.
Therefore, in 2008, the non-renewal of that treaty had a
disproportionate impact on net written premiums when compared to
gross written premiums.
The ratio of net premiums written to gross premiums written was
14.1% for 2008 and 46.7% for 2007, a decline of 32.6 points,
which was primarily due to changes in our mix of business.
Net premiums earned were $8.3 million for 2008, compared
with $5.8 million for 2007, an increase of
$2.5 million or 43.5%. The increase was primarily due to
business written in the latter part of 2007.
Net
Losses and Loss Adjustment Expenses
The loss ratio for our Reinsurance Operations was 136.2% for
2008 compared with 62.3% for 2007. The loss ratio is a non-GAAP
financial measure that is generally viewed in the insurance
industry as an indicator of underwriting profitability and is
calculated by dividing net losses and loss adjustment expenses
by net premiums earned.
The impact of changes to prior accident years is 25.6 points
resulting from an increase of net losses and loss adjustment
expenses for prior accident years of $1.9 million in 2008
compared to a $0.1 million reduction of net losses and loss
adjustment expenses for prior accident years in 2007. When
analyzing loss reserves and prior year
73
development, we consider many factors, including the frequency
and severity of claims, loss credit trends, case reserve
settlements that may have resulted in significant development,
and any other additional or pertinent factors that may impact
reserve estimates.
|
|
|
|
|
In 2008, we increased our prior accident year loss reserves by
$1.9 million, which primarily consisted of an increase of
$2.6 million in our professional liability lines, offset by
reductions of $0.6 million in our general liability lines
and $0.1 million in our property lines. The increase to the
professional liability lines was related to accident year 2007.
The reduction to the general liability lines was related to
accident years 2004 through 2006. The reduction in the property
lines was related to accident year 2007.
|
|
|
|
In 2007, we reduced our prior accident year loss reserves by
$0.1 million which consisted of a reduction in our general
liability lines for accident year 2005.
|
The current accident year loss ratio increased 48.3 points in
2008 primarily due to an increase in the current accident year
property loss and current accident year casualty loss ratios.
The current accident year property loss ratio increased 35.8
points from 35.6% in 2007 to 71.4% in 2008. The increase is due
to $0.4 million of net loss and loss adjustment expenses
primarily related to Hurricanes Ike and Gustav, which occurred
in September 2008. The current accident year casualty loss ratio
increased 49.9 points from 66.0% in 2007 to 115.9% in 2008
primarily due to increased loss trends.
Net losses and loss adjustment expenses were $11.3 million
for 2008, compared with $3.6 million for 2007, an increase
of $7.7 million or 213.9%. Excluding the $1.9 million
increase of net losses and loss adjustment expenses for prior
accident years in 2008 and the $0.1 million reduction of
net losses and loss adjustment expenses for prior accident years
in 2007, the current accident year net losses and loss
adjustment expenses were $9.4 million and $3.7 million
for 2008 and 2007, respectively. This increase is primarily
attributable to an increase in net premiums earned and casualty
loss cost inflation. Property net premiums earned for 2008 and
2007 were $0.6 million and $0.3 million, respectively.
Casualty net premiums earned for 2008 and 2007 were
$7.8 million and $5.5 million, respectively.
Acquisition
Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses were
$5.5 million for 2008, compared with $4.1 million for
2007, an increase of $1.4 million or 33.1%. The increase is
due to a $2.0 million increase in acquisition costs, offset
by a $0.6 million decrease in other underwriting expenses.
|
|
|
|
|
The increase in acquisition costs is primarily due to an
increase in commissions resulting from an increase in net
premiums earned.
|
|
|
|
The decrease in other underwriting expenses is primarily due to
a decrease in total compensation expenses, legal fees, and
consulting costs.
|
Expense
and Combined Ratios
The expense ratio for our Reinsurance Operations was 65.7% for
2008, compared with 70.8% for 2007. The expense ratio is a
non-GAAP financial measure that is calculated by dividing the
sum of acquisition costs and other underwriting expenses by net
premiums earned. The decrease in the expense ratio is primarily
due to the increase in net premiums earned noted above.
The combined ratio for our Reinsurance Operations was 201.9% for
2008, compared with 133.1% for 2007. The combined ratio is a
non-GAAP financial measure and is the sum of our loss and
expense ratios. Excluding the impact of a $1.9 million
increase of prior accident year loss reserves in 2008 and a
$0.1 million reduction of prior accident year loss reserves
in 2007, the combined ratio increased from 135.3% for 2007 to
178.5% for 2008. See discussion of loss ratio included in
Net Losses and Loss Adjustment Expenses above and
discussion of expense ratio in preceding paragraph above for an
explanation of this increase.
74
Loss
from underwriting
The factors described above resulted in a loss from underwriting
for our Reinsurance Operations of $8.5 million for 2008,
compared with a loss from underwriting of $1.9 million for
2007, an increase of $6.6 million or 341.7%.
Unallocated
Corporate Items
The following items are not allocated to our Insurance
Operations or Reinsurance Operations segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
67,830
|
|
|
$
|
77,341
|
|
|
$
|
(9,511
|
)
|
|
|
(12.3
|
)%
|
Net realized investment gains (losses)
|
|
|
(50,259
|
)
|
|
|
968
|
|
|
|
(51,227
|
)
|
|
|
NM
|
|
Corporate and other operating expenses
|
|
|
(13,918
|
)
|
|
|
(11,643
|
)
|
|
|
2,275
|
|
|
|
19.5
|
%
|
Interest expense
|
|
|
(8,657
|
)
|
|
|
(11,372
|
)
|
|
|
(2,715
|
)
|
|
|
(23.9
|
)%
|
Impairments of goodwill and intangible assets
|
|
|
(96,449
|
)
|
|
|
|
|
|
|
(96,449
|
)
|
|
|
|
|
Income tax benefit (expense)
|
|
|
29,216
|
|
|
|
(18,697
|
)
|
|
|
(47,913
|
)
|
|
|
NM
|
|
Equity in net loss of partnership, net of tax
|
|
|
(3,890
|
)
|
|
|
(581
|
)
|
|
|
(3,309
|
)
|
|
|
(569.5
|
)%
|
NM Not meaningful.
Net
Investment Income
Net investment income, which is gross investment income less
investment expenses, was $67.8 million for 2008, compared
with $77.3 million for 2007, a decrease of
$9.5 million or 12.3%.
|
|
|
|
|
Gross investment income, excluding realized gains and losses,
was $72.8 million for 2008, compared with
$83.4 million for 2007, a decrease of $10.6 million or
12.7%. The decrease was primarily due to reductions in
short-term interest rates and a reduction of our cash and
invested assets. Cash and invested assets decreased to
$1,599.5 million as of December 31, 2008, from
$1,765.1 million as of December 31, 2007, a decrease
of $165.6 million or 9.4%. This decrease was due to
negative operating cash flow of $18.2 million, realized and
unrealized losses in our investment portfolio of
$78.6 million, and the remaining $68.8 million is
mainly due to share repurchases and debt repayments that
occurred earlier in the year. Our limited partnership
investments did not generate gross investment income in 2008;
they generated gross investment income of $0.4 million for
2007. Excluding limited partnership distributions, gross
investment income for 2008 decreased 12.3% compared to 2007.
|
|
|
|
Investment expenses were $5.0 million for 2008, compared
with $6.1 million for 2007, a decrease of $1.1 million
or 17.7%. The decrease was primarily due to the decrease in the
average fair value of our invested assets and a decrease in
trust fees.
|
The average duration of our bonds was 3.1 years as of
December 31, 2008, compared with 3.7 years as of
December 31, 2007. Including cash and short-term
investments, the average duration of our investments as of
December 31, 2008 and 2008 was 2.5 and 3.1 years,
respectively. At December 31, 2008, our book yield on our
bonds, not including cash, was 4.95% compared with 5.02% at
December 31, 2007. The book yield on the
$234.6 million of municipal bonds in our portfolio was
3.87% at December 31, 2008.
Net
Realized Investment Gains (Losses)
Net realized investment losses were $50.3 million for 2008,
compared with net realized investment gains of $1.0 million
for 2007. The net realized investment losses for 2008 consist
primarily of net losses of $5.2 million relative to market
value declines in our convertible portfolios, other than
temporary impairment losses of $32.1 million, net losses of
$5.9 million from the sale of Fannie Mae and Freddie Mac
preferred stock, and net losses of $6.8 million from the
sale of Lehman Brothers corporate bonds. The net realized
investment gains for 2007 consist primarily of net gains of
$1.7 million relative to our bond portfolios, net of other
than temporary
75
impairments of $0.7 million, net gains of $2.1 million
relative to our equity portfolio, net losses of
$2.6 million relative to our convertible portfolios, and
net losses of $0.2 million relative to our limited
partnership portfolios.
See Note 3 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for an
analysis of total investment return on an after-tax basis for
the years ended December 31, 2008 and 2007.
Corporate
and Other Operating Expenses
Corporate and other operating expenses consist of outside legal
fees, other professional fees, directors fees, management
fees, salaries and benefits for holding company personnel, and
taxes incurred which are not directly related to operations.
Corporate and other operating expenses were $13.9 million
for 2008, compared with $11.6 million for 2007, an increase
of $2.3 million or 19.5%. This increase is primarily due to
an increase in travel expenses, legal fees, accounting and audit
fees, and other miscellaneous expenses.
Interest
Expense
Interest expense was $8.7 million and $11.4 million
for 2008 and 2007, respectively. The reduction is primarily due
to retiring $15.5 million of trust preferred debt in
December 2007, and $15.5 million in May 2008. See
Note 9 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for
details on our debt.
Impairments
of Goodwill and Intangible Assets
Impairments of goodwill and intangible assets were
$96.4 million for 2008. See Note 5 of the notes to the
consolidated financial statements in Item 8 of Part II
of this report for details on our impairments.
Income
Tax Expense (Benefit)
Income tax benefit relating to continuing operations was
$29.2 million for 2008, compared with income tax expense of
$18.7 million for 2007. See Note 7 of the notes to the
consolidated financial statements in Item 8 of Part II
of this report for a comparison of income tax expense between
periods.
Our alternative minimum tax (AMT) credit
carryforward as of December 31, 2008 and 2007 was
$0.8 million and $0.0 million, respectively. In 2008,
there were $29.0 million of other than temporary impairment
losses on invested assets held by our U.S. Subsidiaries. If
these invested assets are sold and the impairment losses are
realized in 2008, the AMT credit carryforward could increase by
$4.4 million to $5.2 million.
Equity
in Net Loss of Partnerships
Equity in net loss of partnerships, net of tax was
$3.9 million for 2008, compared with $0.6 million for
2007, an increase of $3.3 million. The increase in the loss
was due to the performance of a limited partnership investment
which invests mainly in high yield bonds.
Net
Income (Loss)
The factors described above resulted in net loss of
$141.6 million for 2008, compared with net income of
$98.9 million for 2007, a decrease of $240.5 million
or 243.1%.
Liquidity
and Capital Resources
Sources
and Uses of Funds
United America Indemnity is a holding company. Its principal
asset is its ownership of the shares of its direct and indirect
subsidiaries, including United National Insurance Company,
Diamond State Insurance Company, United National Specialty
Insurance Company, United National Casualty Insurance Company,
Wind River Reinsurance,
Penn-America
Insurance Company, Penn-Star Insurance Company, and Penn-Patriot
Insurance Company.
76
The principal source of cash that United America Indemnity,
United America Indemnity Group, Inc. (United America
Indemnity Group), and AIS need to meet their short term
and long term liquidity needs, including corporate expenses,
includes dividends, other permitted disbursements from their
direct and indirect subsidiaries, and reimbursement to United
America Indemnity from its subsidiaries for equity awards
granted to employees. The principal sources of funds at these
direct and indirect subsidiaries include underwriting
operations, commissions, investment income, and proceeds from
sales and redemptions of investments. Funds are used principally
to pay claims and operating expenses, to make debt payments, to
purchase investments, and to make dividend payments. The future
liquidity of United America Indemnity, United America Indemnity
Group, and AIS is dependent on the ability of their subsidiaries
to pay dividends. United America Indemnity, United America
Indemnity Group, and AIS currently have no planned capital
expenditures that could have a material impact on its long-term
liquidity needs.
In May 2009, United America Indemnity received gross proceeds of
$100.1 million from the issuance of 17.2 million and
11.4 million of its Class A and Class B common
shares, respectively, in conjunction with the Rights Offering
that was announced in March 2009. The net proceeds of
$91.8 million were used to support strategic initiatives,
enhance liquidity and financial flexibility, and for other
general corporate purposes. See Note 10 to the consolidated
financial statements in Item 8 of Part II of this
report for details concerning the Rights Offering.
United America Indemnity Group owes $90.0 million to
unrelated third parties in guaranteed senior notes. On
July 20, 2011 and on each anniversary thereafter to and
including July 20, 2014, United America Indemnity Group is
required to prepay $18.0 million of the principal amount.
On July 20, 2015, United America Indemnity Group is
required to pay any remaining outstanding principal amount on
the notes. The notes are guaranteed by United America Indemnity,
Ltd. In the event that debt service obligations were not
satisfied, United America Indemnity Group would be precluded
from paying dividends to U.A.I. (Luxembourg) Investment S.à
r.l., its parent company.
AIS owes $30.9 million to affiliated parties in junior
subordinated debentures, which are due in 2033. Interest is
payable quarterly. See Note 9 of the notes to consolidated
financial statements in Item 8 of Part II of this
report for the terms of these notes. In the event that debt
service obligations were not satisfied, AIS would be precluded
from paying dividends to United America Indemnity Group, its
parent company.
In July 2008, United America Indemnity completed its purchase of
$100.0 million of its Class A common shares as part of
two $50.0 million share buyback programs that were
initiated in November 2007 and February 2008, respectively. Wind
River Reinsurance loaned United America Indemnity funds to
enable it to execute the buybacks. The loan currently bears
interest at 3.75% per year. In June 2008, Wind River Reinsurance
declared and paid a dividend of $50.0 million to United
America Indemnity. United America Indemnity used proceeds from
the dividend to repay a portion of the loan.
At December 31, 2009, United America Indemnity owed
$48.7 million in principal to Wind River Reinsurance,
$6.0 million in principal to U.A.I. (Luxembourg) Investment
S.à r.l. (UAI Luxembourg Investment), and
$4.0 million in related accrued interest.
The United National Insurance Companies and the
Penn-America
Insurance Companies are restricted by statute as to the amount
of dividends that they may pay without the prior approval of
regulatory authorities. The United National Insurance Companies
and the
Penn-America
Insurance Companies may pay dividends without advance regulatory
approval only out of unassigned surplus. See Note 16 of the
notes to consolidated financial statements in Item 8 of
Part II of this report for the dividends declared and paid
by the United National Insurance Companies and the
Penn-America
Insurance Companies in 2009 and the maximum amount of
distributions that they could pay as dividends in 2010.
For 2010, we believe that Wind River Reinsurance should have
sufficient liquidity and solvency to pay dividends. Wind River
Reinsurance is prohibited, without the approval of the BMA, from
reducing by 15% or more its total statutory capital as set out
in its previous years statutory financial statements, and
any application for such approval must include such information
as the BMA may require. Based upon the total statutory capital
plus the statutory surplus as set out in its 2009 statutory
financial statements that will be filed in 2010, Wind River
Reinsurance could pay a dividend of up to $175.8 million
without requesting BMA approval.
77
Surplus
Levels
Each company in our Insurance Operations is required by law to
maintain a certain minimum level of policyholders surplus
on a statutory basis. Policyholders surplus is calculated
by subtracting total liabilities from total assets. The NAIC
adopted risk-based capital standards that are designed to
identify property and casualty insurers that may be inadequately
capitalized based on the inherent risks of each insurers
assets and liabilities and mix of net premiums written. Insurers
falling below a calculated threshold may be subject to varying
degrees of regulatory action. Based on the standards currently
adopted, the policyholders surplus of each company in our
Insurance Operations is in excess of the prescribed minimum
company action level risk-based capital requirements.
Cash
Flows
Sources of operating funds consist primarily of net premiums
written and investment income. Funds are used primarily to pay
claims and operating expenses and to purchase investments.
Our reconciliation of net income to cash provided from
operations is generally influenced by the following:
|
|
|
|
|
the fact that we collect premiums, net of commission, in advance
of losses paid;
|
|
|
|
the timing of our settlements with our reinsurers; and
|
|
|
|
the timing of our loss payments.
|
Net cash was provided by (used for) operating activities in
2009, 2008, and 2007 of $(52.6) million,
$(18.2) million and $148.0 million, respectively.
In 2009, the decrease in operating cash flows of approximately
$35.4 million from the prior year was primarily a net
result of the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Net premiums collected
|
|
$
|
270,512
|
|
|
$
|
324,785
|
|
|
$
|
(54,273
|
)
|
Net losses paid
|
|
|
(282,144
|
)(1)
|
|
|
(261,553
|
)
|
|
|
(20,591
|
)
|
Acquisition costs and other underwriting expenses
|
|
|
(128,725
|
)
|
|
|
(145,810
|
)
|
|
|
17,085
|
|
Net investment income
|
|
|
76,791
|
|
|
|
76,827
|
|
|
|
(36
|
)
|
Net federal income taxes recovered (paid)
|
|
|
18,311
|
|
|
|
(5,670
|
)
|
|
|
23,981
|
|
Interest paid
|
|
|
(7,292
|
)
|
|
|
(9,016
|
)
|
|
|
1,724
|
|
Other
|
|
|
(96
|
)
|
|
|
2,206
|
|
|
|
(2,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities
|
|
$
|
(52,643
|
)
|
|
$
|
(18,231
|
)
|
|
$
|
(34,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes
out-of-period
adjustment of $(18.6) million. See Note 2 in
Item 8 of Part II of this report for details
concerning this adjustment. |
In 2008, the decrease in operating cash flows of approximately
$166.3 million from the prior year was primarily a net
result of the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Net premiums collected
|
|
$
|
324,785
|
|
|
$
|
504,643
|
|
|
$
|
(179,858
|
)
|
Net losses paid
|
|
|
(261,553
|
)
|
|
|
(235,218
|
)
|
|
|
(26,335
|
)
|
Acquisition costs and other underwriting expenses
|
|
|
(145,810
|
)
|
|
|
(182,088
|
)
|
|
|
36,278
|
|
Net investment income
|
|
|
76,827
|
|
|
|
85,406
|
|
|
|
(8,579
|
)
|
Net federal income taxes recovered (paid)
|
|
|
(5,670
|
)
|
|
|
(17,182
|
)
|
|
|
11,512
|
|
Interest paid
|
|
|
(9,016
|
)
|
|
|
(11,180
|
)
|
|
|
2,164
|
|
Other
|
|
|
2,206
|
|
|
|
3,638
|
|
|
|
(1,432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities
|
|
$
|
(18,231
|
)
|
|
$
|
148,019
|
|
|
$
|
(166,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
See the consolidated statement of cash flows in the financial
statements in Item 8 of Part II of this report for
details concerning our investing and financing activities.
Liquidity
Each company in our Insurance Operations and our Reinsurance
Operations maintains sufficient liquidity to pay claims through
cash generated by operations and investments in liquid
investments. At December 31, 2009, United America Indemnity
had cash and cash equivalents of $186.1 million.
In May 2009, United America Indemnity received gross proceeds of
$100.1 million from the issuance of 17.2 million and
11.4 million of its Class A and Class B common
shares, respectively, in conjunction with the Rights Offering
that was announced in March 2009. See Note 10 to the
consolidated financial statements in Item 8 of Part II
of this report for details concerning the Rights Offering.
Previous
Intercompany Pooling Arrangements
The United National Insurance Companies participated in an
intercompany pooling arrangement whereby premiums, losses, and
expenses were shared pro rata among the members of the group.
United National Insurance Company is not an authorized reinsurer
in all states. As a result, any losses and unearned premium that
were ceded to United National Insurance Company by the other
companies in the group had to be collateralized. To satisfy this
requirement, United National Insurance Company set up custodial
trust accounts on behalf of the other group members. The state
insurance departments that regulate the parties to the
intercompany pooling agreements also required United National
Insurance Company to place assets on deposit subject to trust
agreements for the protection of other group members.
There were two intercompany pooling arrangements in place for
the United National Insurance Companies. The first pooling
agreement governed policies that were written prior to
July 1, 2002. The second pooling agreement governed
policies that were written on or after July 1, 2002. The
method by which intercompany reinsurance is ceded was different
for each pool. In the first pool, the United National Insurance
Companies ceded all business to United National Insurance
Company. United National Insurance Company ceded in turn to
external reinsurers. The remaining net premiums retained were
allocated to the companies in the group according to their
respective pool participation percentages. In the second pool,
each company in the group first ceded to external reinsurers.
The remaining net was ceded to United National Insurance Company
where the net premiums written of the group were pooled and
reallocated to the group based on their respective participation
percentages. The second pool required less collateral by United
National Insurance Company as a result of it assuming less
business from the other group members. United National Insurance
Company only had to fund the portion that was ceded to it after
cessions had occurred with external reinsurers. United National
Insurance Company retained 80.0% of the risk associated with
each pool.
The
Penn-America
Insurance Companies participated in an intercompany pooling
arrangement whereby premiums, losses, and expenses were shared
pro rata among the members of the group. These parties were not
authorized reinsurers in all states. As a result, any losses and
unearned premium that were ceded to Penn-Star Insurance Company
by the other group members had to be collateralized. The state
insurance departments that regulate the parties to the
intercompany pooling agreements required Penn-Star Insurance
Company to place assets on deposit subject to trust agreements
for the protection of other group members.
Current
Intercompany Pooling Arrangement and Stop Loss
Agreement
Effective January 1, 2009, all of the U.S. Insurance
Companies participate in a single pool. The U.S. Insurance
Companies and Wind River Reinsurance also negotiated a new stop
loss agreement that provides protection to the
U.S. Insurance Companies in a loss corridor from 70% to
90%. Regulatory approval for these agreements was obtained.
79
Quota
Share Arrangements
Our
Non-U.S. Insurance
Operations commenced offering reinsurance to the United National
Insurance Companies in January 2004 through quota share
arrangements. These reinsurance arrangements resulted in 60% of
the United National Insurance Companies net retained
insurance liability on new or renewal business being ceded to
Wind River Reinsurance or its predecessors through
December 31, 2006.
On February 1, 2005, the
Non-U.S. Insurance
Operations commenced providing reinsurance to the
Penn-America
Insurance Companies through a quota share arrangement. This
reinsurance arrangement resulted in 30% of
Penn-America
Insurance Companies net retained insurance liability on
new and renewal business bound after February 1, 2005 being
ceded to Wind River Bermuda. The agreement also stipulated that
30% of
Penn-America
Insurance Companies February 1, 2005 net
unearned premium be ceded to Wind River Bermuda.
As part of the amalgamation of our
Non-U.S. Insurance
Operations, each of the aforementioned quota share agreements
was assumed by Wind River Reinsurance.
Effective January 1, 2007, each of the quota share
agreements was terminated and consolidated into a single quota
share reinsurance agreement. Under this new agreement, our
U.S. Insurance Companies have agreed to cede 50% of their
net unearned premiums as of December 31, 2006, plus 50% of
the net retained insurance liability of all new and renewal
business bound on or after January 1, 2007 to Wind River
Reinsurance. Wind River Reinsurance is an unauthorized
reinsurer. As a result, any losses and unearned premium that are
ceded to Wind River Reinsurance by the U.S. Insurance
Companies must be collateralized. To satisfy this requirement,
Wind River Reinsurance has set up custodial trust accounts on
behalf of the U.S. Insurance Companies.
Wind River Reinsurance has established independent reinsurance
trust accounts for the benefit of each of the
U.S. Insurance Companies. We invest the funds in securities
that have durations that closely match the expected duration of
the liabilities assumed. We believe that Wind River Reinsurance
will have sufficient liquidity to pay claims prospectively.
All trusts that we are required to maintain as a result of the
above mentioned pooling agreements and quota share arrangements
are adequately funded.
In 2010, we expect that, in the aggregate, our Insurance
Operations and our Reinsurance Operations will have sufficient
liquidity to pay claims. We monitor our portfolios to assure
liability and investment durations are closely matched.
Prospectively, as fixed income investments mature and new cash
is obtained, the cash available to invest will be invested in
accordance with our investment policy. Our investment policy
allows us to invest in taxable and tax-exempt fixed income
investments as well as publicly traded and private equity
investments. With respect to bonds, our credit exposure limit
for each issuer varies with the issuers credit quality.
The allocation between taxable and tax-exempt bonds is
determined based on market conditions and tax considerations.
We have access to various capital sources including dividends
from insurance subsidiaries, invested assets in our
Non-U.S. Subsidiaries,
and access to the debt and equity capital markets. We believe we
have sufficient liquidity to meet our capital needs. See
Note 16 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for a
discussion of our dividend capacity.
Capital
Resources
In May 2009, United America Indemnity received gross proceeds of
$100.1 million from the issuance of 17.2 million and
11.4 million of its Class A and Class B common
shares, respectively, in conjunction with the Rights Offering
that was announced in March 2009. See Note 10 to the
consolidated financial statements in Item 8 of Part II
of this report for details concerning the Rights Offering.
In July 2005, United America Indemnity Group sold
$90.0 million of guaranteed senior notes, due July 20,
2015. These senior notes have an interest rate of 6.22%, payable
semi-annually. On July 20, 2011 and on each anniversary
thereafter to and including July 20, 2014, United America
Indemnity Group is required to repay $18.0 million of the
principal amount. On July 20, 2015, United America
Indemnity Group is required to pay any
80
remaining outstanding principal amount on the notes. United
America Indemnity Group is dependent on dividends received from
its U.S. Insurance Operations to fund this debt service.
The notes are guaranteed by United America Indemnity, Ltd.
U.A.I. (Luxembourg) Investment S.à r.l. holds promissory
notes of $175.0 million and $110.0 million from United
America Indemnity Group which have interest rates of 6.64% and
6.20%, respectively, and mature in 2018 and 2020, respectively.
Interest on these notes is paid annually.
On January 18, 2006, U.A.I. Luxembourg Investment loaned
$6.0 million to United America Indemnity, Ltd. The loan has
been used to pay operating expenses that arise in the normal
course of business. The loan is a demand loan and bears interest
at 4.38%. At December 31, 2009, there was $1.0 million
of accrued interest on the loan. United America Indemnity, Ltd.
is dependent on its subsidiaries to pay it dividends and its
operating expenses.
On November 12, 2007, Wind River Reinsurance issued a
$50.0 million demand line of credit to United America
Indemnity, Ltd. that bears interest at 5.25%. The proceeds of
the line were used to fund the purchases of our Class A
common shares. See Item 5 in Part II of this report
for details concerning these purchases.
On February 13, 2008, the demand line of credit was
amended. The interest rate was decreased to 3.75% per annum, and
the loan amount was increased to $100.0 million. The
increase was used to fund the repurchase of an additional
$50.0 million of our Class A common shares. See
Item 5 in Part II of this report for details
concerning these purchases.
In June 2008, Wind River Reinsurance declared and paid a
dividend of $50.0 million to United America Indemnity.
United America Indemnity used proceeds from the dividend to
repay a portion of the loan. As of December 31, 2009, there
was $48.7 million outstanding on the line of credit plus
accrued interest of $4.0 million.
United America Indemnity Group has no income producing
operations. The ability of United America Indemnity Group to
generate cash to repay the notes is dependent on dividends that
it receives from its subsidiaries.
On May 15, 2008, we redeemed all of the $15.0 million
issued and outstanding notes of Penn Trust II. In
conjunction with this redemption, the $15.5 million of
junior subordinated debentures of PAGI, which are the sole
assets of Penn Trust II, were also redeemed. The
registration of Penn Trust II was cancelled effective
February 2, 2009.
Our business trust subsidiaries have issued floating rate
capital and floating rate common securities. A summary of the
terms related to these securities is as follows:
|
|
|
|
|
|
|
|
|
Issuer
|
|
Amount
|
|
Maturity
|
|
Interest Rate
|
|
Call Provisions
|
|
AIS through its wholly owned subsidiary United National Group
Capital Trust I (UNG Trust I)
|
|
$10.0 million issued
September 30, 2003
|
|
September 30, 2033
|
|
Payable quarterly at the
three month London
Interbank Offered Rate
(LIBOR) plus 4.05%
|
|
At par after
September 30, 2008
|
AIS through its wholly owned subsidiary United National Group
Capital Statutory Trust II (UNG Trust II)
|
|
$20.0 million issued
October 29, 2003
|
|
October 29, 2033
|
|
Payable quarterly at the
three month LIBOR plus 3.85%
|
|
At par after
October 29, 2008
|
We have the ability to call these floating rate capital and
floating rate common securities on a quarterly basis at anytime
between now and maturity.
The proceeds from the above offerings were used to purchase
junior subordinated interest notes and were used to support the
business growth in the insurance subsidiaries and general
business needs.
Distributions on the above securities can be deferred up to five
years, but in the event of such deferral, we may not declare or
pay cash dividends on the common stock of the applicable
subsidiary.
Our wholly owned business trust subsidiaries, UNG Trust I
and UNG Trust II, are not consolidated pursuant to
applicable accounting guidance. Our business trust subsidiaries
have issued $30.0 million in floating rate capital
securities and $0.9 million of floating rate common
securities. The sole assets of the business trust subsidiaries
are $30.9 million of our junior subordinated debentures,
which have the same terms with respect to maturity, payments,
and distributions as the floating rate capital securities and
the floating rate common securities.
81
We are party to a management agreement with Fox
Paine & Company, whereby in connection with certain
management services provided to us by Fox Paine &
Company, we agreed to pay an annual management fee of
$1.5 million to Fox Paine & Company. The last
annual management fee of $1.5 million was paid to Fox
Paine & Company on September 25, 2009. The next
annual management fee payment of $1.5 million is payable on
November 1, 2010.
Contractual
Obligations
We have commitments in the form of operating leases, a revolving
line of credit, senior notes payable, junior subordinated
debentures and unpaid losses and loss expense obligations. As of
December 31, 2009, contractual obligations related to
United America Indemnitys commitments, including any
principal and interest payments, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
1 Year
|
|
|
2 to 3 Years
|
|
|
4 to 5 Years
|
|
|
6 Years
|
|
|
|
Total
|
|
|
1/1/10-12/31/10
|
|
|
1/1/11-12/31/12
|
|
|
1/1/13-12/31/14
|
|
|
and Later
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases(1)
|
|
$
|
14,437
|
|
|
$
|
3,499
|
|
|
$
|
6,877
|
|
|
$
|
3,884
|
|
|
$
|
177
|
|
Commitments to fund limited partnerships
|
|
|
2,501
|
|
|
|
2,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes(2)
|
|
|
112,392
|
|
|
|
5,598
|
|
|
|
46,076
|
|
|
|
41,598
|
|
|
|
19,120
|
|
Junior subordinated debentures(3)
|
|
|
78,663
|
|
|
|
1,996
|
|
|
|
3,992
|
|
|
|
3,992
|
|
|
|
68,683
|
|
Term Loans
|
|
|
641
|
|
|
|
285
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses obligations(4)
|
|
|
1,257,741
|
|
|
|
421,997
|
|
|
|
477,148
|
|
|
|
203,864
|
|
|
|
154,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,466,375
|
|
|
$
|
435,876
|
|
|
$
|
534,449
|
|
|
$
|
253,338
|
|
|
$
|
242,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We lease office space and equipment as part of our normal
operations. The amounts shown above represent future commitments
under such operating leases. |
|
(2) |
|
On July 20, 2005, United America Indemnity Group sold
$90.0 million of guaranteed senior notes, due July 20,
2015. These notes have an interest rate of 6.22%, payable
semi-annually. On July 20, 2011 and on each anniversary
thereafter to and including July 20, 2014, United America
Indemnity Group is required to prepay $18.0 million of the
principal amount. On July 20, 2015, United America
Indemnity Group, Inc is required to pay any remaining
outstanding principal amount on the notes. The notes are
guaranteed by United America Indemnity, Ltd. Proceeds from the
notes were used to prepay $72.8 million in principal
together with related interest due as of July 20, 2005
under senior notes issued by Wind River to the Ball family
trusts in September 2003. The terms of the prepayment agreement
required the Ball family trusts to reimburse Wind River for
$0.3 million of the issuance costs of the new senior notes
plus $1.0 million of the incremental interest costs that
United America Indemnity Group is estimated to incur under the
new senior notes. The total amount of these reimbursements of
$1.3 million was recorded as a gain on the early
extinguishment of debt. |
|
(3) |
|
See discussion in Capital Resources. |
|
(4) |
|
These amounts represent the gross future amounts needed to pay
losses and related loss adjustment expenses and do not reflect
amounts that are expected to be recovered from our reinsurers.
See discussion in Liability for Unpaid Losses and Loss
Adjustment Expenses for more details. |
Off
Balance Sheet Arrangements
We have no off balance sheet arrangements other than the
Trust Preferred Securities and floating rate common
securities discussed in the Capital Resources
section of Liquidity and Capital Resources.
82
Inflation
Property and casualty insurance premiums are established before
we know the amount of losses and loss adjustment expenses or the
extent to which inflation may affect such amounts. We attempt to
anticipate the potential impact of inflation in establishing our
reserves.
Substantial future increases in inflation could result in future
increases in interest rates, which in turn are likely to result
in a decline in the market value of the investment portfolio and
resulting unrealized losses or reductions in shareholders
equity.
Cautionary
Note Regarding Forward-Looking Statements
Some of the statements under Business,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and elsewhere in this
report may include forward-looking statements that reflect our
current views with respect to future events and financial
performance that are intended to be covered by the safe harbor
for forward-looking statements provided by the Private
Securities Litigation Reform Act of 1995. Forward-looking
statements are statements that are not historical facts. These
statements can be identified by the use of forward-looking
terminology such as believe, expect,
may, will, should,
project, plan, seek,
intend, or anticipate or the negative
thereof or comparable terminology, and include discussions of
strategy, financial projections and estimates and their
underlying assumptions, statements regarding plans, objectives,
expectations or consequences of identified transactions, and
statements about the future performance, operations, products
and services of the companies.
Our business and operations are and will be subject to a variety
of risks, uncertainties and other factors. Consequently, actual
results and experience may materially differ from those
contained in any forward-looking statements. Such risks,
uncertainties and other factors that could cause actual results
and experience to differ from those projected include, but are
not limited to, the following: (1) the ineffectiveness of
our business strategy due to changes in current or future market
conditions; (2) the effects of competitors pricing
policies, and of changes in laws and regulations on competition,
including industry consolidation and development of competing
financial products; (3) greater frequency or severity of
claims and loss activity than our underwriting, reserving or
investment practices have anticipated; (4) decreased level
of demand for our insurance products or increased competition
due to an increase in capacity of property and casualty
insurers; (5) risks inherent in establishing loss and loss
adjustment expense reserves; (6) uncertainties relating to
the financial ratings of our insurance subsidiaries;
(7) uncertainties arising from the cyclical nature of our
business; (8) changes in our relationships with, and the
capacity of, our general agents; (9) the risk that our
reinsurers may not be able to fulfill obligations;
(10) investment performance and credit risk;
(11) risks associated with our proposed re-domestication to
Ireland; (12) new tax legislation or interpretations that
could lead to an increase in our tax burden; and
(13) uncertainties relating to governmental and regulatory
policies.
The foregoing review of important factors should not be
construed as exhaustive and should be read in conjunction with
the other cautionary statements that are set forth in Risk
Factors in Item 1A and elsewhere in this Annual
Report on
Form 10-K.
We undertake no obligation to publicly update or review any
forward-looking statement, whether as a result of new
information, future developments or otherwise.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Market
Risk
Market risk is the risk of economic losses due to adverse
changes in the estimated fair value of a financial instrument as
the result of changes in interest rates, equity prices, credit
risk, illiquidity, foreign exchange rates and commodity prices.
Our consolidated balance sheet includes the estimated fair
values of assets that are subject to market risk. Our primary
market risks are interest rate risk and credit risks associated
with investments in fixed maturities, equity price risk
associated with investments in equity securities, and foreign
exchange risk associated with premium received that is
denominated in foreign currencies. Each of these risks is
discussed in more detail below. We have no commodity risk.
83
Interest
Rate Risk
Our primary market risk exposure is to changes in interest
rates. Our fixed income investments are exposed to interest rate
risk. Fluctuations in interest rates have a direct impact on the
market valuation of these securities. As interest rates rise,
the market value of our fixed income investments fall, and the
converse is also true. We expect to manage interest rate risk
through an active portfolio management strategy that involves
the selection, by our managers, of investments with appropriate
characteristics, such as duration, yield, currency, and
liquidity that are tailored to the anticipated cash outflow
characteristics of our liabilities. Our strategy for managing
interest rate risk also includes maintaining a high quality bond
portfolio with a relatively short duration to reduce the effect
of interest rate changes on book value. A significant portion of
our investment portfolio matures each year, allowing for
reinvestment at current market rates.
As of December 31, 2009, assuming identical shifts in
interest rates for securities of all maturities, the table below
illustrates the sensitivity of market value in United America
Indemnitys bonds to selected hypothetical changes in basis
point increases and decreases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
Market Value
|
Basis Point Change
|
|
Market Value
|
|
$
|
|
%
|
|
(200)
|
|
$
|
1,523,077
|
|
|
$
|
51,505
|
|
|
|
3.5
|
%
|
(100)
|
|
|
1,503,358
|
|
|
|
31,786
|
|
|
|
2.2
|
%
|
No change
|
|
|
1,471,572
|
|
|
|
|
|
|
|
0.0
|
%
|
100
|
|
|
1,428,602
|
|
|
|
(42,970
|
)
|
|
|
(2.9
|
)%
|
200
|
|
|
1,383,131
|
|
|
|
(88,441
|
)
|
|
|
(6.0
|
%)
|
Credit
Risk
We have exposure to credit risk primarily as a holder of fixed
income investments as well as corporate loans. With the
exception of corporate loans, our investment policy requires
that we invest in debt instruments of high credit quality
issuers and limits the amount of credit exposure to any one
issuer based upon the rating of the security.
Our corporate loan portfolio is subject to default risk since
these investments are typically below investment grade. To
mitigate this risk, our investment managers perform an in-depth
structural analysis. As part of this analysis, they focus on the
strength of any security granted to the lenders, the position of
the loan in the companys capital structure and the
appropriate covenant protection. In addition, as part of our
risk control, our investment managers maintain appropriate
portfolio diversification by limiting issuer and industry
exposure.
As of December 31, 2009, we had approximately
$2.5 million worth of investment exposure to subprime and
Alt-A investments. As of December 31, 2009, approximately
$0.8 million of those investments have been rated AAA by
Standard & Poors, $1.6 million were rated
BBB- to AA, and $0.1 million were rated CCC. As of
December 31, 2008, the Company had approximately
$3.5 million worth of investment exposure to subprime and
Alt-A investments. Of that amount, approximately
$1.2 million have been rated AAA by Standard &
Poors, $1.8 million were rated BBB- to AA, and the
remaining $0.5 million were rated BB+. Impairments on these
investments were $0.9 million and $0.5 million during
the years ended December 31, 2009 and 2008, respectively.
In addition, we have credit risk exposure to our general
agencies and reinsurers. We seek to mitigate and control our
risks to producers by typically requiring our general agencies
to render payments within no more than 45 days after the
month in which a policy is effective and including provisions
within our general agency contracts that allow us to terminate a
general agencys authority in the event of non-payment.
With respect to our credit exposure to reinsurers, we seek to
mitigate and control our risk by ceding business to only those
reinsurers having adequate financial strength and sufficient
capital to fund their obligation. In addition, we seek to
mitigate credit risk to reinsurers through the use of trusts and
letters of credit for collateral. As of December 31, 2009,
$378.1 million of collateral and $62.1 million of
letters of credit were held in trust to support the reinsurance
receivables.
84
Equity
Price Risk
In 2009, the strategy for our equity portfolio follows a large
cap value approach. This investment style will place primary
emphasis on selecting the best relative values from those issues
having a projected normalized price-earnings ratio at a discount
to the market multiple.
We compare the results of our equity portfolio to a custom
benchmark index. To protect against equity price risk, the
sector exposures within our equity portfolio closely correlate
to the sector exposures custom benchmark index. In 2009, our
common stock portfolio had a return of 48.6%, not including
investment advisor fees, compared to the benchmark return of
37.9%.
The carrying values of investments subject to equity price risk
are based on quoted market prices as of the balance sheet dates.
Market prices are subject to fluctuation and thus the amount
realized in the subsequent sale of an investment may differ from
the reported market value. Fluctuation in the market price of an
equity security results from perceived changes in the underlying
economic makeup of a stock, the price of alternative investments
and overall market conditions.
We attempt to mitigate our unsystematic risk, which is the risk
that is associated with holding a particular security, by
holding a large number of securities in that market. At year
end, no security represented more than 4.5% of the market value
of the equity portfolio. We continue to have systematic risk,
which is the risk inherent in the general market due to broad
macroeconomic factors that affect all companies in the market.
As of December 31, 2009, the table below summarizes our
equity price risk and reflects the effect of a hypothetical 10%
and 20% increase or decrease in market prices. The selected
hypothetical changes do not indicate what could be the potential
best or worst scenarios.
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical
|
|
|
Estimated Fair Value
|
|
Percentage Increase
|
(Dollars in thousands)
|
|
after Hypothetical
|
|
(Decrease) in
|
Hypothetical Price Change
|
|
Change in Prices
|
|
Shareholders Equity
|
|
(20)%
|
|
$
|
52,525
|
|
|
|
(1.0
|
)%
|
(10)%
|
|
|
59,090
|
|
|
|
(0.5
|
)%
|
No change
|
|
|
65,656
|
|
|
|
|
|
10%
|
|
|
72,222
|
|
|
|
0.5
|
%
|
20%
|
|
|
78,787
|
|
|
|
1.0
|
%
|
Foreign
Exchange Risk
In 2009, we had foreign exchange risk associated with a small
portion of the premium of Wind River Reinsurance. We generally
keep premiums received in
non-U.S. currencies
in their respective original currencies, until there is greater
certainty of net profits under individual reinsurance contracts,
at which time we intend to sell some of those original
currencies into U.S. dollars. At year-end, we revalue those
non-U.S. currency
assets to current U.S. dollar rates. Corresponding
liabilities, if any, are adjusted within the reserving process.
If losses exceed premiums, we intend to purchase the relevant
non-U.S. currencies
at the prevailing rates. At December 31, 2009, there was an
unrealized loss of $0.04 million resulting from our foreign
currency asset revaluations, which is included as a component of
accumulated other comprehensive income. We are converting to
U.S. dollars in 2010.
85
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
UNITED
AMERICA INDEMNITY, LTD.
Index to
Financial Statements
Index to
Financial Statement Schedules
86
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of United America Indemnity, Ltd.:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of United America Indemnity, Ltd. and its
subsidiaries at December 31, 2009 and 2008, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2009 in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial
statement schedules listed in the accompanying index present
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements and financial statement schedules, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Report
on Internal Control over Financial Reporting appearing
under Item 9A. Our responsibility is to express opinions on
these financial statements, on the financial statement
schedules, and on the Companys internal control over
financial reporting based on our integrated audits. We conducted
our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
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, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 16, 2010
87
UNITED
AMERICA INDEMNITY, LTD.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
(In thousands, except share amounts)
|
|
|
|
|
|
ASSETS
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
Available for sale, at fair value
(amortized cost: $1,423,052 and $1,192,385)
|
|
$
|
1,471,572
|
|
|
$
|
1,204,974
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
Preferred stocks:
|
|
|
|
|
|
|
|
|
Available for sale, at fair value
(cost: $1,509 and $4,665)
|
|
|
2,599
|
|
|
|
4,665
|
|
Common stocks:
|
|
|
|
|
|
|
|
|
Available for sale, at fair value
(cost: $50,709 and $46,316)
|
|
|
63,057
|
|
|
|
50,613
|
|
Other invested assets:
|
|
|
|
|
|
|
|
|
Available for sale, at fair value
(cost: $4,323 and $19,689)
|
|
|
6,854
|
|
|
|
39,219
|
|
Securities classified as trading, at fair value
(cost: $1,145 and $7,453)
|
|
|
1,145
|
|
|
|
7,453
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
1,545,227
|
|
|
|
1,306,924
|
|
Cash and cash equivalents
|
|
|
186,087
|
|
|
|
292,604
|
|
Accounts receivable, net
|
|
|
69,711
|
|
|
|
57,117
|
|
Reinsurance receivables
|
|
|
543,351
|
|
|
|
679,277
|
|
Federal income taxes receivable
|
|
|
3,521
|
|
|
|
16,487
|
|
Deferred federal income taxes
|
|
|
13,819
|
|
|
|
32,532
|
|
Deferred acquisition costs
|
|
|
33,184
|
|
|
|
34,734
|
|
Intangible assets
|
|
|
9,236
|
|
|
|
9,309
|
|
Prepaid reinsurance premiums
|
|
|
16,546
|
|
|
|
23,960
|
|
Other assets
|
|
|
25,098
|
|
|
|
24,115
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,445,780
|
|
|
$
|
2,477,059
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses
|
|
$
|
1,257,741
|
|
|
$
|
1,506,429
|
|
Unearned premiums
|
|
|
131,582
|
|
|
|
149,677
|
|
Ceded balances payable
|
|
|
16,009
|
|
|
|
25,165
|
|
Contingent commissions
|
|
|
11,169
|
|
|
|
6,695
|
|
Payable for securities purchased
|
|
|
37,258
|
|
|
|
710
|
|
Notes and debentures payable
|
|
|
121,569
|
|
|
|
121,845
|
|
Other liabilities
|
|
|
38,476
|
|
|
|
34,545
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,613,804
|
|
|
|
1,845,066
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common shares, $0.0001 par value, 900,000,000 common shares
authorized; Class A common shares issued: 42,486,690 and
25,032,618, respectively; Class A common shares
outstanding: 36,430,477 and 19,013,462, respectively;
Class B common shares issued and outstanding: 24,122,744
and 12,687,500, respectively
|
|
|
7
|
|
|
|
4
|
|
Additional paid-in capital
|
|
|
619,469
|
|
|
|
524,345
|
|
Accumulated other comprehensive income, net of taxes
|
|
|
48,481
|
|
|
|
25,108
|
|
Retained earnings
|
|
|
264,739
|
|
|
|
182,982
|
|
Class A common shares in treasury, at cost:
|
|
|
|
|
|
|
|
|
6,056,213 and 6,019,156 shares, respectively
|
|
|
(100,720
|
)
|
|
|
(100,446
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
831,976
|
|
|
|
631,993
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
2,445,780
|
|
|
$
|
2,477,059
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(In thousands, except shares and per share data)
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
340,999
|
|
|
$
|
378,700
|
|
|
$
|
563,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
290,995
|
|
|
$
|
309,080
|
|
|
$
|
490,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
301,674
|
|
|
$
|
382,508
|
|
|
$
|
536,323
|
|
Net investment income
|
|
|
70,214
|
|
|
|
67,830
|
|
|
|
77,341
|
|
Net realized investment gains (losses) :
|
|
|
|
|
|
|
|
|
|
|
|
|
Other than temporary impairment losses on investments
|
|
|
(5,689
|
)
|
|
|
(32,141
|
)
|
|
|
(651
|
)
|
Other than temporary impairment losses on investments recognized
in other comprehensive income
|
|
|
115
|
|
|
|
|
|
|
|
|
|
Other net realized investment gains (losses)
|
|
|
21,436
|
|
|
|
(18,118
|
)
|
|
|
1,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
15,862
|
|
|
|
(50,259
|
)
|
|
|
968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
387,750
|
|
|
|
400,079
|
|
|
|
614,632
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
169,382
|
|
|
|
305,174
|
|
|
|
299,241
|
|
Acquisition costs and other underwriting expenses
|
|
|
119,929
|
|
|
|
142,767
|
|
|
|
174,181
|
|
Corporate and other operating expenses
|
|
|
16,752
|
|
|
|
13,918
|
|
|
|
11,643
|
|
Interest expense
|
|
|
7,216
|
|
|
|
8,657
|
|
|
|
11,372
|
|
Impairments of goodwill and intangible assets
|
|
|
|
|
|
|
96,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
74,471
|
|
|
|
(166,886
|
)
|
|
|
118,195
|
|
Income tax expense (benefit)
|
|
|
4,310
|
|
|
|
(29,216
|
)
|
|
|
18,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before equity in net income (loss) of partnerships
|
|
|
70,161
|
|
|
|
(137,670
|
)
|
|
|
99,498
|
|
Equity in net income (loss) of partnerships, net of taxes
|
|
|
5,276
|
|
|
|
(3,890
|
)
|
|
|
(581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
75,437
|
|
|
$
|
(141,560
|
)
|
|
$
|
98,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.46
|
|
|
$
|
(3.87
|
)
|
|
$
|
2.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.46
|
|
|
$
|
(3.87
|
)
|
|
$
|
2.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
51,712,098
|
|
|
|
36,556,189
|
|
|
|
41,258,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
51,762,764
|
|
|
|
36,556,189
|
|
|
|
41,570,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In 2008, Diluted loss per share is the same as
Basic loss per share since there was a net loss for
the year ended December 31, 2008. |
|
(2) |
|
In May 2009, the Company issued 17.2 million Class A
common shares and 11.4 million Class B common shares
in conjunction with the Rights Offering. In computing the basic
and diluted weighted share counts, the number of shares
outstanding prior to May 5, 2009 (the date that the common
shares were issued in conjunction with the Rights Offering) was
adjusted by a factor of 1.114 to reflect the impact of a bonus
element associated with the Rights Offering in accordance with
appropriate accounting guidance. As a result, share counts for
2008 and 2007 have been restated. |
See accompanying notes to consolidated financial statements.
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
75,437
|
|
|
$
|
(141,560
|
)
|
|
$
|
98,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during the period
|
|
|
40,532
|
|
|
|
(49,111
|
)
|
|
|
18,509
|
|
Portion of other than temporary impairment losses recognized in
other comprehensive income (loss), net of taxes
|
|
|
150
|
|
|
|
|
|
|
|
|
|
Recognition of previously unrealized holding (gains) losses
|
|
|
(11,129
|
)
|
|
|
34,144
|
|
|
|
(621
|
)
|
Unrealized foreign currency translation gains (losses)
|
|
|
140
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
29,693
|
|
|
|
(15,064
|
)
|
|
|
17,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss), net of tax
|
|
$
|
105,130
|
|
|
$
|
(156,624
|
)
|
|
$
|
116,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
Number of Class A common shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number at beginning of period
|
|
|
25,032,618
|
|
|
|
24,770,507
|
|
|
|
24,507,919
|
|
Common shares issued under share incentive plan
|
|
|
72,127
|
|
|
|
252,248
|
|
|
|
243,253
|
|
Common shares issued to directors
|
|
|
203,524
|
|
|
|
9,863
|
|
|
|
19,335
|
|
Common shares issued under Rights Offering
|
|
|
17,178,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number at end of period
|
|
|
42,486,690
|
|
|
|
25,032,618
|
|
|
|
24,770,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Class B common shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number at beginning of period
|
|
|
12,687,500
|
|
|
|
12,687,500
|
|
|
|
12,687,500
|
|
Common shares issued under Rights Offering
|
|
|
11,435,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number at end of period
|
|
|
24,122,744
|
|
|
|
12,687,500
|
|
|
|
12,687,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par value of Class A common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
3
|
|
Common shares issued under Rights Offering
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par value Class B common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Common shares issued under Rights Offering
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
524,345
|
|
|
$
|
519,980
|
|
|
$
|
515,357
|
|
Contributed capital from Class A common shares
|
|
|
|
|
|
|
|
|
|
|
1,002
|
|
Share compensation plans
|
|
|
3,294
|
|
|
|
4,365
|
|
|
|
3,621
|
|
Common shares issued under Rights Offering
|
|
|
91,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
619,469
|
|
|
$
|
524,345
|
|
|
$
|
519,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net of deferred
income tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
25,108
|
|
|
$
|
40,172
|
|
|
$
|
22,580
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during the period
|
|
|
29,554
|
|
|
|
(14,967
|
)
|
|
|
17,888
|
|
Unrealized foreign currency translation losses
|
|
|
140
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
29,694
|
|
|
|
(15,064
|
)
|
|
|
17,888
|
|
Change in other than temporary impairment losses recognized in
other comprehensive income, net of taxes
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Cumulative effect adjustment per new impairment accounting
guidance
|
|
|
(6,320
|
)
|
|
|
|
|
|
|
|
|
Reclass of change in convertible securities per new accounting
guidance
|
|
|
|
|
|
|
|
|
|
|
(296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
48,481
|
|
|
$
|
25,108
|
|
|
$
|
40,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
182,982
|
|
|
$
|
324,542
|
|
|
$
|
225,329
|
|
Reclass of change in convertible securities per new accounting
guidance
|
|
|
|
|
|
|
|
|
|
|
296
|
|
Net income (loss)
|
|
|
75,437
|
|
|
|
(141,560
|
)
|
|
|
98,917
|
|
Cumulative effect adjustment per new impairment accounting
guidance
|
|
|
6,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
264,739
|
|
|
$
|
182,982
|
|
|
$
|
324,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Treasury Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number at beginning of period
|
|
|
6,019,156
|
|
|
|
2,454,087
|
|
|
|
|
|
Class A common shares purchased
|
|
|
37,057
|
|
|
|
3,565,069
|
|
|
|
2,454,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number at end of period
|
|
|
6,056,213
|
|
|
|
6,019,156
|
|
|
|
2,454,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Shares, at cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(100,446
|
)
|
|
$
|
(48,422
|
)
|
|
$
|
|
|
Class A common shares purchased, at cost
|
|
|
(274
|
)
|
|
|
(52,024
|
)
|
|
|
(48,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(100,720
|
)
|
|
$
|
(100,446
|
)
|
|
$
|
(48,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
831,976
|
|
|
$
|
631,993
|
|
|
$
|
836,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
75,437
|
|
|
$
|
(141,560
|
)
|
|
$
|
98,917
|
|
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt issuance costs
|
|
|
83
|
|
|
|
173
|
|
|
|
278
|
|
Amortization and depreciation
|
|
|
73
|
|
|
|
1,008
|
|
|
|
1,010
|
|
Impairments of goodwill and intangible assets
|
|
|
|
|
|
|
96,449
|
|
|
|
|
|
Restricted stock and stock option expense
|
|
|
4,588
|
|
|
|
3,415
|
|
|
|
2,698
|
|
Deferred federal income taxes
|
|
|
9,655
|
|
|
|
(14,944
|
)
|
|
|
(1,561
|
)
|
Amortization of bond premium and discount, net
|
|
|
1,995
|
|
|
|
2,638
|
|
|
|
1,513
|
|
Net realized investment losses (gains)
|
|
|
(15,862
|
)
|
|
|
50,259
|
|
|
|
(968
|
)
|
Equity in loss (income) of partnerships
|
|
|
(5,276
|
)
|
|
|
3,890
|
|
|
|
581
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(12,594
|
)
|
|
|
11,460
|
|
|
|
21,690
|
|
Reinsurance receivable
|
|
|
135,926
|
|
|
|
40,429
|
|
|
|
262,796
|
|
Unpaid losses and loss adjustment expenses
|
|
|
(248,688
|
)
|
|
|
3,192
|
|
|
|
(198,773
|
)
|
Unearned premiums
|
|
|
(18,095
|
)
|
|
|
(78,686
|
)
|
|
|
(54,902
|
)
|
Ceded balances payable
|
|
|
(9,156
|
)
|
|
|
9,427
|
|
|
|
(477
|
)
|
Other assets and liabilities, net
|
|
|
2,867
|
|
|
|
(5,543
|
)
|
|
|
(5,528
|
)
|
Contingent commissions
|
|
|
4,474
|
|
|
|
(2,925
|
)
|
|
|
971
|
|
Federal income tax (receivable) payable
|
|
|
12,966
|
|
|
|
(19,942
|
)
|
|
|
3,076
|
|
Deferred acquisition costs, net
|
|
|
1,550
|
|
|
|
17,771
|
|
|
|
7,581
|
|
Prepaid reinsurance premiums
|
|
|
7,414
|
|
|
|
5,258
|
|
|
|
9,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities
|
|
|
(52,643
|
)
|
|
|
(18,231
|
)
|
|
|
148,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of fixed maturities
|
|
|
499,857
|
|
|
|
222,345
|
|
|
|
217,367
|
|
Proceeds from sale of equity securities
|
|
|
86,376
|
|
|
|
24,611
|
|
|
|
34,854
|
|
Proceeds from maturity of fixed maturities
|
|
|
49,260
|
|
|
|
94,060
|
|
|
|
68,144
|
|
Proceeds from sale of other invested assets
|
|
|
60,191
|
|
|
|
|
|
|
|
|
|
Purchase of fixed maturities
|
|
|
(728,075
|
)
|
|
|
(177,732
|
)
|
|
|
(390,365
|
)
|
Purchase of equity securities
|
|
|
(80,778
|
)
|
|
|
(29,565
|
)
|
|
|
(44,853
|
)
|
Purchase of other invested assets
|
|
|
(31,334
|
)
|
|
|
(277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) investing activities
|
|
|
(144,503
|
)
|
|
|
133,442
|
|
|
|
(114,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common shares
|
|
|
91,833
|
|
|
|
|
|
|
|
1,002
|
|
Borrowings under credit facility
|
|
|
|
|
|
|
|
|
|
|
22,906
|
|
Repayments of credit facility
|
|
|
|
|
|
|
|
|
|
|
(24,441
|
)
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
1,041
|
|
|
|
1,902
|
|
Excess tax benefit (expense) from share-based compensation plan
|
|
|
(794
|
)
|
|
|
(91
|
)
|
|
|
406
|
|
Purchase of Class A common shares
|
|
|
(274
|
)
|
|
|
(52,024
|
)
|
|
|
(48,422
|
)
|
Retirement of junior subordinated debentures
|
|
|
|
|
|
|
(15,464
|
)
|
|
|
(15,464
|
)
|
Principal payments of term debt
|
|
|
(276
|
)
|
|
|
(293
|
)
|
|
|
(479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
90,489
|
|
|
|
(66,831
|
)
|
|
|
(62,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
140
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(106,517
|
)
|
|
|
48,283
|
|
|
|
(29,424
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
292,604
|
|
|
|
244,321
|
|
|
|
273,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
186,087
|
|
|
$
|
292,604
|
|
|
$
|
244,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
92
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Principles
of Consolidation and Basis of Presentation
|
United America Indemnity, Ltd. (United America
Indemnity or the Company), was incorporated on
August 26, 2003, and is domiciled in the Cayman Islands. On
January 24, 2005, the Company changed its name from United
National Group, Ltd. to United America Indemnity, Ltd. The
Companys Class A common stock is publicly traded on
the NASDAQ Global Market. On March 14, 2005, the Company
changed its trading symbol on the NASDAQ Global Market from
UNGL to INDM.
The Company offers property and casualty insurance products in
the excess and surplus lines marketplace through its Insurance
Operations and provides third party facultative reinsurance for
writers of excess and surplus and specialty lines of property
and casualty insurance through its Reinsurance Operations. The
Company manages its Insurance Operations by differentiating them
into three product classifications:
Penn-America,
which markets to small commercial businesses through a select
network of wholesale general agents with specific binding
authority; United National, which markets insurance products for
targeted insured segments, including specialty products, such as
property, general liability, and professional lines through
program administrators with specific binding authority; and
Diamond State, which markets property, casualty, and
professional lines products, which are developed by the
Companys underwriting department by individuals with
expertise in those lines of business, through wholesale brokers
and also markets through program administrators having specific
binding authority. Collectively, the Companys
U.S. insurance subsidiaries are licensed in all
50 states and the District of Columbia. The Companys
Reinsurance Operations consist solely of the operations of its
Bermuda-based wholly-owned subsidiary, Wind River Reinsurance.
The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America (GAAP), which differ in
certain respects from those followed in reports to insurance
regulatory authorities. 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 consolidated financial statements include the accounts of
United America Indemnity and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated in
consolidation.
The Companys wholly-owned business trust subsidiaries,
United National Group Capital Trust I (UNG
Trust I), United National Group Capital Statutory
Trust II (UNG Trust II), are not
consolidated pursuant to applicable accounting guidance. The
Companys business trust subsidiaries have issued
$30.0 million in floating rate capital securities
(Trust Preferred Securities) and
$0.9 million of floating rate common securities. The sole
assets of the Companys business trust subsidiaries are
$30.9 million of junior subordinated debentures issued by
the Company, which have the same terms with respect to maturity,
payments, and distributions as the Trust Preferred
Securities and the floating rate common securities. The
registration of the Companys wholly owned business trust
subsidiary,
Penn-America
Statutory Trust II (Penn Trust II), was
cancelled effective February 2, 2009 as a result of the
redemption of its $15.0 million issued and outstanding
notes on May 15, 2008.
Certain prior period amounts have been reclassified to conform
to the current period presentation.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Investments
The Companys investments in fixed maturities, preferred
stock, and common stock are classified as available for sale and
are carried at their fair value. Fair value is defined as the
price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. The fair values of the
Companys available for sale portfolio, excluding the
limited partnership interest, are determined on the basis of
quoted market prices where available. If quoted market prices
are not available, the Company uses third
93
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
party pricing services to assist in determining fair value. In
many instances, these services examine the pricing of similar
instruments to estimate fair value. The Company purchases bonds
with the expectation of holding them to their maturity; however,
changes to the portfolio are sometimes required to assure it is
appropriately matched to liabilities. In addition, changes in
financial market conditions and tax considerations may cause the
Company to sell an investment before it matures. Corporate loans
have stated maturities; however, they generally do not reach
their final maturity due to borrowers refinancing. The
difference between amortized cost and fair value of the
Companys available for sale investments, excluding the
Companys convertible bond and convertible preferred stock
portfolios, net of the effect of deferred income taxes, is
reflected in accumulated other comprehensive income in
shareholders equity and, accordingly, has no effect on net
income other than for the credit loss component of impairments
deemed to be other than temporary. The difference between
amortized cost and fair value of the convertible bonds and
convertible preferred stocks is included in income.
At December 31, 2009, the Company held $0.6 million of
convertible preferred stock. As of December 31, 2008, the
Company held $16.0 million of convertible bonds and
$3.1 million of convertible preferred stock. The change in
the difference between the amortized cost and the market value
of the convertible portfolio is included in income as a
component of net realized investments gains (losses). The
Company realized a $5.4 million gain, a $5.2 million
loss, and a $2.6 million loss for the years ended
December 31, 2009, 2008, and 2007, respectively, due to
market value changes related to convertible securities.
At December 31, 2009, the Company held $138.9 million
in corporate loans. Corporate loans are primarily investments in
senior secured floating rate loans that banks have made to
corporations. The loans are generally priced at an interest rate
spread over LIBOR which resets every 60 to 90 days. The
Companys investments in corporate loans are purchased in
secondary markets for the purpose of being as held as
investments. They are carried at fair value with any change in
the difference between amortized cost and fair value, net of the
effect of deferred income taxes, reflected in accumulated other
comprehensive income in shareholders equity. These
investments are typically below investment grade.
The Companys investments in other invested assets are
comprised primarily of limited liability partnership interests.
Partnership interests of 3% ownership or greater are carried at
their fair value. The change in the difference between amortized
cost and fair value of partnership interests of 3% ownership or
greater, net of the effect of deferred income taxes, is
reflected in income. Partnership interests of less than 3%
ownership are carried at their fair value. The change in the
difference between amortized cost and the fair value of
partnership interests of less than 3% ownership, net of the
effect of deferred income taxes, is reflected in accumulated
other comprehensive income in shareholders equity and,
accordingly, has no effect on net income other than for
impairments deemed to be other than temporary.
The Companys investments in other invested assets,
including investments in several limited partnerships, were
valued at $8.0 million and $46.7 million as of
December 31, 2009 and 2008, respectively. Of these amounts,
$6.9 million and $13.9 million as of December 31,
2009 and 2008, respectively, were comprised of securities for
which there is no readily available independent market price.
The remaining $1.1 million and $32.8 million were
related to limited partnerships that invest primarily in
securities that are publicly traded. Material assumptions and
factors utilized in pricing these securities include future cash
flows, constant default rates, recovery rates, and any market
clearing activity that may have occurred since the prior
month-end pricing period. Securities that are held by these
partnerships are valued by obtaining values from Bloomberg,
other external pricing sources, and managers that make markets
for these securities. The Company obtains the value of the
partnerships at the end of each reporting period; however, the
Company is not provided with a detailed listing of the
investments held by these partnerships. The Company receives
annual audited financial statements from each of the
partnerships it owns.
Net realized gains and losses on investments are determined
based on the specific identification method.
The Company regularly performs various analytical valuation
procedures with respect to its investments, including reviewing
each fixed maturity security in an unrealized loss position to
assess whether the security is a
94
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
candidate for credit loss. Specifically, the Company considers
credit rating, market price, and issuer specific financial
information, among other factors, to assess the likelihood of
collection of all principal and interest as contractually due.
Securities for which the Company determines that a credit loss
is likely are subjected to further analysis through discounted
cash flow testing to estimate the credit loss to be recognized
in earnings, if any. The specific methodologies and significant
assumptions used by asset class are discussed below. Upon
identification of such securities and periodically thereafter, a
detailed review is performed to determine whether the decline is
considered other than temporary. This review includes an
analysis of several factors, including but not limited to, the
credit ratings and cash flows of the securities, and the
magnitude and length of time that the fair value of such
securities is below cost.
For fixed maturities, the factors considered in reaching the
conclusion that a decline below cost is other than temporary
include, among others, whether:
(1) the issuer is in financial distress;
(2) the investment is secured;
(3) a significant credit rating action occurred;
(4) scheduled interest payments were delayed or missed;
(5) changes in laws or regulations have affected an issuer
or industry;
(6) the investment has an unrealized loss and was
identified by the Companys Investment Manager as an
investment to be sold before recovery or maturity; and
(7) the investment failed cash flow projection testing to
determine if anticipated principal and interest payments will be
realized.
For equity securities, management carefully reviews all
securities with unrealized losses and further focuses on
securities that have either:
(1) persisted for more than twelve consecutive
months or
(2) the value of the investment has been 20% or more below
cost for six continuous months or more to determine if the
security should be impaired.
The amount of any write-down, including those that are deemed to
be other than temporary, is included in earnings as a realized
loss in the period in which the impairment arose.
According to the most recent accounting guidance, for debt
securities in an unrealized loss position, the Company is
required to assess whether the Company has the intent to sell
the debt security or more likely than not will be required to
sell the debt security before the anticipated recovery. If
either of these conditions is met, the Company must recognize an
other than temporary impairment with the entire unrealized loss
being recorded through earnings. For debt securities in an
unrealized loss position not meeting these conditions, the
Company assesses whether the impairment of a security is
other-than-temporary.
If the impairment is deemed to be
other-than-temporary,
the Company must separate the other than temporary impairment
into two components: the amount representing the credit loss and
the amount related to all other factors, such as changes in
interest rates. The credit loss represents the portion of the
amortized book value in excess of the net present value of the
projected future cash flows discounted at the effective interest
rate implicit in the debt security prior to impairment. The
credit loss component of the other than temporary impairment is
recorded through earnings, whereas the amount relating to
factors other than credit losses are recorded in other
comprehensive income, net of taxes.
For an analysis of other than temporary losses that were
recorded for the years ended December 31, 2009, 2008, and
2007, please see Note 3 below.
95
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash
and Cash Equivalents
For the purpose of the statements of cash flows, the Company
considers all liquid instruments with an original maturity of
three months or less to be cash equivalents. The Company has a
cash management program that provides for the investment of
excess cash balances primarily in short-term money market
instruments. Generally, bank balances exceed federally insured
limits. The carrying amount of cash and cash equivalents
approximates fair value.
At December 31, 2009, the Company had approximately
$144.7 million of cash and cash equivalents that was
invested in a diversified portfolio of high quality short-term
debt securities.
Valuation
of Accounts Receivable
The Company evaluates the collectibility of accounts receivable
based on a combination of factors. In circumstances in which the
Company is aware of a specific circumstance where a partys
inability to meet its financial obligations to the Company, a
specific allowance for bad debts against amounts due is recorded
to reduce the net receivable to the amount reasonably believed
by the Companys management to be collectible. For all
remaining balances, allowances are recognized for bad debts
based on the length of time the receivables are past due. The
allowance for bad debts was $2.2 million and
$3.6 million as of December 31, 2009 and 2008,
respectively. There were no bad debts written off in 2009 or
2008.
Goodwill
and Intangible Assets
As of December 31, 2009 and 2008, intangible assets were
$9.2 million and $9.3 million, respectively. All of
our goodwill was completely written off in 2008.
The carrying amount of intangible assets that are deemed to have
an indefinite useful life, which includes trade names and state
insurance licenses, and the carrying amount of intangible assets
that are not deemed to have an indefinite useful life, which
includes software technology, are regularly reviewed for
indicators of impairments in value in accordance with the
applicable accounting guidance. The Companys annual
impairment review of intangible assets is performed at
December 31. Impairment is recognized only if the carrying
amount of the intangible asset is considered not to be
recoverable from its undiscounted cash flows and is measured as
the difference between the carrying amount and the estimated
fair value of the asset. See Note 5 for details concerning
the results of the Companys 2009 impairment testing.
Reinsurance
In the normal course of business, the Company seeks to reduce
the loss that may arise from events that cause unfavorable
underwriting results by reinsuring certain levels of risk in
various areas of exposure with reinsurers. Amounts receivable
from reinsurers are estimated in a manner consistent with the
reinsured policy.
During 2009, the Company decreased its uncollectible reinsurance
reserve by $0.7 million due to a decrease in the amount of
carried reinsurance receivables. During 2008, the Company
increased its uncollectible reinsurance reserve by
$3.1 million due to an increase in the Companys
assessment of its risk of collecting from several individual
reinsurers.
The applicable accounting guidance requires that the reinsurer
must assume significant insurance risk under the reinsured
portions of the underlying insurance contracts and that there
must be a reasonably possible chance that the reinsurer may
realize a significant loss from the transaction. The Company has
evaluated its reinsurance contracts and concluded that each
contract qualifies for reinsurance accounting treatment pursuant
to this guidance.
The Company analyzes its reinsurance contracts to ensure they
meet the risk transfer requirements of the applicable accounting
guidance and regularly reviews the collectibility of reinsurance
receivables. Any changes in the allowances resulting from this
review are included in income during the period in which the
determination is made.
96
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
Taxes
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax assets will not be
realized. Management believes that it is more likely than not
that the results of future operations will generate sufficient
taxable income to realize the remaining deferred income tax
assets, and accordingly, the Company has not established any
valuation allowances.
Deferred
Acquisition Costs
The costs of acquiring new and renewal insurance and reinsurance
contracts include commissions, premium taxes and certain other
costs that vary with and are primarily related to the
acquisition of new and renewal insurance and reinsurance
contracts. The excess of the Companys costs of acquiring
new and renewal insurance and reinsurance contracts over the
related ceding commissions earned from reinsurers is capitalized
as deferred acquisition costs and amortized over the period in
which the related premiums are earned. In accordance with
accounting guidance for insurance enterprises, the method
followed in computing such amounts limits them to their
estimated realizable value that gives effect to the premium to
be earned, related investment income, losses and loss adjustment
expenses, and certain other costs expected to be incurred as the
premium is earned. The amortization of deferred acquisition
costs for the years ended December 31, 2009, 2008, and 2007
was $84.1 million, $108.9 million, and
$142.2 million, respectively. The Company determined that
its acquisition costs of $33.2 million as of
December 31, 2009 were deemed to be recoverable.
Notes
and Debentures Payable
The carrying amounts reported in the balance sheet represent the
outstanding balances.
In accordance with the applicable accounting guidance that
establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities
and equity, the Companys junior subordinated debentures
are classified as a liability on the balance sheets and the
related distributions are recorded as interest expense in the
Statements of Operations.
The Company does not consolidate its business trust
subsidiaries, which in the aggregate issued $30.0 million
of Trust Preferred Securities and $0.9 million of
floating rate common securities. The sole assets of the
Companys business trust subsidiaries are
$30.9 million of junior subordinated debentures issued by
the Company, which have the same terms with respect to maturity,
payments, and distributions as the Trust Preferred
Securities and the floating rate common securities. Therefore,
the Companys junior subordinated debentures are presented
as a liability in the balance sheet at December 31, 2009
and 2008.
Unpaid
Losses and Loss Adjustment Expenses
The liability for unpaid losses and loss adjustment expenses
represents the Companys best estimate of future amounts
needed to pay losses and related settlement expenses with
respect to events insured by the Company. This liability is
based upon the accumulation of individual case estimates for
losses reported prior to the close of the accounting period with
respect to direct business, estimates received from ceding
companies with respect to assumed reinsurance, and estimates of
unreported losses.
The process of establishing the liability for unpaid losses and
loss adjustment expenses of a property and casualty insurance
company is complex, requiring the use of informed actuarially
based estimates and judgments. In
97
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
some cases, significant periods of time, up to several years or
more, may elapse between the occurrence of an insured loss and
the reporting of that loss to the Company. To establish this
liability, the Company regularly reviews and updates the methods
of making such estimates and establishing the resulting
liabilities. Any resulting adjustments are recorded in income
during the period in which the determination is made.
Premiums
Premiums are recognized as revenue ratably over the term of the
respective policies and treaties. Unearned premiums are computed
on a pro rata basis to the day of expiration.
Contingent
Commissions
Certain professional general agencies of the Insurance
Operations are paid special incentives, referred to as
commissions, when loss results of business produced by these
agencies are more favorable than predetermined thresholds.
Similarly, in some circumstances, insurance companies that cede
business to the Companys Reinsurance Operations are paid
ceding or profit commissions based on the profitability of the
ceded portfolio. These commissions are charged to other
underwriting expenses when incurred. The liability for the
unpaid portion of these commissions, which is stated separately
on the face of the consolidated balance sheet as contingent
commissions, was $11.2 million and $6.7 million as of
December 31, 2009 and 2008, respectively. The increase is
primarily due to several reinsurance treaties that were entered
into by the Companys Reinsurance Operations during the
first quarter of 2009 that have generated profitable business
and therefore resulted in increased commissions.
Share-Based
Compensation
The Company accounts for stock options and other equity based
compensation using the modified prospective application of the
fair value-based method permitted by the appropriate accounting
guidance. See Note 13 for details.
Earnings
Per Share
Basic earnings per share has been calculated by dividing net
income available to common shareholders by the weighted-average
common shares outstanding. Diluted earnings per share has been
calculated by dividing net income available to common
shareholders by the sum of the weighted-average common shares
outstanding and the weighted-average common share equivalents
outstanding, which include options, warrants, and other equity
awards. Basic and diluted per common share and related weighted
average number of common share amounts are the same for 2008
since potential common shares were anti-dilutive and excluded
from the computation due to the Companys net loss for the
year ended December 31, 2008. See Note 15 for details.
Out-of-Period
Adjustments
During the preparation of the Companys consolidated
financial statements for the year ended December 31, 2009,
the Company identified an error in the consolidated financial
statements as of and for the years ended December 31, 2009
and 2008 related to the recognition of outstanding claim payment
checks and ACH wires occurring after the early closing of the
paid-loss
sub-ledger
at the end of the reporting periods. The Company typically
closes the general ledger for operations during the third week
of a quarter- or year-end close in order to improve the
timeliness of financial reporting. Cash accounts in the general
ledger remain open through the last day of the reporting period,
which would typically remedy system cut-off issues, since
post-system close cash is applied through the financial
statement date. However, although post-system close claim
payments are recorded in the general ledger, they are not
recorded to the paid claims accounts that are mapped to the
Unpaid losses and loss adjustment expenses line item
on the balance sheet; they are instead recorded to a clearing
account that is mapped to the Cash and cash
equivalents line item. The net effect is that claim
payments that are made after the system close, but before the
financial statement date, are actually not reflected in the
consolidated financial statements
98
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
since neither cash nor unpaid losses and loss adjustment
expenses are reduced for the amount of the claim payments. The
only other balances that are impacted as a result of this
process are operating cash flows on the consolidated statement
of cash flows. There is no impact to the Companys net
income.
The Company has corrected this error in its consolidated
financial statements as of and for the year ended
December 31, 2009 by decreasing the Cash and cash
equivalents and the Unpaid losses and loss
adjustment expenses line items on the consolidated balance
sheet and the Unpaid losses and loss adjustment
expenses line item on the consolidated statement of cash
flows by $18.6 million, the cumulative net effect of the
error. The Company does not believe that that these adjustments
are material to the consolidated financial statements for the
year ended December 31, 2009 or to any prior years
consolidated financial statements. As a result, the Company has
not restated any prior period amounts.
The amortized cost and estimated fair value of investments were
as follows as of December 31, 2009 and 2008:
|
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Than
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
Temporary
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Impairments
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Recognized in AOCI(1)
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency obligations
|
|
$
|
228,386
|
|
|
$
|
7,936
|
|
|
$
|
(234
|
)
|
|
$
|
236,088
|
|
|
$
|
|
|
Obligations of states and political subdivisions
|
|
|
217,713
|
|
|
|
8,255
|
|
|
|
(370
|
)
|
|
|
225,598
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
349,287
|
|
|
|
15,219
|
|
|
|
(506
|
)
|
|
|
364,000
|
|
|
|
(72
|
)
|
Asset-backed securities
|
|
|
112,287
|
|
|
|
2,322
|
|
|
|
(446
|
)
|
|
|
114,163
|
|
|
|
(10
|
)
|
Corporate notes and loans
|
|
|
446,570
|
|
|
|
15,419
|
|
|
|
(1,259
|
)
|
|
|
460,730
|
|
|
|
|
|
Foreign corporate bonds
|
|
|
68,809
|
|
|
|
2,354
|
|
|
|
(170
|
)
|
|
|
70,993
|
|
|
|
(698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
1,423,052
|
|
|
|
51,505
|
|
|
|
(2,985
|
)
|
|
|
1,471,572
|
|
|
|
(780
|
)
|
Common stock
|
|
|
50,709
|
|
|
|
12,473
|
|
|
|
(125
|
)
|
|
|
63,057
|
|
|
|
|
|
Preferred stock
|
|
|
1,509
|
|
|
|
1,090
|
|
|
|
|
|
|
|
2,599
|
|
|
|
|
|
Other invested assets
|
|
|
5,468
|
|
|
|
2,531
|
|
|
|
|
|
|
|
7,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,480,738
|
|
|
|
67,599
|
|
|
$
|
(3,110
|
)
|
|
$
|
1,545,227
|
|
|
$
|
(780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the amount of other than temporary impairment losses
due to other factors which are recognized in accumulated other
comprehensive income (AOCI). Per the accounting
guidance, these items were not included in earnings as of
December 31, 2009. |
99
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency obligations
|
|
$
|
135,457
|
|
|
$
|
17,320
|
|
|
$
|
|
|
|
$
|
152,777
|
|
Obligations of states and political subdivisions
|
|
|
241,457
|
|
|
|
5,712
|
|
|
|
(4,139
|
)
|
|
|
243,030
|
|
Mortgage-backed securities
|
|
|
372,569
|
|
|
|
12,180
|
|
|
|
(680
|
)
|
|
|
384,069
|
|
Commercial mortgage-backed securities
|
|
|
156,402
|
|
|
|
|
|
|
|
(11,945
|
)
|
|
|
144,457
|
|
Asset-backed securities
|
|
|
19,801
|
|
|
|
|
|
|
|
(3,248
|
)
|
|
|
16,553
|
|
Corporate notes and loans
|
|
|
215,931
|
|
|
|
2,175
|
|
|
|
(4,451
|
)
|
|
|
213,655
|
|
Foreign corporate bonds
|
|
|
29,485
|
|
|
|
136
|
|
|
|
(471
|
)
|
|
|
29,150
|
|
Other bonds
|
|
|
21,283
|
|
|
|
|
|
|
|
|
|
|
|
21,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
1,192,385
|
|
|
|
37,523
|
|
|
|
(24,934
|
)
|
|
|
1,204,974
|
|
Common stock
|
|
|
46,316
|
|
|
|
4,482
|
|
|
|
(185
|
)
|
|
|
50,613
|
|
Preferred stock
|
|
|
4,665
|
|
|
|
|
|
|
|
|
|
|
|
4,665
|
|
Other invested assets
|
|
|
27,142
|
|
|
|
19,530
|
|
|
|
|
|
|
|
46,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,270,508
|
|
|
$
|
61,535
|
|
|
$
|
(25,119
|
)
|
|
$
|
1,306,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE: |
Other than temporary impairments recognized in AOCI is not shown
as of December 31, 2008 since the applicable new accounting
guidance on other than temporary impairments is not applied
retrospectively.
|
Excluding U.S. treasury and securities guaranteed by the
U.S. Government, the Company did not hold any debt or
equity investments in a single issuer that was in excess of 2.0%
or 5.0% of shareholders equity at December 31, 2009
or 2008, respectively.
The amortized cost and estimated fair value of the
Companys fixed maturities portfolio classified as
available for sale at December 31, 2009, by contractual
maturity, are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
(Dollars in thousands)
|
|
|
|
|
|
Due in one year or less
|
|
$
|
58,635
|
|
|
$
|
59,587
|
|
Due after one year through five years
|
|
|
695,807
|
|
|
|
718,081
|
|
Due after five years through ten years
|
|
|
143,407
|
|
|
|
149,785
|
|
Due after ten years through fifteen years
|
|
|
25,446
|
|
|
|
26,679
|
|
Due after fifteen years
|
|
|
38,183
|
|
|
|
39,277
|
|
Mortgaged-backed securities
|
|
|
349,287
|
|
|
|
364,000
|
|
Asset-backed securities
|
|
|
112,287
|
|
|
|
114,163
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,423,052
|
|
|
$
|
1,471,572
|
|
|
|
|
|
|
|
|
|
|
100
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table contains an analysis of the Companys
securities with gross unrealized losses, categorized by the
period that the securities were in a continuous loss position as
of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer(1)
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency obligations
|
|
$
|
56,445
|
|
|
$
|
(234
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
56,445
|
|
|
$
|
(234
|
)
|
Obligations of states and political subdivisions
|
|
|
26,488
|
|
|
|
(239
|
)
|
|
|
6,403
|
|
|
|
(131
|
)
|
|
|
32,891
|
|
|
|
(370
|
)
|
Mortgage-backed securities
|
|
|
23,612
|
|
|
|
(217
|
)
|
|
|
5,020
|
|
|
|
(289
|
)
|
|
|
28,632
|
|
|
|
(506
|
)
|
Asset-backed securities
|
|
|
31,255
|
|
|
|
(246
|
)
|
|
|
1,625
|
|
|
|
(200
|
)
|
|
|
32,880
|
|
|
|
(446
|
)
|
Corporate notes and loans
|
|
|
87,286
|
|
|
|
(1,166
|
)
|
|
|
3,556
|
|
|
|
(93
|
)
|
|
|
90,842
|
|
|
|
(1,259
|
)
|
Foreign corporate bonds
|
|
|
11,835
|
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
|
|
11,835
|
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
236,921
|
|
|
|
(2,272
|
)
|
|
|
16,604
|
|
|
|
(713
|
)
|
|
|
253,525
|
|
|
|
(2,985
|
)
|
Common stock
|
|
|
3,184
|
|
|
|
(73
|
)
|
|
|
1,107
|
|
|
|
(52
|
)
|
|
|
4,291
|
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
240,105
|
|
|
$
|
(2,345
|
)
|
|
$
|
17,711
|
|
|
$
|
(765
|
)
|
|
$
|
257,816
|
|
|
$
|
(3,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fixed maturities in a gross unrealized loss position for twelve
months or longer is primarily comprised of non-credit losses on
investment grade securities where management does not intend to
sell, and it is more likely than not that the Company will not
be forced to sell the security before recovery. The Company has
analyzed these securities and has determined that they are not
impaired. |
The following table contains an analysis of the Companys
securities with gross unrealized losses, categorized by the
period that the securities were in a continuous loss position as
of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer(1)
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency obligations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Obligations of states and political subdivisions
|
|
|
59,175
|
|
|
|
(3,253
|
)
|
|
|
7,181
|
|
|
|
(886
|
)
|
|
|
66,356
|
|
|
|
(4,139
|
)
|
Mortgage-backed securities
|
|
|
7,561
|
|
|
|
(282
|
)
|
|
|
4,533
|
|
|
|
(398
|
)
|
|
|
12,094
|
|
|
|
(680
|
)
|
Commercial mortgage-backed securities
|
|
|
55,904
|
|
|
|
(4,514
|
)
|
|
|
45,380
|
|
|
|
(7,431
|
)
|
|
|
101,284
|
|
|
|
(11,945
|
)
|
Asset-backed securities
|
|
|
12,624
|
|
|
|
(2,976
|
)
|
|
|
1,476
|
|
|
|
(272
|
)
|
|
|
14,100
|
|
|
|
(3,248
|
)
|
Corporate notes and loans
|
|
|
112,886
|
|
|
|
(2,555
|
)
|
|
|
20,614
|
|
|
|
(1,896
|
)
|
|
|
133,500
|
|
|
|
(4,451
|
)
|
Foreign corporate bonds
|
|
|
21,171
|
|
|
|
(471
|
)
|
|
|
|
|
|
|
|
|
|
|
21,171
|
|
|
|
(471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
269,321
|
|
|
|
(14,051
|
)
|
|
|
79,184
|
|
|
|
(10,883
|
)
|
|
|
348,505
|
|
|
|
(24,934
|
)
|
Common stock
|
|
|
1,143
|
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
1,143
|
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
270,464
|
|
|
$
|
(14,236
|
)
|
|
$
|
79,184
|
|
|
$
|
(10,883
|
)
|
|
$
|
349,648
|
|
|
$
|
(25,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At December 31, 2008, the Company had 52 bonds that were in
an unrealized loss position for twelve months or longer. The
estimated fair value and amortized cost of these securities was
$79.2 million and $90.1 million, |
101
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
respectively. The Company has analyzed these securities and has
determined that they are not impaired. The Company has the
ability to hold these investments until maturity or until
recovery. 99.9% of these securities are investment grade. |
Subject to the risks and uncertainties in evaluating the
potential impairment of a securitys value, the impairment
evaluation conducted by the Company as of December 31,
2009, concluded the unrealized losses discussed above are not
other than temporary impairments. The impairment evaluation
process is discussed in the Investment section of
Note 2 (Summary of Significant Accounting
Policies).
The following is a description, by asset type, of the
methodology and significant inputs that the Company used to
measure the amount of credit loss recognized in earnings, if any:
U.S. treasury and agency
obligations As of December 31, 2009,
gross unrealized losses related to U.S. treasury and agency
obligations were $0.2 million. All unrealized losses have
been in an unrealized loss position for less than twelve months.
Of these securities, 90% are rated AAA with the remaining
securities being rated AA+. The Companys investment
managers analysis for this sector includes
on-site
visits and meetings with officials in addition to the standard
rigorous analysis that determines the financial condition of the
issuer.
Obligations of states and political
subdivisions As of December 31, 2009,
gross unrealized losses related to obligations of states and
political subdivisions were $0.4 million. Of this
amount, $0.1 million has been in an unrealized loss
position for twelve months or greater. These securities are
rated investment grade. The Companys investment
managers analysis for this sector includes
on-site
visits and meetings with officials in addition to the standard
rigorous analysis that determines the financial condition of the
issuer.
Mortgage-backed securities
non-agency As of December 31, 2009,
gross unrealized losses related to mortgage-backed
securities non-agency were $0.5 million. Of
this amount, $0.3 million has been in an unrealized loss
position for twelve months or greater. Of these securities, 95%
are rated AAA with the remaining securities being rated between
AA and investment grade. The Companys investment manager
models each residential mortgage-backed security to project
principal losses under downside, base, and upside scenarios for
the economy and home prices. The primary assumption that drives
the security and loan level modeling is the Home Price Index
(HPI) projection. The Companys investment
manager first projects HPI at the national level, then at the
Metropolitan Statistical Area (MSA) level based on
the historical relationship between the individual MSA HPI and
the national HPI, using inputs from its macroeconomic team,
mortgage portfolio management team, and structured analyst team.
The model utilizes loan level data and borrower characteristics
including FICO score, geographic location, original and content
loan size, loan age, mortgage rate and type (fixed
rate / interest-only / adjustable rate
mortgage), issuer / originator, residential type
(owner occupied / investor property), dwelling type
(single family / multi-family), loan purpose, level of
documentation, and delinquency status as inputs.
Asset backed securities
(ABS) As of December 31,
2009, gross unrealized losses related to asset backed securities
were $0.4 million. Of this amount, $0.2 million has
been in an unrealized loss position for twelve months or
greater. These securities are rated investment grade. The
weighted average credit enhancement for the Companys asset
backed portfolio is 20.8. The Companys investment manager
analyzes every ABS transaction on a stand-alone basis. This
analysis involves a thorough review of the collateral,
prepayment, and structural risk in each transaction.
Additionally, their analysis includes an in-depth credit
analysis of the originator and servicer of the collateral. The
Companys investment manager projects an expected loss for
a deal given a set of assumptions specific to the asset type.
These assumptions are used to calculate at what level of losses
that the deal will incur a dollar of loss. The major assumptions
used to calculate this ratio are loss severities, recovery lags,
and no advances on principal and interest.
Corporate notes As of
December 31, 2009, gross unrealized losses related to
corporate bonds were $0.4 million. Of this amount,
$0.1 million has been in an unrealized loss position for
twelve months or greater. These securities are rated investment
grade. The Companys investment manager maintains financial
models for the Companys corporate bond issuers. These
models include a projection of each issuers future
financial performance
102
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
including prospective debt servicing capabilities and capital
structure composition. The analysis incorporates macroeconomics
environment, industry conditions in which the issuer operates,
issuers current competitive position, vulnerability to
changes in the competitive environment, regulatory environment,
issuer liquidity, issuer commitment to bondholders, issuer
creditworthiness, and asset protection.
Foreign bonds As of December 31,
2009, gross unrealized losses related to foreign bonds were
$0.2 million. All unrealized losses have been in an
unrealized loss position for less than twelve months. These
securities are rated investment grade. The Companys
investment manager maintains financial models for the
Companys bond issuers. These models include a projection
of each issuers future financial performance including
prospective debt servicing capabilities and capital structure
composition. The analysis incorporates macroeconomics
environment, industry conditions in which the issuer operates,
issuers current competitive position, vulnerability to
changes in the competitive environment, regulatory environment,
issuer liquidity, issuer commitment to bondholders, issuer
creditworthiness, and asset protection.
Corporate loans As of
December 31, 2009, gross unrealized losses related to
corporate loans were $0.8 million. Of this amount, all
unrealized losses have been in an unrealized loss position for
less than three months. The Companys investment
managers analysis for this sector includes maintaining
detailed financial models that include a projection of each
issuers future financial performance, including
prospective debt servicing capabilities, capital structure
composition, and the value of the collateral. Part of the
process is running downside scenarios to evaluate the expected
likelihood of default as well as potential losses in the event
of default. On an ongoing basis, the Companys investment
managers also contact the senior management of each issuer to
discuss financial developments and industry trends.
The Company recorded the following other than temporary
impairments on its investment portfolio for the years ended
December 31, 2009, 2008, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
OTTI losses, gross
|
|
$
|
4,449
|
|
|
$
|
13,811
|
|
|
$
|
432
|
|
Portion of loss recognized in other comprehensive income
(pre-tax)
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net bonds impairment losses recognized in earnings
|
|
|
4,334
|
|
|
|
13,811
|
|
|
|
432
|
|
Preferred stock
|
|
|
647
|
|
|
|
2,130
|
|
|
|
|
|
Common stock
|
|
|
593
|
|
|
|
16,200
|
|
|
|
69
|
|
Other invested assets
|
|
|
|
|
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,574
|
|
|
$
|
32,141
|
|
|
$
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter of 2009, the Company reclassed
$6.3 million of OTTI losses, net of tax, that were
previously recorded through earnings to other comprehensive
income with an offset to retained earnings as a
cumulative-effect adjustment. This one-time adjustment that
resulted from the implementation of new impairment accounting
guidance represented the non-credit portion of previously
recognized OTTI on debt securities which were still held as
investments as of April 1, 2009.
103
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table is an analysis of the credit losses
recognized in earnings on debt securities held by the Company as
of December 31, 2009 for which a portion of the OTTI loss
was recognized in other comprehensive income (loss).
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Balance of credit losses related to securities still being held
as of April 1, 2009, date of adoption
|
|
$
|
|
|
Additions where no OTTI was previously recorded
|
|
|
50
|
|
Additions where an OTTI was previously recorded
|
|
|
|
|
Reductions for securities for which the company intends to sell
or more likely than not will be required to sell before recovery
|
|
|
|
|
Reductions reflecting increases in expected cash flows to be
collected
|
|
|
|
|
Reductions for securities sold during the period
|
|
|
|
|
|
|
|
|
|
Balance of credit losses related to securities still being held
as of December 31, 2009
|
|
$
|
50
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Income
Accumulated other comprehensive income as of December 31,
2009 and 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
(Dollars in thousands)
|
|
|
|
|
|
Net unrealized gains from:
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
48,521
|
|
|
$
|
12,589
|
|
Preferred stocks
|
|
|
1,090
|
|
|
|
|
|
Common stocks
|
|
|
12,348
|
|
|
|
4,297
|
|
Partnerships < 3% owned
|
|
|
2,531
|
|
|
|
19,530
|
|
Foreign currency fluctuations
|
|
|
44
|
|
|
|
(97
|
)
|
Deferred taxes
|
|
|
(16,053
|
)
|
|
|
(11,211
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
48,481
|
|
|
$
|
25,108
|
|
|
|
|
|
|
|
|
|
|
104
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net
Realized Investment Gains (Losses)
The components of net realized investment gains (losses) on the
sale of investments for the years ended December 31, 2009,
2008, and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$
|
21,777
|
|
|
$
|
2,553
|
|
|
$
|
2,573
|
|
Gross realized losses
|
|
|
(12,751
|
)
|
|
|
(26,003
|
)
|
|
|
(2,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
|
9,026
|
|
|
|
(23,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
11,753
|
|
|
|
1,972
|
|
|
|
3,417
|
|
Gross realized losses
|
|
|
(6,118
|
)
|
|
|
(18,513
|
)
|
|
|
(1,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
|
5,635
|
|
|
|
(16,541
|
)
|
|
|
1,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
2,490
|
|
|
|
|
|
|
|
431
|
|
Gross realized losses
|
|
|
(1,289
|
)
|
|
|
(10,268
|
)
|
|
|
(1,085
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
|
1,201
|
|
|
|
(10,268
|
)
|
|
|
(654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other invested assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized losses
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
$
|
15,862
|
|
|
$
|
(50,259
|
)
|
|
$
|
968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The proceeds from sales of available for sale securities
resulting in net realized investment gains (losses) for the
years ended December 31, 2009, 2008, and 2007 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
(Dollars in thousands)
|
|
|
|
|
|
Fixed maturities
|
|
$
|
499,857
|
|
|
$
|
222,345
|
|
|
$
|
217,367
|
|
Equity securities
|
|
|
86,376
|
|
|
|
24,611
|
|
|
|
34,854
|
|
Net
Investment Income
The sources of net investment income for the years ended
December 31, 2009, 2008, and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
62,099
|
|
|
$
|
63,223
|
|
|
$
|
65,778
|
|
Preferred and common stocks
|
|
|
1,752
|
|
|
|
3,059
|
|
|
|
2,365
|
|
Cash and cash equivalents
|
|
|
2,382
|
|
|
|
6,529
|
|
|
|
14,855
|
|
Other invested assets
|
|
|
8,647
|
|
|
|
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
74,880
|
|
|
|
72,811
|
|
|
|
83,393
|
|
Investment expense
|
|
|
(4,666
|
)
|
|
|
(4,981
|
)
|
|
|
(6,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
70,214
|
|
|
$
|
67,830
|
|
|
$
|
77,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys total investment return on an after-tax basis
for the 2009, 2008, and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
56,745
|
|
|
$
|
55,689
|
|
|
$
|
62,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
|
11,129
|
|
|
|
(34,142
|
)
|
|
|
621
|
|
Net equity in net income (loss) of partnerships
|
|
|
5,276
|
|
|
|
(3,890
|
)
|
|
|
(581
|
)
|
Net unrealized investment gains (losses)
|
|
|
29,553
|
|
|
|
(14,969
|
)
|
|
|
17,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment gains (losses)
|
|
|
45,958
|
|
|
|
(53,001
|
)
|
|
|
17,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment return
|
|
$
|
102,703
|
|
|
$
|
2,688
|
|
|
$
|
79,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment return %
|
|
|
6.2
|
%
|
|
|
0.2
|
%
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average investment portfolio(1)
|
|
$
|
1,646,437
|
|
|
$
|
1,682,316
|
|
|
$
|
1,710,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average of total cash and invested assets, net of payable for
securities purchased, as of the beginning and ending of the
period. |
Subprime
and Alt-A Investments
The Company had approximately $2.5 million and
$3.5 million worth of investment exposure through subprime
and Alt-A investments as of December 31, 2009 and 2008,
respectively. An Alt-A investment is one which is backed by a
loan that contains less documentation than required to obtain a
mortgage in the primary market. As of December 31, 2009,
approximately $0.8 million of those investments were rated
AAA by Standard & Poors, $1.6 million were
rated BBB- to AA, and $0.1 million were rated CCC. As of
December 31, 2008, approximately $1.2 million of those
investments were rated AAA by Standard & Poors,
$1.8 million were rated BBB- to AA, and the remaining
$0.5 million were rated BB+.
Insurance
Enhanced Municipal Bonds
As of December 31, 2009, the Company held insurance
enhanced municipal bonds of approximately $155.4 million,
which represented approximately 9.0% of the Companys total
cash and invested assets. These securities had an average rating
of AA. Approximately $70.3 million of these
bonds are pre-refunded with U.S. treasury securities, of
which $52.9 million are backed by financial guarantors,
meaning that funds have been set aside in escrow to satisfy the
future interest and principal obligations of the bond. (See
table below.) Of the remaining $85.1 million of insurance
enhanced municipal bonds, $23.1 million would have carried
a lower credit rating had they not been insured. The following
table provides a breakdown of the ratings for these municipal
bonds with and without insurance.
|
|
|
|
|
|
|
|
|
|
|
Ratings
|
|
|
Ratings
|
|
(Dollars in thousands)
|
|
with
|
|
|
without
|
|
Rating
|
|
Insurance
|
|
|
Insurance
|
|
|
AAA
|
|
$
|
1,463
|
|
|
$
|
|
|
AA
|
|
|
20,707
|
|
|
|
148
|
|
A
|
|
|
958
|
|
|
|
15,828
|
|
BBB
|
|
|
|
|
|
|
1,005
|
|
Not rated
|
|
|
|
|
|
|
6,147
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,128
|
|
|
$
|
23,128
|
|
|
|
|
|
|
|
|
|
|
106
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the Companys insurance enhanced municipal
bonds that are backed by financial guarantors, including the
pre-refunded bonds that are escrowed in U.S. government
obligations, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exposure Net of
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-refunded
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
&Government
|
|
(Dollars in thousands)
|
|
|
|
|
Pre-refunded
|
|
|
Guaranteed
|
|
|
Guaranteed
|
|
Financial Guarantor
|
|
Total
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
Ambac Financial Group
|
|
$
|
19,826
|
|
|
$
|
9,144
|
|
|
$
|
|
|
|
$
|
10,682
|
|
Assured Guaranty Corporation
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
|
405
|
|
Financial Guaranty Insurance Company
|
|
|
6,552
|
|
|
|
5,325
|
|
|
|
|
|
|
|
1,227
|
|
Financial Security Assurance, Inc.
|
|
|
42,653
|
|
|
|
16,944
|
|
|
|
|
|
|
|
25,709
|
|
Municipal Bond Insurance Association
|
|
|
60,723
|
|
|
|
18,691
|
|
|
|
|
|
|
|
42,032
|
|
Federal Housing Association
|
|
|
2,388
|
|
|
|
|
|
|
|
2,388
|
|
|
|
|
|
Federal National Housing Association
|
|
|
780
|
|
|
|
|
|
|
|
780
|
|
|
|
|
|
Govt National Housing Association
|
|
|
1,296
|
|
|
|
1,116
|
|
|
|
180
|
|
|
|
|
|
Permanent School Fund Guaranty
|
|
|
3,359
|
|
|
|
1,690
|
|
|
|
1,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total backed by financial guarantors
|
|
|
137,982
|
|
|
|
52,910
|
|
|
|
5,017
|
|
|
|
80,055
|
|
Other credit enhanced municipal bonds
|
|
|
17,432
|
|
|
|
17,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
155,414
|
|
|
$
|
70,342
|
|
|
$
|
5,017
|
|
|
$
|
80,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the $155.4 million of insurance enhanced
municipal bonds, the Company also held unrated insurance
enhanced asset-backed and credit securities with a market value
of approximately $29.1 million, which represented
approximately 1.7% of the Companys total invested assets.
The financial guarantors of the Companys
$29.1 million of insurance enhanced asset-backed and credit
securities include Financial Guaranty Insurance Company
($1.1 million), Municipal Bond Insurance Association
($7.5 million), Ambac ($3.8 million), Financial
Security Assurance, Inc ($6.2 million) and National Public
Finance Guarantee (10.5 million).
The Company had no direct investments in the entities that have
provided financial guarantees or other credit support to any
security held by the Company at December 31, 2009.
Bonds
Held on Deposit
Certain cash balances, cash equivalents, and bonds available for
sale were deposited with various governmental authorities in
accordance with statutory requirements or were held in trust
pursuant to intercompany reinsurance agreements. The estimated
fair values of bonds available for sale and on deposit or held
in trust were as follows as of December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
(Dollars in thousands)
|
|
|
|
|
|
On deposit with governmental authorities
|
|
$
|
50,080
|
|
|
$
|
44,268
|
|
Intercompany trusts held for the benefit of U.S. policyholders
|
|
|
683,384
|
|
|
|
631,236
|
|
Held in trust pursuant to U.S. regulatory requirements for the
benefit of U.S. policyholders
|
|
|
6,169
|
|
|
|
5,915
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
739,633
|
|
|
$
|
681,419
|
|
|
|
|
|
|
|
|
|
|
107
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Fair
Value Measurements
|
The Company elected to apply the fair value option within its
limited partnership investment portfolio to those investments
where the Company owns more than a 3% interest. The fair value
of this investment was $1.1 million and $7.5 million
as of December 31, 2009 and 2008, respectively. Effective
December 31, 2009, the Company redeemed the majority of its
ownership interest in this limited partnership, resulting in its
ownership interest falling below 3%. This limited partnership
invested primarily in securities that were publicly traded
during the time that the Company held this investment. As of
December 31, 2009, the fair value of the Companys
remaining interest in this limited partnership was
$1.1 million and was comprised of convertible preferred
securities of a privately held company. Securities that are held
by this partnership are valued by obtaining values from
Bloomberg, other external pricing sources, and managers that
make markets for these securities. The Company obtains the value
of this partnership at the end of each reporting period;
however, the Company is only periodically provided with a
detailed listing of the investments held by the partnership.
Accordingly, this investment is classified as Level 3
within the fair value hierarchy.
During 2009, the Company contributed $30.0 million to a
limited partnership which invests in corporate loans. This
partnership interest was redeemed as of December 31, 2009.
The activity associated with this investment is classified as
Level 3 within the fair value hierarchy. The Company
obtained the value of this partnership at the end of each
reporting period; however, the Company was not provided with a
detailed listing of the investments held by the partnership.
Accordingly, this investment was classified as Level 3
within the fair value hierarchy.
During 2009 and 2008, the Company recognized gains (losses), net
of taxes, of $5.3 million and $(3.9) million,
respectively, due to changes in the value of these investments.
These gains (losses) are reflected on the consolidated statement
of operations as equity in net income (loss) of partnerships,
net of taxes.
The fair value option was not elected for the Companys
investments in limited partnerships with less than a 3%
ownership interest.
The accounting standards related to fair value measurements
define fair value, establish a framework for measuring fair
value, outline a fair value hierarchy based on inputs used to
measure fair value, and enhance disclosure requirements for fair
value measurements. These standards do not change existing
guidance as to whether or not an instrument is carried at fair
value. The Company has determined that its fair value
measurements are in accordance with the requirements of these
accounting standards.
The Companys invested assets are carried at their fair
value and are categorized based upon a fair value hierarchy:
|
|
|
|
|
Level 1 inputs utilize quoted prices
(unadjusted) in active markets for identical assets that the
Company has the ability to access at the measurement date.
|
|
|
|
Level 2 inputs utilize other than quoted prices
included in Level 1 that are observable for the similar
assets, either directly or indirectly.
|
|
|
|
Level 3 inputs are unobservable for the asset,
and include situations where there is little, if any, market
activity for the asset.
|
In certain cases, the inputs used to measure fair value may fall
into different levels of the fair value hierarchy. In such
cases, the level in the fair value hierarchy within which the
fair value measurement falls has been determined based on the
lowest level input that is significant to the fair value
measurement in its entirety. The Companys assessment of
the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers
factors specific to the asset.
Both observable and unobservable inputs may be used to determine
the fair value of positions that the Company has classified
within the Level 3 category. As a result, the unrealized
gains and losses for invested assets within the Level 3
category presented in the tables below may include changes in
fair value that are attributed to
108
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
both observable (e.g., changes in market interest rates) and
unobservable (e.g., changes in unobservable long-dated
volatilities) inputs.
The following table presents information about the
Companys invested assets measured at fair value on a
recurring basis as of December 31, 2009 and 2008, and
indicates the fair value hierarchy of the valuation techniques
utilized by the Company to determine such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
Fair Value Measurements
|
|
(Dollars in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency obligations
|
|
$
|
82,021
|
|
|
$
|
154,067
|
|
|
$
|
|
|
|
$
|
236,088
|
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
225,598
|
|
|
|
|
|
|
|
225,598
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
364,000
|
|
|
|
|
|
|
|
364,000
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
|
|
|
|
114,163
|
|
|
|
|
|
|
|
114,163
|
|
Corporate notes and loans
|
|
|
|
|
|
|
460,730
|
|
|
|
|
|
|
|
460,730
|
|
Foreign corporate bonds
|
|
|
|
|
|
|
70,993
|
|
|
|
|
|
|
|
70,993
|
|
Other bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
82,021
|
|
|
|
1,389,551
|
|
|
|
|
|
|
|
1,471,572
|
|
Preferred shares
|
|
|
579
|
|
|
|
2,020
|
|
|
|
|
|
|
|
2,599
|
|
Common shares
|
|
|
63,057
|
|
|
|
|
|
|
|
|
|
|
|
63,057
|
|
Other invested assets
|
|
|
|
|
|
|
|
|
|
|
7,999
|
|
|
|
7,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total invested assets
|
|
$
|
145,657
|
|
|
$
|
1,391,571
|
|
|
$
|
7,999
|
|
|
$
|
1,545,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
Fair Value Measurements
|
|
(Dollars in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency obligations
|
|
$
|
75,460
|
|
|
$
|
77,317
|
|
|
$
|
|
|
|
$
|
152,777
|
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
243,030
|
|
|
|
|
|
|
|
243,030
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
384,069
|
|
|
|
|
|
|
|
384,069
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
|
144,457
|
|
|
|
|
|
|
|
144,457
|
|
Asset-backed securities
|
|
|
|
|
|
|
16,553
|
|
|
|
|
|
|
|
16,553
|
|
Corporate notes and loans
|
|
|
|
|
|
|
213,655
|
|
|
|
|
|
|
|
213,655
|
|
Foreign corporate bonds
|
|
|
|
|
|
|
29,150
|
|
|
|
|
|
|
|
29,150
|
|
Other bonds
|
|
|
|
|
|
|
21,283
|
|
|
|
|
|
|
|
21,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
75,460
|
|
|
|
1,129,514
|
|
|
|
|
|
|
|
1,204,974
|
|
Preferred shares
|
|
|
1,813
|
|
|
|
2,852
|
|
|
|
|
|
|
|
4,665
|
|
Common shares
|
|
|
50,613
|
|
|
|
|
|
|
|
|
|
|
|
50,613
|
|
Other invested assets
|
|
|
|
|
|
|
|
|
|
|
46,672
|
|
|
|
46,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total invested assets
|
|
$
|
127,886
|
|
|
$
|
1,132,366
|
|
|
$
|
46,672
|
|
|
$
|
1,306,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The securities classified as Level 1 in the above table
consist of U.S. Treasuries and equity securities actively
traded on an exchange.
109
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The securities classified as Level 2 in the above table
consist primarily of fixed maturity securities. Based on the
typical trading volumes and the lack of quoted market prices for
fixed maturities, security prices are derived through recent
reported trades for identical or similar securities making
adjustments through the reporting date based upon available
market observable information. If there are no recent reported
trades, matrix or model processes are used to develop a security
price where future cash flow expectations are developed based
upon collateral performance and discounted at an estimated
market rate. Included in the pricing of asset-backed securities,
collateralized mortgage obligations, and mortgage-backed
securities are estimates of the rate of future prepayments of
principal over the remaining life of the securities. Such
estimates are derived based on the characteristics of the
underlying structure and prepayment speeds previously
experienced at the interest rate levels projected for the
underlying collateral. For corporate loans, price quotes from
multiple dealers along with recent reported trades for identical
or similar securities are used to develop prices.
The following table presents changes in Level 3 investments
measured at fair value on a recurring basis for 2009:
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Measurements
|
|
|
|
Using Level 3 Inputs
|
|
|
|
Other
|
|
|
|
Invested Assets
|
|
(Dollars in thousands)
|
|
|
|
|
Beginning balance at January 1, 2008
|
|
$
|
46,672
|
|
Total gains (losses) (realized/unrealized):
|
|
|
|
|
Included in equity in net income of partnership
|
|
|
7,184
|
|
Included in accumulated other comprehensive income (loss)
|
|
|
(8,336
|
)
|
Purchases
|
|
|
31,334
|
|
Sales
|
|
|
(68,855
|
)
|
|
|
|
|
|
Ending balance at December 31, 2009
|
|
$
|
7,999
|
|
|
|
|
|
|
Losses for 2009 included in earnings attributable to the change
in unrealized gains relating to assets still held at
December 31, 2009
|
|
$
|
181
|
|
|
|
|
|
|
The securities classified as Level 3 in the above table
consist of $8.0 million related to investments in limited
partnerships. Of the investments in limited partnerships,
$6.9 million was comprised of securities for which there is
no readily available independent market price, and the remaining
$1.1 million was related to a limited partnership which
holds convertible preferred securities of a privately held
company. These securities are subject to an appraisal action in
Delaware State Court. Until the appraisal action is resolved,
the Companys ownership interest in this limited
partnership is wholly illiquid. The estimated fair value of
these limited partnerships is determined by the general partner
of each limited partnership based on comparisons to transactions
involving similar investments. Material assumptions and factors
utilized in pricing these securities include future cash flows,
constant default rates, recovery rates, and any market clearing
activity that may have occurred since the prior month-end
pricing period. However, since the Company does not have the
ability to see the invested asset composition of this limited
partnership on a daily basis, it has classified this investment
within the Level 3 category.
110
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents changes in Level 3 investments
measured at fair value on a recurring basis for 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
Using Level 3 Inputs
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Fixed
|
|
|
Invested
|
|
|
|
|
|
|
Maturities
|
|
|
Assets
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2007
|
|
$
|
2,376
|
|
|
$
|
64,539
|
|
|
$
|
66,915
|
|
Total gains (losses) (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in equity in net loss of partnership
|
|
|
|
|
|
|
(5,984
|
)
|
|
|
(5,984
|
)
|
Included in accumulated other comprehensive loss
|
|
|
(55
|
)
|
|
|
(12,160
|
)
|
|
|
(12,215
|
)
|
Purchases
|
|
|
|
|
|
|
277
|
|
|
|
277
|
|
Sales
|
|
|
(554
|
)
|
|
|
|
|
|
|
(554
|
)
|
Transfers out of Level 3
|
|
|
(1,767
|
)
|
|
|
|
|
|
|
(1,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance at December 31, 2008
|
|
$
|
|
|
|
$
|
46,672
|
|
|
$
|
46,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses for 2008 included in earnings attributable to the change
in unrealized losses relating to assets still held at
December 31, 2008
|
|
$
|
|
|
|
$
|
(5,984
|
)
|
|
$
|
(5,984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The securities classified as Level 3 in the above table
consist of $46.7 million related to investments in limited
partnerships. Of this amount, $13.9 million was comprised
of securities for which there is no readily available
independent market price. Material assumptions and factors
utilized in pricing these securities include future cash flows,
constant default rates, recovery rates, and any market clearing
activity that may have occurred since the prior month-end
pricing period. The remaining $32.8 million was related to
limited partnerships that invest mainly in securities that are
publicly traded. However, since the Company does not have the
ability to see the invested asset composition of these limited
partnerships on a daily basis, it has classified these
investments within the Level 3 category.
Effective January 1, 2009, the Company changed its primary
investment manager and investment accountants. The former
investment manager provided the Company with one non-binding
price for each of its fixed maturity and equity securities
valued as Level 1 or Level 2 in the fair value
hierarchy. The new investment manager does not provide any
pricing to the Companys investment accountants. As a
result, the Company entered into third party agreements with
pricing vendors to obtain single non-binding prices for its
securities. The third party pricing vendors, and the respective
securities they price, were selected based on the requisite
experience of each asset manager by asset class. The investment
manager provided advice as to which pricing source would provide
the best estimate of fair value for each asset class.
The Companys pricing vendors provide prices for all
investment categories except for investments in limited
partnerships. One vendor provides prices for equity securities
and select fixed maturity categories including: corporate loans,
commercial mortgage backed securities, high yield, investment
grade, short term securities, and international fixed income
securities, if any. A second vendor provides prices for other
fixed maturity categories including: asset backed securities
(ABS), collateralized mortgage obligations
(CMO), and municipals. A third vendor provides
prices for the remaining fixed maturity categories including
mortgage backed securities (MBS) and treasuries.
111
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a description of the valuation methodologies
used by the Companys pricing vendors for investment
securities carried at fair value:
|
|
|
|
|
Equity prices are received from all primary and secondary
exchanges.
|
|
|
|
Corporate notes are individually evaluated on a nominal spread
or an option adjusted spread basis depending on how the market
trades a security or sector. Spreads are updated each day and
compared with those from the broker/dealer community and
contributing firms. Issues are generally benchmarked off of the
U.S. treasuries or LIBOR.
|
|
|
|
For CMOs, which are categorized with mortgage-backed securities
in the tables listed above, a volatility-driven,
multi-dimensional single cash flow stream model or
option-adjusted spread model is used. For ABSs, a single
expected cash flow stream model is utilized. For both asset
classes, evaluations utilize standard inputs plus new issue
data, monthly payment information, and collateral performance.
The evaluated pricing models incorporate security
set-up,
prepayment speeds, cash flows, treasury, swap curves and spread
adjustments.
|
|
|
|
For municipals, a series of matrices are used to evaluate
securities within this asset class. The evaluated pricing models
for this asset class incorporate security
set-up,
sector curves, yield to worst, ratings updates, and adjustments
for material events notices.
|
|
|
|
U.S. Treasuries are priced on the bid side by a market
maker.
|
|
|
|
For MBSs, the pricing vendor utilizes a matrix model correlation
to TBA (a forward MBS trade) or benchmarking to value a security.
|
|
|
|
Corporate loans are priced using averages of bids and offers
obtained from the broker/dealer community involved in trading
such loans.
|
The Company performs certain procedures to validate whether the
pricing information received from the pricing vendors is
reasonable, to ensure that the fair value determination is
consistent with the most recent accounting guidance, and to
ensure that its assets are properly classified in the fair value
hierarchy. The Companys procedures include, but are not
limited to:
|
|
|
|
|
Examining market value changes on an overall portfolio basis to
determine if the market value reported by the pricing vendors
appears reasonable. Duration of the portfolio and changes to
benchmark yields are compared to the market value change
reported by the Investment Manager to make this determination.
The fair values reported are reviewed by management.
|
|
|
|
Reviewing periodic reports provided by the Investment Manager
that provides information regarding rating changes and
securities placed on watch. This procedure allows the Company to
understand why a particular securitys market value may
have changed.
|
|
|
|
Understanding and periodically evaluating the various pricing
methods and procedures used by the Companys pricing
vendors to ensure that investments are properly classified
within the fair value hierarchy.
|
During 2009, the Company has not needed to adjust quotes or
prices obtained from the pricing vendors.
Fair
Value of Alternative Investments
Included in Other invested assets in the fair value
hierarchy at December 31, 2009 are limited liability
partnerships measured at fair value using net asset value as a
practical expedient as provided by the provisions of
112
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
applicable accounting guidance. The following table provides the
fair value and future funding commitments related to these
investments at December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future
|
|
|
|
|
|
|
Funding
|
|
|
|
Fair Value
|
|
|
Commitments
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Equity Fund, LP(1)
|
|
$
|
5,625
|
|
|
$
|
2,500
|
|
Real Estate Fund, LP(2)
|
|
|
1,229
|
|
|
|
|
|
High Yield Convertible Securities Fund, LP(3)
|
|
|
1,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,999
|
|
|
$
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This limited partnership invests in companies, from various
business sectors, whereby the partnership has acquired control
of the operating business as a lead or organizing investor. The
Company does not have the contractual option to redeem its
limited partnership interest but receives distributions based on
the liquidation of the underlying assets. The Company does not
have the ability to sell or transfer its limited partnership
interest without consent from the general partner. |
|
(2) |
|
This limited partnership invests in real estate assets through a
combination of direct or indirect investments in partnerships,
limited liability companies, mortgage loans, and lines of
credit. The Company does not have the contractual option to
redeem its limited partnership interest but receives
distributions based on the liquidation of the underlying assets.
The Company does not have the ability to sell or transfer its
limited partnership interest without consent from the general
partner. |
|
(3) |
|
This limited partnership is a registered mutual fund which
invests in a portfolio of high yield convertible securities
issued by companies with small to medium market capitalizations
and lower credit ratings (generally below investment grade). In
accordance with the partnership agreement, the Company has
exercised its right to submit a capital withdrawal request
effective December 31, 2009. As of December 31, 2009,
the $11.8 million distribution is classified as a
receivable and netted with payable for securities
purchased on the Consolidated Balance Sheet. As of
December 31, 2009, the Company was unable to redeem a
portion of its ownership interest in this limited partnership
with a fair market value of $1.1 million. This is related
to convertible preferred securities of one company which are
subject to an Appraisal Action in Delaware Court. The
partnership decided to participate in the Appraisal Action to
maximize the value of its preferred share. Until the appraisal
action is resolved, the claim relating to the preferred share is
wholly illiquid. |
|
|
5.
|
Goodwill
and Intangible Assets
|
During 2008, the gross written premium of the
Penn-America
Group declined, and the Companys and certain of its
competitors market values declined, indicating that
goodwill and other indefinite lived assets might be impaired.
After testing, the Company concluded that impairment of goodwill
and partial impairment of the intangible assets related to the
merger with
Penn-America
Group, Inc. was necessary. As a result, the Company recorded an
impairment charge of $92.2 million, net of tax, in the
fourth quarter of 2008 related to the Companys 2005 merger
with the
Penn-America
Group. The impairment charge of $92.2 million is comprised
of a goodwill impairment of $84.3 million, an impairment of
intangible assets with an indefinite life of $0.8 million
pre-tax, $0.5 million after tax, and an impairment of
intangible assets with a definite life of $11.4 million
pre-tax, $7.4 million after-tax. An overview of the testing
conducted during the fourth quarter of 2008 is as follows:
Goodwill
In 2008, Goodwill was tested for impairment using a two-step
process. The first step was to determine if there was an
impairment based on the estimated fair value of the reporting
unit compared to the carrying value of the business unit, and
the second step, which is only required if step one yields a
business unit carrying value that is
113
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
greater than the fair value of the business unit, was to
determine the amount of the impairment loss, which was equal to
the excess carrying value over the implied fair value of the
goodwill of the reporting unit giving rise to the goodwill.
In performing step one of the goodwill impairment test during
the fourth quarter of 2008, the Company used two approaches to
estimate the fair value of the
Penn-America
business unit: 1) a market capitalization approach that
allocated a portion of the Companys total market
capitalization to each of its business units; and 2) a
discounted cash flow approach that estimated fair value as the
present value of estimated future cash flows. Under each
approach, the carrying value of the
Penn-America
business unit exceeded the estimated fair value, indicating that
step two of the goodwill impairment test was required.
In the market capitalization approach, the Company allocated its
market capital value as of December 31, 2008 based on a
return on equity approach.
In the discounted cash flow approach, the Company projected the
financial results of the
Penn-America
reporting unit and discounted the projection using a discount
factor of 16.0%. The discount factor was based on the weighted
average cost of capital for the insurance industry of 15.9% as
calculated from empirical data for market participants and other
relevant sources as prepared by an independent valuation firm.
The discounted cash flow approach also assumed a 5.0% annual
increase in net premiums written, a loss ratio declining from
62.2 to 57.7 over the next six years, an equity to net premium
written ratio of 1:1, and that an investment income return of
5.25% would be attainable in future periods.
Step two of the goodwill impairment test, which determines the
amount of the impairment loss, required the Company to determine
the fair value of each asset and liability and to compare those
values to the implied fair value of the reporting unit to
determine the amount of goodwill. The excess of the fair value
of the reporting unit over the amounts assigned to its assets
and liabilities was the implied fair value of goodwill. Step two
of the goodwill impairment test indicated the fair value of the
Penn-America
reporting unit was less than the amounts assigned to the assets
and liabilities of the reporting unit, demonstrating that the
entire amount of the
Penn-America
goodwill was impaired. As a result, the Company recorded an
impairment charge of $84.3 million, which reduced the
balance of goodwill at December 31, 2008 to $0.
A rollforward of goodwill is as follows:
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Balance at December 31, 2005(1)
|
|
$
|
101,854
|
|
Sale of Agency Operations assets
|
|
|
(17,006
|
)
|
Adjustment to transaction costs related to merger with
Penn-America
Group, Inc.
|
|
|
(602
|
)
|
|
|
|
|
|
Balance at December 31, 2006 and 2007
|
|
|
84,246
|
|
Impairment
|
|
|
(84,246
|
)
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Goodwill of $84,848 related to merger with
Penn-America
Group, Inc. and $17,006 related to the purchase of Penn
Independent Corporation. |
There were no changes to goodwill during 2007.
Intangible
assets with indefinite lives
As of December 31, 2009 and 2008, intangible assets with
indefinite lives, which are comprised of trade names and state
insurance licenses, were $9.2 million. Impairment testing
performed in 2009 indicated that there was no impairment.
114
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For intangible assets with indefinite lives, the impairment test
consists of a comparison of the fair value of an intangible
asset to its carrying amount. If the carrying amount of an
intangible asset exceeds its fair value, an impairment loss
shall be recognized in an amount equal to that excess. The
Companys intangible assets with indefinite lives are the
Penn-America
state insurance licenses and trade name, each having a
pre-impairment carrying value of $5.0 million.
The Company worked with an independent valuation firm to
determine the fair value of the intangible assets with
indefinite lives. The valuation firm relied on the market
approach to value the state licenses, which considers
transactions for similar assets to determine value. The
valuation firm appraised the state insurance licenses at a value
higher than the carrying value of $5.0 million, which
demonstrated there was no impairment. The valuation firm used
the relief from royalty method to determine the fair value of
the
Penn-America
trade name. The relief from royalty method calculates the
present value of savings resulting from the right to manufacture
or sell products that incorporate the intangible asset(s)
without having to pay a license fee for its use. This method is
commonly used to value trademarks, patents, developed
technology, and base (core) technology. The assumed royalty rate
under this approach was 0.5%, which yielded an estimated value
of the trade name in the amount of $4.2 million, indicating
that there was an impairment of $0.8 million pre-tax and
$0.5 million after tax.
Intangible
assets with definite lives
As of December 31, 2009 and 2008, intangible assets with
definite lives, which are comprised of software technology, were
$0.04 million and $0.1 million, respectively.
Applicable accounting guidance requires that intangible assets
with definite lives are to be tested for impairment whenever
events or changes in circumstances indicate that its carrying
amount exceeds fair value and the carrying amount is not be
recoverable. Impairment testing performed in 2009 indicated that
there was no impairment. Other than the aforementioned software
technology, all intangible assets with definite lives were
written off in 2008. (See table below.)
Impairment of indefinite lived intangible asset is the condition
that exists when the carrying amount of an intangible asset with
an indefinite life exceeds its fair value and is not
recoverable. The carrying value of an intangible asset is not
recoverable if it exceeds the sum of future undiscounted cash
flows expected to result from the use and disposition of the
asset.
The Companys intangible assets with definite lives pertain
to the
Penn-America
Group agency relationships that were in force at the time of the
merger and internally developed software. The Company determined
that the forecasted undiscounted cash flows related to the
agency relationships, net of a capital charge equal to 16.0% of
required capital, were negative, and therefore there was no
value to the agency relationships. As a result, the Company
recorded an impairment charge of $11.4 million pre-tax and
$7.4 million after-tax, which reduced the balance of the
agency relationships at December 31, 2008 to $0. The
internally developed software related to the
Penn-America
Group does not directly generate cash flows; therefore, the
Company worked with the independent valuation firm to determine
the fair value of the software. The valuation firm used the cost
approach, which estimates the cost to replicate the software, to
determine the fair value of the internally developed software.
The software was valued at $0.3 million, which is greater
than the carrying value of $0.1 million, indicating there
was no impairment.
The following tables present details of the Companys
intangible assets as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Description
|
|
Useful Life
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net Value
|
|
|
Trade names
|
|
|
Indefinite
|
|
|
$
|
4,200
|
|
|
$
|
|
|
|
$
|
4,200
|
|
State insurance licenses
|
|
|
Indefinite
|
|
|
|
5,000
|
|
|
|
|
|
|
|
5,000
|
|
Software technology
|
|
|
5 years
|
|
|
|
400
|
|
|
|
364
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,600
|
|
|
$
|
364
|
|
|
$
|
9,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables present details of the Companys
intangible assets as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Accumulated
|
|
|
Impairment
|
|
|
|
|
Description
|
|
Useful Life
|
|
Cost
|
|
|
Amortization
|
|
|
Charge
|
|
|
Net Value
|
|
|
Agency relationships
|
|
16 years
|
|
$
|
15,012
|
|
|
$
|
3,609
|
|
|
$
|
11,403
|
|
|
$
|
|
|
Trade names
|
|
Indefinite
|
|
|
5,000
|
|
|
|
|
|
|
|
800
|
|
|
|
4,200
|
|
State insurance licenses
|
|
Indefinite
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
Software technology
|
|
5 years
|
|
|
400
|
|
|
|
291
|
|
|
|
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,412
|
|
|
$
|
3,900
|
|
|
$
|
12,203
|
|
|
$
|
9,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to the
Penn-America
Group, Inc. merger was $0.07 million, $1.0 million,
and $1.0 million for 2009, 2008, and 2007.
Remaining amortization of the intangible assets is expected to
be $0.04 million in 2010.
The Company cedes insurance to unrelated insurers on a pro rata
(quota share) and excess of loss basis in the
ordinary course of business to limit its net loss exposure on
insurance contracts. Reinsurance ceded arrangements do not
discharge the Company of primary liability as the originating
insurer. Moreover, reinsurers may fail to pay the Company due to
a lack of reinsurer liquidity, perceived improper underwriting,
losses for risks that are excluded from reinsurance coverage,
and other similar factors, all of which could adversely affect
the Companys financial results.
At December 31, 2009 and 2008, the Company carried
reinsurance receivables of $543.4 million and
$679.3 million, respectively. These amounts are net of a
purchase accounting adjustment and an allowance for
uncollectible reinsurance receivables. The purchase accounting
adjustment is related to discounting the loss reserves to their
present value and applying a risk margin to the discounted
reserves. This adjustment was $17.5 million at
December 31, 2009 and 2008, respectively. The allowance for
uncollectible reinsurance receivables was $12.9 million and
$13.6 million at December 31, 2009 and 2008,
respectively. The change is primarily due to the decrease in the
amount of carried reinsurance receivables.
At December 31, 2009 and 2008, the Company held collateral
securing its reinsurance receivables of $378.1 million and
$477.1 million, respectively. Prepaid reinsurance premiums
were $16.5 million and $24.0 million at
December 31, 2009 and 2008, respectively. Reinsurance
receivables, net of collateral held, were $165.3 million
and $202.2 million at December 31, 2009 and 2008,
respectively.
The Company regularly evaluates retention levels to ensure that
the ultimate reinsurance cessions are aligned with corporate
risk tolerance and capital levels, as follows:
Property Catastrophe Excess of Loss
The Companys current property writings create exposure to
catastrophic events. To protect against these exposures, the
Company purchases a property catastrophe treaty. Effective
June 1, 2009, the Company renewed its property catastrophe
excess of loss treaty which provides occurrence coverage for
losses of $75.0 million in excess of $15.0 million.
This treaty provides for one full reinstatement of coverage at
100% additional premium as to time and pro rata as to amount of
limit reinstated. This replaces the treaty that expired on
May 31, 2009, which provided occurrence coverage for losses
of $70.0 million in excess of $10.0 million, also with
one full reinstatement. The additional limit purchased is a
result of an increase in aggregate loss exposure to catastrophic
events.
Property Per Risk Excess of Loss
Effective January 1, 2010, the Company renewed its property
per risk excess of loss treaty which provides coverage of
$14.0 million per risk in excess of $1.0 million per
risk. This replaces the treaty that expired December 31,
2009, which also covered $14.0 million per risk in excess
of $1.0 million per risk. This treaty provides coverage in
two layers: $4.0 million per risk in excess of
$1.0 million per
116
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
risk, and $10.0 million per risk in excess of
$5.0 million per risk. Similar to expiring terms, the first
layer is subject to a $4.0 million limit of liability for
all risks involved in one loss occurrence, and the second layer
is subject to a $10.0 million limit for all risks involved
in one loss occurrence.
Professional Liability Excess of Loss
Effective January 1, 2010, the Company renewed its
professional liability excess of loss treaty which provides
coverage of $4.0 million per policy / occurrence
in excess of $1.0 million per
policy / occurrence. This replaces the treaty that
expired December 31, 2009, which provided identical limits
of coverage.
Casualty Excess of Loss Effective
May 1, 2009, the Company renewed its casualty excess of
loss treaty which provides coverage for $2.25 million in
excess of $0.75 million per occurrence for general
liability and auto liability. Allocated loss adjustment expenses
are shared in proportion to losses retained and ceded. This
replaces the treaty that expired April 30, 2009, which
provided identical limits of coverage for general liability only.
Casualty Clash Excess of Loss
Effective January 1, 2010, the Company renewed its casualty
clash excess of loss treaty which provides coverage of
$10.0 million per occurrence in excess of $3.0 million
per occurrence, subject to a $20.0 million limit for all
loss occurrences. This replaces the treaty that expired
December 31, 2009, which provided identical coverage.
Property Quota Share Effective
January 1, 2010, the Company renewed its quota share treaty
related to the
Penn-America
property line of business. The expiring quota share program was
terminated on a cut-off basis. The renewal quota share program
covers premiums earned in 2010 on policies written in 2009 and
2010. The quota share percentage was increased from 30% to 40%.
During 2009, the Company ceded $6.3 million of earned
premium.
There were no other significant changes to any of the
Companys other reinsurance treaties during 2009.
To the extent that there may be an increase or decrease in
catastrophe or casualty clash exposure in the future, the
Company may increase or decrease its reinsurance protection for
these exposures commensurately.
As of December 31, 2009, the Company had aggregate
unsecured reinsurance receivables that exceeded 3% of
shareholders equity from the following groups of
reinsurers. Unsecured reinsurance receivables include amounts
receivable for paid and unpaid losses and loss adjustment
expenses and prepaid reinsurance premiums, less amounts secured
by collateral.
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
|
A.M. Best Ratings
|
|
|
|
Receivables
|
|
|
(As of December 31, 2009)
|
|
(Dollars in millions)
|
|
|
|
|
|
Munich Group
|
|
$
|
49.9
|
|
|
|
A+
|
|
Gen Re Group
|
|
|
26.3
|
|
|
|
A++
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
76.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The effect of reinsurance on premiums written and earned is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Written
|
|
|
Earned
|
|
(Dollars in thousands)
|
|
|
|
|
|
For the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
Direct business
|
|
$
|
267,981
|
|
|
$
|
298,427
|
|
Reinsurance assumed
|
|
|
73,018
|
|
|
|
60,667
|
|
Reinsurance ceded
|
|
|
(50,004
|
)
|
|
|
(57,420
|
)
|
|
|
|
|
|
|
|
|
|
Net premiums
|
|
$
|
290,995
|
|
|
$
|
301,674
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
Direct business
|
|
$
|
353,168
|
|
|
$
|
429,164
|
|
Reinsurance assumed
|
|
|
25,532
|
|
|
|
28,221
|
|
Reinsurance ceded
|
|
|
(69,620
|
)
|
|
|
(74,877
|
)
|
|
|
|
|
|
|
|
|
|
Net premiums
|
|
$
|
309,080
|
|
|
$
|
382,508
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
Direct business
|
|
$
|
536,868
|
|
|
$
|
605,316
|
|
Reinsurance assumed
|
|
|
26,244
|
|
|
|
12,698
|
|
Reinsurance ceded
|
|
|
(72,577
|
)
|
|
|
(81,691
|
)
|
|
|
|
|
|
|
|
|
|
Net premiums
|
|
$
|
490,535
|
|
|
$
|
536,323
|
|
|
|
|
|
|
|
|
|
|
The statutory income tax rates of the countries where the
Company does business are 35.0% in the United States, 0.0%
in Bermuda, 0.0% in the Cayman Islands, 28.59% in the Duchy of
Luxembourg, and 25.0% on non-trading income and 12.5% on trading
income in the Republic of Ireland. The statutory income tax rate
of each country is applied against the annual taxable income of
each country to calculate the annual income tax expense.
118
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys income before income taxes from the
Non-U.S. Subsidiaries
and U.S. Subsidiaries, including the results of the quota
share agreement between Wind River Reinsurance and the Insurance
Operations, for the years ended December 31, 2009, 2008,
and 2007 were as follows:
Year
Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
191,138
|
|
|
$
|
267,993
|
|
|
$
|
(118,132
|
)
|
|
$
|
340,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
190,862
|
|
|
$
|
100,133
|
|
|
$
|
|
|
|
$
|
290,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
185,471
|
|
|
$
|
116,203
|
|
|
$
|
|
|
|
$
|
301,674
|
|
Net investment income
|
|
|
41,764
|
|
|
|
46,890
|
|
|
|
(18,440
|
)
|
|
|
70,214
|
|
Net realized investment gains
|
|
|
2,338
|
|
|
|
13,524
|
|
|
|
|
|
|
|
15,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
229,573
|
|
|
|
176,617
|
|
|
|
(18,440
|
)
|
|
|
387,750
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
95,730
|
|
|
|
73,652
|
|
|
|
|
|
|
|
169,382
|
|
Acquisition costs and other underwriting expenses
|
|
|
75,185
|
|
|
|
44,744
|
|
|
|
|
|
|
|
119,929
|
|
Corporate and other operating expenses
|
|
|
10,014
|
|
|
|
6,738
|
|
|
|
|
|
|
|
16,752
|
|
Interest expense
|
|
|
|
|
|
|
25,656
|
|
|
|
(18,440
|
)
|
|
|
7,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
48,644
|
|
|
$
|
25,827
|
|
|
$
|
|
|
|
$
|
74,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
178,310
|
|
|
$
|
353,130
|
|
|
$
|
(152,740
|
)
|
|
$
|
378,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
156,341
|
|
|
$
|
152,739
|
|
|
$
|
|
|
|
$
|
309,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
195,421
|
|
|
$
|
187,087
|
|
|
$
|
|
|
|
$
|
382,508
|
|
Net investment income
|
|
|
41,157
|
|
|
|
45,113
|
|
|
|
(18,440
|
)
|
|
|
67,830
|
|
Net realized investment losses
|
|
|
(4,215
|
)
|
|
|
(46,044
|
)
|
|
|
|
|
|
|
(50,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
232,363
|
|
|
|
186,156
|
|
|
|
(18,440
|
)
|
|
|
400,079
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
151,643
|
|
|
|
153,531
|
|
|
|
|
|
|
|
305,174
|
|
Acquisition costs and other underwriting expenses
|
|
|
83,540
|
|
|
|
59,227
|
|
|
|
|
|
|
|
142,767
|
|
Corporate and other operating expenses
|
|
|
9,168
|
|
|
|
4,750
|
|
|
|
|
|
|
|
13,918
|
|
Interest expense
|
|
|
|
|
|
|
27,097
|
|
|
|
(18,440
|
)
|
|
|
8,657
|
|
Impairments of goodwill and intangible assets
|
|
|
|
|
|
|
96,449
|
|
|
|
|
|
|
|
96,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(11,988
|
)
|
|
$
|
(154,898
|
)
|
|
$
|
|
|
|
$
|
(166,886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Year
Ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
271,120
|
|
|
$
|
536,835
|
|
|
$
|
(244,843
|
)
|
|
$
|
563,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
257,105
|
|
|
$
|
233,430
|
|
|
$
|
|
|
|
$
|
490,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
271,065
|
|
|
$
|
265,258
|
|
|
$
|
|
|
|
$
|
536,323
|
|
Net investment income
|
|
|
44,305
|
|
|
|
51,513
|
|
|
|
(18,477
|
)
|
|
|
77,341
|
|
Net realized investment gains (losses)
|
|
|
(23
|
)
|
|
|
991
|
|
|
|
|
|
|
|
968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
315,347
|
|
|
|
317,762
|
|
|
|
(18,477
|
)
|
|
|
614,632
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
149,803
|
|
|
|
149,438
|
|
|
|
|
|
|
|
299,241
|
|
Acquisition costs and other underwriting expenses
|
|
|
102,223
|
|
|
|
71,958
|
|
|
|
|
|
|
|
174,181
|
|
Corporate and other operating expenses
|
|
|
9,044
|
|
|
|
2,599
|
|
|
|
|
|
|
|
11,643
|
|
Interest expense
|
|
|
|
|
|
|
29,849
|
|
|
|
(18,477
|
)
|
|
|
11,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
54,277
|
|
|
$
|
63,918
|
|
|
$
|
|
|
|
$
|
118,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average expected tax provision has been calculated
using income (loss) before income taxes in each jurisdiction
multiplied by that jurisdictions applicable statutory tax
rate.
The following table summarizes the differences between the tax
provision for financial statement purposes and the expected tax
provision at the weighted average tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
% of Pre-
|
|
|
|
|
|
% of Pre-
|
|
|
|
|
|
% of Pre-
|
|
|
|
Amount
|
|
|
Tax Income
|
|
|
Amount
|
|
|
Tax Income
|
|
|
Amount
|
|
|
Tax Income
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected tax provision at weighted average
|
|
$
|
9,110
|
|
|
|
12.2
|
%
|
|
$
|
(54,182
|
)
|
|
|
(32.4
|
)%
|
|
$
|
22,434
|
|
|
|
19.0
|
%
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt interest
|
|
|
(2,571
|
)
|
|
|
(3.5
|
)
|
|
|
(2,994
|
)
|
|
|
(1.8
|
)
|
|
|
(2,462
|
)
|
|
|
(2.1
|
)
|
Dividend exclusion
|
|
|
(375
|
)
|
|
|
(0.5
|
)
|
|
|
(653
|
)
|
|
|
(0.4
|
)
|
|
|
(476
|
)
|
|
|
(0.4
|
)
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
29,486
|
|
|
|
17.7
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(1,854
|
)
|
|
|
(2.4
|
)
|
|
|
(920
|
)
|
|
|
(0.6
|
)
|
|
|
(816
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual taxes (benefits) on continuing operations
|
|
$
|
4,310
|
|
|
|
5.8
|
%
|
|
$
|
(29,263
|
)
|
|
|
(17.5
|
)%
|
|
$
|
18,680
|
|
|
|
15.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective income tax rate for 2009 was 5.8%, compared with
an effective income tax benefit rate of 17.5% for 2008 and an
effective income tax rate of 15.8% for 2007. The effective rate
differed from the weighted average expected income tax expense
rate of 12.2% for 2009 primarily due to investments in
tax-exempt securities and the decrease in prior years tax
contingencies due to lapses on the statute of limitations. The
effective rate differed from the weighted average expected
income tax benefit rate of 32.4% for 2008 primarily due to
investments in tax-exempt securities and the impairments of
goodwill and intangible assets. The effective rate differed from
the
120
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
weighted average expected income tax expense rate of 19.0% for
2007 primarily due to investments in tax-exempt securities.
The following table summarizes the components of income tax
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign and U.S. Federal
|
|
$
|
(5,345
|
)
|
|
$
|
(14,319
|
)
|
|
$
|
20,241
|
|
Deferred income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
9,655
|
|
|
|
(14,944
|
)
|
|
|
(1,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
4,310
|
|
|
$
|
(29,263
|
)
|
|
$
|
18,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to
significant portions of the net deferred tax assets at
December 31, 2009 and 2008 are presented below:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Discounted unpaid losses and loss adjustment expenses
|
|
$
|
17,316
|
|
|
$
|
21,520
|
|
Unearned premiums
|
|
|
3,215
|
|
|
|
4,340
|
|
Alternative minimum tax credit carryover
|
|
|
3,240
|
|
|
|
796
|
|
Partnership K1 basis differences
|
|
|
3,435
|
|
|
|
8,549
|
|
Investment impairments
|
|
|
4,362
|
|
|
|
11,707
|
|
Stock options
|
|
|
1,977
|
|
|
|
2,021
|
|
Losses on securities
|
|
|
1
|
|
|
|
1,905
|
|
Other
|
|
|
4,661
|
|
|
|
2,536
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
38,207
|
|
|
|
53,374
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
3,233
|
|
|
|
3,259
|
|
Unrealized gain on securities
available-for-sale
and less than 3% owned investments in partnerships included in
accumulated other comprehensive income
|
|
|
16,053
|
|
|
|
11,210
|
|
Gain on partnerships greater than 20% owned
|
|
|
2,714
|
|
|
|
806
|
|
Investment basis differences
|
|
|
(417
|
)
|
|
|
1,771
|
|
Deferred acquisition costs
|
|
|
1,875
|
|
|
|
2,304
|
|
Depreciation and amortization
|
|
|
193
|
|
|
|
233
|
|
Other
|
|
|
737
|
|
|
|
1,259
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
24,388
|
|
|
|
20,842
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
$
|
13,819
|
|
|
$
|
32,532
|
|
|
|
|
|
|
|
|
|
|
Management believes it is more likely than not that the deferred
tax assets will be completely utilized in future years. As a
result, there is no valuation allowance at December 31,
2009 and 2008.
The Company had an alternative minimum tax (AMT)
credit carryforward of $3.2 million and $0.8 million
as of December 31, 2009 and 2008, respectively, which can
be carried forward indefinitely. As a result of the 2008
121
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and 2009 capital loss carrybacks and 2009 net operating
loss carryback, the alternative minimum tax was triggered in the
carryback years. In 2008, there were $29.0 million of other
than temporary impairment losses on invested assets held by the
Companys U.S. Subsidiaries. Of that amount,
$18.3 million was realized in 2009, net of capital gains of
$11.1 million. In 2009, there was a net operating loss of
$15.6 million. As a result, the AMT credit carryforward
increased by $2.4 million.
The Company and some of its subsidiaries file income tax returns
in the U.S. federal jurisdiction, and various states and
foreign jurisdictions. The Company is no longer subject to
U.S. federal tax examinations by tax authorities for tax
years before 2006.
The Company applies a more-likely-than-not recognition threshold
for all tax uncertainties whereby it only recognizes those tax
benefits that have a greater than 50% likelihood of being
sustained upon examination by the taxing authorities. The
Companys unrecognized tax benefits were $1.1 million
and $3.1 million as of December 31, 2009 and 2008,
respectively.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Balance as of January 1, 2007 and 2008
|
|
$
|
3,646
|
|
Lapses on statutes of limitations
|
|
|
(554
|
)
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
3,092
|
|
Lapses on statutes of limitations
|
|
|
(1,986
|
)
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
1,106
|
|
|
|
|
|
|
If recognized, the gross unrecognized tax benefits could lower
the effective income tax rate in any future period. The
provision for gross unrecognized tax benefits decreased
$2.0 million during 2009 due to the expiration of the IRS
statute of limitations on the Companys 2005 federal income
tax return. As a result, the effective income tax rate was
reduced by 2.7% during 2009.
The Company classifies all interest and penalties related to
uncertain tax positions as income tax expense. As of
December 31, 2009, the Company has recorded
$0.1 million in liabilities for tax-related interest and
penalties on its consolidated balance sheet.
122
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Liability
for Unpaid Losses and Loss Adjustment Expenses
|
Activity in the liability for unpaid losses and loss adjustment
expenses is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses at beginning of period
|
|
$
|
1,506,429
|
|
|
$
|
1,503,237
|
|
|
$
|
1,702,010
|
|
Less: Gross reinsurance receivables on unpaid losses and loss
adjustment expenses
|
|
|
670,591
|
|
|
|
702,353
|
|
|
|
966,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance at beginning of period
|
|
|
835,838
|
|
|
|
800,884
|
|
|
|
735,342
|
|
Incurred losses and loss adjustment expenses related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
178,492
|
|
|
|
270,242
|
|
|
|
328,346
|
|
Prior years(1)
|
|
|
(9,110
|
)(2)
|
|
|
34,932
|
(3)
|
|
|
(29,105
|
)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred losses and loss adjustment expenses
|
|
|
169,382
|
|
|
|
305,174
|
|
|
|
299,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid losses and loss adjustment expenses related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
44,100
|
|
|
|
58,435
|
|
|
|
73,923
|
|
Prior years
|
|
|
230,328
|
|
|
|
211,785
|
|
|
|
159,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid losses and loss adjustment expenses
|
|
|
274,892
|
|
|
|
270,220
|
|
|
|
233,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance at end of period
|
|
|
730,328
|
|
|
|
835,838
|
|
|
|
800,884
|
|
Plus: Gross reinsurance receivables on unpaid losses and loss
adjustment expenses
|
|
|
527,413
|
|
|
|
670,591
|
|
|
|
702,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses at end of period
|
|
$
|
1,257,741
|
|
|
$
|
1,506,429
|
|
|
$
|
1,503,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
When analyzing loss reserves and prior year development, the
Company considers many factors, including the frequency and
severity of claims, loss credit trends, case reserve settlements
that may have resulted in significant development, and any other
additional or pertinent factors that may impact reserve
estimates. |
|
(2) |
|
In 2009, the Company reduced its prior accident year loss
reserves by $8.4 million and reduced its allowance for
uncollectible reinsurance by $0.7 million. The reduction of
the prior accident year loss reserves primarily consisted of a
$5.5 million reduction in property lines, a
$2.9 million reduction in general liability lines, and a
$4.7 million reduction in umbrella lines, partially offset
by a $4.7 million increase in professional liability lines.
The reduction in the property lines primarily consisted of
reductions related to accident year 2006 through 2008 due to
better than expected loss emergence in brokerage. The reduction
in the general liability lines primarily consisted of reductions
of $13.5 million related to accident years 2006 and prior
due to loss emergence that had been consistently lower than
expected during the year, partially offset by increases of
$10.6 million to accident years 2007 and 2008 that were
driven by a large claim and an increase in our construction
defect provisions for Penn America. The reduction in the
umbrella lines primarily consisted of net reductions of
$5.1 million related to accident years 2007 and prior that
were driven by loss emergence throughout the year that was
consistently better than expected, partially offset by increases
of $0.4 million related to accident year 2008. The increase
to the professional liability lines primarily consisted of
increases of $10.1 million related to accident years 2007
and 2008 due to an increase in severity, partially offset by net
reductions of $5.4 million primarily related to accident
years 2006 and prior. The reduction in the allowance for
uncollectible reinsurance is due to a decrease in the amount of
the Companys carried reinsurance receivables. |
|
(3) |
|
In 2008, the Company increased its prior accident year loss
reserves by $31.8 million and increased its allowance for
uncollectible reinsurance by $3.1 million. The loss
reserves increase of $31.8 million consisted of |
123
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
increases of $15.3 million in general liability lines and
$18.3 million in professional liability lines, offset by
reductions of $1.2 million in property lines and
$0.6 million in umbrella lines. The increase to the general
liability lines consisted of increases of $20.4 million
related to accident years 2006, 2007, and 2001 and prior, offset
by reductions of $5.1 million related to accident years
2002 through 2005. The increase to the professional liability
lines consisted of increases of $20.3 million related to
accident years 2006 and 2007, offset by reductions of
$2.0 million related to accident years 2005 and prior. The
reduction in property lines consisted of reductions of
$2.6 million related to accident years 2007 and 2003 and
prior, offset by increases of $1.4 million related to
accident years 2004 through 2006. The reduction in umbrella
lines was primarily related to accident years 2004 and prior. |
|
(4) |
|
In 2007, the Company reduced its prior accident year loss
reserves by $24.7 million and reduced its allowance for
uncollectible reinsurance by $4.4 million. The loss
reserves reduction of $24.7 million consisted of a net
reduction of $42.5 million for primary liability, umbrella
and excess, construction defect, and lines in run-off due to
both lower than expected frequency and severity emergence,
offset by a $17.8 million increase in net reserves for
unallocated loss adjustment expenses and asbestos and
environmental. |
Prior to 2001, the Company underwrote multi-peril business
insuring general contractors, developers, and
sub-contractors
primarily involved in residential construction that has resulted
in significant exposure to construction defect (CD)
claims. Management believes its reserves for CD claims
($55.0 million and $58.1 million as of
December 31, 2009 and 2008, net of reinsurance,
respectively) are appropriately established based upon known
facts, existing case law and generally accepted actuarial
methodologies. However, due to the inherent uncertainty
concerning this type of business, the ultimate exposure for
these claims may vary significantly from the amounts currently
recorded.
The Company has exposure to asbestos & environmental
(A&E) claims. The asbestos exposure primarily
arises from the sale of product liability insurance, and the
environmental exposure arises from the sale of general liability
and commercial multi-peril insurance. In establishing the
liability for unpaid losses and loss adjustment expenses related
to A&E exposures, management considers facts currently
known and the current state of the law and coverage litigation.
Liabilities are recognized for known claims (including the cost
of related litigation) when sufficient information has been
developed to indicate the involvement of a specific insurance
policy, and management can reasonably estimate its liability. In
addition, liabilities have been established to cover additional
exposures on both known and unasserted claims. Estimates of the
liabilities are reviewed and updated regularly. Case law
continues to evolve for such claims, and significant uncertainty
exists about the outcome of coverage litigation and whether past
claim experience will be representative of future claim
experience. Included in net unpaid losses and loss adjustment
expenses as of December 31, 2009, 2008, and 2007 were IBNR
reserves of $21.6 million, $31.8 million, and
$21.5 million, respectively, and case reserves of
approximately $10.1 million, $5.2 million, and
$8.7 million, respectively, for known A&E-related
claims.
The following table shows the Companys gross reserves for
A&E losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Gross reserve for A&E losses and loss adjustment
expenses beginning of period
|
|
$
|
60,601
|
|
|
$
|
65,116
|
|
|
$
|
48,274
|
|
Plus: Incurred losses and loss adjustment expenses
case reserves
|
|
|
9,212
|
|
|
|
6,592
|
|
|
|
11,519
|
|
Plus: Incurred losses and loss adjustment expenses
IBNR
|
|
|
(5,716
|
)
|
|
|
1,469
|
|
|
|
9,719
|
|
Less: Payments
|
|
|
12,927
|
|
|
|
12,576
|
|
|
|
4,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserves for A&E losses and loss adjustment
expenses end of period
|
|
$
|
51,170
|
|
|
$
|
60,601
|
|
|
$
|
65,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table shows the Companys net reserves for
A&E losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Net reserve for A&E losses and loss adjustment
expenses beginning of period
|
|
$
|
36,926
|
|
|
$
|
30,144
|
|
|
$
|
17,078
|
|
Plus: Incurred losses and loss adjustment expenses
case reserves
|
|
|
9,989
|
|
|
|
4,150
|
|
|
|
4,242
|
|
Plus: Incurred losses and loss adjustment expenses
IBNR
|
|
|
(5,564
|
)
|
|
|
7,988
|
|
|
|
10,562
|
|
Less: Payments
|
|
|
9,674
|
|
|
|
5,356
|
|
|
|
1,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for A&E losses and loss adjustment
expenses end of period
|
|
$
|
31,677
|
|
|
$
|
36,926
|
|
|
$
|
30,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Establishing reserves for A&E and other mass tort claims
involves more judgment than other types of claims due to, among
other things, inconsistent court decisions, an increase in
bankruptcy filings as a result of asbestos-related liabilities,
and judicial interpretations that often expand theories of
recovery and broaden the scope of coverage. The insurance
industry continues to receive a substantial number of
asbestos-related bodily injury claims, with an increasing focus
being directed toward other parties, including installers of
products containing asbestos rather than against asbestos
manufacturers. This shift has resulted in significant insurance
coverage litigation implicating applicable coverage defenses or
determinations, if any, including but not limited to,
determinations as to whether or not an asbestos related bodily
injury claim is subject to aggregate limits of liability found
in most comprehensive general liability policies. In response to
these developments, management increased gross and net A&E
reserves during the third quarter of 2007 to reflect its best
estimate of A&E exposures. In 2009, one of the
Companys insurance companies was dismissed from a lawsuit
seeking coverage from it and other unrelated insurance
companies. The suit involved issues related to approximately
3,900 existing asbestos related bodily injury claims and future
claims. The dismissal was the result of a settlement of a
disputed claim related to accident year 1984. The settlement is
conditioned upon certain legal events occurring which will
trigger financial obligations by the insurance company.
Management will continue to monitor the developments of the
litigation to determine if any additional financial exposure is
present.
As of December 31, 2009, 2008, and 2007, the survival ratio
on a gross basis for the Companys open A&E claims was
5.1 years, 9.2 years, and 8.2 years,
respectively. As of December 31, 2009, 2008, and 2007, the
survival ratio on a net basis for the Companys open
A&E claims was 5.7 years, 13.8 years, and
6.3 years, respectively. The survival ratio, which is the
ratio of gross or net reserves to the
3-year
average of annual paid claims, is a non-GAAP financial measure
that indicates how long the current amount of gross or net
reserves are expected to last based on the current rate of paid
claims.
125
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Debt consisted of the following as of December 31, 2009 and
2008:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
6.22% guaranteed senior notes of United America Indemnity Group
due July 2015
|
|
$
|
90,000
|
|
|
$
|
90,000
|
|
Three-month LIBOR plus 4.05% junior subordinated debentures of
AIS due September 2033
|
|
|
10,310
|
|
|
|
10,310
|
|
Three-month LIBOR plus 3.85% junior subordinated debentures of
AIS due October 2033
|
|
|
20,619
|
|
|
|
20,619
|
|
Loans payable, due 2012 to 2013, stated interest up to 4.5%
|
|
|
640
|
|
|
|
916
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
121,569
|
|
|
$
|
121,845
|
|
|
|
|
|
|
|
|
|
|
Guaranteed
Senior Notes
On July 20, 2005, United America Indemnity Group sold
$90.0 million of guaranteed senior notes, due July 20,
2015. These senior notes have an interest rate of 6.22%, payable
semi-annually. On July 20, 2011 and on each anniversary
thereafter to and including July 20, 2014, United America
Indemnity Group is required to prepay $18.0 million of the
principal amount. On July 20, 2015, United America
Indemnity Group is required to pay any remaining outstanding
principal amount on the notes. The notes are guaranteed by
United America Indemnity, Ltd.
Junior
Subordinated Debentures
In 2003, trusts formed and owned by the Company issued a total
of $30.0 million of trust preferred securities. The funds
were used to purchase junior subordinated interest notes and to
support the business growth in the insurance subsidiaries and
general business needs. A summary of the terms related to the
trust preferred securities that are still currently outstanding
is as follows:
|
|
|
|
|
|
|
|
|
Issuer
|
|
Amount
|
|
Maturity
|
|
Interest Rate
|
|
Call Provisions
|
|
AIS through its wholly owned subsidiary UNG Trust I
|
|
$10.0 million issued September 30, 2003
|
|
September 30, 2033
|
|
Payable quarterly at the three month London Interbank Offered
Rate (LIBOR) plus 4.05%
|
|
At par after September 30, 2008
|
AIS through its wholly owned subsidiary UNG Trust II
|
|
$20.0 million issued October 29, 2003
|
|
October 29, 2033
|
|
Payable quarterly at the three month LIBOR plus 3.85%
|
|
At par after October 29, 2008
|
The proceeds from the above offerings were used to purchase
junior subordinated interest notes and were used to support the
business growth in the insurance subsidiaries and general
business needs.
Distributions on the above securities can be deferred up to five
years, but in the event of such deferral, the Company may not
declare or pay cash dividends on the common stock of the
applicable subsidiary.
The Companys wholly owned business trust subsidiaries, UNG
Trust I and UNG Trust II, are not consolidated
pursuant to applicable accounting guidance. These business trust
subsidiaries have issued $30.0 million in floating rate
capital securities and $0.9 million of floating rate common
securities. The sole assets of the business trust subsidiaries
are $30.9 million of the Companys junior subordinated
debentures, which have the same terms with respect to maturity,
payments, and distributions as the floating rate capital
securities and the floating rate common securities.
On May 15, 2008, the Company redeemed all of the
$15.0 million issued and outstanding notes of Penn
Trust II. In conjunction with this redemption, the
$15.5 million of junior subordinated debentures of PAGI,
which
126
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
are the sole assets of Penn Trust II, were also redeemed.
The registration of Penn Trust II was cancelled effective
February 2, 2009.
Loans
Payable
Loans payable of $0.6 million and $0.9 million as of
December 31, 2009 and 2008 were comprised of a loan payable
to a former minority shareholder. The current portion of these
loans that will be payable in 2010 is $0.3 million.
Interest expense related to loans payable was
$0.03 million, $0.03 million, and $0.05 million
for 2009, 2008, and 2007, respectively.
Rights
Offering
On February 17, 2009, the Company filed a universal shelf
registration statement on
Form S-3
with the U.S. Securities and Exchange Commission
(SEC) covering up to $300.0 million of
Class A common shares, preferred shares, depositary shares,
debt securities, warrants to purchase Class A common
shares, preferred shares or debt securities, stock purchase
contracts, and stock purchase units. The filing was made in
order to provide the Company with future financial flexibility.
On March 10, 2009, the Company filed Amendment No. 1
to the
Form S-3
filing with the SEC, which included a preliminary prospectus
defining the terms of United America Indemnitys intended
non-transferable rights offering (the Rights
Offering). On March 17, 2009, the Company filed a
final Prospectus under SEC Rule 424(b)(2), denoting the
amended terms of the prospectus.
The Rights Offering allowed holders of the Companys
Class A common shares to subscribe to a new offering of
Class A common shares and the holders of the Companys
Class B common shares to subscribe to a new offering of
Class B common shares. One non-transferable Class A
Right for each Class A common share held, and one
non-transferable Class B Right for each Class B common
share held, was distributed to the respective Class A and B
share holders for each share owned at 5:00 PM EST on
March 16, 2009, the record date for the Rights Offering.
Each Right entitled the holder to purchase either 0.9013
Class A shares or 0.9013 Class B shares, depending on
the class of shares owned on the record date of the offering, at
the subscription price of $3.50 per share. The Rights Offering
expired April 6, 2009.
The Rights Offering included an agreement with Fox
Paine & Company and an investment entity referred to
as the Backstop Purchaser, which is controlled by
Fox Paine & Company. The Backstop Purchaser agreed,
subject to certain conditions, to purchase all of the
Class A and Class B common shares offered in the
Rights Offering and not subscribed for pursuant to the Rights
Offering. The Company entered into the agreement to ensure that,
subject to the conditions of the agreement, all Class A
common shares and Class B common shares offered in the
Rights Offering were either distributed in the Rights Offering
or purchased subsequent to the Rights Offering at the same
purchase price at which the rights were exercisable. Through
this arrangement, the Company had a high degree of certainty
that it would raise gross proceeds of $100.0 million
through the Rights Offering. In the agreement and subject to the
successful completion of the Rights Offering, the Company agreed
to pay Fox Paine & Company an arrangement fee of
$2.0 million and a backstop fee equal to 5% of the
aggregate gross proceeds raised in the Rights Offering, or
$5.0 million, for total payments of $7.0 million.
Payment of these fees was subject to the prior approval by the
Companys shareholders, which was obtained at the Annual
General Shareholders meeting that was held on
October 27, 2009. The fees were paid on October 27,
2009.
As a result of the Rights Offering, 17.2 million
Class A common shares and 11.4 million Class B
common shares were purchased, resulting in gross proceeds of
$100.1 million. After deducting expenses associated with
the Rights Offering, the Companys equity increased
$91.8 million. Approximately 66% of the Class A common
shareholders had exercised their subscription right. Excluding
those Class A common shares that are owned by Fox
Paine & Company and affiliated entities, approximately
72% of the Class A common shareholders had exercised
127
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
their subscription right. Fox Paine & Company and
affiliated entities purchased 5.9 million Class A
common shares and all Class B common shares for
$60.7 million. Post the Rights Offering, Fox
Paine & Company and affiliated entities own
7.5 million of the total 36.4 million outstanding
Class A common shares and all 24.1 million of the
outstanding Class B common shares. In total, Fox
Paine & Company and affiliated entities now own 52.3%
of all outstanding shares and beneficially own shares having
approximately 89.6% of the Companys total outstanding
voting power.
See the specific filings with the SEC for the details regarding
the shelf registration and the Rights Offering.
Repurchases
of the Companys Class A Common Shares
The Company allows employees to surrender the Companys
Class A common shares as payment for the tax liability
incurred upon the vesting of restricted stock that was issued
under the Companys Share Incentive Plan. During 2009, the
Company purchased an aggregate of 27,057 of surrendered
Class A common shares from its employees for
$0.2 million. During 2008, the Company purchased an
aggregate of 17,948 of surrendered Class A common shares
from its employees for $0.3 million. All Class A
common shares purchased from employees by the Company are held
as treasury stock and recorded at cost.
As part of the Rights Offering, the Company purchased 10,000
Class A common shares for $0.04 million that had been
purchased by a former employee with the non-transferable
Class A Rights that were distributed to that former
employee for Class A common shares held of non-vested
restricted stock. Since the restricted stock was not vested, the
former employee, upon leaving the Company, had to forfeit those
Class A common shares that had been purchased with the
non-transferable Class A Rights that were distributed on
that unvested restricted stock. See above for more details
concerning the Rights Offering.
On October 24, 2007, the Company announced that its Board
of Directors authorized it to repurchase up to
$50.0 million of the Companys Class A common
shares through a share repurchase program over the subsequent
twelve months. This repurchase was completed in January 2008.
All shares repurchased under this program are held as treasury
stock and recorded at cost.
On February 11, 2008, the Company announced that its Board
of Directors authorized the Company to repurchase up to an
additional $50.0 million of its Class A common shares.
This repurchase was completed in July 2008. All shares
repurchased under this program are held as treasury stock and
recorded at cost.
The following table provides information with respect to the
Class A common shares that were surrendered or repurchased
in 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Dollar Value
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
of Shares That
|
|
|
|
Total Number
|
|
|
Average
|
|
|
as Part of Publicly
|
|
|
May Yet Be
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced Plan
|
|
|
Purchased Under the
|
|
Period(1)
|
|
Purchased
|
|
|
Per Share
|
|
|
or Program
|
|
|
Plan or Program(2)
|
|
|
January 1-31, 2009
|
|
|
9,246
|
(3)
|
|
$
|
12.13
|
|
|
|
|
|
|
$
|
|
|
February 1-28, 2009
|
|
|
4,326
|
(3)
|
|
$
|
10.50
|
|
|
|
|
|
|
$
|
|
|
May 1-31, 2009
|
|
|
2,398
|
(3)
|
|
$
|
4.89
|
|
|
|
|
|
|
$
|
|
|
July 1-31, 2009
|
|
|
17,302
|
(4)
|
|
$
|
4.51
|
|
|
|
|
|
|
$
|
|
|
October 1-31, 2009
|
|
|
1,594
|
(3)
|
|
$
|
7.46
|
|
|
|
|
|
|
$
|
|
|
November 1-30, 2009
|
|
|
2,191
|
(3)
|
|
$
|
6.95
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
37,057
|
|
|
$
|
7.40
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on settlement date. |
|
(2) |
|
Approximate dollar value of shares is as of the last date of the
applicable month. |
128
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(3) |
|
Surrendered by employees as payment of taxes withheld on the
vesting of restricted stock. |
|
(4) |
|
Includes 7,302 shares surrendered by employees as payment
of taxes withheld on the vesting of restricted stock and
10,000 shares repurchased as part of the Rights Offering. |
The following table provides information with respect to the
Class A common shares that were surrendered or repurchased
in 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Dollar Value
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
of Shares That
|
|
|
|
Total Number
|
|
|
Average
|
|
|
as Part of Publicly
|
|
|
May Yet Be
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced Plan
|
|
|
Purchased Under the
|
|
Period(1)
|
|
Purchased
|
|
|
Per Share
|
|
|
or Program
|
|
|
Plan or Program(2)
|
|
|
January 1-31, 2008
|
|
|
93,054
|
(3)
|
|
$
|
19.70
|
|
|
|
88,362
|
(4)
|
|
$
|
434
|
|
February 1-29, 2008
|
|
|
71,242
|
(5)
|
|
$
|
19.23
|
|
|
|
68,659
|
(6)
|
|
$
|
49,680,261
|
|
March 1-31, 2008
|
|
|
154,200
|
|
|
$
|
19.03
|
|
|
|
154,200
|
(6)
|
|
$
|
45,746,974
|
|
May 1-31, 2008
|
|
|
995,674
|
|
|
$
|
14.06
|
|
|
|
995,674
|
(6)
|
|
$
|
31,749,232
|
|
June 1-30, 2008
|
|
|
1,606,850
|
|
|
$
|
14.25
|
|
|
|
1,606,850
|
(6)
|
|
$
|
8,847,487
|
|
July 1-31, 2008
|
|
|
636,545
|
(7)
|
|
$
|
13.97
|
|
|
|
633,376
|
(6)
|
|
$
|
|
|
September 1-30, 2008
|
|
|
2,173
|
(8)
|
|
$
|
14.69
|
|
|
|
|
|
|
$
|
|
|
October 1-31, 2008
|
|
|
1,931
|
(8)
|
|
$
|
11.21
|
|
|
|
|
|
|
$
|
|
|
November 1-30, 2008
|
|
|
3,226
|
(8)
|
|
$
|
12.35
|
|
|
|
|
|
|
$
|
|
|
December 1-31, 2008
|
|
|
174
|
(8)
|
|
$
|
11.45
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,565,069
|
|
|
$
|
14.59
|
|
|
|
3,547,121
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on settlement date. |
|
(2) |
|
Approximate dollar value of shares is as of the last date of the
applicable month. |
|
(3) |
|
Includes 4,692 shares surrendered by employees as payment
of taxes withheld on the vesting of restricted stock. |
|
(4) |
|
Purchased as part of the repurchase authorization announced in
December 2007. |
|
(5) |
|
Includes 2,583 shares surrendered by employees as payment
of taxes withheld on the vesting of restricted stock. |
|
(6) |
|
Purchased as part of the repurchase authorization announced in
February 2008. |
|
(7) |
|
Includes 3,169 shares surrendered by employees as payment
of taxes withheld on the vesting of restricted stock. |
|
(8) |
|
Surrendered by employees as payment of taxes withheld on the
vesting of restricted stock. |
|
|
11.
|
Related
Party Transactions
|
Fox
Paine & Company
As of December 31, 2009, Fox Paine & Company
beneficially owns shares having approximately 89.6% of the
Companys total outstanding voting power. Fox
Paine & Company can nominate five of the directors of
the Companys Board of Directors. The Companys
Chairman is a member of Fox Paine & Company. The
Company relies on Fox Paine & Company to provide
management services and other services related to the operations
of the Company. The Company directly reimbursed Fox
Paine & Company $0.5 million, $0.1 million,
and $0.3 million during 2009, 2008, and 2007, respectively,
for expenses incurred in providing management services.
As mentioned in Note 10 above, as a result of the Rights
Offering, the Company agreed to pay Fox Paine &
Company an arrangement fee of $2.0 million and a backstop
fee equal to 5% of the aggregate gross proceeds raised in the
Rights Offering, or $5.0 million, for total payments of
$7.0 million. Since Fox Paine & Company is a
related party, and all other shareholders were not offered these
fees in the Rights Offering, the payment of the fees was
129
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
subject to the prior approval of the Companys
shareholders, which was obtained at the Annual General
Shareholders meeting that was held on October 27,
2009. The fees were paid on October 27, 2009. See
Note 10 above for more details concerning the Rights
Offering.
At December 31, 2009 and 2008, Wind River Reinsurance was a
limited partner in the Fox Paine Capital Fund, II, which is
managed by Fox Paine & Company. This investment was
originally made by United National Insurance Company in June
2000 and pre-dates the September 5, 2003 acquisition by Fox
Paine & Company of Wind River Investment Corporation,
the holding company for the Companys Predecessor Insurance
Operations. The Companys investment in this limited
partnership was valued at $5.6 million and
$6.8 million at December 31, 2009 and 2008,
respectively. At December 31, 2009, the Company had an
unfunded capital commitment of $2.5 million to the
partnership.
In September 2009, management fees of $1.5 million in the
aggregate were paid to Fox Paine & Company pursuant to
the Management Agreement with Fox Paine & Company. The
management fees cover the period from September 5, 2009
through September 4, 2010 and will be recognized ratably
over that period. In November 2008, management fees of
$1.5 million in the aggregate were paid to Fox
Paine & Company. The management fees cover the period
from September 5, 2008 through September 4, 2009 and
were recognized ratably over that period. In November 2007,
management fees of $1.5 million in the aggregate were paid
to Fox Paine & Company. The management fees covered
the period from September 5, 2007 through September 4,
2008 and were recognized ratably over that period. The Company
relies on Fox Paine & Company to provide management
services and other services related to the operations of the
Company.
As part of the Companys intended redomestication from the
Cayman Islands to Ireland (see Note 20 for details), the
Company has agreed to indemnify Fox Paine & Company
against any Irish stamp duty that it may incur. See Item 1B
in Part I of the report for details concerning the Irish
stamp duty.
Cozen
OConnor
In 2009, 2008, and 2007, the Company incurred
$0.09 million, $1.1 million, and $1.3 million,
respectively, for legal services rendered by Cozen
OConnor. Stephen A. Cozen, the chairman of Cozen
OConnor, is a member of the Companys Board of
Directors.
Validus
Reinsurance, Ltd.
Validus Reinsurance, Ltd. (Validus) was a
participant on the Companys following catastrophe
reinsurance treaties:
|
|
|
|
|
$30.0 million in excess of $30.0 million, which
expired on May 31, 2007;
|
|
|
|
$25.0 million in excess of $5.0 million, which expired
on May 31, 2007;
|
|
|
|
$100.0 million in excess of $10.0 million, which
expired on May 31, 2008; and
|
|
|
|
$70.0 million in excess of $10.0 million, which
expired on May 31, 2009.
|
The Company paid $0.2 million and $0.9 million in 2008
and 2007, respectively, in premium to Validus as a result these
treaties. There was no premium paid to Validus in 2009.
130
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Validus is also a participant in a quota share retrocession
agreement with Wind River Reinsurance. The Company estimated
that the following written premium and losses related to the
quota share retrocession agreement have been assumed by Validus
from Wind River Reinsurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Ceded written premium
|
|
$
|
2,518
|
|
|
$
|
10,634
|
|
|
$
|
10,762
|
|
Ceded losses
|
|
|
2,314
|
|
|
|
8,075
|
|
|
|
1,893
|
|
Edward J. Noonan, the chairman and chief executive officer of
Validus, was a member of the Companys Board of Directors
until June 1, 2007, when he resigned from the
Companys Board. Validus remains a related party since the
current quota share retrocession agreement between Validus and
Wind River Reinsurance was put in place during the period when
Mr. Noonan was a member of the Companys Board of
Directors.
Citigroup
Global Markets, Inc.
In connection with the Rights Offering, the Company entered into
an agreement with Citigroup Global Markets, Inc.
(Citi), wherein Citi agreed to be the Companys
exclusive capital markets structuring adviser to provide
advisory and investment banking services. The Company paid Citi
$1.0 million in connection with these services. Chad A.
Leat, a managing director and chairman of Citigroups
Global Alternative Asset Group, is a member of the
Companys Board of Directors.
|
|
12.
|
Commitments
and Contingencies
|
Lease
Commitments
Total rental expense under operating leases for the years ended
December 31, 2009, 2008, and 2007 were $3.5 million,
$3.7 million, and $3.6 million, respectively. At
December 31, 2009, future minimum payments under
non-cancelable operating leases were as follows:
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
2010
|
|
$
|
3,499
|
|
2011
|
|
|
3,398
|
|
2012
|
|
|
3,480
|
|
2013
|
|
|
3,414
|
|
2014 and thereafter
|
|
|
646
|
|
|
|
|
|
|
Total
|
|
$
|
14,437
|
|
|
|
|
|
|
Legal
Proceedings
The Company is, from time to time, involved in various legal
proceedings in the ordinary course of business. The Company
purchases insurance and reinsurance policies covering such risks
in amounts that it considers adequate.
However, there can be no assurance that the insurance and
reinsurance coverage that the Company maintains is sufficient or
will be available in adequate amounts or at a reasonable cost.
The Company does not believe that the resolution of any
currently pending legal proceedings, either individually or
taken as a whole, will have a material adverse effect on the
Companys business, results of operations, cash flows, or
financial condition.
There is a greater potential for disputes with reinsurers who
are in a runoff of their reinsurance operations. Some of the
Companys reinsurers reinsurance operations are in
runoff, and therefore, the Company closely
131
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
monitors those relationships. The Company anticipates that,
similar to the rest of the insurance and reinsurance industry,
it will continue to be subject to litigation and arbitration
proceedings in the ordinary course of business.
On December 4, 2008, a federal jury in the
U.S. District Court for the Eastern District of
Pennsylvania (Philadelphia) returned a $24.0 million
verdict in favor of United National Insurance Company
(United National), an indirect wholly owned
subsidiary of the Company, against AON Corp., an insurance and
reinsurance broker. On July 24, 2009, a federal judge from
the U.S. District Court for the Eastern District of
Pennsylvania (Philadelphia) upheld that jury verdict. In doing
so, the U.S. District Judge increased the verdict to
$32.2 million by adding more than $8.2 million in
prejudgment interest. AON has filed its Notice of Appeal and a
Bond in the amount of $33.0 million. A court ordered
mediation took place on December 10, 2009, which did not
result in a settlement. The Company has received a briefing
schedule from the Appellate Court. Once all briefs have been
filed and reviewed by the Court, the Court will likely order
oral arguments. It is estimated that it will take another eight
to ten months for a decision following oral arguments. United
National does not intend to recognize the gain contingency until
the matter has been resolved through the appellate process.
Other
Commitments
As mentioned in Note 11 above, the Company has a remaining
commitment of $2.5 million to the Fox Paine Capital
Fund, II. The timing and funding of this remaining
commitment has not been determined. As investment opportunities
are identified by the partnerships, capital calls will be made.
The Company is party to a Management Agreement, as amended, with
Fox Paine & Company, whereby in connection with
certain management services provided to it by Fox
Paine & Company, the Company agreed to pay an annual
management fee of $1.5 million to Fox Paine &
Company. The most recent annual management fee of
$1.5 million was paid to Fox Paine & Company on
September 25, 2009. The next annual management fee payment
of $1.5 million is payable on November 1, 2010.
|
|
13.
|
Share-Based
Compensation Plans
|
The fair value method of accounting recognizes share-based
compensation in the statements of operations using the
grant-date fair value of the stock options and other
equity-based compensation expensed over the requisite service
and vesting period.
The Company adopted accounting guidance that sets accounting
requirements for share-based compensation to employees and
non-employee directors, and requires companies to recognize in
the statement of operations the grant-date fair value of stock
options and other equity based compensation. For the purpose of
determining the fair value of stock option awards, the Company
uses the Black-Scholes option-pricing model. The estimation of
forfeitures is required when recognizing compensation expense
which is then adjusted over the requisite service period should
actual forfeitures differ from such estimates. Changes in
estimated forfeitures are recognized through a cumulative
adjustment to compensation in the period of change.
The prescribed accounting guidance also requires tax benefits
relating to excess stock-based compensation deductions to be
prospectively presented in the statement of cash flows as
financing cash inflows. Tax expense (benefits) resulting from
stock-based compensation deductions in excess of amounts
reported for financial reporting purposes were
$0.3 million, $0.1 million and $(0.4) million for
the years ended December 31, 2009, 2008, and 2007,
respectively.
See the Companys 2008 Annual Report on
Form 10-K,
filed with the SEC on March 10, 2008 for plan activity
prior to 2007.
132
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
OPTIONS
Share
Incentive Plan
The Company maintains the United America Indemnity, Ltd. Share
Incentive Plan (as so amended, the Plan). The
purpose of the Plan is to give the Company a competitive
advantage in attracting and retaining officers, employees,
consultants and non-employee directors by offering stock
options, restricted shares and other stock-based awards. As
amended in May 2005, the Company may issue up to
5.0 million Class A common shares for issuance
pursuant to awards granted under the Plan. Award activity for
stock options granted under the Plan and the weighted average
exercise price per share are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Time-Based
|
|
|
Performance-
|
|
|
Tranche A
|
|
|
Total
|
|
|
Exercise Price
|
|
|
|
Options
|
|
|
Based Options
|
|
|
Options
|
|
|
Options
|
|
|
Per Share
|
|
|
Options outstanding at January 1, 2007
|
|
|
1,132,139
|
|
|
|
202,429
|
|
|
|
56,074
|
|
|
|
1,390,642
|
|
|
$
|
15.92
|
|
Options issued
|
|
|
217,473
|
|
|
|
197,473
|
|
|
|
|
|
|
|
414,946
|
|
|
$
|
25.15
|
|
Options forfeited
|
|
|
(254,979
|
)
|
|
|
(202,429
|
)
|
|
|
|
|
|
|
(457,408
|
)
|
|
$
|
23.90
|
|
Options exercised
|
|
|
(144,232
|
)
|
|
|
|
|
|
|
|
|
|
|
(144,232
|
)
|
|
$
|
13.19
|
|
Options retired
|
|
|
(90,300
|
)
|
|
|
|
|
|
|
|
|
|
|
(90,300
|
)
|
|
$
|
10.00
|
|
Options purchased by Company
|
|
|
(119,700
|
)
|
|
|
|
|
|
|
|
|
|
|
(119,700
|
)
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2007
|
|
|
740,401
|
|
|
|
197,473
|
|
|
|
56,074
|
|
|
|
993,948
|
|
|
$
|
17.75
|
|
Options issued
|
|
|
249,419
|
|
|
|
249,419
|
|
|
|
|
|
|
|
498,838
|
|
|
$
|
20.05
|
|
Options forfeited
|
|
|
(54,206
|
)
|
|
|
|
|
|
|
|
|
|
|
(54,206
|
)
|
|
$
|
12.98
|
|
Options exercised
|
|
|
(98,743
|
)
|
|
|
|
|
|
|
|
|
|
|
(98,743
|
)
|
|
$
|
10.54
|
|
Options retired
|
|
|
(322
|
)
|
|
|
|
|
|
|
|
|
|
|
(322
|
)
|
|
$
|
8.49
|
|
Options purchased by Company
|
|
|
(197,473
|
)
|
|
|
(197,473
|
)
|
|
|
|
|
|
|
(394,946
|
)
|
|
$
|
25.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2008
|
|
|
639,076
|
|
|
|
249,419
|
|
|
|
56,074
|
|
|
|
944,569
|
|
|
$
|
16.83
|
|
Options issued
|
|
|
249,419
|
|
|
|
249,419
|
|
|
|
|
|
|
|
498,838
|
|
|
$
|
11.90
|
|
Options forfeited
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(15,000
|
)
|
|
$
|
21.87
|
|
Options retired
|
|
|
(205,455
|
)
|
|
|
|
|
|
|
(56,074
|
)
|
|
|
(261,529
|
)
|
|
$
|
11.22
|
|
Options purchased by Company
|
|
|
(249,419
|
)
|
|
|
(249,419
|
)
|
|
|
|
|
|
|
(498,838
|
)
|
|
$
|
12.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2009
|
|
|
418,621
|
|
|
|
249,419
|
|
|
|
|
|
|
|
668,040
|
|
|
$
|
13.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2009
|
|
|
226,557
|
|
|
|
62,355
|
|
|
|
|
|
|
|
288,912
|
|
|
$
|
15.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE: |
The above table excludes 55,000 warrants that were issued, at an
exercise price of $10.00 per share, on September 5, 2003
and which expired on September 11, 2008. In addition, the
Tranche A options were granted outside of the Plan.
|
There was no activity in the Option-A Tranche during 2007 or
2008. In 2009, 56,074 Option-A Tranche options expired on
March 31, 2009.
During 2008, the Company granted 249,419 Time-Based Options and
249,419 Performance-Based Options under the Plan. The Company
also cancelled 197,473 Time-Based Options and 197,473
Performance-Based Options under the plan as a result of the
amendment and restatement of Larry A. Frakes employment
agreement. The Time-Based Options vest in 25% increments over a
four-year period, with any unvested options being forfeited upon
termination of employment for any reason, and expire
10 years after the grant date. The Performance-Based
133
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Options vest in 25% increments and are conditional upon the
Company achieving various operating targets and expire
10 years after the grant date.
During 2009, the Company granted 249,419 Time-Based Options and
249,419 Performance-Based Options under the Plan. The Company
also cancelled 249,419 Time-Based Options and 249,419
Performance-Based Options under the plan as a result of the
amendment and restatement of Larry A. Frakes employment
agreement. The Time-Based Options vest in 25% increments on
December 31, 2008, 2010, 2011, and 2012, with any unvested
options being forfeited upon termination of employment for any
reason, and expire 10 years after the grant date. The
Performance-Based Options vest in 25% increments and are
conditional upon the Company achieving various operating targets
and expire 10 years after the grant date.
In 2009, the Company recorded $1.2 million of compensation
expense for the 668,040 outstanding options granted under the
Plan. In 2008, the Company recorded $1.2 million of
compensation expense for the 944,569 outstanding options granted
under the Plan. In 2007, the Company recorded $0.8 million
of compensation expense for the 993,948 outstanding options
granted under the Plan. The Company received $0.0 million,
$1.0 million and $1.9 million of proceeds from the
exercise of options during 2009, 2008, and 2007, respectively.
Amortization expense related to options is anticipated to be
$1.3 million in 2010, $1.3 million in 2011, and
$0.1 million in 2012.
Option intrinsic values, which are the differences between the
fair market value of $7.92 at December 31, 2009 and the
strike price of the option, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
|
|
|
|
of Shares
|
|
|
Strike Price
|
|
|
Intrinsic Value
|
|
|
Outstanding
|
|
|
668,040
|
|
|
$
|
12.83
|
|
|
$
|
0.0 million
|
|
Exercisable
|
|
|
288,912
|
|
|
|
13.92
|
|
|
|
0.0 million
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
0.0 million
|
|
|
|
NOTE: |
The intrinsic value of the Exercised Options is the difference
between the fair market value at time of exercise and the strike
price of the option.
|
The options exercisable at December 31, 2009 include the
following:
|
|
|
|
|
|
|
Number of Options
|
|
Option Price
|
|
Exercisable
|
|
|
$8.49
|
|
|
415
|
|
$10.00
|
|
|
38,587
|
|
$14.62
|
|
|
10,000
|
|
$17.00
|
|
|
90,200
|
|
$18.40
|
|
|
5,000
|
|
$18.85
|
|
|
20,000
|
|
$20.05
|
|
|
124,710
|
|
|
|
|
|
|
Options exercisable at December 31, 2009
|
|
|
288,912
|
|
|
|
|
|
|
134
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted average fair value of options granted under the
Plan was $2.28, $7.57, and $9.19 in 2009, 2008, and 2007,
respectively, using a Black-Scholes option-pricing model and the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Dividend yield
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
Expected volatility
|
|
48.40%
|
|
31.4%
|
|
26.6%
|
Risk-free interest rate
|
|
3.0%
|
|
3.1%
|
|
4.6%
|
Expected option life
|
|
6.1 years
|
|
6.6 years
|
|
6.2 years
|
The following tables summarize the range of exercise prices of
options outstanding at December 31, 2009, 2008, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Outstanding at
|
|
|
Per Share
|
|
|
Weighted Average
|
|
Ranges of Exercise Prices
|
|
December 31, 2009
|
|
|
Exercise Price
|
|
|
Remaining Life
|
|
|
$8.48- $9.99
|
|
|
415
|
|
|
$
|
8.49
|
|
|
|
2.0 years
|
(1)
|
$10.00-$16.99
|
|
|
547,425
|
|
|
$
|
11.82
|
|
|
|
7.1 years
|
(1)
|
$17.00-$19.99
|
|
|
120,200
|
|
|
$
|
17.44
|
|
|
|
4.0 years
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
688,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Decrease in weighted average remaining life from the prior year
is due to terminations of employees with exercisable options
that expired in early 2009. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Outstanding at
|
|
|
Per Share
|
|
|
Weighted Average
|
|
Ranges of Exercise Prices
|
|
December 31, 2008
|
|
|
Exercise Price
|
|
|
Remaining Life
|
|
|
$6.50- $9.99
|
|
|
56,489
|
|
|
$
|
6.51
|
|
|
|
0.4 years
|
(1)
|
$10.00-$16.99
|
|
|
187,887
|
|
|
$
|
10.25
|
|
|
|
2.3 years
|
(1)
|
$17.00-$19.99
|
|
|
181,355
|
|
|
$
|
17.45
|
|
|
|
3.6 years
|
(1)
|
$20.00-$21.87
|
|
|
518,838
|
|
|
$
|
20.12
|
|
|
|
8.4 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
944,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Decrease in weighted average remaining life from the prior year
is due to terminations of employees with exercisable options
that expired in early 2009. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Outstanding at
|
|
|
Per Share
|
|
|
Weighted Average
|
|
Ranges of Exercise Prices
|
|
December 31, 2007
|
|
|
Exercise Price
|
|
|
Remaining Life
|
|
|
$6.50- $9.99
|
|
|
58,812
|
|
|
$
|
6.59
|
|
|
|
5.9 years
|
|
$10.00-$16.99
|
|
|
310,425
|
|
|
$
|
10.15
|
|
|
|
6.0 years
|
|
$17.00-$19.99
|
|
|
209,765
|
|
|
$
|
17.48
|
|
|
|
6.6 years
|
|
$20.00-$25.32
|
|
|
414,946
|
|
|
$
|
25.15
|
|
|
|
9.4 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
993,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Shares
In addition to stock option awards, the Plan also provides for
the issuance of Restricted Shares to employees and non-employee
Directors. The Company recognized compensation expense for
restricted stock of $1.8 million, $1.4 million and
$1.4 million for 2009, 2008, and 2007, respectively. The
total unrecognized compensation expense
135
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
for the non-vested restricted stock was $2.3 million at
December 31, 2009, which will be recognized over a weighted
average life of 2.2 years. The weighted average fair value
of the 292,995 Class A common shares, subject to certain
restrictions granted to key employees of the Company under the
Plan (Restricted Shares) that vested during the year
ended December 31, 2009 was $7.39 per share.
The following table summarizes the restricted stock awards since
inception.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
|
|
Year
|
|
Employees
|
|
|
Directors
|
|
|
Total
|
|
|
Inception through 2006(1)
|
|
|
550,664
|
|
|
|
58,804
|
|
|
|
609,468
|
|
2007
|
|
|
83,984
|
|
|
|
19,335
|
|
|
|
103,319
|
|
2008
|
|
|
222,675
|
|
|
|
47,404
|
|
|
|
270,079
|
|
2009
|
|
|
131,138
|
|
|
|
203,524
|
|
|
|
334,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
988,461
|
|
|
|
329,067
|
|
|
|
1,317,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 245,208 shares that were purchased by key
employees in 2003. |
The following table summarizes the non-vested Restricted Shares
activity for the years ended December 31, 2007, 2008, and
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Price
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Non-vested Restricted Shares at January 1, 2007
|
|
|
227,639
|
|
|
$
|
20.56
|
|
Shares issued
|
|
|
103,319
|
|
|
$
|
23.60
|
|
Shares vested
|
|
|
(54,886
|
)
|
|
$
|
21.70
|
|
Shares forfeited
|
|
|
(31,531
|
)
|
|
$
|
22.58
|
|
Shares returned
|
|
|
31,531
|
|
|
$
|
22.58
|
|
Shares purchased
|
|
|
(35,000
|
)
|
|
$
|
20.18
|
|
|
|
|
|
|
|
|
|
|
Non-vested Restricted Shares at December 31, 2007
|
|
|
241,072
|
|
|
$
|
24.59
|
|
Shares issued
|
|
|
160,863
|
|
|
$
|
14.46
|
|
Shares vested
|
|
|
(109,453
|
)
|
|
$
|
19.07
|
|
Shares forfeited
|
|
|
(38,882
|
)
|
|
$
|
21.77
|
|
Shares returned
|
|
|
38,882
|
|
|
$
|
21.77
|
|
|
|
|
|
|
|
|
|
|
Non-vested Restricted Shares at December 31, 2008
|
|
|
292,482
|
|
|
$
|
16.39
|
|
Shares issued
|
|
|
276,191
|
|
|
$
|
8.03
|
|
Shares vested
|
|
|
(292,995
|
)
|
|
$
|
10.39
|
|
Shares forfeited
|
|
|
(78,639
|
)
|
|
$
|
13.92
|
|
Shares returned
|
|
|
78,639
|
|
|
$
|
13.92
|
|
|
|
|
|
|
|
|
|
|
Non-vested Restricted Shares at December 31, 2009
|
|
|
275,678
|
|
|
$
|
11.67
|
|
|
|
|
|
|
|
|
|
|
Based on the terms of the Restricted Shares awards, all
forfeited shares revert back to the Company.
During 2007, the Company granted an aggregate of 83,984
Restricted Shares to key employees of the Company and an
aggregate of 19,332 fully vested Director Restricted Shares, at
a weighted average fair value of $23.13 per share, to
non-employee directors of the Company under the Plan. Included
in the 83,984, the Company granted 2,500 Restricted Shares in
exchange for a signed non-compete agreement. Of this award, 850
Restricted
136
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Shares vested immediately and the remainder vest 33% on
October 24, 2008 and 2009. Also included, the Company
granted 27,000 Restricted Shares to key executives of the
Company in exchange for signed employment agreements. The shares
vest
331/3%
on each subsequent anniversary date of the award for a period of
three years. Included in the 83,984 shares, the Company
granted 54,484 Restricted Shares, as a result of the 2006 Board
of Directors approval of the grant of Restricted Shares as
described below.
During 2007, the Board of Directors authorized a grant of
Restricted Shares to officers of the Company if the Company
achieves a minimum 10% return on equity based on 2007s
operating results. 45,514 Restricted Shares were awarded during
the first quarter of 2008, based on the December 31, 2007
market value of the Companys common shares, and will vest
34% on January 1, 2009 and 33% on each January 1 of years
2010 and 2011. The Board of Directors also authorized an
incentive award of Restricted Shares to these individuals if the
Company earns no less than 85% of planned 2007 net income
excluding after-tax net realized investment gains (losses),
after-tax gain and one-time charges from discontinued
operations, and after-tax extraordinary items that do not
reflect overall operating trends. The results of calendar year
2007 will be examined in 2010 by an independent actuary. If net
income excluding after-tax net realized investment gains
(losses), after-tax gain and one-time charges from discontinued
operations, and after-tax extraordinary items that do not
reflect overall operating trends, adjusted to reflect the
results of the actuarial study, is greater than or equal to net
income excluding after-tax net realized investment gains
(losses), after-tax gain and one-time charges from discontinued
operations, and after-tax extraordinary items that do not
reflect overall operating trends as originally reported,
Restricted Shares may be awarded in 2011 based on the
December 31, 2007 market value of the Companys common
shares. The awards are being expensed over the intrinsic service
period, which includes the performance period and the employee
service period. The employee must be continually employed
through the vesting date to be eligible to receive the award.
The Company recognized $0.4 million of expense in 2007
related to these awards.
During 2008, the Company granted an aggregate of 222,675
Restricted Shares to key employees of the Company and an
aggregate of 47,404 fully vested Director Restricted Shares, at
a weighted average fair value of $16.70 per share, to
non-employee directors of the Company under the Plan. In 2008,
the company granted 71,675 Restricted Shares to key employees
and 37,541 fully vested Director Restricted Shares to
non-employee directors of the Company out of shares held in
treasury. Included in the 222,675 are 142,000 Restricted Shares
granted by the Company to key executives of the Company in
exchange for signed employment agreements. Included in the
142,000 are 12,000 shares that vest
331/3%
on each subsequent anniversary date of the award for a period of
three years, and 30,000 shares that vest 25% on each
subsequent anniversary date of the award for a period of four
years. Of the remaining 100,000 shares, 10% of the shares
vested upon being granted and 22.5% vest on each subsequent
anniversary date of the award for a period of four years. The
Company also granted 16,161 shares to a key executive in
2008. The 16,161 Restricted Shares vest 25% on each subsequent
anniversary date of the award for a period of four years.
During 2009, the Company granted an aggregate of 131,138
Restricted Shares to key employees of the Company and an
aggregate of 203,524 fully vested Director Restricted Shares, at
a weighted average fair value of $6.77 per share, to
non-employee directors of the Company under the Plan. In 2009,
the company granted 58,471 Restricted Shares to key employees
and 0 fully vested Director Restricted Shares to non-employee
directors of the Company out of shares held in treasury.
Included in the 131,138 are 77,362 Restricted Shares granted by
the Company to key executives of the Company in exchange for
signed employment agreements. Included in the 77,362 are
52,362 shares that were forfeited in 2009 and
15,000 shares that vest
331/3%
on each subsequent anniversary date of the award for a period of
three years, and 10,000 shares that vest 25% on each
subsequent anniversary date of the award for a period of four
years.
Chief
Executive Officer
Effective May 9, 2007, Larry A. Frakes was hired as the
Companys President and Chief Operating Officer, as well as
Chief Executive Officer of all of the Company Affiliates.
Mr. Frakes four-year employment agreement
137
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
includes several equity components including (a) the
granting of $10.0 million of stock options, or
394,946 shares split evenly between time-based and
performance-based options at the grant date market value of
$25.32 per share; (b) an annual bonus program under which
the first $0.5 million is paid in restricted stock based on
the market value at December 31 of the subject Bonus Year;
(c) the purchase of $1.0 million of the Companys
Class A common shares by Mr. Frakes; and (d) the
requirement that, effective January 1, 2009,
Mr. Frakes hold Class A common shares of the Company
with a value of the lesser of two times his Annual Compensation
or the sum of owned, granted, and vested Class A common
shares. The time-based options vest at 25% on each December 31
of years 2008 through 2011. The performance-based options
generally vest at the same rate based on the achievement of
various Company financial performance goals. The restricted
stock portion of the 2008, 2009, and 2010 bonuses vest at 25%
per year each year after the bonus year, and awards for the 2010
bonus year and thereafter will vest at 33.3% per year each year
after the bonus year.
On February 5, 2008, the Company entered into an amended
and restated employment agreement with Mr. Frakes, which
amended and restated Mr. Frakes original employment
agreement that was entered into on May 10, 2007. The
amended and restated employment agreement changes and clarifies
the terms of options granted under the original employment
agreement. The amended and restated agreement grants
Mr. Frakes $10.0 million of options with a strike
price equal to the average price per share that was paid by
Mr. Frakes upon his purchase of $1.0 million of the
Companys Class A common shares.
On September 14, 2009, the Company entered into an amended
and restated employment agreement with Mr. Frakes, which
amended and restated Mr. Frakes amended employment
agreement that was entered into on February 5, 2008. The
amended and restated employment agreement changes and clarifies
the terms of options granted under the original employment
agreement. The Time Based Options vest at 25% on
December 31, 2008, 2010, 2011, and 2012. The Performance
Based Options have three vesting opportunities. Each Tranche
which represents 25% of the total award can initially vest on
December 31, 2008, 2009, 2010, and 2011. Subsequent vesting
opportunities occur on April 30, 2011 and 2012 for each
tranche.
The Company maintains a 401(k) defined contribution plan that
covers all eligible U.S employees. Under this plan, the Company
matches 100% of the first 6% contributed by an employee. Vesting
on contributions made by the Company for new employees with less
than 3 years of service prior to January 1, 2009
occurs pro-rata over a three year period. Effective
January 1, 2009, vesting on contributions made by the
Company is immediate. Total expenses for the plan were
$1.4 million, $1.3 million, and $1.3 million for
the years ended December 31, 2009, 2008, and 2007,
respectively.
|
|
15.
|
Earnings
(Loss) Per Share
|
Earnings (loss) per share have been computed using the weighted
average number of common shares and common share equivalents
outstanding during the period. As detailed below, share counts
for prior years have been restated as a result of the Rights
Offering.
The Company issued non-transferable rights to stockholders of
record on March 16, 2009. The rights entitled the holders
to purchase 0.9013 shares of common stock for every right
held. The Rights Offering expired on April 6, 2009. On
May 5, 2009, the Company issued 17.2 million
Class A common shares and 11.4 million Class B
common shares at a subscription price of $3.50 per share in
conjunction with the Rights Offering.
The market price of the Companys Class A common
shares was $4.89 per share on March 12, 2009, which was the
ex-rights date related to the Rights Offering. Since the $3.50
per share subscription price of the shares issued under the
Rights Offering was lower than the $4.89 per share market price
on March 12, 2009, the Rights Offering contained a bonus
element. In computing the basic and diluted weighted share
counts, the number of shares outstanding prior to May 5,
2009 (the date that the common shares were issued in conjunction
with the Rights
138
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Offering) was adjusted by a factor of 1.114 to reflect the
impact of a bonus element associated with the Rights Offering.
See Note 10 above for more details concerning the Rights
Offering.
The following table sets forth the computation of basic and
diluted earnings (loss) per share. In 2008, Diluted
loss per share is the same as Basic loss per share
since there was a net loss for that year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
75,437
|
|
|
$
|
(141,560
|
)
|
|
$
|
98,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
50,492,343
|
|
|
|
32,826,379
|
|
|
|
37,048,491
|
|
Adjustment for bonus element of Rights Offering
|
|
|
1,219,755
|
|
|
|
3,729,810
|
|
|
|
4,209,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares outstanding basic
|
|
|
51,712,098
|
|
|
|
36,556,189
|
|
|
|
41,258,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.46
|
|
|
$
|
(3.87
|
)
|
|
$
|
2.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted
|
|
|
50,543,009
|
|
|
|
32,826,379
|
|
|
|
37,360,703
|
|
Adjustment for bonus element of Rights Offering
|
|
|
1,219,755
|
|
|
|
3,729,810
|
|
|
|
4,209,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares outstanding diluted
|
|
|
51,762,764
|
|
|
|
36,556,189
|
|
|
|
41,570,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.46
|
|
|
$
|
(3.87
|
)
|
|
$
|
2.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of weighted average shares for basic earnings
per share to weighted average shares for diluted earnings per
share for the years ended December 31, 2009, 2008, and 2007
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Weighted average shares for basic earnings per share
|
|
|
51,712,098
|
|
|
|
36,556,189
|
|
|
|
41,258,027
|
|
Non-vested restricted stock
|
|
|
5,922
|
|
|
|
|
|
|
|
60,549
|
|
Options and warrants
|
|
|
44,744
|
|
|
|
|
|
|
|
251,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares for diluted earnings per share
|
|
|
51,762,764
|
|
|
|
36,556,189
|
|
|
|
41,570,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If the Company had not incurred a loss in 2008, then 36,706,995
weighted average shares would have been used to compute the
diluted loss per share calculation. In addition to the basic
shares, weighted average shares for the diluted calculation
would have included 50,551 shares of non-vested restricted
stock and 100,255 share equivalents for options and
warrants.
|
|
16.
|
Statutory
Financial Information
|
GAAP differs in certain respects from Statutory Accounting
Principles (SAP) as prescribed or permitted by the
various U.S. State Insurance Departments. The principal
differences between SAP and GAAP are as follows:
|
|
|
|
|
Under SAP, investments in debt securities are primarily carried
at amortized cost, while under GAAP the Company records its debt
securities at estimated fair value.
|
|
|
|
Under SAP, policy acquisition costs, such as commissions,
premium taxes, fees and other costs of underwriting policies are
charged to current operations as incurred, while under GAAP such
costs are deferred and amortized on a pro rata basis over the
period covered by the policy.
|
139
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Under SAP, certain assets designated as Non-admitted
Assets (such as prepaid expenses) are charged against
surplus.
|
|
|
|
Under SAP, net deferred income tax assets are admitted following
the application of specified criteria, with the resulting
admitted deferred tax amount being credited directly to surplus.
|
|
|
|
Under SAP, certain premium receivables are non-admitted and are
charged against surplus based upon aging criteria.
|
|
|
|
Under SAP, the costs and related receivables for guaranty funds
and other assessments are recorded based on managements
estimate of the ultimate liability and related receivable
settlement, while under GAAP such costs are accrued when the
liability is probable and reasonably estimable and the related
receivable amount is based on future premium collections or
policy surcharges from in-force policies.
|
|
|
|
Under SAP, unpaid losses and loss adjustment expenses and
unearned premiums are reported net of the effects of reinsurance
transactions, whereas under GAAP, unpaid losses and loss
adjustment expenses and unearned premiums are reported gross of
reinsurance.
|
|
|
|
Under SAP, a provision for reinsurance is charged to surplus
based on the authorized status of reinsurers, available
collateral, and certain aging criteria, whereas under GAAP, an
allowance for uncollectible reinsurance is established based on
managements best estimate of the collectibility of
reinsurance receivables.
|
The National Association of Insurance Commissioners
(NAIC) issues model laws and regulations, many of
which have been adopted by state insurance regulators, relating
to: (a) risk-based capital (RBC) standards;
(b) codification of insurance accounting principles;
(c) investment restrictions; and (d) restrictions on
the ability of insurance companies to pay dividends.
The Companys U.S. insurance subsidiaries are required
by law to maintain certain minimum surplus on a statutory basis,
and are subject to regulations under which payment of a dividend
from statutory surplus is restricted and may require prior
approval of regulatory authorities. Applying the current
regulatory restrictions as of December 31, 2009, the
maximum amount of distributions that could be paid for 2010 by
the United National Insurance Companies and the
Penn-America
Insurance Companies as dividends under applicable laws and
regulations without regulatory approval is approximately
$50.3 million and $19.1 million, respectively. The
Penn-America
Insurance Companies limitation includes $6.3 million that
would be distributed to United National Insurance Company or its
subsidiary Penn Independent Corporation based on the
December 31, 2009 ownership percentages. For 2009, United
National Insurance Companies and
Penn-America
Insurance Companies declared and paid dividends of
$31.3 million and $18.9 million, respectively.
The NAICs RBC model provides a tool for insurance
regulators to determine the levels of statutory capital and
surplus an insurer must maintain in relation to its insurance
and investment risks, as well as its reinsurance exposures, to
assess the potential need for regulatory attention. The model
provides four levels of regulatory attention, varying with the
ratio of an insurance companys total adjusted capital to
its authorized control level RBC (ACLRBC). If a
companys total adjusted capital is:
(a) less than or equal to 200%, but greater than 150% of
its ACLRBC (the Company Action Level), the company
must submit a comprehensive plan to the regulatory authority
proposing corrective actions aimed at improving its capital
position;
(b) less than or equal to 150%, but greater than 100% of
its ACLRBC (the Regulatory Action Level), the
regulatory authority will perform a special examination of the
company and issue an order specifying the corrective actions
that must be followed;
140
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(c) less than or equal to 100%, but greater than 70% of its
ACLRBC (the Authorized Control Level), the
regulatory authority may take any action it deems necessary,
including placing the company under regulatory control; and
(d) less than or equal to 70% of its ACLRBC (the
Mandatory Control Level), the regulatory authority
must place the company under its control.
Based on the standards currently adopted, the Company reported
in its 2009 statutory filings that the capital and surplus of
the U.S. Insurance Companies are above the prescribed
Company Action Level RBC requirements.
The following is selected information for the Companys
U.S. Insurance Companies, net of intercompany eliminations,
where applicable, as determined in accordance with SAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Statutory capital and surplus, as of end of period
|
|
$
|
461,756
|
|
|
$
|
440,157
|
|
|
$
|
585,859
|
|
Statutory net income (loss)
|
|
|
55,811
|
|
|
|
(45,363
|
)
|
|
|
85,077
|
|
The following is a reconciliation of statutory net income of the
Companys U.S. Insurance Companies for the year ended
December 31, 2009 to GAAP net income per the consolidated
statement of operations:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2009(1)
|
|
(Dollars in thousands)
|
|
|
|
|
Statutory net income of U.S. Insurance Companies
|
|
$
|
55,811
|
|
Adjustments to statutory net income:
|
|
|
|
|
Change in DAC
|
|
|
(1,226
|
)
|
Deferred income taxes
|
|
|
(11,737
|
)
|
Agents balance charged off
|
|
|
424
|
|
Realized investment gain/loss
|
|
|
1,915
|
|
Investment income
|
|
|
(10,320
|
)
|
Reinsurance allowance
|
|
|
2,144
|
|
Excess offshore commission
|
|
|
(321
|
)
|
Other UW expenses
|
|
|
68
|
|
Partnerships
|
|
|
3,544
|
|
|
|
|
|
|
Total adjustments
|
|
|
(15,509
|
)
|
|
|
|
|
|
GAAP net income of U.S. Insurance Companies
|
|
|
40,302
|
|
GAAP net income of all other subsidiaries
|
|
|
35,135
|
|
|
|
|
|
|
Net income per the consolidated statement of operations
|
|
$
|
75,437
|
|
|
|
|
|
|
|
|
|
(1) |
|
A reconciliation is not presented for the years ended
December 31, 2008 and 2007 since the U.S. Insurance
Companies did not participate in a single intercompany pooling
arrangement in those years. |
The Company manages its business through two business segments:
Insurance Operations, which includes the operations of the
United National Insurance Companies and the
Penn-America
Insurance Companies, and Reinsurance Operations, which includes
the operations of Wind River Reinsurance.
141
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Insurance Operations segment and the Reinsurance Operations
segment follow the same accounting policies used for the
Companys consolidated financial statements. For further
disclosure regarding the Companys accounting policies,
please see Note 2.
Gross premiums written by product classification are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Insurance Operations
|
|
$
|
267,992
|
|
|
$
|
353,130
|
|
|
$
|
536,835
|
|
Reinsurance Operations
|
|
|
73,007
|
|
|
|
25,570
|
|
|
|
26,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
340,999
|
|
|
$
|
378,700
|
|
|
$
|
563,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the Companys non-affiliated professional wholesale
general agents and program administrators, the top five
accounted for 34.1% of gross premiums written for the year ended
December 31, 2009. No one agency accounted for more than
12.9% of gross premiums written.
Following is a tabulation of business segment information.
Corporate information is included to reconcile segment data to
the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
Reinsurance
|
|
|
|
|
2009:
|
|
Operations(1)
|
|
|
Operations(2)
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
267,992
|
|
|
$
|
73,007
|
|
|
$
|
340,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
218,264
|
|
|
$
|
72,731
|
|
|
$
|
290,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
250,409
|
|
|
$
|
51,265
|
|
|
$
|
301,674
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
146,197
|
|
|
|
23,185
|
|
|
|
169,382
|
|
Acquisition costs and other underwriting expenses
|
|
|
106,297
|
(3)
|
|
|
13,632
|
|
|
|
119,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from segments
|
|
$
|
(2,085
|
)
|
|
$
|
14,448
|
|
|
|
12,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
70,214
|
|
Net realized investment gains
|
|
|
|
|
|
|
|
|
|
|
15,862
|
|
Corporate and other operating expenses
|
|
|
|
|
|
|
|
|
|
|
(16,752
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(7,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
74,471
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
4,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in net income of partnerships
|
|
|
|
|
|
|
|
|
|
|
70,161
|
|
Equity in net income of partnerships, net of tax
|
|
|
|
|
|
|
|
|
|
|
5,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
75,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,805,273
|
|
|
$
|
640,507
|
(4)
|
|
$
|
2,445,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes business ceded to the Companys Reinsurance
Operations. |
|
(2) |
|
External business only, excluding business assumed from
affiliates. |
|
(3) |
|
Includes excise tax of $1,342 related to cessions from U.S.
Insurance Companies to Wind River Reinsurance. |
|
(4) |
|
Comprised of Wind River Reinsurances total assets less its
investment in subsidiaries. |
142
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
Reinsurance
|
|
|
|
|
2008:
|
|
Operations(1)
|
|
|
Operations(2)
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
353,130
|
|
|
$
|
25,570
|
|
|
$
|
378,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
305,479
|
|
|
$
|
3,601
|
|
|
$
|
309,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
374,174
|
|
|
$
|
8,334
|
|
|
$
|
382,508
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
293,820
|
|
|
|
11,354
|
|
|
|
305,174
|
|
Acquisition costs and other underwriting expenses
|
|
|
137,294
|
(3)
|
|
|
5,473
|
|
|
|
142,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from segments
|
|
$
|
(56,940
|
)
|
|
$
|
(8,493
|
)
|
|
|
(65,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
67,830
|
|
Net realized investment losses
|
|
|
|
|
|
|
|
|
|
|
(50,259
|
)
|
Corporate and other operating expenses
|
|
|
|
|
|
|
|
|
|
|
(13,918
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(8,657
|
)
|
Impairments of goodwill & intangible assets
|
|
|
|
|
|
|
|
|
|
|
(96,449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
(166,886
|
)
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
(29,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in net loss of partnerships
|
|
|
|
|
|
|
|
|
|
|
(137,670
|
)
|
Equity in net loss of partnerships, net of tax
|
|
|
|
|
|
|
|
|
|
|
(3,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
$
|
(141,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,870,030
|
|
|
$
|
607,029
|
(4)
|
|
$
|
2,477,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes business ceded to the Companys Reinsurance
Operations. |
|
(2) |
|
External business only, excluding business assumed from
affiliates. |
|
(3) |
|
Includes excise tax of $1,871 related to cessions from U.S.
Insurance Companies to Wind River Reinsurance. |
|
(4) |
|
Comprised of Wind River Reinsurances total assets less its
investment in subsidiaries. |
143
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
Reinsurance
|
|
|
|
|
|
|
|
2007:
|
|
Operations(1)
|
|
|
Operations(2)
|
|
|
Eliminations
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
536,835
|
|
|
$
|
26,277
|
|
|
$
|
|
|
|
$
|
563,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
478,274
|
|
|
$
|
12,261
|
|
|
$
|
|
|
|
$
|
490,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
530,516
|
|
|
$
|
5,807
|
|
|
$
|
|
|
|
$
|
536,323
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
295,624
|
|
|
|
3,617
|
|
|
|
|
|
|
|
299,241
|
|
Acquisition costs and other underwriting expenses
|
|
|
170,611
|
(3)
|
|
|
4,113
|
|
|
|
(543
|
)
|
|
|
174,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from segments
|
|
$
|
64,281
|
|
|
$
|
(1,923
|
)
|
|
$
|
543
|
|
|
|
62,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,341
|
|
Net realized investment gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
968
|
|
Corporate and other operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,643
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118,195
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in net loss of partnerships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,498
|
|
Equity in net loss of partnerships, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
98,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,131,185
|
|
|
$
|
643,987
|
(4)
|
|
$
|
|
|
|
$
|
2,775,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes business ceded to the Companys Reinsurance
Operations. |
|
(2) |
|
External business only, excluding business assumed from
affiliates. |
|
(3) |
|
Includes excise tax of $2,390 related to cessions from U.S.
Insurance Companies to Wind River Reinsurance. |
|
(4) |
|
Comprised of Wind River Reinsurances total assets less its
investment in subsidiaries. |
|
|
18.
|
Supplemental
Cash Flow Information
|
Taxes
and Interest Paid
The Company paid the following net federal income taxes and cash
interest for 2009, 2008, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Net federal income taxes paid
|
|
$
|
18,019
|
|
|
$
|
5,763
|
|
|
$
|
16,779
|
|
Interest paid
|
|
|
7,292
|
|
|
|
9,015
|
|
|
|
11,181
|
|
|
|
19.
|
New
Accounting Pronouncements
|
In June 2009, the FASB issued new accounting guidance entitled
The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement
No. 162, which identifies the sources of accounting
principles and the framework for selecting the principles used
144
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in the preparation of financial statements of non-governmental
entities that are presented in conformity with GAAP. This new
guidance is effective for financial statements issued for
interim and annual periods ending after September 15, 2009.
The adoption of this guidance has changed how the Company
references various elements of GAAP when preparing its financial
statement disclosures, but did not have an impact on the
Companys financial position, results of operations, or
cash flows.
In January 2009, the FASB issued new accounting guidance on
other than temporary impairments with the intent of achieving
more consistent determination of whether an other than temporary
impairment has occurred. This guidance retains and emphasizes
the other than temporary impairment assessment guidance and
required disclosures from previous related disclosures. Under
this new guidance, the holder of a beneficial interest should
continue to update the estimate of cash flows over the life of
the beneficial interest. If upon evaluation, it is probable that
there is a favorable or an adverse change in estimated cash
flows from previously projected cash flows, then the investor
should recalculate the amount of accretable yield for the
beneficial interest and apply this new yield prospectively as a
change in estimate. An entity should then apply the impairment
guidance from previous related disclosures. This new guidance
became effective for interim and annual reporting periods ending
after December 15, 2008. The Company adopted this new
guidance in its valuation review of applicable securities during
the fourth quarter of 2008, and it did not result in a material
impact on the Companys consolidated financial position or
results of operations.
In April 2009, the FASB issued new accounting guidance on fair
value measurements. The new guidance clarifies that the
measurement objective in determining fair value when the volume
and level of activity for the asset or liability have
significantly decreased, is the price that would be received to
sell the asset in an orderly transaction between willing market
participants under current market conditions at the date of the
financial statements. The new guidance includes additional
factors for determining whether there has been a significant
decrease in the volume and level of activity for an asset or
liability compared to normal activity for that asset or
liability (or similar assets or liabilities) and provides
additional guidance in estimating fair value in those instances.
The new guidance further requires an entity to disclose any
change in valuation techniques, the related inputs, and the
effects resulting from the application of the new guidance. In
addition, the adoption of the new guidance did not have any
impact on the Companys consolidated financial condition or
results of operations because it did not result in a change in
valuation techniques or related inputs. This new guidance was
effective for interim and annual reporting periods ending after
June 15, 2009 with early adoption permitted for periods
ending after March, 15, 2009. The Company adopted this new
guidance in the second quarter of 2009.
In April 2009, the FASB issued new accounting guidance on other
than temporary impairments. The new guidance is intended to
bring greater consistency to the timing of impairment
recognition and to provide greater clarity to investors about
the credit and other factors (interest rates, market conditions,
etc.) components of impaired debt securities that are not
expected to be sold. It modifies the impairment model utilized
for debt securities, the presentation of other than temporary
impairment losses, and expands the required disclosures of other
than temporary impairment for debt and equity securities. The
new guidance provides that in order for an entity to conclude
impairment is not
other-than-temporary,
it is required to assess whether it has the intent to sell the
debt security or more likely than not will be required to sell
the debt security before the anticipated recovery. When the
entity asserts it does not have the intent to sell the security
and it is more likely than not it will not have to sell the
security before recovery of its cost basis, only the credit
related impairment losses are to be recorded in earnings; losses
from other factors are to be recorded in accumulated other
comprehensive income (loss). The Company adopted the new
guidance on April 1, 2009. As a result, $6.3 million
of other than temporary impairment losses, net of tax, that were
previously recorded through earnings were reclassified to other
comprehensive income (loss) with an offset to retained earnings
as a cumulative-effect adjustment. This new guidance was
effective for interim and annual reporting periods ending after
June 15, 2009 with early adoption permitted for periods
ending after March, 15, 2009. The Company adopted this new
guidance in the second quarter of 2009.
145
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In April 2009, the FASB issued new accounting guidance on
interim disclosures of fair value measurements. This new
guidance relates to fair value disclosures for any financial
instruments that are not currently reflected on the balance
sheet of companies at fair value. Prior to issuing this new
guidance, fair values for these assets and liabilities were only
disclosed once a year. The new guidance now requires these
disclosures on a quarterly basis, providing qualitative and
quantitative information about fair value estimates for all
those financial instruments not measured on the balance sheet at
fair value. This new guidance was effective for interim and
annual reporting periods ending after June 15, 2009 with
early adoption permitted for periods ending after March, 15,
2009. The Company adopted this new guidance in the second
quarter of 2009.
In May 2009, the FASB issued new accounting guidance on
subsequent events. This 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. This new guidance sets forth the period after the
balance sheet date during which management should evaluate
events or transactions that may occur for potential recognition
or disclosure in the financial statements, the circumstances
under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial
statements, and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet
date. This new guidance is effective for interim or annual
financial periods ending after June 15, 2009. The Company
adopted this new guidance during the second quarter of 2009, and
it did not result in a material impact on the Companys
consolidated financial position or results of operations.
In June 2009, the FASB issued new accounting guidance on
accounting for transfers of financial assets. This new guidance
eliminates the concept of a qualifying special-purpose entity
from previous guidance. This new guidance also introduces the
concept of a participating interest, which will
limit the circumstances where the transfer of a portion of a
financial asset will qualify as a sale, assuming all other
de-recognition criteria are met. Furthermore, it clarifies and
amends the de-recognition criteria for determining whether a
transfer qualifies for sale accounting. This new guidance is
effective as of the beginning of the first annual reporting
period and interim reporting periods that begin after
November 15, 2009 and is not expected to have a material
impact on the Companys consolidated financial position or
results of operations.
In June 2009, the FASB issued new accounting guidance on whether
an enterprise is the primary beneficiary of a variable interest
entity. In addition, this new accounting guidance eliminated the
quantitative approach previously required for determining the
primary beneficiary of a variable interest entity. This new
guidance amends certain previously issued guidance for
determining whether an entity is a variable interest entity and
adds an additional reconsideration event for determining whether
an entity is a variable interest entity when any changes in
facts and circumstances occur such that the holders of the
equity investment at risk, as a group, lose the power from
voting rights or similar rights of those investments to direct
the activities of the entity that most significantly impact the
entitys economic performance. Further, this new guidance
requires enhanced disclosures that will provide users of
financial statements with more transparent information about an
enterprises involvement in a variable interest entity.
This new guidance is effective as of the beginning of the first
annual reporting period and interim reporting periods that begin
after November 15, 2009, and is not expected to have a
material impact on the Companys consolidated financial
position or results of operations.
In January 2010, the FASB issued authoritative guidance that
requires new disclosures related to fair value measurements and
clarifies existing disclosure requirements about the level of
disaggregation, inputs, and valuation techniques. Specifically,
reporting entities now must disclose separately the amounts of
significant transfers in and out of Level 1 and
Level 2 fair value measurements and describe the reasons
for the transfers. In addition, in the reconciliation for
Level 3 fair value measurements, a reporting entity should
separately present information about purchases, sales,
issuances, and settlements. The guidance clarifies that a
reporting entity needs to use judgment in determining the
appropriate classes of assets and liabilities for disclosure of
fair value measurement, considering the level of disaggregated
information required by other applicable GAAP guidance and
should also provide disclosures about the valuation techniques
and inputs used to measure fair value for each class of assets
and liabilities. This guidance will be effective on
January 1, 2010, except for the disclosures about
purchases, sales,
146
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
issuances, and settlements in the reconciliation for
Level 3 fair value measurements, which will be effective on
January 1, 2011. This guidance will not have a material
impact on our consolidated financial statements.
Redomestication
to Ireland
On February 16, 2010, we announced that the Companys
Board of Directors has unanimously approved a plan for the
Company to re-domicile from the Cayman Islands to Ireland. The
Companys shareholders will be asked to vote in favor of
completing the reorganization proposal at a special shareholders
meeting. If the proposal is accepted, the Company will become a
wholly-owned subsidiary of Global Indemnity plc, an Irish
company.
If the move to Ireland is approved, the Companys
Class A common shares will be exchanged for Global
Indemnity plcs Class A ordinary shares on a
two-for-one
basis, which will trade on The NASDAQ Global Select Market under
the ticker symbol GBLI. Global Indemnity plc will be
subject to U.S. Securities and Exchange Commission
reporting requirements, the mandates of the
U.S. Sarbanes-Oxley Act, and the corporate governance rules
of Nasdaq. Global Indemnity plc will continue to report the
Companys consolidated financial results in
U.S. dollars and under U.S. generally accepted
accounting principles. If required by Irish law, audited
consolidated annual financial statements prepared in accordance
with Irish generally accepted accounting principles will also be
made available to shareholders. In addition to shareholder
approval, the move to Ireland is subject to an order from the
Grand Court of the Cayman Islands sanctioning the transaction.
Haiti
Earthquake
On January 12, 2010, a massive earthquake struck the
Republic of Haiti that devastated the capital city
Port-au-Prince and resulted in widespread damage. The Company
does not expect much, if any, catastrophe loss exposure as
insurance penetration in Haiti has historically been low. Any
exposure that may develop would be as a result of tsunami
activity that affected neighboring islands where the Company has
exposure. At this time, however, the Company does not expect any
significant exposure.
California
Mudslides and Flooding
In January 2010, the southern California coast was battered by
multiple heavy rainstorms that caused mudslides and flooding
which resulted in significant property losses. The Company does
not expect much, if any, catastrophe loss exposure since it
expects losses to be within the Companys retention limits
of its property catastrophe reinsurance coverage.
Chile
Earthquake
In February 2010, a massive earthquake struck the Republic of
Chile that resulted in widespread damage. The Company does not
anticipate any catastrophe loss exposure as its current
exposures do not include Chilean risks. Any exposure that may
develop would be as a result of tsunami activity that affected
the Australian, Asian, or Pacific island regions where the
Company has exposure. At this time, however, the Company does
not expect any significant exposure.
Europe
Winter Storm
In February 2010, a late winter storm with fierce rain and
hurricane strength winds hit western Europe. At this time, the
Company does not know the extent of its catastrophe loss
exposure, if any.
There were no subsequent events requiring adjustment to the
financial statements or disclosure through March 16, 2010,
the date that the Companys financial statements were
issued.
147
UNITED
AMERICA INDEMNITY, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
21.
|
Summary
of Quarterly Financial Information (Unaudited)
|
An unaudited summary of the Companys 2009 and 2008
quarterly performance is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
(Dollars in thousands, except per share data)
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Net premiums earned
|
|
$
|
78,540
|
|
|
$
|
74,732
|
|
|
$
|
72,893
|
|
|
$
|
75,509
|
|
Net investment income
|
|
|
22,177
|
|
|
|
16,605
|
|
|
|
15,267
|
|
|
|
16,165
|
|
Net realized investment gains (losses)
|
|
|
(8,596
|
)
|
|
|
5,398
|
|
|
|
6,613
|
|
|
|
12,447
|
|
Net losses and loss adjustment expenses
|
|
|
47,740
|
|
|
|
44,047
|
|
|
|
38,887
|
|
|
|
38,708
|
|
Acquisition costs and other underwriting expenses
|
|
|
30,814
|
|
|
|
29,972
|
|
|
|
27,564
|
|
|
|
31,579
|
|
Income before income taxes
|
|
|
7,738
|
|
|
|
17,221
|
|
|
|
21,870
|
|
|
|
27,642
|
|
Net income
|
|
|
7,150
|
|
|
|
16,261
|
|
|
|
27,352
|
|
|
|
24,674
|
|
Per share data Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.23
|
(1)
|
|
$
|
0.32
|
|
|
$
|
0.45
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
(Dollars in thousands, except per share data)
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Net premiums earned
|
|
$
|
113,057
|
|
|
$
|
100,673
|
|
|
$
|
89,511
|
|
|
$
|
79,267
|
|
Net investment income
|
|
|
17,786
|
|
|
|
17,072
|
|
|
|
16,627
|
|
|
|
16,345
|
|
Net realized investment gains (losses)
|
|
|
(1,070
|
)
|
|
|
(2,480
|
)
|
|
|
(20,510
|
)
|
|
|
(26,199
|
)
|
Net losses and loss adjustment expenses
|
|
|
76,650
|
|
|
|
83,644
|
|
|
|
76,134
|
|
|
|
68,746
|
|
Acquisition costs and other underwriting expenses
|
|
|
38,195
|
|
|
|
38,112
|
|
|
|
33,164
|
|
|
|
33,296
|
|
Impairments of goodwill and intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,499
|
|
Income (loss) before income taxes
|
|
|
8,444
|
|
|
|
(10,948
|
)
|
|
|
(28,822
|
)
|
|
|
(135,560
|
)
|
Net income (loss)
|
|
|
7,440
|
|
|
|
(8,971
|
)
|
|
|
(19,598
|
)
|
|
|
(120,431
|
)
|
Per share data Diluted:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.19
|
(1)
|
|
$
|
(0.24
|
)(1)
|
|
$
|
(0.56
|
)(1)
|
|
$
|
(3.44
|
)(1)
|
|
|
|
(1) |
|
In May 2009, the Company issued 17.2 million Class A
common shares and 11.4 million Class B common shares
in conjunction with the Rights Offering. In computing the basic
and diluted weighted share counts, the number of shares
outstanding prior to May 5, 2009 (the date that the common
shares were issued in conjunction with the Rights Offering) was
adjusted by a factor of 1.114 to reflect the impact of a bonus
element associated with the Rights Offering in accordance with
appropriate accounting guidance. As a result, share counts and
per share data have been restated. |
|
(2) |
|
Diluted loss per share is the same as
Basic loss per share for the second, third, and
fourth quarters since there was a net loss for those periods. |
148
|
|
Item 9.
|
Changes
In And Disagreements With Accountants On Accounting And
Financial Disclosure
|
None
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Based on their evaluation of the effectiveness of our disclosure
controls and procedures (as defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act)), our principal executive officer and
principal financial officer have concluded that as of
December 31, 2009, our disclosure controls and procedures
are effective in that they are designed to ensure that
information required to be disclosed by us in the reports that
we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms and
information that we are required to disclose in our Exchange Act
reports is accumulated and communicated to management as
appropriate to allow timely decisions regarding required
disclosure.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended). Our
management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2009. In making
this assessment, our management used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated
Framework. Our management has concluded that, as of
December 31, 2009, our internal control over financial
reporting was effective based on these criteria. Our independent
registered public accounting firm, PricewaterhouseCoopers LLP,
has audited the effectiveness of our internal control over
financial reporting, as stated in their report, which is
included in Item 8 of this report on
Form 10-K.
Changes
in Internal Control over Financial Reporting
We have added, deleted, or modified certain of our internal
controls over financial reporting during 2009. However, there
have been no changes in our internal controls over financial
reporting that occurred during the year ended December 31,
2009 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial
reporting.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers of the Registrant, and Corporate
Governance
|
The information required by this Item is incorporated by
reference to, and will be contained in, our definitive proxy
statement.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item is incorporated by
reference to, and will be contained in, our definitive proxy
statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management, and
Related Stockholder Matters
|
The information required by this Item is incorporated by
reference to, and will be contained in, our definitive proxy
statement.
149
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this Item is incorporated by
reference to, and will be contained in, our definitive proxy
statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this Item is incorporated by
reference to, and will be contained in, our definitive proxy
statement.
150
PART IV
|
|
Item 15.
|
Exhibits and
Financial Statement Schedules
|
(a) The following documents are filed as part of this
report:
(1) The Financial Statements listed in the accompanying
index on page 84 are filed as part of this report.
(2) The Financial Statement Schedules listed in the
accompanying index on page 84 are filed as part of this
report.
(3) The Exhibits listed below are filed as part of, or
incorporated by reference into, this report.
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
2
|
.1
|
|
Amended and Restated Investment Agreement, dated as of
September 5, 2003, by and among U.N. Holdings (Cayman),
Ltd., United National Group, Ltd., United America Indemnity
Group, Inc., U.N. Holdings LLC, U.N. Holdings Inc., Wind River
Investment Corporation and certain Trusts Listed on
Schedule A thereof (incorporated herein by reference to
Exhibit 2.1 of Amendment No. 1 to our Registration
Statement on
Form S-1
(Registration
No. 333-108857)
filed on October 28, 2003).
|
|
2
|
.2
|
|
Agreement and Plan of Merger, dated as of October 14, 2004,
by and among
Penn-America
Group, Inc., United National Group, Ltd., United America
Indemnity Group, Inc. and Cheltenham Acquisition Corp.
(incorporated herein by reference to Exhibit 2.1 of our
Current Report on
Form 8-K
dated October 15, 2004).
|
|
2
|
.3
|
|
Stock Purchase Agreement, dated as of October 14, 2004, by
and among United National Group, Ltd., United National Insurance
Company, Penn Independent Corporation, the Shareholders named
therein and the Shareholders representative (incorporated
herein by reference to Exhibit 2.2 of our Current Report on
Form 8-K
dated October 15, 2004).
|
|
2
|
.4
|
|
Stock Purchase Agreement, dated as of October 14, 2004, by
and among United National Group, Ltd., United National Insurance
Company and Irvin Saltzman (incorporated herein by reference to
Exhibit 2.3 of our Current Report on
Form 8-K
dated October 15, 2004).
|
|
2
|
.5
|
|
Stock Purchase Agreement, dated as of October 14, 2004, by
and among United National Group, Ltd., United National Insurance
Company, Jon S. Saltzman and Joanne Lynch Saltzman (incorporated
herein by reference to Exhibit 2.4 of our Current Report on
Form 8-K
dated October 15, 2004).
|
|
3
|
.1
|
|
Amended and Restated Memorandum and Articles of Association of
United America Indemnity, Ltd. (incorporated herein by reference
to Exhibit 3.1 of our Quarterly Report on
Form 10-Q,
filed on November 11, 2009).
|
|
4
|
.1
|
|
Note and Guarantee Agreement dated July 20, 2005, among
United America Indemnity Group, Inc., United America Indemnity,
Ltd. and the Investors named therein (incorporated herein by
reference to Exhibit 4.1 of our Current Report on
Form 8-K
filed on July 21, 2005).
|
|
4
|
.2
|
|
Form of 6.22% Guaranteed Senior Note due 2015 (incorporated
herein by reference to Exhibit 4.1 of our Current Report on
Form 8-K
filed on July 21, 2005).
|
|
4
|
.3
|
|
Form of Specimen Certificate for Registrants Class A
Common Shares (incorporated herein by reference to
Exhibit 4.3 of Amendment No. 4 to our Registration
Statement on
Form S-1
(Registration
No. 333-108857)
filed on December 15, 2003).
|
|
10
|
.1
|
|
Amended and Restated Shareholders Agreement dated
December 15, 2003, by and among United National Group,
Ltd., U.N. Holdings (Cayman) Ltd. and those trusts signatory
thereto (incorporated herein by reference to Exhibit 10.1
of our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2003).
|
|
10
|
.2
|
|
Amendment No. 1 to Amended and Restated Shareholders
Agreement, dated as of April 10, 2006, by and among United
America Indemnity, Ltd., U.N. Holdings (Cayman) Ltd., those
co-investment funds signatory thereto and those trust signatory
thereto (incorporated herein by reference to Exhibit 10.1
of our Current Report on
Form 8-K
filed on April 20, 2006).
|
|
10
|
.3*
|
|
Management Shareholders Agreement, dated as of September 5,
2003, by and among United National Group, Ltd. and those
management shareholders signatory thereto (incorporated herein
by reference to Exhibit 10.2 of Amendment No. 1 to our
Registration Statement on
Form S-1
(Registration
No. 333-108857)
filed on October 28, 2003).
|
151
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.4*
|
|
Amendment to Management Shareholders Agreement, dated as
of January 1, 2006, by and among United America Indemnity,
Ltd. and those management shareholders signatory thereto
(incorporated herein by reference to Exhibit 10.1 of our
Current Report on
Form 8-K
filed January 12, 2006).
|
|
10
|
.5*
|
|
Management Agreement, dated as of September 5, 2003, by and
among United National Group, Ltd., Fox Paine &
Company, LLC and The AMC Group, L.P., with related Indemnity
Letter (incorporated herein by reference to Exhibit 10.3 of
Amendment No. 1 to our Registration Statement on
Form S-1
(Registration
No. 333-108857)
filed on October 28, 2003).
|
|
10
|
.6*
|
|
Amendment No. 1 to the Management Agreement, dated as of
May 25, 2006, by and among United America Indemnity,
Ltd., Fox Paine & Company, LLC and Wind River
Holdings, L.P., formerly The AMC Group, L.P. (incorporated
herein by reference to Exhibit 10.3 of our Current Report
on
Form 8-K
filed on June 1, 2006).
|
|
10
|
.7*
|
|
United National Group, Ltd. Share Incentive Plan and Amendment
No. 1 thereto (incorporated herein by reference to
Exhibit 10.4 of Amendment No 2. to our Registration
Statement on
Form S-1
(Registration
No. 333-108857)
filed on November 26, 2003).
|
|
10
|
.8*
|
|
Amendment No. 2 to the United America Indemnity, Ltd. Share
Incentive Plan (incorporated herein by reference to
Exhibit 10.2 of our Current Report on
Form 8-K
filed on May 9, 2005).
|
|
10
|
.9*
|
|
Amendment No. 3 to the United America Indemnity, Ltd. Share
Incentive Plan (incorporated herein by reference to
Exhibit 10.1 of our Current Report on
Form 8-K
filed on June 1, 2006).
|
|
10
|
.10*
|
|
Amendment No. 4 to the United America Indemnity, Ltd. Share
Incentive Plan (incorporated herein by reference to
Exhibit 10 of our Current Report on
Form 8-K
filed on May 31, 2007).
|
|
10
|
.11*
|
|
Amendment No. 5 to the United America Indemnity, Ltd. Share
Incentive Plan (incorporated herein by reference to
Exhibit 10 of our Current Report on
Form 8-K
filed on January 31, 2008).
|
|
10
|
.12*
|
|
Amended and Restated United America Indemnity, Ltd. Annual
Incentive Awards Program (incorporated herein by reference to
Exhibit 10.1 of our Current Report on
Form 8-K
filed on May 9, 2005).
|
|
10
|
.13*
|
|
Amendment No. 1 to the Amended and Restated United America
Indemnity, Ltd. Annual Incentive Awards Program (incorporated
herein by reference to Exhibit 10.2 of our Current Report
on
Form 8-K
filed on June 1, 2006).
|
|
10
|
.14*
|
|
Employment Agreement for Larry A. Frakes, dated May 10,
2007 (incorporated herein by reference to Exhibit 10.1 of
our Quarterly Report on
Form 10-Q
filed on May 10, 2007).
|
|
10
|
.15*
|
|
Amended and Restated Employment Agreement for Larry A. Frakes,
dated February 5, 2008 (incorporated herein by reference to
Exhibit 10.1 of our Current Report on
Form 8-K
filed on February 8, 2008).
|
|
10
|
.16*
|
|
Amended and Restated Employment Agreement for Larry A. Frakes,
dated August 14, 2009 (incorporated herein by reference to
Exhibit 10.1 of our Current Report on
Form 8-K
filed on August 17, 2009).
|
|
10
|
.17*
|
|
Executive Employment Agreement, dated as of April 1, 2006,
between Wind River Insurance Company (Bermuda), Ltd. and David
R. Whiting (incorporated herein by reference to
Exhibit 10.1 of our Current Report on
Form 8-K
filed on May 17, 2006).
|
|
10
|
.18*
|
|
Amended and Restated Executive Employment Agreement, dated
January 1, 2005, between United National Insurance
Company and Richard S. March (incorporated herein by reference
to Exhibit 10.1 of our Current Report on
Form 8-K
filed on April 12, 2005).
|
|
10
|
.19*
|
|
Amendment to Executive Employment Agreement, dated as of
January 1, 2006, between United National Insurance
Company and Richard S. March (incorporated herein by reference
to Exhibit 10.4 of our Current Report on
Form 8-K
filed on January 12, 2006).
|
|
10
|
.20*
|
|
Amended and Restated Executive Employment Agreement, dated
January 1, 2005, between United National Insurance
Company and Kevin L. Tate (incorporated herein by reference to
Exhibit 10.2 of our Current Report on
Form 8-K
filed on April 12, 2005).
|
|
10
|
.21*
|
|
Amendment to Executive Employment Agreement, dated as of
January 1, 2006, between United National Insurance
Company and Kevin L. Tate (incorporated herein by reference to
Exhibit 10.3 of our Current Report on
Form 8-K
filed on January 12, 2006).
|
152
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.22*
|
|
Executive Employment Agreement, dated August 9, 2007,
between
Penn-America
Insurance Company and Raymond H. McDowell (incorporated herein
by reference to Exhibit 10.1 of our Current Report on
Form 8-K
filed on August 15, 2007).
|
|
10
|
.23*
|
|
Executive Employment Agreement, dated July 28, 2008,
between United National Insurance Company and J. Scott Reynolds
(incorporated herein by reference to Exhibit 10.22 to our
annual report on
Form 10-K
for the fiscal year ended December 31, 2008).
|
|
10
|
.24*
|
|
Amendment No. 1 to Executive Employment Agreement, dated as
of July 30, 2008, between United National Insurance
Company and J. Scott Reynolds (incorporated herein by reference
to Exhibit 10.23 to our annual report on
Form 10-K
for the fiscal year ended December 31, 2008).
|
|
10
|
.25*+
|
|
Executive Employment Agreement, dated as of June 8, 2009,
between
Penn-America
Insurance Company and Matthew B. Scott.
|
|
10
|
.26*+
|
|
Executive Employment Agreement, dated as of November 15,
2009, between Wind River Reinsurance Company, Ltd. and Troy W.
Santora.
|
|
10
|
.27*+
|
|
Executive Employment Agreement, dated as of December 8,
2009, between United America Indemnity, Ltd. and Thomas M.
McGeehan.
|
|
10
|
.28
|
|
Subscription and Backstop Agreement, dated as of March 16,
2009, between United America Indemnity, Ltd., U.N. Holdings
(Cayman) II, Ltd., and Fox Paine & Company, LLC.
|
|
21
|
.1+
|
|
List of Subsidiaries.
|
|
23
|
.1+
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
31
|
.1+
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2+
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1+
|
|
Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2+
|
|
Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
+ |
|
Filed herewith. |
|
* |
|
Management contract or compensatory plan or arrangement required
to be filed as an exhibit to this
Form 10-K. |
153
SIGNATURES
Pursuant to the requirements of the Section 13 or 15
(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
United
America Indemnity, Ltd.
Name: Larry
A. Frakes
|
|
|
|
Title:
|
Chief Executive
Officer
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities indicated below
on March 16, 2010.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Saul
A. Fox
Saul
A. Fox
|
|
Chairman and Director
|
|
|
|
/s/ Larry
A. Frakes
Larry
A. Frakes
|
|
President, Chief Executive Officer, and Director
|
|
|
|
/s/ Thomas
M. McGeehan
Thomas
M. McGeehan
|
|
Principal Financial and Accounting Officer
|
|
|
|
/s/ Stephen
A. Cozen
Stephen
A. Cozen
|
|
Director
|
|
|
|
/s/ Seth
J. Gersch
Seth
J. Gersch
|
|
Director
|
|
|
|
/s/ James
R. Kroner
James
R. Kroner
|
|
Director
|
|
|
|
/s/ Chad
A. Leat
Chad
A. Leat
|
|
Director
|
|
|
|
/s/ Michael
J. Marchio
Michael
J. Marchio
|
|
Director
|
154
UNITED
AMERICA INDEMNITY, LTD.
IN RELATED PARTIES
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
Included in the
|
|
|
|
Cost *
|
|
|
Value
|
|
|
Balance Sheet
|
|
|
Type of Investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government and government agencies and authorities
|
|
$
|
228,386
|
|
|
$
|
236,088
|
|
|
$
|
236,088
|
|
States, municipalities, and political subdivisions
|
|
|
217,713
|
|
|
|
225,598
|
|
|
|
225,598
|
|
Mortgage-backed and asset-backed securities
|
|
|
461,574
|
|
|
|
478,163
|
|
|
|
478,163
|
|
Public utilities
|
|
|
42,569
|
|
|
|
44,828
|
|
|
|
44,828
|
|
All other corporate bonds
|
|
|
472,810
|
|
|
|
486,895
|
|
|
|
486,895
|
|
Redeemable preferred stock
|
|
|
1,509
|
|
|
|
2,599
|
|
|
|
2,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
1,424,561
|
|
|
|
1,474,171
|
|
|
|
1,474,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities
|
|
|
1,758
|
|
|
|
2,002
|
|
|
|
2,002
|
|
Banks, trusts and insurance companies
|
|
|
3,083
|
|
|
|
4,211
|
|
|
|
4,211
|
|
Industrial and miscellaneous
|
|
|
45,868
|
|
|
|
56,844
|
|
|
|
56,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
50,709
|
|
|
|
63,057
|
|
|
|
63,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term investments
|
|
|
5,468
|
|
|
|
7,999
|
|
|
|
7,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
1,480,738
|
|
|
$
|
1,545,227
|
|
|
$
|
1,545,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Original cost of equity securities; original cost of fixed
maturities adjusted for amortization of premiums and accretion
of discounts. All amounts are shown net of impairment losses. |
S-1
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
Available for sale, at fair value (amortized cost: $68,755 and
$0)
|
|
$
|
69,899
|
|
|
$
|
|
|
Cash and cash equivalents
|
|
|
32,553
|
|
|
|
203
|
|
Equity in unconsolidated subsidiaries(1)
|
|
|
804,550
|
|
|
|
691,006
|
|
Due from affiliates
|
|
|
1,152
|
|
|
|
|
|
Other assets
|
|
|
1,316
|
|
|
|
1,034
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
909,470
|
|
|
$
|
692,243
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Note payable to affiliate(1)
|
|
$
|
54,747
|
|
|
$
|
54,747
|
|
Due to affiliates
|
|
|
|
|
|
|
1,378
|
|
Payable for securities purchased
|
|
|
14,314
|
|
|
|
|
|
Other liabilities
|
|
|
8,433
|
|
|
|
4,125
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
77,494
|
|
|
|
60,250
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common shares, $0.0001 par value, 900,000,000 common shares
authorized; Class A common shares issued: 42,486,690 and
25,032,618, respectively; Class A common shares
outstanding: 36,430,477 and 19,013,462, respectively;
Class B common shares issued and outstanding: 24,122,744
and 12,687,500, respectively
|
|
|
7
|
|
|
|
4
|
|
Preferred shares, $0.0001 par value,
100,000,000 shares authorized, none issued and outstanding
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
619,469
|
|
|
|
524,345
|
|
Accumulated other comprehensive income, net of tax
|
|
|
48,481
|
|
|
|
25,108
|
|
Retained earnings
|
|
|
264,739
|
|
|
|
182,982
|
|
Class A common shares in treasury, at cost: 6,056,213 and
6,019,156 shares, respectively
|
|
|
(100,720
|
)
|
|
|
(100,446
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
831,976
|
|
|
|
631,993
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
909,470
|
|
|
$
|
692,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This item has been eliminated in the Companys Consolidated
Financial Statements. |
See Notes to Consolidated Financial Statements included in
Item 8.
S-2
UNITED
AMERICA INDEMNITY, LTD.
SCHEDULE II Condensed Financial Information of
Registrant (Continued)
(Parent Only)
Statement of Operations and Comprehensive Income
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
877
|
|
|
$
|
90
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
12,167
|
|
|
|
11,025
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in earnings (loss) of unconsolidated
subsidiaries
|
|
|
(11,290
|
)
|
|
|
(10,935
|
)
|
Equity in earnings (loss) of partnerships
|
|
|
1,732
|
|
|
|
|
|
Equity in earnings (loss) of unconsolidated subsidiaries(1)
|
|
|
84,995
|
|
|
|
(130,625
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
75,437
|
|
|
|
(141,560
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
Unrealized holding gains arising during the period
|
|
|
1,145
|
|
|
|
|
|
Equity in other comprehensive income (loss) of unconsolidated
subsidiaries(1)
|
|
|
28,548
|
|
|
|
(15,064
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
29,693
|
|
|
|
(15,064
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss), net of tax
|
|
$
|
105,130
|
|
|
$
|
(156,624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This item has been eliminated in the Companys Consolidated
Financial Statements. |
See Notes to Consolidated Financial Statements included in
Item 8.
S-3
UNITED
AMERICA INDEMNITY, LTD.
SCHEDULE II Condensed Financial Information of
Registrant (Continued)
(Parent Only)
Statement of Cash Flows
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Net cash used for operating activities
|
|
$
|
(5,889
|
)
|
|
$
|
(2,371
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of fixed maturities
|
|
|
13,473
|
|
|
|
|
|
Purchases of fixed maturities
|
|
|
(55,999
|
)
|
|
|
|
|
Purchases of other invested assets
|
|
|
(10,000
|
)
|
|
|
|
|
Dividends from subsidiaries(1)
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) investing activities
|
|
|
(52,526
|
)
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Issuance of common shares
|
|
|
91,833
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
1,041
|
|
Excess tax benefit (expense) from share-based compensation plans
|
|
|
(794
|
)
|
|
|
(91
|
)
|
Purchase of Class A common shares
|
|
|
(274
|
)
|
|
|
(52,024
|
)
|
Payment of note to related party
|
|
|
|
|
|
|
(1,253
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
90,765
|
|
|
|
(52,327
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and equivalents
|
|
|
32,350
|
|
|
|
(4,698
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
203
|
|
|
|
4,901
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
32,553
|
|
|
$
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This item has been eliminated in the Companys Consolidated
Financial Statements. |
See Notes to Consolidated Financial Statements included in
Item 8.
S-4
UNITED
AMERICA INDEMNITY, LTD.
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future
|
|
|
|
|
|
|
|
|
Policy Benefits,
|
|
|
|
|
|
|
Deferred Policy
|
|
Losses, Claims And
|
|
Unearned
|
|
Other Policy and
|
Segment
|
|
Acquisition Costs
|
|
Loss Expenses
|
|
Premiums
|
|
Benefits Payable
|
|
At December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
$
|
26,345
|
|
|
$
|
1,221,516
|
|
|
$
|
108,352
|
|
|
$
|
|
|
Reinsurance Operations
|
|
|
6,839
|
|
|
|
36,225
|
|
|
|
23,230
|
|
|
|
|
|
At December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
$
|
33,737
|
|
|
$
|
1,481,793
|
|
|
$
|
138,796
|
|
|
$
|
|
|
Reinsurance Operations
|
|
|
997
|
|
|
|
24,636
|
|
|
|
10,881
|
|
|
|
|
|
At December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
$
|
49,186
|
|
|
$
|
1,496,344
|
|
|
$
|
214,800
|
|
|
|
|
|
|
|
|
3,319
|
|
|
|
6,893
|
|
|
|
13,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, Claims,
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses And
|
|
|
Amortization of
|
|
|
|
|
|
|
Premium
|
|
|
Settlement
|
|
|
Deferred Policy
|
|
|
Net Written
|
|
Segment
|
|
Revenue
|
|
|
Expenses
|
|
|
Acquisition Costs
|
|
|
Premium
|
|
|
For the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
$
|
250,409
|
|
|
$
|
146,197
|
|
|
$
|
(73,437
|
)
|
|
$
|
218,264
|
|
Reinsurance Operations
|
|
|
51,265
|
|
|
|
23,185
|
|
|
|
(10,659
|
)
|
|
|
72,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
301,674
|
|
|
$
|
169,382
|
|
|
$
|
(84,096
|
)
|
|
$
|
290,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
$
|
374,174
|
|
|
$
|
293,820
|
|
|
$
|
(105,492
|
)
|
|
$
|
305,479
|
|
Reinsurance Operations
|
|
|
8,334
|
|
|
|
11,354
|
|
|
|
(3,390
|
)
|
|
|
3,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
382,508
|
|
|
$
|
305,174
|
|
|
$
|
(108,882
|
)
|
|
$
|
309,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
$
|
530,516
|
|
|
$
|
295,624
|
|
|
$
|
(139,503
|
)
|
|
$
|
478,274
|
|
Reinsurance Operations
|
|
|
5,807
|
|
|
|
3,617
|
|
|
|
(2,653
|
)
|
|
|
12,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
536,323
|
|
|
$
|
299,241
|
|
|
$
|
(142,156
|
)
|
|
$
|
490,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Net
|
|
and Other
|
|
|
Investment
|
|
Operating
|
Unallocated Corporate Items
|
|
Income
|
|
Expenses
|
|
For the year ended December 31, 2009
|
|
$
|
70,214
|
|
|
$
|
16,752
|
|
For the year ended December 31, 2008
|
|
|
67,830
|
|
|
|
13,918
|
|
For the year ended December 31, 2007
|
|
|
77,341
|
|
|
|
11,643
|
|
S-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Gross
|
|
Ceded to Other
|
|
Assumed from
|
|
|
|
of Amount
|
|
|
Amount(1)
|
|
Companies
|
|
Other Companies
|
|
Net Amount
|
|
Assumed to Net
|
|
For the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & Liability Insurance
|
|
$
|
298,427
|
|
|
$
|
57,420
|
|
|
$
|
60,667
|
|
|
$
|
301,674
|
|
|
|
20.1
|
%
|
For the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & Liability Insurance
|
|
$
|
429,164
|
|
|
$
|
74,877
|
|
|
$
|
28,221
|
|
|
$
|
382,508
|
|
|
|
7.4
|
%
|
For the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & Liability Insurance
|
|
$
|
605,316
|
|
|
$
|
81,691
|
|
|
$
|
12,698
|
|
|
$
|
536,323
|
|
|
|
2.4
|
%
|
|
|
|
(1) |
|
Includes direct premiums written. |
S-6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Charged
|
|
|
|
|
|
|
|
|
Beginning of
|
|
(Credited) to Costs
|
|
Charged (Credited)
|
|
Other
|
|
Balance at End
|
Description
|
|
Period
|
|
and Expenses
|
|
to Other Accounts
|
|
Deductions
|
|
of Period
|
|
For the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment asset valuation reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums, accounts and notes receivable
|
|
$
|
2,655
|
|
|
$
|
(434
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,221
|
|
Deferred tax asset valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance receivables
|
|
|
13,661
|
|
|
|
(714
|
)
|
|
|
|
|
|
|
|
|
|
|
12,947
|
|
For the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment asset valuation reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums, accounts and notes receivable
|
|
$
|
3,910
|
|
|
$
|
(1,255
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,655
|
|
Deferred tax asset valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance receivables
|
|
|
10,542
|
|
|
|
3,119
|
|
|
|
|
|
|
|
|
|
|
|
13,661
|
|
For the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment asset valuation reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums, accounts and notes receivable
|
|
$
|
3,987
|
|
|
$
|
(690
|
)
|
|
$
|
613
|
|
|
$
|
|
|
|
$
|
3,910
|
|
Deferred tax asset valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance receivables
|
|
|
20,667
|
|
|
|
(5,092
|
)
|
|
|
(5,033
|
)
|
|
|
|
|
|
|
10,542
|
|
S-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Unpaid Claims
|
|
|
|
|
|
|
|
|
|
Policy
|
|
|
and Claim
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
Adjustment
|
|
|
Discount If
|
|
|
Unearned
|
|
|
|
Costs
|
|
|
Expenses
|
|
|
Any Deducted
|
|
|
Premiums
|
|
|
Consolidated Property & Casualty Entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
$
|
33,184
|
|
|
$
|
1,257,741
|
|
|
$
|
17,500
|
|
|
$
|
131,582
|
|
As of December 31, 2008
|
|
|
34,734
|
|
|
|
1,506,429
|
|
|
|
17,500
|
|
|
|
149,677
|
|
As of December 31, 2007
|
|
|
52,505
|
|
|
|
1,503,237
|
|
|
|
17,500
|
|
|
|
228,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and Claim
|
|
|
|
|
|
Paid Claims
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Adjustment Expense
|
|
|
Amortization of
|
|
|
and Claim
|
|
|
|
|
|
|
Earned
|
|
|
Investment
|
|
|
Incurred Related to
|
|
|
Deferred Policy
|
|
|
Adjustment
|
|
|
Premiums
|
|
|
|
Premiums
|
|
|
Income
|
|
|
Current Year
|
|
|
Prior Year
|
|
|
Acquisition Costs
|
|
|
Expenses
|
|
|
Written
|
|
|
Consolidated Property & Casualty Entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009
|
|
$
|
301,674
|
|
|
$
|
70,214
|
|
|
$
|
178,492
|
|
|
$
|
(9,110
|
)
|
|
$
|
(84,096
|
)
|
|
$
|
279,923
|
|
|
$
|
290,995
|
|
For the year ended December 31, 2008
|
|
|
382,508
|
|
|
|
67,830
|
|
|
|
270,242
|
|
|
|
34,932
|
|
|
|
(108,882
|
)
|
|
|
270,220
|
|
|
|
309,080
|
|
For the year ended December 31, 2007
|
|
|
536,323
|
|
|
|
77,341
|
|
|
|
328,346
|
|
|
|
(29,105
|
)
|
|
|
(142,156
|
)
|
|
|
233,699
|
|
|
|
490,535
|
|
|
|
Note: |
All of the Companys insurance subsidiaries are 100% owned
and consolidated.
|
S-8