AmCOMP
INCORPORATED AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.
BASIS OF PRESENTATION
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America (“United States”) for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
and recurring accruals) considered necessary for a fair presentation have been
included. These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto set forth in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007. The unaudited consolidated financial statements include the
accounts of AmCOMP, AmCOMP Preferred Insurance Company (“AmCOMP Preferred”),
Pinnacle Administrative, Inc. (“Pinnacle Administrative”), Pinnacle Benefits,
Inc. (“Pinnacle Benefits”), AmCOMP Assurance Corporation (“AmCOMP Assurance”)
and AmServ Incorporated (“AmServ”). All intercompany accounts and transactions
have been eliminated in consolidation.
Results
of operations for the six months ended June 30, 2008 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2008.
New Accounting Pronouncements
—In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accounting principles generally accepted in the United
States, and expands disclosures about fair value measurements. This statement
addresses how to calculate fair value measurements required or permitted under
other accounting pronouncements. Accordingly, this statement does not require
any new fair value measurements. However, for some entities, the application of
this statement will change current practice. This interpretation was adopted by
the Company on January 1, 2008. FASB Staff Position (FSP)FAS 157-2,
Effective Date of FASB
Statement No. 157
(“FSP 157-2”), delays the effective date of SFAS
No. 157 to fiscal years beginning after November 15, 2008 for nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis.
The delay is intended to allow the Board and constituents additional time to
consider the effect of various implementation issues that have arisen, or that
may arise, from the application of FAS 157. The partial adoption of SFAS
No. 157 had no impact on our financial position or results of
operations.
In
February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities
(“SFAS No. 159”), which permits entities
to elect to measure many financial instruments and certain other items at fair
value. Upon adoption of SFAS No. 159, an entity may elect the fair value
option for eligible items that exist at the adoption date. Subsequent to the
initial adoption, the election of the fair value option should only be made at
the initial recognition of the asset or liability or upon a re-measurement event
that gives rise to the new basis of accounting. All subsequent changes in fair
value for that instrument are reported in earnings. SFAS No. 159 does not
affect any existing accounting literature that requires certain assets and
liabilities to be recorded at fair value nor does it eliminate disclosure
requirements included in other accounting standards. This interpretation
was adopted by the Company on January 1, 2008. We have elected not to implement
the fair value option with respect to any existing assets or liabilities;
therefore, the adoption of SFAS No. 159 had no impact on our financial position
or results of operations.
In
December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
. SFAS
No. 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree and recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase. SFAS
No. 141(R) also sets forth the disclosures required to be made in the
financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.
Accordingly, SFAS No. 141(R) will be applied by the Company to business
combinations occurring on or after January 1, 2009.
In May
2008, the FASB issued Statement No. 162,
The Hierarchy of Generally Accepted
Accounting Principles
(“SFAS No. 162”). SFAS No. 162 identifies
the sources of accounting principles and the framework for selecting the
principles used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles in the United States. This Statement shall be effective 60 days
following the Security and Exchange Commission’s approval of the Public Company
Accounting Oversight Board (PCAOB) amendments to AU Section 411,
The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles
. The Company
does not believe the adoption will have a material impact on its financial
condition or results of operations.
2.
STOCK OPTIONS
In
accordance with SFAS No. 123R,
Accounting for Stock-Based
Compensation
(“SFAS 123R”), the Company expenses all outstanding employee
stock options over the vesting period based on the fair value of the options at
the date they were granted. Additionally, SFAS No. 123R requires the
estimation of forfeitures in calculating the expense related to stock-based
compensation. The Company recognized approximately $0.2 million of
stock option compensation expense for the three months ended June 30, 2008 and
2007, and $0.4 million for the six months ended June 30, 2008 and 2007,
respectively. The related tax benefit was less than $0.1 million in
the three and six months ended June 30, 2008. As of June 30, 2008, total
unrecognized compensation expense related to non-vested stock options was
approximately $0.9 million. This cost is expected to be recognized
over the weighted average period of 1.5 years.
A summary
of the Company’s stock option activity for the three and six months ended June
30, 2008 and June 30, 2007 is as follows:
|
|
|
Three
Months Ended June 30, 2008
|
|
|
Three
Months Ended June 30, 2007
|
|
|
Six
Months Ended June 30, 2008
|
|
|
Six
Months Ended June 30, 2007
|
|
|
|
|
Employees,
Directors and Executives
|
|
|
Employees,
Directors and Executives
|
|
|
Employees,
Directors and Executives
|
|
|
Employees,
Directors and Executives
|
|
|
|
|
Average
Exercise Price
|
|
|
Number
of Shares
|
|
|
Average
Exercise Price
|
|
|
Number
of Shares
|
|
|
Average
Exercise Price
|
|
|
Number
of Shares
|
|
|
Average
Exercise Price
|
|
|
Number
of Shares
|
|
|
Outstanding–beginning
balance
|
|
$
|
9.43
|
|
|
|
901,287
|
|
|
$
|
9.36
|
|
|
|
1,054,173
|
|
|
$
|
9.43
|
|
|
|
906,422
|
|
|
$
|
10.08
|
|
|
|
1,221,558
|
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
9.35
|
|
|
|
5,648
|
|
|
|
10.66
|
|
|
|
54,737
|
|
|
Exercised
|
|
|
9.00
|
|
|
|
(1,091
|
)
|
|
|
9.00
|
|
|
|
(9,277
|
)
|
|
|
9.00
|
|
|
|
(4,190
|
)
|
|
|
8.98
|
|
|
|
(10,914
|
)
|
|
Forfeited
|
|
|
9.00
|
|
|
|
(656
|
)
|
|
|
9.00
|
|
|
|
(32,746
|
)
|
|
|
9.00
|
|
|
|
(1,312
|
)
|
|
|
9.00
|
|
|
|
(34,384
|
)
|
|
Expired
|
|
|
13.69
|
|
|
|
(55,230
|
)
|
|
|
9.00
|
|
|
|
(1,091
|
)
|
|
|
13.14
|
|
|
|
(62,258
|
)
|
|
|
13.71
|
|
|
|
(219,938
|
)
|
|
Outstanding–ending
balance
|
|
$
|
9.16
|
|
|
|
844,310
|
|
|
$
|
9.37
|
|
|
|
1,011,059
|
|
|
$
|
9.16
|
|
|
|
844,310
|
|
|
$
|
9.37
|
|
|
|
1,011,059
|
|
As of
June 30, 2008 and 2007, options to purchase 458,518 shares and 372,766 shares,
respectively, were exercisable. The weighted average remaining
contractual life of the exercisable options was 2.5 years and 2.4 years as of
June 30, 2008 and 2007, respectively. The per-share weighted average
grant date fair value of options granted in the six months ended June 30, 2008
and 2007 was $2.56 and $3.78, respectively. The fair value of stock options
granted was estimated on the dates of grant using the Black-Scholes option
pricing model. The following weighted average assumptions were used to perform
the calculations for the six months ended June 30, 2008: zero expected dividend
yield, 3.26% risk-free interest rate, 5 year expected life, and 25.0%
volatility. For the six months ended June 30, 2007, the following
weighted average assumptions were used: zero expected dividend yield, 4.63%
risk-free interest rate, 5 year expected life, and 30.3%
volatility. The expected life was based on historical exercise
behavior and the contractual life of the options. Due to
unavailability of historical company information, volatility was based on
average volatilities of similar entities for the appropriate
period. Forfeitures were estimated at 20% for board members, 5% for
executives and 10% for all remaining employees. The weighted-average
grant date fair value of options vesting during the six months ending June 30,
2008 and 2007 was $3.10 and $2.92, respectively. As of June 30, 2008
the aggregate intrinsic value of options outstanding and options exercisable was
approximately $2.2 million and $1.2 million, respectively. The total
aggregate intrinsic value of options exercised during the six months ending June
30, 2008 and 2007 was less than $0.1 million.
Summary
information for option awards expected to vest is as follows:
|
|
Options
Outstanding
|
|
Range
of Exercise Prices
|
Number
Outstanding
at
June
30, 2008
|
Weighted
Average
Remaining
Contractual
Life
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
|
$
0.00 – $ 9.99
|
747,043
|
2.53
|
$ 9.02
|
$ 2,024,356
|
|
10.00
– 10.99
|
70,240
|
3.38
|
10.58
|
80,450
|
|
|
817,283
|
2.61
|
$ 9.15
|
$ 2,104,806
|
Summary
information for total outstanding option awards is as follows:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Range
of Exercise Prices
|
Number
Outstanding
at
June
30,
2008
|
Weighted
Average
Remaining
Contractual
Life
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
at
June
30,
2008
|
Weighted
Average
Exercise
Price
|
|
$
0.00 – $ 9.99
|
770,774
|
2.54
|
$
9.02
|
|
434,735
|
$ 9.02
|
|
10.00
– 10.99
|
73,536
|
3.39
|
10.59
|
|
23,783
|
10.55
|
|
|
844,310
|
2.61
|
$
9.16
|
|
458,518
|
$ 9.10
|
In the event that currently outstanding
options are exercised, the Company intends to first issue treasury shares to the
extent available, or new shares as necessary.
3.
ASSESSMENTS
Guaranty Fund
Assessments
— Most states have guaranty fund laws under which insurers
doing business in the state are required to fund policyholder liabilities of
insolvent insurance companies. Generally, assessments are levied by
guaranty associations within the state, up to prescribed limits, on all insurers
doing business in that state on the basis of the proportionate share of the
premiums written by insurers doing business in that state in the lines of
business in which the impaired, insolvent or failed insurer is
engaged. The Company accrues a liability for estimated assessments as
direct premiums are written and defers these costs and recognizes them as an
expense as the related premiums are earned. The Company is
continually notified of assessments from various states relating to insolvencies
in that particular state; however, the Company estimates the potential future
assessment in the absence of an actual assessment. Guaranty fund
assessment expenses were $0.1 million and ($1.0) million for the three months
ended June 30, 2008 and 2007, respectively, and $0.6 million and ($0.5) million
for the six months ended June 30, 2008 and 2007, respectively. The
Company has deferred approximately $0.7 million and $1.0 million as of June 30,
2008 and December 31, 2007 related to guaranty fund assessments, which is
included in deferred policy acquisition costs. Additionally,
guarantee fund receivable assets of $1.5 million as of June 30, 2008 and
December 31, 2007 are included in other assets, as they can be used as a credit
against future premium taxes owed. Maximum contributions required by
law in any one state in which we offer insurance vary between 0.2% and 2.0% of
direct premiums written.
Second Injury
Fund Assessments and Recoveries
— Many states have laws that established
second injury funds to reimburse employers and insurance carriers for workers’
compensation benefits paid to employees who are injured and whose disability is
increased by a prior work-related injury. The source of these funds
is an assessment charged to workers’ compensation insurance carriers doing
business in such states. Assessments are based on paid losses or
premium surcharge mechanisms. Several of the states in which we
operate maintain second injury funds with material assessments. The
Company accrues a liability for second injury fund assessments as net premiums
are written or as losses are incurred based on individual state guidelines, and
for premium based assessments, we defer these costs and recognize them as an
expense as the related premiums are earned. Second Injury Fund
assessment expense was ($0.6) million and $1.9 million for the three months
ended June 30, 2008 and 2007, respectively, and $0.4 million and $2.8 million
for the six months ended June 30, 2008 and 2007, respectively. The
Company has deferred approximately $1.4 million and $1.5 million as of June 30,
2008 and December 31, 2007, respectively, related to second injury fund
assessments, which is included in deferred policy acquisition
costs.
The
Company submits claims to the appropriate state’s second injury fund for
recovery of applicable claims paid on behalf of the Company’s
insureds. Because of the uncertainty of the collectability of such
amounts, second injury fund recoverables are reported in the accompanying
consolidated financial statements when received. Cash collections
from the second injury funds were approximately $0.7 million and $0.9 million in
the six months ended June 30, 2008 and 2007.
The
Florida Second Disability Trust Fund (“Florida SDTF”) currently has
significant unfunded liabilities. It is not possible to predict how
the Florida SDTF will operate, if at all, in the future after further
legislative review. Changes in the Florida SDTF’s operations could
decrease the availability of recoveries from the Florida SDTF, increase Florida
SDTF assessments payable by AmCOMP and/or result in the discontinuation of the
Florida SDTF and thus could have an adverse effect on AmCOMP’s business,
financial condition, and its operations. Under current law, future
assessments are capped at 4.52% of net written premiums, and no recoveries can
be made for losses or submitted on claims occurring after January 1,
1998.
Other
Assessments
— Various other assessments are levied by states in which the
Company transacts business, and are primarily based on premiums written or
collected in the applicable state. The total expense related to these
assessments was ($0.3) million and $0.2 million for the three months ended June
30, 2008 and 2007, respectively, and ($0.1) million and $0.4 million for the six
months ended June 30, 2008 and 2007, respectively. The Company has
deferred approximately $0.2 million and $0.3 million as of June 30, 2008 and
December 31, 2007, related to these assessments, which are included in deferred
policy acquisition costs.
Liabilities
for assessments are expected to be paid over the next five
years. Guarantee fund receivable assets are expected to be realized
over the next five to ten years.
4.
INVESTMENTS
The
Company’s investments in available-for-sale securities and held-to-maturity
securities are summarized as follows at June 30, 2008 (in
thousands):
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair
Value
|
|
|
Available-for-sale
securities at June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$
|
22,763
|
|
|
$
|
1,379
|
|
|
$
|
–
|
|
|
$
|
24,142
|
|
|
Agency
|
|
|
23,754
|
|
|
|
248
|
|
|
|
14
|
|
|
|
23,988
|
|
|
Municipalities
|
|
|
85,319
|
|
|
|
246
|
|
|
|
441
|
|
|
|
85,124
|
|
|
Corporate
debt securities
|
|
|
143,700
|
|
|
|
741
|
|
|
|
1,850
|
|
|
|
142,591
|
|
|
Mortgage-backed
securities
|
|
|
61,195
|
|
|
|
391
|
|
|
|
762
|
|
|
|
60,824
|
|
|
Total
fixed maturity securities
|
|
$
|
336,731
|
|
|
$
|
3,005
|
|
|
$
|
3,067
|
|
|
$
|
336,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
securities at June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
$
|
97,381
|
|
|
$
|
607
|
|
|
$
|
609
|
|
|
$
|
97,379
|
|
The
amortized cost and estimated fair values of investments in fixed maturity
securities, segregated by available-for-sale and held-to-maturity, at June 30,
2008 are summarized by maturity as follows (in thousands):
|
|
|
Available-for-sale
|
|
|
Held-to-maturity
|
|
|
|
|
Amortized
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
|
|
Cost
|
|
|
Fair
Value
|
|
|
Cost
|
|
|
Fair
Value
|
|
|
Years
to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
or less
|
|
$
|
45,136
|
|
|
$
|
45,342
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
After
one through five
|
|
|
117,611
|
|
|
|
117,372
|
|
|
|
–
|
|
|
|
–
|
|
|
After
five through ten
|
|
|
107,825
|
|
|
|
107,139
|
|
|
|
–
|
|
|
|
–
|
|
|
After
ten
|
|
|
4,964
|
|
|
|
5,992
|
|
|
|
–
|
|
|
|
–
|
|
|
Mortgage-backed
securities
|
|
|
61,195
|
|
|
|
60,824
|
|
|
|
97,381
|
|
|
|
97,379
|
|
|
Total
|
|
$
|
336,731
|
|
|
$
|
336,669
|
|
|
$
|
97,381
|
|
|
$
|
97,379
|
|
The
foregoing data is based on the stated maturities of the securities. Actual
maturities may differ as borrowers may have the right to call or prepay
obligations.
At June
30, 2008 and December 31, 2007, bonds with an amortized cost of $14.2 million
and $7.9 million and a fair value of $15.4 million and $9.0 million,
respectively, were on deposit with various states’ departments of insurance in
accordance with regulatory requirements. Additionally, as of December
31, 2007, $6.0 million of cash, representing a matured security not yet
reinvested, was on deposit with a department of insurance. At June
30, 2008 and December 31, 2007, bonds with an amortized cost of $6.5 million and
a fair value $6.6 million were held in a reinsurance trust for the benefit of
members of the Orion Insurance Group in accordance with the terms of a
reinsurance agreement between the Company and the Orion Companies.
Major
categories of the Company’s net investment income for the three and six months
ended June 30, 2008 and 2007 are summarized as follows (in
thousands):
|
|
|
Three
Months Ended
|
|
|
Six Months
Ended
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities
|
|
$
|
5,216
|
|
|
$
|
4,977
|
|
|
$
|
10,469
|
|
|
$
|
9,892
|
|
|
Cash
and cash equivalents
|
|
|
76
|
|
|
|
180
|
|
|
|
343
|
|
|
|
348
|
|
|
Investment
income
|
|
$
|
5,292
|
|
|
$
|
5,157
|
|
|
$
|
10,812
|
|
|
$
|
10,240
|
|
|
Investment
expenses
|
|
|
(224
|
)
|
|
|
(216
|
)
|
|
|
(435
|
)
|
|
|
(437
|
)
|
|
Net
investment income
|
|
$
|
5,068
|
|
|
$
|
4,941
|
|
|
$
|
10,377
|
|
|
$
|
9,803
|
|
Proceeds
from the sale of available-for-sale fixed maturity securities during the six
months ended June 30, 2008 and 2007 were $14.3 million and $4.7 million,
respectively. Gross losses realized on the sales during the six months ended
June 30, 2008 and 2007 were $0.1 million and $0.2 million,
respectively.
The
Company continuously monitors its portfolio to preserve principal values
whenever possible. An investment in a fixed maturity security is
impaired if its fair value falls below its book value. All securities
in an unrealized loss position are reviewed to determine whether the impairment
is other-than-temporary. Factors considered in determining whether an
impairment is considered to be other-than-temporary include length of time and
the extent to which fair value has been below cost, the financial condition and
near-term prospects of the issuer, and the Company’s ability and intent to hold
the security until its expected recovery.
The
following table summarizes, for all fixed maturity securities in an unrealized
loss position at June 30, 2008 the aggregate fair value and gross unrealized
loss by length of time the security has continuously been in an
unrealized
loss position (in thousands):
|
|
|
|
|
|
Unrealized
|
|
|
Number
of
|
|
|
|
|
Fair
Value
|
|
|
Losses
|
|
|
Issues
|
|
|
Less
than 12 months:
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
Agency
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Municipalities
|
|
|
47,165
|
|
|
|
(441
|
)
|
|
|
24
|
|
|
Corporate
debt securities
|
|
|
58,663
|
|
|
|
(1,030
|
)
|
|
|
35
|
|
|
Mortgage-backed
securities
|
|
|
78,041
|
|
|
|
(1,148
|
)
|
|
|
30
|
|
|
Total
|
|
$
|
183,869
|
|
|
$
|
(2,619
|
)
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater
than 12 months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
Agency
|
|
|
4,001
|
|
|
|
(14
|
)
|
|
|
1
|
|
|
Municipalities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Corporate
debt securities
|
|
|
15,466
|
|
|
|
(820
|
)
|
|
|
10
|
|
|
Mortgage-backed
securities
|
|
|
8,648
|
|
|
|
(223
|
)
|
|
|
7
|
|
|
Total
|
|
$
|
28,115
|
|
|
$
|
(1,057
|
)
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
Agency
|
|
|
4,001
|
|
|
|
(14
|
)
|
|
|
1
|
|
|
Municipalities
|
|
|
47,165
|
|
|
|
(441
|
)
|
|
|
24
|
|
|
Corporate
debt securities
|
|
|
74,129
|
|
|
|
(1,850
|
)
|
|
|
45
|
|
|
Mortgage-backed
securities
|
|
|
86,689
|
|
|
|
(1,371
|
)
|
|
|
37
|
|
|
Total
fixed maturity securities
|
|
$
|
211,984
|
|
|
$
|
(3,676
|
)
|
|
|
107
|
|
At June
30, 2008, there were no investments in fixed maturity securities with individual
material unrealized losses. One other-than-temporary impairment
totaling $0.1 million was recorded on an investment during the six months ended
June 30, 2008. Substantially all the unrealized losses on the fixed
maturity securities are interest rate related.
5.
UNPAID LOSSES AND LAE
The
following table provides a reconciliation of the beginning and ending balances
for unpaid losses and loss adjustment expenses (“LAE”), reported in the
accompanying consolidated balance sheets:
|
|
|
Six
Months Ended
June
30,
2008
|
|
|
Twelve
Months
Ended
December 31,
2007
|
|
|
|
|
(Dollars in
thousands
)
|
|
|
Unpaid
losses and LAE, gross of related reinsurance recoverables, at beginning of
period
|
|
$
|
324,224
|
|
|
$
|
334,363
|
|
|
Less
reinsurance recoverables on unpaid losses and LAE at beginning of
period
|
|
|
66,353
|
|
|
|
72,296
|
|
|
Unpaid
losses and LAE, net of related reinsurance recoverables, at beginning of
the period
|
|
|
257,871
|
|
|
|
262,067
|
|
|
|
|
|
|
|
|
|
|
|
|
Add
provision for losses and LAE, net of reinsurance, occurring
in:
|
|
|
|
|
|
|
|
|
|
Current
period
|
|
|
72,228
|
|
|
|
163,070
|
|
|
Prior
periods
|
|
|
(13,466
|
)
|
|
|
(36,508
|
)
|
|
Incurred
losses during the current period, net of reinsurance
|
|
|
58,762
|
|
|
|
126,562
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct
payments for losses and LAE, net of reinsurance, occurring
in:
|
|
|
|
|
|
|
|
|
|
Current
period
|
|
|
16,951
|
|
|
|
52,974
|
|
|
Prior
periods
|
|
|
50,902
|
|
|
|
77,784
|
|
|
Payments
for losses and LAE during the current period, net of
reinsurance
|
|
|
67,853
|
|
|
|
130,758
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
losses and LAE, net of related reinsurance recoverables, at end of
period
|
|
|
248,780
|
|
|
|
257,871
|
|
|
Reinsurance
recoverables on unpaid losses and LAE at end of period
|
|
|
62,761
|
|
|
|
66,353
|
|
|
Unpaid
losses and LAE, gross of related reinsurance recoverables, at end of
period
|
|
$
|
311,541
|
|
|
$
|
324,224
|
|
The
Company’s estimate for losses and LAE related to prior years, net of related
reinsurance recoverables, decreased during the six months ended June 30, 2008
and the year ended December 31, 2007 by $13.5 million and $36.5 million,
respectively, as a result of actual loss development emerging more favorably
than expected. Excluding business assumed from state mandated pools, the
redundancy in the six months ended June 30, 2008 was attributable to prior year
reserve decreases in Florida ($4.1 million), Tennessee ($3.3 million), North
Carolina ($2.8 million), Georgia ($1.7 million), Illinois ($1.2 million), and
Texas ($1.0 million), offset by an increase in Indiana ($1.7 million), combined
with less significant decreases in several other states. The accident
years with the largest redundancies were 2006 ($5.9 million), 2007 ($3.3
million), 2005 ($2.1 million) and 2004 ($1.3 million). Management
believes the historical experience of the Company is a reasonable basis for
estimating future losses. However, future events beyond the control of
management, such as changes in law, judicial interpretations of law, and
inflation may favorably or unfavorably impact the ultimate settlement of the
Company’s loss and loss adjustment expenses.
6. COMMITMENTS
AND CONTINGENCIES
As of
June 30, 2008 and December 31, 2007, the Company had accrued $0.5 million for
estimated additional Florida dividends based on its statutory underwriting
results pursuant to Florida Statute 627.215 and applicable regulations (“Florida
excessive profits”). AmCOMP’s ultimate liability will be based on its premiums
earned, loss reserves and expenses computed in accordance with the statute and
regulations.
Litigation
—AmCOMP
along with AmCOMP Preferred and AmCOMP Assurance are collectively defendants in
an action commenced in Florida by the Insurance Commissioner of Pennsylvania,
acting in the capacity as liquidator of Reliance Insurance
Company. The complaint in this action alleges that preferential
payments were made by Reliance Insurance Company under the formerly existing
reinsurance agreement with AmCOMP Preferred and AmCOMP Assurance and seeks
damages in the amount of approximately $2.3 million. AmCOMP,
along with AmCOMP Preferred and AmCOMP Assurance, has filed a response and has
made various motions addressed to these complaints. The Company,
based on the advice of counsel, believes that it has a variety of factual and
legal defenses, including but not limited to a right of offset related to the
statement of claim filed by the Company and AmCOMP Preferred in the Reliance
Insurance Company liquidation proceeding for the recovery of approximately
$7.8 million under the reinsurance agreement. However, on
November 14, 2007 the trial court in Florida granted the plaintiff liquidator’s
motion for partial summary judgment, finding that the approximate $2.3 million
in payments were “preferential” under Pennsylvania law. This order is
not yet a final, appealable order under Florida law. There are a
number of remaining issues, including AmCOMP’s affirmative defenses, which must
be determined by the court before a final order or judgment could be
entered. Although the ultimate results of these legal actions and
related claims (including any future appeals) are uncertain, the Company had
accrued liabilities of $0.9 million and $1.2 million, as of June 30, 2008 and
December 31, 2007, respectively, which are included in accounts payable and
accrued expenses, related to those matters. The decrease in the
accrual is the result of the Company’s further analysis of the amount at which
this matter may be resolved.
The
Company is named as a defendant in various legal actions arising principally
from claims made under insurance policies and contracts. Those
actions are considered by the Company in estimating the losses and LAE
reserves
.
7. NOTES
PAYABLE
On
October 12, 2000, the Company entered into a credit facility (the “Loan”)
with a financial institution under which the Company borrowed $11.3
million. The Loan called for monthly interest payments at the 30-day
London Interbank Offered Rate (“LIBOR”) plus a margin. The expiration
date on the loan is April 10, 2010. During 2003, the remaining
balance of the Loan was refinanced and the Company borrowed an additional $5.5
million. On May 23, 2008, the loan agreement was amended and
restated, changing the annual interest rate to 160 basis points in excess of one
month LIBOR. The Loan is collateralized by $37.5 million of surplus notes issued
by AmCOMP Preferred and AmCOMP Assurance and the stock of AmCOMP
Preferred. At June 30, 2008 and December 31, 2007, the principal
balance was $3.6 million and $4.5 million, respectively. The interest
rate was 4.06% and 6.83% at June 30, 2008 and December 31, 2007,
respectively. Interest paid during the six months ended June 30, 2008
and 2007 totaled $0.1 million and $0.2 million, respectively. The
Loan contains various restrictive covenants and certain financial
covenants. At June 30, 2008, the Company was in compliance with all
restrictive and financial covenants.
On
April 30, 2004, AmCOMP Preferred issued a $10.0 million surplus note in
return for $10.0 million in cash to Dekania CDO II, Ltd., as part of a
pooled transaction. The note matures in 30 years and is callable
by the Company after five years. The terms of the note provide for
quarterly interest payments at a rate 425 basis points in excess of the 90-day
LIBOR. Both the payment of interest and repayment of the principal
under this note and the surplus notes described in the succeeding two paragraphs
are subject to the prior approval of the Florida Department of Financial
Services. Interest paid during the six months ending June 30, 2008 and 2007
totaled $0.4 million and $0.5 million, respectively. Interest accrued as of June
30, 2008 and December 31, 2007 was $0.1 million.
On
May 26, 2004, AmCOMP Preferred issued a $12.0 million surplus note, in
return for $12.0 million in cash, to ICONS, Inc., as part of a pooled
transaction. The note matures in 30 years and is callable by the
Company after five years. The terms of the note provide for quarterly
interest payments at a rate 425 basis points in excess of the 90-day LIBOR.
Interest paid during the six months ending June 30, 2008 and 2007 totaled $0.5
million and $0.6 million, respectively. Interest accrued as of June 30, 2008 and
December 31, 2007 was $0.1 million.
On
September 14, 2004, AmCOMP Preferred issued a $10.0 million surplus note,
in return for $10.0 million in cash, to Alesco Preferred Funding V, LTD, as
part of a pooled transaction. The note matures in approximately
30 years and is callable by the Company after approximately five
years. The terms of the note provide for quarterly interest payments
at a rate 405 basis points in excess of the 90-day LIBOR. Interest paid during
the six months ending June 30, 2008 and 2007 totaled $0.4 million and $0.5
million, respectively. Interest accrued as of June 30, 2008 and
December 31, 2007 was less than $0.1 million.
On May
23, 2008, the Company obtained a $30.0 million secured non-revolving line of
credit (the “line of credit”) from Regions Bank. The line of credit
calls for monthly interest payments at 160 basis points in excess
of one month LIBOR on principal advanced from time to
time. The Company has until May 23, 2010 to procure any advances
under this agreement. Thereafter, repayments of any principal then
outstanding will be made quarterly with any unpaid principal maturing on May 23,
2017. The line of credit is collateralized by $37.5 million of surplus notes
issued by AmCOMP Preferred and AmCOMP Assurance and the stock of AmCOMP
Preferred. As of June 30, 2008, the Company had not made any
borrowings under this line of credit. The Loan contains various
restrictive covenants and certain financial covenants. At June 30,
2008, the Company was in compliance with all restrictive and financial
covenants.
8.
FEDERAL AND STATE INCOME TAXES
Effective
January 1, 2007, the Company adopted FIN 48. This interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements, prescribes a recognition threshold and measurement
attributes for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This interpretation also
provides guidance on derecognition, classification, interest and penalties, and
accounting in interim periods. The Interpretation establishes a “more
likely than not” recognition threshold for tax benefits to be recognized in the
financial statements. The “more likely than not” determination is to
be based solely on the technical merits of the position. As of the
adoption date and as of June 30, 2008, the Company had no material unrecognized
tax benefits and no adjustments to liabilities or operations were
required. We recognize income tax related interest in interest
expense and penalties in income tax expense. Income tax related interest
recognized in the three and six months ended June 30, 2008 and 2007 was less
than $0.1 million. Tax related interest accrued as of June 30, 2008
and December 31, 2007 was $0.7 million and $0.6 million,
respectively. Tax years 2004 through 2007 are subject to examination
by the federal and state taxing authorities. There are no income tax
examinations currently in process.
Significant components of income tax
for the three and six months ended June 30, 2008 and 2007 are as follows (in
thousands):
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Current
(benefit) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(184
|
)
|
|
$
|
2,948
|
|
|
$
|
1,892
|
|
|
$
|
6,013
|
|
|
State
|
|
|
2
|
|
|
|
349
|
|
|
|
154
|
|
|
|
673
|
|
|
Total
current tax (benefit) expense
|
|
|
(182
|
)
|
|
|
3,297
|
|
|
|
2,046
|
|
|
|
6,686
|
|
|
Deferred
tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,124
|
|
|
|
(225
|
)
|
|
|
1,158
|
|
|
|
(1,411
|
)
|
|
State
|
|
|
74
|
|
|
|
(24
|
)
|
|
|
76
|
|
|
|
(151
|
)
|
|
Total
deferred tax expense (benefit)
|
|
|
1,198
|
|
|
|
(249
|
)
|
|
|
1,234
|
|
|
|
(1,562
|
)
|
|
Income
tax expense
|
|
$
|
1,016
|
|
|
$
|
3,048
|
|
|
$
|
3,280
|
|
|
$
|
5,124
|
|
The
effective federal income tax rates on income before income taxes differ from the
maximum statutory rates as follows for the three and six months ended June 30,
2008 and 2007 (in thousands):
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Income
tax at statutory rate
|
|
$
|
1,080
|
|
|
|
35.0
|
%
|
|
$
|
3,001
|
|
|
|
35.0
|
%
|
|
$
|
3,440
|
|
|
|
35.0
|
%
|
|
$
|
5,135
|
|
|
|
35.0
|
%
|
|
Permanent
differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
income taxes
|
|
|
75
|
|
|
|
2.4
|
|
|
|
182
|
|
|
|
2.1
|
|
|
|
168
|
|
|
|
1.7
|
|
|
|
339
|
|
|
|
2.3
|
|
|
Tax-exempt
interest
|
|
|
(262
|
)
|
|
|
(8.5
|
)
|
|
|
(325
|
)
|
|
|
(3.8
|
)
|
|
|
(551
|
)
|
|
|
(5.6
|
)
|
|
|
(629
|
)
|
|
|
(4.3
|
)
|
|
Non-deductible
meals and entertainment
|
|
|
109
|
|
|
|
3.5
|
|
|
|
101
|
|
|
|
1.2
|
|
|
|
162
|
|
|
|
1.7
|
|
|
|
144
|
|
|
|
1.0
|
|
|
Provision
to return adjustment
|
|
|
–
|
|
|
|
–
|
|
|
|
45
|
|
|
|
0.5
|
|
|
|
(7
|
)
|
|
|
(0.1
|
)
|
|
|
6
|
|
|
|
0.0
|
|
|
Non-deductible
option expense
|
|
|
40
|
|
|
|
1.3
|
|
|
|
33
|
|
|
|
0.4
|
|
|
|
86
|
|
|
|
0.9
|
|
|
|
75
|
|
|
|
0.5
|
|
|
Other
expense—net
|
|
|
(26
|
)
|
|
|
(0.8
|
)
|
|
|
11
|
|
|
|
0.1
|
|
|
|
(18
|
)
|
|
|
(0.2
|
)
|
|
|
54
|
|
|
|
0.4
|
|
|
Effective
income tax expense
|
|
$
|
1,016
|
|
|
|
32.9
|
%
|
|
$
|
3,048
|
|
|
|
35.5
|
%
|
|
$
|
3,280
|
|
|
|
33.4
|
%
|
|
$
|
5,124
|
|
|
|
34.9
|
%
|
The Company records deferred federal
income taxes on certain temporary differences between the amounts reported in
the accompanying consolidated financial statements and the amounts reported for
federal and state income tax reporting purposes.
The tax effects of temporary
differences that give rise to significant portions of the deferred tax assets
and tax liabilities as of June 30, 2008 and December 31, 2007 are presented
below (in thousands):
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Loss
and LAE reserve adjustments
|
|
$
|
12,633
|
|
|
$
|
13,094
|
|
|
Unearned
and advance premiums
|
|
|
7,238
|
|
|
|
7,325
|
|
|
Allowance
for bad debts
|
|
|
1,047
|
|
|
|
998
|
|
|
Policyholder
dividends
|
|
|
2,973
|
|
|
|
3,746
|
|
|
Deferred
compensation
|
|
|
1,030
|
|
|
|
974
|
|
|
Disallowed
capital losses
|
|
|
557
|
|
|
|
491
|
|
|
Other
|
|
|
1,324
|
|
|
|
1,335
|
|
|
Total
deferred tax assets
|
|
|
26,802
|
|
|
|
27,963
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition expenses
|
|
|
(7,038
|
)
|
|
|
(6,968
|
)
|
|
FAS
115 unrealized gains
|
|
|
–
|
|
|
|
(799
|
)
|
|
Other
|
|
|
(287
|
)
|
|
|
(307
|
)
|
|
Total
deferred tax liabilities
|
|
|
(7,325
|
)
|
|
|
(8,074
|
)
|
|
Net
deferred tax assets
|
|
$
|
19,477
|
|
|
$
|
19,889
|
|
9. EARNINGS
PER SHARE
The
following table sets forth the computation of basic and diluted earnings per
share computations (amounts in thousands, except per share
amounts):
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to common stockholders
|
|
$
|
2,068
|
|
|
$
|
5,527
|
|
|
$
|
6,548
|
|
|
$
|
9,547
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(denominator for basic
earnings per share)
|
|
|
15,294
|
|
|
|
15,769
|
|
|
|
15,293
|
|
|
|
15,764
|
|
|
Plus
effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
115
|
|
|
|
7
|
|
|
|
112
|
|
|
|
13
|
|
|
Weighted-average
shares and assumed conversions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(denominator
for diluted earnings per share)
|
|
|
15,409
|
|
|
|
15,776
|
|
|
|
15,405
|
|
|
|
15,777
|
|
|
Basic
earnings per share
|
|
$
|
0.14
|
|
|
$
|
0.35
|
|
|
$
|
0.43
|
|
|
$
|
0.61
|
|
|
Diluted
earnings per share
|
|
$
|
0.13
|
|
|
$
|
0.35
|
|
|
$
|
0.43
|
|
|
$
|
0.61
|
|
For the
three months ended June 30, 2008 and 2007, outstanding employee stock options of
73,536, and 926,117, respectively, and for the six months ended June 30, 2008
and 2007, outstanding employee stock options of, 79,184 and 882,457,
respectively, have been excluded from the computation of diluted earnings per
share because they are anti-dilutive.
10.
FAIR VALUE MEASUREMENTS
The
Company’s estimates of fair value for financial assets and financial liabilities
are based on the framework established in SFAS No. 157. The framework is based
on the inputs used in valuation and gives the highest priority to quoted prices
in active markets and requires that observable inputs be used in the valuations
when available. The disclosure of fair value estimates in the SFAS No. 157
hierarchy is based on whether the significant inputs into the valuation are
observable. In determining the level of the hierarchy in which the estimate is
disclosed, the highest priority is given to unadjusted quoted prices in active
markets and the lowest priority to unobservable inputs that reflect the
Company’s significant market assumptions. The three levels of the hierarchy are
as follows:
|
·
|
Level
1
-
Unadjusted quoted market prices for identical assets or liabilities
in active markets that the Company has the ability to
access.
|
|
·
|
Level
2
-
Quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in inactive
markets; or valuations based on models where the significant inputs are
observable (e.g., interest rates, yield curves, prepayment speeds, default
rates, loss severities, etc.) or can be corroborated by observable market
data.
|
|
·
|
Level
3
-
Valuations based on models where significant inputs are not
observable. The unobservable inputs reflect the Company’s own assumptions
about the assumptions that market participants would
use.
|
Valuation of
Investments
—
For
investments that have quoted market prices in active markets, the Company uses
the quoted market prices as fair value and includes these prices in the amounts
disclosed in Level 1 of the hierarchy. When quoted market prices are
unavailable, the Company estimates fair value based on objectively verifiable
information, if available. The fair value estimates determined by using
objectively verifiable information are included in the amount disclosed in Level
2 of the hierarchy. If quoted market prices and an estimate determined by using
objectively verifiable information are unavailable, the Company produces an
estimate of fair value based on internally developed valuation techniques,
which, depending on the level of observable market inputs, will render the fair
value estimate as Level 2 or Level 3. The Company bases all of its estimates of
fair value for assets on the bid price as it represents what a third party
market participant would be willing to pay in an arm’s length transaction. The
following section describes the valuation methods used by the Company for each
type of financial instrument it holds that is carried at fair
value.
Fixed Maturities—
The Company
utilizes market quotations for fixed maturity securities that have quoted prices
in active markets. Since fixed maturities other than U.S. Treasury securities
generally do not trade on a daily basis, estimates of fair value measurements
for these securities are estimated using relevant inputs, including available
relevant market information, benchmark curves, benchmarking of like securities,
sector groupings, and matrix pricing. Additionally, an Option Adjusted Spread
model is used to develop prepayment and interest rate scenarios.
Each
asset class is evaluated based on relevant market information, relevant credit
information, perceived market movements and sector news. The market inputs
utilized in the pricing evaluation include: benchmark yields, reported trades,
broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities,
bids, offers, reference data, and industry and economic events. The extent of
the use of each market input depends on the asset class and the market
conditions. Depending on the security, the priority of the use of inputs may
change or some market inputs may not be relevant. For some securities additional
inputs may be necessary.
This
method of valuation will only produce an estimate of fair value if there is
objectively verifiable information to produce a valuation. If objectively
verifiable information is not available, the Company would be required to
produce an estimate of fair value using some of the same methodologies, but
would have to make assumptions for market based inputs that are unavailable due
to market conditions.
Because
the fair value estimates of most fixed maturity investments are determined by
evaluations that are based on observable market information rather than market
quotes, all estimates of fair value for fixed maturities, other than U.S.
Treasury securities, priced based on estimates using objectively verifiable
information are included in the amount disclosed in Level 2 of the hierarchy.
The estimated fair value of U.S. Treasury securities are included in the amount
disclosed in Level 1 as the estimates are based on unadjusted market
prices.
Fair Value
Hierarchy
—
The
following table presents the level within the fair value hierarchy at which the
Company’s financial assets and financial liabilities are measured on a recurring
basis.
|
|
|
June 30,
2008
|
|
|
|
|
Fair
Value Measurements Using
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable Inputs
|
|
|
|
|
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
Total
|
|
|
|
|
(in
thousands)
|
|
|
Invested
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities available-for-sale
|
|
$
|
24,142
|
|
|
$
|
312,527
|
|
|
$
|
–
|
|
|
$
|
336,669
|
|
|
Total
|
|
$
|
24,142
|
|
|
$
|
312,527
|
|
|
$
|
–
|
|
|
$
|
336,669
|
|
As noted
in the above table, we did not have any assets measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) during the
period.
Assets and
Liabilities Recorded at Fair Value on a Non-recurring Basis
—
As allowed under FSP 157-2,
as of January 1, 2008, we have elected not to fully adopt SFAS No. 157 and
are deferring adoption for certain nonfinancial assets and liabilities until
January 1, 2009. On our balance sheet, this deferral would apply to
goodwill. As of June 30, 2008, $1.3 million of goodwill was recorded
on the balance sheet.
11. REGULATORY
EVENTS
On March
19, 2007, the Company received a Notice of Intent to Issue Order to Return
Excessive Profit (the “2007 Notice”) from the Florida Office of Insurance
Regulation (the “Florida OIR”). The 2007 Notice indicates on a
preliminary basis that Florida OIR proposes to make a finding, following its
review of data submitted by the Company on July 1, 2006 for accident years 2002,
2003 and 2004, that “Florida excessive profits” (as defined in Florida Statute
Section 627.215) in the amount of $5,663,805 have been realized by the
Company. Florida excessive profits under the statute are required to
be returned to policyholders under methods defined in the statute. Upon receipt
of the 2007 Notice, and upon further review by the Company of the data
previously submitted, the Company amended its filings with the Florida OIR
responding to the 2007 Notice and amending the deductible expense items that are
utilized in the calculation of Florida excessive profits. These filings amend
and increase the expenses the Company believes are permitted by the statute in
calculating Florida excessive profits.
The
Company, through outside regulatory counsel, has submitted its amended filings
to Florida OIR for the years 2002, 2003 and 2004. The amended filings report no
Florida excessive profits for the reporting periods. In the event Florida OIR
does not agree with the amended filings as submitted by the Company, there would
be a disputed issue of material fact and law regarding the calculation of
Florida excessive profits. The Company has preserved its right to an
administrative hearing under the provisions of the 2007 Notice and Florida
Statute Chapter 120 (the Florida Administrative Procedures Act). Under Chapter
120, the Company is entitled to a
de novo
proceeding on the
issues described above. If the administrative ruling is adverse to the
Company, the Company would have further appellate rights to the District Court
of Appeal. Management of the Company believes, in part based on advice
from legal counsel, that Florida excessive profits were not, in fact, earned in
Florida for the years 2002, 2003, and 2004.
The
Company has also received a Notice of Intent to Issue Order to Return Excess
Profit dated May 19, 2008 (the “2008 Notice”) from the Florida
OIR. The Notice indicates on a preliminary basis that Florida OIR
proposes to make a finding, following its review of data submitted by the
Company on June 22, 2007 for accident years 2003, 2004 and 2005 that Florida
excessive profits in the amount of approximately $11.7 million have been
realized by the Company and are required to be returned to
policyholders.
The
Company believes, in part based on advice from legal counsel, that the
formulation used by Florida OIR in computing Florida excessive profits is not
the only one permitted by Florida law. On May 22, 2008, the Company
amended its previously filed returns to include additional items deductible in
calculating Florida excessive profits. Both the original filing and
the amended filing reflect that there were no Florida excessive profits for the
applicable reporting periods.
On June
9, 2008, the Company’s insurance subsidiaries, AmCOMP Assurance and AmCOMP
Preferred through counsel, filed a Petition For Administrative Hearing Involving
Disputed Issues of Fact (the “Petition”) with the Florida OIR, challenging
Florida OIR’s 2008 Notice. In the Petition, AmCOMP has asked, among
other things, that the Petition be referred to the Florida Division of
Administrative Hearings for assignment of an administrative law judge in order
to conduct a proceeding involving the matters set forth in the 2008 Notice, and
that such administrative law judge recommend that Florida OIR withdraw or
rescind its 2008 Notice or otherwise find that AmCOMP does not owe any excessive
profits for accident years 2003, 2004 and 2005. As the 2008 Notice
was issued on a preliminary basis, AmCOMP will not be required to return the
allegedly excessive profits unless required to do so upon the conclusion of the
above proceedings. There can be no assurance that the Division of
Administrative Hearings will refer the Petition for assignment to an
administrative law judge or that an administrative law judge will accept
AmCOMP’s position.
On June
29, 2008, the Company made its annual filing related to Florida excessive
profits with the Florida OIR for the accident years 2004, 2005 and
2006. The basis of preparation of the Company’s filing was consistent
with that of previous years’ filings and the Company’s interpretation of
applicable law. As explained above, the Florida OIR is using a
different formulation than the Company in calculating the amount of excessive
profits realized by the Company, and it may be expected to object to the
Company’s basis of preparation.As of June 30, 2008 and December 31, 2007, $0.5
million was accrued for Florida excessive profits.
12. MERGER
AGREEMENT
On
January 10, 2008, the Company entered into an Agreement and Plan of Merger (the
“Merger Agreement”) with Employers Holdings, Inc., a Nevada corporation
("Employers") and Sapphire Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of Employers ("Merger Sub"), providing for the
acquisition of the Company by Employers.
Pursuant
to the Merger Agreement, each issued and outstanding share of common stock,
$0.01 par value, of the Company, other than dissenting shares or shares owned by
the Company as treasury stock, or by Employers or Merger Sub, will be converted
into the right to receive $12.50 per share in cash. As part of the Merger
Agreement, Merger Sub will merge with and into the Company with the Company
being the surviving corporation in the merger.
The Board
of Directors of the Company and Employers each approved the entry into the
Merger Agreement. The Merger Agreement and related transactions are
subject to the approval of the Company's stockholders, the receipt of other
material regulatory approvals, including from the Florida OIR, and certain other
customary closing conditions.
In
connection with its consideration and approval of the merger, the Board of
Directors of the Company received a written opinion, dated January 10, 2008,
from Raymond James & Associates, Inc. (“Raymond James”), as to the fairness
to its stockholders, from a financial point of view and as of the date of the
opinion, of the $12.50 per share merger consideration. Raymond James
received a $350,000 fee, included in underwriting and acquisition expenses for
the six months ended June 30, 2008, for services rendered in connection with
delivery of the fairness opinion provided to the Company, plus reimbursement of
out-of-pocket expenses. This fee was payable even if Raymond James concluded the
merger consideration was not fair to the Company. The Company has also agreed to
pay Raymond James approximately $2.3 million as an advisory fee for services in
connection with the merger, which is contingent upon the closing of the merger.
The Company also agreed to indemnify Raymond James against certain liabilities,
including liabilities under the federal securities laws.
Employers
may terminate the Merger Agreement under certain circumstances, including if the
Company’s Board of Directors changes or withdraws its recommendation that the
Company stockholders adopt the Merger Agreement or under other circumstances
involving a competing offer to acquire the Company. In connection
with such termination, the Company may be required to pay a fee to Employers.
The amount of such fee would be $8.0 million or $5.0 million depending upon the
timing of agreement to a consummation of a competing transaction. The
Company may terminate the Merger Agreement as a result of Employers’ material
breach of any of its representations, warranties, covenants or agreements under
the Merger Agreement. In connection with Employers’ breach of any of its
covenants or agreements or of its representation and warranty that is has
sufficient funds to complete the transaction, Employers may be required to pay a
termination fee of $8 million to the Company.
In
connection with the Merger Agreement, the Company and Employers entered into
Integration Bonus and Enhanced Severance Agreements, effective as of January 10,
2008 (together, the “Severance Agreements”), with Employers and each of Debra
Cerre-Ruedisili, the Executive Vice President and Chief Operating Officer of the
Company, and Kumar Gursahaney, the Senior Vice President and Chief Financial
Officer of the Company (the “Executives”).
Under the
Severance Agreements, each of the Executive’s employment with the Company will
terminate on the date that is 60 calendar days following the closing of the
merger (the “Separation Date”). The Executives have each agreed to
use best efforts to ensure a smooth transition and integration in the merger and
to perform certain other duties prior to and following the closing of the
merger. In consideration of the above, and subject to the
consummation of the merger, provided that the Executive either remains employed
by the Company through the Separation Date or is terminated by Employers or the
Company other than for cause on or prior to the Separation Date, the Executive
will be entitled to receive a bonus in an amount equal to $200,000 in the case
of Ms. Cerre-Ruedisili and $110,000 in the case of Mr. Gursahaney, as soon as
practicable, but in no event later than, 75 days following the effective time of
the merger.
In
addition, provided that such Executive remains employed by the Company on a date
that is 60 days after the effective time of the merger, or is
terminated by the Company or Employers other than due to death, disability or
for cause at any time following the closing of the merger, then in lieu of
payments set forth in Section 7(c) of such Executive’s employment agreement,
Employers will pay or will cause the Company to pay to such Executive 18 months
of severance pay, each monthly payment in an amount equal to the sum of (i)
one-sixth of annual salary in the case of Ms. Cerre-Ruedisili, and one-eighth of
annual salary in the case of Mr. Gursahaney, each as in effect immediately prior
to such termination and (ii) one-twelfth of the amount of incentive compensation
and bonuses approved and accrued for such Executive in respect of the most
recent fiscal year preceding such termination. The Executives will also be
entitled to continued eligibility to participate in any medical and health plans
or other employee welfare benefit plans that may be provided by the Company for
its senior executive employees for 18 months following the date that is 60 days
after the effective time of the merger.
Each
Executive has also acknowledged and agreed that such Executive will continue to
be subject to the terms and conditions of the restrictive covenants set forth
such Executive’s employment agreement with the Company for the 18-month period
set forth therein (the “Restricted Period”). The Executives have each
further agreed to be available to the Company and Employers and to assist the
Company and Employers during the Restricted Period in performing such duties as
the Company or Employers may request from time to time.
In
addition, all outstanding stock options will fully vest upon a successful
closing of the merger.
On March
4, 2008, a purported class-action complaint was filed in the Circuit Court of
the 15
th
Judicial Circuit, in and for Palm Beach County, Florida, on behalf of Broadbased
Equities, an alleged stockholder of the Company, and all others similarly
situated. The complaint, which names as defendants the Company, the Company’s
directors Fred R. Lowe, Debra Cerre-Ruedisili, Sam A. Stephens, Paul B. Queally,
Donald C. Stewart and Spencer L. Cullen, Jr., and Employers, asserts claims
related to the proposed transaction with Employers for breaches of fiduciary
duty and, in the case of Employers, aiding and abetting such breaches, in
connection with the directors’ determination to sell the Company. The
complaint seeks a declaratory judgment that the defendants have breached their
fiduciary duties to plaintiff and the purported class members and/or, in the
case of Employersaided and abetted such breaches, compensatory and/or rescissory
damages, as well as pre and post-trial interest, as allowed by law, and the
costs and disbursements of the action, including reasonable attorneys’ and
experts’ fees and other costs. The Company believes that these claims are
without merit and is vigorously defending this action, and therefore, no
provision for this litigation has been made in the current financial
statements.
In
contemplation of a potential settlement of the action, we agreed to make certain
additional disclosures to our stockholders in our proxy materials. We
have also entered into an amendment to the Merger Agreement to provide that the
termination fee payable to Parent would be reduced from $8.0 million to $5.0
million in cash in certain circumstances.
On May 8,
2008, the parties entered into a memorandum of understanding providing for a
settlement of the litigation in accordance with the terms described
above. Under the memorandum of understanding, the parties will,
subject to certain conditions, enter into and seek court approval for a
stipulation of settlement. There can be no assurance that any
stipulation will be approved by the court. Any potential settlement
will not affect the amount of merger consideration to be paid to stockholders of
the Company in the merger or, other than the amendment of the provisions
regarding payment of the termination fee referenced above, any other terms of
the Merger Agreement.
On May
27, 2008, the Company postponed the special meeting of stockholders to vote on
the proposed merger with Employers and Merger Sub in order to give the Company
additional time to address the issues raised by the 2008 Notice. The Company
will provide information on the new date for the special meeting of stockholders
promptly after it has been scheduled.
Any
person wishing to acquire control of the Company or any substantial portion of
its outstanding shares would first be required to obtain the approval of the
Florida OIR. In connection with the proposed merger, Employers has
filed a Form A with the Florida OIR requesting the required approvals, which
request is currently pending. The original “deemer” date applicable
to the Florida OIR’s review of Employers’ application
i.e.
, the date on
which such filing would be deemed approved absent action to the contrary, was
June 20, 2008, but has since been extended twice. The current
“deemer” date is the close of business on October 31, 2008. The Company does not
believe that the Employers’ Form A will be approved, unless the Company and the
Florida OIR reach agreement on the amounts, if any, of excessive profits
realized by the Company for some or all of the 2002-2006 accident
years.
13. SUBSEQUENT
EVENT
On August
6, 2008, the Company and its insurance subsidiaries entered into a formal
settlement agreement with the plaintiff, Insurance Commissioner of the
Commonwealth of Pennsylvania as liquidator for Reliance Insurance
Company. This agreement settles all outstanding issues in the
preference litigation described in Case No. 2003-CA010663XX0CAI, Circuit Court
Palm Beach County, Florida (the “Florida lawsuit”). Under the terms
of the settlement, the Company will pay to the liquidator, within 30 days from
the date of the execution of the settlement agreement, the sum of $930,000, as
settlement and payment in full for any and all claims or causes of action
(including but not limited to claims involving alleged preferential transfers)
which the liquidator and Reliance Insurance Company have or may claim to have
against the Company and its insurance subsidiaries. Upon payment of
this settlement amount, the Company is released and discharged from any further
claims and obligations to Reliance Insurance Company and the
liquidator. The Florida lawsuit against the Company will also be
dismissed with prejudice upon payment of the settlement amount. As
described in Note 6 – Commitments and Contingencies, the original accrued
liability for this litigation exceeded the final settlement amount; the accrual
was reduced to the anticipated settlement amount in the second quarter in
anticipation of the settlement. Under the settlement, the Company’s
claim for reinsurance payments which remain due from Reliance Insurance Company
as filed in the Reliance liquidation estate shall remain pending and will be
processed by the liquidator. There are no representations or
guarantees by the liquidator regarding the amount, if any, to be ultimately
received by the Company as a distribution from the estate for such
claim.
I
tem 2. Management’s 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 the accompanying notes appearing in our Annual Report on Form
10-K and elsewhere in this report.
In
addition to historical information, the following discussion contains
forward-looking statements that are subject to risks and uncertainties. Our
actual results in future periods may differ from those referred to herein due to
a number of factors, including the risks described in the sections entitled
“Risk Factors” and “Forward-Looking Statements and Associated Risks” and
elsewhere in this report.
Overview
AmCOMP
Incorporated, a Delaware corporation, is a holding company engaged through its
wholly-owned subsidiaries, including AmCOMP Preferred and AmCOMP Assurance, in
the workers’ compensation insurance business. Our long-term source of
consolidated earnings is principally the income from our workers’ compensation
insurance business and investment income from our investment
portfolio. Workers’ compensation insurance provides coverage for the
statutorily prescribed wage replacement and medical care benefits that employers
are required to make available to their employees injured in the course of
employment. We are licensed as an insurance carrier in 29 states and
the District of Columbia, but currently focus our resources in 17 states that we
believe provide the greatest opportunity for near-term profitable
growth.
Our
results of operations are affected by the following business and accounting
factors and critical accounting policies:
Revenues
Our
revenues are principally derived from:
|
·
|
premiums
we earn from the sale of workers’ compensation insurance policies and from
the portion of the premiums assumed from the National Workers’
Compensation Reinsurance Pool (“NWCRP”) and other state mandated
involuntary pools, which we refer to as gross premiums, less the portion
of those premiums that we cede to other insurers, which we refer to as
ceded premiums. We refer to the difference between gross premiums and
ceded premiums as net premiums; and
|
|
·
|
investment
income that we earn on invested
assets.
|
Expenses
Our
expenses primarily consist of:
|
·
|
insurance
losses and LAE relating to the insurance policies we write directly and to
the portion of the losses assumed from the state mandated involuntary
pools, including estimates for losses incurred during the period and
changes in estimates from prior periods, which we refer to as gross losses
and LAE, less the portion of those insurance losses and LAE that we cede
to our reinsurers, which we refer to as ceded losses and LAE. We refer to
the difference as net losses and
LAE;
|
|
·
|
dividends
paid to policyholders, primarily in administered pricing states where
premium rates are set by the
regulators;
|
|
·
|
commissions
and other underwriting expenses, which consist of commissions we pay to
agents, premium taxes and company expenses related to the production and
underwriting of insurance policies, less ceding commissions reinsurers pay
to us under our reinsurance
contracts;
|
|
·
|
other
operating and general expenses, which include general and administrative
expenses such as salaries, rent, office supplies and depreciation and
other expenses not otherwise classified
separately;
|
|
·
|
assessments
and premium surcharges related to our insurance activities, including
assessments and premium surcharges for state guaranty funds and other
second injury funds; and
|
|
·
|
interest
expense under our bank credit facility and surplus notes issued to third
parties.
|
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”), requires management
to make estimates and assumptions that affect amounts reported in the financial
statements. As more information becomes known, these estimates and assumptions
could change, which would have an impact on the amounts reported in the future.
There were no changes from Critical Accounting Policies as previously disclosed
in our Annual Report on Form 10-K for the fiscal year ended December 31,
2007.
Measurement
of Results
We
evaluate our operations by monitoring key measures of growth and profitability.
We measure our growth by examining our gross premiums. We measure our operating
results by examining our net income, return on equity, and our loss and LAE
expense, dividend and combined ratios. The following provides further
explanation of the key measures that we use to evaluate our
results:
Gross Premiums
Written.
Gross premiums written is the sum of direct premiums
written and assumed premiums written. Direct premiums written is the sum of the
total policy premiums, net of cancellations, associated with policies
underwritten by our insurance subsidiaries. Assumed premiums written represent
our share of the premiums assumed from state mandated involuntary pools. We use
gross premiums written, which excludes the impact of premiums ceded to
reinsurers, as a measure of the underlying growth of our insurance business from
period to period.
Net Premiums
Written.
Net premiums written is the sum of direct premiums
written and assumed premiums written less ceded premiums written. Ceded premiums
written is the portion of our direct premiums that we cede to our reinsurers
under our reinsurance contracts. We use net premiums written, primarily in
relation to gross premiums written, to measure the amount of business retained
after cession to reinsurers.
Gross Premiums
Earned.
Gross premiums earned represent that portion of gross
premiums written equal to the expired portion of the time for which the
insurance policy was in effect during the financial year and is recognized as
revenue. For each day a one-year policy is in force, we earn 1/365th of the
annual premium.
Net Premiums
Earned.
Net premiums earned represents that portion of net
premiums written equal to the expired portion of the time for which the
insurance policy was in effect during the financial year and is recognized as
revenue. It represents the portion of premium that belongs to us on the part of
the policy period that has passed and for which coverage has been provided. Net
premium earned is used to calculate the net loss, policy acquisition expense,
underwriting and other expense and dividend ratios, as indicated
below.
Net Loss
Ratio.
The net loss ratio is a measure of the underwriting
profitability of an insurance company’s business. Expressed as a percentage,
this is the ratio of net losses and LAE incurred to net premiums
earned.
Like many
insurance companies, we analyze our loss ratios on a calendar year basis and on
an accident year basis. A calendar year loss ratio is calculated by dividing the
losses and LAE incurred during the calendar year, regardless of when the
underlying insured event occurred, by the premiums earned during that calendar
year. The calendar year net loss ratio includes changes made during the calendar
year in reserves for losses and LAE established for insured events occurring in
all prior periods. A calendar year net loss ratio is calculated using premiums
and losses and LAE that are net of amounts ceded to reinsurers.
An
accident year loss ratio is calculated by dividing the losses and LAE,
regardless of when such losses and LAE are incurred, for insured events that
occurred during a particular year by the premiums earned for that year. An
accident year net loss ratio is calculated using premiums and losses and LAE
that are net of amounts ceded to reinsurers. An accident year loss ratio for a
particular year can decrease or increase when recalculated in subsequent periods
as the reserves established for insured events occurring during that year
develop favorably or unfavorably, respectively, whereas the calendar year loss
ratio for a particular year will not change in future periods.
We
analyze our calendar year loss ratio to measure our profitability in a
particular year and to evaluate the adequacy of our premium rates charged in a
particular year to cover expected losses and LAE from all periods, including
development (whether favorable or unfavorable) of reserves established in prior
periods. In contrast, we analyze our accident year loss ratios to evaluate our
underwriting performance and the adequacy of the premium rates we charged in a
particular year in relation to ultimate losses and LAE from insured events
occurring during that year.
While
calendar year loss ratios are useful in measuring our profitability, we believe
that accident year loss ratios are more useful in evaluating our underwriting
performance for any particular year because an accident year loss ratio better
matches premium and loss information. Furthermore, accident year loss
ratios are not distorted by adjustments to reserves established for insured
events that occurred in other periods, which may be influenced by factors that
are not generally applicable to all years. The loss ratios provided
in this report are calendar year loss ratios, except where they are expressly
identified as accident year loss ratios.
Policy Acquisition Expense
Ratio.
The policy acquisition expense ratio is a measure of an
insurance company’s operational efficiency in producing and underwriting its
business. Expressed as a percentage, this is the ratio of premium acquisition
expenses to net premiums earned.
Underwriting and Other Expense
Ratio.
The underwriting and other expense ratio is a measure
of an insurance company’s operational efficiency in administering its business.
Expressed as a percentage, this is the ratio of underwriting and other expenses
to net premiums earned. For underwriting and other expense ratio purposes,
underwriting and other expenses of an insurance company exclude investment
expenses and dividends to policyholders.
Dividend
Ratio.
The dividends to policyholders ratio equals policy
dividends incurred in the current year divided by net premiums earned for the
year.
Net Combined
Ratio.
The net combined ratio is a measure of an insurance
company’s overall underwriting profit. This is the sum of the net loss, policy
acquisition expense, underwriting and other expense, and dividend ratios. If the
net combined ratio is at or above 100%, an insurance company cannot be
profitable without investment income, and may not be profitable if investment
income is insufficient.
Return on
Equity.
This percentage is the sum of return on equity (“ROE”)
from underwriting, ROE from investing, the ROE impact of debt and ROE from other
income, multiplied by one minus the effective tax rate. ROE
from underwriting is calculated as one minus the combined ratio, representing
our underwriting profit percentage, multiplied by our operating leverage
(annualized net premiums earned divided by average equity). ROE from
investing is calculated by multiplying the investment yield for the period by
our investment leverage (average investments divided by average
equity). The ROE impact of debt is calculated by multiplying the
effective interest rate on debt for the period by our financial leverage
(average debt divided by average equity). We use return on equity to
measure our growth and profitability. We can compare our return on equity to
that of other companies in our industry to see how we are performing compared to
our competition.
Results
of Operations
Financial
information relating to our unaudited Consolidated Financial Results for the
three and six month periods ended June 30, 2008 and 2007 is as
follows:
|
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease)
2008
over
|
|
|
|
|
|
|
|
|
Increase
(decrease)
2008
over
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
|
(Dollars
in thousands)
|
|
|
(Dollars
in thousands)
|
|
|
Selected
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums written
|
|
$
|
39,459
|
|
|
$
|
50,902
|
|
|
|
(22.5
|
)%
|
|
$
|
103,158
|
|
|
$
|
126,481
|
|
|
|
(18.4
|
)%
|
|
Net
premiums written
|
|
|
37,910
|
|
|
|
49,965
|
|
|
|
(24.1
|
)%
|
|
|
100,111
|
|
|
|
125,035
|
|
|
|
(19.9
|
)%
|
|
Gross
premiums earned
|
|
|
49,958
|
|
|
|
57,359
|
|
|
|
(12.9
|
)%
|
|
|
103,705
|
|
|
|
118,546
|
|
|
|
(12.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
premiums earned
|
|
|
48,409
|
|
|
|
55,424
|
|
|
|
(12.7
|
)%
|
|
|
100,658
|
|
|
|
114,637
|
|
|
|
(12.2
|
)%
|
|
Net
investment income
|
|
|
5,068
|
|
|
|
4,941
|
|
|
|
2.6
|
%
|
|
|
10,377
|
|
|
|
9,803
|
|
|
|
5.9
|
%
|
|
Net
realized investment loss
|
|
|
(82
|
)
|
|
|
(212
|
)
|
|
|
(61.3
|
)%
|
|
|
(180
|
)
|
|
|
(212
|
)
|
|
|
(15.1
|
)%
|
|
Other
income
|
|
|
20
|
|
|
|
18
|
|
|
|
11.1
|
%
|
|
|
35
|
|
|
|
48
|
|
|
|
(27.1
|
)%
|
|
Total
revenue
|
|
|
53,415
|
|
|
|
60,171
|
|
|
|
(11.2
|
)%
|
|
|
110,890
|
|
|
|
124,276
|
|
|
|
(10.8
|
)%
|
|
Loss
and loss adjustment expenses
|
|
|
31,206
|
|
|
|
26,188
|
|
|
|
19.2
|
%
|
|
|
58,762
|
|
|
|
61,106
|
|
|
|
(3.8
|
)%
|
|
Policy
acquisition expenses
|
|
|
8,631
|
|
|
|
11,478
|
|
|
|
(24.8
|
)%
|
|
|
18,696
|
|
|
|
20,681
|
|
|
|
(9.6
|
)%
|
|
Underwriting
and other expenses
|
|
|
7,991
|
|
|
|
6,672
|
|
|
|
19.8
|
%
|
|
|
17,925
|
|
|
|
17,365
|
|
|
|
3.2
|
%
|
|
Dividends
to policyholders
|
|
|
1,855
|
|
|
|
6,357
|
|
|
|
(70.8
|
)%
|
|
|
4,224
|
|
|
|
8,598
|
|
|
|
(50.9
|
)%
|
|
Interest
expense
|
|
|
648
|
|
|
|
901
|
|
|
|
(28.1
|
)%
|
|
|
1,455
|
|
|
|
1,855
|
|
|
|
(21.6
|
)%
|
|
Federal
and state income taxes
|
|
|
1,016
|
|
|
|
3,048
|
|
|
|
(66.7
|
)%
|
|
|
3,280
|
|
|
|
5,124
|
|
|
|
(36.0
|
)%
|
|
Net
Income
|
|
$
|
2,068
|
|
|
$
|
5,527
|
|
|
|
(62.6
|
)%
|
|
$
|
6,548
|
|
|
$
|
9,547
|
|
|
|
(31.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
Financial Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss ratio
|
|
|
64.5
|
%
|
|
|
47.3
|
%
|
|
|
|
|
|
|
58.4
|
%
|
|
|
53.3
|
%
|
|
|
|
|
|
Policy
acquisition expense ratio
|
|
|
17.8
|
%
|
|
|
20.7
|
%
|
|
|
|
|
|
|
18.6
|
%
|
|
|
18.0
|
%
|
|
|
|
|
|
Underwriting
and other expense ratio
|
|
|
16.5
|
%
|
|
|
12.0
|
%
|
|
|
|
|
|
|
17.8
|
%
|
|
|
15.1
|
%
|
|
|
|
|
|
Net
combined ratio, excluding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policyholder
dividends
|
|
|
98.8
|
%
|
|
|
80.0
|
%
|
|
|
|
|
|
|
94.8
|
%
|
|
|
86.4
|
%
|
|
|
|
|
|
Dividend
ratio
|
|
|
3.8
|
%
|
|
|
11.5
|
%
|
|
|
|
|
|
|
4.2
|
%
|
|
|
7.5
|
%
|
|
|
|
|
|
Net
combined ratio, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policyholder
dividends
|
|
|
102.6
|
%
|
|
|
91.5
|
%
|
|
|
|
|
|
|
99.0
|
%
|
|
|
93.9
|
%
|
|
|
|
|
|
Return
on equity
|
|
|
5.1
|
%
|
|
|
15.2
|
%
|
|
|
|
|
|
|
8.1
|
%
|
|
|
13.4
|
%
|
|
|
|
|
Gross premiums written
decreased $11.4 million, or 22.5% for the three months ended June 30,
2008 as compared to the same period in 2007. Direct premiums written
decreased $10.7 million, while assumed premiums written decreased $0.7
million. Direct premiums written decreased due to decreases in
writings in Florida ($5.5 million), Indiana ($2.0 million), Texas ($1.4
million), Wisconsin ($0.7 million), Virginia ($0.6 million), and North Carolina
($0.6 million), combined with other smaller changes. The decrease in
Florida premiums is the result of the 18.4% rate decrease in 2008, and a
reduction in construction-related payrolls, while the number of in-force
policies as of June 30, 2008 from June 30, 2007 remained relatively
flat. Overall, there was only a slight decrease in the number of
in-force policies from June 30, 2007 to June 30, 2008. The average
written premium per in-force policy decreased 12.4% from June 30, 2007 to June
30, 2008. The decrease in assumed premiums written is the result of
decreases in North Carolina, Indiana, Virginia, and South Carolina premiums
assumed through involuntary pools, combined with smaller changes in other
states. Such increases or decreases in premiums assumed from
involuntary pools are the result of changes in the total written premiums in the
pool and/or a change in the Company’s premiums as a percentage of total premiums
written in the state for the same line of business.
Gross
premiums written
decreased $23.3 million,
or 18.4% for the six months ended June 30, 2008 as compared to the same period
in 2007. Direct premiums written decreased $22.2 million, while
assumed premiums written decreased $1.1 million. Direct premiums
written decreased due to decreases in writings in Florida ($15.8 million), Texas
($3.3 million), Indiana ($2.1 million), Georgia ($1.3 million), and North
Carolina ($1.3 million) offset by an increase in Illinois ($1.4 million),
combined with other smaller changes. The decrease in Florida premiums
is the result of the 18.4% rate decrease in 2008, and a reduction in
construction-related payrolls. The decrease in assumed premiums
written is the result of decreases in Indiana, North Carolina, South Carolina,
and Virginia premiums assumed through involuntary pools, combined with smaller
changes in other states. Such increases or decreases in premiums
assumed from involuntary pools are the result of changes in the total written
premiums in the pool and/or a change in the Company’s premiums as a percentage
of total premiums written in the state for the same line of
business.
Net premiums written
decreased
$12.1 million, or 24.1% for the three months ended June 30, 2008 as compared to
the same period in 2007. This decrease is the result of the decrease
in gross premiums written, combined with an increase in ceded premiums written
of $0.6 million. The increase in ceded premiums written is the result
of a change in the 2007 ceded reinsurance agreement to ceding on an earned basis
from ceding on a written basis in 2006, which resulted in reduced 2007 ceded
premiums written. The retention in our 2008 and 2007 excess-of-loss
treaties was unchanged at $2.0 million.
Net
premiums written
decreased $24.9 million,
or 19.9% for the six months ended June 30, 2008 as compared to the same period
in 2007. This decrease is the result of the decrease in gross
premiums written, combined with an increase in ceded premiums written of $1.6
million. The increase in ceded premiums written is the result of a
change in the 2007 ceded reinsurance agreement to ceding on an earned basis from
ceding on a written basis in 2006, which resulted in reduced 2007 ceded premiums
written.
Gross premiums earned
decreased $7.4 million, or 12.9% for the three months ended June 30, 2008
as compared to the same period in 2007. This decrease is primarily
the result of decreases in direct earned premiums, with the largest decreases
being in Florida ($3.9 million), Indiana ($2.0 million), and Texas ($1.1
million), combined with other smaller changes in other
states. Assumed premiums earned also decreased by $0.5 million, as a
result of the decrease in assumed premiums written.
Gross
premiums earned
decreased $14.8 million,
or 12.5% for the six months ended June 30, 2008 as compared to the same period
in 2007. This decrease is primarily the result of decreases in direct
earned premiums, with the largest decreases being in Florida ($11.0 million),
Indiana ($2.8 million), and Texas ($1.5 million), combined with off-setting
smaller changes in other states. Assumed premiums earned also
decreased by $0.9 million, as a result of the decrease in assumed premiums
written.
Net premiums earned
decreased
$7.0 million, or 12.7% for the three months ended June 30, 2008 as compared to
the same period in 2007. This decrease is primarily the result of the decrease
in gross premiums earned. The change in gross premiums earned was
partially offset by a $0.4 million decrease in ceded premiums
earned. Ceded premiums earned are calculated as a percentage of
direct premiums earned, and decreased as a result of the decrease in direct
premiums earned. The ceded reinsurance premiums rates decreased slightly to 3.0%
in 2008 from 3.2% in 2007.
Net
premiums earned
decreased $14.0 million,
or 12.2% for the six months ended June 30, 2008 as compared to the same period
in 2007. This decrease is primarily the result of the decrease in gross premiums
earned. The change in gross premiums earned was partially offset by a
$0.9 million decrease in ceded premiums earned. Ceded premiums earned
are calculated as a percentage of direct premiums earned, and decreased as a
result of the decrease in direct premiums earned.
The table
below sets forth the calculation of net premiums earned and this amount as a
percentage of gross premiums earned:
|
|
|
For
the Three
|
|
Percent
of
|
|
For
the Three
|
|
Percent
of
|
|
For
the Six
|
|
Percent
of
|
|
For
the Six
|
|
Percent
of
|
|
|
|
Months
Ended
|
|
Gross
|
|
Months
Ended
|
Gross
|
|
Months
Ended
|
|
Gross
|
|
Months
Ended
|
|
Gross
|
|
|
|
June
30,
|
|
Premiums
|
|
June
30,
|
|
Premiums
|
|
June
30,
|
|
Premiums
|
|
June
30,
|
|
Premiums
|
|
|
|
2008
|
|
Earned
|
|
2007
|
|
Earned
|
|
2008
|
|
Earned
|
|
2007
|
|
Earned
|
|
|
|
(Dollars
in thousands)
|
|
|
(Dollars
in thousands)
|
|
|
Gross
premiums earned
|
|
$
|
49,958
|
|
|
|
100.0
|
%
|
|
$
|
57,359
|
|
|
|
100.0
|
%
|
|
$
|
103,705
|
|
|
|
100.0
|
%
|
|
$
|
118,546
|
|
|
|
100.0
|
%
|
|
Excess
reinsurance premiums
|
|
|
(1,549
|
)
|
|
|
(3.1
|
%)
|
|
|
(1,935
|
)
|
|
|
(3.4
|
%)
|
|
|
(3,047
|
)
|
|
|
(2.9
|
%)
|
|
|
(3,880
|
)
|
|
|
(3.3
|
%)
|
|
Quota
share reinsurance premiums
|
|
|
–
|
|
|
|
0.0
|
%
|
|
|
–
|
|
|
|
0.0
|
%
|
|
|
–
|
|
|
|
0.0
|
%
|
|
|
(29
|
)
|
|
|
0.0
|
%
|
|
Net
premiums earned
|
|
$
|
48,409
|
|
|
|
96.9
|
%
|
|
$
|
55,424
|
|
|
|
96.6
|
%
|
|
$
|
100,658
|
|
|
|
97.1
|
%
|
|
$
|
114,637
|
|
|
|
96.7
|
%
|
Net investment income
increased $0.1 million or 2.6% for the three months ended June 30, 2008
as compared to the same period in 2007. The increase is primarily attributable
to a 2.5% increase in the average balance of invested assets for the three
months ended June 30, 2008 as compared to the same period in
2007. The additional funds available for investment were provided by
cash generated from operating activities.
Net
investment income
increased $0.6 million
or 5.9% for the six months ended June 30, 2008 as compared to the same period in
2007. The increase is attributable to a 2.6% increase in the average balance of
invested assets for the six months ended June 30, 2008 as compared to the same
period in 2007. The additional funds available for investment were
provided by cash generated from operating activities. Additionally,
the current yield increased to 5.2% as of June 30, 2008 from 4.7% at June 30,
2007.
Losses and loss adjustment expenses
increased $5.0 million, or 19.2% for the three months ended June 30, 2008
as compared to the same period in 2007. Loss and loss adjustment expenses were
64.5% and 47.3% of net premiums earned for the three months ended June 30, 2008
and 2007, respectively. These changes are the result of two
factors. First, there was a reduction in the redundancies reported in
the three months ended June 30, 2008 as compared to the same period in 2007.
Reflected in our losses and LAE in the three months ended June 30, 2008 is a
$6.7 million redundancy, net of reinsurance, for years prior to
2008. Excluding business assumed from state mandated pools, the
redundancy in the three months ended June 30, 2008 was attributable to prior
year reserve decreases in Florida ($2.4 million), Tennessee ($2.3 million),
North Carolina ($1.9 million), Georgia ($1.1 million), and Illinois ($1.0
million), offset by a deficiency in Indiana ($2.1 million), combined with less
significant changes in several other states. The accident years with
the largest redundancies were 2006 ($4.0 million), 2007 ($1.0 million) and 2004
($1.0 million). The redundancy for the three months ended June 30,
2008 was less than the redundancy of $13.0 million for the comparable period in
2007. Second, loss and loss adjustment expenses increased as a result
of an increase in the current net accident year loss ratio. The
current net accident year loss ratio, excluding business assumed from state
mandated pools and adjusting and other expense, increased to 68.7% for the six
months ended June 30, 2008 from 63.3% for the three months ended March 31,
2008. In 2007, the current net accident year loss ratio, excluding
business assumed from state mandated pools and adjusting and other expense,
increased to 66.2% for the six months ended June 30, 2007 from 65.2% for the
three months ended March 31, 2007. Additionally, adjusting and other
expense was 3.9% of net premiums earned for the three months ended June 30,
2008, up from 3.8% for the comparable period in 2007.
Losses
and loss adjustment expenses
decreased $2.3 million,
or 3.8% for the six months ended June 30, 2008 as compared to the same period in
2007. Loss and loss adjustment expenses were 58.4% and 53.3% of net premiums
earned for the six months ended June 30, 2008 and 2007,
respectively. These changes are the result of a three
factors. First, there was a reduction in the redundancies reported in
the six months ended June 30, 2008 as compared to the same period in 2007.
Reflected in our losses and LAE in the six months ended June 30, 2008 is a $13.5
million redundancy, net of reinsurance, for years prior to
2008. Excluding business assumed from state mandated pools, the
redundancy in the six months ended June 30, 2008 was attributable to prior year
reserve decreases in Florida ($4.1 million), Tennessee ($3.3 million), North
Carolina ($2.8 million), Georgia ($1.7 million), Illinois ($1.2 million), and
Texas ($1.0 million), offset by an increase in Indiana ($1.7 million), combined
with less significant decreases in several other states. The accident
years with the largest redundancies were 2006 ($5.9 million), 2007 ($3.3
million), 2005 ($2.1 million) and 2004 ($1.3 million). The redundancy
for the six months ended June 30, 2008 was less than the redundancy of $18.9
million for the comparable period in 2007. Second, loss and loss
adjustment expenses increased as a result of an increase in the current net
accident year loss ratio. The current net accident year loss ratio,
excluding business assumed from state mandated pools and adjusting and other
expense, increased to 68.7% for the six months ended June 30, 2008 from 66.2%
for the six months ended June 30, 2007. Third, loss and loss
adjustment expenses decreased as a result of the decrease in net premiums earned
discussed above. Additionally, adjusting and other expense was 3.9%
of net premiums earned for the six months ended June 30, 2008, down from 4.5%
for the comparable period in 2007.
Policy acquisition expenses
decreased $2.8 million, or 24.8% for the three months ended June 30, 2008
as compared to the same period in 2007. Policy acquisition expenses decreased to
17.8% from 20.7% of net premiums earned for the three months ended June 30, 2008
and 2007, respectively. This decrease is primarily the result of
decreases in commissions ($1.3 million) and assessments ($1.5
million). The decrease in commissions is the result of decreases in
direct and assumed commissions due to decreases in premiums
earned. The decrease in the assessment expense is the result of the
decrease in direct earned premiums, and a decrease in Georgia assessment
expense. During the three months ended June 30, 2008, there was a 34%
decrease in the Georgia Subsequent Injury Trust Fund assessment
rate. During the three months ended June 30, 2007, Georgia
assessments increased as a result of a 42% increase in Georgia Subsequent Injury
Trust Fund assessment rate. In addition, during the second quarter of
2008 there was also a decrease in the Georgia guarantee fund assessment to
reduce the accrual to the Company’s current estimate of assessments to be made
based on insolvencies.
Policy
acquisition decreased $2.0 million, or 9.6% for the six months ended June 30,
2008 as compared to the same period in 2007. This decrease is
primarily the result of decreases in commissions ($0.7 million) and assessments
($1.1 million). The decrease in commissions is the result of
decreases in direct and assumed commissions. The decrease in direct
commissions is the result of a decrease in direct premiums earned, offset by a
decrease to the commission accrual booked in the first six months of
2007. The decrease in assumed commissions is the result of a decrease
in assumed premiums earned. The decrease in the assessment expense is
the result of the decrease in direct earned premiums, and a decrease in Georgia
assessment expense. Georgia assessment expense decreased as a result
of the Georgia Subsequent Injury Trust Fund assessment rate changes noted above
and the current year decrease in the Georgia guarantee fund
assessment. These decreases in assessments were partially offset by
an increase in South Carolina assessments. In the first six months of
2007 the Company received notification that the unpaid portion of the South
Carolina Second Injury Fund assessment would not be billed, which resulted in a
$0.9 million expense reduction in 2007. Policy acquisition expenses
increased to 18.6% from 18.0% of net premiums earned for the six months ended
June 30, 2008 and 2007, respectively.
Underwriting and other
expenses
increased $1.3 million, or 19.8% for the three months ended June
30, 2008 as compared to the same period in 2007. Underwriting and other expenses
were 16.5% and 12.0% of net premiums earned for the three months ended June 30,
2008 and 2007, respectively. The increase in underwriting and other
expense is primarily attributable to an increase in bad debt expense, offset by
other smaller changes. The increase in bad debt expense is the result
of a change in the second quarter of 2007 in the method used to determine the
allowance for doubtful accounts. The method used was refined to limit
the impact that non-cash premium adjustments have on the allowance calculated,
as such premium adjustments were already accounted for in the earned but
unbilled premium calculation.
Underwriting
and other expenses increased $0.6 million, or 3.2% for the six months ended June
30, 2008 as compared to the same period in 2007. Underwriting and other expenses
were 17.8% and 15.1% of net premiums earned for the six months ended June 30,
2008 and 2007, respectively. The increase in underwriting and other
expense is primarily attributable to an increase in bad debt expense, offset by
other smaller changes. In the first six months of 2007
refinements were made to the allowance for bad debt calculation as discussed
above and to increase the allowance to give consideration for balances less than
90 days old which may become uncollectible. These refinements
resulted in negative year-to-date bad debt expense as of June 30,
2007.
Dividends to policyholders
decreased $4.5 million, or 70.8% for the three months ended June 30, 2008 as
compared to the same period in 2007. Dividends to policyholders were
3.8% and 11.5%, of net premiums earned for the three months ended June 30, 2008
as compared to the same period in 2007, respectively. During the
second quarter of 2007 the Company booked a $4.1 million Florida excess profits
dividend accrual based on its statutory underwriting results pursuant to the
applicable Florida statute and regulations. (This accrual was later
reversed in the third quarter of 2007.) Excluding excess profits
dividends, the decrease is primarily a result of a decrease in direct premiums
earned. Excluding excess profits dividends, the percentage of average
direct premiums written in Florida on a dividend plan increased to 50.3% as of
June 30, 2008 from 40.4% as of June 30, 2007. The percentage of
average direct premiums written in Wisconsin on a dividend plan increased to
91.0% as of June 30, 2008 from 88.5% as of June 30, 2007. Excluding
excess profits dividends, the company wide average direct premiums written on a
dividend plan increased to 27.8% as of June 30, 2008 from 26.2% as of June 30,
2007.
Dividends
to policyholders decreased $4.4 million, or 50.9% for the six months ended June
30, 2008 as compared to the same period in 2007. Dividends to
policyholders were 4.2% and 7.5%, of net premiums earned for the six months
ended June 30, 2008 as compared to the same period in 2007,
respectively. The decrease in dividend expense is the result of the
$4.1 million Florida excess profits dividend accrual booked in the second
quarter of 2007 and a decrease in direct premiums earned. Excluding
excess profits dividends, the percentage of direct premiums written in Florida
on a dividend plan increased to 51.3% as of June 30, 2008 from 38.9% as of June
30, 2007. The percentage of direct premiums written in Wisconsin on a
dividend plan increased to 90.8% as of June 30, 2008 from 88.9% as of June 30,
2007. Excluding excess profits dividends, the company wide direct
premiums written on a dividend plan increased to 27.9% as of June 30, 2008 from
25.5% as of June 30, 2007.
Interest expense
decreased
$0.3 million, or 28.1% for the three months ended June 30, 2008 as compared to
the same period in 2007. This decrease is primarily the result of a
decrease in the weighted average interest rate on variable rate notes payable to
6.6% as of June 30, 2008 from 9.3% as of June 30, 2007.
Interest
expense
decreased
$0.4 million, or 21.6% for the six months ended June 30, 2008 as compared to the
same period in 2007. This decrease is primarily the result of a
decrease in the weighted average interest rate on variable rate notes
payable.
Federal and state income taxes
decreased $2.0 million, or 66.7% for the three months ended June 30, 2008 as
compared to the same period in 2007. Federal and state income taxes
were 32.9% and 35.5% of pre-tax income for the three months ended June 30, 2008
and 2007, respectively. The decrease in tax expense is primarily a
result of a decrease in pre-tax income. The decrease in the effective
rate is primarily due to an increase in tax-exempt interest expense as a
percentage of pre-tax income, partially offset by an increase in non-deductible
meals and entertainment as a percentage of pre-tax income. As pre-tax
income decreased in the three months ended June 30, 2008 from the comparable
period in 2007, these items increased as a percentage of pre-tax
income.
Federal
and state income taxes decreased $1.8 million, or 36.0% for the six months ended
June 30, 2008 as compared to the same period in 2007. Federal and
state income taxes were 33.4% and 34.9% of pre-tax income for the six months
ended June 30, 2008 and 2007, respectively. The decrease in tax
expense is primarily a result of a decrease in pre-tax income. The
decrease in the effective rate is primarily due to an increase in tax-exempt
interest expense as a percentage of pre-tax income, as a result of the decrease
in pre-tax income.
Net income
decreased
$3.5 million or 62.6% for the three months ended June 30, 2008 as compared
to the same period in 2007. A decrease in net premiums earned of $7.0
million, an increase in loss and LAE of $5.0 million, and an increase in
underwriting and other expenses of $1.3 million, offset by a decrease in
dividends to policyholders of $4.5 million, a decrease in policy acquisition
expenses of $2.8 million, and a decrease in federal and state income taxes of
$2.0 million, primarily comprised the change.
Net
income decreased $3.0 million or 31.4% for the six months ended June 30,
2008 as compared to the same period in 2007. A decrease in net
premiums earned of $14.0 million, offset by a decrease in dividends to
policyholders of $4.4 million, a decrease in loss and LAE of $2.3 million, a
decrease in policy acquisition expenses of $2.0 million, and a decrease in
federal and state income taxes of $1.8 million, primarily comprised the
change.
Return on Equity -
Our
annualized return on equity for the three months ended June 30, 2008 and 2007 is
5.1% and 15.2%, respectively.
Our
annualized return on equity for the six months ended June 30, 2008 and 2007 is
8.1% and 13.4%, respectively.
The Company’s financial results also
have been negatively affected by the pending merger with
Employers. Significant efforts were made by the Company and Employers
to educate agents, insureds and employees, to allow for a smooth transition
following the pending sale of the Company. The uncertainty of timing
of the merger has interfered with the performance of agents and employees and
has affected the perceptions of the Company by insureds and potential
insureds. This has had a negative impact on the Company’s ability to
efficiently and effectively market its products and has been a significant
factor in the reported decline in net premiums earned. In addition,
the Company has incurred documented out-of-pocket expenses in excess of $1.0
million related to the pending merger, consisting of legal, investment banking,
other professional fees and filing fees, as well as unquantified internal
costs.
Liquidity
and Capital Resources
We are a
holding company and our insurance subsidiaries are the primary source of funds
for our operations. We have historically received dividend payments solely from
Pinnacle Administrative and Pinnacle Benefits. These dividend payments are
funded by fee payments under service agreements between Pinnacle Administrative
and Pinnacle Benefits and our insurance subsidiaries. Fee payments under the
service agreements are subject to review by Florida OIR, as are dividend
payments by our insurance subsidiaries. There are no restrictions on the payment
of dividends by our non-insurance subsidiaries, Pinnacle Administrative,
Pinnacle Benefits and AmSERV, Inc., other than customary state corporation
laws regarding solvency. The cash requirements of these non-insurance
subsidiaries are primarily for the payment of salaries, employee benefits and
other operating expenses.
Liquidity
The
primary source of cash flow for Pinnacle Benefits and Pinnacle Administrative is
service fees paid by our insurance subsidiaries. Our insurance subsidiaries’
primary cash sources are insurance premiums, investment income and the proceeds
from the sale, redemption or maturity of invested assets. The cash requirements
of the insurance subsidiaries are primarily for the payment of losses and LAE,
dividends, guaranty fund and second-injury fund assessments, commissions,
reinsurance premiums, premium taxes, services fees, interest on surplus notes
and purchase of investment securities. We maintain cash reserves to meet our
obligations that comprise current outstanding loss and LAE, reinsurance
premiums, interest payments on notes payable, and administrative expenses. Due
to the uncertainty regarding the timing and amount of settlement of unpaid
losses, the liquidity requirements of the insurance subsidiaries vary. The
insurance subsidiaries’ investment guidelines and investment portfolio take into
account historical payout patterns. If loss payments were to accelerate beyond
our ability to fund them from current operating cash flows, we would need to
liquidate a portion of our investment portfolio and/or arrange for financing.
For example, several catastrophic injuries occurring in a relatively short
period of time could cause such a liquidity strain. Our insurance subsidiaries
have historically purchased excess reinsurance to mitigate the effects of large
losses and to help stabilize liquidity. These reinsurance agreements require
initial outlays of reinsurance premiums, based on premiums written, which is in
advance of our receipt of cash premiums, and the reinsurers reimburse us after
losses and LAE are paid by us. These reinsurance agreements exclude coverage for
losses arising out of terrorism and nuclear, biological and chemical
attacks.
Capital
Resources
We have
historically met our cash requirements and financed our growth principally from
operations, the proceeds of borrowings, investment income and in 2006 the
initial public offering completed February 10, 2006 for $48.0 million. Cash
flow is summarized in the table below.
|
|
|
For
the Six Months
|
|
|
|
|
Ended
June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
Cash
and cash equivalents (used in) provided by:
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(466
|
)
|
|
$
|
11,491
|
|
|
Investing
activities
|
|
|
(14,111
|
)
|
|
|
(18,491
|
)
|
|
Financing
activities
|
|
|
(970
|
)
|
|
|
(802
|
)
|
|
Change
in cash and cash equivalents
|
|
$
|
(15,547
|
)
|
|
$
|
(7,802
|
)
|
Reinsurance
We have
historically operated with a limited amount of capital and, as a result, have
made extensive use of the reinsurance market to maintain our net exposures
within our capital resources. We have ceded premiums and losses to unaffiliated
insurance companies under quota share, excess of loss and catastrophe
reinsurance agreements. We evaluate the financial condition of our reinsurers
and monitor various credit risks to minimize our exposure to losses from
reinsurer insolvencies. However, we remain obligated for amounts ceded
irrespective of whether the reinsurers meet their obligations. We ceded a high
percentage of our premiums and the associated losses prior to July 1, 2004.
A failure of one of our reinsurers to pay could have a significant adverse
effect on our capital and our financial condition and results of operations. At
June 30, 2008 and December 31, 2007, reinsurance recoverables on paid and unpaid
losses and LAE were $63.8 million and $67.8 million, respectively. Our
largest recoverable from a single reinsurer as of June 30, 2008 was
$29.0 million owed to us by Continental Casualty Company, a subsidiary of CNA
Financial Corporation, representing 17.7% of our total stockholders’ equity as
of that date. Of the $29.0 million, $0.7 million was the current
recoverable on paid losses. The balance of $28.3 million is recoverable
from Continental Casualty Company on losses that may be paid by us in the future
and therefore is not currently due. The unpaid losses will become current as we
pay the related claimants.
As a
result of raising $32.0 million from surplus notes issued by one of our
insurance subsidiaries, we eliminated the need for quota share reinsurance on
new and renewal business since July 1, 2004. In addition, we increased our
retention in our excess of loss reinsurance program to $2.0 million in 2005
and thereafter.
Investments
Our
insurance subsidiaries employ an investment strategy that emphasizes asset
quality to minimize the credit risk of our investment portfolio. As
economic conditions change, our insurance subsidiaries’ investment committees
recommend strategy changes and adjustments to our investment
portfolio. We have maintained a high portion of our portfolio in
short-term investments recently to mitigate the risk of falling prices for fixed
maturity securities if rates should rise. Changes in interest rates
impact our investment income and cause fluctuations in the carrying values of
our available-for-sale investments (these changes are reflected as changes in
stockholders’ equity, net of tax).
We may
sell securities due to changes in the investment environment, our expectation
that fair value may deteriorate further, our desire to reduce our exposure to an
issuer or an industry and changes in the credit quality of the security. In
addition, depending on changes in prevailing interest rates, our investment
strategy may shift toward long-term securities, and we may adjust that portion
of our investment portfolio that is held-to-maturity rather than
available-for-sale. Except for recognizing other-than-temporary impairments, our
held-to-maturity portfolio is carried at amortized cost because we have the
ability and intent to hold those securities to maturity. As of June 30, 2008 and
December 31, 2007, 77.6% and 77.9%, respectively, of our entire portfolio was
classified as available-for-sale.
The
amount and types of investments that may be made by our insurance subsidiaries
are regulated under the Florida Insurance Code and the rules and regulations
promulgated by the Florida OIR. As of June 30, 2008 and December 31,
2007, our insurance subsidiaries’ combined portfolio consisted entirely of
investment grade fixed-income securities. As of June 30, 2008, our
investments (excluding cash and cash equivalents) had an average duration of
4.2 years, and the bond portfolio was heavily weighted toward short- to
intermediate-term securities.
Our
insurance subsidiaries employ Regions Bank to act as their independent
investment advisor. Regions Bank follows the insurance subsidiaries’
written investment guidelines based upon strategies approved by our insurance
subsidiaries’ boards of directors. Our insurance subsidiaries have no
investments in common stock (other than AmCOMP Preferred’s investment in AmCOMP
Assurance and certain institutional money market accounts), preferred stock,
real estate, asset-backed securities (other than mortgage-backed) or derivative
securities. Additionally, the Company had no subprime or auction rate
securities exposure at June 30, 2008.
In early
2008, several bond insurers had their credit ratings downgraded or placed under
review by the major nationally recognized credit rating agencies. As
the Company has traditionally not relied upon bond insurers for credit rating
but instead bought bonds with underlying ratings that are considered investment
grade, we do not expect a material impact to our investment portfolio or
financial position as a result of the problems currently facing bond
insurers.
Regions
Bank has discretion to enter into investment purchase transactions within our
insurance subsidiaries’ investment guidelines. In the case of sales
of securities prior to maturity or the acquisition of securities that differ
from the types of securities already present in the portfolio, Regions Bank is
required to obtain approval from our insurance subsidiaries’ executive officers,
who report regularly to our insurance subsidiaries’ investment committees, prior
to executing the transactions. Regions Bank’s fee is based on the
amount of assets in the portfolio and is not dependent upon investment results
or portfolio turnover.
The table
below contains information concerning the composition of our investment
portfolio at June 30, 2008:
|
|
|
|
|
|
|
|
|
Percentage
of Carrying Amount
(1)
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Bonds:
(2)
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$
|
24,142
|
|
|
|
3.1
|
%
|
|
|
5.4
|
%
|
|
Agencies
|
|
|
23,988
|
|
|
|
4.9
|
|
|
|
5.3
|
|
|
Municipalities
(3)
|
|
|
85,124
|
|
|
|
4.9
|
|
|
|
19.0
|
|
|
Corporate
“A” rated and above
|
|
|
126,244
|
|
|
|
5.1
|
|
|
|
28.1
|
|
|
Corporate
“BBB”/“Baa” rated
|
|
|
16,347
|
|
|
|
5.5
|
|
|
|
3.7
|
|
|
Mortgage-backed
securities
|
|
|
158,205
|
|
|
|
5.5
|
|
|
|
35.2
|
|
|
Total
Bonds
|
|
$
|
434,050
|
|
|
|
5.1
|
%
|
|
|
96.7
|
%
|
|
Cash
and cash equivalents
|
|
|
15,144
|
|
|
|
2.3
|
|
|
|
3.3
|
|
|
Total
|
|
$
|
449,194
|
|
|
|
5.0
|
%
|
|
|
100.0
|
%
|
|
(1)
|
Carrying
amount is amortized cost for bonds held-to-maturity. Carrying
value is fair value for bonds available-for-sale. As of
June 30, 2008, $336.7 million of our bonds was classified as
available-for-sale and $97.4 million was classified as
held-to-maturity.
|
|
(2)
|
Standard &
Poor’s highest rating is “AAA” and signifies that a company’s capacity to
meet its financial commitment on the obligation is extremely strong,
followed by “AA” (very strong), “A” (strong) and “BBB”
(adequate). Ratings may be modified by the addition of a plus
or minus sign to show relative standing within the major rating
categories. Moody’s Investors Service, Inc.’s highest
rating is “Aaa” (best quality), followed by “Aa” (high quality), “A”
(strong) and “Baa” (adequate). For investments with split
ratings, the higher rating has been
used.
|
|
(3)
|
The
municipal bonds’ yields to maturity have been shown on a tax-equivalent
basis. The tax impact was 1.3% on the yield to maturity for
municipal bonds and 0.2% on the yield to maturity for total cash and
investments.
|
The table
below sets forth the maturity profile of our bond portfolio at amortized cost
and fair values as of June 30, 2008 (in thousands):
|
|
|
Available-for-sale
|
|
|
Held-to-maturity
|
|
|
|
|
Amortized
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
|
|
Cost
|
|
|
Fair
Value
|
|
|
Cost
|
|
|
Fair
Value
|
|
|
Years
to maturity
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
or less
|
|
$
|
45,136
|
|
|
$
|
45,342
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
After
one through five
|
|
|
117,611
|
|
|
|
117,372
|
|
|
|
–
|
|
|
|
–
|
|
|
After
five through ten
|
|
|
107,825
|
|
|
|
107,139
|
|
|
|
–
|
|
|
|
–
|
|
|
After
ten
|
|
|
4,964
|
|
|
|
5,992
|
|
|
|
–
|
|
|
|
–
|
|
|
Mortgage-backed
securities
|
|
|
61,195
|
|
|
|
60,824
|
|
|
|
97,381
|
|
|
|
97,379
|
|
|
Total
|
|
$
|
336,731
|
|
|
$
|
336,669
|
|
|
$
|
97,381
|
|
|
$
|
97,379
|
|
|
(1)
|
Based
on the stated maturities of the securities. Actual maturities may differ
as obligors may have the right to call or prepay
obligations.
|
We
continuously monitor our portfolio to preserve principal values whenever
possible. An investment in a fixed maturity security is impaired if
its fair value falls below its book value. All securities in an
unrealized loss position are reviewed to determine whether the impairment is
other-than-temporary. Factors considered in determining whether a
decline is considered to be other-than-temporary include length of time and the
extent to which fair value has been below book value, the financial condition
and near-term prospects of the issuer, and our ability and intent to hold the
security until its expected recovery.
The
following table summarizes, for all fixed maturity securities in an unrealized
loss position at June 30, 2008, the aggregate fair value and gross unrealized
loss by length of time the security has continuously been in an unrealized loss
position (in thousands):
|
|
|
|
|
|
Unrealized
|
|
|
Number
of
|
|
|
|
|
Fair
Value
|
|
|
Losses
|
|
|
Issues
|
|
|
Less
than 12 months:
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
Agency
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Municipalities
|
|
|
47,165
|
|
|
|
(441
|
)
|
|
|
24
|
|
|
Corporate
debt securities
|
|
|
58,663
|
|
|
|
(1,030
|
)
|
|
|
35
|
|
|
Mortgage-backed
securities
|
|
|
78,041
|
|
|
|
(1,148
|
)
|
|
|
30
|
|
|
Total
|
|
$
|
183,869
|
|
|
$
|
(2,619
|
)
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater
than 12 months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
Agency
|
|
|
4,001
|
|
|
|
(14
|
)
|
|
|
1
|
|
|
Municipalities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Corporate
debt securities
|
|
|
15,466
|
|
|
|
(820
|
)
|
|
|
10
|
|
|
Mortgage-backed
securities
|
|
|
8,648
|
|
|
|
(223
|
)
|
|
|
7
|
|
|
Total
|
|
$
|
28,115
|
|
|
$
|
(1,057
|
)
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
Agency
|
|
|
4,001
|
|
|
|
(14
|
)
|
|
|
1
|
|
|
Municipalities
|
|
|
47,165
|
|
|
|
(441
|
)
|
|
|
24
|
|
|
Corporate
debt securities
|
|
|
74,129
|
|
|
|
(1,850
|
)
|
|
|
45
|
|
|
Mortgage-backed
securities
|
|
|
86,689
|
|
|
|
(1,371
|
)
|
|
|
37
|
|
|
Total
fixed maturity securities
|
|
$
|
211,984
|
|
|
$
|
(3,676
|
)
|
|
|
107
|
|
At June
30, 2008, there were no investments in fixed maturity securities with individual
material unrealized losses. One other-than-temporary impairment
totaling $0.1 million was recorded on an investment during the six months ended
June 30, 2008. Substantially all the unrealized losses on the fixed
maturity securities are interest rate related.
We
believe our future cash flow generated by operations and our cash and
investments will be sufficient to fund continuing operations, service our
outstanding obligations and provide for required capital expenditures for at
least the next 12 months.
Litigation
AmCOMP
along with AmCOMP Preferred and AmCOMP Assurance are collectively defendants in
an action commenced in Florida by the Insurance Commissioner of Pennsylvania,
acting in the capacity as liquidator of Reliance Insurance
Company. The complaint in this action alleges that preferential
payments were made by Reliance Insurance Company under the formerly existing
reinsurance agreement with AmCOMP Preferred and AmCOMP Assurance and seeks
damages in the amount of approximately $2.3 million. AmCOMP,
along with AmCOMP Preferred and AmCOMP Assurance, has filed a response and has
made various motions addressed to these complaints. The Company,
based on the advice of counsel, believes that it has a variety of factual and
legal defenses, including but not limited to a right of offset related to the
statement of claim filed by the Company and AmCOMP Preferred in the Reliance
Insurance Company liquidation proceeding for the recovery of approximately
$7.8 million under the reinsurance agreement. However, on
November 14, 2007 the trial court in Florida granted the plaintiff liquidator’s
motion for partial summary judgment, finding that the approximate $2.3 million
in payments were “preferential” under Pennsylvania law. This order is
not yet a final, appealable order under Florida law. There are a
number of remaining issues, including AmCOMP’s affirmative defenses, which must
be determined by the court before a final order or judgment could be
entered. Although the ultimate results of these legal actions and
related claims (including any future appeals) are uncertain, the Company had
accrued liabilities of $0.9 million and $1.2 million, as of June 30, 2008 and
December 31, 2007, respectively, which are included in accounts payable and
accrued expenses, related to those matters. The decrease in the
accrual is the result of the Company’s further analysis of the amount at which
this matter may be resolved.
Other
In
August 1998, in an effort to expand its customer base, AmCOMP began selling
insurance policies for a third party insurance company. This arrangement
included insurance policies with effective dates of August 1, 1998 through
November 1, 2000. Pinnacle Administrative performed marketing,
underwriting, loss prevention and other administrative functions, and Pinnacle
Benefits provided claim adjusting services, including the payment of claims,
related to these policies. Included in other assets at June 30, 2008 is
approximately $2.1 million in loss and LAE payments on the administered business
that is currently due from the third-party insurer. Management is
currently in discussion with the insurer regarding payment, and expects to
recover the balance due.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements.
Effects
of Inflation
The
effects of inflation could impact our financial statements and results of
operations. Our estimates for losses and loss expenses include assumptions about
future payments for closure of claims and claims handling expenses, such as
medical treatments and litigation costs. To the extent inflation causes these
costs to increase above reserves established, we will be required to increase
reserves for losses and loss expenses with a corresponding reduction in our
earnings in the period in which the deficiency is identified. We consider
inflation in the reserving process by reviewing cost trends and our historical
reserving results. Additionally, an actuarial estimate of increased costs is
considered in setting adequate rates, especially as it relates to medical and
hospital rates where historical inflation rates have exceeded general inflation
rates. We are able to mitigate the effects of inflation on medical costs due to
the fee schedules imposed by most of the states where we do business and the
utilization of preferred provider networks. However, providers are not obligated
to invoice us per the fee schedule or the negotiated rate. We review medical
bills for appropriate coding and pay the lower of the negotiated or fee schedule
rate. Disputes are resolved by negotiation.
Fluctuations
in rates of inflation also influence interest rates, which in turn impact the
fair value of our investment portfolio and yields on new investments. Operating
expenses, including payrolls, are impacted to a certain degree by the inflation
rate.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accounting principles generally accepted in the United
States, and expands disclosures about fair value measurements. This statement
addresses how to calculate fair value measurements required or permitted under
other accounting pronouncements. Accordingly, this statement does not require
any new fair value measurements. However, for some entities, the application of
this statement will change current practice. This interpretation was adopted by
the Company on January 1, 2008. FASB Staff Position (FSP)FAS 157-2,
Effective Date of FASB
Statement No. 157
(“FSP 157-2”), delays the effective date of SFAS
No. 157 to fiscal years beginning after November 15, 2008 for nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis.
The delay is intended to allow the Board and constituents additional time to
consider the effect of various implementation issues that have arisen, or that
may arise, from the application of FAS 157. The partial adoption of SFAS
No. 157 had no impact on our financial position or results of
operations.
In
February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities
(“SFAS No. 159”), which permits entities
to elect to measure many financial instruments and certain other items at fair
value. Upon adoption of SFAS No. 159, an entity may elect the fair value
option for eligible items that exist at the adoption date. Subsequent to the
initial adoption, the election of the fair value option should only be made at
the initial recognition of the asset or liability or upon a re-measurement event
that gives rise to the new basis of accounting. All subsequent changes in fair
value for that instrument are reported in earnings. SFAS No. 159 does not
affect any existing accounting literature that requires certain assets and
liabilities to be recorded at fair value nor does it eliminate disclosure
requirements included in other accounting standards. This interpretation
was adopted by the Company on January 1, 2008. We have elected not to implement
the fair value option with respect to any existing assets or liabilities;
therefore, the adoption of SFAS No. 159 had no impact on our financial position
or results of operations.
In
December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
. SFAS
No. 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree and recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase. SFAS
No. 141(R) also sets forth the disclosures required to be made in the
financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.
Accordingly, SFAS No. 141(R) will be applied by the Company to business
combinations occurring on or after January 1, 2009.
In May
2008, the FASB issued Statement No. 162,
The Hierarchy of Generally Accepted
Accounting Principles
(“SFAS No. 162”). SFAS No. 162 identifies
the sources of accounting principles and the framework for selecting the
principles used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles in the United States. This Statement shall be effective 60 days
following the Security and Exchange Commission’s approval of the Public Company
Accounting Oversight Board (PCAOB) amendments to AU Section 411,
The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles
. The Company
does not believe the adoption will have a material impact on its financial
condition or results of operations.
Forward-Looking
Statements and Associated Risks
This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) relating to our
operations and our results of operations that are based on our current
expectations, estimates and projections. Words such as “expects,” “intends,”
“plans,” “projects,” “believes,” “estimates” and similar expressions are used to
identify these forward-looking statements. These statements are not guarantees
of future performance and involve risks, uncertainties and assumptions that are
difficult to predict. Forward-looking statements are based upon assumptions as
to future events that may not prove to be accurate. Actual outcomes and results
may differ materially from what is expressed or forecast in these
forward-looking statements. The reasons for these differences include changes in
general economic and political conditions, including fluctuations in exchange
rates, and the factors discussed under the section entitled “Business—Risks
Related to Our Business and Industry” in our Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
Available
Information
Our
website address is
www.amcomp.com
. We make
available free of charge on the Investor Relations section of our website (
ir.amcomp.com
) our Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and all amendments to those reports as soon as reasonably practicable after such
material is electronically filed or furnished with the Securities and Exchange
Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Exchange Act.
We also make available through our website other reports filed with or furnished
to the SEC under the Exchange Act, including our proxy statements and reports
filed by officers and directors under Section 16(a) of that Act, as well as our
Code of Business Conduct and Ethics. We do not intend for information contained
in our website to be part of the Quarterly Report on Form 10-Q.
You also
may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, N.E., Washington, DC, 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site (
www.sec.gov
) that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC.
I
tem 3. Quantitative and Qualitative Disclosure about
Market Risk
We
believe we are principally exposed to two types of market risk: interest rate
risk and credit risk.
Interest
Rate Risk
Investments.
Our
investment portfolio consists primarily of debt securities, of which 77.6% was
classified as available-for-sale as of June 30, 2008. The primary
market risk exposure to our debt securities portfolio is interest rate risk,
which we strive to limit by managing duration. As of June 30, 2008,
our investments (excluding cash and cash equivalents) had an average duration of
4.2 years. Interest rate risk includes the risk from movements in the
underlying market rate and in the credit spread of the respective sectors of the
debt securities held in our portfolio. The fair value of our fixed
maturity portfolio is directly impacted by changes in market interest
rates. As interest rates rise, the fair value of our fixed-income
portfolio falls, and the converse is also true. We expect to manage
interest rate risk by instructing our investment manager to select investments
consistent with our investment strategy based on characteristics such as
duration, yield, credit risk and liquidity.
Credit Facility and Third Party
Surplus Notes.
Our exposure to market risk for changes in
interest rates also relates to the interest expense of variable rate debt under
our bank credit facilities and our insurance subsidiaries’ surplus notes issued
to unaffiliated third parties. The interest rates we pay on these obligations
increase or decrease with changes in LIBOR.
Sensitivity
Analysis.
Sensitivity analysis is a measurement of potential
loss in future earnings, fair values or cash flows of market sensitive
instruments resulting from one or more selected hypothetical changes in interest
rates and other market rates or prices over a selected time. In our
sensitivity analysis model, we select a hypothetical change in market rates that
reflects what we believe are reasonably possible near-term changes in those
rates. The term “near-term” means a period of time going forward up
to one year from the date of the consolidated financial
statements. Actual results may differ from the hypothetical change in
market rates assumed in this disclosure, especially since this sensitivity
analysis does not reflect the results of any action that we may take to mitigate
such hypothetical losses in fair value.
In this
sensitivity analysis model, we use fair values to measure our potential
loss. The sensitivity analysis model includes fixed maturities and
cash equivalents.
For
invested assets, we use modified duration modeling to calculate changes in fair
values. Durations on invested assets are adjusted for call, put, and
interest rate reset features. Durations on tax-exempt securities are
adjusted for the fact that the yield on such securities is less sensitive to
changes in interest rates compared to Treasury securities. Invested
asset portfolio durations are calculated on a fair value weighted basis,
including accrued investment income, using holdings as of June 30,
2008.
The
following table summarizes the estimated change in fair value on our fixed
maturity portfolio including cash equivalents based on specific changes in
interest rates:
|
|
|
Estimated
Increase (Decrease) in Fair Value
|
|
|
Estimated
Percentage Increase (Decrease) in Fair Value
|
|
|
June
30, 2008:
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
300
basis point rise
|
|
$
|
(49,556
|
)
|
|
|
(11.7
|
%)
|
|
200
basis point rise
|
|
|
(33,040
|
)
|
|
|
(7.8
|
%)
|
|
100
basis point rise
|
|
|
(16,162
|
)
|
|
|
(3.8
|
%)
|
|
50
basis point decline
|
|
|
7,003
|
|
|
|
1.7
|
%
|
|
100
basis point decline
|
|
|
13,251
|
|
|
|
3.1
|
%
|
The
sensitivity analysis model used by us produces a predicted pre-tax loss in fair
value of market-sensitive instruments of $16.2 million or 3.8% based on a 100
basis point increase in interest rates as of June 30, 2008. This loss
amount only reflects the impact of an interest rate increase on the fair value
of our fixed maturities and cash equivalents, which constituted approximately
96.6% of our total invested assets as of June 30, 2008.
Interest
expense would also be affected by a hypothetical change in interest
rates. As of June 30, 2008, we had $35.6 million in variable
rate debt obligations. Assuming this amount remains constant, a
hypothetical 100 basis point increase in interest rates would increase annual
interest expense by approximately $0.4 million, a 200 basis point increase would
increase interest expense by approximately $0.7 million and a 300 basis point
increase would increase interest expense by approximately $1.1
million.
With
respect to investment income, the most significant assessment of the effects of
hypothetical changes in interest rates on investment income would be based on
Statement of Financial Accounting Standards No. 91,
Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases
(“FAS 91”), issued by the FASB, which requires
amortization adjustments for mortgage backed securities. The rates at
which the mortgages underlying mortgage backed securities are prepaid, and
therefore the average life of mortgage backed securities, can vary depending on
changes in interest rates (for example, mortgages are prepaid faster and the
average life of mortgage backed securities falls when interest rates
decline). The adjustments for changes in amortization, which are
based on revised average life assumptions, would have an impact on investment
income if a significant portion of our mortgage backed securities holdings had
been purchased at significant discounts or premiums to par value. As
of June 30, 2008, the par value of our mortgage backed securities holdings was
$158.5 million. Amortized cost divided by par value equates to an
average price of 100.1% of par. Since some of our mortgage backed
securities were purchased at a premium or discount that is a significant
percentage of par, a FAS 91 adjustment could have a significant effect on
investment income.
Interest
rates have declined recently, leading to some increase in expected prepayment
activity. However, further declines in interest rates sufficient to
significantly elevate prepayment risk from levels currently reflected in the
valuations and duration of the mortgage holdings are not
expected. The mortgage backed securities portion of the portfolio
totaled approximately 36.4% of total investments as of June 30,
2008. Of this total, 100% was in agency pass through
securities.
Credit
Risk
Investments.
Our
debt securities portfolio is also exposed to credit risk, which we attempt to
manage through issuer and industry diversification. We regularly monitor our
overall investment results and review compliance with our investment objectives
and guidelines. Our investment guidelines include limitations on the minimum
rating of debt securities in our investment portfolio, as well as restrictions
on investments in debt securities of a single issuer. As of June 30, 2008 and
December 31, 2007, all of the debt securities in our portfolio were rated
investment grade by the NAIC, Standard & Poor’s, Moody’s and
Fitch.
Reinsurance.
We
are subject to credit risk with respect to our reinsurers. Although our
reinsurers are liable to us to the extent we cede risk to them, we are
ultimately liable to our policyholders on all risks we have reinsured. As a
result, reinsurance agreements do not limit our ultimate obligations to pay
claims to policyholders and we may not recover claims made to our
reinsurers.
I
tem 4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures.
AmCOMP’s
management, with the participation of AmCOMP’s Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of AmCOMP’s disclosure
controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the
end of the period covered by this report. Based on such evaluation, AmCOMP’s
Chief Executive Officer and Chief Financial Officer have concluded that, as of
the end of such period, AmCOMP’s disclosure controls and procedures are
effective in recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by AmCOMP in the reports that it
files or submits under the Exchange Act and are effective in ensuring that
information required to be disclosed by AmCOMP in the reports that it files or
submits under the Exchange Act is accumulated and communicated to AmCOMP’s
management, including AmCOMP’s Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.
Changes
in Internal Control Over Financial Reporting.
There
have not been any changes in AmCOMP’s internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) during the quarter ended June 30, 2008 to which this report
relates that have materially affected, or are reasonably likely to materially
affect, AmCOMP’s internal control over financial reporting.
P
ART II. OTHER INFORMATION
I
tem 6. Exhibits.
Exhibit
Index
|
Number
|
Description of
Exhibit
|
|
*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.
|
S
IGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of North Palm
Beach, State of Florida, on the
8
th
day
of August 2008.
|
|
AMCOMP
INCORPORATED
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
By:
|
|
|
|
|
Fred
R. Lowe
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
(principal
executive officer)
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
|
|
|
Kumar
Gursahaney
|
|
|
|
Senior
Vice President, Chief Financial Officer and
|
|
|
|
Treasurer
(principal financial and accounting
officer)
|