U.S. SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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for the fiscal year ended
December 31, 2008
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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transition period
from to .
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Commission file number
000-25425
Mercer Insurance Group,
Inc.
(Exact name of registrant as
specified in its charter)
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Pennsylvania
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23-2934601
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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10 North Highway 31
P.O. Box 278
Pennington, NJ 08534
(Address of principal executive
offices)
Registrants telephone number, including area code:
(609) 737-0426
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
ACT:
Common Stock (no par value)
Title of Each Class:
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
o
No
þ
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934. Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months and (2) has been subject to such filing
requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2
of the
Exchange Act. (Check one):
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Large accelerated
filer
o
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Accelerated
filer
þ
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Non-accelerated
filer
o
(Do not check if a smaller reporting company)
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Smaller reporting
company
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
o
No
þ
The aggregate market value of the voting and non-voting common
stock held by non-affiliates (computed by reference to the price
at which the common stock was last sold) as of the last business
day of the Registrants most recently completed second
fiscal quarter was: $113,262,359.
Indicate the number of shares outstanding of each of the
registrants classes of common stock as of March 2,
2009. Common Stock, no par value: 6,443,560.
Documents
Incorporated by Reference
Portions of the definitive Proxy Statement for the 2009 Annual
Meeting of Shareholders are incorporated by reference in
Part III of this
Form 10-K.
FORM 10-K
For the
Year Ended December 31, 2008
Table of
Contents
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PART I
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3
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ITEM 1. Business.
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3
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ITEM 1A. Risk Factors.
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37
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ITEM 1B. Unresolved Staff Comments.
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42
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ITEM 2. Properties.
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42
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ITEM 3. Legal Proceedings.
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42
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ITEM 4. Submission of Matters to a Vote of Security Holders.
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42
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PART II
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43
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ITEM 5. Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.
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43
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ITEM 6. Selected Financial Data.
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45
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ITEM 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations.
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46
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ITEM 7A Quantitative and Qualitative Disclosures about Market
Risk.
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71
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ITEM 8. Financial Statements and Supplementary Data.
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76
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ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
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114
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ITEM 9A. Controls and Procedures.
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114
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ITEM 9B. Other Information.
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116
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PART III
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116
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ITEM 10. Directors, Executive Officers and Corporate Governance.
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116
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ITEM 11. Executive Compensation.
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116
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ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
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116
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ITEM 13. Certain Relationships and Related Transactions, and
Director Independence.
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116
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ITEM 14. Principal Accounting Fees and Services.
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116
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PART IV
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117
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ITEM 15. Exhibits, Financial Statement Schedules.
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117
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2
PART I
THE
HOLDING COMPANY
Mercer Insurance Group, Inc. (the Holding Company,
the Company, or MIG) is a holding
company which resulted from the conversion of Mercer Mutual
Insurance Company from the mutual to the stock form of
organization on December 15, 2003 (the
Conversion). Prior to the Conversion, and since
1844, Mercer Mutual Insurance Company was engaged in the
business of selling property and casualty insurance. Mercer
Mutual Insurance Company, a Pennsylvania domiciled company,
changed its name to Mercer Insurance Company immediately after
the Conversion, and became a subsidiary of the Holding Company.
Mercer Insurance Group, Inc. and subsidiaries (collectively, the
Group) includes Mercer Insurance Company (MIC), its subsidiaries
Queenstown Holding Company, Inc. (QHC) and its subsidiary Mercer
Insurance Company of New Jersey, Inc. (MICNJ), Franklin Holding
Company, Inc. (FHC) and its subsidiary Franklin Insurance
Company (FIC), and BICUS Services Corporation (BICUS), Financial
Pacific Insurance Group, Inc. (FPIG) and its subsidiaries,
Financial Pacific Insurance Company (FPIC) and Financial Pacific
Insurance Agency (FPIA), which is currently inactive. FPIG also
holds an interest in three statutory business trusts that were
formed for the purpose of issuing Floating Rate Capital
Securities.
OVERVIEW
OF THE BUSINESS
MIG, through its property and casualty insurance subsidiaries,
provides a wide array of property and casualty insurance
products designed to meet the insurance needs of individuals in
New Jersey and Pennsylvania, and small and medium-sized
businesses throughout Arizona, California, Nevada, New Jersey,
Oregon and Pennsylvania. A limited amount of business is written
in New York to support accounts in adjacent states.
The Groups operating subsidiaries are licensed
collectively in twenty two states, but are currently focused on
doing business in seven states; Arizona, California, Nevada, New
Jersey, New York, Pennsylvania and Oregon. MIC and MICNJ are
licensed to write property and casualty insurance in New York,
and write business there which supports existing accounts FPIC
holds an additional fifteen state licenses outside of the
Groups current focus area. Currently, only direct mail
surety policies are being written in some of these states.
The insurance affiliates within the Group participate in a
reinsurance pooling arrangement (the Pool) whereby
each insurance affiliates underwriting results are
combined and then distributed proportionately to each
participant. FPIC joined the Pool effective January 1,
2006, after receiving regulatory approvals. Each insurers
share in the Pool is based on their respective statutory surplus
from the most recently filed statutory annual statement as of
the beginning of each year.
All insurance companies in the Group have been assigned a group
rating of A (Excellent) by A.M. Best. The Group
has been assigned that rating for the past 8 years. An
A rating is the third highest rating of
A.M. Bests 16 possible rating categories.
The Group is subject to regulation by the insurance regulators
of each state in which it is licensed to transact business. The
primary regulators are the Pennsylvania Insurance Department,
the California Department of Insurance, and the New Jersey
Department of Banking and Insurance, because these are the
regulators for the states of domicile of the Groups
insurance subsidiaries, as follows: MIC
(Pennsylvania-domiciled), FPIC (California-domiciled), MICNJ
(New Jersey-domiciled), and FIC (Pennsylvania-domiciled).
We manage our business and report our operating results in three
operating segments: commercial lines insurance, personal lines
insurance and the investment function. Assets are not allocated
to segments and are reviewed in the aggregate for
decision-making purposes. Our commercial lines insurance
business consists primarily of multi-peril, general liability,
commercial auto, surety and related insurance coverages. Our
personal lines insurance business consists primarily of
homeowners (in New Jersey and Pennsylvania) and private
passenger automobile (in Pennsylvania only) insurance coverages.
The Group markets its products through a network of
3
approximately 561 independent agents, of which approximately 277
are located in New Jersey and Pennsylvania, 224 in California,
and the balance in Arizona, Nevada and Oregon.
OUR
INSURANCE COMPANIES
Mercer
Insurance Company
MIC is a stock Pennsylvania insurance company originally
incorporated under a special act of the legislature of the State
of New Jersey in 1844 as a mutual insurance company. On
October 16, 1997, it filed Articles of Domestication with
Pennsylvania which changed its state of domicile from New Jersey
to Pennsylvania, and then subsequently changed its name to
Mercer Insurance Company after the Conversion in 2003. MIC owns
all of the issued and outstanding capital stock of QHC, which
owns all of the issued and outstanding capital stock of MICNJ.
MIC also owns 49% of the issued and outstanding stock of FHC,
which owns all of the issued and outstanding capital stock of
FIC. The remaining 51% of FHC is owned by MIG.
MIC is a property and casualty insurer of primarily small and
medium-sized businesses and property owners located in New
Jersey and Pennsylvania. It markets commercial multi-peril and
homeowners policies, as well as other liability, workers
compensation, fire, allied, inland marine and commercial
automobile insurance. MIC does not market private passenger
automobile insurance in New Jersey. MIC is subject to
examination and comprehensive regulation by the Pennsylvania
Insurance Department. See Business
Regulation.
Mercer
Insurance Company of New Jersey, Inc.
MICNJ is a stock property and casualty insurance company that
was incorporated in 1981. It writes the same lines of business
as MIC, with its book of business predominantly located in New
Jersey. MICNJ is subject to examination and comprehensive
regulation by the New Jersey Department of Banking and
Insurance. See Business Regulation.
Franklin
Insurance Company
FIC is a stock property and casualty insurance company that was
incorporated in 1997. MIC acquired 49% of FIC in 2001, with the
remaining 51% acquired by MIG as part of the Conversion
transaction in 2003. FIC currently offers private passenger
automobile and homeowners insurance to individuals located in
Pennsylvania. FIC is subject to examination and comprehensive
regulation by the Pennsylvania Insurance Department. See
Business Regulation.
Financial
Pacific Insurance Company
FPIC is a stock property and casualty company that was
incorporated in California in 1986 and commenced business in
1987. The Group acquired all of the outstanding stock of FPIG,
the holding company for FPIC, on October 1, 2005. FPIC is
based in Rocklin, California, and writes primarily commercial
package policies for small to medium-sized businesses in
targeted classes. It has developed specialized underwriting and
claims handling expertise in a number of classes of business,
including apartments, restaurants, artisan contractors and
ready-mix operators. FPICs business is heavily weighted
toward the liability lines of business (commercial multi-peril
liability, commercial auto) but also includes commercial
multi-peril property, commercial auto physical damage and surety
for small and medium-sized businesses. FPIC is licensed in
nineteen western states, and actively writes insurance (other
than its direct-marketed surety business) in four (Arizona,
California, Nevada and Oregon). FPIC is subject to examination
and comprehensive regulation by the California Department of
Insurance. See Business Regulation.
OUR
BUSINESS STRATEGIES
The acquisition of FPIG has moved the Group closer to its goals
of a higher proportion of commercial lines premiums as well as
product and geographic diversity. As a west coast-based
commercial writer, the addition of FPIG resulted in an expansion
of our geographic scope and a meaningful line of business
diversification. We will
4
continue our efforts to pursue geographic and product line
diversification in order to diminish the importance of any one
line of business, class of business or territory.
Increase
our commercial writings
In recent years, and including the FPIG acquisition, the Group
has taken steps to increase commercial premium volume, and we
will continue our focus on this goal. Growth in commercial lines
reduces our personal lines exposure as a percentage of our
overall exposure, which reduces the relative adverse impact that
weather-related property losses can have on us. Increased
commercial lines business also benefits us because we have
greater flexibility in establishing rates for these lines.
In order to attract and retain commercial insurance business, we
have developed insurance products and underwriting guidelines
specifically tailored to meet the needs of particular types of
businesses. These programs are continually refined and, if
successful, expanded based on input from our producers and our
marketing personnel. We are continually looking for new types of
business where we can apply this focus.
We have specialized pricing approaches
and/or
products designed for religious institutions, contracting,
apartment, restaurant, condominium and main street
accounts as well as various other types of risks. The products,
rates and eligibilities vary based on our opinion of the local
market opportunities for products in a given area.
We believe that there is an opportunity to increase our volume
of commercial business by working with our existing producers of
commercial lines business and forming and developing
relationships with new producers that focus on commercial
business. We believe an increasing share of this market is
desirable and attainable given our existing relationships with
our producers and our insureds.
For selected commercial lines products, we have developed
technology that will allow our agents to rate and bind
transactions via an internet-based rating system. Based on the
success of this technology, our goal would be to expand the
process to other products at some point in the future. We
launched this process in late 2008 in California and launched a
similar process for New Jersey and Pennsylvania agents in
January, 2009. We believe that there is an opportunity to
increase our commercial lines writings by expanding the use of
internet-based processing in 2009 and beyond.
We began writing our business owners policy in the California
territory in the fourth quarter of 2008. This product targets
small to medium sized businesses which we believe are somewhat
less price sensitive than larger accounts. This product will
also help to balance FPICs business between property and
casualty exposures. Additionally, a new contracting product
which specializes in covering artisan contractors is being
developed for Arizona, California, Nevada and Oregon and is
targeted for introduction in early 2009. Artisan contractors
primarily provide repair and maintenance services, and this
segment tends to experience less severe market fluctuations
compared to the real estate construction industry.
Both the California business owners and western states artisan
product will be transacted using an internet-based rating
process where agents will be able to rate and bind these
products, subject to pre-programmed underwriting criteria.
5
Diversify
our business geographically
As of December 31, 2008, 2007 and 2006 our direct written
premiums were distributed as follows:
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Years Ended December 31,
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% of Total
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2008
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2007
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2006
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2008
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2007
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2006
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(In thousands)
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California
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$
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89,629
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$
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100,202
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$
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97,628
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54.3
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%
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54.7
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%
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52.5
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%
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New Jersey
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47,000
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48,750
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51,302
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28.4
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%
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26.7
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%
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27.6
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%
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Pennsylvania
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13,332
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13,259
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14,274
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8.1
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%
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7.2
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%
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7.7
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%
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Nevada
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8,494
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11,670
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14,235
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5.1
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%
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6.4
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%
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7.7
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%
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Arizona
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4,711
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6,134
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5,031
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2.8
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%
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3.4
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%
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2.7
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%
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Oregon
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1,995
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2,758
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3,107
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1.2
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%
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1.5
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%
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1.7
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%
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Other States
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216
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134
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168
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0.1
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%
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0.1
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%
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0.1
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%
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Total
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$
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165,377
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$
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182,907
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$
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185,745
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100.0
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%
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100.0
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%
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100.0
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%
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We hold twenty two state licenses, and we are currently focused
on doing business in primarily seven of these states (including
New York, where our activity is currently limited to supporting
accounts located in adjacent states). These state licenses
provide additional opportunity for future growth when market
opportunities dictate utilization of those licenses. If market
opportunities indicate desirable growth is available through the
acquisition of additional state licenses, we will pursue
licenses in new states.
Attract
and retain high-quality producers with diverse customer
bases
We believe our insurance companies have a strong reputation with
producers and insureds for personal attention and prompt,
efficient service. This reputation has allowed us to foster our
relationships with many high volume producers. Several of these
producers focus primarily on commercial business and are located
in areas we have targeted as growth opportunities within our
territories. We intend to focus our marketing efforts on
maintaining and improving our relationships with these
producers, as well as on attracting new high-quality producers
in areas with a substantial potential for growth. We also intend
to continue to develop and tailor our commercial programs to
enable our products to meet the needs of the customers served by
our producers.
Reduce
our ratio of expenses to net premiums earned
We are committed to improving our profitability by reducing
expenses through the use of enhanced technology, by increasing
our net premium revenue through the strategic deployment of our
capital and by prudently deploying our workforce to build
efficiencies in our processes.
Reduce
our reliance on reinsurance
We continue to reduce our reliance on reinsurance by increasing
our retention of business written by our insurance companies on
individual property and casualty risks. Our capital is best
utilized by retaining as much profitable business as practical.
We continually evaluate our reinsurance program to reduce the
cost and achieve the optimal balance between cost and protection.
We determine the appropriate level of reinsurance based on a
number of factors, which include:
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the amount of capital the Group is prepared to dedicate to
support its underwriting activities;
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our evaluation of our ability to absorb multiple losses; and
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the terms and limits that we can obtain from our reinsurers.
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A decrease in the use of reinsurance would result in a decrease
in ceded premiums and a corresponding increase in net premium
revenue, but would also potentially increase our losses from
claims that would previously have been reinsured. See
Business Reinsurance for a description
of our reinsurance program.
6
COMMERCIAL
LINES PRODUCTS
The following table sets forth the direct premiums written, net
premiums earned, net loss ratios, expense ratios and combined
ratios of our commercial lines products on a consolidated basis
for the periods indicated. In 2007, the Group evaluated its
methodology for allocating costs to its lines of business and
adopted changes to such methodology in order to more accurately
reflect the allocation of joint costs. This resulted in
allocating less joint cost to the personal lines of business and
more joint cost to the commercial lines of business, but with no
net change in cost allocated to personal lines and commercial
lines in the aggregate. Related 2006 amounts have been
reclassified to reflect this change in allocation methodology:
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Year Ended December 31,
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2008
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2007
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2006
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(Dollars in thousands)
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Direct Premiums Written:
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Commercial multi-peril
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$
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103,864
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$
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116,622
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$
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118,030
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Commercial automobile
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25,779
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28,232
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25,807
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Other liability
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2,408
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4,251
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6,246
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Workers compensation
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5,833
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4,959
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4,697
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Surety
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4,711
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4,987
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5,388
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Fire, allied, inland marine
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685
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979
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1,424
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Total
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$
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143,280
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$
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160,030
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$
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161,592
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Net Premiums Earned:
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Commercial multi-peril
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$
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95,481
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$
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90,088
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$
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80,952
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Commercial automobile
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25,913
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22,551
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17,944
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Other liability
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1,247
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2,387
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5,710
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Workers compensation
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5,828
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5,501
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6,001
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Surety
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3,651
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4,428
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4,381
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Fire, allied, inland marine
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305
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472
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473
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Total
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$
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132,425
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$
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125,427
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$
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115,461
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Net Loss Ratios:
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Commercial multi-peril
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61.8
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%
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55.6
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%
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66.1
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%
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Commercial automobile
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60.6
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61.2
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68.3
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Other liability
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34.7
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315.3
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34.0
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Workers compensation
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48.0
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|
|
51.4
|
|
|
|
61.8
|
|
Surety
|
|
|
73.9
|
|
|
|
41.5
|
|
|
|
40.0
|
|
Fire, allied, inland marine
|
|
|
176.7
|
|
|
|
46.9
|
|
|
|
74.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
61.3
|
%
|
|
|
60.8
|
%
|
|
|
63.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial multi-peril
|
|
|
35.5
|
%
|
|
|
34.2
|
%
|
|
|
34.3
|
%
|
Commercial automobile
|
|
|
34.2
|
|
|
|
38.5
|
|
|
|
30.4
|
|
Other liability
|
|
|
56.8
|
|
|
|
36.1
|
|
|
|
38.2
|
|
Workers compensation
|
|
|
28.4
|
|
|
|
19.8
|
|
|
|
22.3
|
|
Surety
|
|
|
44.2
|
|
|
|
34.4
|
|
|
|
18.3
|
|
Fire, allied, inland marine
|
|
|
65.8
|
|
|
|
46.7
|
|
|
|
55.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
35.5
|
%
|
|
|
34.4
|
%
|
|
|
32.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Ratios(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial multi-peril
|
|
|
97.3
|
%
|
|
|
89.8
|
%
|
|
|
100.4
|
%
|
Commercial automobile
|
|
|
94.8
|
|
|
|
99.7
|
|
|
|
98.7
|
|
Other liability
|
|
|
91.5
|
|
|
|
351.4
|
|
|
|
72.2
|
|
Workers compensation
|
|
|
76.4
|
|
|
|
71.2
|
|
|
|
84.1
|
|
Surety
|
|
|
118.1
|
|
|
|
75.9
|
|
|
|
58.3
|
|
Fire, allied, inland marine
|
|
|
242.5
|
|
|
|
93.6
|
|
|
|
130.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
96.8
|
%
|
|
|
95.2
|
%
|
|
|
96.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
A combined ratio over 100% means that an insurers
underwriting operations are not profitable.
|
7
Commercial
Multi-Peril
We write a number of multi-peril policies providing property and
liability coverage. Various risk classes are written on this
policy.
We offer a business owners policy that provides property and
liability coverages to small businesses. This product is
marketed to several distinct groups: (i) apartment building
owners; (ii) condominium associations; (iii) business
owners who lease their buildings to tenants;
(iv) mercantile business owners, such as florists,
delicatessens, and beauty parlors; and (v) offices with
owner and tenant occupancies. We began writing this product in
our California territory in the fourth quarter of 2008.
We offer in New Jersey and Pennsylvania a specialized
multi-peril policy specifically designed for religious
institutions. This enhanced product offers directors and
officers coverage, religious counseling coverage and equipment
breakdown coverage (through a reinsurance arrangement). Coverage
for child care centers and schools is also available. We offer
versions of this product to individual religious institutions as
well as to denomination groups who seek coverage for
participating member institutions. This product is also
available in New York on a limited basis.
A custom underwritten commercial multi-peril package policy is
written in the western states for select contracting classes, as
well as small to medium-sized businesses within specified niche
markets. This product is focused on commercial accounts
primarily in non-urban areas that do not easily fit within a
generic business owner policy. The target markets for this
product include apartments, artisan and construction
contractors, farm labor operations, service contractors, and
mercantile (including restaurants) as well as various other risk
types. We expect to introduce a new specialized product for
artisan contractors in Arizona, California, Oregon and Nevada in
early 2009.
Commercial
Automobile
This product is designed to cover primarily trucks used in
business, as well as company-owned private passenger type
vehicles. Other specialty classes such as church vans, funeral
director vehicles and farm labor buses can also be covered. The
policy is marketed as a companion offering to our business
owners, commercial multi-peril, religious institution,
commercial property or general liability policies.
We also write heavy and extra heavy trucks through our refuse
hauler, aggregate hauler and ready-mix programs offered
principally in the western states and in Pennsylvania.
Other
Liability
We write liability coverage for insureds who do not have
property exposure or whose property exposure is insured
elsewhere. The majority of these policies are written for
contractors such as carpenters, painters or electricians, who
often self-insure small property exposures. Coverage for both
premises and products liability exposures are regularly
provided. Coverage is available for other exposures such as
vacant land and habitational risks.
Commercial umbrella coverage and following form excess coverage
is available for insureds that insure their primary general
liability exposures with us through a business owners,
commercial multi-peril, religious institution or commercial
general liability policy. This coverage typically has limits of
$1 million to $10 million, but higher limits are
available if needed. To improve processing efficiencies and
maintain underwriting standards, we prefer to offer this
coverage as an endorsement to the underlying liability policy
rather than as a separate stand-alone policy, but both versions
are available.
Workers
Compensation
We typically write workers compensation policies in
conjunction with an otherwise eligible business owners,
commercial multi-peril, religious institution, commercial
property or general liability policy. As of December 31,
2008, most of our workers compensation insureds have other
policies with us. Workers compensation is written
principally in New Jersey and Pennsylvania, with availability in
New York on a limited basis.
8
Surety
The Group, through FPIC, writes a mix of contract and
subdivision bonds as well as miscellaneous license and permit
bonds in our western states. Our bonds are distributed through
both our independent agents as well as a direct marketing effort
that includes on-line sales via our web-site Bondnow.com.
Fire,
Allied Lines and Inland Marine
Fire and allied lines insurance generally covers fire, lightning
and extended perils. Inland marine coverage insures merchandise
or cargo in transit and business and personal property. We offer
these coverages for property exposures in cases where we are not
insuring the companion liability exposures. Generally, the rates
charged on these policies are higher than those for the same
property exposures written on a multi-peril or business owners
policy.
9
PERSONAL
LINES PRODUCTS
The following table sets forth the direct premiums written, net
premiums earned, net loss ratios, expense ratios and combined
ratios of our personal lines products on a consolidated basis
for the periods indicated. In 2007, the Group evaluated its
methodology for allocating costs to its lines of business and
adopted changes to such methodology in order to more accurately
reflect the allocation of joint costs. This resulted in
allocating less joint cost to the personal lines of business and
more joint cost to the commercial lines of business, but with no
net change in cost allocated to personal lines and commercial
lines in the aggregate. Related 2006 amounts have been
reclassified to reflect this change in allocation methodology:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Direct Premiums Written:
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners
|
|
$
|
14,339
|
|
|
$
|
14,675
|
|
|
$
|
15,149
|
|
Personal automobile
|
|
|
5,343
|
|
|
|
5,822
|
|
|
|
6,578
|
|
Fire, allied, inland marine
|
|
|
2,015
|
|
|
|
1,967
|
|
|
|
1,983
|
|
Other liability
|
|
|
371
|
|
|
|
380
|
|
|
|
409
|
|
Workers compensation
|
|
|
29
|
|
|
|
33
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,097
|
|
|
$
|
22,877
|
|
|
$
|
24,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums Earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners
|
|
$
|
12,503
|
|
|
$
|
13,005
|
|
|
$
|
13,196
|
|
Personal automobile
|
|
|
5,320
|
|
|
|
5,797
|
|
|
|
6,415
|
|
Fire, allied, inland marine
|
|
|
1,927
|
|
|
|
2,049
|
|
|
|
2,228
|
|
Other liability
|
|
|
375
|
|
|
|
369
|
|
|
|
341
|
|
Workers compensation
|
|
|
27
|
|
|
|
28
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,152
|
|
|
$
|
21,248
|
|
|
$
|
22,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners
|
|
|
78.3
|
%
|
|
|
73.8
|
%
|
|
|
65.2
|
%
|
Personal automobile
|
|
|
70.8
|
|
|
|
69.2
|
|
|
|
71.6
|
|
Fire, allied, inland marine
|
|
|
8.5
|
|
|
|
44.1
|
|
|
|
26.0
|
|
Other liability
|
|
|
69.7
|
|
|
|
101.5
|
|
|
|
109.2
|
|
Workers compensation
|
|
|
28.3
|
|
|
|
16.8
|
|
|
|
60.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
69.5
|
%
|
|
|
70.1
|
%
|
|
|
63.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners
|
|
|
39.9
|
%
|
|
|
27.7
|
%
|
|
|
40.3
|
%
|
Personal automobile
|
|
|
29.9
|
|
|
|
34.1
|
|
|
|
29.3
|
|
Fire, allied, inland marine
|
|
|
45.8
|
|
|
|
22.9
|
|
|
|
33.4
|
|
Other liability
|
|
|
30.9
|
|
|
|
18.1
|
|
|
|
44.6
|
|
Workers compensation
|
|
|
24.6
|
|
|
|
10.6
|
|
|
|
22.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
37.6
|
%
|
|
|
28.8
|
%
|
|
|
36.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Ratios(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners
|
|
|
118.2
|
%
|
|
|
101.5
|
%
|
|
|
105.5
|
%
|
Personal automobile
|
|
|
100.7
|
|
|
|
103.3
|
|
|
|
100.9
|
|
Fire, allied, inland marine
|
|
|
54.3
|
|
|
|
67.0
|
|
|
|
59.4
|
|
Other liability
|
|
|
100.6
|
|
|
|
119.6
|
|
|
|
153.8
|
|
Workers compensation
|
|
|
52.9
|
|
|
|
27.4
|
|
|
|
83.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
107.1
|
%
|
|
|
98.9
|
%
|
|
|
100.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
A combined ratio over 100% means that an insurers
underwriting operations are not profitable.
|
10
Homeowners
Our homeowners policy is a multi-peril policy providing property
and liability coverages and optional inland marine coverage. The
homeowners policy is sold to provide coverage for an
insureds residence. We market both a standard and a
preferred homeowner product. The preferred product is offered at
a discount to our standard rates to our customers who have a
lower risk of loss. This product is sold only in New Jersey and
Pennsylvania.
Personal
Automobile
We write comprehensive personal automobile coverage including
liability, property damage and all state required insurance
minimums for individuals domiciled in Pennsylvania only. This
product is multi-tiered with an emphasis placed on individuals
with lower than average risk profiles. During 2008, we
introduced a new online rating system for agents to make it
easier for them to quote, sell, bind and service business.
Combination
Dwelling Policy
Our combination dwelling product is a flexible, multi-line
package of insurance coverages. It is targeted to be written on
an owner or tenant occupied dwelling of no more than two
families. The dwelling policy combines property and liability
insurances but also may be written on a monoline basis. The
property portion is considered a fire, allied lines and inland
marine policy, and the liability portion is considered an other
liability policy. This product is available in both New Jersey
and Pennsylvania.
Other
Liability
We write personal lines excess liability, or
umbrella, policies covering personal liabilities in
excess of amounts covered under our homeowners policies. These
policies are available generally with limits of $1 million
to $5 million. We do not market excess liability policies
to individuals unless we also write an underlying primary
liability policy.
Workers
Compensation
A small portion of our workers compensation premiums are
considered personal lines insurance because our New Jersey
homeowners policy is required to include workers
compensation coverage for domestic employees.
MARKETING
We market our insurance products exclusively through independent
producers, with the exception of a relatively small amount of
business within our surety book of business marketed online and
by direct mail. All of these producers represent multiple
carriers and are established businesses in the communities in
which they operate. They generally market and write the full
range of our insurance companies products. We consider our
relationships with our producers to be good. For the year ending
December 31, 2008, 2007 and 2006, there were no agents in
the Group that individually produced greater than 5% of the
Groups direct written premiums.
We emphasize personal contact between our producers and the
policyholders. We believe that our producers fast and
efficient service and name recognition, as well as our
policyholders loyalty to and satisfaction with producer
relationships are the principal sources of new customer
referrals, cross-selling of additional insurance products and
policyholder retention.
Our insurance companies depend upon their producer force to
produce new business, to provide customer service, and to be
selective underwriters in their screening of risks for our
insurance companies to consider underwriting. The network of
independent producers also serves as an important source of
information about the needs of the communities served by our
insurance companies. We use this information to develop new
products and new product features.
Producers are compensated through a fixed base commission often
with an opportunity for profit sharing depending on the
producers aggregate premiums earned and loss experience.
Profit sharing opportunities are for a producers entire
book of business with the Group and not specifically for any
individual policy. The Group does not
11
have any marketing services agreements, placement services
agreements, or similar arrangements. By contract, our producers
represent one or more of the Groups carriers. They are
monitored and supported by our marketing representatives, who
are employees of the Group. These marketing representatives also
have principal responsibility for recruiting and training new
producers.
Our insurance companies manage their producers through periodic
business reviews (with underwriter and marketing participation)
and establishment of benchmarks/goals for premium volume and
profitability. Our insurance companies in recent years have
terminated a number of underperforming producers.
Our marketing efforts are further supported by our claims
philosophy, which is designed to provide prompt and efficient
service, resulting in a positive experience for producers and
policyholders. We believe that these positive experiences are
then conveyed by producers and policyholders to many potential
customers.
UNDERWRITING
Our insurance companies write their personal and commercial
lines by evaluating each risk with consistently applied
standards. We maintain information on all aspects of our
business that is regularly reviewed to determine product line
profitability. We also employ a staff of underwriters, who
specialize in either personal or commercial lines, and have
experience as underwriters in their specialized areas. Specific
information is monitored with regard to individual insureds to
assist us in making decisions about policy renewals or
modifications. New property risks are frequently inspected to
insure they are as desirable as suggested by the application
process.
We have recently introduced, for selected products, an automated
process for acceptance and rejection of small accounts through
an internet-based rating system. Based on the success of this
process, our goal would be to expand the process to other
products at some point in the future. Though there will be less
direct underwriter involvement, we are confident that
underwriting standards will continue to be maintained as risks
will continue to be subject to our standardized underwriting
verification processes, including physical inspections.
We rely on information provided by our independent producers.
Subject to certain guidelines, producers also pre-screen policy
applicants. The producers have the authority to sell and bind
insurance coverages in accordance with pre-established
guidelines in some, but not all cases, provided their historic
underwriting performance warrants such authority.
Producers results are continuously monitored, and
continued poor loss ratios often result in agency termination.
CLAIMS
Claims on insurance policies are received directly from the
insured or through our independent producers. Claims are then
assigned to either an in-house adjuster or an independent
adjuster, depending upon the size and complexity of the claim.
The adjuster investigates and settles the claim. Our trend is to
manage an increasing higher proportion of our claims internally
without the use of independent adjusters where scale permits.
The Group also has a contingency plan for adjusting and
processing claims resulting from a natural catastrophe.
Claims settlement authority levels are established for each
claims adjuster based upon his or her level of experience.
Multi-line teams exist to handle all claims. The claims
department is responsible for reviewing all claims, obtaining
necessary documentation, estimating the loss reserves and
resolving the claims.
We attempt to minimize claims and related legal costs by
encouraging the use of alternative dispute resolution
procedures. Litigated claims are assigned to outside counsel for
many types of claims, however most litigated claims files
handled in our western state operations are managed by in-house
attorneys who have specialized training relating to construction
liability issues and other casualty risks. We believe this
arrangement reduces dramatically the cost of managing these
types of claims, as the use of in-house attorneys dramatically
reduces the cost of defense work.
12
TECHNOLOGY
The Group seeks to transact much of its business using
technology wherever possible and, in recent years, has made
significant investments in information technology platforms,
integrated systems and internet-based applications.
The focus of our ongoing information technology effort is:
|
|
|
|
|
to streamline how our producers transact business with us;
|
|
|
|
to continue to evolve our internal processes to allow for more
efficient operations;
|
|
|
|
to enable our producers to efficiently provide their clients
with a high level of service;
|
|
|
|
to enhance agency online inquiry capabilities; and
|
|
|
|
to provide agencies with on-line reporting.
|
We believe that our technology initiative may increase revenues
by making it easier for our insurance companies and producers to
exchange information and do business. Increased ease of use is
also an opportunity for us to lower expenses, eliminating the
need to operate more than one system once the transition is
complete. This will further reduce technology expense and
simplify information technology management.
We take reasonable steps to protect information we are entrusted
with in the ordinary course of business. As a core part of our
disaster recovery planning, we have implemented a secure and
reliable off-site
disk-to-disk
backup and restore capability.
INTERCOMPANY
AGREEMENTS
Our insurance companies are parties to a Reinsurance Pooling
Agreement. Under this agreement, all premiums, losses and
underwriting expenses of our insurance companies are combined
and subsequently shared based on each individual companys
statutory surplus from the most recently filed statutory annual
statement. The Pool has no impact on our consolidated results.
The Groups insurance subsidiaries are parties to a
Services Allocation Agreement. Pursuant to this agreement, any
and all employees of the Group are employees of, BICUS, a wholly
owned subsidiary of MIC. BICUS has agreed to perform all
necessary functions and services required by the subsidiaries of
the Group in conducting their respective operations. In turn,
the subsidiaries of the Group have agreed to reimburse BICUS for
its costs and expenses incurred in rendering such functions and
services in an amount determined by the parties. The Services
Allocation Agreement has no impact on our consolidated results.
The Group and its subsidiaries are parties to a consolidated Tax
Allocation Agreement that allocates to each company a pro rata
share of the consolidated income tax expense based upon its
contribution of taxable income to the consolidated group. The
Tax Allocation Agreement has no impact on our consolidated
results.
LOSS AND
LOSS ADJUSTMENT EXPENSE RESERVES
Our insurance companies are required by applicable insurance
laws and regulations to maintain reserves for the payment of
losses and loss adjustment expenses (LAE). These reserves are
established for both reported claims and for claims incurred but
not reported (IBNR), arising from the policies that have been
issued related to the premiums that have been earned. The
provision must be made for the ultimate cost of those claims
that have occurred through the date of the balance sheet without
regard to how long it takes to settle them or the time value of
money. The determination of reserves involves actuarial
projections of what our insurance companies expect to be the
cost of the ultimate settlement and administration of such
claims. The reserves are set based on facts and circumstances
then known, estimates of future trends in claims severity, and
other variable factors such as inflation and changing judicial
theories of liability.
In light of such uncertainties, the Group also relies on policy
language, developed by the Group and by others, to exclude or
limit coverage where not intended. If such language is held by a
court to be invalid or unenforceable, it could materially
adversely affect the Groups results of operations and
financial position. The possibility of
13
expansion of an insurers liability, either through new
concepts of liability or through a courts refusal to
accept restrictive policy language, contributes to the inherent
uncertainty of reserving for claims.
Unpaid losses and loss adjustment expenses, also referred to as
loss reserves, are the largest liability of our property and
casualty subsidiaries. Our loss reserves include case reserve
estimates for claims that have been reported and bulk reserve
estimates for (a) the expected aggregate differences
between the case reserve estimates and the ultimate cost of
reported claims and (b) claims that have been incurred but
not reported as of the balance sheet date, less estimates of the
anticipated salvage and subrogation recoveries. Each of these
categories also includes estimates of the loss adjustment
expenses associated with processing and settling all reported
and unreported claims. Estimates are based upon past loss
experience modified for current and expected trends as well as
prevailing economic, legal and social conditions.
The amount of loss and loss adjustment expense reserves for
reported claims is based primarily upon a
case-by-case
evaluation of the type of risk involved, specific knowledge of
the circumstances surrounding each claim, and the insurance
policy provisions relating to the type of loss. The amounts of
loss reserves for unreported losses and loss adjustment expenses
are determined using historical information by line of business,
adjusted to current conditions. Inflation is ordinarily provided
for implicitly in the reserving function through analysis of
costs, trends, and reviews of historical reserving results over
multiple years. Our loss reserves are not discounted to present
value.
Reserves are closely monitored and recomputed periodically using
the most recent information on reported claims and a variety of
projection techniques. Specifically, on at least a quarterly
basis, we review, by line of business, existing reserves, new
claims, changes to existing case reserves, and paid losses with
respect to the current and prior accident years. We use
historical paid and incurred losses and accident year data to
derive expected ultimate loss and loss adjustment expense ratios
(to earned premiums) by line of business. We then apply these
expected loss and loss adjustment expense ratios to earned
premiums to derive a reserve level for each line of business. In
connection with the determination of the reserves, we also
consider other specific factors such as recent weather-related
losses, trends in historical paid losses, economic conditions,
and legal and judicial trends with respect to theories of
liability. Any changes in estimates are reflected in operating
results in the period in which the estimates are changed.
We perform a comprehensive annual review of loss reserves for
each of the lines of business we write in connection with the
determination of the year end carried reserves. The review
process takes into consideration the variety of trends and other
factors that impact the ultimate settlement of claims in each
particular class of business. A similar review is performed
prior to the determination of the June 30 carried reserves.
Prior to the determination of the March 31 and September 30
carried reserves, we review the emergence of paid and reported
losses relative to expectations and make necessary adjustments
to our carried reserves. There are also a number of analyses of
claims experience and reserves undertaken by management on a
monthly basis.
When a claim is reported to us, our claims personnel establish a
case reserve for the estimated amount of the
ultimate payment. This estimate reflects an informed judgment
based upon general insurance reserving practices and the
experience and knowledge of the estimator. The individual
estimating the reserve considers the nature and value of the
specific claim, the severity of injury or damage, and the policy
provisions relating to the type of loss. Case reserves are
adjusted by our claims staff as more information becomes
available. It is our policy to periodically review and revise
case reserves and to settle each claim as expeditiously as
possible.
We maintain bulk and IBNR reserves (usually referred to as
IBNR reserves) to provide for claims already
incurred that have not yet been reported (and which often may
not yet be known to the insured) and for future developments on
reported claims. The IBNR reserve is determined by estimating
our insurance companies ultimate net liability for both
reported and incurred but not reported claims and then
subtracting both the case reserves and payments made to date for
reported claims; as such, the IBNR reserves
represent the difference between the estimated ultimate cost of
all claims that have occurred or will occur and the reported
losses and loss adjustment expenses. Reported losses include
cumulative paid losses and loss adjustment expenses plus
aggregate case reserves. A large proportion of our gross and net
loss reserves, particularly for long tail liability classes, are
reserves for IBNR losses. More than 74% and 75% of our aggregate
loss reserves at December 31, 2008 and 2007, respectively,
were bulk and IBNR reserves.
14
Some of our business relates to coverage for short-tail risks
and, for these risks, the development of losses is comparatively
rapid and historical paid losses and case reserves, adjusted for
known variables, have been a reliable guide for purposes of
reserving. Tail refers to the time period between
the occurrence of a loss and the settlement of the claim. The
longer the time span between the incidence of a loss and the
settlement of the claim, the more the ultimate settlement amount
can vary. Some of our business relates to long-tail risks, where
claims are slower to emerge (often involving many years before
the claim is reported) and the ultimate cost is more difficult
to predict. For these lines of business, more sophisticated
actuarial techniques, such as the Bornhuetter-Ferguson method,
are employed to project an ultimate loss expectation, and then
the related loss history must be regularly evaluated and loss
expectations updated, with a likelihood of variability from the
initial estimate of ultimate losses. A substantial portion of
the business written by FPIC is this type of longer-tailed
casualty business. Please see the discussion under
Liabilities for Loss and Loss Adjustment Expenses of the
Critical Accounting Policies section of ITEM 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations for further
information relating to methods used to estimate reserves.
Because the establishment of loss reserves is an inherently
uncertain process, we cannot be certain that ultimate losses
will not exceed the established loss reserves and have a
material adverse effect on the Groups results of
operations and financial condition. We do not believe our
insurance companies are subject to any material potential
asbestos or environmental liability claims.
The charts below display the Companys case and IBNR
reserves by line of business as of December 31, 2008 and
2007:
As of
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoverable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IBNR
|
|
|
on Unpaid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
|
|
|
Losses and
|
|
|
|
|
|
|
Case Loss
|
|
|
Case LAE
|
|
|
Total Case
|
|
|
(including
|
|
|
Loss
|
|
|
Net
|
|
|
|
Reserves
|
|
|
Reserves
|
|
|
Reserves
|
|
|
LAE)
|
|
|
Expenses
|
|
|
Reserves
|
|
|
|
(In thousands)
|
|
|
Homeowners
|
|
$
|
4,894
|
|
|
|
|
|
|
|
4,894
|
|
|
|
2,491
|
|
|
|
673
|
|
|
|
6,712
|
|
Workers compensation
|
|
|
3,864
|
|
|
|
|
|
|
|
3,864
|
|
|
|
4,321
|
|
|
|
602
|
|
|
|
7,583
|
|
Commercial multi-peril
|
|
|
32,501
|
|
|
|
5,737
|
|
|
|
38,238
|
|
|
|
186,205
|
|
|
|
61,450
|
|
|
|
162,993
|
|
Other liability
|
|
|
4,185
|
|
|
|
|
|
|
|
4,185
|
|
|
|
4,793
|
|
|
|
86
|
|
|
|
8,892
|
|
Other lines
|
|
|
60
|
|
|
|
|
|
|
|
60
|
|
|
|
269
|
|
|
|
104
|
|
|
|
225
|
|
Commercial auto liability
|
|
|
14,990
|
|
|
|
391
|
|
|
|
15,381
|
|
|
|
24,227
|
|
|
|
17,959
|
|
|
|
21,649
|
|
Commercial auto physical damage
|
|
|
355
|
|
|
|
17
|
|
|
|
372
|
|
|
|
2,293
|
|
|
|
860
|
|
|
|
1,805
|
|
Products liability
|
|
|
30
|
|
|
|
|
|
|
|
30
|
|
|
|
18
|
|
|
|
197
|
|
|
|
(149
|
)
|
Personal auto liability
|
|
|
800
|
|
|
|
|
|
|
|
800
|
|
|
|
695
|
|
|
|
33
|
|
|
|
1,462
|
|
Personal auto physical damage
|
|
|
279
|
|
|
|
|
|
|
|
279
|
|
|
|
(21
|
)
|
|
|
(20
|
)
|
|
|
278
|
|
Surety
|
|
|
3,536
|
|
|
|
464
|
|
|
|
4,000
|
|
|
|
6,606
|
|
|
|
4,094
|
|
|
|
6,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loss & LAE Reserves
|
|
$
|
65,494
|
|
|
|
6,609
|
|
|
|
72,103
|
|
|
|
231,897
|
|
|
|
86,038
|
|
|
|
217,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
As of
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoverable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IBNR
|
|
|
on Unpaid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
|
|
|
Losses and
|
|
|
|
|
|
|
Case Loss
|
|
|
Case LAE
|
|
|
Total Case
|
|
|
(including
|
|
|
Loss
|
|
|
Net
|
|
|
|
Reserves
|
|
|
Reserves
|
|
|
Reserves
|
|
|
LAE)
|
|
|
Expenses
|
|
|
Reserves
|
|
|
|
(In thousands)
|
|
|
Homeowners
|
|
$
|
5,071
|
|
|
|
|
|
|
|
5,071
|
|
|
|
2,095
|
|
|
|
684
|
|
|
|
6,482
|
|
Workers compensation
|
|
|
3,936
|
|
|
|
|
|
|
|
3,936
|
|
|
|
4,389
|
|
|
|
742
|
|
|
|
7,583
|
|
Commercial multi-peril
|
|
|
28,560
|
|
|
|
4,997
|
|
|
|
33,557
|
|
|
|
165,359
|
|
|
|
58,891
|
|
|
|
140,025
|
|
Other liability
|
|
|
5,395
|
|
|
|
|
|
|
|
5,395
|
|
|
|
7,556
|
|
|
|
546
|
|
|
|
12,405
|
|
Other lines
|
|
|
280
|
|
|
|
|
|
|
|
280
|
|
|
|
205
|
|
|
|
111
|
|
|
|
374
|
|
Commercial auto liability
|
|
|
10,950
|
|
|
|
387
|
|
|
|
11,337
|
|
|
|
23,369
|
|
|
|
18,094
|
|
|
|
16,612
|
|
Commercial auto physical damage
|
|
|
319
|
|
|
|
8
|
|
|
|
327
|
|
|
|
2,467
|
|
|
|
1,081
|
|
|
|
1,713
|
|
Products liability
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
|
|
30
|
|
|
|
197
|
|
|
|
(152
|
)
|
Personal auto liability
|
|
|
1,103
|
|
|
|
|
|
|
|
1,103
|
|
|
|
714
|
|
|
|
60
|
|
|
|
1,757
|
|
Personal auto physical damage
|
|
|
282
|
|
|
|
|
|
|
|
282
|
|
|
|
93
|
|
|
|
(18
|
)
|
|
|
393
|
|
Surety
|
|
|
1,384
|
|
|
|
9
|
|
|
|
1,393
|
|
|
|
5,426
|
|
|
|
1,994
|
|
|
|
4,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loss & LAE Reserves
|
|
$
|
57,295
|
|
|
|
5,401
|
|
|
|
62,696
|
|
|
|
211,703
|
|
|
|
82,382
|
|
|
|
192,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the development of our consolidated
reserves for unpaid losses and LAE from 1998 through 2008 as
determined under U.S. generally accepted accounting
principles (GAAP). The top line of each table shows the
liabilities, net of reinsurance, at the balance sheet date,
including losses incurred but not yet reported. The upper
portion of each table shows the cumulative amounts subsequently
paid as of successive years with respect to the liability. The
lower portion of each table shows the re-estimated amount of the
previously recorded liability based on experience as of the end
of each succeeding year. The estimates change as additional
information becomes known about the frequency and severity of
claims for individual years. A redundancy exists when the
re-estimated liability at each December 31 is less than the
prior liability estimate. A deficiency exists when the
re-estimated liability at each December 31 is greater than the
prior liability estimate. The cumulative
16
redundancy depicted in the tables, for any particular
calendar year, represents the aggregate change in the initial
estimates over all subsequent calendar years.
Amounts shown in the 2005 column of the table include both 2005
and prior to 2005 accident year development for FPIC, which was
acquired on October 1, 2005, and accounted for as a
purchase business combination.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
|
|
|
|
(In thousands)
|
|
|
Liability for unpaid losses and LAE net of reinsurance
recoverable
|
|
$
|
22,565
|
|
|
$
|
23,643
|
|
|
$
|
24,091
|
|
|
$
|
25,634
|
|
|
$
|
27,198
|
|
|
$
|
32,225
|
|
|
|
|
|
Cumulative amount of liability paid through:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
5,525
|
|
|
|
5,842
|
|
|
|
5,726
|
|
|
|
7,376
|
|
|
|
8,840
|
|
|
|
12,772
|
|
|
|
|
|
Two years later
|
|
|
8,655
|
|
|
|
8,627
|
|
|
|
9,428
|
|
|
|
11,850
|
|
|
|
15,442
|
|
|
|
20,624
|
|
|
|
|
|
Three years later
|
|
|
10,605
|
|
|
|
11,237
|
|
|
|
12,142
|
|
|
|
15,610
|
|
|
|
19,947
|
|
|
|
26,610
|
|
|
|
|
|
Four years later
|
|
|
11,893
|
|
|
|
12,726
|
|
|
|
14,139
|
|
|
|
18,493
|
|
|
|
23,126
|
|
|
|
29,309
|
|
|
|
|
|
Five years later
|
|
|
12,554
|
|
|
|
13,613
|
|
|
|
15,750
|
|
|
|
20,123
|
|
|
|
24,156
|
|
|
|
30,939
|
|
|
|
|
|
Six years later
|
|
|
13,034
|
|
|
|
14,865
|
|
|
|
16,628
|
|
|
|
20,726
|
|
|
|
24,910
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
13,888
|
|
|
|
15,702
|
|
|
|
17,210
|
|
|
|
21,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
14,600
|
|
|
|
16,254
|
|
|
|
17,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
15,003
|
|
|
|
16,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
15,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
19,909
|
|
|
|
19,689
|
|
|
|
20,810
|
|
|
|
23,490
|
|
|
|
26,601
|
|
|
|
31,339
|
|
|
|
|
|
Two years later
|
|
|
17,478
|
|
|
|
18,506
|
|
|
|
19,539
|
|
|
|
22,084
|
|
|
|
26,924
|
|
|
|
32,392
|
|
|
|
|
|
Three years later
|
|
|
16,625
|
|
|
|
17,484
|
|
|
|
17,745
|
|
|
|
22,522
|
|
|
|
26,681
|
|
|
|
32,763
|
|
|
|
|
|
Four years later
|
|
|
15,826
|
|
|
|
16,167
|
|
|
|
18,050
|
|
|
|
22,047
|
|
|
|
26,507
|
|
|
|
33,228
|
|
|
|
|
|
Five years later
|
|
|
14,762
|
|
|
|
16,200
|
|
|
|
17,751
|
|
|
|
21,817
|
|
|
|
26,458
|
|
|
|
34,312
|
|
|
|
|
|
Six years later
|
|
|
14,955
|
|
|
|
16,604
|
|
|
|
17,934
|
|
|
|
22,014
|
|
|
|
26,952
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
15,329
|
|
|
|
16,791
|
|
|
|
18,153
|
|
|
|
22,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
15,523
|
|
|
|
16,919
|
|
|
|
18,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
15,560
|
|
|
|
16,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
15,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative total redundancy (deficiency), net
|
|
$
|
6,902
|
|
|
$
|
6,656
|
|
|
$
|
5,881
|
|
|
$
|
3,465
|
|
|
$
|
246
|
|
|
$
|
(2,087
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability end of year
|
|
|
30,948
|
|
|
|
29,471
|
|
|
|
28,766
|
|
|
|
31,059
|
|
|
|
31,348
|
|
|
|
37,261
|
|
|
|
|
|
Reinsurance recoverable end of year
|
|
|
8,383
|
|
|
|
5,828
|
|
|
|
4,676
|
|
|
|
5,425
|
|
|
|
4,150
|
|
|
|
5,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability end of year
|
|
$
|
22,565
|
|
|
$
|
23,643
|
|
|
$
|
24,090
|
|
|
$
|
25,634
|
|
|
$
|
27,198
|
|
|
$
|
32,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross re-estimated liability latest
|
|
|
20,939
|
|
|
|
21,800
|
|
|
|
22,482
|
|
|
|
27,057
|
|
|
|
31,974
|
|
|
|
40,536
|
|
|
|
|
|
Re-estimated reinsurance recoverable latest
|
|
|
5,276
|
|
|
|
4,813
|
|
|
|
4,272
|
|
|
|
4,888
|
|
|
|
5,022
|
|
|
|
6,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-estimated liability latest
|
|
$
|
15,663
|
|
|
$
|
16,987
|
|
|
$
|
18,210
|
|
|
$
|
22,169
|
|
|
$
|
26,952
|
|
|
$
|
34,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative total redundancy (deficiency), gross
|
|
$
|
10,009
|
|
|
$
|
7,671
|
|
|
$
|
6,284
|
|
|
$
|
4,002
|
|
|
$
|
(626
|
)
|
|
$
|
(3,275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Liability for unpaid losses and LAE net of
|
|
$
|
32,965
|
|
|
$
|
132,935
|
|
|
$
|
164,522
|
|
|
$
|
192,017
|
|
|
$
|
217,962
|
|
|
|
|
|
|
|
|
|
reinsurance recoverable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative amount of liability paid through:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
14,580
|
|
|
|
32,826
|
|
|
|
41,102
|
|
|
|
44,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two years later
|
|
|
23,011
|
|
|
|
62,178
|
|
|
|
73,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
29,177
|
|
|
|
87,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
33,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
32,427
|
|
|
|
141,357
|
|
|
|
172,693
|
|
|
|
198,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two years later
|
|
|
35,323
|
|
|
|
151,741
|
|
|
|
182,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
37,330
|
|
|
|
164,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
38,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative total redundancy (deficiency), net
|
|
$
|
(5,368
|
)
|
|
$
|
(31,602
|
)
|
|
$
|
(18,081
|
)
|
|
$
|
(6,131
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability end of year
|
|
|
36,028
|
|
|
|
211,679
|
|
|
|
250,455
|
|
|
|
274,399
|
|
|
|
304,000
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverable end of year
|
|
|
3,063
|
|
|
|
78,744
|
|
|
|
85,933
|
|
|
|
82,382
|
|
|
|
86,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability end of year
|
|
$
|
32,965
|
|
|
$
|
132,935
|
|
|
$
|
164,522
|
|
|
$
|
192,017
|
|
|
$
|
217,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross re-estimated liability latest
|
|
|
45,024
|
|
|
|
253,431
|
|
|
|
270,431
|
|
|
|
281,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Re-estimated reinsurance recoverable latest
|
|
|
6,691
|
|
|
|
88,894
|
|
|
|
87,828
|
|
|
|
83,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-estimated liability latest
|
|
$
|
38,333
|
|
|
$
|
164,537
|
|
|
$
|
182,603
|
|
|
$
|
198,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative total redundancy (deficiency), gross
|
|
$
|
(8,996
|
)
|
|
$
|
(41,752
|
)
|
|
$
|
(19,976
|
)
|
|
$
|
(6,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in Reinsurance
In each of the years ended December 31, 2008, 2007 and
2006, reinsurance retentions were increased. An increase in
retention means that the Company retains responsibility for
losses and loss adjustment expenses to a higher initial
threshold before which reinsurance attaches and becomes
responsible for the amount of a claim exceeding the threshold,
subject to the terms of the reinsurance agreement. The impact of
such an increase in retention is generally to cause the net
liability for losses and loss adjustment expenses to increase,
since fewer losses are ceded to reinsurers, although the direct
liability for losses and loss adjustment expenses will be
unchanged by a change in retention. This increase in retention
will result in a decline over time in the amount of the
difference between the Net Liability and Gross Liability totals
in the ten-year chart above.
18
For further information about the Companys reinsurance
program and retentions, please see the Reinsurance
heading in this ITEM 1. Business section.
Prior
Year Development
As a result of changes in estimates for losses on insured events
occurring in prior years, the liability for losses and loss
adjustment expenses increased by $6.1 million,
$8.2 million and $8.4 million in 2008, 2007 and 2006,
respectively.
The following table presents, by line of business, the change in
the liability for unpaid losses and loss adjustment expenses
incurred in the years ended December 31, 2008, 2007 and
2006, for insured events of prior years.
Prior year favorable (unfavorable) development, by line of
business, reported in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Commercial multi-peril
|
|
$
|
(9,220
|
)
|
|
$
|
(5,911
|
)
|
|
$
|
(9,618
|
)
|
Commercial automobile
|
|
|
3,041
|
|
|
|
2,504
|
|
|
|
1,968
|
|
Other liability
|
|
|
869
|
|
|
|
(4,388
|
)
|
|
|
292
|
|
Workers compensation
|
|
|
413
|
|
|
|
787
|
|
|
|
(525
|
)
|
Homeowners
|
|
|
(1,093
|
)
|
|
|
(1,220
|
)
|
|
|
55
|
|
Personal automobile
|
|
|
(98
|
)
|
|
|
(101
|
)
|
|
|
(571
|
)
|
Other lines
|
|
|
(43
|
)
|
|
|
158
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unfavorable prior year development
|
|
$
|
(6,131
|
)
|
|
$
|
(8,171
|
)
|
|
$
|
(8,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We evaluate our estimated ultimate liability by line of business
on a quarterly basis. The establishment of loss and loss
adjustment expense reserves is an inherently uncertain process,
and reserve uncertainty stems from a variety of sources. Court
decisions, regulatory changes and economic conditions, among
other factors, can affect the ultimate cost of claims that
occurred in the past as well as create uncertainties regarding
future loss cost trends. Similarly, actual experience, including
the number of claims and the severity of claims, to the extent
it varies from data previously used or projected, will be used
to update the projected ultimate liability for losses, by
accident year and line of business. Changes in estimates, or
differences between estimates and amounts ultimately paid, are
reflected in the operating results of the period during which
such changes are made. A discussion of factors contributing to
an (increase) decrease in the liability for unpaid losses and
loss adjustment expenses (as shown in the chart immediately
above) for the Groups major lines, representing 92% of net
loss and loss adjustment reserves at December 31, 2008,
follows:
Commercial
multi-peril
With $163.0 million, $140.0 million, and
$120.1 million of recorded reserves, net of reinsurance, at
December 31, 2008, 2007 and 2006, respectively, commercial
multi-peril is the line of business that carries the largest net
loss and loss adjustment expense reserves, representing 75%,
73%, and 73%, respectively, of the Groups total carried
net loss and loss adjustment expense reserves at
December 31, 2008, 2007, and 2006.
The commercial multi-peril line of business experienced adverse
prior year development of $9.2 million in 2008,
$5.9 million in 2007 and $9.6 million in 2006. The
majority of this development relates to the west coast
contractor liability book of business. Contractor liability
claims, particularly construction defect claims, are long-tailed
in nature and develop over a period of ten to twelve years.
The adverse development in 2008 and 2007 was driven by higher
than expected reported construction defect claim activity,
particularly on the 1998 through 2002 accident years. The
adverse development in 2006 was driven by increases in case
reserve estimates on claims reported prior to 2006. The adverse
development in 2008, 2007 and 2006 includes ($0.4) million,
$0.7 million and $2.8 million, respectively, in
reserve (decreases) increases related to
19
accident years 1997 and prior which are pre-
Montrose
claims (see discussion of
Montrose
under the heading
of Description of Ultimate Loss Estimation Methods in the
Critical Accounting Policies section of ITEM 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations).
The adverse development in 2008, 2007 and 2006 also includes
$1.9 million, $0.5 million and $1.1 million,
respectively, in post-commutation reserve increases for losses
formerly subject to reinsurance treaties.
In 2008 there was $3.5 million in favorable development on
accident years 2003 through 2005, due to lower than expected
loss emergence. In 2007 and 2006 there was no development on the
2003 through 2005 accident years. The favorable development was
driven by a decrease in claim frequency for accident years 2003
through 2005 which reflects the impact of both rate increases
and changes in underwriting.
The variances from previous expectations in the loss activity
described above were taken into account in evaluating the
ultimate liability for losses and loss adjustment expenses.
Commercial
automobile
With $21.6 million, $16.6 million, and
$13.4 million of recorded reserves, net of reinsurance, at
December 31, 2008, 2007, and 2006, respectively, commercial
automobile is the Groups second largest reserved line of
business, representing 10%, 9%, and 8%, respectively, of the
Groups total carried net loss and loss adjustment expense
reserves at December 31, 2008, 2007 and 2006.
The commercial automobile line of business experienced favorable
prior year development of $3.0 million in 2008,
$2.5 million in 2007 and $2.0 million in 2006.
The favorable development on the commercial automobile line of
business reflects a reduction in claims frequency for the recent
accident years and a lower than expected emergence of losses,
particularly on the Groups heavy truck programs like Ready
Mix and Aggregate Haulers.
The variances from previous expectations in the loss activity
described above were taken into account in evaluating the
ultimate liability for losses and loss adjustment expenses.
Other
liability
With $8.9 million, $12.4 million, and
$9.3 million of recorded reserves, net of reinsurance, at
December 31, 2008, 2007, and 2006, respectively, other
liability is the Groups third largest reserved line of
business, representing 4%, 6%, and 6%, respectively, of the
Groups total carried net loss and loss adjustment expense
reserves at December 31, 2008, 2007 and 2006.
The other liability line of business experienced favorable prior
year development of $0.9 million in 2008, adverse
development of $4.4 million in 2007, and favorable
development of $0.3 million in 2006.
The adverse development on the other liability line of business
in 2007 was primarily the result of an increase in litigation
activity resulting in larger than expected settlements and
increased litigation expense.
The variances from previous expectations in the loss activity
described above were taken into account in evaluating the
ultimate liability for losses and loss adjustment expenses.
Workers
compensation
With $7.6 million, $7.6 million, and $7.3 million
of recorded reserves, net of reinsurance, at December 31,
2008, 2007, and 2006, respectively, workers compensation
represents 3%, 4%, and 4%, respectively, of the Groups
total carried net loss and loss adjustment expense reserves at
December 31, 2008, 2007 and 2006. A portion of this
business is assumed from the National Involuntary Pool managed
by the National Council on Compensation Insurance (NCCI).
Workers compensation reserves developed favorably in 2008 by
$0.4 million, and in 2007 by $0.8 million, and
developed adversely in 2006 by $0.5 million. The adverse
development in 2006 occurred predominantly on
20
business assumed from the National Involuntary Pool managed by
the National Council on Compensation Insurance (NCCI).
The actuarial data reported to us by the NCCI is very volatile
with significant upward and downward swings.
Workers compensation losses are impacted heavily by medical cost
increases which have been significant recently.
The variances from previous expectations in the loss activity
described above were taken into account in evaluating the
ultimate liability for losses and loss adjustment expenses.
All
Other lines
The remaining lines of business, which collectively contributed
approximately $1.2 million, $1.2 million, and
$0.5 million of adverse development for the years ended
December 31, 2008, 2007, and 2006, respectively, do not
individually reflect any significant trends related to prior
year development.
Reconciliation
Table for Loss and Loss Adjustment Expenses
The following table provides a reconciliation of beginning and
ending consolidated loss and LAE reserve balances of the Group
for the years ended December 31, 2008, 2007 and 2006,
prepared in accordance with U.S. generally accepted
accounting principles.
RECONCILIATION
OF RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Reserves for losses and loss adjustment expenses at the
beginning of period
|
|
$
|
274,399
|
|
|
$
|
250,455
|
|
|
$
|
211,679
|
|
Less: Reinsurance recoverable on unpaid losses and loss expenses
|
|
|
(82,382
|
)
|
|
|
(85,933
|
)
|
|
|
(78,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for losses and loss adjustment expenses at
beginning of period
|
|
|
192,017
|
|
|
|
164,522
|
|
|
|
132,935
|
|
Add: Provision for losses and loss adjustment expenses for
claims occurring in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
89,088
|
|
|
|
83,015
|
|
|
|
79,275
|
|
Prior years
|
|
|
6,131
|
|
|
|
8,171
|
|
|
|
8,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
95,219
|
|
|
|
91,186
|
|
|
|
87,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Loss and loss adjustment expense payments for claims
occurring in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
24,521
|
|
|
|
22,589
|
|
|
|
23,284
|
|
Prior years
|
|
|
44,753
|
|
|
|
41,102
|
|
|
|
32,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
69,274
|
|
|
|
63,691
|
|
|
|
56,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, December 31
|
|
|
217,962
|
|
|
|
192,017
|
|
|
|
164,522
|
|
Plus reinsurance recoverable on unpaid losses and loss expenses
at end of period
|
|
|
86,038
|
|
|
|
82,382
|
|
|
|
85,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses at end of period
|
|
$
|
304,000
|
|
|
$
|
274,399
|
|
|
$
|
250,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Potential
Impact on Reserves due to Changes in Key Assumptions
The following table presents, by line of business, the
(increase) decrease in the liability for unpaid losses and loss
adjustment expenses attributable to insured events of prior
years incurred in the year ended December 31, 2008. Amounts
shown in the 2005 column of the table include both 2005 and
prior to 2005 accident year development for FPIC, which was
acquired on October 1, 2005, and accounted for as a
purchase business combination.
Prior
Year Development in 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Events of Indicated Prior Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
Total
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
and Prior
|
|
|
|
(In thousands)
|
|
|
Commercial multi-peril
|
|
$
|
(9,220
|
)
|
|
$
|
1,146
|
|
|
$
|
(641
|
)
|
|
$
|
(9,388
|
)
|
|
$
|
(337
|
)
|
Commercial automobile
|
|
|
3,041
|
|
|
|
1,234
|
|
|
|
1,645
|
|
|
|
280
|
|
|
|
(118
|
)
|
Other liability
|
|
|
869
|
|
|
|
1,619
|
|
|
|
988
|
|
|
|
(1,727
|
)
|
|
|
(11
|
)
|
Workers compensation
|
|
|
413
|
|
|
|
45
|
|
|
|
320
|
|
|
|
(48
|
)
|
|
|
96
|
|
Homeowners
|
|
|
(1,093
|
)
|
|
|
(9
|
)
|
|
|
(189
|
)
|
|
|
(560
|
)
|
|
|
(335
|
)
|
Personal automobile
|
|
|
(98
|
)
|
|
|
133
|
|
|
|
109
|
|
|
|
(50
|
)
|
|
|
(290
|
)
|
Other lines
|
|
|
(43
|
)
|
|
|
(392
|
)
|
|
|
649
|
|
|
|
(306
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net 2008 (unfavorable) favorable prior year development
|
|
$
|
(6,131
|
)
|
|
$
|
3,776
|
|
|
$
|
2,881
|
|
|
$
|
(11,799
|
)
|
|
$
|
(989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has concluded that in its judgment the range of
reasonable estimates of loss and loss expense reserves, on a net
basis, is likely to range from 169.2 million to
227.9 million as of December 31, 2008. Similarly, the
Company concluded that in its judgment the range of reasonable
estimates of loss and loss expense reserves, on a net basis,
ranged from $153.5 million to $200.3 million as of
December 31, 2007. The Groups net loss and loss
adjustment expense reserves are carried at $218.0 million
as of December 31, 2008, and $192.0 million as of
December 31, 2007, toward the upper ends of the ranges for
the respective years. We have not performed stochastic modeling
of the reserves; however, management believes that it is
probable that the final outcome will fall within the range
specified above.
The table below summarizes the impact on net loss and loss
adjustment expense reserves and stockholders equity of
variances from the selected carried reserves to either extreme
of the management-selected range of estimates of loss and loss
adjustment expense reserves, net of reinsurance, based on
reasonably likely changes in the variables considered in
establishing loss and loss adjustment expense reserves. The
range of reasonably likely changes was established based on a
review of changes in accident year development by line of
business and applied to loss reserves as a whole. The asymmetry
of the range of estimates reflects the general shape of the
probability distribution for liability loss reserves (i.e., it
is typical to have smaller redundancies more often than larger
deficiencies) and the fact that the consequences of deficiencies
are more severe. The selected range of changes does not indicate
what could be the potential best or worst case or likely
scenarios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Loss and
|
|
|
Percentage
|
|
|
Adjusted Loss and
|
|
|
Percentage
|
|
|
|
Loss Adjustment
|
|
|
Change in
|
|
|
Loss Adjustment
|
|
|
Change in
|
|
|
|
Reserves Net of
|
|
|
Stockholders
|
|
|
Reserves Net of
|
|
|
Stockholders
|
|
Range of Loss and Loss
|
|
Reinsurance as of
|
|
|
Equity as of
|
|
|
Reinsurance as of
|
|
|
Equity as of
|
|
Adjustment Reserves Net of
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
Reinsurance
|
|
2008
|
|
|
2008(1)
|
|
|
2007
|
|
|
2007(1)
|
|
|
|
(Dollars in thousands)
|
|
|
Reserve range low end
|
|
$
|
169,228
|
|
|
|
23.4
|
%
|
|
$
|
153,500
|
|
|
|
19.1
|
%
|
Selected reserves
|
|
$
|
217,962
|
|
|
|
|
|
|
$
|
192,017
|
|
|
|
|
|
Reserve range high end
|
|
$
|
227,942
|
|
|
|
(4.8
|
)
|
|
$
|
200,300
|
|
|
|
(4.1
|
)%
|
The following paragraphs discuss considerations taken into
account for the Companys major lines of business in
selecting reserves for losses and loss adjustment expenses (note
that in the discussions below reserves relating to
22
FPIC are discussed in the context of their actual accident
years, notwithstanding that they are shown in the ten-year
development chart and prior development charts above as
attributable under purchase accounting to 2005, the year of
FPICs acquisition by the Group).
Commercial
multi-peril
The Companys selection of an estimate towards the upper
end of the range is related primarily to its commercial multiple
peril liability book, and is due to a number of factors,
including the fact that historically generally accepted
actuarial projection techniques have proved somewhat inadequate
in estimating loss reserves for CMP liability (more
specifically, in the Companys case, contractors
liability). Trends in legal, economic, and social factors have
caused development patterns for CMP liability to become more
protracted; that is, claims, especially construction defect
claims, are being reported much longer after the occurrence of
the event giving rise to the claim. This effect causes the use
of historical development patterns to understate loss reserves
for more recent accident year periods. It also makes the
investigation and defense of the claim more difficult and
costly. We have therefore applied alternative techniques in our
analysis (and segregated contractors policies from all
other policies in the analysis) and have judgmentally selected
our best estimate of the loss reserves to reflect our
expectation that such trends will continue.
Commercial
automobile
The loss and loss adjustment expense reserves for commercial
automobile liability have experienced favorable trends in the
last few years. Prior to 1998, the development of reported
losses was effectively complete (claims were reported and case
reserves were at or near ultimate values) by about four years
after the beginning of an accident year. For accident years 1998
through 2001, the development pattern extended as long as seven
years. Since accident year 2003, however, the development
pattern has shortened to about five years. At the same time,
claims frequencies have decreased. Reliance on historical
emergence patterns have produced redundancies in the loss and
loss adjustment expense reserves in recent accident years.
Other
liability
Reserves for other liability developed adversely in 2007 for
accident years 2003 through 2006. This adverse development was
due to the increased litigation activity in this line. This
increase in litigation has resulted in higher settlements and
higher legal expenses. We will continue to monitor the higher
development trends we have observed since 2007 to determine if
we will place greater emphasis on the more recent data.
Workers
Compensation
The development in workers compensation reserves is almost
entirely due to our experience on assumed business from the
national involuntary pool, which has been volatile. We
continuously review the trends in this experience and use our
best judgment in estimating assumed reserves.
Sensitivity
of key assumptions in reserve selection
Our process of establishing loss reserves for long-tailed
classes of business takes into account a variety of key
assumptions, including, but not limited to, the following:
|
|
|
|
|
the selection of loss development patterns;
|
|
|
|
the selection of Tail Factors;
|
|
|
|
the selection of Expected Ultimate Loss Ratios; and
|
|
|
|
for CMP liability, the Companys biggest line of business,
for the older policy years (1996 and prior), the number of
remaining unreported claims and expected average cost of those
claims.
|
The relative significance of any individual assumption depends
upon several considerations, such as the line of business and
the accident year. If the actual experience emerges differently
than the assumptions used in the process of establishing
reserves, then it is possible that there will be changes in the
reserve estimates (prior year
23
development) that may be material to the results of operations
in future periods. Set forth below is a discussion of the
potential impact of using certain key assumptions that differ
from those used in our latest reserve analysis. It is important
to note that the following discussion considers each assumption
individually without any consideration of the correlation (or
the lack thereof) between lines of business and accident years
or between assumptions, and therefore does not constitute an
actuarial range. While the following discussion represents
possible volatility due to variations in key assumptions
identified by management, there is no assurance that future
emergence of our loss experience will be consistent with either
our current or alternative sets of assumptions. By the very
nature of the insurance business, it is normal for loss
development patterns to have a certain amount of variability.
As an illustration of the potential volatility, consider the
impact of the use of the different assumptions described below
in setting reserves for the Commercial multiple peril liability
line, the Companys biggest line of business and the one
for which reserves have been the most volatile. CMP comprises
about 75% of the Groups net reserves; 98% of the reserves
for CMP relate to liability; and about 80% of the CMP liability
business is related to contractors.
|
|
|
|
|
For CMP liability, if we chose certain alternate sets of
assumptions for loss development factors, factors which would
still be considered reasonable, the net (of ceded reinsurance)
reserve estimates at December 31, 2008, could decrease by
$22.2 million, pre-tax, implying a redundancy (i.e.,
reserves should be lower), or increase by $24.2 million,
pre-tax, implying a deficiency (i.e., reserves should be higher).
|
|
|
|
Tail factors refer to loss development factors for
the oldest accident years, in this case accident years 1998 and
prior. Using alternate assumptions for tail factors for CMP
liability, factors which would still be considered reasonable,
would create net reserve estimates at December 31, 2008,
ranging from a redundancy of $8.7 million, pre-tax, to a
deficiency of $9.4 million, pre-tax.
|
|
|
|
In selecting managements best estimates of the loss
reserves for the more recent accident years, we use methods that
rely on expected ultimate loss ratios (the ratios of expected
net ultimate losses and loss expenses to net earned premiums).
Those ratios vary by accident year and class of business. For
CMP liability, if we increased or decreased those expected
ultimate loss ratios by 5 percentage points, then the net
loss reserves at December 31, 2008, would increase by
$10.4 million or decrease by $10.1 million, pre-tax,
respectively.
|
|
|
|
For the very oldest accident years (1997 and prior), the years
most affected by the California
Montrose
decision, we
project the reserves for incurred but not reported claims
judgmentally, by selecting the number of additional claims
expected to be reported, the percentage of those claims expected
to be closed with payment (more than half are determined to be
without merit and closed without payment of losses), and an
expected average cost (including loss adjustment expenses) per
claim closed with payment. We have assumed that the twelve-year
statute of limitations is valid and enforceable (as it has been
in the past) and that therefore there will be no additional
claims reported after December 31, 2008, for accident years
1997 and prior (related to policy years 1996 and prior), that
will require the payment of losses. However, there are claims
still pending from these older years and it is possible that
claims previously closed without payment may reopen. Using
alternative assumptions, the estimates of the net reserves at
December 31, 2008, could increase or decrease by about
$0.5 million.
|
Another example of potential variability is in the Other
liability line, where losses have developed at a much higher
rate since 2006. We continue to monitor this line in order to
determine if the recent trends will continue or if the losses
will develop closer to the historical trends. Relying only on
development factors observed since 2006 could lead to
significant redundancies. Conversely, it is possible that higher
development factors may continue.
In light of the many uncertainties involved in the estimation of
reserves, we monitor the reserves monthly, quarterly, and
semi-annually, and perform a comprehensive review of our reserve
estimates at least twice a year. These reviews could result in
the identification of information and trends that would require
us to increase or decrease some reserves for prior periods and
could materially affect our results of operations, equity,
business, financial strength and ratings. In 2008, we
experienced adverse development of $6.1 million, comprised
of adverse development of $9.2 million for commercial
multiple peril, offset by a redundancy of $3.0 million for
commercial automobile liability and relatively small amounts of
redundancies and deficiencies for other lines of business.
24
Statutory
and GAAP Loss and Loss Expense Reserves
There are no material differences between the Companys
loss and loss expense reserves under Statutory Accounting
Principles and its loss reserves under U.S. Generally
Accepted Accounting Principles at December 31, 2008, and
2007.
See additional discussion of loss and loss adjustment expense
reserves in the section Managements Discussion and
Analysis of Financial Condition and Results of Operations,
Critical Accounting Policies under the sections titled
Liabilities for Loss and Loss Adjustment Expenses,
Methods Used to Estimate Loss and Loss Adjustment Expense
Reserves and Description of Ultimate Loss Estimation
Methods.
REINSURANCE
The table below summarizes for 2008, 2007 and 2006, the premiums
and losses and loss adjustment expenses assumed and ceded under
the Groups reinsurance programs in place for those years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
165,377
|
|
|
$
|
182,907
|
|
|
$
|
185,745
|
|
|
|
|
|
Assumed
|
|
|
1,058
|
|
|
|
1,383
|
|
|
|
2,374
|
|
|
|
|
|
Ceded
|
|
|
(19,083
|
)
|
|
|
(24,623
|
)
|
|
|
(42,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
147,352
|
|
|
$
|
159,667
|
|
|
$
|
145,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
172,817
|
|
|
$
|
176,395
|
|
|
$
|
182,633
|
|
|
|
|
|
Assumed
|
|
|
1,233
|
|
|
|
1,801
|
|
|
|
2,539
|
|
|
|
|
|
Ceded
|
|
|
(21,473
|
)
|
|
|
(31,521
|
)
|
|
|
(47,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
152,577
|
|
|
$
|
146,675
|
|
|
$
|
137,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses incurred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
110,150
|
|
|
$
|
107,141
|
|
|
$
|
115,995
|
|
|
|
|
|
Assumed
|
|
|
1,043
|
|
|
|
1,185
|
|
|
|
3,908
|
|
|
|
|
|
Ceded
|
|
|
(15,974
|
)
|
|
|
(17,140
|
)
|
|
|
(32,206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss expenses incurred
|
|
$
|
95,219
|
|
|
$
|
91,186
|
|
|
$
|
87,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
Ceded
In accordance with insurance industry practice, our insurance
companies reinsure a portion of their exposure and pay to the
reinsurers a portion of the premiums received on all policies
reinsured. Insurance policies written by our companies are
reinsured with other insurance companies principally to:
|
|
|
|
|
reduce net liability on individual risks;
|
|
|
|
mitigate the effect of individual loss occurrences (including
catastrophic losses);
|
|
|
|
stabilize underwriting results;
|
|
|
|
decrease leverage; and
|
|
|
|
increase our insurance companies underwriting capacity.
|
Reinsurance can be facultative reinsurance or treaty
reinsurance. Under facultative reinsurance, each policy or
portion of a policy is reinsured individually. Under treaty
reinsurance, an
agreed-upon
portion of a class of business is automatically reinsured.
Reinsurance also can be classified as quota share reinsurance,
pro-rata reinsurance or excess of loss reinsurance. Under quota
share reinsurance and pro-rata reinsurance, the ceding company
cedes a
25
percentage of its insurance liability to the reinsurer in
exchange for a like percentage of premiums less a ceding
commission. The ceding company in turn recovers from the
reinsurer the reinsurers share of all losses and loss
adjustment expenses incurred on those risks. Under excess
reinsurance, an insurer limits its liability to all or a
particular portion of the amount in excess of a predetermined
deductible or retention. Regardless of type, reinsurance does
not legally discharge the ceding insurer from primary liability
for the full amount due under the reinsured policies. However,
the assuming reinsurer is obligated to reimburse the ceding
company to the extent of the coverage ceded.
The amount and scope of reinsurance coverage we purchase each
year is determined based on a number of factors. These factors
include the evaluation of the risks accepted, consultations with
reinsurance representatives and a review of market conditions,
including the availability and pricing of reinsurance.
Reinsurance arrangements are placed with non-affiliated
reinsurers, and are generally renegotiated annually. The
decrease in ceded premium in 2008 and 2007 relates primarily to
the increases in underlying retentions in 2008, 2007, and 2006,
and the related decrease in ceding rates.
The largest exposure retained in 2008, 2007, and 2006 on any one
individual property risk was $850,000, $750,000, and $500,000,
respectively. Individual property risks in excess of these
amounts are covered on an excess of loss basis pursuant to
various reinsurance treaties. All property lines of business,
including commercial automobile physical damage, are reinsured
under the same treaties.
Except for umbrella liability, individual casualty risks that
are in excess of $850,000, $750,000, and $500,000, respectively,
in 2008, 2007, and 2006 are covered on an excess of loss basis
up to $1.0 million per occurrence. Casualty losses in
excess of $1.0 million arising from workers
compensation claims are reinsured up to $10.0 million per
occurrence per insured. Umbrella liability losses (except for
non-business owner policies issued by FPIC) are reinsured on a
75% quota share basis up to $1.0 million and a 100% quota
share basis in excess of $1.0 million. FPICs umbrella
program is 100% reinsured (except for business owner policies).
For the surety line of business, written exclusively by FPIC,
the Group maintains an excess of loss contract under which it
retains the first $500,000 and 10% of the next $4.0 million
resulting in a maximum retention of $900,000 per principal.
Catastrophic reinsurance protects the ceding insurer from
significant aggregate loss exposure. Catastrophic events include
windstorms, hail, tornadoes, hurricanes, earthquakes, riots,
blizzards, terrorist activities and freezing temperatures. We
purchase layers of excess treaty reinsurance for catastrophic
property losses. We reinsure 100% of losses per occurrence in
excess of $5.0 million for 2008 and 2007, and
$2.0 million for 2006 and, up to a maximum of
$55.0 million for 2008 and 2007, and $32.0 million for
2006.
The Group also carries coverage on commercial lines of business
for acts of terrorism of $10.0 million excess of
$3.0 million in 2008 and 2007, and excess of
$2.0 million for 2006. This coverage does not apply to
nuclear, chemical or biological events.
Prior to 2007, FPIC had a separate reinsurance program from the
other insurance companies in the Group, which was largely a
continuation of the program it had in place immediately prior to
its acquisition by the Group. Commercial multi-peril property
and auto physical damage coverage was reinsured, through a
$1,650,000 excess of $350,000 excess of loss contract. Excess of
$2.0 million, FPIC had a semi-automatic facultative
agreement, which provided $8.0 million of coverage. On
casualty business FPIC maintained two reinsurance layers,
$250,000 excess of $250,000, and $500,000 excess of $500,000,
respectively, for commercial multiple peril liability and
commercial automobile liability with a syndicate of reinsurers.
The maximum exposure on any one casualty risk was $250,000.
Excess of $1.0 million, there was a semi-automatic
facultative agreement, which provided $5.0 million of
coverage.
Effective January 1, 2008, the Group renewed its
reinsurance coverages with the following changes. The retention
on any individual property or casualty risk was increased to
$850,000 from $750,000. Pollution coverage written by FPIC is
fully retained with a standard sub-limit of $150,000 (and up to
$300,000 on an exception basis). Prior to 2008, FPIC reinsured
100% of its pollution coverage, which in 2007 represented
$1.8 million of ceded written premium. The Group also
purchased an additional $1.0 million of surety coverage
(subject to a 10% retention) which results in an increased
reinsurance coverage to $4.5 million from $3.5 million
per principal and a maximum retention of $900,000 per principal
as compared to the previous $800,000. The Group continued its
26
primary treaties (i.e., treaties covering risk limits less than
$1.0 million on casualty lines, less than $7.5 million
on property lines and less than $10 million on
workers compensation) with General Reinsurance
Corporation, rated A++ (Superior) by A.M. Best, their
highest rating.
In conjunction with the renewal of the reinsurance program for
both 2008 and 2007, the prior year reinsurance treaties were
terminated on a run-off basis, requiring that for policies in
force as of December 31, 2007 and 2006, respectively, these
reinsurance agreements continue to cover losses occurring on
these policies in the future. Therefore, the Group will remit
premiums to and collect reinsurance recoverables from the
reinsurers on these prior year treaties as the underlying
business runs off.
As of January 1, 2006, FPIC terminated its 2005 property
quota share and casualty excess of loss reinsurance contracts on
a cut-off basis and restructured its reinsurance program to the
structure described above. The restructuring also included the
assumption of ceded unearned premiums by FPIC from the 2005
property quota share and casualty excess of loss agreements.
These assumed premiums were then ceded into the respective 2006
treaties, which due to the reduced ceding rates, resulted in a
$5.6 million increase in net written and earned premiums
for the year ending December 31, 2006.
During the third quarter of 2006, the Group commuted all
reinsurance agreements with Alea North America Insurance Company
(Alea). These reinsurance agreements included participation in
the property quota share and casualty excess of loss treaties.
As a result of the commutation the Group received a cash payment
of $4.5 million, and recorded a pre-tax net loss on
commutation of $160,000.
During the fourth quarter of 2008, the Group commuted all
reinsurance agreements with St Paul Fire and Marine Insurance
Company. These reinsurance agreements included participation in
the property quota share and casualty excess of loss treaties.
As a result of the commutation the Group received a cash payment
of $2.5 million, and recorded a pre-tax net gain on
commutation of $0.9 million.
Prior to 2007, some of the Groups reinsurance treaties
(primarily FPIC treaties) have included provisions that
establish minimum and maximum cessions and allow limited
participation in the profit of the ceded business. Generally,
the Group shares on a limited basis in the profitability through
contingent ceding commissions. Exposure to the loss experience
is contractually defined at minimum and maximum levels, and the
terms of such contracts are fixed at inception. Since estimating
the emergence of claims to the applicable reinsurance layers is
subject to significant uncertainty, the net amounts that will
ultimately be realized may vary significantly from the estimated
amounts presented in the Groups results of operations.
The Groups significant reinsurance treaties as of
December 31, 2008 are summarized below:
Property
Excess of Loss
The Property Excess of Loss program consists of three layers
with coverage of $6,650,000 above an $850,000 retention. The
first layer is $150,000 excess of $850,000 with a per occurrence
limit of $450,000. The second layer is $4.0 million excess
of $1.0 million with a per occurrence limit of
$8.0 million. The third layer is $2.5 million excess
of $5.0 million with a per occurrence limit of
$2.5 million. The first and second layers have no annual
aggregate limit or reinstatement premium. The third layer has a
$5.0 million annual aggregate limit and a reinstatement
premium based on the reinsurance premium multiplied by the
percentage of reinstated limit. The Group purchases facultative
coverage in excess of these limits. Effective January 1,
2009, this program was renewed with the Group increasing its
retention to $1.0 million from $850,000 and thereby
eliminating the first layer of coverage. There will be no change
to coverage excess of $1.0 million for 2009.
Property
Catastrophe Excess of Loss
The Property Catastrophe Excess of Loss program consists of
three layers with coverage of $50.0 million above a
$5.0 million retention. The first layer is
$5.0 million excess of $5.0 million with a per
occurrence limit of $5.0 million. The second layer is
$10.0 million excess of $10.0 million with a per
occurrence limit of $10.0 million. The third layer is
$35.0 million excess of $20.0 million with a per
occurrence limit of $35.0 million. There is an annual
aggregate limit of $10.0 million on the first layer,
$20.0 million on the second layer and $70.0 million on
the
27
third layer. There is a reinstatement premium on each layer
based on 50% of the reinsurance premium multiplied by the
percentage of reinstated limit. There will be no change to this
programs structure for 2009.
Casualty
Excess of Loss
The Casualty Excess of Loss program consists of four layers with
coverage of $9,150,000 above an $850,000 retention. The first
layer is $150,000 excess of $850,000 with a per occurrence limit
of $150,000. The second layer is $1.0 million excess of
$1.0 million with a per occurrence limit of
$1.0 million. The third layer is $3.0 million excess
of $2.0 million with a per occurrence limit of
$3.0 million. The fourth layer is only for the
workers compensation line of business and is
$5.0 million excess of $5.0 million with a per
occurrence limit of $5.0 million. The first layer has no
annual aggregate limit or reinstatement premium. The second,
third and fourth layers have a $5.0 million,
$6.0 million and $10.0 million annual aggregate limit
and no reinstatement premium, respectively. Effective
January 1, 2009, this program was renewed with the Group
increasing its retention to $1.0 million from $850,000 and
thereby eliminating the first layer of coverage. There will be
no change to coverage excess of $1.0 million for 2009.
Umbrella
Liability Quota Share
The Umbrella Liability Quota Share program consists of two
treaties, one for MIC, MICNJ, and FIC, and one for FPIC. The
East coast treaty reinsures losses on a 75% quota share basis up
to $1.0 million and on a 100% quota share basis in excess
of $1.0 million. The FPIC treaty reinsures losses on a 100%
quota share basis with the exception of business owner policies,
which are reinsured 75% up to $1.0 million and then on a
100% quota share basis in excess of $1.0 million. The East
coast treaty provides for up to $10.0 million in limit, and
the FPIC treaty provides for $5.0 million. The Group
purchases facultative coverage in excess of these limits. For
2009 the FPIC treaty will be reinsuring all policies on a 75%
quota share basis up to $1.0 million and on a 100% quota
share basis in excess of $1.0 million.
Surety
Excess of Loss
The Surety Excess of Loss program consists of four layers with
coverage of $4.0 million above a $500,000 retention. The
first layer is $1.5 million excess of $500,000 with a 10%
retention and a per occurrence limit of $1,350,000. The second
layer is $1.5 million excess of $2.0 million with a
10% retention and a per occurrence limit of $1,350,000. The
third layer is $500,000 excess of $3.5 million with a 10%
retention and a per occurrence limit of $450,000. The fourth
layer is $500,000 excess of $4.0 million with a 10%
retention and a per occurrence limit of $450,000. The first and
second layers have a $2.7 million annual aggregate limit
and a 25% and 50%, respectively, reinstatement premium. The
third and fourth layers each have a $450,000 annual aggregate
and no reinstatement premium. The Groups maximum retention
is $900,000 per principal. There will be no change to this
programs structure for 2009.
Terrorism
The Terrorism program consists of three treaties. The first
treaty is $10.0 million above a $3.0 million retention
for commercial lines of business. This coverage does not apply
to nuclear, chemical or biological events. The annual aggregate
limit is $10.0 million. The second treaty is the Property
Terrorism Excess treaty with coverage of $6,650,000 above a
$850,000 retention. This coverage does not apply to nuclear,
chemical or biological events. The annual aggregate limit is
$6,650,000. The third treaty is the Workers Compensation
Terrorism treaty with coverage of $4,150,000 above a $850,000
retention. This coverage does not apply to nuclear, chemical or
biological events. The annual aggregate limit is $4,150,000.
Effective January 1, 2009, this program was renewed with
the Group increasing its retention to $1.0 million from
$850,000. There will be no change to coverage excess of
$1.0 million for 2009.
Reinsurance
Assumed
We generally do not assume risks from other insurance companies.
However, we are required by statute to participate in certain
residual market pools. This participation requires us to assume
business for workers
28
compensation and for property exposures that are not insured in
the voluntary marketplace. We participate in these residual
markets pro rata on a market share basis, and as of
December 31, 2008, our participation is not material. For
the years ended December 31, 2008, 2007 and 2006, our
insurance companies assumed $1.1 million, $1.4 million
and $2.4 million of written premiums, respectively.
Reinsurer
Credit Risk
The insolvency or inability of any reinsurer to meet its
obligations to us could have a material adverse effect on our
results of operations or financial condition. As of
December 31, 2008, the Groups five largest reinsurers
based on percentage of ceded premiums are set forth in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
of Ceded
|
|
|
A.M. Best
|
|
Name
|
|
|
|
|
Premiums
|
|
|
Rating
|
|
|
|
1.
|
|
|
General Reinsurance Corporation
|
|
|
37
|
%
|
|
|
A++
|
|
|
2.
|
|
|
Berkley Insurance Company
|
|
|
34
|
%
|
|
|
A+
|
|
|
3.
|
|
|
Munich Reinsurance America, Inc.
|
|
|
12
|
%
|
|
|
A+
|
|
|
4.
|
|
|
Hartford Steam Boiler Inspection and Insurance Company
|
|
|
6
|
%
|
|
|
A
|
|
|
5.
|
|
|
Montpelier Reinsurance
|
|
|
2
|
%
|
|
|
A−
|
|
The following table sets forth the five largest amounts of loss
and loss expenses recoverable from reinsurers on unpaid claims
as of December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and
|
|
|
|
|
|
|
|
|
|
Loss Expenses
|
|
|
|
|
|
|
|
|
|
Recoverable on
|
|
|
A.M. Best
|
|
Name
|
|
|
|
|
Unpaid Claims
|
|
|
Rating
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
1.
|
|
|
Berkley Insurance Company
|
|
$
|
26,594
|
|
|
|
A+
|
|
|
2.
|
|
|
Partner Reinsurance Company of the U.S.
|
|
|
17,463
|
|
|
|
A+
|
|
|
3.
|
|
|
General Reinsurance Corporation
|
|
|
12,550
|
|
|
|
A++
|
|
|
4.
|
|
|
QBE Reinsurance Corporation
|
|
|
8,932
|
|
|
|
A
|
|
|
5.
|
|
|
Continental Casualty Company
|
|
|
6,194
|
|
|
|
A
|
|
The A++, A+ and A ratings are the top three highest of
A.M. Bests 16 ratings. According to A.M. Best,
companies with a rating of A++ or A+ are
rated Superior, with ...a superior ability to
meet their ongoing obligations to policyholders. Companies
with a rating of A are rated Excellent,
with ...an excellent ability to meet their ongoing
obligations to policyholders.
INVESTMENTS
On a consolidated basis, all of our investments in fixed income
and equity securities are classified as available for sale and
are carried at fair value.
An important component of our consolidated operating results has
been the return on invested assets. Our investment objectives
are to: (i) maximize current yield, (ii) maintain
safety of capital through a balance of high quality, diversified
investments that minimize risk, (iii) maintain adequate
liquidity for our insurance operations, (iv) meet
regulatory requirements, and (v) increase surplus through
appreciation. However, in order to enhance the yield on our
fixed income securities, our investments generally have a longer
duration than the duration of our insurance liabilities. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations under the subsection
entitled Quantitative and Qualitative Information about
Market Risk.
Our investment policy requires that investments be made in a
portfolio consisting of bonds, equity securities, and short-term
money market instruments. Our equity investments are
concentrated in companies with larger capitalizations. The
investment policy does not permit investment in unincorporated
businesses, private placements or direct mortgages, foreign
denominated securities, financial guarantees or commodities. The
Board of Directors of the Group has developed this investment
policy and reviews it periodically.
29
The following table sets forth consolidated information
concerning our investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008
|
|
|
At December 31, 2007
|
|
|
At December 31, 2006
|
|
|
|
Cost(2)
|
|
|
Fair Value
|
|
|
Cost(2)
|
|
|
Fair Value
|
|
|
Cost(2)
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Fixed income securities(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government and government agencies(3)
|
|
$
|
84,747
|
|
|
$
|
87,975
|
|
|
$
|
83,016
|
|
|
$
|
83,715
|
|
|
$
|
75,683
|
|
|
$
|
74,981
|
|
Obligations of states and political subdivisions
|
|
|
143,042
|
|
|
|
145,125
|
|
|
|
142,873
|
|
|
|
144,026
|
|
|
|
116,361
|
|
|
|
116,298
|
|
Industrial and miscellaneous
|
|
|
77,859
|
|
|
|
77,499
|
|
|
|
65,109
|
|
|
|
65,208
|
|
|
|
53,298
|
|
|
|
52,717
|
|
Mortgage-backed securities
|
|
|
25,427
|
|
|
|
23,488
|
|
|
|
30,980
|
|
|
|
31,289
|
|
|
|
29,427
|
|
|
|
29,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
331,075
|
|
|
|
334,087
|
|
|
|
321,978
|
|
|
|
324,238
|
|
|
|
274,769
|
|
|
|
273,454
|
|
Equity securities
|
|
|
9,232
|
|
|
|
10,203
|
|
|
|
12,500
|
|
|
|
17,930
|
|
|
|
10,940
|
|
|
|
16,522
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,692
|
|
|
|
7,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
340,307
|
|
|
$
|
344,290
|
|
|
$
|
334,478
|
|
|
$
|
342,168
|
|
|
$
|
293,401
|
|
|
$
|
297,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In our consolidated financial statements, investments are
carried at fair value.
|
|
(2)
|
|
Original cost of equity and fixed income securities adjusted for
other than temporary impairment writedowns and amortization of
premium and accretion of discount.
|
|
(3)
|
|
Includes approximately $66,576, $56,142 and $48,840 (cost) and
$68,696, $56,637 and $48,548 (estimated fair value) of
mortgage-backed securities backed by the U.S. government and
government agencies as of December 31, 2008, 2007 and 2006,
respectively.
|
The following table shows our Industrial and miscellaneous fixed
income securities and equity holdings by industry sector:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Cost(1)
|
|
|
Fair Value
|
|
|
Cost(1)
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Industrial and miscellaneous:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
$
|
36,520
|
|
|
$
|
36,065
|
|
|
$
|
35,784
|
|
|
$
|
35,603
|
|
Retail specialty
|
|
|
27,561
|
|
|
|
27,810
|
|
|
|
19,434
|
|
|
|
19,601
|
|
Energy
|
|
|
9,680
|
|
|
|
9,444
|
|
|
|
4,298
|
|
|
|
4,355
|
|
Pharmaceutical
|
|
|
2,249
|
|
|
|
2,320
|
|
|
|
2,747
|
|
|
|
2,792
|
|
Information Technology
|
|
|
1,849
|
|
|
|
1,860
|
|
|
|
2,846
|
|
|
|
2,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
77,859
|
|
|
$
|
77,499
|
|
|
$
|
65,109
|
|
|
$
|
65,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
$
|
2,329
|
|
|
$
|
2,343
|
|
|
$
|
4,364
|
|
|
$
|
6,007
|
|
Retail specialty
|
|
|
4,117
|
|
|
|
4,565
|
|
|
|
4,083
|
|
|
|
6,037
|
|
Energy
|
|
|
746
|
|
|
|
1,135
|
|
|
|
953
|
|
|
|
1,620
|
|
Pharmaceutical
|
|
|
794
|
|
|
|
974
|
|
|
|
840
|
|
|
|
1,379
|
|
Information Technology
|
|
|
1,246
|
|
|
|
1,186
|
|
|
|
1,637
|
|
|
|
2,115
|
|
Transportation
|
|
|
|
|
|
|
|
|
|
|
623
|
|
|
|
772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,232
|
|
|
$
|
10,203
|
|
|
$
|
12,500
|
|
|
$
|
17,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Original cost of equity securities; original cost of fixed
income securities adjusted for amortization of premium and
accretion of discount, as well as any impairment write-downs.
|
30
The table below contains consolidated information concerning the
investment ratings of our fixed maturity investments at
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
|
|
Type/Ratings of Investment(1)(2)
|
|
Cost
|
|
|
Fair Value
|
|
|
Percentages(3)
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. government and agencies
|
|
$
|
84,747
|
|
|
$
|
87,975
|
|
|
|
26.3
|
%
|
AAA
|
|
|
90,318
|
|
|
|
89,691
|
|
|
|
26.9
|
%
|
AA
|
|
|
87,443
|
|
|
|
88,452
|
|
|
|
26.5
|
%
|
A
|
|
|
59,691
|
|
|
|
59,112
|
|
|
|
17.7
|
%
|
BBB
|
|
|
7,422
|
|
|
|
7,411
|
|
|
|
2.2
|
%
|
BB and lower
|
|
|
1,454
|
|
|
|
1,446
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
331,075
|
|
|
$
|
334,087
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The ratings set forth in this table are based on the ratings
assigned by Standard & Poors Corporation
(S&P). If S&Ps ratings were unavailable, the
equivalent ratings supplied by Moodys Investors Services,
Inc., Fitch Investors Service, Inc. or the NAIC were used where
available.
|
|
(2)
|
|
The ratings shown above include, where applicable, credit
enhancement by monoline bond insurers (see Item 7A for
discussion of credit enhancement)
|
|
(3)
|
|
Represents the fair value of the classification as a percentage
of the total fair value of the portfolio.
|
The table below sets forth the maturity profile of our
consolidated fixed maturity investments as of December 31,
2008 (note that mortgage-backed securities in the below table
include securities backed by the U.S. government and
agencies):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
|
|
Maturity
|
|
Cost(1)
|
|
|
Fair Value
|
|
|
Percentages(2)
|
|
|
|
(Dollars in thousands)
|
|
|
1 year or less
|
|
$
|
24,377
|
|
|
$
|
24,452
|
|
|
|
7.3
|
%
|
More than 1 year through 5 years
|
|
|
90,786
|
|
|
|
92,092
|
|
|
|
27.6
|
%
|
More than 5 years through 10 years
|
|
|
93,830
|
|
|
|
95,860
|
|
|
|
28.7
|
%
|
More than 10 years
|
|
|
30,079
|
|
|
|
29,499
|
|
|
|
8.8
|
%
|
Mortgage-backed securities
|
|
|
92,003
|
|
|
|
92,184
|
|
|
|
27.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
331,075
|
|
|
$
|
334,087
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Fixed maturities are carried at fair value in our consolidated
financial statements.
|
|
(2)
|
|
Represents the fair value of the classification as a percentage
of the total fair value of the portfolio.
|
As of December 31, 2008, the average maturity of our fixed
income investment portfolio (excluding mortgage-backed
securities) was 5.0 years and the average duration was
3.5 years. Our fixed maturity investments include
U.S. government bonds, securities issued by government
agencies, obligations of state and local governments and
governmental authorities, corporate bonds and mortgage-backed
securities, most of which are exposed to changes in prevailing
interest rates. We carry these investments as available for
sale. This allows us to manage our exposure to risks associated
with interest rate fluctuations through active review of our
investment portfolio by our management and board of directors
and consultation with our portfolio advisor.
We continue to maintain a conservative, diversified investment
portfolio, with fixed maturity investments representing 97% of
invested assets. As of December 31, 2008, the fixed income
portfolio consists of 99.6% investment grade securities, with
the remaining 0.4% non-investment grade rated securities. The
0.4% includes three corporate securities held with a combined
market value of $1.2 million, and one asset-backed security
held with a market value of $0.2 million. The fixed income
portfolio has an average rating of Aa2/AA and an average tax
equivalent book yield of 5.40%.
31
Among its portfolio holdings, the Groups only direct
subprime exposure consists of asset-backed securities (ABS)
within the home equity subsector. The ABS home equity subsector
totaled $0.6 million (book value) on December 31,
2008, representing 4.1% of the ABS holdings, 0.7% of the total
structured product holdings, and 0.2% of total fixed income
portfolio holdings. The subprime related exposure consists of
three individual securities, of which two are insured by a
monoline insurere against default of principal and interest.
However, since FGIC and AMBAC have been downgraded from their
previous AAA status, the two insured securities are now rated
according to the higher of the underlying collateral or the
monoline rating. One bond is rated Baa1/A while the other is
rated Baa3/BB. With regard to the remaining security without
monoline insurance, it is rated Aa2/AA by Moodys and
S&P, respectively. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations under the subsection entitled
Quantitative and Qualitative Information about Market
Risk.
Our consolidated average cash and invested assets, net
investment income and return on average cash and invested assets
for the years ended December 31, 2008, 2007 and 2006 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Average cash and invested assets
|
|
$
|
366,852
|
|
|
$
|
332,580
|
|
|
$
|
294,358
|
|
Net investment income(1)
|
|
|
13,936
|
|
|
|
13,053
|
|
|
|
10,070
|
|
Return on average cash and invested assets
|
|
|
3.8
|
%
|
|
|
3.9
|
%
|
|
|
3.4
|
%
|
|
|
|
(1)
|
|
Net investment income for 2007 includes $720,000 non-recurring
investment income from the retaliatory tax refund.
|
A.M. BEST
RATING
A.M. Best rates insurance companies based on factors of
concern to policyholders. All companies in the Group participate
in the intercompany pooling agreement (see Intercompany
Agreements above) and have been assigned a group rating of
A (Excellent) by A.M. Best. The Group has been
assigned that rating for the past 8 years. An A
rating is the third highest of A.M. Bests 16 possible
rating categories.
According to the A.M. Best guidelines, A.M. Best
assigns A ratings to companies that have, on
balance, excellent balance sheet strength, operating performance
and business profiles. Companies rated A are
considered by A.M. Best to have an excellent ability
to meet their ongoing obligations to policyholders. In
evaluating a companys financial and operating performance,
A.M. Best reviews:
|
|
|
|
|
the companys profitability, leverage and liquidity;
|
|
|
|
its book of business;
|
|
|
|
the adequacy and soundness of its reinsurance;
|
|
|
|
the quality and estimated market value of its assets;
|
|
|
|
the adequacy of its reserves and surplus;
|
|
|
|
its capital structure;
|
|
|
|
the experience and competence of its management; and
|
|
|
|
its marketing presence.
|
COMPETITION
The property and casualty insurance market is very highly
competitive. Our insurance companies compete with stock
insurance companies, mutual companies, local cooperatives and
other underwriting organizations. Some of these competitors have
substantially greater financial, technical and operating
resources than our insurance companies. Within our
producers offices we compete to be a preferred market for
desirable business, as well as competing with other carriers to
attract and retain the best producers. Our ability to compete
successfully in our principal markets is dependent upon a number
of factors, many of which are outside our control. These factors
32
include market and competitive conditions. Many of our lines of
insurance are subject to significant price competition. Some
companies may offer insurance at lower premium rates through the
use of salaried personnel or other distribution methods, rather
than through independent producers paid on a commission basis
(as our insurance companies do). In addition to price,
competition in our lines of insurance is based on quality of the
products, quality and speed of service, financial strength,
ratings, distribution systems and technical expertise.
Pricing in the property and casualty insurance industry
historically has been and remains cyclical. During a soft market
cycle, price competition becomes prevalent, which makes it
difficult to write and retain properly priced personal and
commercial lines business. In response to the current soft
market, the marketplace is populated with some competitors who
are significantly reducing their prices
and/or
offering coverage terms that are generous in relation to the
premiums being charged. We believe that in some instances the
prices and terms being offered, if matched by us, would not
provide us with an adequate rate of return, if any.
Our policy is to maintain disciplined underwriting during soft
markets, declining business which is inadequately priced for its
level of risk. The market has become very highly competitive,
with increasing competition being seen in virtually all classes
of commercial and personal accounts. This affects our new
business opportunities and creates more challenges for renewals,
which can adversely impact premium revenue levels for the Group.
We continue to focus on long-term profitability rather than
short-term revenue. We also continue to work with our agents to
target classes of business and accounts compatible with our
underwriting appetite, which includes certain types of religious
institutions risks, contracting risks, small business risks and
property risks.
Many of our competitors offer internet-based quoting
and/or
policy issuance systems to their producers. In response to this
improvement in marketplace technology, we have developed
technology that will allow our agents to rate and bind
transactions via an internet-based rating system for some
products and lines of business. We launched this process in late
2008 in California and launched a similar process for New Jersey
and Pennsylvania agents in January 2009. We intend on expanding
the use of internet-based processing in 2009 and beyond.
A new form of competition may enter the marketplace as
reinsurers attempt to diversify their insurance risk by writing
business in the primary marketplace. The Group also faces
competition, primarily in the commercial insurance market, from
entities that may desire to self-insure their own risks.
REGULATION
General
Insurance companies are subject to supervision and regulation in
the states in which they do business. State insurance
authorities have broad administrative powers to administer
statutes and regulations with respect to all aspects of our
insurance business including:
|
|
|
|
|
approval of policy forms and premium rates;
|
|
|
|
standards of solvency, including establishing statutory and
risk-based capital requirements for statutory surplus;
|
|
|
|
classifying assets as admissible for purposes of determining
statutory surplus;
|
|
|
|
licensing of insurers and their producers;
|
|
|
|
advertising and marketing practices;
|
|
|
|
restrictions on the nature, quality and concentration of
investments;
|
|
|
|
assessments by guaranty associations;
|
|
|
|
restrictions on the ability of our insurance company
subsidiaries to pay dividends to us;
|
|
|
|
restrictions on transactions between our insurance company
subsidiaries and their affiliates;
|
|
|
|
restrictions on the size of risks insurable under a single
policy;
|
|
|
|
requiring deposits for the benefit of policyholders;
|
33
|
|
|
|
|
requiring certain methods of accounting;
|
|
|
|
periodic examinations of our operations and finances;
|
|
|
|
claims practices;
|
|
|
|
prescribing the form and content of records of financial
condition required to be filed; and
|
|
|
|
requiring reserves for unearned premiums, losses and other
purposes.
|
State insurance laws and regulations require our insurance
companies to file financial statements with insurance
departments everywhere they do business, and the operations of
our insurance companies and accounts are subject to examination
by those departments at any time. Our insurance companies
prepare statutory financial statements in accordance with
accounting practices and procedures prescribed or permitted by
these departments.
Financial
Examinations
Financial examinations are conducted by the Pennsylvania
Insurance Department, the California Department of Insurance,
and the New Jersey Department of Banking and Insurance every
three to five years. The Pennsylvania Insurance
Departments last completed examination of MIC was as of
December 31, 2004. Their last completed examination of FIC
was as of December 31, 2004. The New Jersey Department of
Banking and Insurances last completed examination of MICNJ
was as of December 31, 2004. The last examination of FPIC
by the California Department of Insurance was as of
December 31, 2003. These examinations did not result in any
adjustments to the financial position of any of our insurance
companies. In addition, there were no substantive qualitative
matters indicated in the examination reports that had a material
adverse impact on the operations of our insurance companies.
In 2008, the Pennsylvania Insurance Department began an
examination which will be a coordinated examination with both
the New Jersey Department of Banking and Insurance and the
California Department of Insurance for MICNJ and FPIC,
respectively. That examination was ongoing as of
December 31, 2008.
NAIC
Risk-Based Capital Requirements
In 1990, the NAIC began an accreditation program to ensure that
states have adequate procedures in place for effective insurance
regulation, especially with respect to financial solvency. The
accreditation program requires that a state meet specific
minimum standards in over five regulatory areas to be considered
for accreditation. The accreditation program is an ongoing
process and once accredited, a state must enact any new or
modified standards approved by the NAIC within two years
following adoption. As of December 31, 2008, Pennsylvania,
New Jersey, and California, the states in which our insurance
company subsidiaries are domiciled, were accredited.
Pennsylvania, New Jersey and California impose the NAICs
risk-based capital requirements that require insurance companies
to calculate and report information under a risk-based formula.
These risk-based capital requirements attempt to measure
statutory capital and surplus needs based on the risks in a
companys mix of products and investment portfolio. Under
the formula, a company first determines its authorized
control level risk-based capital ( RBC). This
authorized control level takes into account (i) the risk
with respect to the insurers assets; (ii) the risk of
adverse insurance experience with respect to the insurers
liabilities and obligations, (iii) the interest rate risk
with respect to the insurers business; and (iv) all
other business risks and such other relevant risks as are set
forth in the RBC instructions. A companys total
adjusted capital is the sum of statutory capital and
surplus and such other items as the risk-based capital
instructions may provide. The formula is designed to allow state
insurance regulators to identify weakly capitalized companies.
The requirements provide for four different levels of regulatory
attention. The company action level is triggered if
a companys total adjusted capital is less than 2.0 times
its authorized control level but greater than or equal to 1.5
times its authorized control level. At the company action level,
the company must submit a comprehensive plan to the regulatory
authority that discusses proposed corrective actions to improve
the capital position. The regulatory action level is
triggered if a companys total adjusted capital is less
than 1.5 times but greater than or equal to 1.0 times its
authorized control level. At the regulatory action level, the
regulatory authority will perform a special examination of the
company and issue an order specifying corrective actions that
must be
34
followed. The authorized control level is triggered
if a companys total adjusted capital is less than 1.0
times but greater than or equal to 0.7 times its authorized
control level; at this level the regulatory authority may take
action it deems necessary, including placing the company under
regulatory control. The mandatory control level is
triggered if a companys total adjusted capital is less
than 0.7 times its authorized control level; at this level the
regulatory authority is mandated to place the company under its
control. The capital levels of our insurance companies have
never triggered any of these regulatory capital levels. We
cannot assure you, however, that the capital requirements
applicable to the business of our insurance companies will not
increase in the future.
Market
Conduct Regulation
State insurance laws and regulations include numerous provisions
governing trade practices and the marketplace activities of
insurers, including provisions governing the form and content of
disclosure to consumers, illustrations, advertising, sales
practices and complaint handling. State regulatory authorities
generally enforce these provisions through periodic market
conduct examinations, which the Group is subject to from time to
time. No material issues have been raised in the market conduct
exams performed on the Groups insurance subsidiaries.
Property
and Casualty Regulation
Our property and casualty operations are subject to rate and
policy form approval. All of the rates and policy forms that we
use that require regulatory approval have been filed with and
approved by the appropriate insurance regulator. Our operations
are also subject to laws and regulations covering a range of
trade and claim settlement practices. To our knowledge, we are
currently in compliance with these laws and regulations. State
insurance regulatory authorities have broad discretion in
approving an insurers proposed rates. The extent to which
a state restricts underwriting and pricing of a line of business
may adversely affect an insurers ability to operate that
business profitably in that state on a consistent basis.
State insurance laws and regulations require us to participate
in mandatory property-liability shared market,
pooling or similar arrangements that provide certain
types of insurance coverage to individuals or others who
otherwise are unable to purchase coverage voluntarily provided
by private insurers. Shared market mechanisms include assigned
risk plans; fair access to insurance requirements or
FAIR plans; and reinsurance facilities, such as the
New Jersey Unsatisfied Claim and Judgment Fund. In addition,
some states require insurers to participate in reinsurance pools
for claims that exceed specified amounts. Our participation in
these mandatory shared market or pooling mechanisms generally is
related to the amounts of our direct writings for the type of
coverage written by the specific arrangement in the applicable
state. For the three years ended December 31, 2008, 2007
and 2006, we received earned premiums from these arrangements in
the amounts of $1,233,000, $1,801,000, and $2,539,000,
respectively, and incurred losses and loss adjustment expenses
from these arrangements in the amounts of $1,043,000,
$1,185,000, and $3,908,000, respectively. Because we do not have
a significant amount of direct writings in the coverages written
under these arrangements, we do not anticipate that these
arrangements will have a material effect on us in the future.
However, we cannot predict the financial impact of our
participation in any shared market or pooling mechanisms that
may be implemented in the future by the states in which we do
business.
Guaranty
Fund Laws
All states have guaranty fund laws under which insurers doing
business in the state can be assessed to fund policyholder
liabilities of insolvent insurance companies. The states in
which our insurance companies do business have such laws. Under
these laws, an insurer is subject to assessment depending upon
its market share in the state of a given line of business. For
the years ended December 31, 2008, 2007 and 2006, we
incurred approximately $98,000, $(180,000), and $105,000,
respectively, in assessments pursuant to state insurance
guaranty association laws. We establish reserves relating to
insurance companies that are subject to insolvency proceedings
when we are notified of assessments by the guaranty
associations. We cannot predict the amount and timing of any
future assessments on our insurance companies under these laws.
35
Terrorism
Risk Insurance Act
The Terrorism Risk Insurance Act of 2002 (TRIA) established a
program that provides a backstop for insurance-related losses
resulting from any act of terrorism as defined. Under this law,
coverage provided by an insurer for losses caused by certified
acts of terrorism is partially reimbursed by the United States
under a formula under which the government pays 85% (beginning
in 2007) of covered terrorism losses, exceeding a
prescribed deductible. Therefore, the act limits an
insurers exposure to certified terrorist acts (as defined
by the act) to the deductible formula. The deductible is based
upon a percentage of direct earned premiums for commercial
property and casualty policies. Coverage under the act must be
offered to all property, casualty and surety insureds. On
December 26, 2007, the President of the United States
signed into law the Terrorism Risk Insurance Program
Reauthorization Act of 2007 which extends TRIA through
December 31, 2014. The law extends the temporary federal
program that provides for a transparent system of shared public
and private compensation for insured losses resulting from acts
of terrorism.
We are currently charging a premium for terrorism coverage on
our businessowners, commercial automobile, commercial
workers compensation, tenant-occupied dwelling, special
contractors, special multi-peril, monoline commercial fire,
monoline general liability and religious institution policies.
Insureds that are charged a terrorism premium have the option
(except workers compensation) of deleting terrorism
coverage to reduce their premium costs; however many do not do
so. Insureds under commercial workers compensation
policies do not have the option to delete the terrorism
coverage. Most other policies include terrorism coverage at no
additional cost. Where allowed, we exclude coverage for losses
that are from events not certified as terrorism events, with no
buyback option available to the policyholder.
We are unable to predict the extent to which this legislation
may affect the demand for our products or the risks that will be
available for us to consider underwriting. We do not know the
extent to which insureds will elect to purchase this coverage
when available.
New and
Proposed Legislation and Regulations
The property and casualty insurance industry continues to
receive a considerable amount of publicity related to pricing,
coverage terms, the lack of availability of insurance, and the
issue of paying profit-sharing commissions to agents.
Regulations and legislation are being proposed to limit damage
awards, to control plaintiffs counsel fees, to bring the
industry under regulation by the federal government and to
control premiums, policy terminations and other policy terms. We
are unable to predict whether, in what form, or in what
jurisdictions, any regulatory proposals might be adopted or
their effect, if any, on our insurance companies.
Dividends
Our insurance companies are restricted by the insurance laws of
their respective states of domicile regarding the amount of
dividends or other distributions they may pay without notice to
or the prior approval of the state regulatory authority.
All dividends from MIC to MIG require prior notice to the
Pennsylvania Insurance Department. All extraordinary
dividends require advance approval. A dividend is deemed
extraordinary if, when aggregated with all other
dividends paid within the preceding 12 months, the dividend
exceeds the greater of (a) statutory net income (excluding
realized capital gains) for the preceding calendar year or
(b) 10% of statutory surplus as of the preceding
December 31. As of December 31, 2008, the amount
available for payment of dividends from MIC in 2009, without the
prior approval, is approximately $5.7 million.
All dividends from FPIC to FPIG (wholly owned by MIG) require
prior notice to the California Department of Insurance. All
extraordinary dividends require advance approval. A
dividend is deemed extraordinary if, when aggregated
with all other dividends paid within the preceding
12 months, the dividend exceeds the greater of
(a) statutory net income for the preceding calendar year or
(b) 10% of statutory surplus as of the preceding
December 31. As of December 31, 2008, the amount
available for payment of dividends from FPIC in 2009, without
the prior approval, is approximately $6.4 million.
36
Holding
Company Laws
Most states have enacted legislation that regulates insurance
holding company systems. Each insurance company in a holding
company system is required to register with the insurance
supervisory agency of its state of domicile and furnish certain
information. This includes information concerning the operations
of companies within the holding company system that may
materially affect the operations, management or financial
condition of the insurers within the system. Pursuant to these
laws, the respective insurance departments may examine our
insurance companies and their holding companies at any time,
require disclosure of material transactions by our insurance
companies and their holding companies and require prior notice
of approval of certain transactions, such as extraordinary
dividends distributed by our insurance companies.
All transactions within the holding company system affecting our
insurance companies and their holding companies must be fair and
equitable. Notice of certain material transactions between our
insurance companies and any person or entity in our holding
company system will be required to be given to the applicable
insurance commissioner. In some states, certain transactions
cannot be completed without the prior approval of the insurance
commissioner.
EMPLOYEES
All of our employees are employed directly by BICUS, a wholly
owned subsidiary of MIC. Our insurance companies do not have any
employees. BICUS provides management services to all of our
insurance companies. As of December 31, 2008, the total
number of full-time equivalent employees of BICUS was 198. None
of these employees are covered by a collective bargaining
agreement, and BICUS believes that its employee relations are
good.
AVAILABLE
INFORMATION
The Company maintains a website at www.mercerins.com. Our annual
report on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K,
and amendments to those reports, filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, are available free of charge on our website as soon as
practicable after electronic filing of such material with, or
furnishing it to, the Securities and Exchange Commission.
Risks
Relating to Our Business and Industry
General
Economic Conditions
A disruption in world financial markets could adversely affect
demand for the Groups products, and credit risk associated
with agents, customers, and reinsurers, as well as adversely
affecting the Groups investment portfolio value and
investment income. Disrupted markets could also adversely affect
the Groups ability to raise additional capital if it
needed to do so in the future.
A prolonged downturn in the construction segment of the economy
would have a continued negative effect on the Groups
premium volume through fewer construction risks to insure and
reduced premiums for those contractors that remain in business.
During the second half of 2008, there were significant
disruptions to the financial and equity markets. This resulted
from, in part, failures of financial institutions on an
unprecedented scale, and caused a significant reduction in
liquidity and trading flows in the credit markets in addition to
a dramatic widening in credit spreads. Such impacts affected the
valuations of both the fixed income and equity securities held
by the Group. If the financial and equity markets continue their
adverse performance, the Groups business and
stockholders equity could be adversely affected.
37
Catastrophic
Events
As a property and casualty insurer, we are subject to claims
from catastrophes that may have a significant negative impact on
operating and financial results. We have experienced catastrophe
losses, and can be expected to experience catastrophe losses in
the future. Catastrophe losses can be caused by various events,
including coastal storms, snow storms, ice storms, freezing,
hurricanes, earthquakes, tornadoes, wind, hail, fires, and other
natural or man-made disasters. We also face exposure to losses
resulting from acts of war, acts of terrorism and political
instability. The frequency, number and severity of these losses
are unpredictable. The extent of losses from a catastrophe is a
function of both the total amount of insured exposure in the
area affected by the event and the severity of the event.
We attempt to mitigate catastrophe risk by reinsuring a portion
of our exposure. However, reinsurance may prove inadequate if:
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A major catastrophic loss exceeds the reinsurance limit;
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A number of small catastrophic losses occur which individually
fall below the reinsurance retention level.
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In addition, because accounting regulations do not permit
insurers to reserve for catastrophic events until they occur,
claims from catastrophic events could cause substantial
volatility in our financial results for any fiscal quarter or
year and could have a material adverse affect on our financial
condition or results of operations. Our ability to write new
business also could be adversely affected.
Loss
Reserves
We maintain reserves to cover amounts we estimate will be needed
to pay for insured losses and for the expenses necessary to
settle claims. Estimating loss and loss expense reserves is a
difficult and complex process involving many variables and
subjective judgments. Estimates are based on management
assessment of the known facts and circumstances, prediction of
future events, claims severity and frequency and other
subjective factors. We regularly review our reserving techniques
and our overall amount of reserves. We review historical data
and consider the impact of various factors such as:
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trends in claim frequency and severity;
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our loss history and the industrys loss history;
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information regarding each claim for losses;
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legislative enactments, judicial decisions and legal
developments regarding damages;
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changes in political attitudes; and
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trends in general economic conditions, including inflation.
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Our estimated loss reserves could be incorrect and potentially
inadequate. If we determine that our loss reserves are
inadequate, we will have to increase them. This adjustment would
reduce income during the period in which the adjustment is made,
which could have a material adverse impact on our financial
condition and results of operation. There is no precise way to
determine the ultimate liability for losses and loss settlements
prior to final settlement of the claim.
Terrorism
The threat of terrorism, both within the United States and
abroad, and military and other actions and heightened security
measures in response to these types of threats, may cause
significant volatility and declines in the equity markets in the
United States, Europe and elsewhere, as well as loss of life,
property damage, additional disruptions to commerce and reduced
economic activity. Actual terrorist attacks could cause losses
from insurance claims related to the property and casualty
insurance operations of the Group as well as a decrease in our
stockholders equity, net income
and/or
revenue. The Terrorism Risk Insurance Reauthorization and
Extension Act of 2007 requires that some coverage for terrorist
loss be offered by primary property insurers and provides
Federal assistance for recovery of claims. In addition, some of
the assets in our investment portfolio may be adversely
38
affected by declines in the equity markets and economic activity
caused by the continued threat of terrorism, ongoing military
and other actions and heightened security measures.
We cannot predict at this time whether and the extent to which
industry sectors in which we maintain investments may suffer
losses as a result of terrorism-related decreases in commercial
and economic activity, or how any such decrease might impact the
ability of companies within the affected industry sectors to pay
interest or principal on their securities, or how the value of
any underlying collateral might be affected.
We can offer no assurances that the threats of future
terrorist-like events in the United States and abroad or
military actions by the United States will not have a material
adverse effect on our business, financial condition or results
of operations.
Reinsurance
Our ability to manage our exposure to underwriting risks depends
on the availability and cost of reinsurance coverage.
Reinsurance is the practice of transferring part of an insurance
companys liability and premium under an insurance policy
to another insurance company. We use reinsurance arrangements to
limit and manage the amount of risk we retain, to stabilize our
underwriting results and to increase our underwriting capacity.
The availability and cost of reinsurance are subject to current
market conditions and may vary significantly over time.
Significant variation in reinsurance availability and cost could
result in us being unable to maintain our desired reinsurance
coverage or to obtain other reinsurance coverage in adequate
amounts and at favorable rates. If we are unable to renew our
expiring coverage or obtain new coverage, it will be difficult
for us to manage our underwriting risks and operate our business
profitably.
It is also possible that the losses we experience on risks we
have reinsured will exceed the coverage limits on the
reinsurance. If the amount of our reinsurance coverage is
insufficient, our insurance losses could increase substantially.
If our reinsurers do not pay our claims in a timely manner, we
may incur losses. We are subject to loss and credit risk with
respect to the reinsurers with whom we deal because buying
reinsurance does not relieve us of our liability to
policyholders. If our reinsurers are not capable of fulfilling
their financial obligations to us, our insurance losses would
increase.
Investments
Our investment portfolio contains a significant amount of
fixed-income securities, including at different times bonds,
mortgage-backed securities (MBSs) and other securities. The
market values of all of our investments fluctuate depending on
economic conditions and other factors. The market values of our
fixed-income securities are particularly sensitive to changes in
interest rates.
We may not be able to prevent or minimize the negative impact of
interest rate changes. Additionally, we may, from time to time,
for business, regulatory or other reasons, elect or be required
to sell certain of our invested assets at a time when their
market values are less than their original cost, resulting in
realized capital losses, which would reduce net income.
Regulation
If we fail to comply with insurance industry regulations, or if
those regulations become more burdensome, we may not be able to
operate profitably.
Our insurance companies are regulated by government agencies in
the states in which we do business, as well as by the federal
government. Most insurance regulations are designed to protect
the interests of policyholders rather than shareholders and
other investors. These regulations are generally administered by
a department of insurance in each state in which we do business.
State insurance departments conduct periodic examinations of the
affairs of insurance companies and require the filing of annual
and other reports relating to financial condition, holding
company issues and other matters.
39
These regulatory requirements may adversely affect or inhibit
our ability to achieve some or all of our business objectives.
In addition, regulatory authorities have relatively broad
discretion to deny or revoke licenses for various reasons,
including the violation of regulations. In some instances, we
follow practices based on our interpretations of regulations or
practices that we believe may be generally followed by the
industry. These practices may turn out to be different from the
interpretations of regulatory authorities. If we do not have the
requisite licenses and approvals or do not comply with
applicable regulatory requirements, insurance regulatory
authorities could preclude or temporarily suspend us from
carrying on some or all of our activities or otherwise penalize
us. This could adversely affect our ability to operate our
business. Further, changes in the level of regulation of the
insurance industry or changes in laws or regulations themselves
or interpretations by regulatory authorities could adversely
affect our ability to operate our business.
We are also subject to various accounting and financial
requirements established by the NAIC. If we fail to comply with
these laws, regulations and requirements, it could result in
consequences ranging from a regulatory examination to a
regulatory takeover of one or more of our insurance companies.
This would make our business less profitable. In addition, state
regulators and the NAIC continually re-examine existing laws and
regulations, with an emphasis on insurance company solvency
issues and fair treatment of policyholders. Insurance laws and
regulations could change or additional restrictions could be
imposed that are more burdensome and make our business less
profitable.
We are subject to the application of U.S. generally accepted
accounting principles (GAAP), which are periodically revised
and/or
expanded. As such, we are periodically required to adopt new or
revised accounting standards issued by recognized authoritative
bodies, including the Financial Accounting Standards Board. It
is possible that future changes required to be adopted could
change the current accounting treatment that we apply and such
changes could result in a material adverse impact on our results
of operations and financial condition.
Geographic
Due to the geographic concentration of our business
(principally, Arizona, California, Nevada, New Jersey, Oregon
and Pennsylvania, and a limited amount in New York) catastrophe
and natural peril losses may have a greater adverse effect on us
than they would on a more geographically diverse property and
casualty insurer.
We could be significantly affected by legislative, judicial,
economic, regulatory, demographic and other events and
conditions in these states. In addition, we have significant
exposure to property losses caused by severe weather that
affects any of these states. Those losses could adversely affect
our results.
Additionally, a significant portion of our direct premium
writings are written in the construction contractor markets,
primarily in California. A significant downturn in the United
States or California construction industry could adversely
affect our direct written premiums.
Competition
The property and casualty insurance market in which we operate
is very highly competitive. Competition in the property and
casualty insurance business is based on many factors. These
factors include the perceived financial strength of the insurer,
premiums charged, policy terms and conditions, services
provided, reputation, financial ratings assigned by independent
rating agencies and the experience of the insurer in the line of
insurance to be written. We compete with stock insurance
companies, mutual companies, local cooperatives and other
underwriting organizations. Many of these competitors have
substantially greater financial, technical and operating
resources than we have.
We pay producers on a commission basis to produce business. Some
of our competitors may offer higher commissions or insurance at
lower premium rates through the use of salaried personnel or
other distribution methods that do not rely on independent
producers. Increased competition could adversely affect our
ability to attract and retain business and thereby reduce our
profits from operations.
40
We believe that our current marketplace is experiencing
significant pressure to reduce prices
and/or
increase coverage that is generous in relation to the premium
being charged. This pricing pressure could result in fewer new
business opportunities for us and possibly fewer renewals
retained, which could lead to reduced direct written premium
levels.
Many of our competitors offer internet-based quoting
and/or
policy issuance systems to their agents. Our ability to compete
with marketplace technology advances could adversely affect our
ability to write business and service accounts with the agency
force, and could adversely impact its results of operations and
financial condition.
A new form of competition may enter the marketplace as
reinsurers attempt to diversify their insurance risk by writing
business in the primary marketplace. We also face competition,
primarily in the commercial insurance market, from entities that
may desire to self-insure their own risks. The Groups
ability to compete with reinsurers and self-insurers could
adversely impact our results of operations and financial
condition.
Rating
A reduction in our A.M. Best rating could affect our
ability to write new business or renew our existing business.
Ratings assigned by the A.M. Best Company, Inc. are an
important factor influencing the competitive position of
insurance companies. A.M. Best ratings represent an
independent opinion of financial strength and ability to meet
obligations to policyholders and are not directed toward the
protection of investors. If our financial position deteriorates,
we may not maintain our favorable financial strength rating from
A.M. Best. A downgrade of our rating could severely limit
or prevent us from writing desirable business or from renewing
our existing business.
Key
Producers
Our results of operations may be adversely affected by any loss
of business from key producers. Our products are marketed by
independent producers. Other insurance companies compete with us
for the services and allegiance of these producers. These
producers may choose to direct business to our competitors, or
may direct less desirable risks to us which could have a
material adverse effect on us.
Dividends
Our subsidiaries may declare and pay dividends to MIG (the
holding company) only if they are permitted to do so under the
insurance regulations of their respective state of domicile. If
our insurance subsidiaries are unable to pay adequate dividends
to us through their respective holding companies, our ability to
pay shareholder dividends would be affected. All of the states
in which our subsidiaries are domiciled regulate the payment of
dividends. States, including New Jersey, Pennsylvania, and
California require that we give notice to the relevant state
insurance commissioner prior to its subsidiaries making any
dividends and distributions to the parent. During the notice
period, the state insurance commissioner may disallow all or
part of the proposed dividend upon determination that:
(i) the insurers surplus is not reasonable in
relation to its liabilities and adequate to its financial needs
and those of the policyholders, or (ii) in the case of New
Jersey, the insurer is otherwise in a hazardous financial
condition. In addition, insurance regulators may block dividends
or other paments to affiliates that would otherwise be permitted
without prior approval upon determination that, because of the
financial condition of the insurance subsidiary or otherwise,
payment of a dividend or any other payment to an affiliate would
be detrimental to an insurance subsidiarys policyholders
or creditors.
We began paying a quarterly dividend in the second quarter of
2006. However, future cash dividends will depend upon our
results of operations, financial condition, cash requirements
and other factors, including the ability of our subsidiaries to
make distributions to us, which ability is restricted in the
manner previously discussed in this section. Also, there can be
no assurance that we will continue to pay dividends even if the
necessary financial conditions are met and if sufficient cash is
available for distribution.
Technology
Our business is increasingly dependent on computer and
internet-enabled technology. Our ability to anticipate or manage
problems with technology associated with scalability, security,
functionality or reliability could
41
adversely affect its ability to write business and service
accounts, and could adversely impact our results of operations
and financial condition.
Acquisitions
We made an acquisition in 2005 and intend to grow our business
in part through acquisitions in the future as part of its long
term business strategy. These type of transactions involve
significant challenges and risks that the acquisition will not
advance our business strategy, that we wont realize a
satisfactory return on the investment we make, or that we may
experience difficulty in the integration of new employees,
business systems, and technology or diversion of
managements attention from our other businesses. These
factors could adversely affect our operating results and
financial condition.
Key
Personnel
We could be adversely affected by the loss of our key personnel.
The success of our business is dependent, to a large extent, on
the efforts of certain key management personnel, and the loss of
key personnel could prevent us from executing our business
strategy and could significantly and negatively affect our
financial condition and results of operations. As we continue to
grow, we will need to recruit and retain additional qualified
management personnel, and our ability to do so will depend upon
a number of factors, such as our results of operations and
prospects and the level of competition then prevailing in the
market for qualified personnel. Recruiting key personnel can be
a difficult challenge.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None
Our main office and corporate headquarters is located at 10
North Highway 31, Pennington, New Jersey in a facility of
approximately 25,000 square feet owned by MIC. We also own
a tract of land adjacent to our main office property.
MIC also owns a 32,000 square foot office facility in Lock
Haven, Pennsylvania. MIC sub-leases a portion of this facility.
FPIC leases approximately 25,000 square feet for the
Groups west coast operations in Rocklin, California. That
lease expires on December 31, 2009, subject to extension.
FPIC began construction on a new 41,000 square foot
building on the 2.9 acres of land it owns adjacent to the
leased building, to which the Rocklin operations will be moved.
The cost of the project is expected to be $6.7 million,
including improvements and building permits and fees. The land
is carried at $1.3 million. FPIC also owns a townhouse,
used for corporate purposes, in Rocklin, California carried at
$0.4 million.
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ITEM 3.
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LEGAL
PROCEEDINGS
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Our insurance companies are parties to litigation in the normal
course of business. Based upon information presently available
to us, we do not consider any litigation to be material.
Nonetheless, given the often large or indeterminate amounts
sought in litigation, and the inherent unpredictability of
litigation, an adverse outcome in certain matters could, from
time to time, have a material adverse effect on our financial
position, consolidated results of operations, or cash flows.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
42
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
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The Groups common stock trades on the NASDAQ National
Market under the symbol MIGP. As of March 2,
2009, the Group had 293 certificated shareholders holding
approximately .7 million shares, with the balance of the
outstanding shares held in street name.
The payment of shareholder dividends is subject to the
discretion of the MIGs Board of Directors which considers,
among other factors, the Groups operating results, overall
financial condition, capital requirements and general business
conditions. MIG began paying quarterly dividends of $0.05 per
common share in the second quarter of 2006. On April 16,
2008, MIGs Board of Directors increased the quarterly
dividend from $0.05 per share of common stock to $0.075 per
share of common stock, effective with the payment of the
June 27, 2008 dividend. The amount of dividends paid during
2008 and 2007 totaled $1.7 million and $1.3 million,
respectively. The shareholder dividend was funded from the
Groups insurance companies, for which approval was sought
and received (where necessary) from each of the insurance
companies primary regulators. We currently expect that the
present quarterly dividend of $0.075 per common share will
continue through 2009.
The Groups ability to receive dividends, loans or advances
from its insurance subsidiaries is subject to the approval
and/or
review of the insurance regulators in the respective domiciliary
states of the insurance subsidiaries. Such approval and review
is made under the respective domiciliary states insurance
holding company act, which generally requires that any
transaction between currently related companies be fair and
equitable to the insurance company and its policyholders. The
Group does not believe that such restrictions reasonably limit
the ability of the insurance subsidiaries to pay dividends to
the Group now or in the foreseeable future.
Information regarding restrictions and limitations on the
payment of cash dividends can be found in Item 1,
Business Regulation in the
Dividends section.
The range of closing prices of the Groups stock, traded on
the NASDAQ National Market, during 2008 was between $10.91 and
$17.94 per share. The range of closing prices during each of the
quarters in 2008 and 2007 is shown below:
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4th Quarter
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3rd Quarter
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2nd Quarter
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1st Quarter
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2008
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2007
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2008
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2007
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2008
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2007
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2008
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2007
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Share price range:
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High
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$
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17.01
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$
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18.90
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$
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17.68
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$
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21.59
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$
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17.85
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$
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20.07
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$
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17.94
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$
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20.56
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Low
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$
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10.91
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$
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17.40
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|
|
$
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16.40
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$
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17.38
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$
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16.35
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$
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17.94
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$
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17.16
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$
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17.70
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Information relating to the Companys stock repurchase
program and activity in the most recent quarter is presented
below:
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Total Number of
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Maximum Number of
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Shares Purchased as
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Shares That May Yet
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Part of Publicly
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Be Purchased Under
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Total Number of
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Average Price Paid
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Announced Plans or
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The Plans or
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Period
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Shares Purchased
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per Share
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Programs (Note 1)
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Programs (Note 1)
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October 1-31, 2008
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54,300
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$
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14.32
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114,300
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214,176
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November 1-30, 2008
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0
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N/A
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0
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214,176
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December 1-31, 2008
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0
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N/A
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0
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214,176
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Total
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54,300
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$
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14.32
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114,300
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214,176
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Note 1 On April 16, 2008, the Groups
Board of Directors authorized the repurchase of up to 5% of
outstanding common shares of the Group. The repurchased shares
will be held as treasury shares available for issuance in
connection with Mercer Insurance Groups 2004 Stock
Incentive Plan. In addition to the shares described above, the
Group purchased 1,729 shares from employees in connection
with the vesting of restricted stock in 2008. These repurchases
were made to satisfy tax withholding obligations with respect to
those employees and the vesting of their restricted stock. These
tax-withholding shares were purchased at the current market
value of the Groups common stock on the date of purchase,
and were not purchased as part of the publicly announced program.
43
Performance
Graph
Set forth below is a line graph comparing the cumulative total
shareholder return on the Groups Common Stock to the
cumulative total return of the Nasdaq Stock Market
(U.S. Companies) and the Nasdaq Insurance Index for the
period commencing December 31, 2003 and ended
December 31, 2008.
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December 31,
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December 31,
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December 31,
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December 31,
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December 31,
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December 31,
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2003
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2004
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2005
|
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2006
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2007
|
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2008
|
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Mercer Insurance Group, Inc.
|
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100
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107
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|
|
120
|
|
|
|
|
162
|
|
|
|
|
146
|
|
|
|
|
104
|
|
Nasdaq Companies Index
|
|
|
|
100
|
|
|
|
|
109
|
|
|
|
|
110
|
|
|
|
|
121
|
|
|
|
|
132
|
|
|
|
|
79
|
|
Nasdaq Insurance Index
|
|
|
|
100
|
|
|
|
|
120
|
|
|
|
|
131
|
|
|
|
|
147
|
|
|
|
|
146
|
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The graph assumes $100 was invested on December 31, 2003,
in the Groups Common Stock and each of the indices, and
that dividends were reinvested. The comparisons in the graph are
not intended to forecast or be indicative of possible future
performance of our common stock.
44
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following table sets forth selected consolidated financial
data for MIG at and for each of the years in the five year
period ended December 31, 2008. You should read this data
in conjunction with the Groups consolidated financial
statements and accompanying notes, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and other financial information included
elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Shares and dollars in thousands, except per share
amounts)
|
|
|
Revenue Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct premiums written
|
|
$
|
165,377
|
|
|
$
|
182,907
|
|
|
$
|
185,745
|
|
|
$
|
92,240
|
|
|
$
|
65,790
|
|
Net premiums written
|
|
|
147,352
|
|
|
|
159,667
|
|
|
|
145,791
|
|
|
|
75,266
|
|
|
|
59,504
|
|
Statement of Earnings Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
|
152,577
|
|
|
|
146,675
|
|
|
|
137,673
|
|
|
|
74,760
|
|
|
|
55,784
|
|
Investment income, net of expenses
|
|
|
13,936
|
|
|
|
13,053
|
|
|
|
10,070
|
|
|
|
4,467
|
|
|
|
2,841
|
|
Net realized investment (losses)/gains
|
|
|
(7,072
|
)
|
|
|
24
|
|
|
|
151
|
|
|
|
1,267
|
|
|
|
484
|
|
Total revenue
|
|
|
161,462
|
|
|
|
161,681
|
|
|
|
149,929
|
|
|
|
81,266
|
|
|
|
59,467
|
|
Net income(7)
|
|
|
8,234
|
|
|
|
14,235
|
|
|
|
10,635
|
|
|
|
7,020
|
|
|
|
3,264
|
|
Comprehensive income(1)(7)
|
|
|
5,832
|
|
|
|
16,316
|
|
|
|
10,599
|
|
|
|
4,685
|
|
|
|
3,972
|
|
Balance Sheet Data (End of Period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
568,986
|
|
|
|
546,435
|
|
|
|
506,967
|
|
|
|
446,698
|
|
|
|
181,560
|
|
Total investments and cash
|
|
|
381,333
|
|
|
|
363,748
|
|
|
|
315,286
|
|
|
|
269,076
|
|
|
|
141,393
|
|
Stockholders equity
|
|
|
137,270
|
|
|
|
133,406
|
|
|
|
115,839
|
|
|
|
103,399
|
|
|
|
100,408
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP combined ratio(2)(7)
|
|
|
98.1
|
%
|
|
|
95.8
|
%
|
|
|
97.0
|
%
|
|
|
94.9
|
%
|
|
|
98.8
|
%
|
Statutory combined ratio(3)(7)
|
|
|
98.5
|
%
|
|
|
94.4
|
%
|
|
|
95.2
|
%
|
|
|
94.1
|
%
|
|
|
95.4
|
%
|
Statutory premiums to-surplus ratio(4)
|
|
|
1.17
|
x
|
|
|
1.30
|
x
|
|
|
1.27
|
x
|
|
|
1.15
|
x
|
|
|
0.96
|
x
|
Yield on average investments, before tax(5)
|
|
|
3.8
|
%
|
|
|
3.9
|
%
|
|
|
3.4
|
%
|
|
|
2.2
|
%
|
|
|
2.0
|
%
|
Return on average equity
|
|
|
6.1
|
%
|
|
|
11.4
|
%
|
|
|
9.7
|
%
|
|
|
6.9
|
%
|
|
|
3.3
|
%
|
Per-share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(7)
|
|
|
1.32
|
|
|
|
2.32
|
|
|
|
1.77
|
|
|
|
1.18
|
|
|
|
0.52
|
|
Diluted(7)
|
|
|
1.30
|
|
|
|
2.25
|
|
|
|
1.71
|
|
|
|
1.14
|
|
|
|
0.51
|
|
Dividends to stockholders
|
|
|
0.28
|
|
|
|
0.20
|
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
22.21
|
|
|
|
21.48
|
|
|
|
19.06
|
|
|
|
17.34
|
|
|
|
16.49
|
|
Weighted average shares:(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,217
|
|
|
|
6,144
|
|
|
|
6,023
|
|
|
|
5,943
|
|
|
|
6,236
|
|
Diluted
|
|
|
6,344
|
|
|
|
6,325
|
|
|
|
6,222
|
|
|
|
6,160
|
|
|
|
6,354
|
|
|
|
|
(1)
|
|
Includes Net Income and the change in Unrealized Gains and
Losses of the investment portfolio as well as a defined benefit
pension adjustment.
|
|
(2)
|
|
The sum of losses, loss adjustment expenses, underwriting
expenses and dividends to policyholders divided by net premiums
earned. A combined ratio of less than 100% means a company is
making an underwriting profit.
|
|
(3)
|
|
The sum of the ratio of underwriting expenses divided by net
premiums written, and the ratio of losses, loss adjustment
expenses, and dividends to policyholders divided by net premiums
earned.
|
|
(4)
|
|
The ratio of net premiums written divided by ending statutory
surplus
|
|
(5)
|
|
The ratio of investment income, net of expenses divided by
average cash and investments
|
45
|
|
|
(6)
|
|
Unallocated ESOP shares at December 31 of each year are not
reflected in weighted average shares.
|
|
(7)
|
|
The 2007 results include a non-recurring refund of state premium
retaliatory taxes, plus interest, in the after-tax amounts of
$2.8 million, or $0.44 per diluted share. See footnote 15
to the consolidated financial statements.
|
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
The following presents managements discussion and analysis
of our financial condition and results of operations as of the
dates and for the periods indicated. You should read this
discussion in conjunction with the consolidated financial
statements and notes thereto included in this report, and the
Description of Business contained in Item 1 of
this report. This discussion contains forward-looking
information that involves risks and uncertainties. Actual
results could differ significantly from these forward-looking
statements.
OVERVIEW
MIG, through its property and casualty insurance subsidiaries,
provides a wide array of property and casualty insurance
products designed to meet the insurance needs of individuals in
New Jersey and Pennsylvania, and small and medium-sized
businesses throughout Arizona, California, Nevada, New Jersey,
Oregon and Pennsylvania. The Group also writes a limited amount
of business in New York which supports accounts in adjacent
states.
The Group manages its business in three segments: commercial
lines insurance, personal lines insurance, and investments. The
commercial lines insurance and personal lines insurance segments
are managed based on underwriting results determined in
accordance with U.S. generally accepted accounting
principles, and the investment segment is managed based on
after-tax investment returns. In determining the results of each
segment, assets are not allocated to segments and are reviewed
in the aggregate for decision-making purposes.
The Groups net income is primarily determined by five
elements:
|
|
|
|
|
net premium earned;
|
|
|
|
underwriting cost, including agent commissions;
|
|
|
|
investment income;
|
|
|
|
general and administrative expenses;
|
|
|
|
amounts paid or reserved to settle insured claims.
|
Variations in premium earned are subject to a number of factors,
including:
|
|
|
|
|
limitations on rates arising from competitive market place
conditions or regulation;
|
|
|
|
general economic conditions and economic conditions in sectors
in which the group offers insurance products, such as the
construction industry;
|
|
|
|
limitation on available business arising from a need to maintain
the pricing and quality of underwritten risks;
|
|
|
|
the Groups ability to maintain its A
(Excellent) rating by A.M. Best;
|
|
|
|
the ability of the Group to maintain a reputation for efficiency
and fairness in claims administration;
|
|
|
|
the availability, cost and terms of reinsurance.
|
Variations on investment income are subject to a number of
factors, including:
|
|
|
|
|
general interest rate levels;
|
|
|
|
specific adverse events affecting the issuers of debt
obligations held by the Group;
|
|
|
|
changes in prices of debt and equity securities generally and
those held by the Group specifically.
|
46
Loss and loss adjustment expenses are affected by a number of
factors, including:
|
|
|
|
|
the quality of the risks underwritten by the Group;
|
|
|
|
the nature and severity of catastrophic losses;
|
|
|
|
weather-related patterns in areas where we insured property
risks;
|
|
|
|
the availability, cost and terms of reinsurance and the
financial condition of our reinsurers;
|
|
|
|
underlying settlement costs, including medical and legal costs.
|
The Group seeks to manage each of the foregoing to the extent
within its control. Many of the foregoing factors are partially,
or entirely, outside the control of the Group.
CRITICAL
ACCOUNTING POLICIES
General
We are required to make estimates and assumptions in certain
circumstances that affect amounts reported in our consolidated
financial statements and related footnotes. We evaluate these
estimates and assumptions on an on-going basis based on
historical developments, market conditions, industry trends and
other information that we believe to be reasonable under the
circumstances. There can be no assurance that actual results
will conform to our estimates and assumptions, and that reported
results of operations will not be materially adversely affected
by the need to make accounting adjustments to reflect changes in
these estimates and assumptions from time to time. We believe
the following policies are the most sensitive to estimates and
judgments.
Liabilities
for Loss and Loss Adjustment Expenses
Unpaid losses and loss adjustment expenses, also referred to as
loss reserves, are the largest liability of our property and
casualty subsidiaries. Our loss reserves include case reserve
estimates for claims that have been reported and bulk reserve
estimates for (a) the expected aggregate differences
between the case reserve estimates and the ultimate cost of
reported claims and (b) claims that have been incurred but
not reported as of the balance sheet date, less estimates of the
anticipated salvage and subrogation recoveries. Each of these
categories also includes estimates of the loss adjustment
expenses associated with processing and settling all reported
and unreported claims. Estimates are based upon past loss
experience modified for current and expected trends as well as
prevailing economic, legal and social conditions.
The amount of loss and loss adjustment expense reserves for
reported claims is based primarily upon a
case-by-case
evaluation of the type of risk involved, specific knowledge of
the circumstances surrounding each claim, and the insurance
policy provisions relating to the type of loss. The amounts of
loss reserves for unreported losses and loss adjustment expenses
are determined using historical information by line of business,
adjusted to current conditions. Inflation is ordinarily provided
for implicitly in the reserving function through analysis of
costs, trends, and reviews of historical reserving results over
multiple years. Our loss reserves are not discounted to present
value.
Reserves are closely monitored and recomputed periodically using
the most recent information on reported claims and a variety of
projection techniques. Specifically, on at least a quarterly
basis, we review, by line of business, existing reserves, new
claims, changes to existing case reserves, and paid losses with
respect to the current and prior accident years. We use
historical paid and incurred losses and accident year data to
derive expected ultimate loss and loss adjustment expense ratios
(to earned premiums) by line of business. We then apply these
expected loss and loss adjustment expense ratios to earned
premiums to derive a reserve level for each line of business. In
connection with the determination of the reserves, we also
consider other specific factors such as recent weather-related
losses, trends in historical paid losses, economic conditions,
and legal and judicial trends with respect to theories of
liability. Any changes in estimates are reflected in operating
results in the period in which the estimates are changed.
We perform a comprehensive annual review of loss reserves for
each of the lines of business we write in connection with the
determination of the year end carried reserves. The review
process takes into consideration the
47
variety of trends and other factors that impact the ultimate
settlement of claims in each particular class of business. A
similar review is performed prior to the determination of the
June 30 carried reserves. Prior to the determination of the
March 31 and September 30 carried reserves, we review the
emergence of paid and reported losses relative to expectations
and make necessary adjustments to our carried reserves. There
are also a number of analyses of claims experience and reserves
undertaken by management on a monthly basis.
When a claim is reported to us, our claims personnel establish a
case reserve for the estimated amount of the
ultimate payment. This estimate reflects an informed judgment
based upon general insurance reserving practices and the
experience and knowledge of the estimator. The individual
estimating the reserve considers the nature and value of the
specific claim, the severity of injury or damage, and the policy
provisions relating to the type of loss. Case reserves are
adjusted by our claims staff as more information becomes
available. It is our policy to periodically review and revise
case reserves and to settle each claim as expeditiously as
possible.
We maintain bulk and IBNR reserves (usually referred to as
IBNR reserves) to provide for claims already
incurred that have not yet been reported (and which often may
not yet be known to the insured) and for future developments on
reported claims. The IBNR reserve is determined by estimating
our insurance companies ultimate net liability for both
reported and incurred but not reported claims and then
subtracting both the case reserves and payments made to date for
reported claims; as such, the IBNR reserves
represent the difference between the estimated ultimate cost of
all claims that have occurred or will occur and the reported
losses and loss adjustment expenses. Reported losses include
cumulative paid losses and loss adjustment expenses plus
aggregate case reserves. A relatively large proportion of our
gross and net loss reserves, particularly for long tail
liability classes, are reserves for IBNR losses. More than 74%
and 75% of our aggregate loss reserves at December 31, 2008
and 2007, respectively, were bulk and IBNR reserves.
Some of our business relates to coverage for short-tail risks
and, for these risks, the development of losses is comparatively
rapid and historical paid losses and case reserves, adjusted for
known variables, have been a reliable guide for purposes of
reserving. Tail refers to the time period between
the occurrence of a loss and the settlement of the claim. The
longer the time span between the incidence of a loss and the
settlement of the claim, the more the ultimate settlement amount
can vary. Some of our business relates to long-tail risks, where
claims are slower to emerge (often involving many years before
the claim is reported) and the ultimate cost is more difficult
to predict. For these lines of business, more sophisticated
actuarial methods, such as the Bornhuetter-Ferguson loss
development method, are employed to project an ultimate loss
expectation, and then the related loss history must be regularly
evaluated and loss expectations updated, with a likelihood of
variability from the initial estimate of ultimate losses. A
substantial portion of the business written by FPIC is this type
of longer-tailed casualty business.
Methods
Used to Estimate Loss & Loss Adjustment Expense
Reserves
We apply the following general methods in projecting loss and
loss adjustment expense reserves for the Group:
1. Paid loss development;
2. Paid Bornhuetter-Ferguson loss development;
3. Reported loss development;
4. Reported Bornhuetter-Ferguson loss development; and
5. Separate developments of claims frequency and severity.
In addition, we apply several diagnostic ratio tests of the
reserves for long-tailed liability lines of business, including
but not limited to:
1. Retrospective tests of the ratios of IBNR reserves to
earned premiums and to estimated ultimate incurred losses;
2. Retrospective tests of the ratios of the loss reserves
to earned premiums and to estimated ultimate incurred losses;
48
3. Ratios of cumulative and incremental incurred and paid
losses to earned premiums and to estimated ultimate incurred
losses;
4. Ratios of cumulative and incremental paid losses to
cumulative incurred losses and ratios of incremental paid losses
to prior case loss and LAE reserves;
5. Ratios of cumulative average incurred loss per claim and
cumulative average incurred loss per reported claim; and
6. Ratios of cumulative average paid loss per claim closed
with payment and average case reserve per pending claim.
Description
of Ultimate Loss Estimation Methods
The reported loss development method relies on the assumption
that, at any given state of maturity, ultimate losses can be
predicted by multiplying cumulative reported losses (paid losses
plus case reserves) by a cumulative development factor. The
validity of the results of this method depends on the stability
of claim reporting and settlement rates, as well as the
consistency of case reserve levels. Case reserves do not have to
be adequately stated for this method to be effective; they only
need to have a fairly consistent level of adequacy at comparable
stages of maturity. Historical age-to-age loss
development factors are calculated to measure the relative
development of an accident year from one maturity point to the
next. We then select appropriate age-to-age loss development
factors based on these historical factors and use the selected
factors to project the ultimate losses.
The paid loss development method is mechanically identical to
the incurred loss development method described above with the
exception that paid losses replace incurred losses. The paid
method does not rely on case reserves or their adequacy in
making projections.
The validity of the results from using a loss development
approach can be affected by many conditions, such as internal
claim department processing changes, a shift between single and
multiple claim payments, legal changes, or variations in a
companys mix of business from year to year. Also, since
the percentage of losses paid for immature years is often low,
development factors are volatile. A small variation in the
number of claims paid can have a leveraging effect that can lead
to significant changes in estimated ultimates. Therefore,
ultimate values for immature accident years are often based on
alternative estimation techniques.
The Bornhuetter-Ferguson expected loss projection method based
on reported loss data relies on the assumption that remaining
unreported losses are a function of the total expected losses
rather than a function of currently reported losses. The
expected losses used in this analysis are selected judgmentally
based upon the historical relationship between premiums and
losses for more mature accident years, adjusted to reflect
changes in average rates and expected changes in claims
frequency and severity. The expected losses are multiplied by
the unreported percentage to produce expected unreported losses.
The unreported percentage is calculated as one minus the
reciprocal of the selected incurred loss development factors.
Finally, the expected unreported losses are added to the current
reported losses to produce ultimate losses.
The calculations underlying the Bornhuetter-Ferguson expected
loss projection method based on paid loss data are similar to
the incurred Bornhuetter-Ferguson calculations with the
exception that paid losses and unpaid percentages replace
reported losses and unreported percentages.
The Bornhuetter-Ferguson method is most useful as an alternative
to other models for immature accident years. For these immature
years, the amounts reported or paid may be small and unstable
and therefore not predictive of future development. Therefore,
future development is assumed to follow an expected pattern that
is supported by more stable historical data or by emerging
trends. This method is also useful when changing reporting
patterns or payment patterns distort the historical development
of losses.
For the property lines of business (special property, personal
auto physical damage, and commercial auto physical damage) the
results of the reserve calculations were similar and we
generally rely on an averaging of the methods utilized.
49
For the homeowners and commercial multi-peril lines of business
(excluding California CMP business for policy years 1996 and
prior) we generally rely on the incurred loss development and
incurred Bornhuetter-Ferguson methods in estimating loss
reserves. These two methods yield more consistent results
although the two paid methods yielded reserves that were similar
in total to the incurred methods.
In July of 1995, the California Supreme Court rendered its
Opinion in Admiral Insurance Company vs. Montrose Chemical
Corporation (the
Montrose
Decision). In that decision,
the California Supreme Court ruled that in the case of a
continuous and progressively deteriorating loss, such as
pollution liability (or construction defect liability), an
insurance company has a definitive duty to defend the
policyholder until all uncertainty related to the severity and
cause of the loss is extinguished.
After the
Montrose
Decision, FPIC (a subsidiary of the
Group since October 1, 2005) experienced a significant
increase in construction defect liability cases impacting our
West Coast commercial multi-peril liability lines of business,
to which it would not have been subject under the old
interpretation of the law. In response, FPIC (prior to its
acquisition by the Group) implemented a series of underwriting
measures to limit the prospective exposure to
Montrose
and construction defect liability claims. These changes to
coverage and risk selection resulted in an improvement in the
post-
Montrose
underwriting results.
FPIC evaluates commercial multi-peril liability reserves by
segregating pre- and post-
Montrose
activity as well as
segregating contractor versus non-contractor experience. An
inception to date
ground-up
incurred loss database was created as the basis for this new
analysis. The pre-
Montrose
activity is evaluated on a
report year basis, which eliminates the accident year
development distortions caused by the effects of the
Montrose
Decision. For policy years 1997 and later, the reserves are
analyzed using the more traditional accident year analysis.
For the casualty lines (commercial multi-peril liability, other
liability, personal auto liability, commercial auto liability,
workers compensation) the paid loss development method
yielded less than reliable results for the immature years, and
we did not use the method in selecting ultimate losses and
reserves. For these lines we primarily relied on the incurred
Bornhuetter-Ferguson method for the most recent accident years
and both of the incurred loss development methods for the
remaining years.
The property and casualty industry has incurred substantial
aggregate losses from claims related to asbestos-related
illnesses, environmental remediation, product and mold, and
other uncertain or environmental exposures. We have not
experienced significant losses from these types of claims.
We compute our estimated ultimate liability using these
principles and procedures applicable to the lines of business
written. However, because the establishment of loss reserves is
an inherently uncertain process, we cannot be certain that
ultimate losses will not exceed the established loss reserves
and have a material adverse effect on the Groups results
of operations and financial condition. Changes in estimates, or
differences between estimates and amounts ultimately paid, are
reflected in the operating results of the period during which
such adjustments are made.
Reserves are estimates because there are uncertainties inherent
in the determination of ultimate losses. Court decisions,
regulatory changes and economic conditions can affect the
ultimate cost of claims that occurred in the past as well as
create uncertainties regarding future loss cost trends.
Accordingly, the ultimate liability for unpaid losses and loss
settlement expenses will likely differ from the amount recorded
at December 31, 2008.
For further information relating to the determination of loss
and loss adjustment expense reserves, please see the discussion
under Loss and Loss Adjustment Expense Reserves
contained in ITEM 1. Business of this
Form 10-K.
Investments
Unrealized investment gains or losses on investments carried at
fair value, net of applicable income taxes, are reflected
directly in stockholders equity as a component of
accumulated other comprehensive income and, accordingly, have no
effect on net income. A decline in fair value of an investment
below its cost that is deemed other than temporary is charged to
earnings as a realized loss. We monitor our investment portfolio
and review investments that have experienced a decline in fair
value below cost to evaluate whether the decline is other than
50
temporary. These evaluations involve judgment and consider the
magnitude and reasons for a decline and the prospects for the
fair value to recover in the near term. Adverse investment
market conditions, poor operating performance, or other
adversity encountered by companies whose stock or fixed maturity
securities we own could result in impairment charges in the
future. Our policy on impairment of value of investments is as
follows: if a security has a market value below cost it is
considered impaired. For any such security a review of the
financial condition and prospects of the company will be
performed by the Investment Committee to determine if the
decline in market value is other than temporary. If it is
determined that the decline in market value is other than
temporary, the carrying value of the security will be
written down to realizable value and the amount of
the write down accounted for as a realized loss.
Realizable value is defined for this purpose as the
market price of the security. Write down to a value other than
the market price requires objective evidence in support of that
value.
In evaluating the potential impairment of fixed income
securities, the Investment Committee will evaluate relevant
factors, including but not limited to the following: the
issuers current financial condition and ability to make
future scheduled principal and interest payments, relevant
rating history, analysis and guidance provided by rating
agencies and analysts, the degree to which an issuer is current
or in arrears in making principal and interest payments, and
changes in price relative to the market.
In evaluating the potential impairment of equity securities, the
Investment Committee will evaluate certain factors, including
but not limited to the following: the relationship of market
price per share versus carrying value per share at the date of
acquisition and the date of evaluation, the price-to-earnings
ratio at the date of acquisition and the date of evaluation, any
rating agency announcements, the issuers financial
condition and near-term prospects, including any specific events
that may influence the issuers operations, the independent
auditors report on the issuers financial statements;
and any buy/sell/hold recommendations or price projections by
outside investment advisors.
In the years ended December 31, 2008, 2007 and 2006, we
recorded a pre-tax charge to earnings of $6.2 million,
$0.1 million and $0.1 million, respectively, for
write-downs of other than temporarily impaired securities (OTTI).
During the second half of 2008, there were significant
disruptions to the financial and equity markets. This resulted
from, in part, failures of financial institutions on an
unprecedented scale, and caused a significant reduction in
liquidity and trading flows in the credit markets in addition to
a dramatic widening in credit spreads. Such impacts affected the
valuations of both the fixed income and equity securities we
held. The loss of confidence and the so-called, credit
freeze in the capital markets during 2008 led to several
significant events, including the conservatorship of Fannie Mae
and Freddie Mac, the bankruptcy filing of Lehman Brothers, and
an agreement for Merrill Lynch to be acquired by Bank of
America, among others.
Of the $6.2 million in 2008 OTTI write-downs,
$3.9 million related to 11 fixed-income securities
including the following:
|
|
|
|
|
$0.5 million relating to one residential mortgage-backed
security. This charge resulted from increased delinquency and
default rates.
|
|
|
|
$0.8 million relating to four asset-backed securities.
These charges related to issuer-specific credit events that
revolved around the performance of the underlying collateral,
which had materially deteriorated. In general, these securities
were experiencing increased conditional default rates and
expected loss severities. Although some of these securities were
insured or guaranteed by mono-line bond guarantors, downgrades
have reduced our confidence in their ability to perform in the
event of default. In addition, credit support for these
securities has also begun to erode, thereby further increasing
the potential for eventual loss.
|
|
|
|
$2.6 million relating to six corporate bonds. These charges
were also due to issuer-specific events which lead to a
deteriorated financial condition.
|
Of the $6.2 million in 2008 OTTI write-downs,
$2.3 million related to 33 equity securities, including the
following:
|
|
|
|
|
$1.4 million on 29 equity securities related to
issuer-specific events which led to a deteriorated financial
condition.
|
51
|
|
|
|
|
$0.9 million on four preferred stock securities, of which
the largest write-off related to an issuer that has incurred
large losses on mortgage guarantee insurance coverage on
residential mortgage loans.
|
Policy
Acquisition Costs
We defer policy acquisition costs, such as commissions, premium
taxes and certain other underwriting expenses that vary with and
are primarily related to the production of business. These costs
are amortized over the effective period of the related insurance
policies. The method followed in computing deferred policy
acquisition costs limits the amount of deferred costs to their
estimated realizable value, which gives effect to the premium to
be earned, related investment income, loss and loss adjustment
expenses, and certain other costs expected to be incurred as the
premium is earned. Future changes in estimates, the most
significant of which is expected loss and loss adjustment
expenses, may require acceleration of the amortization of
deferred policy acquisition costs. If the estimation of net
realizable value indicates that the acquisition costs are
unrecoverable, further analyses are completed to determine if a
reserve is required to provide for losses that may exceed the
related unearned premiums.
Reinsurance
Amounts recoverable from property and casualty reinsurers are
estimated in a manner consistent with the claim liability
associated with the reinsured policy. Amounts paid for
reinsurance contracts are expensed over the contract period
during which insured events are covered by the reinsurance
contracts.
Ceded unearned premiums and reinsurance balances recoverable on
paid and unpaid loss and loss adjustment expenses are reported
separately as assets, instead of being netted with the related
liabilities, because reinsurance does not relieve us of our
legal liability to our policyholders. Reinsurance balances
recoverable are subject to credit risk associated with the
particular reinsurer. Additionally, the same uncertainties
associated with estimating unpaid loss and loss adjustment
expenses affect the estimates for the ceded portion of these
liabilities.
We continually monitor the financial condition of our reinsurers.
Many of the reinsurance treaties participated in by the Group
prior to 2007, and primarily FPIC treaties, have included
provisions that establish minimum and maximum cessions and allow
limited participation in the profit of the ceded business.
Generally, the Group shares on a limited basis in the
profitability of our reinsurance treaties through contingent
ceding commissions. The Groups exposure in the loss
experience is contractually defined at minimum and maximum
levels. The terms of such contracts are fixed at inception.
Since estimating the emergence of claims to the applicable
reinsurance layers is subject to significant uncertainty, the
net amounts that will ultimately be realized may vary
significantly from the estimated amounts presented in the
Groups results of operations.
Income
Taxes
We use the asset and liability method of accounting for income
taxes. Deferred income taxes arise from the recognition of
temporary differences between financial statement carrying
amounts and the tax bases of our assets and liabilities.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. A valuation allowance is provided when it is more
likely than not that some portion of the deferred tax asset will
not be realized. The effect of a change in tax rates is
recognized in the period of the enactment date.
Contingencies
Besides claims related to its insurance products, the Group is
subject to proceedings, lawsuits and claims in the normal course
of business. The Group assesses the likelihood of any adverse
outcomes to these matters as well as potential ranges of
probable losses. There can be no assurance that actual outcomes
will be consistent with those assessments.
52
RESULTS
OF OPERATIONS
Revenue and income by segment is as follows for the years ended
December 31, 2008, 2007 and 2006. In 2007, the Group
evaluated its methodology for allocating costs to its lines of
business and adopted changes to such methodology in order to
more accurately reflect the allocation of joint costs. This
resulted in allocating less joint cost to the personal lines of
business and more joint cost to the commercial lines of
business, but with no net change in cost allocated to personal
lines and commercial lines in the aggregate. Related 2006
amounts have been reclassified to reflect this change in
allocation methodology:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial lines
|
|
$
|
132,425
|
|
|
$
|
125,427
|
|
|
$
|
115,461
|
|
Personal lines
|
|
|
20,152
|
|
|
|
21,248
|
|
|
|
22,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net premiums earned
|
|
|
152,577
|
|
|
|
146,675
|
|
|
|
137,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
13,936
|
|
|
|
13,053
|
|
|
|
10,070
|
|
Realized investment (losses) / gains
|
|
|
(7,072
|
)
|
|
|
24
|
|
|
|
151
|
|
Other
|
|
|
2,021
|
|
|
|
1,929
|
|
|
|
2,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
161,462
|
|
|
|
161,681
|
|
|
|
149,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial lines
|
|
|
4,246
|
|
|
|
5,964
|
|
|
|
4,246
|
|
Personal lines
|
|
|
(1,423
|
)
|
|
|
234
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwriting income
|
|
|
2,823
|
|
|
|
6,198
|
|
|
|
4,186
|
|
Net investment income
|
|
|
13,936
|
|
|
|
13,053
|
|
|
|
10,070
|
|
Realized investment (losses) / gains
|
|
|
(7,072
|
)
|
|
|
24
|
|
|
|
151
|
|
Other
|
|
|
703
|
|
|
|
714
|
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
10,390
|
|
|
$
|
19,989
|
|
|
$
|
15,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our results of operations are influenced by factors affecting
the property and casualty insurance industry in general. The
operating results of the United States property and casualty
insurance industry are subject to significant variations due to
competition, weather, catastrophic events, regulation, the
availability and cost of satisfactory reinsurance, general
economic conditions, judicial trends, fluctuations in interest
rates and other changes in the investment environment.
The availability of reinsurance at reasonable pricing is an
important part of our business. Effective January 1, 2008,
we increased our retention to $850,000 (from a maximum retention
of $750,000 and $500,000 in 2007 and 2006, respectively) on the
casualty, property and workers compensation lines of
business. As we increase the net retention of the business we
write, net premiums written and earned will increase and ceded
losses will decrease. The impact of increased retentions under
our reinsurance program in 2008 and 2007 was offset in part by a
decline in direct written premiums due to the increasingly
competitive marketplace and the contraction of the economy in
our markets, particularly as it relates to new construction
contractors we insure. As older reinsurance treaties run off,
the impact described above of the new reinsurance program will
become more evident in net premiums written and net premiums
earned.
We write homeowners insurance only in New Jersey and
Pennsylvania, and personal automobile insurance only in
Pennsylvania. Personal lines insurance is not written in any
other states in which we do business.
53
The key elements of our business model are the sales of properly
priced and underwritten personal and commercial property and
casualty insurance through independent agents and the investment
of the premiums in a manner designed to assure that claims and
expenses can be paid while providing a return on the capital
employed. Loss trends and investment performance are critical
factors in influencing the success of the business model. These
factors are affected by the factors impacting the insurance
industry in general and factors unique to us as described in the
following discussion.
YEAR
ENDED DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31,
2007
The components of income for 2008 and 2007, and the change and
percentage change from year to year, are shown in the charts
below. The accompanying narrative refers to the statistical
information displayed in the chart immediately above the
narrative.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007 Income
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Commercial lines underwriting income
|
|
$
|
4,246
|
|
|
$
|
5,964
|
|
|
$
|
(1,718
|
)
|
|
|
(28.8
|
)%
|
Personal lines underwriting (loss) income
|
|
|
(1,423
|
)
|
|
|
234
|
|
|
|
(1,657
|
)
|
|
|
N/M
|
|
Total underwriting income
|
|
|
2,823
|
|
|
|
6,198
|
|
|
|
(3,375
|
)
|
|
|
(54.5
|
)%
|
Net investment income
|
|
|
13,936
|
|
|
|
13,053
|
|
|
|
883
|
|
|
|
6.8
|
%
|
Net realized investment (losses)/gains
|
|
|
(7,072
|
)
|
|
|
24
|
|
|
|
(7,096
|
)
|
|
|
N/M
|
|
Other
|
|
|
2,021
|
|
|
|
1,929
|
|
|
|
92
|
|
|
|
4.8
|
%
|
Interest expense
|
|
|
(1,318
|
)
|
|
|
(1,215
|
)
|
|
|
(103
|
)
|
|
|
8.5
|
%
|
Income before income taxes
|
|
|
10,390
|
|
|
|
19,989
|
|
|
|
(9,599
|
)
|
|
|
(48.0
|
)%
|
Income taxes
|
|
|
2,156
|
|
|
|
5,754
|
|
|
|
(3,598
|
)
|
|
|
(62.5
|
)%
|
Net Income
|
|
$
|
8,234
|
|
|
$
|
14,235
|
|
|
$
|
(6,001
|
)
|
|
|
(42.2
|
)%
|
Loss/LAE ratio (GAAP)
|
|
|
62.4
|
%
|
|
|
62.2
|
%
|
|
|
0.2
|
%
|
|
|
|
|
Underwriting expense ratio (GAAP)
|
|
|
35.7
|
%
|
|
|
33.6
|
%
|
|
|
2.1
|
%
|
|
|
|
|
Combined ratio (GAAP)
|
|
|
98.1
|
%
|
|
|
95.8
|
%
|
|
|
2.3
|
%
|
|
|
|
|
Loss/LAE ratio (Statutory)
|
|
|
62.4
|
%
|
|
|
62.2
|
%
|
|
|
0.2
|
%
|
|
|
|
|
Underwriting expense ratio (Statutory)
|
|
|
36.1
|
%
|
|
|
32.2
|
%
|
|
|
3.9
|
%
|
|
|
|
|
Combined ratio (Statutory)
|
|
|
98.5
|
%
|
|
|
94.4
|
%
|
|
|
4.1
|
%
|
|
|
|
|
(N/M means not meaningful)
As previously disclosed in our SEC filings, we paid an aggregate
of $3.5 million, including accrued interest, to the New
Jersey Division of Taxation (the Division) in
retaliatory premium tax for the years
1999-2004.
In conjunction with making such payments, we filed notices of
protest with the Division with respect to the retaliatory tax
imposed. The payments were made in response to notices of
deficiency issued by the Division of taxation.
We received $4.3 million in 2007 as a reimbursement of
protested payments of retaliatory tax, including accrued
interest thereon, previously made by us for the periods
1999-2004.
The refund was recorded, after reduction for Federal income tax,
in the amount of $2.8 million in the 2007 consolidated
statement of earnings. The allocation of the refund to 2007
pre-tax earnings included an increase to net investment income
of $720,000 for the interest received on the refund, and
$3.6 million as a reduction to other expense to recognize
the recovery of amounts previously charged to other expense.
This is a non-recurring item which significantly affected the
earnings for the year ended December 31, 2007, and related
performance metrics such as the combined ratio.
Our GAAP combined ratio for 2008 was 98.1%, as compared to a
combined ratio for the prior year of 95.8%. On a pro-forma
basis, after removing the effect of the non-recurring
retaliatory tax refund described above, the GAAP combined ratio
for 2007 was 98.3%. The statutory combined ratio for 2008 and
2007 was 98.5% and 94.4%, respectively. See the discussion below
relating to commercial and personal lines performance.
Net investment income increased $0.9 million or 6.8% to
$13.9 million in 2008 as compared to $13.1 million in
2007. This increase was driven by an increase in average cash
and invested assets. Net investment income for
54
2007 included $720,000 of interest income as a result of the
non-recurring impact of the retaliatory tax refund. Average cash
and invested assets totaled $367 million for 2008 as
compared to $333 million for 2007, representing an increase
of $34 million, driven by operating cash flow.
Net realized investment losses amounted to $7.1 million in
2008, which is primarily driven by other than temporary
impairment write-downs on investment securities, a realized loss
on the mark-to-market valuation on the interest rate swaps for
the trust preferred securities, offset in part by realized gains
on the sales of investments. Net realized investment gains
amounted to $24,000 in 2007, which is primarily realized gains
on the sales of investments, offset in part by other than
temporary impairments on investment securities and a realized
loss on the mark-to-market valuation on the interest rate swaps
for the trust preferred securities. See the discussion of other
than temporary impairments on investment securities in the
Critical Accounting Policies section. Other revenue
of $2.0 million and $1.9 million in 2008 and 2007,
respectively, represents primarily service charges recorded on
insurance premium payment plans. Interest expense of
$1.3 million and $1.2 million in 2008 and 2007,
respectively, represents interest charges on the trust preferred
obligations of FPIG.
Charts and discussion relating to each of our segments
(commercial lines underwriting, personal lines underwriting, and
the investment segment) follow with further discussion below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007 Revenue
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Direct premiums written
|
|
$
|
165,377
|
|
|
$
|
182,907
|
|
|
$
|
(17,530
|
)
|
|
|
(9.6
|
)%
|
Net premiums written
|
|
|
147,352
|
|
|
|
159,667
|
|
|
|
(12,315
|
)
|
|
|
(7.7
|
)%
|
Net premiums earned
|
|
|
152,577
|
|
|
|
146,675
|
|
|
|
5,902
|
|
|
|
4.0
|
%
|
Net investment income
|
|
|
13,936
|
|
|
|
13,053
|
|
|
|
883
|
|
|
|
6.8
|
%
|
Net realized investment (losses)/gains
|
|
|
(7,072
|
)
|
|
|
24
|
|
|
|
(7,096
|
)
|
|
|
N/M
|
|
Other revenue
|
|
|
2,021
|
|
|
|
1,929
|
|
|
|
92
|
|
|
|
4.8
|
%
|
Total revenue
|
|
$
|
161,462
|
|
|
$
|
161,681
|
|
|
$
|
(219
|
)
|
|
|
(0.1
|
)%
|
(N/M means not meaningful)
Total revenues remained consistent at $161.5 million and
$161.7 million in 2008 and 2007, respectively. Revenues
were flat
year-on-year
due to the significant realized loss on OTTI write-downs in
2008, which offset the growth in net premiums earned and net
investment income. Net premiums earned totaled
$152.6 million in 2008 as compared to $146.7 million
in 2007, representing a 4.0% or $5.9 million increase. Net
premiums written decreased $12.3 million or 7.7% to
$147.4 million in 2008 as compared to $159.7 million
in 2007. Net premiums earned increased 4.0% despite the 7.7%
decline in net premiums written. The decline in net premiums
written is attributable to the 9.6% decline in direct premiums
written, offset by the positive impact on net premiums written
of the change in reinsurance structure (in 2007 retention
increased to $750,000 from $250,000 and $350,000 in 2006 on
FPICs casualty and property lines, respectively, and from
$500,000 on MICs, MICNJs and FICs 2006
property, casualty and workers compensation lines, and in
2008 to $850,000 from $750,000). Direct premiums written and
earned were negatively impacted by the reduction in audit
premium recorded during 2008, which is earned immediately upon
booking (see the discussion below for discussion of audit
premium and changes in reinsurance arrangements).
Net investment income totaled $13.9 million in 2008, as
compared to $13.1 million in 2007, representing a 6.8% or
$0.9 million increase. Net investment income for 2007 was
impacted by the $720,000 non-recurring impact of the retaliatory
tax refund. Net realized investment losses amounted to
$7.1 million in 2008 as compared to net realized investment
gains of $24,000 in 2007. The net realized investment loss in
2008 is primarily driven by other than temporary impairments on
investment securities, a realized loss on the mark-to-market
valuation on the interest rate swaps for the trust preferred
securities, offset in part by realized gains on the sales of
investments. The net realized investment gain in 2007 is
primarily driven by realized gains on the sales of investments,
offset in part by other than temporary impairments on investment
securities and a realized loss on the mark-to-market valuation
on the interest rate swaps for the trust preferred securities.
See the discussion of other than temporary impairments on
investment securities in the Critical Accounting
Policies section.
55
In 2008, direct premiums written declined $17.5 million or
9.6% to $165.4 million as compared to $182.9 million
in 2007. The decline in direct premiums written is attributable
to a more difficult economic environment and competitive market
conditions. A decline in construction related activity and
related audit premium in California, increased competition on
large accounts, as well as the return of a number of competitors
to the California contractor market and the East Coast
habitational market contributed to this decline.
The decline in audit premium, as compared to the prior year,
relates to a general decline in construction related activity
and failing businesses in the construction industry,
specifically in California, driven by a slowdown of the
residential housing market. Approximately 50% of FPICs
business (and approximately one-third of our business in total)
is related to contractor liability.
Commercial multiple peril policies constitute a majority of the
business written in FPICs contractor book of business. The
premium on these policies is estimated at policy inception based
on a prediction of the volume of the insureds business
operations during the policy period. In addition to endorsing
the policy throughout the policy period based on known
information, at policy expiration FPIC conducts an audit of the
insureds business operations in order to adjust the policy
premium from an estimate to actual. Contractor liability policy
premium tends to vary with local construction activity as well
as changes in the nature of the contractors operations.
The decline in construction related activity and failing
businesses in the construction industry has impacted both the
volume of premium for the contractor in-force book of business
(and related exposures) and the related audit premium on
expiring policies. Audits, primarily of construction related
policies, generated return premium of $2.6 million in 2008,
representing a decline of $5.7 million as compared to
$3.1 million of additional premium that was generated in
2007.
The decline in year-to-date direct premiums written reflects a
continuing competitive marketplace and declining levels of
economic activity in our operating territories. The current
market is highly competitive, with pricing and coverage
competition being seen in virtually all classes of commercial
accounts, package policies, commercial automobile policies and
in the Pennsylvania personal auto market and Pennsylvania and
New Jersey homeowners markets, all of which makes it more
challenging to retain our accounts on renewal, or to renew a
policy at the expiring premium. Competition also continues on
large accounts, particularly in the East Coast habitational and
California construction contracting programs, as competitors
aggressively compete for these higher premium accounts. Pricing
in the property and casualty insurance industry historically has
been and remains cyclical. During a soft market cycle, such as
the current market condition, price competition is prevalent,
which makes it challenging to write and retain properly priced
personal and commercial lines business. We continue to work with
our agents to target classes of business and accounts compatible
with our underwriting appetite, which includes certain types of
religious institution risks, contracting risks, small business
risks and property risks. Despite the pricing pressures of the
marketplace, management maintains a strong focus on its policy
of disciplined underwriting and pricing standards, declining
business which it determines is inadequately priced for its
level of risk. In spite of these competitive market conditions,
ourGroups policy retention on renewal has been favorable
across most product lines.
In the fourth quarter of 2008, a new Business Owners Policy for
California risks was introduced. This product targets small to
medium sized businesses, which have been shown to be somewhat
less price sensitive than larger accounts. This product also
helps to balance FPICs business between property and
casualty exposures. Additionally, a new contracting product
which specializes in covering artisan contractors is being
developed for Arizona, California, Nevada and Oregon and is
targeted for introduction in early 2009. Artisan contractors
primarily provide repair and maintenance services, and this
segment tends to experience less severe market fluctuations
compared to the real estate construction industry.
Effective January 1, 2008, the Group increased its
reinsurance retention to $850,000 (from a maximum retention of
$750,000 in 2007) on the casualty, property and
workers compensation lines of business. Pollution coverage
written by FPIC is now fully retained with a standard sub-limit
of $150,000 (and up to $300,000 on an exception basis). Prior to
2008, FPIC reinsured 100% of its pollution coverage, which in
the twelve months ended December 31, 2007 represented
$1.8 million of ceded written premium. We also purchased an
additional $1.0 million of surety coverage (subject to a
10% retention), which resulted in an increased reinsurance
coverage to $4.5 million from $3.5 million per
principal and a maximum retention of $900,000 per principal as
compared to
56
the previous $800,000. The net effect of these changes in
reinsurance arrangements increased net premiums written for 2008.
Growth in Net Investment Income is discussed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007 Investment Income and Realized Gains
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
14,871
|
|
|
$
|
13,356
|
|
|
$
|
1,515
|
|
|
|
11.3
|
%
|
Dividends
|
|
|
351
|
|
|
|
319
|
|
|
|
32
|
|
|
|
10.0
|
%
|
Cash, cash equivalents & other
|
|
|
473
|
|
|
|
1,442
|
|
|
|
(969
|
)
|
|
|
(67.2
|
)%
|
Gross investment income
|
|
|
15,695
|
|
|
|
15,117
|
|
|
|
578
|
|
|
|
3.8
|
%
|
Investment expenses
|
|
|
1,759
|
|
|
|
2,064
|
|
|
|
(305
|
)
|
|
|
(14.8
|
)%
|
Net investment income
|
|
$
|
13,936
|
|
|
$
|
13,053
|
|
|
$
|
883
|
|
|
|
6.8
|
%
|
Net realized losses fixed income securities
|
|
$
|
(3,832
|
)
|
|
$
|
|
|
|
$
|
(3,832
|
)
|
|
|
N/M
|
|
Net realized (losses)/gains equity securities
|
|
|
(1,740
|
)
|
|
|
798
|
|
|
|
(2,538
|
)
|
|
|
N/M
|
|
Mark-to-market valuation for interest rate swaps
|
|
|
(1,500
|
)
|
|
|
(774
|
)
|
|
|
(726
|
)
|
|
|
N/M
|
|
Net realized (losses)/gains
|
|
$
|
(7,072
|
)
|
|
$
|
24
|
|
|
$
|
(7,096
|
)
|
|
|
N/M
|
|
(N/M means not meaningful)
In 2008 net investment income increased $0.9 million,
or 6.8%, to $13.9 million, as compared to
$13.1 million in 2007. Net investment income in 2007
benefited from the $720,000 non-recurring impact of the
retaliatory tax refund. The increase in net investment income in
2008 is the result of an increase in average cash and invested
assets. Average cash and invested assets totaled
$367 million for 2008 as compared to $333 million for
2007, representing an increase of $33 million. The increase
in invested assets is driven primarily by operating cash flow,
including the benefits of the 2008 and 2007 reinsurance
agreement changes, which result in less premium being ceded to
reinsurers.
In 2008 investment income on fixed income securities increased
$1.5 million, or 11.3%, to $14.9 million, as compared
to $13.4 million in 2007. This was driven by an increase in
the average investments held in fixed income securities, offset
by a decline in the yield on investments. Our tax equivalent
yield (yield adjusted for tax-benefit received on tax-exempt
securities) on fixed income securities declined to 5.06% in
2008, as compared to 5.22% in 2007.
Dividend income remained consistent at $351,000 in 2008 as
compared to $319,000 in 2007. Interest income on cash and cash
equivalents declined $1.0 million or 67.2% to
$0.5 million in 2008, as compared to $1.4 million in
2007, primarily as a result of the $720,000 of non-recurring
interest received on the retaliatory tax refund in 2007.
Investment expenses declined $0.3 million or 14.8% to
$1.8 million in 2008, from $2.1 million in 2007.
Net realized losses in 2008 were $7.1 million, as compared
to net realized gains of $24,000 in 2007. In 2008 net
realized losses of $7.1 million included write-downs of
securities determined to be other than-temporarily impaired of
$6.2 million, net gains on securities sales of
$0.6 million, and a loss on the mark-to-market valuation on
the interest rate swaps of $1.5 million. In 2007 net
realized gains of $24,000 included net gains on securities sales
of $0.9 million, a loss on the mark-to-market valuation on
the interest rate swaps of $0.8 million, and write-downs of
securities determined to be other than-temporarily impaired of
$0.1 million. Securities determined to be
other-than-temporarily impaired were written down to fair value
at the time of the write-down. See the discussion of other than
temporary impairments on investment securities in the Critical
Accounting Policies section. We have three ongoing interest rate
swap agreements to hedge against interest rate risk on our
floating rate trust preferred securities. The estimated fair
value of the interest rates swaps is obtained from the
third-party financial institution counterparties. We mark the
investments to market using these valuations and records the
change in the economic value of the interest rate swaps as a
realized gain or loss in the consolidated statement of earnings.
Fixed maturity investments represent 99.6% of invested assets,
and as of December 31, 2008, the fixed income portfolio
consists of 99.6% investment grade securities, with the
remaining 0.4% non-investment grade rated securities. The 0.4%
includes three corporate securities held with a combined market
value of $1.2 million, and one
57
asset-backed security held with a market value of
$0.2 million. The fixed income portfolio has an average
rating of Aa2/AA, an average effective maturity of
5.0 years, an average duration of 3.5 years with an
average tax equivalent book yield of 5.06%.
Among our portfolio holdings, the only subprime exposure
consists of asset-backed securities (ABS) within the home equity
subsector. The ABS home equity subsector totaled
$0.6 million (book value) on December 31, 2008,
representing 4.1% of the ABS holdings, 0.7% of the total
structured product holdings, and 0.2% of total fixed income
portfolio holdings. The subprime related exposure consists of
three individual securities, of which two are insured by a
monoline insurer against default of principal and interest.
However, since FGIC and AMBAC have been downgraded from their
previous AAA status, the two insured securities are now rated
according to the higher of the underlying collateral or the
monoline rating. One bond is rated Baa1/A while the other is
rated Baa3/BB. With regard to the remaining security without
monoline insurance, it is rated Aa2/AA by Moodys and
S&P, respectively. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations under the subsection entitled
Quantitative and Qualitative Information about Market
Risk.
The estimated fair value and unrealized loss for securities in a
temporary unrealized loss position as of December 31, 2008
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
|
U.S. Treasury securities and obligations of U.S. government
corporations and agencies
|
|
$
|
2,460
|
|
|
$
|
4
|
|
|
$
|
951
|
|
|
$
|
10
|
|
|
$
|
3,411
|
|
|
$
|
14
|
|
Obligations of states and political subdivisions
|
|
|
25,847
|
|
|
|
564
|
|
|
|
2,108
|
|
|
|
559
|
|
|
|
27,955
|
|
|
|
1,123
|
|
Corporate securities
|
|
|
39,226
|
|
|
|
1,528
|
|
|
|
2,535
|
|
|
|
236
|
|
|
|
41,761
|
|
|
|
1,764
|
|
Mortgage-backed securities
|
|
|
19,277
|
|
|
|
1,241
|
|
|
|
2,761
|
|
|
|
820
|
|
|
|
22,038
|
|
|
|
2,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
86,810
|
|
|
|
3,337
|
|
|
|
8,355
|
|
|
|
1,625
|
|
|
|
95,165
|
|
|
|
4,962
|
|
Total equity securities
|
|
|
2,232
|
|
|
|
363
|
|
|
|
69
|
|
|
|
31
|
|
|
|
2,301
|
|
|
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities in a temporary unrealized loss position
|
|
$
|
89,042
|
|
|
$
|
3,700
|
|
|
$
|
8,424
|
|
|
$
|
1,656
|
|
|
$
|
97,466
|
|
|
$
|
5,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity investments with unrealized losses for less than
twelve months are primarily due to changes in the interest rate
environment and anomalies in pricing in the current difficult
market. At December 31, 2008 we had 11 fixed maturity
securities with unrealized losses for more than twelve months.
Of the 11 securities with unrealized losses for more than twelve
months, all of them have fair values of no less than 72% of book
value. We do not believe these declines are other than temporary
due to the credit quality of the holdings. We currently have the
ability and intent to hold these securities until recovery.
In the years ended December 31, 2008, 2007 and 2006, we
recorded a pre-tax charge to earnings of $6.2 million,
$0.1 million and $0.1 million, respectively, for
write-downs of other than temporarily impaired securities. See
the discussion of recent downgrades and other than temporary
impairments on investment securities in the Critical
Accounting Policies section.
There are 12 common stock securities that are in an unrealized
loss position at December 31, 2008. All of these securities
have been in an unrealized loss position for less than
6 months. There are 4 preferred stock securities that are
in an unrealized loss position at December 31, 2008. Three
preferred stock securities have been in an unrealized loss
position for less than 8 months. One preferred stock
security has been in an unrealized loss position for more than
twelve months. We do not believe these declines are other than
temporary as a result of reviewing the circumstances of each
such security in an unrealized loss position. We currently have
the ability and intent to hold these securities until recovery.
However, future write-downs may become necessary in light of
unprecedented market and liquidity disruptions.
58
The following table summarizes the period of time that equity
securities sold at a loss during 2008 had been in a continuous
unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
Value on
|
|
|
Realized
|
|
Period of Time in an Unrealized Loss Position
|
|
Sale Date
|
|
|
Loss
|
|
|
|
(In thousands)
|
|
|
0-6 months
|
|
$
|
1,544
|
|
|
$
|
986
|
|
7-12 months
|
|
|
118
|
|
|
|
54
|
|
More than 12 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,662
|
|
|
$
|
1,040
|
|
|
|
|
|
|
|
|
|
|
The equity securities sold at a loss had been expected to
appreciate in value, but due to unforeseen circumstances were
sold so that sale proceeds could be reinvested. Securities were
sold due to a desire to reduce exposure to certain issuers and
industries or in light of unforeseen economic conditions.
Results of our Commercial Lines segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007 Commercial Lines (CL)
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
CL Direct premiums written
|
|
$
|
143,280
|
|
|
$
|
160,030
|
|
|
$
|
(16,750
|
)
|
|
|
(10.5
|
)%
|
CL Net premiums written
|
|
$
|
127,418
|
|
|
$
|
139,359
|
|
|
$
|
(11,941
|
)
|
|
|
(8.6
|
)%
|
CL Net premiums earned
|
|
$
|
132,425
|
|
|
$
|
125,427
|
|
|
$
|
6,998
|
|
|
|
5.6
|
%
|
CL Loss/LAE expense ratio (GAAP)
|
|
|
61.3
|
%
|
|
|
60.8
|
%
|
|
|
0.5
|
%
|
|
|
|
|
CL Expense ratio (GAAP)
|
|
|
35.5
|
%
|
|
|
34.4
|
%
|
|
|
1.1
|
%
|
|
|
|
|
CL Combined ratio (GAAP)
|
|
|
96.8
|
%
|
|
|
95.2
|
%
|
|
|
1.6
|
%
|
|
|
|
|
In 2008 our commercial lines direct premiums written decreased
by $16.8 million or 10.5% to $143.3 million as
compared to direct premium written in 2007 of
$160.0 million. The decline in direct premiums written is
attributed to several factors, including a decline in
construction related activity and related audit premium in
California, increased competition on large accounts, and the
return of a number of competitors to the California contractor
market and the East Coast habitational market. Our California
contractors book reflects the decreased economic activity in the
California construction market. Since the insurance premiums for
these contractors generally reflect their level of economic
activity, the average premium per policy has fallen as the
insureds business has contracted, resulting in lower
insurance exposures for these contractors. The retention levels
in this book remain attractive, and policy count is up
year-over-year, despite the decline in direct premiums written.
See additional discussion above in the 2008 vs. 2007
Revenue discussion.
In 2008 our commercial lines net premiums earned increased by
$7.0 million or 5.6% to $132.4 million as compared to
net premiums earned in 2007 of $125.4 million. Net premiums
earned increased 5.6% despite a 8.6% decline in net premiums
written, with the decline in net premiums written caused
primarily by the 10.5% decline in direct premiums written,
offset by the positive impact on net premiums written of the
change in our reinsurance structure as described above.
Offsetting these factors was the reduction in audit premium
recorded in 2008, which is earned immediately upon booking.
In the commercial lines segment for 2008 we had underwriting
income of $4.2 million, a GAAP combined ratio of 96.8%, a
GAAP loss and loss adjustment expense ratio of 61.3% and a GAAP
underwriting expense ratio of 35.5%, compared to underwriting
income of $6.0 million, a GAAP combined ratio of 95.2%, a
GAAP loss and loss adjustment expense ratio of 60.8% and a GAAP
underwriting expense ratio of 34.4% in 2007. Our commercial
lines loss ratio for 2008 reflects a higher frequency and claim
severity than the similar period in 2007 for casualty and
property lines of business in our West Coast commercial lines
business. The performance of the commercial lines in 2007 was
impacted favorably by the non-recurring retaliatory tax refund.
59
Results of our Personal Lines segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007 Personal Lines (PL)
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
PL Direct premiums written
|
|
$
|
22,097
|
|
|
$
|
22,877
|
|
|
$
|
(780
|
)
|
|
|
(3.4
|
)%
|
PL Net premiums written
|
|
$
|
19,934
|
|
|
$
|
20,308
|
|
|
$
|
(374
|
)
|
|
|
(1.8
|
)%
|
PL Net premiums earned
|
|
$
|
20,152
|
|
|
$
|
21,248
|
|
|
$
|
(1,096
|
)
|
|
|
(5.2
|
)%
|
PL Loss/LAE expense ratio (GAAP)
|
|
|
69.5
|
%
|
|
|
70.1
|
%
|
|
|
(0.6
|
)%
|
|
|
|
|
PL Expense ratio (GAAP)
|
|
|
37.6
|
%
|
|
|
28.8
|
%
|
|
|
8.8
|
%
|
|
|
|
|
PL Combined ratio (GAAP)
|
|
|
107.1
|
%
|
|
|
98.9
|
%
|
|
|
8.2
|
%
|
|
|
|
|
Personal lines direct premiums written declined to
$22.1 million in 2008 as compared to $22.9 million in
2007, representing a decline of $0.8 million or 3.4%. Our
personal lines have also been impacted by increased competition,
similar to our commercial lines.
In the personal lines segment for 2008 we had an underwriting
loss of $1.4 million, a GAAP combined ratio of 107.1%, a
GAAP loss and loss adjustment expense ratio of 69.5% and a GAAP
underwriting expense ratio of 37.6%, compared to underwriting
income of $0.2 million, a GAAP combined ratio of 98.9%, a
GAAP loss and loss adjustment expense ratio of 70.1% and a GAAP
underwriting expense ratio of 28.8% in 2007. Our personal lines
loss ratio for 2007 reflected increased severity, due to large
losses related to a variety of causes including an increase in
water and freeze related claims. In addition, the 2007 expense
ratio benefited from the retaliatory tax refund previously noted.
Underwriting Expenses and the Expense Ratio is discussed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007 Expenses and Expense Ratio
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Amortization of Deferred Acquisition Costs
|
|
$
|
41,684
|
|
|
$
|
38,763
|
|
|
$
|
2,921
|
|
|
|
7.5
|
%
|
As a % of net premiums earned
|
|
|
27.3
|
%
|
|
|
26.4
|
%
|
|
|
0.9
|
%
|
|
|
|
|
Other underwriting expenses
|
|
|
12,851
|
|
|
|
10,528
|
|
|
|
2,323
|
|
|
|
22.1
|
%
|
Total expenses excluding losses/LAE
|
|
$
|
54,535
|
|
|
$
|
49,291
|
|
|
$
|
5,244
|
|
|
|
10.6
|
%
|
Underwriting expense ratio
|
|
|
35.7
|
%
|
|
|
33.6
|
%
|
|
|
2.1
|
%
|
|
|
|
|
Underwriting expenses increased by $5.2 million, or 10.6%,
to $54.5 million in 2008, as compared to $49.3 million
in 2007. The increase in underwriting expenses primarily
reflects an increase in the amortization of deferred acquisition
costs in 2008 and the inclusion in 2007 of the non-recurring
retaliatory tax refund, which reduced other underwriting
expenses by $3.6 million in 2007. The amortization of
deferred acquisition costs increased in 2008 as compared to 2007
due to the increase in net earned premiums. Underwriting
expenses also reflect lower share-based compensation expense
under SFAS 123R and lower net contingent commission
expense. Lastly, underwriting expenses are impacted by the
previously discussed changes in the 2008 and 2007 reinsurance
program whereby less ceded premium is being recorded and
accordingly less ceding commission is received, which increases
underwriting expenses and net acquisition costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007 Income Taxes
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Income before income taxes
|
|
$
|
10,390
|
|
|
$
|
19,989
|
|
|
$
|
9,599
|
|
|
|
48.0
|
%
|
Income taxes
|
|
|
2,156
|
|
|
|
5,754
|
|
|
|
3,598
|
|
|
|
62.5
|
%
|
Net income
|
|
$
|
8,234
|
|
|
$
|
14,235
|
|
|
$
|
6,001
|
|
|
|
42.2
|
%
|
Effective tax rate
|
|
|
20.8
|
%
|
|
|
28.8
|
%
|
|
|
8.0
|
%
|
|
|
|
|
Federal income tax expense was $8.2 million and
$14.2 million for 2008 and 2007, respectively. The
effective tax rate was 20.8% and 28.8% for 2008 and 2007,
respectively. The 2007 effective tax rate was impacted by an
unusually high amount of taxable income in the period caused by
the retaliatory tax refund, which increased the effective tax
rate. The 2008 effective tax rate was impacted by the higher
level of other than temporary investment impairments, which
caused tax-advantaged income (municipal bond interest) to
represent a higher proportion of income, reducing the effective
tax rate.
60
YEAR
ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31,
2006
The components of income for 2007 and 2006, and the change and
percentage change from year to year, are shown in the charts
below. The accompanying narrative refers to the statistical
information displayed in the chart immediately above the
narrative. In 2007, we evaluated our methodology for allocating
costs to its lines of business and adopted changes to such
methodology in order to more accurately reflect the allocation
of joint costs. This resulted in allocating less joint cost to
the personal lines of business and more joint cost to the
commercial lines of business, but with no net change in cost
allocated to personal lines and commercial lines in the
aggregate. Related 2006 amounts have been reclassified to
reflect this change in allocation methodology:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 vs. 2006 Income
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial lines underwriting income
|
|
$
|
5,964
|
|
|
$
|
4,246
|
|
|
$
|
1,718
|
|
|
|
40.5
|
%
|
Personal lines underwriting income (loss)
|
|
|
234
|
|
|
|
(60
|
)
|
|
|
294
|
|
|
|
490.0
|
%
|
Total underwriting income
|
|
|
6,198
|
|
|
|
4,186
|
|
|
|
2,012
|
|
|
|
48.1
|
%
|
Net investment income
|
|
|
13,053
|
|
|
|
10,070
|
|
|
|
2,983
|
|
|
|
29.6
|
%
|
Net realized investment gains
|
|
|
24
|
|
|
|
151
|
|
|
|
(127
|
)
|
|
|
(84.1
|
)%
|
Other
|
|
|
1,929
|
|
|
|
1,889
|
|
|
|
40
|
|
|
|
2.1
|
%
|
Interest expense
|
|
|
(1,215
|
)
|
|
|
(1,212
|
)
|
|
|
(3
|
)
|
|
|
0.2
|
%
|
Income before income taxes
|
|
|
19,989
|
|
|
|
15,084
|
|
|
|
4,905
|
|
|
|
32.5
|
%
|
Income taxes
|
|
|
5,754
|
|
|
|
4,449
|
|
|
|
1,305
|
|
|
|
29.3
|
%
|
Net Income
|
|
$
|
14,235
|
|
|
$
|
10,635
|
|
|
$
|
3,600
|
|
|
|
33.9
|
%
|
Loss/LAE ratio (GAAP)
|
|
|
62.2
|
%
|
|
|
63.7
|
%
|
|
|
(1.5
|
)%
|
|
|
|
|
Underwriting expense ratio (GAAP)
|
|
|
33.6
|
%
|
|
|
33.3
|
%
|
|
|
0.3
|
%
|
|
|
|
|
Combined ratio (GAAP)
|
|
|
95.8
|
%
|
|
|
97.0
|
%
|
|
|
(1.2
|
)%
|
|
|
|
|
Loss/LAE ratio (Statutory)
|
|
|
62.2
|
%
|
|
|
61.5
|
%
|
|
|
0.7
|
%
|
|
|
|
|
Underwriting expense ratio (Statutory)
|
|
|
32.2
|
%
|
|
|
33.7
|
%
|
|
|
(1.5
|
)%
|
|
|
|
|
Combined ratio (Statutory)
|
|
|
94.4
|
%
|
|
|
95.2
|
%
|
|
|
(0.8
|
)%
|
|
|
|
|
As previously disclosed in our SEC filings, we paid an aggregate
of $3.5 million, including accrued interest, to the New
Jersey Division of Taxation (the Division) in
retaliatory premium tax for the years
1999-2004.
In conjunction with making such payments, we filed notices of
protest with the Division with respect to the retaliatory tax
imposed. The payments were made in response to notices of
deficiency issued by the Division.
We received $4.3 million in 2007 as a reimbursement of
protested payments of retaliatory tax, including accrued
interest thereon, that we previously made for the periods
1999-2004.
The refund has been recorded, after reduction for Federal income
tax, in the amount of $2.8 million in the consolidated
statement of earnings, with $2.5 million recorded in the
quarter ended June 30, 2007, and $0.3 million recorded
in the quarter ended September 30, 2007. The allocation of
the refund to pre-tax earnings included an increase to net
investment income of $720,000, with $687,000 of that amount
recognized in the quarter ended June 30, 2007, and $33,000
recognized in the quarter ended September 30, 2007, for the
interest received on the refund, and $3.6 million as a
reduction to Other Expense to recognize the recovery of amounts
previously charged to Other Expense, with $3.1 million of
that amount recognized in the quarter ended June 30, 2007,
and $0.5 million recognized in the quarter ended
September 30, 2007. This is a non-recurring item which
significantly affects the earnings for the year ended
December 31, 2007, and related performance metrics such as
the combined ratio.
Our GAAP combined ratio for 2007 was 95.8%, as compared to a
combined ratio for the prior year of 97.0%. On a pro-forma
basis, after removing the effect of the non-recurring
retaliatory tax refund described above, the GAAP combined ratio
for 2007 was 98.3%. The statutory combined ratio for 2007 and
2006 was 94.4% and 95.2%, respectively. See discussion below
relating to commercial and personal lines performance.
Net investment income increased $3.0 million or 29.6% to
$13.1 million in 2007 as compared to $10.1 million in
2006. Included in this increase is $720,000 attributable to the
non-recurring impact of the retaliatory taxes described above.
The balance of the increased investment income is due to
increased cash and invested assets,
61
resulting from operating cash flow and the reduced premium ceded
to reinsurers in 2007, as well as a favorable interest rate
environment.
Realized investment gains amounted to $24,000 in 2007 as
compared to $151,000 in 2006, driven in part by changes in the
fair value of the interest rate swaps for our floating rate
trust preferred securities. Other revenue of $1.9 million
in 2007 and 2006 represents service charges recorded on
insurance premiums. Interest expense of $1.2 million in
2007 and 2006 represents interest charges on the trust preferred
obligations of FPIG.
Charts and discussion relating to each of our segments
(commercial lines underwriting, personal lines underwriting, and
the investment segment) follow with further discussion below.
Changes have been made to the 2006 presentation of the
commercial and personal lines segments to conform to the
allocation methodology used for the 2007 commercial and personal
lines results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 vs. 2006 Revenue
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
Direct premiums written
|
|
$
|
182,907
|
|
|
$
|
185,745
|
|
|
$
|
(2,838
|
)
|
|
|
(1.5
|
)%
|
Net premiums written
|
|
|
159,667
|
|
|
|
145,791
|
|
|
|
13,876
|
|
|
|
9.5
|
%
|
Net premiums earned
|
|
|
146,675
|
|
|
|
137,673
|
|
|
|
9,002
|
|
|
|
6.5
|
%
|
Net investment income
|
|
|
13,053
|
|
|
|
10,070
|
|
|
|
2,983
|
|
|
|
29.6
|
%
|
Net realized investment gains
|
|
|
24
|
|
|
|
151
|
|
|
|
(127
|
)
|
|
|
(84.1
|
)%
|
Other revenue
|
|
|
1,929
|
|
|
|
2,035
|
|
|
|
(106
|
)
|
|
|
(5.2
|
)%
|
Total revenue
|
|
$
|
161,681
|
|
|
$
|
149,929
|
|
|
$
|
11,752
|
|
|
|
7.8
|
%
|
Total revenues for 2007 increased $11.8 million or 7.8% to
$161.7 million as compared to $149.9 million in 2006.
This increase was due primarily to an increase in net premiums
earned and net investment income. Net premiums earned totaled
$146.7 million in 2007 as compared to $137.7 million
in 2006, representing a 6.5% or $9.0 million increase. Net
premiums written increased $13.9 million or 9.5% to
$159.7 million as compared to $145.8 million in 2006.
Net premiums written and net premiums earned were impacted in
2007 by the volume of audit premium recorded, which is earned
immediately upon recording, and by changes in reinsurance
arrangements (see discussion below).
Net investment income totaled $13.1 million in 2007, as
compared to $10.1 million in 2006, representing a 29.6% or
$3.0 million increase. The increase in net investment
income in 2007 is primarily driven by an increase in average
cash and invested assets and a favorable interest rate
environment, as well as the $720,000 non-recurring impact of the
retaliatory tax refund. Realized investment gains amounted to
$24,000 in 2007 as compared to $151,000 in 2006. Net realized
gains in 2007 and 2006 include the mark-to-market fair value
adjustment on the interest rate swaps related to the
floating-rate trust preferred securities. The mark-to-market on
the swaps resulted in a realized loss of $774,000 and $94,000 in
2007 and 2006, respectively. See the investment income
discussion below for further information.
In 2007, direct premiums written decreased $2.8 million or
1.5% to $182.9 million in 2007 as compared to
$185.7 million in 2006. The decline in direct premiums
written is attributed to a more difficult economic environment
and competitive market conditions, including a decline in
construction related activity and related audit premium in
California, increased competition on large accounts as well as
the return of a number of competitors to the California
contractor market and the East Coast habitational market.
The decline in year-to-date audit premium, as compared to the
prior year, relates to a general decline in construction related
activity, specifically in California, driven by a slowdown of
the residential housing market. Approximately 50% of FPICs
business (and approximately one-third of the Groups
business in total) is related to artisan contractor liability,
primarily in the central valley of California.
Commercial multiple peril policies constitute a majority of the
business written in FPICs contractor book of business. The
premium on these policies is estimated at policy inception based
on a prediction of the volume of the insureds business
operations during the policy period. In addition to endorsing
the policy throughout the policy period based on known
information, at policy expiration FPIC conducts an audit of the
insureds business operations in order to adjust the policy
premium from an estimate to actual. Contractor liability policy
premium tends to vary
62
with local construction activity as well as changes in the
nature of the contractors operations. The decline in
construction related activity has impacted both the volume of
premium for the contractor in-force book of business (and
related exposures) and the related audit premium on expiring
policies. Audits, primarily of construction related policies,
generated $3.1 million of premiums in 2007, representing a
decline of $8.9 million as compared to $12.0 million
of premium that was generated in 2006.
The decline in year-to-date direct premiums written also
reflects an increasingly competitive marketplace and what
management characterizes as a soft market. There has been
increased competition on large accounts particularly in the East
Coast habitational and California contractor programs, as
competitors aggressively compete for these higher premium
accounts. Management continues to maintain its policy of
disciplined underwriting and pricing standards, declining
business which is inadequately priced for its level of risk.
Effective January 1, 2006, FPIC restructured its property
reinsurance agreement covering the first $2.0 million of
loss from an 80% quota share to an $1,650,000 excess of $350,000
excess of loss contract to take advantage of the our combined
capital. The restructuring also included the assumption of ceded
unearned premium at January 1, 2006 by FPIC from the 2005
property quota share and casualty excess of loss agreements.
These assumed premiums were then ceded into the respective 2006
treaties, which due to the reduced ceding rates, resulted in a
$5.6 million increase in net written and earned premiums
for 2006. There was no similar impact in 2007 relating to this
restructuring.
Effective, January 1, 2007, we Group consolidated the
reinsurance program of all our subsidiaries into a single
program, and increased our reinsurance retention to $750,000
(from a maximum retention of $500,000 in 2006) on the
working layer for all casualty, property and workers
compensation lines of business. The effect of this change in
reinsurance arrangements increased net premiums written for 2007.
Growth in Net Investment Income is discussed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 vs. 2006 Investment Income and Realized Gains
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
Fixed income securities
|
|
$
|
13,356
|
|
|
$
|
11,044
|
|
|
$
|
2,312
|
|
|
|
20.9
|
%
|
Dividends
|
|
|
319
|
|
|
|
514
|
|
|
|
(195
|
)
|
|
|
(37.9
|
)%
|
Cash, cash equivalents & other
|
|
|
1,442
|
|
|
|
859
|
|
|
|
583
|
|
|
|
67.9
|
%
|
Gross investment income
|
|
|
15,117
|
|
|
|
12,417
|
|
|
|
2,700
|
|
|
|
21.7
|
%
|
Investment expenses
|
|
|
2,064
|
|
|
|
2,347
|
|
|
|
(283
|
)
|
|
|
(12.1
|
)%
|
Net investment income
|
|
$
|
13,053
|
|
|
$
|
10,070
|
|
|
$
|
2,983
|
|
|
|
29.6
|
%
|
Realized losses fixed income securities
|
|
$
|
|
|
|
$
|
(402
|
)
|
|
$
|
402
|
|
|
|
N/M
|
|
Realized gains equity securities
|
|
|
798
|
|
|
|
638
|
|
|
|
160
|
|
|
|
N/M
|
|
Mark-to-market valuation for interest rate swaps
|
|
|
(774
|
)
|
|
|
(94
|
)
|
|
|
(680
|
)
|
|
|
N/M
|
|
Net realized gains other
|
|
|
|
|
|
|
9
|
|
|
|
(9
|
)
|
|
|
N/M
|
|
Net realized gains
|
|
$
|
24
|
|
|
$
|
151
|
|
|
$
|
(127
|
)
|
|
|
(84.1
|
)%
|
(N/M means not meaningful)
In 2007, net investment income increased $3.0 million, or
29.6% to $13.1 million, as compared to $10.1 million
in 2006. Our investment income benefited in 2007 from a
favorable interest rate environment and an increase in average
cash and invested assets. The increase in invested assets is
driven primarily by operating cash flow, including the benefit
of the 2007 reinsurance agreement, which results in less premium
being ceded to reinsurers. Net investment income also benefited
from the $720,000 non-recurring impact of the retaliatory tax
refund.
In 2007, investment income on fixed income securities increased
$2.3 million, or 20.9% to $13.4 million, as compared
to $11.0 million in 2006. This was driven by a favorable
interest rate environment and an increase in the average
investments held in fixed income securities caused by the
reasons described above. The tax equivalent yield (yield
adjusted for tax-benefit received on tax-exempt securities) on
fixed income securities increased to 5.22% in 2007, as compared
to 5.14% in 2006.
63
Dividend income declined $0.2 million or 37.9% to
$0.3 million in 2007, from $0.5 million in 2006. The
decline in dividend income is primarily attributable to a
decline in dividends received relating to an equity security
held in a reinsurance company. Excess Reinsurance Company paid a
special dividend to us in 2007 and 2006 in the amount of $1,000
and $228,000, respectively. Interest income on cash and cash
equivalents increased $0.6 million or 67.9% to
$1.4 million in 2007, as compared to $0.9 million in
2006, primarily as a result of the $720,000 of non-recurring
interest received on the retaliatory tax refund. Investment
expenses decreased $0.3 million or 12.1% to
$2.1 million in 2007, from $2.3 million in 2006.
Net realized gains for 2007 were $24,000, as compared to
$151,000 in 2006. In 2007, net realized gains of $24,000
included a loss on the mark-to-market valuation on the interest
rate swaps of $774,000, write-down of securities determined to
be other than-temporarily impaired of $138,000, and gains of
$936,000 on the sale of equity investments. Securities
determined to be other-than-temporarily impaired were written
down to our estimate of fair market value at the time of the
write-down. The Group has entered into four interest rate swap
agreements to hedge against interest rate risk on its floating
rate trust preferred securities. The estimated fair value of the
interest rates swaps is obtained from the third-party financial
institution counterparties. we mark the investments to market
using these valuations and record the change in the economic
value of the interest rate swaps as a realized gain or loss in
the consolidated statement of earnings.
The fixed income portfolio is invested 100% in investment grade
securities, with the exception of one corporate security held
with a market value of $0.4 million. As of
December 31, 2007, the fixed income portfolio had an
average rating of AA, an average effective maturity of
5.9 years, and an average tax equivalent yield of 5.22%.
Among our portfolio holdings, our only subprime exposure
consists of asset-backed securities within the home equity
subsector. The ABS home equity subsector totaled
$1.7 million (book value) on December 31, 2007,
representing 10.4% of the ABS holdings, 2.0% of the total
structured product holdings, and 0.5% of total fixed income
holdings. The subprime related exposure consists of five
individual securities, two of which have a 100% credit
enhancement, based on insurance against default as to principal
and interest. In the case that the monoline insurance companies
were to be downgraded, the ratings on the ABS securities would
receive the equivalent rating. Among the three securities
without credit enhancement, two are rated Aaa/AAA and one is
rated Aa2/AA by Moodys and S&P. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations under the subsection
entitled Quantitative and Qualitative Information about
Market Risk.
The estimated fair value and unrealized loss for securities in a
temporary unrealized loss position as of December 31, 2007
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(In Thousands)
|
|
|
U.S. Treasury securities and obligations of U.S. government
corporations and agencies
|
|
$
|
6,242
|
|
|
$
|
24
|
|
|
$
|
12,089
|
|
|
$
|
91
|
|
|
$
|
18,331
|
|
|
$
|
115
|
|
Obligations of states and political subdivisions
|
|
|
4,535
|
|
|
|
9
|
|
|
|
12,386
|
|
|
|
68
|
|
|
|
16,921
|
|
|
|
77
|
|
Corporate securities
|
|
|
5,586
|
|
|
|
108
|
|
|
|
22,842
|
|
|
|
345
|
|
|
|
28,428
|
|
|
|
453
|
|
Mortgage-backed securities
|
|
|
484
|
|
|
|
16
|
|
|
|
7,679
|
|
|
|
87
|
|
|
|
8,163
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
16,847
|
|
|
|
157
|
|
|
|
54,996
|
|
|
|
591
|
|
|
|
71,843
|
|
|
|
748
|
|
Total equity securities
|
|
|
4,155
|
|
|
|
276
|
|
|
|
84
|
|
|
|
20
|
|
|
|
4,239
|
|
|
|
296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities in a temporary unrealized loss position
|
|
$
|
21,002
|
|
|
$
|
433
|
|
|
$
|
55,080
|
|
|
$
|
611
|
|
|
$
|
76,082
|
|
|
$
|
1,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity investments with unrealized losses for less than
twelve months are primarily due to changes in the interest rate
environment. At December 31, 2007, we had 74 fixed maturity
securities with unrealized losses for more than twelve months.
Of the 74 securities with unrealized losses for more than twelve
months, 72 of them had
64
fair values of no less than 94% or more of cost, and the other 2
securities had a fair value greater than 89% of cost. The fixed
income portfolio is invested 100% in investment grade
securities, with the exception of one corporate security held
with a market value of $0.4 million, and these unrealized
losses primarily reflect the current interest rate environment.
The Group does not believe these declines are other than
temporary due to the credit quality of the holdings. The Group
currently has the ability and intent to hold these securities
until recovery.
There are 16 common stock securities that are in an unrealized
loss position at December 31, 2007. All of these securities
have been in an unrealized loss position for less than six
months. There are 7 preferred stock securities that are in an
unrealized loss position at December 31, 2007. Five
preferred stock securities have been in an unrealized loss
position for less than six months. One preferred stock security
has been in an unrealized loss position for more than six months
but less than twelve months and one preferred stock security has
been in an unrealized loss position for more than twelve months.
The Group believes these declines are not other than temporary
as a result of reviewing the circumstances of each such security
in an unrealized position. The Group currently has the ability
and intent to hold these securities until recovery.
The following table summarizes the period of time that equity
securities sold at a loss during 2007 had been in a continuous
unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
Value on
|
|
|
Realized
|
|
Period of Time in an Unrealized Loss Position
|
|
Sale Date
|
|
|
Loss
|
|
|
|
(In thousands)
|
|
|
0-6 months
|
|
$
|
1,051
|
|
|
$
|
93
|
|
7-12 months
|
|
|
63
|
|
|
|
2
|
|
More than 12 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,114
|
|
|
$
|
95
|
|
|
|
|
|
|
|
|
|
|
The equity securities sold at a loss had been expected to
appreciate in values but due to unforeseen circumstances were
sold so that sale proceeds could be reinvested. Securities were
sold due to a desire to reduce exposure to certain issuers and
industries or in light of unforeseen economic conditions.
Results of our Commercial Lines segment were as follows. In
2007, we evaluated our methodology for allocating costs to our
lines of business and adopted changes to such methodology in
order to more accurately reflect the allocation of joint costs.
This resulted in allocating less joint cost to the personal
lines of business and more joint cost to the commercial lines of
business, but with no net change in cost allocated to personal
lines and commercial lines in the aggregate. Related 2006
amounts have been reclassified to reflect this change in
allocation methodology:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 vs. 2006 Commercial Lines (CL)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
CL Direct premiums written
|
|
$
|
160,030
|
|
|
$
|
161,592
|
|
|
$
|
(1,562
|
)
|
|
|
(1.0
|
)%
|
CL Net premiums written
|
|
$
|
139,359
|
|
|
$
|
123,829
|
|
|
$
|
15,530
|
|
|
|
12.5
|
%
|
CL Net premiums earned
|
|
$
|
125,427
|
|
|
$
|
115,461
|
|
|
$
|
9,966
|
|
|
|
8.6
|
%
|
CL Loss/LAE expense ratio (GAAP)
|
|
|
60.8
|
%
|
|
|
63.7
|
%
|
|
|
(2.9
|
)%
|
|
|
|
|
CL Expense ratio (GAAP)
|
|
|
34.4
|
%
|
|
|
32.8
|
%
|
|
|
1.6
|
%
|
|
|
|
|
CL Combined ratio (GAAP)
|
|
|
95.2
|
%
|
|
|
96.5
|
%
|
|
|
(1.3
|
)%
|
|
|
|
|
In 2007, our commercial lines direct premiums written decreased
by $1.6 million or 1.0% to $160.0 million as compared
to direct written premium in 2006 of $161.6 million. The
decline in year-to-date direct premiums written is attributed to
several factors including a decline in construction related
activity and related audit premium in California, increased
competition on large accounts, as well as the return of a number
of competitors to the California contractor market and the East
Coast habitational market. See additional discussion above in
the 2007 vs. 2006 Revenue discussion.
In 2007, our commercial lines net premiums written increased by
$15.5 million, or 12.5%, to $139.4 million as compared
to net premiums written in 2006 of $123.8 million. Net
premiums earned in 2007 increased 8.6%, or
65
$10.0 million, to $125.4 million from
$115.5 million in 2006. See additional discussion above in
the 2007 vs. 2006 Revenue discussion.
In the commercial lines segment for 2007, we had underwriting
income of $6.0 million, a GAAP combined ratio of 95.2%, a
GAAP loss and loss adjustment expense ratio of 60.8% and a GAAP
underwriting expense ratio of 34.4%, compared to underwriting
income of $4.2 million, a GAAP combined ratio of 96.5%, a
GAAP loss and loss adjustment expense ratio of 63.7% and a GAAP
underwriting expense ratio of 32.8% in 2006. Our commercial
lines loss ratio for 2007 reflects a frequency of losses
reported and severity within a normal range of our expectations.
The performance of the commercial lines in 2007 was impacted
favorably by the non-recurring retaliatory tax refund.
Results of our Personal Lines segment were as follows. In 2007,
we evaluated our methodology for allocating costs to our lines
of business and adopted changes to such methodology in order to
more accurately reflect the allocation of joint costs. This
resulted in allocating less joint cost to the personal lines of
business and more joint cost to the commercial lines of
business, but with no net change in cost allocated to personal
lines and commercial lines in the aggregate. Related 2006
amounts have been reclassified to reflect this change in
allocation methodology:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 vs. 2006 Personal Lines (PL)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
PL Direct premiums written
|
|
$
|
22,877
|
|
|
$
|
24,153
|
|
|
$
|
(1,276
|
)
|
|
|
(5.3
|
)%
|
PL Net premiums written
|
|
$
|
20,308
|
|
|
$
|
21,962
|
|
|
$
|
(1,654
|
)
|
|
|
(7.5
|
)%
|
PL Net premiums earned
|
|
$
|
21,248
|
|
|
$
|
22,212
|
|
|
$
|
(964
|
)
|
|
|
(4.3
|
)%
|
PL Loss/LAE expense ratio (GAAP)
|
|
|
70.1
|
%
|
|
|
63.8
|
%
|
|
|
6.3
|
%
|
|
|
|
|
PL Expense ratio (GAAP)
|
|
|
28.8
|
%
|
|
|
36.5
|
%
|
|
|
(7.7
|
)%
|
|
|
|
|
PL Combined ratio (GAAP)
|
|
|
98.9
|
%
|
|
|
100.3
|
%
|
|
|
(1.4
|
)%
|
|
|
|
|
In 2007, personal lines direct premiums written declined to
$22.9 million, representing a decline of $1.3 million
or 5.3% from $24.2 million in 2006. Our personal lines have
been impacted by increased competition, similar to our
commercial lines. Net premiums written also declined to
$20.3 million in 2007, as compared to $22.0 million in
2006, representing a decline of $1.7 million or 7.5%.
Personal lines net premiums earned in 2007 declined 4.3% or
$1.0 million to $21.2 million from $22.2 million
in 2006.
In the personal lines segment for 2007, we had underwriting
income of $0.2 million, a GAAP combined ratio of 98.9%, a
GAAP loss and loss adjustment expense ratio of 70.1% and a GAAP
underwriting expense ratio of 28.8%, compared to an underwriting
loss of $0.1 million, a GAAP combined ratio of 100.3%, a
GAAP loss and loss adjustment expense ratio of 63.8% and a GAAP
underwriting expense ratio of 36.5% in 2006. Our personal lines
loss ratio for 2007 reflects a frequency and severity of losses
reported which falls generally within a normal range of our
expectations.
Underwriting Expenses and the Expense Ratio is discussed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 vs. 2006 Expenses and Expense Ratio
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Amortization of Deferred Acquisition Costs
|
|
$
|
38,763
|
|
|
$
|
32,694
|
|
|
$
|
6,069
|
|
|
|
18.6
|
%
|
As a % of net premiums earned
|
|
|
26.4
|
%
|
|
|
23.7
|
%
|
|
|
2.7
|
%
|
|
|
|
|
Other underwriting expenses
|
|
|
10,528
|
|
|
|
13,242
|
|
|
|
(2,714
|
)
|
|
|
(20.5
|
)%
|
Total expenses excluding losses/LAE
|
|
$
|
49,291
|
|
|
$
|
45,936
|
|
|
$
|
3,355
|
|
|
|
7.3
|
%
|
Underwriting expense ratio
|
|
|
33.6
|
%
|
|
|
33.3
|
%
|
|
|
0.3
|
%
|
|
|
|
|
Underwriting expenses increased by $3.4 million, or 7.3%,
to $49.3 million in 2007, as compared to $45.9 million
in 2006. The increase in 2007 underwriting expenses reflects the
inclusion of the non-recurring retaliatory tax refund, which
reduced other underwriting expenses by $3.6 million in
2007. Offsetting that refund, other underwriting expenses
increased due to an increase in salary expense from additions in
staff company-wide to support strategic initiatives, and other
increased operating expenses. In addition, the amortization of
deferred acquisition costs is lower in 2006 as compared to 2007
due to the fact that when FPIG was purchased on October 1,
66
2005, the accounting for the business combination required us to
begin accruing deferred acquisition costs from the date of
acquisition. Lastly, underwriting expenses are impacted by the
previously discussed changes in the 2007 and 2006 reinsurance
program whereby less ceded premium is being recorded and
accordingly less ceding commission is received on treaties in
runoff, and most of the treaties effective January 1, 2007
do not provide for ceding commission, which increases
underwriting expenses and net acquisition costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 vs. 2006 Income Taxes
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
19,989
|
|
|
$
|
15,084
|
|
|
$
|
4,905
|
|
|
|
32.5
|
%
|
Income taxes
|
|
|
5,754
|
|
|
|
4,449
|
|
|
|
1,305
|
|
|
|
29.3
|
%
|
Net income
|
|
$
|
14,235
|
|
|
$
|
10,635
|
|
|
$
|
3,600
|
|
|
|
33.9
|
%
|
Effective tax rate
|
|
|
28.8
|
%
|
|
|
29.5
|
%
|
|
|
(0.7
|
)%
|
|
|
|
|
Federal income tax expense was $5.8 million and
$4.4 million for 2007 and 2006, respectively. The effective
tax rate was 28.8% and 29.5% for 2007 and 2006, respectively.
The 2007 effective tax rate was impacted by an unusually high
amount of taxable income in the period caused by the retaliatory
tax refund, offset by higher tax-advantaged income (municipal
bond interest and dividend income, which reduced the effective
tax rate).
LIQUIDITY
AND CAPITAL RESOURCES
Our insurance companies generate sufficient funds from their
operations and maintain a high degree of liquidity in their
investment portfolios. The primary source of funds to meet the
demands of claim settlements and operating expenses are premium
collections, investment earnings and maturing investments.
Our insurance companies maintain investment and reinsurance
programs that are intended to provide sufficient funds to meet
their obligations without forced sales of investments. This
requires them to ladder the maturity of their portfolios and
thereby maintain a portion of their investment portfolio in
relatively short-term and highly liquid assets to ensure the
availability of funds.
The principal source of liquidity for the Holding Company (which
has modest expenses and does not currently, or for the
foreseeable future, need a significant regular source of cash
flow to cover these expenses other than its debt service on its
indebtedness to MIC, its quarterly dividend to shareholders, and
the funding necessary for any stock repurchases pursuant to the
currently authorized stock repurchase program) is dividend
payments and other fees received from the insurance
subsidiaries, and payments it receives on the
10-year
note
it received from the ESOP (see below) when the ESOP purchased
shares at the time of the conversion from a mutual to a stock
form of organization (the Conversion). The Holding
Company also has access to an existing credit line under which
it can draw up to $7.5 million dollars.
On April 16, 2008, the Holding Company was authorized by
the Board of Directors to repurchase, at managements
discretion, up to 5% of its outstanding stock. Any such
purchases will be funded by the Holding Companys existing
resources, dividends from subsidiaries, or the credit line, or
any combination of these resources. As of December 31,
2008, the Holding Company had purchased, pursuant to the
authority granted by the Board on April 16, 2008, a total
of 114,300 shares of outstanding stock at an average cost
of $16.03 per share, and is holding the stock as treasury stock.
In addition, 1,659 and 2,301 shares of stock were
repurchased from employees in 2008 and 2007, respectively, in
order to pay the required tax withholdings on the vesting of
restricted stock under the stock incentive plan.
The Groups insurance companies are required by law to
maintain a certain minimum surplus on a statutory basis, and are
subject to risk-based capital requirements and to regulations
under which payment of a dividend from statutory surplus may be
restricted and may require prior approval of regulatory
authorities. See discussion of restrictions on dividends and
distributions in the section Business
Regulation.
Additionally, there is a covenant in the Groups line of
credit agreement that requires the Group to maintain at least
50% of its insurance companies capacity to pay dividends without
state regulation pre-approval.
As part of the funding of the acquisition of FPIG, MIC entered
into a loan agreement with MIG, by which it advanced on
September 30, 2005, a loan of $10 million with a
20-year
note
and a fixed interest rate of 4.75%,
67
repayable in 20 equal annual installments. MIG has no special
limitations on its ability to take periodic dividends from its
insurance subsidiaries except for normal dividend restrictions
administered by the respective domiciliary state regulators as
described above. The Group believes that the resources available
to MIG will be adequate for it to meet its obligation under the
note to MIC, the line of credit and its other expenses.
MIG began paying quarterly dividends of $0.05 per common share
in the second quarter of 2006. On April 16, 2008,
MIGs Board of Directors increased the quarterly dividend
from $0.05 per share of common stock to $0.075 per share of
common stock, effective with the payment of the June 27,
2008 dividend. The amount of dividends paid during 2008 and 2007
totaled $1.7 million and $1.3 million, respectively.
The shareholder dividend was funded from the Groups
insurance companies, for which approval was sought and received
(where necessary) from each of the insurance companies
primary regulators.
The Group maintains an Employee Stock Ownership Plan (ESOP),
which purchased 626,111 shares from the Group at the time
of the Conversion in return for a note bearing interest at 4% on
the principal amount of $6,261,110. MIC makes annual
contributions to the ESOP sufficient for it to make its required
annual payment under the terms of the loan to the Holding
Company. It is anticipated that approximately 10% of the
original ESOP shares will be allocated annually to employee
participants of the ESOP. An expense charge is booked ratably
during each year for the shares committed to be allocated to
participants that year, determined with reference to the fair
market value of the Groups stock at the time the
commitment to allocate the shares is accrued and recognized. The
issuance of the shares to the ESOP was fully recognized in the
additional paid-in capital account at Conversion, with a contra
account entitled Unearned ESOP Shares established in the
stockholders equity section of the balance sheet for the
unallocated shares at an amount equal to their original
per-share purchase price. Shareholder dividends received on
unallocated ESOP shares are used to pay-down principal and
interest owed on the loan to the Holding Company.
The Group adopted a stock-based incentive plan at its 2004
annual meeting of shareholders. Pursuant to that plan, the Group
may issue a total of 876,555 shares, which amount will
increase automatically each year by 1% of the number of shares
outstanding at the end of the preceding year. At
December 31, 2008, the shares authorized under the plan
have been increased under this provision to
1,141,565 shares. During 2008, the Group made no grants of
restricted stock, incentive stock options and non-qualified
stock options. There were 2,500 stock options and
1,000 shares of restricted stock forfeited in 2008.
Total assets increased 4%, or $22.6 million, to
$569.0 million, at December 31, 2008, as compared to
$546.4 million at December 31, 2007. The Groups
cash and invested assets increased $17.6 million or 5%,
primarily due to net cash provided by operating activities,
offset by declines in market value of securities within the
portfolio. Premiums receivable decreased $2.2 million or
6%, primarily due to timing differences in the recording and
collecting of premium, and the decrease in premiums written.
Reinsurance receivables increased $2.6 million or 3%,
primarily due to an increase in ceded loss and loss adjustment
expense reserves. Prepaid reinsurance premiums decreased
$2.4 million or 25%, primarily due to a change in certain
of the Groups reinsurance contracts, whereby fewer
unearned premium reserves are ceded. Property and equipment
increased $3.1 million, or 24%, due Primarily to
Capitalization of internally developed software costs.
Additionally, the deferred income tax asset increased
$2.1 million or 28%, due to changes in a variety of
temporary differences items and the decline in unrealized
appreciation.
Total liabilities increased 5% or $18.7 million, to
$431.7 million at December 31, 2008 as compared to
$413.0 million at December 31, 2007, primarily as a
result of the increase in loss and loss adjustment expense
reserves of $29.6 million or 11%, offset by a decline in
unearned premiums of $7.6 million or 9%, a decline in
accounts payable and accrued expenses of $1.3 million or 9%
and a decline in other reinsurance balances of $3.2 million
or 22%. Unearned premiums declined primarily due to the decline
in written premiums. Accounts payable and accrued expenses
declined primarily due to cost saving measures reducing
operating expenses. Other reinsurance balances declined
primarily due to a change in certain of the Groups
reinsurance contracts, whereby fewer premium is ceded.
Total stockholders equity increased $3.9 million or
3%, to $137.3 million, at December 31, 2008, from
$133.4 million at December 31, 2007, primarily due to
net income of $8.2 million, stock compensation plan
amortization of $0.6 million, and ESOP shares committed to
be allocated to participants of $1.0 million, offset by
68
stockholder dividends of $1.7 million, the purchase of
treasury stock of $1.8 million, changes in valuation for
the defined benefit pension plan of $0.1 million and
changes in unrealized holding gains and losses on securities of
$2.3 million.
IMPACT OF
INFLATION
Inflation increases consumers needs for property and
casualty insurance coverage. Inflation also increases claims
incurred by property and casualty insurers as property repairs,
replacements and medical expenses increase. These cost increases
reduce profit margins to the extent that rate increases are not
implemented on an adequate and timely basis. We establish
property and casualty insurance premiums levels before the
amount of losses and loss expenses, or the extent to which
inflation may affect these expenses, are known. Therefore, our
insurance companies attempt to anticipate the potential impact
of inflation when establishing rates. Because inflation has
remained relatively low in recent years, financial results have
not been significantly affected by inflation.
Inflation also often results in increases in the general level
of interest rates, and, consequently, generally results in
increased levels of investment income derived from our
investments portfolio.
RECENT
ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 157,
Fair Value Measurements
(SFAS 157).
SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosure about fair value
measurements. It applies to other pronouncements that require or
permit fair value but does not require any new fair value
measurements. The statement defines fair value as the
price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date.
SFAS 157 establishes a fair value hierarchy to increase
consistency and comparability in fair value measurements and
disclosures. The hierarchy is based on the inputs used in
valuation and gives the highest priority to quoted prices in
active markets. The highest possible level should be used to
measure fair value. SFAS 157 is effective for fiscal years
beginning after November 15, 2007.
In February 2008, the FASB issued FSP
SFAS 157-2,
Effective Date of FASB Statement No. 157
(FSP
SFAS 157-2),
which delays the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities until
January, 2009, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at
least annually).
The Group adopted SFAS 157 and FSP
SFAS 157-2
effective January 1, 2008. Accordingly, the provisions of
SFAS 157 were not applied to goodwill and other intangible
assets held by the Group and measured annually for impairment
testing purposes only. The adoption of SFAS 157, for all
other assets and liabilities held by the Group, did not have a
material effect on the Groups results of operations,
financial position or liquidity. The Group will adopt
SFAS 157 for non-financial assets and non-financial
liabilities on January 1, 2009 and does not expect the
provisions to have a material effect on its results of
operations, financial position or liquidity.
In October 2008, the FASB issued FSP
SFAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market For That Asset Is Not Active
(FSP
SFAS 157-3),
with an immediate effective date, including prior periods for
which financial statements have not been issued. FSP
SFAS 157-3
amends SFAS 157 to clarify the application of fair value in
inactive markets and allows for the use of managements
internal assumptions about future cash flows with appropriately
risk-adjusted discount rates when relevant observable market
data does not exist. The objective of SFAS 157 has not
changed and continues to be the determination of the price that
would be received in an orderly transaction between market
participants that is not a forced liquidation or distressed sale
at the measurement date. The adoption of FSP
SFAS 157-3
in the third quarter of 2008 did not have a material effect on
the Groups results of operations, financial position or
liquidity.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement
No. 115
(SFAS 159). SFAS 159 permits an
entity to irrevocably elect fair value on a
contract-by-contract
basis for new assets or liabilities within the scope as the
initial and subsequent measurement attribute for those financial
assets and liabilities and certain other items including
69
property and casualty insurance contracts. Entities electing the
fair value option would be required to recognize changes in fair
value in earnings and to expense up-front costs and fees
associated with the item for which the fair value option is
elected. Entities electing the fair value option are required to
distinguish on the face of the statement of financial position
the fair value of assets and liabilities for which the fair
value option has been elected, and similar assets and
liabilities measured using another measurement attribute. An
entity can accomplish this by either reporting the fair value
and non-fair-value carrying amounts as separate line items or
aggregating those amounts and disclosing parenthetically the
amount of fair value included in the aggregate amount. The Group
adopted SFAS 159 effective January 1, 2008 and the
adoption did not have a material effect on the Groups
results of operations, financial position or liquidity. The
Group did not elect to measure at fair value any assets or
liabilities that were not otherwise already carried at fair
value in accordance with other accounting pronouncements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an Amendment of FASB Statement No. 133
(SFAS 161). SFAS 161 changes the disclosure
requirements for derivative instruments and hedging activities
and specifically requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of, and gains and losses
on, derivative instruments, and disclosures about
credit-risk-related contingent features in derivative
agreements. The provisions of SFAS 161 are effective for
financial statements issued for fiscal years beginning after
November 15, 2008. The Group is currently evaluating the
effect, if any, that the adoption of SFAS No. 161 will
have on operations, financial condition or liquidity.
In May 2008, the FASB issued SFAS No. 162,
The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162) to identify the sources of accounting
principles and provide a framework for selecting the principles
to be used in the preparation of financial statements in
accordance with U.S. generally accepted accounting
principles. The hierarchy of authoritative accounting guidance
is not expected to change current practice but is expected to
facilitate the FASBs plan to designate as authoritative
its forthcoming codification of accounting standards. This
Statement is effective November 15, 2008. The adoption of
SFAS 162 did not have a material impact on the Groups
results of operations, financial condition, or liquidity.
In December 2007, the FASB issued Revised
SFAS No. 141R,
Business Combinations
(SFAS 141R), a replacement of SFAS 141,
Business Combinations
(SFAS 141). SFAS 141R
provides revised guidance on how an acquirer recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any noncontrolling
interest in the acquiree. In addition, it provides revised
guidance on the recognition and measurement of goodwill acquired
in the business combination. SFAS 141R also provides
guidance specific to the recognition, classification, and
measurement of assets and liabilities related to insurance and
reinsurance contracts acquired in a business combination.
SFAS 141R applies to business combinations for acquisitions
occurring on or after January 1, 2009. Accordingly,
SFAS 141R does not impact the Groups previous
transactions involving purchase accounting.
In June 2008, the FASB issued FASB Staff Position (FSP)
No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions are Participating Securities
(FSP 03-6-1)
.
FSP 03-6-1
addresses the treatment of unvested share-based payment awards
containing nonforfeitable rights to dividends or dividend
equivalents in the calculation of earnings per share and is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those years. The Group is currently evaluating the impact
of
FSP 03-6-1
on the calculation of earnings per share.
In June 2007, the Emerging Issues Task Force (EITF) of FASB
issued EITF Issue
No. 06-11
Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards
(EITF 06-11).
EITF 06-11
requires that the tax benefit from dividends or dividend
equivalents that are charged to retained earnings and are paid
to employees for equity classified nonvested equity shares,
nonvested equity share units, and outstanding equity share
options be recognized as an increase to additional paid-in
capital.
EITF 06-11,
was effective on a prospective basis beginning with dividends
declared in fiscal years beginning after December 15, 2007,
and the Group adopted it in the first quarter of 2008. The
adoption of
EITF 06-11
did not have a material impact on the Groups results of
operations, financial condition, or liquidity.
70
OFF
BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS
The Group was not a party to any unconsolidated arrangement or
financial instrument with special purpose entities or other
vehicles at December 31, 2008 that would give rise to
previously undisclosed market, credit or financing risk.
The Group and its subsidiaries have no significant contractual
obligations at December 31, 2008, other than their
insurance obligations under their policies of insurance, trust
preferred securities, a line of credit obligation, and operating
lease obligations. Projected cash disbursements pertaining to
these obligations at December 31, 2008, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2009
|
|
|
Jan. 1, 2010
|
|
|
Jan. 1, 2012
|
|
|
After
|
|
|
|
|
|
|
to Dec. 31,
|
|
|
to Dec. 31,
|
|
|
to Dec. 31,
|
|
|
Dec. 31,
|
|
|
|
|
|
|
2009
|
|
|
2011
|
|
|
2013
|
|
|
2013
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Gross property and casualty insurance reserves
|
|
$
|
66,757
|
|
|
|
85,289
|
|
|
|
47,680
|
|
|
|
104,274
|
|
|
$
|
304,000
|
|
Trust preferred securities, net principal outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,576
|
|
|
|
15,576
|
|
Interest expense relating to trust preferred securities
|
|
|
1,390
|
|
|
|
2,780
|
|
|
|
2,783
|
|
|
|
26,942
|
|
|
|
33,895
|
|
Line of credit
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
Operating leases
|
|
|
422
|
|
|
|
84
|
|
|
|
13
|
|
|
|
|
|
|
|
519
|
|
Construction of new building
|
|
|
6,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
78,069
|
|
|
|
88,153
|
|
|
|
50,476
|
|
|
|
146,792
|
|
|
$
|
363,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The timing of the amounts for gross property and casualty
insurance reserves are an estimate based on historical
experience and expectations of future payment patterns. However,
the timing of these payments may vary significantly from the
amounts stated above.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
General.
Market risk is the risk that we will
incur losses due to adverse changes in market rates and prices.
We have exposure to three principal types of market risk through
our investment activities: interest rate risk, credit risk and
equity risk. Our primary market risk exposure is to changes in
interest rates, although in the current very difficult fixed
income market we also are very concerned about credit risk. We
have not entered, and do not plan to enter, into any derivative
financial instruments for hedging, trading or speculative
purposes, other than the interest rate swap agreements that
hedge the floating rate trust preferred securities which were
assumed as part of the FPIG acquisition.
Interest
Rate Risk
Interest rate risk is the risk that we will incur economic
losses due to adverse changes in interest rates. Our exposure to
interest rate changes primarily results from our significant
holdings of fixed rate investments. Fluctuations in interest
rates have a direct impact on the market valuation of these
securities. Our available-for-sale portfolio of fixed-income
securities is carried on the balance sheet at fair value.
Therefore, an adverse change in market prices of these
securities would result in losses reflected on the balance sheet.
The average duration of our fixed maturity investments,
excluding mortgage-backed securities that are subject to
prepayment, was approximately 3.5 years as of
December 31, 2008. As a result, the market value of our
investments may fluctuate in response to changes in interest
rates. In addition, we may experience investment losses to the
extent our liquidity needs require the disposition of fixed
maturity securities in unfavorable interest rate environments.
Fluctuations in near-term interest rates could have an impact on
the results of operations and cash flows. Certain of these fixed
income securities have call features. In a declining interest
rate environment, these securities
71
may be called by their issuer and replaced with securities
bearing lower interest rates. In a rising interest rate
environment, we may sell these securities (rather than holding
to maturity) and receive less than we paid for them.
As a general matter, we do not attempt to match the durations of
our assets with the durations of our liabilities, although we do
ladder our maturities. Our goal is to maximize the total return
on all of our investments. An important strategy that we employ
to achieve this goal is to try to hold enough in cash and
short-term investments in order to avoid liquidating longer-term
investments to pay claims.
The table below shows the interest rate sensitivity of our fixed
income financial instruments measured in terms of market value
(which is equal to the carrying value for all our securities).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
Market Value
|
|
|
|
−100 Basis
|
|
|
No Rate
|
|
|
+100 Basis
|
|
|
|
Point Change
|
|
|
Change
|
|
|
Point Change
|
|
|
|
(In thousands)
|
|
|
Bonds and preferred stocks
|
|
$
|
347,633
|
|
|
$
|
335,305
|
|
|
$
|
321,498
|
|
Cash and cash equivalents
|
|
|
37,043
|
|
|
|
37,043
|
|
|
|
37,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
384,676
|
|
|
$
|
372,348
|
|
|
$
|
358,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
Risk
As of December 31, 2008, the fixed income portfolio
(including short-term) consists of 99.6% investment grade
securities, with the remaining 0.4% being non-investment grade
rated securities. The 0.4% includes three corporate securities
held with a combined market value of $1.2 million, and one
asset-backed security held with a market value of
$0.2 million. The fixed income portfolio has an average
rating of Aa2/AA, an average effective maturity of
5.0 years, an average duration of 3.5 years with an
average tax equivalent book yield of 5.06%.
Municipal
Bond Holding Exposure
The overall credit quality, based on weighted average
Standard & Poors (S&P) ratings or
equivalent when the S&P rating is not available, of the
total $145 million municipal fixed income portfolio is:
|
|
|
|
|
AA including insurance enhancement
|
|
|
|
AA excluding insurance enhancement
|
|
|
|
|
|
99% of the underlying ratings are A− or better
|
|
|
|
90% of the underlying ratings are AA− or better
|
The municipal fixed income portfolio with insurance enhancement
represents $104 million, or 72% of the total municipal
fixed income portfolio.
|
|
|
|
|
The average credit quality with insurance enhancement is
AA
|
|
|
|
The average credit quality of the underlying, excluding
insurance enhancement, is AA
|
|
|
|
Each municipal fixed income investment is evaluated based on its
underlying credit fundamentals, irrespective of credit
enhancement provided by bond insurers
|
The municipal fixed income portfolio without insurance
enhancement represents $41 million, or 28% of the total
municipal fixed income portfolio.
|
|
|
|
|
The average credit quality of those securities without
enhancement is AA+
|
72
The following represents the Groups municipal fixed income
portfolio as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
Average Credit
|
|
|
Market
|
|
|
Muni
|
|
|
Unrealized
|
|
|
|
Rating
|
|
|
Value
|
|
|
Portfolio
|
|
|
Loss
|
|
|
|
(Dollars in thousands)
|
|
|
Uninsured Securities
|
|
|
AA+
|
|
|
$
|
41,152,563
|
|
|
|
28
|
%
|
|
$
|
(518,678
|
)
|
Securities with Insurance Enhancement
|
|
|
AA
|
|
|
|
103,972,630
|
|
|
|
72
|
%
|
|
|
(1,564,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
145,125,193
|
|
|
|
100
|
%
|
|
$
|
(2,083,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
|
|
Credit Enhancement
|
|
Value
|
|
|
% of Total
|
|
|
|
(Dollars in thousands)
|
|
|
AMBAC
|
|
$
|
10,912,255
|
|
|
|
8
|
%
|
FGIC
|
|
|
2,595,800
|
|
|
|
2
|
%
|
FSA
|
|
|
29,571,777
|
|
|
|
20
|
%
|
MBIA
|
|
|
54,293,386
|
|
|
|
37
|
%
|
No Enhancement
|
|
|
32,554,440
|
|
|
|
23
|
%
|
Other Enhancement
|
|
|
5,975,111
|
|
|
|
4
|
%
|
Escrowed to Maturity
|
|
|
9,222,424
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
Grand Total
|
|
$
|
145,125,193
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
The following represents the Groups ratings on the
municipal fixed income portfolio as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Municipal
|
|
|
Total Municipal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income
|
|
|
Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying Rating
|
|
|
Portfolio
|
|
|
Portfolio
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
of Insurance
|
|
|
(with Insurance
|
|
|
(without Insurance
|
|
|
|
Uninsured
|
|
|
Enhanced
|
|
|
Enhanced
|
|
|
Enhancement)
|
|
|
Enhancement)
|
|
S&P or
|
|
Securities(1)
|
|
|
Securities(2)
|
|
|
Securities(3)
|
|
|
(1) + (2)
|
|
|
(1) + (3)
|
|
equivalent
|
|
Market
|
|
|
% of
|
|
|
Market
|
|
|
% of
|
|
|
Market
|
|
|
% of
|
|
|
Market
|
|
|
% of
|
|
|
Market
|
|
|
% of
|
|
ratings
|
|
Value
|
|
|
Total
|
|
|
Value
|
|
|
Total
|
|
|
Value
|
|
|
Total
|
|
|
Value
|
|
|
Total
|
|
|
Value
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
AAA
|
|
$
|
24,728,378
|
|
|
|
60
|
%
|
|
$
|
38,153,182
|
|
|
|
37
|
%
|
|
$
|
14,069,974
|
|
|
|
14
|
%
|
|
$
|
62,881,560
|
|
|
|
43
|
%
|
|
$
|
38,798,352
|
|
|
|
27
|
%
|
AA+
|
|
|
3,015,979
|
|
|
|
7
|
%
|
|
|
21,141,391
|
|
|
|
20
|
%
|
|
|
27,436,187
|
|
|
|
26
|
%
|
|
|
24,157,370
|
|
|
|
17
|
%
|
|
|
30,452,166
|
|
|
|
20
|
%
|
AA
|
|
|
11,199,726
|
|
|
|
27
|
%
|
|
|
37,937,896
|
|
|
|
36
|
%
|
|
|
32,147,980
|
|
|
|
31
|
%
|
|
|
49,137,622
|
|
|
|
34
|
%
|
|
|
43,347,706
|
|
|
|
30
|
%
|
AA−
|
|
|
2,208,480
|
|
|
|
5
|
%
|
|
|
4,750,721
|
|
|
|
5
|
%
|
|
|
15,564,855
|
|
|
|
15
|
%
|
|
|
6,959,201
|
|
|
|
5
|
%
|
|
|
17,773,335
|
|
|
|
12
|
%
|
A+
|
|
|
|
|
|
|
|
|
|
|
1,037,850
|
|
|
|
1
|
%
|
|
|
4,174,077
|
|
|
|
4
|
%
|
|
|
1,037,850
|
|
|
|
1
|
%
|
|
|
4,174,077
|
|
|
|
3
|
%
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,724,712
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
6,724,712
|
|
|
|
5
|
%
|
A−
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,903,255
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
2,903,255
|
|
|
|
2
|
%
|
BBB−
|
|
|
|
|
|
|
|
|
|
|
951,590
|
|
|
|
1
|
%
|
|
|
951,590
|
|
|
|
1
|
%
|
|
|
951,590
|
|
|
|
1
|
%
|
|
|
951,590
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,152,563
|
|
|
|
100
|
%
|
|
$
|
103,972,630
|
|
|
|
100
|
%
|
|
$
|
103,972,630
|
|
|
|
100
|
%
|
|
$
|
145,125,193
|
|
|
|
100
|
%
|
|
$
|
145,125,193
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Rating
|
|
|
AA+
|
|
|
|
|
|
|
|
AA
|
|
|
|
|
|
|
|
AA
|
|
|
|
|
|
|
|
AA+
|
|
|
|
|
|
|
|
AA
|
|
|
|
|
|
The Groups municipal portfolio experienced ratings
migration in 2008 as a result of the downgrade of the claims
paying ratings of nearly all of the monoline insurance
companies. There were further downgrades of monocline insurance
companies during the fourth quarter of 2008, including a
downgrade of FSA from AAA to Aa3.
Insured municipals generally carry two ratings: a standalone
rating based on individual fundamentals and an insured rating
based on the claims paying ability of the issuers monoline
insurer (if the issue is insured). The monoline insurers
downgrades triggered ratings downgrades in the Groups
insured municipal portfolio during the second quarter of 2008.
When the monoline insurers are downgraded, the ratings on
insured municipal bonds are
73
downgraded to the municipality or revenue bonds underlying
credit rating or the insured rating, whichever is higher.
As of December 31, 2008, all of the Groups municipal
bonds carry an underlying rating of at least an A- or better by
S&P or Moodys, except $1 million of Puerto Rico
Commonwealth bonds due in 2013. These bonds are rated Baa3/BBB-.
The bonds were originally rated A3/A due to the insurance
provided by the monoline insurer, FGIC. When FGIC was
downgraded, the Puerto Rico municipal bonds were downgraded to
their underlying or standalone rating of Baa3/BBB-, as
FGICs rating is lower at Ca/CC.
Structured
Product Exposure
The Groups structured product exposure includes commercial
mortgage backed securities (CMBS), residential mortgage backed
securities (MBS) and asset backed securities (ABS). The total
book value, as of December 31, 2008, was $92 million
and represented 26% of the total fixed income portfolio.
As of December 31, 2008, CMBS holdings totaled
$9.3 million (book value), representing 10% of the total
structured product holdings. All CMBS securities are rated
Aaa/AAA by either Moodys, S&P, or Fitch.
As of December 31, 2008, MBS holdings totaled
$67.4 million (book value), representing 73% of the total
structured product holdings. The MBS securities consist of both
pass-through and collateralized mortgage obligation (CMO)
structures. The pass-throughs are all agency sponsored
securities and have a Aaa/AAA rating. Among the CMOs, a
majority are agency sponsored and as a result, also have a
Aaa/AAA rating. The non-agency backed securities represent 12%
of the CMO holdings and 3% of total MBS holdings; three of the
four of non-agency CMOs have a Aaa/AAA rating by
Moodys or S&P and one security is rated A by S&P.
As of December 31, 2008, ABS holdings totaled
$15.3 million (book value), representing 17% of the total
structured product holdings. The ABS securities consist of a
diversified blend of subsectors including, automobile loan and
credit card receivables, equipment financing, home equity, rate
reduction bonds, among other ABS. Outside of three holdings of
home equity (sub-prime), all ABS securities are rated Aaa/AAA by
Moodys and S&P.
The ABS home equity subsector (collateral of sub-prime home
equity loans) totaled $0.63 million (book value) on
December 31, 2008, representing 4.13% of the ABS holdings,
0.69% of the total structured product holdings, and 0.18% of
total fixed income portfolio holdings. The subprime related
exposure consists of three individual securities, of which two
are insured by a monoline against default of principal and
interest. However, since FGIC and AMBAC have been downgraded
from their previous AAA status, the two insured securities are
now rated according to the higher of the underlying collateral
or the monoline rating. One bond is rated Baa1/A while the other
is rated Baa3/BB. With regard to the remaining security without
monoline insurance, it is rated Aa2/AA by Moodys and
S&P, respectively.
There are two sectors where the Group has indirect exposure to
subprime securities. These are the U.S. agency and
investment grade corporate sectors. As of December 31,
2008, the Group held $17.0 million (book value) of agency
debt, consisting predominately of Fannie Mae, Federal Home Loan
Bank, Freddie Mac, and Federal Farm Credit Bank securities.
The second sector of the market in which the Group has indirect
exposure to subprime securities is the investment grade
corporate market. As of December 31, 2008, the Groups
portfolio held $74.6 million (book value) of corporate
bonds. Among the corporate credit exposure, $27.8 million
or 37% of the holdings, were in the financial industry. The
banking, brokerage, finance, insurance and REIT sectors of the
investment grade corporate market continue to face stresses and
challenges. Although some issuers, particularly banks, will
continue to need to strengthen their reserves and write-off bad
debts which will impact their earnings, it is expected that
these issuers will continue to pay principal and interest when
due.
Equity
Risk
Equity price risk is the risk that we will incur economic losses
due to adverse changes in equity prices. Our exposure to changes
in equity prices primarily results from our holdings of common
stocks, mutual funds and other equities. Our portfolio of equity
securities is carried on the balance sheet at fair value.
Therefore, an adverse change
74
in market prices of these securities would result in losses
reflected in the balance sheet. Portfolio characteristics are
analyzed regularly and market risk is actively managed through a
variety of techniques. In accordance with accounting principles
generally accepted in the United States of America, when an
equity security becomes other than temporarily impaired, we
record this impairment as a charge against earnings. For the
year ended December 31, 2008, we recorded a pre-tax charge
to earnings of $2.3 million for write-downs of other than
temporarily impaired equity securities. See discussion of other
than temporary impairments on investment securities under
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Critical Accounting Policies.
Group and industry concentrations are monitored by the Board of
Directors. At December 31, 2008, our equity portfolio made
up 3.0% of the Groups total investment portfolio. At
December 31, 2008, the top ten equity holdings represented
$4.6 million or 44.8% of the equity portfolio. Investments
in the financial sector represented 23.0% while investments in
pharmaceutical companies, retail specialty companies, energy
companies and information technology companies represented 9.6%,
44.7%, 11.1% and 11.6%, respectively, of the equity portfolio at
December 31, 2008. The table below summarizes the
Groups equity price risk and shows the effect of a
hypothetical 20% increase and a 20% decrease in market prices as
of December 31, 2008. The selected hypothetical changes do
not indicate what could be the potential best or worst case
scenarios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
|
|
|
Hypothetical
|
|
Estimated Fair
|
|
|
|
Value After
|
|
|
Percentage Increase
|
|
Value of Equity
|
|
|
|
Hypothetical
|
|
|
(Decrease) in
|
|
Securities at
|
|
Hypothetical
|
|
Change in
|
|
|
Stockholders
|
|
12/31/08
|
|
Price Change
|
|
Prices
|
|
|
Equity(1)
|
|
(Dollars in thousands)
|
|
|
$10,203
|
|
20% increase
|
|
$
|
12,244
|
|
|
|
1.0
|
%
|
$10,203
|
|
20% decrease
|
|
$
|
8,162
|
|
|
|
(1.0
|
%)
|
Market
conditions
The credit crisis, panic and volatility in the credit markets
experienced during the third quarter of 2008 carried over into
the fourth quarter, but moderated somewhat in some classes late
in the year. Most asset classes outperformed in December 2008;
for example, investment grade corporate bonds had 318 basis
points of excess return versus similar duration Treasury bonds.
Nonetheless, the severity and duration of the economic downturn
in the U.S. is anticipated to be worse than previous
recessions. The contraction is now assumed to last approximately
through 2009, but the actual depth and duration of the current
downturn remains unknown.
For fixed maturity securities, yield and income generation
remain the key drivers to our investment strategy and our
overall philosophy is to invest with a long-term horizon in high
quality obligations. We remain cautious with a bias toward
higher quality securities that are well suited to withstand a
soft economic cycle. Reliance on independent investment research
to avoid potential difficulties will continue to be a key driver
behind our investment decisions. The continued elevation of
fixed income spreads relative to historical levels may provide
attractive investment opportunities, particularly in the
corporate bond sector.
With all these risks present, we are cautious in the equities
markets and will manage through this period by investing in
companies with strong balance sheets and reasonable valuations.
75
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
|
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Mercer Insurance Group, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
Mercer Insurance Group, Inc. and subsidiaries as of
December 31, 2008 and 2007, and the related consolidated
statements of earnings, stockholders equity, and cash
flows for each of the years in the three-year period ended
December 31, 2008. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Mercer Insurance Group, Inc. and subsidiaries as of
December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Mercer Insurance Group, Inc.s internal control over
financial reporting as of December 31, 2008, based on
criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated March 16, 2009, expressed an unqualified opinion on
the effectiveness of the Companys internal control over
financial reporting.
Philadelphia, Pennsylvania
March 16, 2009
76
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
December 31,
2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands, except share amounts)
|
|
|
ASSETS
|
|
|
|
|
Investments, at fair value:
|
|
|
|
|
|
|
|
|
Fixed-income securities, available for sale, at fair value (cost
$331,075 and $321,978, respectively)
|
|
$
|
334,087
|
|
|
|
324,238
|
|
Equity securities, at fair value (cost $9,232 and $12,500,
respectively)
|
|
|
10,203
|
|
|
|
17,930
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
344,290
|
|
|
|
342,168
|
|
Cash and cash equivalents
|
|
|
37,043
|
|
|
|
21,580
|
|
Premiums receivable
|
|
|
34,165
|
|
|
|
36,339
|
|
Reinsurance receivables
|
|
|
86,443
|
|
|
|
83,844
|
|
Prepaid reinsurance premiums
|
|
|
7,096
|
|
|
|
9,486
|
|
Deferred policy acquisition costs
|
|
|
20,193
|
|
|
|
20,528
|
|
Accrued investment income
|
|
|
3,901
|
|
|
|
3,582
|
|
Property and equipment, net
|
|
|
16,144
|
|
|
|
13,056
|
|
Deferred income taxes
|
|
|
9,814
|
|
|
|
7,670
|
|
Goodwill
|
|
|
5,416
|
|
|
|
5,416
|
|
Other assets
|
|
|
4,481
|
|
|
|
2,766
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
568,986
|
|
|
|
546,435
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
$
|
304,000
|
|
|
|
274,399
|
|
Unearned premiums
|
|
|
80,408
|
|
|
|
88,024
|
|
Accounts payable and accrued expenses
|
|
|
13,283
|
|
|
|
14,622
|
|
Other reinsurance balances
|
|
|
11,509
|
|
|
|
14,734
|
|
Trust preferred securities
|
|
|
15,576
|
|
|
|
15,559
|
|
Advances under line of credit
|
|
|
3,000
|
|
|
|
3,000
|
|
Other liabilities
|
|
|
3,940
|
|
|
|
2,691
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
431,716
|
|
|
|
413,029
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, no par value, authorized 5,000,000 shares,
no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, no par value, authorized 15,000,000 shares,
issued 7,074,333 shares and 7,075,333 shares,
outstanding 6,801,095 and 6,717,693 shares
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
71,369
|
|
|
|
70,394
|
|
Accumulated other comprehensive income
|
|
|
2,494
|
|
|
|
4,896
|
|
Retained Earnings
|
|
|
74,138
|
|
|
|
67,613
|
|
Unearned ESOP shares
|
|
|
(2,505
|
)
|
|
|
(3,131
|
)
|
Treasury stock, 621,773 and 505,814 shares
|
|
|
(8,226
|
)
|
|
|
(6,366
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
137,270
|
|
|
|
133,406
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
568,986
|
|
|
|
546,435
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
77
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Consolidated
Statements of Earnings
Years
ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands, except per
|
|
|
|
share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
152,577
|
|
|
|
146,675
|
|
|
|
137,673
|
|
Investment income, net of expenses
|
|
|
13,936
|
|
|
|
13,053
|
|
|
|
10,070
|
|
Net realized investment (losses) gains
|
|
|
(7,072
|
)
|
|
|
24
|
|
|
|
151
|
|
Other revenue
|
|
|
2,021
|
|
|
|
1,929
|
|
|
|
2,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
161,462
|
|
|
|
161,681
|
|
|
|
149,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
95,219
|
|
|
|
91,186
|
|
|
|
87,697
|
|
Amortization of deferred policy acquisition costs (related party
amounts of $1,063, $1,141 and $1,212, respectively)
|
|
|
41,684
|
|
|
|
38,763
|
|
|
|
32,694
|
|
Other expenses
|
|
|
12,851
|
|
|
|
10,528
|
|
|
|
13,242
|
|
Interest expense
|
|
|
1,318
|
|
|
|
1,215
|
|
|
|
1,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
151,072
|
|
|
|
141,692
|
|
|
|
134,845
|
|
Income before income taxes
|
|
|
10,390
|
|
|
|
19,989
|
|
|
|
15,084
|
|
Income taxes
|
|
|
2,156
|
|
|
|
5,754
|
|
|
|
4,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,234
|
|
|
|
14,235
|
|
|
|
10,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.32
|
|
|
|
2.32
|
|
|
|
1.77
|
|
Diluted
|
|
$
|
1.30
|
|
|
|
2.25
|
|
|
|
1.71
|
|
See accompanying notes to consolidated financial statements.
78
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders Equity
Years
ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Unearned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
other
|
|
|
|
|
|
restricted
|
|
|
Unearned
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
paid-in
|
|
|
comprehensive
|
|
|
Retained
|
|
|
stock
|
|
|
ESOP
|
|
|
Treasury
|
|
|
|
|
|
|
stock
|
|
|
stock
|
|
|
capital
|
|
|
income
|
|
|
earnings
|
|
|
compensation
|
|
|
shares
|
|
|
stock
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Balance, December 31, 2005
|
|
$
|
|
|
|
|
|
|
|
|
67,973
|
|
|
|
2,851
|
|
|
|
44,896
|
|
|
|
(1,654
|
)
|
|
|
(4,383
|
)
|
|
|
(6,284
|
)
|
|
|
103,399
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,635
|
|
Unrealized gains on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains arising during period, net of related
income tax expense of $62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
|
|
Less reclassification adjustment for gains included in net
income, net of related income tax expense of $80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of unearned restricted stock compensation
|
|
|
|
|
|
|
|
|
|
|
(1,654
|
)
|
|
|
|
|
|
|
|
|
|
|
1,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation plan amortization
|
|
|
|
|
|
|
|
|
|
|
1,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,398
|
|
Tax benefit from stock compensation plan
|
|
|
|
|
|
|
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
ESOP shares committed
|
|
|
|
|
|
|
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
626
|
|
|
|
|
|
|
|
1,253
|
|
Treasury stock purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
(37
|
)
|
Dividends to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
|
|
|
|
|
|
|
|
68,473
|
|
|
|
2,815
|
|
|
|
54,629
|
|
|
|
|
|
|
|
(3,757
|
)
|
|
|
(6,321
|
)
|
|
|
115,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,235
|
|
Unrealized gains on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains arising during period, net of related
income tax expense of $1,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,787
|
|
Less reclassification adjustment for gains included in net
income, net of related income tax expense of $271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(527
|
)
|
Defined benefit pension plan, net of related income tax benefit
of $92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation plan amortization
|
|
|
|
|
|
|
|
|
|
|
1,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,043
|
|
Tax benefit from stock compensation plan
|
|
|
|
|
|
|
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153
|
|
ESOP shares committed
|
|
|
|
|
|
|
|
|
|
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
626
|
|
|
|
|
|
|
|
1,175
|
|
Treasury stock purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45
|
)
|
|
|
(45
|
)
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
|
|
Dividends to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
|
|
|
|
|
|
|
|
70,394
|
|
|
|
4,896
|
|
|
|
67,613
|
|
|
|
|
|
|
|
(3,131
|
)
|
|
|
(6,366
|
)
|
|
|
133,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,234
|
|
Unrealized losses on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses arising during period, net of related
income tax benefit of $3,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,126
|
)
|
Less reclassification adjustment for losses included in net
income, net of related income tax benefit of $1,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,678
|
|
Defined benefit pension plan, net of related income tax expense
of $24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation plan amortization
|
|
|
|
|
|
|
|
|
|
|
547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
547
|
|
Tax benefit from stock compensation plan
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
ESOP shares committed
|
|
|
|
|
|
|
|
|
|
|
388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
626
|
|
|
|
|
|
|
|
1,014
|
|
Treasury stock purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,860
|
)
|
|
|
(1,860
|
)
|
Dividends to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
|
|
|
|
|
|
|
|
71,369
|
|
|
|
2,494
|
|
|
|
74,138
|
|
|
|
|
|
|
|
(2,505
|
)
|
|
|
(8,226
|
)
|
|
|
137,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
79
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
Years
ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,234
|
|
|
|
14,235
|
|
|
|
10,635
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of fixed assets
|
|
|
2,232
|
|
|
|
2,135
|
|
|
|
2,587
|
|
Net amortization of premium
|
|
|
1,505
|
|
|
|
1,272
|
|
|
|
1,039
|
|
Amortization of restricted stock compensation
|
|
|
547
|
|
|
|
1,043
|
|
|
|
1,398
|
|
ESOP share commitment
|
|
|
1,014
|
|
|
|
1,175
|
|
|
|
1,253
|
|
Net realized investment losses (gains)
|
|
|
7,072
|
|
|
|
(24
|
)
|
|
|
(151
|
)
|
Deferred income tax
|
|
|
(907
|
)
|
|
|
(967
|
)
|
|
|
(4,168
|
)
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums receivable
|
|
|
2,174
|
|
|
|
1,691
|
|
|
|
(533
|
)
|
Reinsurance receivables
|
|
|
(2,599
|
)
|
|
|
4,143
|
|
|
|
(8,773
|
)
|
Prepaid reinsurance premiums
|
|
|
2,390
|
|
|
|
6,897
|
|
|
|
5,171
|
|
Deferred policy acquisition costs
|
|
|
335
|
|
|
|
(3,820
|
)
|
|
|
(5,919
|
)
|
Other assets
|
|
|
(2,723
|
)
|
|
|
884
|
|
|
|
388
|
|
Losses and loss adjustment expenses
|
|
|
29,601
|
|
|
|
23,944
|
|
|
|
38,776
|
|
Unearned premiums
|
|
|
(7,616
|
)
|
|
|
6,094
|
|
|
|
2,948
|
|
Other reinsurance balances
|
|
|
(3,225
|
)
|
|
|
(9,854
|
)
|
|
|
6,014
|
|
Other
|
|
|
550
|
|
|
|
1,445
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
38,584
|
|
|
|
50,293
|
|
|
|
50,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of fixed income securities, available for sale
|
|
|
(57,552
|
)
|
|
|
(84,640
|
)
|
|
|
(193,614
|
)
|
Purchase of equity securities
|
|
|
(3,569
|
)
|
|
|
(4,188
|
)
|
|
|
(5,543
|
)
|
Sale (purchase) of short-term investments, net
|
|
|
|
|
|
|
7,692
|
|
|
|
(3,403
|
)
|
Sale and maturity of fixed income securities, available for sale
|
|
|
43,119
|
|
|
|
35,602
|
|
|
|
148,593
|
|
Sale of equity securities
|
|
|
3,726
|
|
|
|
3,425
|
|
|
|
3,844
|
|
Purchase of property and equipment, net
|
|
|
(5,316
|
)
|
|
|
(3,255
|
)
|
|
|
(2,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(19,592
|
)
|
|
|
(45,364
|
)
|
|
|
(52,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(1,860
|
)
|
|
|
(45
|
)
|
|
|
(37
|
)
|
Tax benefit from stock compensation plans
|
|
|
40
|
|
|
|
153
|
|
|
|
129
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
176
|
|
|
|
|
|
Dividends to shareholders
|
|
|
(1,709
|
)
|
|
|
(1,251
|
)
|
|
|
(902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(3,529
|
)
|
|
|
(967
|
)
|
|
|
(810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
15,463
|
|
|
|
3,962
|
|
|
|
(3,059
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
21,580
|
|
|
|
17,618
|
|
|
|
20,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
37,043
|
|
|
|
21,580
|
|
|
|
17,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,290
|
|
|
|
1,163
|
|
|
|
1,222
|
|
Income taxes
|
|
$
|
3,900
|
|
|
|
5,900
|
|
|
|
7,745
|
|
See accompanying notes to consolidated financial statements.
80
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
(Dollars
in thousands, except per share amounts)
|
|
(1)
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
|
|
(a)
|
Description
of Business
|
Mercer Insurance Group, Inc. (MIG) and subsidiaries
(collectively, the Group) includes Mercer Insurance Company
(MIC), its subsidiaries Queenstown Holding Company, Inc. (QHC)
and its subsidiary Mercer Insurance Company of New Jersey, Inc.
(MICNJ), Franklin Holding Company, Inc. (FHC) and its subsidiary
Franklin Insurance Company (FIC), and BICUS Services Corporation
(BICUS), Financial Pacific Insurance Group, Inc. (FPIG) and its
subsidiaries Financial Pacific Insurance Company (FPIC) and
Financial Pacific Insurance Agency (FPIA), which is currently
inactive, commencing in October, 2006. FPIG also holds an
interest in three statutory business trusts that were formed for
the purpose of issuing Floating Rate Capital Securities (see
note 18).
The companies in the Group are operated under common management.
The Groups operating subsidiaries are licensed
collectively in twenty two states, but are currently focused on
doing business in seven states; Arizona, California, Nevada, New
Jersey, New York, Oregon and Pennsylvania. MIC and MICNJ are
also licensed to write property and casualty insurance in New
York where a limited amount of business is written to support
accounts in adjacent states. FPIC holds an additional fifteen
state licenses outside of the Groups current focus area.
Currently, only direct mail surety is being written in some of
these states.
The Groups business activities are separated into three
operating segments, which are commercial lines of insurance,
personal lines of insurance and the investment function. The
commercial lines of business consist primarily of multi-peril
and commercial auto coverage. These two commercial lines
represented 62%, 64% and 61%, and 17%, 17% and 14%,
respectively, of the Groups net premiums written in 2008,
2007 and 2006. The personal lines business consists primarily of
homeowners insurance in Pennsylvania and New Jersey and private
passenger automobile insurance in Pennsylvania. These two
personal lines represented 8%, 8% and 9%, and 4%, 4% and 4%,
respectively, of the Groups net premiums written in 2008,
2007 and 2006.
|
|
(b)
|
Consolidation
Policy and Basis of Presentation
|
The consolidated financial statements are prepared in accordance
with U.S. generally accepted accounting principles (GAAP),
which differ in some respects from those followed in reports to
insurance regulatory authorities, and include the accounts of
each member of the Group since the date of acquisition. The
insurance subsidiaries within the Group participate in a
reinsurance pooling arrangement (the Pool) whereby each
insurance affiliates underwriting results are combined and
then distributed proportionately to each participant. Each
insurers share in the Pool is based on their respective
statutory surplus as of the beginning of each year. The effects
of the Pool as well as all other significant intercompany
accounts and transactions have been eliminated in consolidation.
The preparation of the accompanying financial statements
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant items
subject to such estimates include liabilities for losses and
loss adjustment expenses, deferred policy acquisition costs,
reinsurance, goodwill valuation, deferred income tax assets and
investment valuation and assessment of other than temporary
impairment of investments. Actual results could differ from
those estimates.
|
|
(d)
|
Concentration
of Risk
|
The Groups business is subject to concentration risk with
respect to geographic concentration. Although the Groups
operating subsidiaries are licensed collectively in twenty two
states, direct premiums written for three states, California,
New Jersey and Pennsylvania, constituted 54%, 28% and 8% of the
2008 direct premium written,
81
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
55%, 27% and 7% of the 2007 direct premium written, and 53%,
28%, and 8% of the 2006 direct premium written. Consequently,
changes in the California, New Jersey or Pennsylvania legal,
regulatory or economic environment could adversely affect the
Group.
For the year ending December 31, 2008, 2007 and 2006, there
were no agents in the Group that individually produced greater
than 5% of the Groups direct written premiums.
Due to periodic shifts in the portfolio arising from income tax
planning strategies and asset-liability matching, as well as the
need to be flexible in responding to changes in the securities
markets and economic factors, management considers the entire
portfolio of fixed-income securities as available for sale.
Fixed-income securities available for sale are stated at fair
value. Equity securities are carried at fair value. Unrealized
investment gains or losses on investments carried at fair value,
net of applicable income taxes, are reflected directly in
stockholders equity as a component of accumulated other
comprehensive income and, accordingly, have no effect on net
income.
Interest on fixed-income securities is credited to income as it
accrues on the principal amounts outstanding, adjusted for
amortization of premiums and accretion of discounts computed
utilizing the effective interest rate method. Premiums and
discounts on mortgage-backed securities are amortized/accreted
using anticipated prepayments with changes in anticipated
prepayments, which are evaluated semi-annually, accounted for
prospectively. The model used to determine anticipated
prepayment assumptions for mortgage-backed securities uses
separate home sale, refinancing, curtailment, and full pay-off
components, derived from a variety of industry sources as
determined by the Groups fixed income securities manager.
Realized gains and losses are determined on the specific
identification basis. When the fair value of any investment is
lower than its cost, an assessment is made to determine if the
decline is other than temporary. If the decline is deemed to be
other than temporary, the investment is written down to fair
value and the amount of the write-down is charged to income as a
realized loss. The fair value of the investment becomes its new
cost basis.
|
|
(f)
|
Cash
and Cash Equivalents
|
Cash and cash equivalents are carried at cost which approximates
fair value. The Group considers all highly liquid investments
with a maturity of three months or less when purchased to be
cash equivalents.
Cash and cash equivalents as of December 31, 2008 and 2007
include restricted cash of $264 and $506, respectively,
consisting of funds held for surety bonds.
|
|
(g)
|
Fair
Values of Financial Instruments
|
The Group has used the following methods and assumptions in
estimating its fair values:
Investments
The fair values for fixed-income
securities available for sale are based on quoted market prices,
when available. If not available, fair values are based on
readily observable market data for similar securities or
valuations based on models where significant inputs are
observable. Fair values for marketable equity securities are
based on quoted market prices.
Cash and cash equivalents
The carrying
amounts reported in the consolidated balance sheet approximate
their fair values.
Premium and reinsurance receivables
The
carrying amounts reported in the consolidated balance sheet for
these instruments approximate their fair values.
Trust preferred securities and line of credit
obligations
The carrying amounts reported in the
consolidated balance sheets for these instruments approximate
their fair values.
82
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Interest rate swaps
The estimated fair value
of the interest rate swaps is based on valuations received from
the financial institution counterparties.
The Group cedes insurance to unrelated insurers to limit its
maximum loss exposure through risk diversification. Ceded
reinsurance receivables and unearned premiums are reported as
assets; loss and loss adjustment expense reserves are reported
gross of ceded reinsurance credits, unless the reinsurance
contract includes a right of offset. Premiums receivable is
recorded gross of ceded premiums payable. An allowance for
estimated uncollectible reinsurance is recorded based on an
evaluation of balances due from reinsurers and other available
information.
|
|
(i)
|
Deferred
Policy Acquisition Costs
|
Acquisition costs such as commissions, premium taxes, and
certain other expenses which vary with and are primarily related
to the production of business, are deferred and amortized over
the effective period of the related insurance policies. The
method followed in computing deferred policy acquisition costs
limits the amount of such deferred costs to their estimated net
realizable value, which gives effect to premiums to be earned,
anticipated investment income, loss and loss adjustment
expenses, and certain other maintenance costs expected to be
incurred as the premiums are earned. Future changes in
estimates, the most significant of which is expected losses and
loss adjustment expenses, may require adjustments to deferred
policy acquisition costs.
|
|
(j)
|
Property
and Equipment
|
Property and equipment are carried at cost less accumulated
depreciation calculated on the straight-line basis. Property is
depreciated over useful lives generally ranging from five to
forty years. Equipment is depreciated over three to ten years.
The Group applies the provisions of Statement of Position (SOP)
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use to account for internally
developed computer software costs. In accordance with
SOP 98-1,
the Group has capitalized $4,530, $2,499 and $942 in software
development costs, respectively, in 2008, 2007 and 2006. These
costs are amortized over their useful lives, ranging from three
to five years, from the dates the systems technology becomes
operational.
The carrying value of property and equipment is reviewed for
recoverability including an evaluation of the estimated useful
lives of such assets. Impairment is recognized only if the
carrying amount of the property and equipment is not deemed
recoverable. A change in the estimated useful lives of such
assets is treated as a change in estimate and is accounted for
prospectively.
Upon disposal of assets, the cost and related accumulated
depreciation is removed from the accounts and the resulting gain
or loss is included in income.
Premiums include direct writings plus reinsurance assumed less
reinsurance ceded to other insurers and are recognized as
revenue over the period that coverage is provided using the
daily pro-rata method. Audit premiums and premium adjustments
are recorded when they are considered probable and adequate
information exists to estimate the premium. Unearned premiums
represent that portion of direct premiums written that are
applicable to the unexpired terms of policies in force and is
reported as a liability. Prepaid reinsurance premiums represent
the unexpired portion of premiums ceded to reinsurers and is
reported as an asset. Premiums receivable are reported net of an
allowance for estimated uncollectible premium amounts. Revenue
related to service fees is earned over the installment period.
Agency commission and related fees are recognized based on the
policy issue date.
83
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
(l)
|
Losses
and Loss Adjustment Expenses
|
The liability for losses includes the amount of claims which
have been reported to the Group and are unpaid at the statement
date as well as provision for claims incurred but not reported,
after deducting anticipated salvage and subrogation. The
liability for loss adjustment expenses is determined as a
percentage of the liability for losses based on the historical
ratio of paid adjustment expenses to paid losses by line of
business.
Estimates of liabilities for losses and loss adjustment are
necessarily based on estimates, and the amount of losses and
loss adjustment expenses ultimately paid may be more or less
than such estimates. Changes in the estimates for losses and
loss adjustment expenses are recognized in the period in which
they are determined.
|
|
(m)
|
Share-Based
Compensation
|
The Group can make grants of qualified (ISOs) and
non-qualified stock options (NQOs), and non-vested shares
(restricted stock) under its stock incentive plan. Stock options
are granted at exercise prices that are not less than market
price at the date of grant, vest over a period of three or five
years, and are outstanding for a period of ten years for
ISOs and ten years and one month for NQOs.
Restricted stock grants vest over a period of three to five
years.
The Group applies the fair value recognition provisions of
Statement of Financial Accounting Standards (SFAS)
No. 123R, Share-Based Payment, using the
modified-prospective-transition method. The after-tax
compensation expense recorded in the consolidated statements of
earnings for stock options (net of forfeitures) for the years
ended December 31, 2008, 2007 and 2006 was $234, $439, and
$555 respectively. The after-tax compensation expense recorded
in the consolidated statements of earnings for restricted stock
(net of forfeitures) for the years ended December 31, 2008,
2007, and 2006 was $195, $336, and $442 respectively.
As of December 31, 2008, the Group has $0.5 million of
unrecognized total compensation cost related to non-vested stock
options and restricted stock. That cost will be recognized over
the remaining weighted-average vesting period of 1.2 years,
based on the estimated grant date fair value.
The Group uses the asset and liability method of accounting for
income taxes. Deferred income taxes arise from the recognition
of temporary differences between financial statement carrying
amounts and the tax bases of the Groups assets and
liabilities and operating loss carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. A
valuation allowance is provided when it is more likely than not
that some portion of the deferred tax asset will not be
realized. The effect of a change in tax rates is recognized in
the period of the enactment date.
|
|
(o)
|
Goodwill
and Intangible Assets
|
Goodwill is tested annually for impairment, and is tested for
impairment more frequently if events and circumstances indicate
that the asset might be impaired. An impairment loss is
recognized to the extent that the carrying amount exceeds the
assets fair value. This determination is made at the
reporting unit level and consists of two steps. First, the Group
determines the fair value of a reporting unit and compares it to
its carrying amount. Second, if the carrying amount of a
reporting unit exceeds its fair value, an impairment loss is
recognized for any excess of the carrying amount of the
reporting units goodwill over the implied fair value of
that goodwill. The implied fair value of goodwill is determined
by allocating the fair value of the reporting unit in a manner
similar to a purchase price allocation, in accordance with
SFAS No. 141, Business Combinations. The
residual fair value after this allocation is the implied fair
value of the reporting unit goodwill. The Group has two
reporting units with goodwill as of December 31, 2008 and
2007. The Group performed the annual impairment tests as of
December 31, 2008 and 2007, and the results indicated that
the fair value of the reporting units exceeded their carrying
amounts.
84
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Intangible assets held by the Group have definite lives and the
value is amortized on a straight-line basis over their useful
lives, ranging from eight to fourteen years. The carrying amount
of these intangible assets are regularly reviewed for indicators
of impairments in value. Impairment is recognized only if the
carrying amount of the intangible asset is not recoverable from
its undiscounted cash flows and is measured as the difference
between the carrying amount and the fair value of the asset.
|
|
(p)
|
Derivative
Instruments and Hedging Activities
|
The Group entered into three interest rate swap agreements to
hedge against interest rate risk on its floating rate Trust
preferred securities. Interest rate swaps are contracts to
convert, for a period of time, the floating rate of the Trust
preferred securities into a fixed rate without exchanging the
instruments themselves.
The Group accounts for its interest rate swaps in accordance
with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by
SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. The Group has
designated the interest rate swaps as non-hedge instruments.
Accordingly, the Group recognizes the fair value of the interest
rate swaps as assets or liabilities on the consolidated balance
sheets with the changes in fair value recognized in the
consolidated statement of earnings. The estimated fair value of
the interest rate swaps is based on valuations received from the
financial institution counterparties.
Earnings per share (EPS) is computed in accordance with
SFAS No. 128, Earnings per Share. Basic EPS is
computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding during
the period. The computation of Diluted EPS reflects the effect
of potentially dilutive securities. The denominator for basic
and diluted EPS includes ESOP shares committed to be released.
|
|
(r)
|
Recent
Accounting Pronouncements
|
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 157,
Fair Value Measurements
(SFAS 157).
SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosure about fair value
measurements. It applies to other pronouncements that require or
permit fair value but does not require any new fair value
measurements. The statement defines fair value as the
price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date.
SFAS 157 establishes a fair value hierarchy to increase
consistency and comparability in fair value measurements and
disclosures. The hierarchy is based on the inputs used in
valuation and gives the highest priority to quoted prices in
active markets. The highest possible level should be used to
measure fair value. SFAS 157 is effective for fiscal years
beginning after November 15, 2007.
In February 2008, the FASB issued FSP
SFAS 157-2,
Effective Date of FASB Statement No. 157
(FSP
SFAS 157-2),
which delays the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities until
January, 2009, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at
least annually).
The Group adopted SFAS 157 and FSP
SFAS 157-2
effective January 1, 2008. Accordingly, the provisions of
SFAS 157 were not applied to goodwill and other intangible
assets held by the Group and measured annually for impairment
testing purposes only. The adoption of SFAS 157, for all
other assets and liabilities held by the Group, did not have a
material effect on the Groups results of operations,
financial position or liquidity. The Group will adopt
SFAS 157 for non-financial assets and non-financial
liabilities on January 1, 2009 and does not expect the
provisions to have a material effect on its results of
operations, financial position or liquidity.
85
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
In October 2008, the FASB issued FSP
SFAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market For That Asset Is Not Active
(FSP
SFAS 157-3),
with an immediate effective date, including prior periods for
which financial statements have not been issued. FSP
SFAS 157-3
amends SFAS 157 to clarify the application of fair value in
inactive markets and allows for the use of managements
internal assumptions about future cash flows with appropriately
risk-adjusted discount rates when relevant observable market
data does not exist. The objective of SFAS 157 has not
changed and continues to be the determination of the price that
would be received in an orderly transaction between market
participants that is not a forced liquidation or distressed sale
at the measurement date. The adoption of FSP
SFAS 157-3
in the third quarter of 2008 did not have a material effect on
the Groups results of operations, financial position or
liquidity.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement
No. 115
(SFAS 159). SFAS 159 permits an
entity to irrevocably elect fair value on a
contract-by-contract
basis for new assets or liabilities within the scope as the
initial and subsequent measurement attribute for those financial
assets and liabilities and certain other items including
property and casualty insurance contracts. Entities electing the
fair value option would be required to recognize changes in fair
value in earnings and to expense up-front costs and fees
associated with the item for which the fair value option is
elected. Entities electing the fair value option are required to
distinguish on the face of the statement of financial position
the fair value of assets and liabilities for which the fair
value option has been elected, and similar assets and
liabilities measured using another measurement attribute. An
entity can accomplish this by either reporting the fair value
and non-fair-value carrying amounts as separate line items or
aggregating those amounts and disclosing parenthetically the
amount of fair value included in the aggregate amount. The Group
adopted SFAS 159 effective January 1, 2008 and the
adoption did not have a material effect on the Groups
results of operations, financial position or liquidity. The
Group did not elect to measure at fair value any assets or
liabilities that were not otherwise already carried at fair
value in accordance with other accounting pronouncements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an Amendment of FASB Statement No. 133
(SFAS 161). SFAS 161 changes the disclosure
requirements for derivative instruments and hedging activities
and specifically requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of, and gains and losses
on, derivative instruments, and disclosures about
credit-risk-related contingent features in derivative
agreements. The provisions of SFAS 161 are effective for
financial statements issued for fiscal years beginning after
November 15, 2008. The Group is currently evaluating the
effect, if any, that the adoption of SFAS No. 161 will
have on operations, financial condition or liquidity.
In May 2008, the FASB issued SFAS No. 162,
The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162) to identify the sources of accounting
principles and provide a framework for selecting the principles
to be used in the preparation of financial statements in
accordance with generally accepted accounting principles in the
United States. The hierarchy of authoritative accounting
guidance is not expected to change current practice but is
expected to facilitate the FASBs plan to designate as
authoritative its forthcoming codification of accounting
standards. This Statement is effective November 15, 2008.
The adoption of SFAS 162 did not have a material impact on
the Groups results of operations or financial condition.
In December 2007, the FASB issued Revised
SFAS No. 141R,
Business Combinations
(SFAS 141R), a replacement of SFAS 141,
Business Combinations
(SFAS 141). SFAS 141R
provides revised guidance on how an acquirer recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any noncontrolling
interest in the acquiree. In addition, it provides revised
guidance on the recognition and measurement of goodwill acquired
in the business combination. SFAS 141R also provides
guidance specific to the recognition, classification, and
measurement of assets and liabilities related to insurance and
reinsurance contracts acquired in a business combination.
SFAS 141R applies to business combinations for acquisitions
occurring on or after January 1, 2009. Accordingly,
SFAS 141R does not impact the Groups previous
transactions involving purchase accounting.
86
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
In June 2008, the FASB issued FASB Staff Position (FSP)
No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions are Participating Securities
(FSP 03-6-1).
FSP 03-6-1
addresses the treatment of unvested share-based payment awards
containing nonforfeitable rights to dividends or dividend
equivalents in the calculation of earnings per share and is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those years. The Group is currently evaluating the impact
of
FSP 03-6-1
on the calculation of earnings per share.
In June 2007, the Emerging Issues Task Force (EITF) of FASB
issued EITF Issue
No. 06-11
Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards
(EITF 06-11).
EITF 06-11
requires that the tax benefit from dividends or dividend
equivalents that are charged to retained earnings and are paid
to employees for equity classified nonvested equity shares,
nonvested equity share units, and outstanding equity share
options be recognized as an increase to additional paid-in
capital.
EITF 06-11,
was effective on a prospective basis beginning with dividends
declared in fiscal years beginning after December 15, 2007,
and the Group adopted it in the first quarter of 2008. The
adoption of
EITF 06-11
did not have a material impact on the Groups results of
operations, financial condition, or liquidity.
Net investment income, net realized investment gains (losses),
and change in unrealized gains (losses) on investment securities
are as follows.
Net investment income and net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
14,871
|
|
|
|
13,356
|
|
|
|
11,044
|
|
Equity securities
|
|
|
351
|
|
|
|
319
|
|
|
|
514
|
|
Cash and equivalents
|
|
|
369
|
|
|
|
613
|
|
|
|
614
|
|
Other
|
|
|
104
|
|
|
|
829
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment income
|
|
|
15,695
|
|
|
|
15,117
|
|
|
|
12,417
|
|
Less investment expenses
|
|
|
1,759
|
|
|
|
2,064
|
|
|
|
2,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
13,936
|
|
|
|
13,053
|
|
|
|
10,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
|
(3,832
|
)
|
|
|
|
|
|
|
(402
|
)
|
Equity securities, net
|
|
|
(1,740
|
)
|
|
|
798
|
|
|
|
638
|
|
Mark-to-market valuation for interest rate swaps
|
|
|
(1,500
|
)
|
|
|
(774
|
)
|
|
|
(94
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment (losses) gains
|
|
|
(7,072
|
)
|
|
|
24
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income and net realized investment gains
|
|
$
|
6,864
|
|
|
|
13,077
|
|
|
|
10,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment expenses include salaries, advisory fees and other
miscellaneous expenses attributable to the maintenance of
investment activities.
87
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The changes in net unrealized (losses) gains of securities are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Fixed-income securities
|
|
$
|
752
|
|
|
|
3,575
|
|
|
|
747
|
|
Equity securities
|
|
|
(4,459
|
)
|
|
|
(152
|
)
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,707
|
)
|
|
|
3,423
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The cost and estimated market value of available-for-sale
fixed-income and equity investment securities at
December 31, 2008 and 2007 are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost(1)
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-income securities, available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies(2)
|
|
$
|
84,747
|
|
|
|
3,242
|
|
|
|
14
|
|
|
|
87,975
|
|
Obligations of states and political subdivisions
|
|
|
143,042
|
|
|
|
3,206
|
|
|
|
1,123
|
|
|
|
145,125
|
|
Industrial and miscellaneous
|
|
|
77,859
|
|
|
|
1,404
|
|
|
|
1,764
|
|
|
|
77,499
|
|
Mortgage-backed securities
|
|
|
25,427
|
|
|
|
122
|
|
|
|
2,061
|
|
|
|
23,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
331,075
|
|
|
|
7,974
|
|
|
|
4,962
|
|
|
|
334,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At estimated market value
|
|
|
9,232
|
|
|
|
1,365
|
|
|
|
394
|
|
|
|
10,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
340,307
|
|
|
|
9,339
|
|
|
|
5,356
|
|
|
|
344,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost(1)
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-income securities, available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies(2)
|
|
$
|
83,016
|
|
|
|
814
|
|
|
|
115
|
|
|
|
83,715
|
|
Obligations of states and political subdivisions
|
|
|
142,873
|
|
|
|
1,230
|
|
|
|
77
|
|
|
|
144,026
|
|
Industrial and miscellaneous
|
|
|
65,109
|
|
|
|
552
|
|
|
|
453
|
|
|
|
65,208
|
|
Mortgage-backed securities
|
|
|
30,980
|
|
|
|
412
|
|
|
|
103
|
|
|
|
31,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
321,978
|
|
|
|
3,008
|
|
|
|
748
|
|
|
|
324,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At estimated market value
|
|
|
12,500
|
|
|
|
5,726
|
|
|
|
296
|
|
|
|
17,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
334,478
|
|
|
|
8,734
|
|
|
|
1,044
|
|
|
|
342,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Original cost of equity and fixed-income securities adjusted for
other than temporary impairment writedowns and amortization of
premium and accretion of discount.
|
88
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
(2)
|
|
Includes approximately $66,576 and $68,696 (cost) and $56,142
and $48,840 (fair value) of mortgage-backed securities
implicitly or explicitly backed by the U.S. government and
government agencies as of December 31, 2008 and 2007,
respectively.
|
The following table shows our Industrial and miscellaneous fixed
income securities and equity holdings by industry sector:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Industrial and miscellaneous
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
$
|
36,520
|
|
|
$
|
36,065
|
|
|
$
|
35,784
|
|
|
$
|
35,603
|
|
Retail specialty
|
|
|
27,561
|
|
|
|
27,810
|
|
|
|
19,434
|
|
|
|
19,601
|
|
Energy
|
|
|
9,680
|
|
|
|
9,444
|
|
|
|
4,298
|
|
|
|
4,355
|
|
Pharmaceutical
|
|
|
2,249
|
|
|
|
2,320
|
|
|
|
2,747
|
|
|
|
2,792
|
|
Information Technology
|
|
|
1,849
|
|
|
|
1,860
|
|
|
|
2,846
|
|
|
|
2,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
77,859
|
|
|
$
|
77,499
|
|
|
$
|
65,109
|
|
|
$
|
65,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
$
|
2,329
|
|
|
$
|
2,343
|
|
|
$
|
4,364
|
|
|
$
|
6,007
|
|
Retail specialty
|
|
|
4,117
|
|
|
|
4,565
|
|
|
|
4,083
|
|
|
|
6,037
|
|
Energy
|
|
|
746
|
|
|
|
1,135
|
|
|
|
953
|
|
|
|
1,620
|
|
Pharmaceutical
|
|
|
794
|
|
|
|
974
|
|
|
|
840
|
|
|
|
1,379
|
|
Information Technology
|
|
|
1,246
|
|
|
|
1,186
|
|
|
|
1,637
|
|
|
|
2,115
|
|
Transportation
|
|
|
|
|
|
|
|
|
|
|
623
|
|
|
|
772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,232
|
|
|
$
|
10,203
|
|
|
$
|
12,500
|
|
|
$
|
17,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated market value and unrealized loss for securities in
a temporary unrealized loss position as of December 31,
2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
U.S. Treasury securities and obligations of U.S. government
corporations and agencies
|
|
$
|
2,460
|
|
|
$
|
4
|
|
|
$
|
951
|
|
|
$
|
10
|
|
|
$
|
3,411
|
|
|
$
|
14
|
|
Obligations of states and political subdivisions
|
|
|
25,847
|
|
|
|
564
|
|
|
|
2,108
|
|
|
|
559
|
|
|
|
27,955
|
|
|
|
1,123
|
|
Corporate securities
|
|
|
39,226
|
|
|
|
1,528
|
|
|
|
2,535
|
|
|
|
236
|
|
|
|
41,761
|
|
|
|
1,764
|
|
Mortgage-backed securities
|
|
|
19,277
|
|
|
|
1,241
|
|
|
|
2,761
|
|
|
|
820
|
|
|
|
22,038
|
|
|
|
2,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
86,810
|
|
|
|
3,337
|
|
|
|
8,355
|
|
|
|
1,625
|
|
|
|
95,165
|
|
|
|
4,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
2,232
|
|
|
|
363
|
|
|
|
69
|
|
|
|
31
|
|
|
|
2,301
|
|
|
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities in a temporary unrealized loss position
|
|
$
|
89,042
|
|
|
$
|
3,700
|
|
|
$
|
8,424
|
|
|
$
|
1,656
|
|
|
$
|
97,466
|
|
|
$
|
5,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity investments with unrealized losses for less than
twelve months are primarily due to changes in the interest rate
environment. At December 31, 2008 the Group has 11 fixed
maturity securities with unrealized
89
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
losses for more than twelve months. Of the 11 securities with
unrealized losses for more than twelve months, all of them have
fair values of no less than 72% of book value. The Group does
not believe these declines are other than temporary due to the
credit quality of the holdings. The Group currently has the
ability and intent to hold these securities until recovery.
However, future write-downs may become necessary in light of
unprecedented market and liquidity disruptions.
There are 12 common stock securities that are in an unrealized
loss position at December 31, 2008. All of these securities
have been in an unrealized loss position for less than
6 months. There are 4 preferred stock securities that are
in an unrealized loss position at December 31, 2008. Three
preferred stock securities have been in an unrealized loss
position for less than 8 months. One preferred stock
security has been in an unrealized loss position for more than
twelve months. The Group does not believe these declines are
other than temporary as a result of reviewing the circumstances
of each such security in an unrealized loss position. The Group
currently has the ability and intent to hold these securities
until recovery. However, future write-downs may become necessary
in light of unprecedented market and liquidity disruptions.
The estimated market value and unrealized loss for securities in
a temporary unrealized loss position as of December 31,
2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
U.S. Treasury securities and obligations of U.S. government
corporations and agencies
|
|
$
|
6,242
|
|
|
$
|
24
|
|
|
$
|
12,089
|
|
|
$
|
91
|
|
|
$
|
18,331
|
|
|
$
|
115
|
|
Obligations of states and political subdivisions
|
|
|
4,535
|
|
|
|
9
|
|
|
|
12,386
|
|
|
|
68
|
|
|
|
16,921
|
|
|
|
77
|
|
Corporate securities
|
|
|
5,586
|
|
|
|
108
|
|
|
|
22,842
|
|
|
|
345
|
|
|
|
28,428
|
|
|
|
453
|
|
Mortgage-backed securities
|
|
|
484
|
|
|
|
16
|
|
|
|
7,679
|
|
|
|
87
|
|
|
|
8,163
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
16,847
|
|
|
|
157
|
|
|
|
54,996
|
|
|
|
591
|
|
|
|
71,843
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
4,155
|
|
|
|
276
|
|
|
|
84
|
|
|
|
20
|
|
|
|
4,239
|
|
|
|
296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities in a temporary unrealized loss position
|
|
$
|
21,002
|
|
|
$
|
433
|
|
|
$
|
55,080
|
|
|
$
|
611
|
|
|
$
|
76,082
|
|
|
$
|
1,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity investments with unrealized losses for less than
twelve months are primarily due to changes in the interest rate
environment. At December 31, 2007 the Group has 74 fixed
maturity securities with unrealized losses for more than twelve
months. Of the 74 securities with unrealized losses for more
than twelve months, 72 of them have fair values of no less than
94% or more of cost, and the other 2 securities have a fair
value greater than 89% of cost. The fixed income portfolio is
invested 100% in investment grade securities, with the exception
of one corporate security held with a market value of
$0.4 million, and these unrealized losses primarily reflect
the current interest rate environment. The Group does not
believe these declines are other than temporary due to the
credit quality of the holdings. The Group currently has the
ability and intent to hold these securities until recovery.
There are 16 common stock securities that are in an unrealized
loss position at December 31, 2007. All of these securities
have been in an unrealized loss position for less than six
months. There are 7 preferred stock securities that are in an
unrealized loss position at December 31, 2007. Five
preferred stock securities have been in an unrealized loss
position for less than six months. One preferred stock security
has been in an unrealized loss position for more than six months
but less than twelve months and one preferred stock security has
been in an unrealized loss position for more than twelve months.
The Group believes these declines are not other than temporary
as a result of reviewing the circumstances of each such security
in an unrealized position. The Group currently has the ability
and intent to hold these securities until recovery.
90
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The amortized cost and estimated fair value of fixed-income
securities at December 31, 2008, by contractual maturity,
are shown below (note that mortgage-backed securities in the
below table include securities backed by the
U.S. government and agencies). Expected maturities may
differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or
prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Due in one year or less
|
|
$
|
24,377
|
|
|
|
24,452
|
|
Due after one year through five years
|
|
|
90,786
|
|
|
|
92,092
|
|
Due after five years through ten years
|
|
|
93,830
|
|
|
|
95,860
|
|
Due after ten years
|
|
|
30,079
|
|
|
|
29,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239,072
|
|
|
|
241,903
|
|
Mortgage-backed securities
|
|
|
92,003
|
|
|
|
92,184
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
331,075
|
|
|
|
334,087
|
|
|
|
|
|
|
|
|
|
|
The gross realized gains and losses on investment securities are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Gross realized gains
|
|
$
|
1,698
|
|
|
|
1,032
|
|
|
|
1,023
|
|
Gross realized losses
|
|
|
(8,770
|
)
|
|
|
(1,008
|
)
|
|
|
(872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,072
|
)
|
|
|
24
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the years ended December 31, 2008, 2007 and 2006, we
recorded a pre-tax charge to earnings of $6.2 million,
$0.1 million and $0.1 million, respectively, for
write-downs of other than temporarily impaired securities (OTTI).
During the second half of 2008, there were significant
disruptions to the financial and equity markets. This resulted
from, in part, failures of financial institutions on an
unprecedented scale, and caused a significant reduction in
liquidity and trading flows in the credit markets in addition to
a dramatic widening in credit spreads. Such impacts affected the
valuations of both the fixed income and equity securities held
by the Group.
Of the $6.2 million in 2008 OTTI write-downs,
$3.9 million related to 11 fixed-income securities
including the following:
|
|
|
|
|
$0.5 million relating to one residential mortgage-backed
security. This charge resulted from increased delinquency and
default rates.
|
|
|
|
$0.8 million relating to four asset-backed securities.
These charges related to issuer-specific credit events that
revolved around the performance of the underlying collateral,
which had materially deteriorated. In general, these securities
were experiencing increased conditional default rates and
expected loss severities.
|
|
|
|
$2.6 million relating to six corporate bonds. These charges
were also due to issuer-specific events which lead to a
deteriorated financial condition.
|
Of the $6.2 million in 2008 OTTI write-downs,
$2.3 million related to 33 equity securities, including the
following:
|
|
|
|
|
$1.4 million on 29 equity securities related to
issuer-specific events which led to a deteriorated financial
condition.
|
|
|
|
$0.9 million on four preferred stock securities, of which
the largest write-off related to an issuer that has incurred
large losses on mortgage guarantee insurance coverage on
residential mortgage loans.
|
91
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Proceeds from sales and maturities of securities were $46,845,
$39,027 and $152,438 in 2008, 2007, and 2006, respectively.
Accumulated other comprehensive income was net of deferred
income taxes of $1,353 and $2,615 applicable to net unrealized
investment gains at December 31, 2008 and 2007,
respectively.
The amortized cost of invested securities on deposit with
regulatory authorities at December 31, 2008 and 2007 was
$4,911 and $4,913, respectively.
|
|
(3)
|
DEFERRED
POLICY ACQUISITION COSTS
|
Changes in deferred policy acquisition costs are as follows:x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Balance, January 1
|
|
$
|
20,528
|
|
|
|
16,708
|
|
|
|
10,789
|
|
Acquisition costs deferred
|
|
|
41,349
|
|
|
|
42,583
|
|
|
|
38,613
|
|
Amortization charged to earnings
|
|
|
(41,684
|
)
|
|
|
(38,763
|
)
|
|
|
(32,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
20,193
|
|
|
|
20,528
|
|
|
|
16,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
PROPERTY
AND EQUIPMENT
|
Property and equipment was as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,720
|
|
|
|
1,720
|
|
Buildings and improvements
|
|
|
7,846
|
|
|
|
7,504
|
|
Furniture, fixtures, and equipment
|
|
|
20,606
|
|
|
|
15,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,172
|
|
|
|
24,883
|
|
Accumulated depreciation
|
|
|
(14,028
|
)
|
|
|
(11,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,144
|
|
|
|
13,056
|
|
|
|
|
|
|
|
|
|
|
92
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
(5)
|
LIABILITIES
FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
|
Activity in the liabilities for losses and loss adjustment
expenses is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Balance at January 1
|
|
$
|
274,399
|
|
|
$
|
250,455
|
|
|
$
|
211,679
|
|
Less reinsurance recoverable on unpaid losses and loss expenses
|
|
|
(82,382
|
)
|
|
|
(85,933
|
)
|
|
|
(78,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, January 1
|
|
|
192,017
|
|
|
|
164,522
|
|
|
|
132,935
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
89,088
|
|
|
|
83,015
|
|
|
|
79,275
|
|
Prior years
|
|
|
6,131
|
|
|
|
8,171
|
|
|
|
8,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
95,219
|
|
|
|
91,186
|
|
|
|
87,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
24,521
|
|
|
|
22,589
|
|
|
|
23,284
|
|
Prior years
|
|
|
44,753
|
|
|
|
41,102
|
|
|
|
32,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
69,274
|
|
|
|
63,691
|
|
|
|
56,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, December 31
|
|
|
217,962
|
|
|
|
192,017
|
|
|
|
164,522
|
|
Plus reinsurance recoverable on unpaid losses and loss expenses
|
|
|
86,038
|
|
|
|
82,382
|
|
|
|
85,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
304,000
|
|
|
$
|
274,399
|
|
|
$
|
250,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The balance at December 31, 2008, 2007, and 2006 is
recorded net of reserves for salvage and subrogation in the
amounts of $7,629, $6,140, and $4,284, respectively.
As a result of changes in estimates of insured events in prior
years, the liabilities for losses and loss adjustment expenses
increased by $6.1 million, $8.2 million and
$8.4 million in 2008, 2007 and 2006, respectively.
The following table presents the (increase) decrease in the
liability for unpaid losses and loss adjustment expenses
attributable to insured events of prior years incurred in the
year ended December 31, 2008 by line of business. Amounts
shown in the 2005 column of the table include all 2005 and prior
accident year development for FPIC, which was acquired on
October 1, 2005, and accounted for as a purchase business
combination.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Events of Indicated Prior Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
Total
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
and Prior
|
|
|
|
(In thousands)
|
|
|
Commercial multi-peril
|
|
$
|
(9,220
|
)
|
|
$
|
1,146
|
|
|
$
|
(641
|
)
|
|
$
|
(9,388
|
)
|
|
$
|
(337
|
)
|
Commercial automobile
|
|
|
3,041
|
|
|
|
1,234
|
|
|
|
1,645
|
|
|
|
280
|
|
|
|
(118
|
)
|
Other liability
|
|
|
869
|
|
|
|
1,619
|
|
|
|
988
|
|
|
|
(1,727
|
)
|
|
|
(11
|
)
|
Workers compensation
|
|
|
413
|
|
|
|
45
|
|
|
|
320
|
|
|
|
(48
|
)
|
|
|
96
|
|
Homeowners
|
|
|
(1,093
|
)
|
|
|
(9
|
)
|
|
|
(189
|
)
|
|
|
(560
|
)
|
|
|
(335
|
)
|
Personal automobile
|
|
|
(98
|
)
|
|
|
133
|
|
|
|
109
|
|
|
|
(50
|
)
|
|
|
(290
|
)
|
Other lines
|
|
|
(43
|
)
|
|
|
(392
|
)
|
|
|
649
|
|
|
|
(306
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net 2008 (unfavorable) favorable prior year development
|
|
$
|
(6,131
|
)
|
|
$
|
3,776
|
|
|
$
|
2,881
|
|
|
$
|
(11,799
|
)
|
|
$
|
(989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The following table presents, by line of business, the change in
the liability for unpaid losses and loss adjustment expenses
incurred in the years ended December 31, 2008, 2007 and
2006, for insured events of prior years.
Prior year favorable (unfavorable) development, by line of
business, reported in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Commercial multi-peril
|
|
$
|
(9,220
|
)
|
|
$
|
(5,911
|
)
|
|
$
|
(9,618
|
)
|
Commercial automobile
|
|
|
3,041
|
|
|
|
2,504
|
|
|
|
1,968
|
|
Other liability
|
|
|
869
|
|
|
|
(4,388
|
)
|
|
|
292
|
|
Workers compensation
|
|
|
413
|
|
|
|
787
|
|
|
|
(525
|
)
|
Homeowners
|
|
|
(1,093
|
)
|
|
|
(1,220
|
)
|
|
|
55
|
|
Personal automobile
|
|
|
(98
|
)
|
|
|
(101
|
)
|
|
|
(571
|
)
|
Other lines
|
|
|
(43
|
)
|
|
|
158
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unfavorable prior year development
|
|
$
|
(6,131
|
)
|
|
$
|
(8,171
|
)
|
|
$
|
(8,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We evaluate our estimated ultimate liability by line of business
on a quarterly basis. The establishment of loss and loss
adjustment expense reserves is an inherently uncertain process
and reserve uncertainty stems from a variety of sources. Court
decisions, regulatory changes and economic conditions, among
other factors, can affect the ultimate cost of claims that
occurred in the past as well as create uncertainties regarding
future loss cost trends. Similarly, actual experience, including
the number of claims and the severity of claims, to the extent
it varies from data previously used or projected, will be used
to update the projected ultimate liability for losses, by
accident year and line of business. Changes in estimates, or
differences between estimates and amounts ultimately paid, are
reflected in the operating results of the period during which
such changes are made. A discussion of factors contributing to
an (increase) decrease in the liability for unpaid losses and
loss adjustment expenses (as shown in the chart immediately
above) for the Groups major lines, representing 92% of net
loss and loss adjustment reserves at December 31, 2008,
follows:
Commercial
multi-peril
With $163.0 million, $140.0 million, and
$120.1 million of recorded reserves, net of reinsurance, at
December 31, 2008, 2007 and 2006, respectively, commercial
multi-peril is the line of business that carries the largest net
loss and loss adjustment expense reserves, representing 75%,
73%, and 73%, respectively, of the Groups total carried
net loss and loss adjustment expense reserves at
December 31, 2008, 2007, and 2006.
The commercial multi-peril line of business experienced adverse
prior year development of $9.2 million in 2008,
$5.9 million in 2007 and $9.6 million in 2006. The
majority of this development relates to the West coast
contractor liability book of business. Contractor liability
claims, particularly construction defect claims, are long-tailed
in nature and develop over a period of ten to twelve years.
The adverse development in 2008 and 2007 was driven by higher
than expected reported construction defect claim activity,
particularly on the 1998 through 2002 accident years. The
adverse development in 2006 was driven by increases in case
reserve estimates on claims reported prior to 2006. The adverse
development in 2008, 2007 and 2006 includes ($0.4) million,
$0.7 million and $2.8 million, respectively, in
reserve increases related to accident years 1997 and prior which
are pre-
Montrose
claims.
The adverse development in 2008, 2007 and 2006 also includes
$1.9 million, $0.5 million and $1.1 million,
respectively, in post-commutation reserve increases for losses
formerly subject to reinsurance treaties.
94
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
In 2008 there was $3.5 million in favorable development on
accident years 2003 through 2005, due to lower than expected
loss emergence. In 2007 and 2006 there was no development on the
2003 through 2005 accident years. The favorable development was
driven by a decrease in claim frequency for accident years 2003
through 2005.
The variances from previous expectations in the loss activity
described above were taken into account in evaluating the
ultimate liability for losses and loss adjustment expenses.
Commercial
automobile
With $21.6 million, $16.6 million, and
$13.4 million of recorded reserves, net of reinsurance, at
December 31, 2008, 2007, and 2006, respectively, commercial
automobile is the Groups second largest reserved line of
business, representing 10%, 9%, and 8%, respectively, of the
Groups total carried net loss and loss adjustment expense
reserves at December 31, 2008, 2007 and 2006.
The commercial automobile line of business experienced favorable
prior year development of $3.0 million in 2008,
$2.5 million in 2007 and $2.0 million in 2006.
The favorable development on the commercial automobile line of
business reflects a reduction in claims frequency for the recent
accident years and a lower than expected emergence of losses,
particularly on the Groups heavy truck programs like Ready
Mix and Aggregate Haulers.
The variances from previous expectations in the loss activity
described above were taken into account in evaluating the
ultimate liability for losses and loss adjustment expenses.
Other
liability
With $8.9 million, $12.4 million, and
$9.3 million of recorded reserves, net of reinsurance, at
December 31, 2008, 2007, and 2006, respectively, other
liability is the Groups third largest reserved line of
business, representing 4%, 6%, and 6%, respectively, of the
Groups total carried net loss and loss adjustment expense
reserves at December 31, 2008, 2007 and 2006.
The other liability line of business experienced favorable prior
year development of $0.9 million in 2008, adverse
development of $4.4 million in 2007, and favorable
development of $0.3 million in 2006.
The adverse development on the other liability line of business
in 2007 was primarily the result of an increase in litigation
activity resulting in larger than expected settlements and
increased litigation expense.
The variances from previous expectations in the loss activity
described above were taken into account in evaluating the
ultimate liability for losses and loss adjustment expenses.
Workers
compensation
With $7.6 million, $7.6 million, and $7.3 million
of recorded reserves, net of reinsurance, at December 31,
2008, 2007, and 2006, respectively, workers compensation
represents 3%, 4%, and 4%, respectively, of the Groups
total carried net loss and loss adjustment expense reserves at
December 31, 2008, 2007 and 2006. A portion of this
business is assumed from the National Involuntary Pool managed
by the National Council on Compensation Insurance (NCCI).
Workers compensation reserves developed favorably in 2008 by
$0.4 million, and in 2007 by $0.8 million, and
developed adversely in 2006 by $0.5 million. The adverse
development in 2006 occurred predominantly on business assumed
from the National Involuntary Pool managed by the National
Council on Compensation Insurance (NCCI).
The actuarial data reported to us by the NCCI is very volatile
with significant upward and downward swings.
95
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Workers compensation losses are impacted heavily by medical cost
increases which have been significant recently.
The variances from previous expectations in the loss activity
described above were taken into account in evaluating the
ultimate liability for losses and loss adjustment expenses.
All
Other lines
The remaining lines of business, which collectively contributed
approximately $1.2 million, $1.2 million, and
$0.5 million of adverse development for the years ended
December 31, 2008, 2007, and 2006, respectively, do not
individually reflect any significant trends related to prior
year development.
The Group has geographic exposure to catastrophe losses in its
operating territories. Catastrophes can be caused by various
events including hurricanes, windstorms, earthquakes, hail,
explosion, severe weather, and fire. The incidence and severity
of catastrophes are inherently unpredictable. The extent of
losses from a catastrophe is a function of both the total amount
of insured exposure in the area affected by the event and the
severity of the event. Most catastrophes are restricted to small
geographic areas. However, hurricanes and earthquakes may
produce significant damage in large, heavily populated areas.
The Group generally seeks to reduce its exposure to catastrophe
through individual risk selection and the purchase of
catastrophe reinsurance.
In the ordinary course of business, the Group seeks to limit its
exposure to loss on individual claims and from the effects of
catastrophes by entering into reinsurance contracts with other
insurance companies. Reinsurance is ceded on excess of loss and
pro-rata bases with the Groups retention not exceeding
$850, $750 and $500 per occurrence in 2008, 2007 and 2006,
respectively. Insurance ceded by the Group does not relieve it
of its primary liability as the originating insurer.
In conjunction with the renewal of the reinsurance program in
2008 and 2007, the prior year reinsurance treaties were
terminated on a run-off basis, which requires that for policies
in force as of the prior year end, these reinsurance agreements
continue to cover losses occurring on these policies in the
future. Therefore, the Group will continue to remit premiums to
and collect reinsurance recoverables from these syndicates of
reinsurers as the underlying business runs off.
Effective January 1, 2006, FPIC restructured its property
reinsurance agreement covering the first $2,000 of loss from an
80% quota share to a $1,650 excess of $350 excess of loss
contract to take advantage of the Groups capital. The
restructuring also included the assumption of ceded unearned
premium at January 1, 2006 by FPIC from the 2005 property
quota share and casualty excess of loss agreements. These
assumed premiums were then ceded into the respective 2006
treaties, which due to the reduced ceding rates, resulted in a
$5.6 million increase in net written and earned premium for
the year ended December 31, 2006. There was no similar
impact in 2008 and 2007 relating to this restructuring.
Prior to 2007, some of the Groups reinsurance treaties
(primarily FPIC treaties) included provisions that establish
minimum and maximum cessions and allow limited participation in
the profit of the ceded business. Generally, the Group shares on
a limited basis in the profitability through contingent ceding
commissions. Exposure to the loss experience is contractually
defined at minimum and maximum levels, and the terms of such
contracts are fixed at inception. Since estimating the emergence
of claims to the applicable reinsurance layers is subject to
significant uncertainty, the net amounts that will ultimately be
realized may vary significantly from the estimated amounts
presented in the Groups results of operations.
During the third quarter of 2006, the Group commuted all
reinsurance agreements with Alea North America Insurance Company
(Alea). These reinsurance agreements included participation in
the property quota share and
96
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
casualty excess of loss treaties. As a result of the
commutation, the Group received a cash payment of
$4.5 million, and recorded a pre-tax net loss on
commutation of $0.2 million.
During the fourth quarter of 2008, the Group commuted all
reinsurance agreements with St Paul Fire and Marine Insurance
Company. These reinsurance agreements included participation in
the property quota share and casualty excess of loss treaties.
As a result of the commutation the Group received a cash payment
of $2.5 million, and recorded a pre-tax net gain on
commutation of $0.9 million.
The effect of reinsurance on premiums written and earned is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
165,377
|
|
|
|
182,907
|
|
|
|
185,745
|
|
Assumed
|
|
|
1,058
|
|
|
|
1,383
|
|
|
|
2,374
|
|
Ceded
|
|
|
(19,083
|
)
|
|
|
(24,623
|
)
|
|
|
(42,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
147,352
|
|
|
|
159,667
|
|
|
|
145,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
172,817
|
|
|
|
176,395
|
|
|
|
182,633
|
|
Assumed
|
|
|
1,233
|
|
|
|
1,801
|
|
|
|
2,539
|
|
Ceded
|
|
|
(21,473
|
)
|
|
|
(31,521
|
)
|
|
|
(47,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
152,577
|
|
|
|
146,675
|
|
|
|
137,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of reinsurance on unearned premiums as of
December 31, 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Unearned Premiums:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
80,048
|
|
|
|
87,487
|
|
Assumed
|
|
|
360
|
|
|
|
537
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
$
|
80,408
|
|
|
|
88,024
|
|
|
|
|
|
|
|
|
|
|
The effect of reinsurance on the liability for losses and loss
adjustment expenses, and on losses and loss adjustment expenses
incurred is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Liability:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
297,988
|
|
|
|
268,438
|
|
Assumed
|
|
|
6,012
|
|
|
|
5,961
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
$
|
304,000
|
|
|
|
274,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Losses and loss expenses incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
110,150
|
|
|
|
107,141
|
|
|
|
115,995
|
|
Assumed
|
|
|
1,043
|
|
|
|
1,185
|
|
|
|
3,908
|
|
Ceded
|
|
|
(15,974
|
)
|
|
|
(17,140
|
)
|
|
|
(32,206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
95,219
|
|
|
|
91,186
|
|
|
|
87,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The Group performs credit reviews of its reinsurers, focusing on
financial stability. To the extent that a reinsurer may be
unable to pay losses for which it is liable under the terms of a
reinsurance agreement, the Group is exposed to the risk of
continued liability for such losses.
|
|
(7)
|
RETIREMENT
PLANS AND DEFERRED COMPENSATION PLAN
|
The Group maintains a 401(k) qualified retirement savings plan
covering substantially all employees. Benefits are based on an
employees annual compensation, with new employees
participating after a six-month waiting period. The Group
matches a percentage of each employees pre-tax
contribution and also contributes an amount equal to 2% of each
employees annual compensation. Deferral amounts in excess
of the qualified plan limitations, as well as Group
contributions on such compensation, are funded into nonqualified
plans benefiting affected individuals. The cost for these
benefits was $628, $510 and $469 for 2008, 2007 and 2006,
respectively. In addition, the Group generally makes a
discretionary contribution each year, based on Group
profitability, to both the qualified 401(k) plan, and, where
applicable, to the nonqualified plans. The cost for this portion
of the retirement plan was $492, $463 and $389 for 2008, 2007
and 2006, respectively.
The Group has an unfunded noncontributory defined benefit plan
for its directors. The plan provides for monthly payments for
life upon retirement, with a minimum payment period of ten
years. The net periodic benefit cost for this plan amounted to
$118, $166, and $145 for 2008, 2007, and 2006 respectively.
Assumptions used in estimating the projected benefit obligation
of the plan are the discount rate (6.5% in 2008 and 6.3% in
2007) and retirement age (65). Benefit payments for the
plan were $34 in 2008, 2007 and 2006. Costs accrued under this
plan amounted to $1,315 and $1,301 at December 31, 2008 and
2007, respectively.
The Group also maintains nonqualified deferred compensation
plans for its directors and officers. Under the plans,
participants may elect to defer receipt of all or a portion of
their fees or salary amounts, although there is no match by the
Group. Amounts deferred by directors and officers, together with
accumulated earnings, are distributed either as a lump sum or in
installments over a period of not greater than ten years.
Deferred compensation, including accumulated earnings, amounted
to $1,505 and $1,438 at December 31, 2008 and 2007,
respectively.
The Group has purchased Company-owned life insurance covering
key individuals. The Groups cost, net of increases in cash
surrender value, for the Company-owned life insurance was $125,
$(208) and $(23) for the years ended December 31, 2008,
2007 and 2006, respectively. The cash surrender value of the
Company-owned life insurance totaled $1,557 and $1,548 at
December 31, 2008 and 2007, respectively, and is included
in other assets.
On December 15, 2003, MIG was formed from the conversion of
Mercer Mutual Insurance Company from the mutual to the stock
form of ownership (the Conversion). The Group
established an Employee Stock Ownership Plan (ESOP) and issued
626,111 shares to the ESOP at the Conversion offering
price. The ESOP signed a promissory note in the amount of $6,261
to purchase the shares, which is due in 10 equal annual
installments with interest at 4%. Shares purchased are held in a
suspense account for allocation among participating employees as
the loan is repaid, and are allocated to participants based on
compensation as described in the plan. During 2008, 2007 and
2006, 62,611 shares were allocated to employee
participants. Compensation expense equal to the fair value of
the shares allocated is recognized ratably over the period that
the shares are committed to be allocated to the employees. In
2008, 2007 and 2006 the Group recognized compensation expense of
$1,014, $1,175 and $1,253, respectively, related to the ESOP. As
of December 31, 2008, the cost of the 250,445 shares
issued to the ESOP but not yet allocated to its employee
participants is classified within equity as unearned ESOP shares.
98
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The tax effect of temporary differences that give rise to the
Groups net deferred tax asset as of December 31 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Net loss reserve discounting
|
|
$
|
7,170
|
|
|
|
6,708
|
|
Net unearned premiums
|
|
|
5,013
|
|
|
|
5,397
|
|
Compensation and benefits
|
|
|
1,339
|
|
|
|
1,269
|
|
Market discount on investments
|
|
|
220
|
|
|
|
325
|
|
Contingent ceding commission payable
|
|
|
3,115
|
|
|
|
4,190
|
|
Impairment of investments
|
|
|
2,311
|
|
|
|
102
|
|
Other
|
|
|
885
|
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
20,053
|
|
|
|
18,423
|
|
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
6,866
|
|
|
|
6,980
|
|
Unrealized net gain on investments
|
|
|
1,353
|
|
|
|
2,615
|
|
Depreciation
|
|
|
1,043
|
|
|
|
292
|
|
Other
|
|
|
977
|
|
|
|
866
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
10,239
|
|
|
|
10,753
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
9,814
|
|
|
|
7,670
|
|
|
|
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized.
The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods
in which those temporary differences become deductible.
Management believes it is more likely than not the Group will
realize the benefits of the deferred tax assets at
December 31, 2008 and 2007.
Actual income tax expense differed from expected tax expense,
computed by applying the United States federal corporate income
tax rate of 34% to income before income taxes, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Expected tax expense
|
|
$
|
3,532
|
|
|
|
6,796
|
|
|
|
5,129
|
|
Tax-exempt interest
|
|
|
(1,545
|
)
|
|
|
(1,392
|
)
|
|
|
(1,115
|
)
|
Dividends received deduction
|
|
|
(71
|
)
|
|
|
(65
|
)
|
|
|
(104
|
)
|
Non-deductible ESOP expense
|
|
|
132
|
|
|
|
187
|
|
|
|
213
|
|
Non-deductible options expense
|
|
|
68
|
|
|
|
86
|
|
|
|
74
|
|
Graduated tax rate adjustment
|
|
|
|
|
|
|
190
|
|
|
|
245
|
|
Company-owned life insurance
|
|
|
43
|
|
|
|
(71
|
)
|
|
|
(8
|
)
|
Other
|
|
|
(3
|
)
|
|
|
23
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
2,156
|
|
|
|
5,754
|
|
|
|
4,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current
|
|
$
|
3,063
|
|
|
|
6,721
|
|
|
|
8,617
|
|
Deferred
|
|
|
(907
|
)
|
|
|
(967
|
)
|
|
|
(4,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
2,156
|
|
|
|
5,754
|
|
|
|
4,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2007, the Group adopted FIN 48. As a
result of adoption, the Group recognized a previously
unrecognized tax benefit of approximately $0.2 million
relating to merger-related expenses for the FPIG acquisition
that took place October 1, 2005. The application of FIN 48
for this unrecognized tax benefit resulted in a corresponding
reduction to goodwill relating to the FPIG acquisition of
$0.2 million. The adoption of FIN 48 did not result in
any adjustments to beginning retained earnings, nor have a
significant effect on operations, financial condition or
liquidity. As of December 31, 2008, the Group has no
unrecognized tax benefits. The Groups policy is to account
for interest and penalties as a component of other expenses. The
Group files income tax returns in the federal jurisdiction and
various states.
The Group markets its products through independent insurance
agents, which sell commercial lines of insurance to small to
medium-sized businesses and personal lines of insurance to
individuals.
The Group manages its business in three segments: commercial
lines insurance, personal lines insurance, and investments. The
commercial lines insurance and personal lines insurance segments
are managed based on underwriting results determined in
accordance with U.S. generally accepted accounting
principles, and the investment segment is managed based on
after-tax investment returns.
Underwriting results for commercial lines and personal lines
take into account premiums earned, incurred losses and loss
adjustment expenses, and underwriting expenses. The investments
segment is evaluated by consideration of net investment income
(investment income less investment expenses) and realized gains
and losses.
In determining the results of each segment, assets are not
allocated to segments and are reviewed in the aggregate for
decision-making purposes.
In 2007, the Group evaluated its methodology for allocating
costs to its lines of business and adopted changes to such
methodology in order to more accurately reflect the allocation
of joint costs. This resulted in allocating less joint cost to
the personal lines of business and more joint cost to the
commercial lines of business, but with no net change in cost
allocated to personal lines and commercial lines in the
aggregate. Related 2006 amounts have been reclassified to
reflect this change in allocation methodology:
100
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Financial data by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial lines
|
|
$
|
132,425
|
|
|
$
|
125,427
|
|
|
$
|
115,461
|
|
Personal lines
|
|
|
20,152
|
|
|
|
21,248
|
|
|
|
22,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net premiums earned
|
|
|
152,577
|
|
|
|
146,675
|
|
|
|
137,673
|
|
Net investment income
|
|
|
13,936
|
|
|
|
13,053
|
|
|
|
10,070
|
|
Net realized investment (losses) gains
|
|
|
(7,072
|
)
|
|
|
24
|
|
|
|
151
|
|
Other
|
|
|
2,021
|
|
|
|
1,929
|
|
|
|
2,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
161,462
|
|
|
$
|
161,681
|
|
|
$
|
149,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial lines
|
|
$
|
4,246
|
|
|
$
|
5,964
|
|
|
$
|
4,246
|
|
Personal lines
|
|
|
(1,423
|
)
|
|
|
234
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwriting income
|
|
|
2,823
|
|
|
|
6,198
|
|
|
|
4,186
|
|
Net investment income
|
|
|
13,936
|
|
|
|
13,053
|
|
|
|
10,070
|
|
Net realized investment (losses) gains
|
|
|
(7,072
|
)
|
|
|
24
|
|
|
|
151
|
|
Other
|
|
|
703
|
|
|
|
714
|
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
10,390
|
|
|
$
|
19,989
|
|
|
$
|
15,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
(10)
|
STATUTORY
FINANCIAL INFORMATION
|
A reconciliation of the Groups statutory net income and
surplus to the Groups net income and stockholders
equity, under U.S. generally accepted accounting
principles, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory net income
|
|
$
|
10,991
|
|
|
|
12,280
|
|
|
|
8,173
|
|
Deferred policy acquisition costs
|
|
|
(335
|
)
|
|
|
3,820
|
|
|
|
1,027
|
|
Deferred federal income taxes
|
|
|
406
|
|
|
|
733
|
|
|
|
4,168
|
|
Dividends from affiliates
|
|
|
(3,036
|
)
|
|
|
(2,002
|
)
|
|
|
(1,501
|
)
|
Parent holding company loss
|
|
|
(585
|
)
|
|
|
(1,226
|
)
|
|
|
(1,816
|
)
|
Other
|
|
|
793
|
|
|
|
630
|
|
|
|
584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income
|
|
$
|
8,234
|
|
|
|
14,235
|
|
|
|
10,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surplus:
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory surplus
|
|
$
|
125,964
|
|
|
|
126,910
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
20,193
|
|
|
|
20,528
|
|
|
|
|
|
Deferred federal income taxes
|
|
|
(1,477
|
)
|
|
|
(3,354
|
)
|
|
|
|
|
Nonadmitted assets
|
|
|
10,354
|
|
|
|
6,518
|
|
|
|
|
|
Unrealized gain on fixed-income securities
|
|
|
3,012
|
|
|
|
2,260
|
|
|
|
|
|
Holding company
|
|
|
(19,758
|
)
|
|
|
(18,643
|
)
|
|
|
|
|
Other
|
|
|
(1,018
|
)
|
|
|
(813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP stockholders equity
|
|
$
|
137,270
|
|
|
|
133,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Groups insurance companies are required to file
statutory financial statements with various state insurance
regulatory authorities. Statutory financial statements are
prepared in accordance with accounting principles and practices
prescribed or permitted by the various states of domicile.
Prescribed statutory accounting practices include state laws,
regulations, and general administrative rules, as well as a
variety of publications of the National Association of Insurance
Commissioners (NAIC). Furthermore, the NAIC adopted the
Codification of Statutory Accounting Principles effective
January 1, 2001. The codified principles are intended to
provide a comprehensive basis of accounting recognized and
adhered to in the absence of conflict with, or silence of, state
statutes and regulations. The effects of such do not affect
financial statements prepared under U.S. generally accepted
accounting principles.
The Groups insurance companies are required by law to
maintain a certain minimum surplus on a statutory basis, and are
subject to risk-based capital requirements and to regulations
under which payment of a dividend from statutory surplus may be
restricted and may require prior approval of regulatory
authorities.
All dividends from MIC to MIG require prior notice to the
Pennsylvania Insurance Department. All extraordinary
dividends require advance approval. A dividend is deemed
extraordinary if, when aggregated with all other
dividends paid within the preceding 12 months, the dividend
exceeds the greater of (a) statutory net income (excluding
realized capital gains) for the preceding calendar year or
(b) 10% of statutory surplus as of the preceding
December 31. As of December 31, 2008, the amount
available for payment of dividends from MIC in 2009, without the
prior approval, is approximately $5.7 million.
All dividends from FPIC to FPIG (wholly owned by MIG) require
prior notice to the California Department of Insurance. All
extraordinary dividends require advance approval. A
dividend is deemed extraordinary if, when aggregated
with all other dividends paid within the preceding
12 months, the dividend exceeds the greater of
102
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(a) statutory net income for the preceding calendar year or
(b) 10% of statutory surplus as of the preceding
December 31. As of December 31, 2008, the amount
available for payment of dividends from FPIC in 2009, without
the prior approval, is approximately $6.4 million.
The NAIC has risk-based capital (RBC) requirements that require
insurance companies to calculate and report information under a
risk-based formula which measures statutory capital and surplus
needs based on a regulatory definition of risk in a
companys mix of products and its balance sheet. All of the
Groups insurance subsidiaries have an RBC amount above the
authorized control level RBC, as defined by the NAIC.
|
|
(11)
|
GOODWILL
AND INTANGIBLE ASSETS
|
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Intangible assets subject to amortization
|
|
$
|
484
|
|
|
|
484
|
|
Less accumulated amortization
|
|
|
(195
|
)
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
Net intangible assets subject to amortization
|
|
$
|
289
|
|
|
|
362
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets subject to
amortization was $73 in 2008 and $54 in 2007 and 2006. Estimated
amortization expense for 2009 and future years is as follows:
|
|
|
|
|
2009
|
|
$
|
91
|
|
2010
|
|
|
69
|
|
2011
|
|
|
47
|
|
2012
|
|
|
47
|
|
2013
|
|
|
35
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total estimated amortization
|
|
$
|
289
|
|
|
|
|
|
|
The Group carries goodwill on its balance sheet in connection
with the acquisitions of FHC and FPIG. The change in the
carrying amount of goodwill for these acquisitions for the years
ended December 31, 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance beginning of year
|
|
$
|
5,416
|
|
|
|
5,625
|
|
Adjustment to goodwill for adoption of FIN 48
|
|
|
|
|
|
|
(209
|
)
|
|
|
|
|
|
|
|
|
|
Balance end of year
|
|
$
|
5,416
|
|
|
|
5,416
|
|
|
|
|
|
|
|
|
|
|
Goodwill was reduced by $209 as a result of the adoption of
FIN 48 as of January 1, 2007.
103
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The computation of basic and diluted earnings per share is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,234
|
|
|
$
|
14,235
|
|
|
$
|
10,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted average shares outstanding
|
|
|
6,217
|
|
|
|
6,144
|
|
|
|
6,023
|
|
Effect of stock incentive plans
|
|
|
127
|
|
|
|
181
|
|
|
|
199
|
|
Denominator for diluted earnings per share :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted average shares outstanding
|
|
|
6,344
|
|
|
|
6,325
|
|
|
|
6,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.32
|
|
|
$
|
2.32
|
|
|
$
|
1.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.30
|
|
|
$
|
2.25
|
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The denominator for diluted earnings per share does not include
the effect of outstanding stock options that have an
anti-dilutive effect. For the years ended December 31,
2008, 2007 and 2006, 115,000, 40,000 and 40,000 stock options,
respectively, were considered to be anti-dilutive and were
excluded from the earnings per share calculation.
|
|
(13)
|
SHARE-BASED
COMPENSATION
|
The Group adopted the Mercer Insurance Group, Inc. 2004 Stock
Incentive Plan (the Plan) on June 16, 2004. Awards under
the Plan may be made in the form of incentive stock options,
nonqualified stock options, restricted stock or any combination
to employees and non-employee Directors. At adoption, the Plan
initially limited to 250,000 the number of shares that may be
awarded as restricted stock, and to 500,000 the number of shares
for which incentive stock options may be granted. The total
number of shares initially authorized in the Plan was
876,555 shares, with an annual increase equal to 1% of the
shares outstanding at the end of each year. As of
December 31, 2008, the Plans authorization has been
increased under this feature to 1,141,565 shares. The Plan
provides that stock options and restricted stock awards may
include vesting restrictions and performance criteria at the
discretion of the Compensation Committee of the Board of
Directors. The term of options may not exceed ten years for
incentive stock options, and ten years and one month for
nonqualified stock options, and the option exercise price may
not be less than fair market value on the date of grant. All
grants made under the Plan employ graded vesting over vesting
periods of 3 or 5 years for restricted stock, incentive
stock options, and nonqualified stock option grants, and include
only service conditions. During 2008 and 2007, the Group made no
grants of restricted stock, incentive stock options and
non-qualified stock options. During 2006, restricted stock
grants of 10,000 shares were made, and there were 26,550
Incentive Stock Options and 13,450 nonqualified options granted.
There were 2,500 stock options and 1,000 shares of
restricted stock forfeited in 2008.
In determining the charge to the consolidated statement of
earnings for 2008, 2007 and 2006, the fair value of each option
award is estimated on the date of grant using the
Black-Scholes-Merton option pricing model. The significant
assumptions utilized in applying the Black-Scholes-Merton option
pricing model are the risk-free interest rate, expected term,
dividend yield, and expected volatility. The risk-free interest
rate is the implied yield currently available on
U.S. Treasury zero-coupon issues with a remaining term
equal to the expected term used as the assumption in the model.
The expected term of an option award is based on expected
experience of the awards. The dividend yield is determined by
dividing the per share-dividend by the grant date stock price.
The expected volatility is based on the volatility of the
Groups stock price over a historical period. The weighted
average
104
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
assumptions used in applying the Black-Scholes-Merton model are
shown below (there were no options granted in 2008 and 2007):
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Risk-free interest rate
|
|
|
4.62
|
%
|
Expected term
|
|
|
6.9 years
|
|
Dividend yield
|
|
|
0.77
|
%
|
Expected volatility
|
|
|
30.94
|
%
|
Weighted-average fair value of options granted
|
|
$
|
11.05
|
|
Information regarding 2008 stock option activity in the Plan is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Outstanding at December 31, 2007
|
|
|
603,200
|
|
|
$
|
13.24
|
|
Granted 2008
|
|
|
|
|
|
|
|
|
Exercised 2008
|
|
|
|
|
|
|
|
|
Forfeited 2008
|
|
|
(2,500
|
)
|
|
|
12.21
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
600,700
|
|
|
$
|
13.24
|
|
|
|
|
|
|
|
|
|
|
Exercisable at:
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
545,867 shares
|
|
Weighted-average remaining contractual life
|
|
|
|
|
|
|
5.5 years
|
|
Compensation remaining to be recognized for unvested stock
options at December 31, 2008 (millions)
|
|
|
|
|
|
$
|
0.3
|
|
Weighted-average remaining amortization period
|
|
|
|
|
|
|
1.4 years
|
|
Aggregate Intrinsic Value of outstanding options,
December 31, 2008 (millions)
|
|
|
|
|
|
$
|
0.2
|
|
Aggregate Intrinsic Value of exercisable options,
December 31, 2008 (millions)
|
|
|
|
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
Information regarding unvested restricted stock activity in the
Plan in 2008 is below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Unvested restricted stock at December 31, 2007
|
|
|
44,584
|
|
|
$
|
14.66
|
|
Granted 2008
|
|
|
|
|
|
|
|
|
Vested 2008
|
|
|
(20,792
|
)
|
|
|
14.12
|
|
Forfeited 2008
|
|
|
(1,000
|
)
|
|
|
12.21
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock at December 31, 2008
|
|
|
22,792
|
|
|
$
|
15.26
|
|
|
|
|
|
|
|
|
|
|
Compensation remaining to be recognized for unvested restricted
stock at December 31, 2008 (millions)
|
|
|
|
|
|
$
|
0.2
|
|
Weighted-average remaining amortization period
|
|
|
|
|
|
|
0.9 years
|
|
105
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Information regarding 2007 stock option activity in the Plan is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Outstanding at December 31, 2006
|
|
|
636,700
|
|
|
$
|
13.21
|
|
Granted 2007
|
|
|
0
|
|
|
|
0.00
|
|
Exercised 2007
|
|
|
(14,100
|
)
|
|
|
12.43
|
|
Forfeited 2007
|
|
|
(19,400
|
)
|
|
|
12.85
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
603,200
|
|
|
$
|
13.24
|
|
|
|
|
|
|
|
|
|
|
Exercisable at:
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
509,533
|
|
|
$
|
12.57
|
|
Weighted-average remaining contractual life
|
|
|
|
|
|
|
6.6 years
|
|
Compensation remaining to be recognized for unvested stock
options at December 31, 2008 (millions)
|
|
|
|
|
|
$
|
0.5
|
|
Weighted-average remaining amortization period
|
|
|
|
|
|
|
2.2 years
|
|
Aggregate Intrinsic Value of outstanding options,
December 31, 2007 (millions)
|
|
|
|
|
|
$
|
3.2
|
|
Aggregate Intrinsic Value of exercisable options,
December 31, 2007 (millions)
|
|
|
|
|
|
$
|
2.8
|
|
|
|
|
|
|
|
|
|
|
Information regarding unvested restricted stock activity in the
Plan in 2007 is below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Unvested restricted stock at December 31, 2006
|
|
|
106,334
|
|
|
$
|
13.61
|
|
Granted 2007
|
|
|
0
|
|
|
|
0.00
|
|
Vested 2007
|
|
|
(58,750
|
)
|
|
|
12.89
|
|
Forfeited 2007
|
|
|
(3,000
|
)
|
|
|
12.21
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock at December 31, 2007
|
|
|
44,584
|
|
|
$
|
14.66
|
|
|
|
|
|
|
|
|
|
|
Compensation remaining to be recognized for unvested restricted
stock at December 31, 2007 (millions)
|
|
|
|
|
|
$
|
0.5
|
|
Weighted-average remaining amortization period
|
|
|
|
|
|
|
1.8 years
|
|
106
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Information regarding 2006 stock option activity in Mercer
Insurance Groups Plan is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Outstanding at December 31, 2005
|
|
|
659,200
|
|
|
$
|
12.42
|
|
Granted 2006
|
|
|
40,000
|
|
|
|
25.89
|
|
Exercised 2006
|
|
|
|
|
|
|
|
|
Forfeited 2006
|
|
|
(62,500
|
)
|
|
|
13.04
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
636,700
|
|
|
$
|
13.21
|
|
|
|
|
|
|
|
|
|
|
Exercisable at:
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
339,533
|
|
|
$
|
12.47
|
|
Weighted-average remaining contractual life
|
|
|
|
|
|
|
7.8 years
|
|
Compensation remaining to be recognized for unvested stock
options at December 31, 2006 (millions)
|
|
|
|
|
|
$
|
1.1
|
|
Weighted-average remaining amortization period
|
|
|
|
|
|
|
1.9 years
|
|
Aggregate Intrinsic Value of outstanding options,
December 31, 2006 (millions)
|
|
|
|
|
|
$
|
4.5
|
|
Aggregate Intrinsic Value of exercisable options,
December 31, 2006 (millions)
|
|
|
|
|
|
$
|
2.7
|
|
|
|
|
|
|
|
|
|
|
Information regarding unvested restricted stock activity in
Mercer Insurance Groups Plan in 2006 is below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Unvested restricted stock at December 31, 2005
|
|
|
166,417
|
|
|
$
|
12.29
|
|
Granted 2006
|
|
|
10,000
|
|
|
|
26.87
|
|
Vested 2006
|
|
|
(56.083
|
)
|
|
|
12.22
|
|
Forfeited 2006
|
|
|
(14,000
|
)
|
|
|
13.08
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock at December 31, 2006
|
|
|
106,334
|
|
|
$
|
13.61
|
|
|
|
|
|
|
|
|
|
|
Compensation remaining to be recognized for unvested restricted
stock at December 31, 2006 (millions)
|
|
|
|
|
|
$
|
1.1
|
|
Weighted-average remaining amortization period
|
|
|
|
|
|
|
2.0 years
|
|
|
|
(14)
|
COMMITMENTS
AND CONTINGENCIES
|
The Group becomes involved with certain claims and legal actions
arising in the ordinary course of business operations. Such
legal actions involve disputes by policyholders relating to
claims payments as well as other litigation. In addition, the
Groups business practices are regularly subject to review
by various state insurance regulatory authorities. These reviews
may result in changes or clarifications of the Groups
business practices, and may result in fines, penalties or other
sanctions. In the opinion of management, while the ultimate
outcome of these actions and these regulatory proceedings cannot
be determined at this time, they are not expected to result in
liability for amounts material to the financial condition,
results of operations, or liquidity, of the Group.
107
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
As of December 31, 2008, the Group occupied office space
and leased equipment and vehicles under various operating leases
that have remaining non-cancelable lease terms in excess of one
year. A summary of minimum future lease commitments as of
December 31, 2008 follows:
|
|
|
|
|
|
|
Minimum
|
|
|
|
Requirements
|
|
|
Year ending December 31:
|
|
|
|
|
2009
|
|
$
|
422
|
|
2010
|
|
|
58
|
|
2011
|
|
|
27
|
|
2012
|
|
|
13
|
|
|
|
|
|
|
|
|
$
|
520
|
|
|
|
|
|
|
Rental expenses were $422, $437, and $474 were incurred for the
years ended December 31, 2008, 2007, and 2006, respectively.
The Group leases approximately 25,000 square feet for the
its West coast operations in Rocklin, California. The current
building lease expires on December 31, 2009, with two
five-year options for extension after December 31, 2009. In
lieu of remaining in the leased facility, the Gtoup began
construction on a new 41,000 square foot building on the
2.9 acres of land it owns adjacent to the leased building.
The cost of the project is estimated to be $6.7 million,
including improvements and building permits and fees.
The Groups executives are parties to employment agreements
with the Group which include customary provisions for severance
and change of control.
|
|
(15)
|
RETALIATORY
TAX REFUND
|
As previously disclosed in the Groups SEC filings, the
Group paid an aggregate of $3.5 million, including accrued
interest, to the New Jersey Division of Taxation (the
Division) in retaliatory premium tax for the years
1999-2004.
In conjunction with making such payments, the Group filed
notices of protest with the Division with respect to the
retaliatory tax imposed. The payments were made in response to
notices of deficiency issued by the Division to the Group.
Pursuant to the protests, the Group has received
$4.3 million in 2007 as a reimbursement of protested
payments of retaliatory tax, including accrued interest,
previously made by the Group for the periods 1999-2004. The
refund has been recorded, after reduction for Federal income
tax, in the amount of $2.8 million in the 2007 consolidated
statement of earnings, with $2.5 million recorded in the
quarter ended June 30, 2007, and $0.3 million recorded
in the quarter ended September 30, 2007. The allocation of
the refund to pre-tax earnings included an increase to net
investment income of $720,000, with $687,000 of that amount
recognized in the quarter ended June 30, 2007, and $33,000
recognized in the quarter ended September 30, 2007, for the
interest received on the refund, and $3.6 million as a
reduction to Other Expense to recognize the recovery of amounts
previously charged to Other Expense, with $3.1 million of
the amount recognized in the quarter ended June 30, 2007,
and $0.5 million recognized in the quarter ended
September 30, 2007.
|
|
(16)
|
RELATED-PARTY
TRANSACTIONS
|
The Group produces a large percentage of its business through
one insurance agent, Davis Insurance Agency (Davis), the owner
of which is also a Board member of the Group. In 2008, 2007 and
2006, premiums written through Davis totaled 4%
,
4% and
4%, respectively, of the Groups direct written premiums.
Commissions paid to Davis were $1,115, $1,177 and $1,187 in
2008, 2007 and 2006, respectively.
108
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Van Rensselaer, Ltd., which is owned by William V.R. Fogler, a
director, has provided equities investment management services
to the Group since the year 1980. Fees to Van Rensselaer, Ltd.
amounted to $124, $128 and $117 in 2008, 2007 and 2006,
respectively.
Thomas, Thomas & Hafer of Harrisburg, PA is a law firm
the Group uses for claims handling assistance. The brother of
the Chief Executive Officer of the Group is a partner of the
firm. Fees to Thomas, Thomas & Hafer amounted to $77,
$60 and $73 in 2008, 2007 and 2006, respectively.
As of December 31, 2008 and 2007, FPIG owed $3,000 under a
$7,500 and $5,000 bank line of credit, respectively. The line of
credit bears interest at the banks base rate or an
optional rate based on LIBOR. The effective annual interest rate
as of December 31, 2008 and 2007 was 3.25% and 7.25%,
respectively. The line of credit includes covenants to maintain
certain financial requirements including a minimum
A.M. Best rating, minimum statutory surplus and a
requirement that no more than 50% of allowable dividends be
distributed from subsidiaries. The Company was in compliance
with all covenants as of December 31, 2008 and 2007.
|
|
(18)
|
TRUST PREFERRED
SECURITIES
|
The Group had the following Trust Preferred Securities
outstanding as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
Issue Date
|
|
Amount
|
|
|
Interest Rate
|
|
Date
|
|
Financial Pacific Statutory Trust I
|
|
12/4/2002
|
|
$
|
5,155
|
|
|
LIBOR + 4.00%
|
|
12/4/2032
|
Financial Pacific Statutory Trust II
|
|
5/15/2003
|
|
|
3,093
|
|
|
LIBOR + 4.10%
|
|
5/15/2033
|
Financial Pacific Statutory Trust III
|
|
9/30/2003
|
|
|
7,740
|
|
|
LIBOR + 4.05%
|
|
9/30/2033
|
|
|
|
|
|
|
|
|
|
|
|
Total Trust Preferred Securities
|
|
|
|
|
15,988
|
|
|
|
|
|
Less: Unamortized issuance costs
|
|
|
|
|
(412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
15,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FPIG formed three statutory business trusts for the purpose of
issuing Floating Rate Capital Securities (Trust preferred
securities) and investing the proceeds thereof in Junior
Subordinated Debentures of FPIG. FPIG holds $488 of common stock
securities issued to capitalize the Trusts. Trust preferred
securities totaling $15,500 were issued to the public.
Financial Pacific Statutory Trust I (Trust I) is
a Connecticut statutory business trust. The Trust issued
5,000 shares of the Trust preferred securities at a price
of $1 per share for $5,000. The Trust purchased $5,155 in Junior
Subordinated Debentures from the Group that mature on
December 4, 2032. The annual effective rate of interest at
December 31, 2008 is 8.74%.
Financial Pacific Statutory Trust II
(Trust II) is a Connecticut statutory business trust.
The Trust issued 3,000 shares of the Trust preferred
securities at a price of $1 per share for $3,000. The Trust
purchased $3,093 in Junior Subordinated Debentures from the
Group that mature on May 15, 2033. The annual effective
rate of interest at December 31, 2008 is 8.90%.
Financial Pacific Statutory Trust III
(Trust III) is a Delaware statutory business trust.
The Trust issued 7,500 shares of the Trust preferred
securities at a price of $1 per share for $7,500. The Trust
purchased $7,740 in
109
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Junior Subordinated Debentures from the Group that mature on
September 30, 2033. The annual effective rate of interest
at December 31, 2008 is 8.89%.
The Group has the right, at any time, so long as there are no
continuing events of default, to defer payments of interest on
the Junior Subordinated Debentures for a period not exceeding 20
consecutive quarters; but not beyond the stated maturity of the
Junior Subordinated Debentures. To date no interest has been
deferred. FPIG entered into three interest rate swap agreements
to economically hedge the floating interest rate on the Junior
Subordinated Debentures (note 19).
The Trust preferred securities are subject to mandatory
redemption, in whole or in part, upon repayment of the Junior
Subordinated Debentures at maturity or their earlier redemption.
The Group has the right to redeem the Junior Subordinated
Debentures after December 4, 2007 for Trust I, after
May 15, 2008 for Trust II and after September 30,
2008 for Trust III. The Group has not exercised these
rights as of December 31, 2008.
|
|
(19)
|
INTEREST
RATE SWAP AGREEMENT FOR VARIABLE-RATE DEBT
|
The Group had the following interest rate swaps outstanding as
of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
Counterparty
|
|
Maturity
|
|
|
|
Effective Date
|
|
|
Amount
|
|
|
Counterparty Pays
|
|
|
Receives
|
|
Date
|
|
|
Union Bank of California (Trust I)
|
|
|
12/4/2007
|
|
|
$
|
5,000
|
|
|
|
3 Month LIBOR
|
|
|
4.7400% fixed
|
|
|
12/4/2012
|
|
Union Bank of California (Trust II)
|
|
|
5/15/2008
|
|
|
$
|
3,000
|
|
|
|
3 Month LIBOR
|
|
|
4.8000% fixed
|
|
|
5/15/2013
|
|
Union Bank of California (Trust III)
|
|
|
9/30/2008
|
|
|
$
|
7,500
|
|
|
|
3 Month LIBOR
|
|
|
4.8400% fixed
|
|
|
9/30/2013
|
|
The Group has interest-rate related hedging instruments to
manage its exposure on its debt instruments. The type of hedging
instruments utilized by the Group are interest rate swap
agreements (swaps). Interest differentials to be paid or
received because of swap agreements are reflected as an
adjustment in the consolidated statement of earnings over the
swap period and are recorded as realized gains or losses. By
using hedging financial instruments to hedge exposures to
changes in interest rates, the Group exposes itself to market
risk.
Market risk is the adverse effect on the value of a financial
instrument that results from a change in interest rates. Credit
risk is the failure of the counterparty to perform under the
terms of the contract. When the fair value of a contract is
positive, the counterparty owes the Group, which creates credit
risk for the Group. When the fair value of a contract is
negative, the Group owes the counterparty and, therefore, it
does not possess credit risk. The Group minimizes the credit
risk in hedging instruments by entering into transactions with
high-quality counterparties whose credit rating is higher than
Aa.
The Group is party to interest rate swap agreements to hedge the
floating interest rate on the Junior Subordinated Debentures
purchased by Trust I, Trust II and Trust III. The
variable-rate debt obligations expose the Group to variability
in interest payments due to changes in interest rates.
Management believes it is prudent to limit the variability of a
portion of its interest payments. To meet this objective,
management enters into swap agreements to manage fluctuations in
cash flows resulting from interest rate risk. These swaps change
the variable-rate cash flow exposure on the debt obligations to
fixed-rate cash flows. Under the terms of the interest rate
swaps, the Group makes fixed interest rate payments and receives
variable interest rate payments, thereby creating the equivalent
of fixed-rate debt.
As of December 31, 2008 and 2007 the Group was party to
interest-rate swap agreements with an aggregate notional
principal amount of $15,500. For the year ended
December 31, 2008 and 2007, the Group recognized the change
in the economic value of the interest rate swap agreements which
is recognized in the consolidated statement of earnings as a
realized loss of $1,500 and $774, respectively. The estimated
fair value of the interest-rate swap was a liability of $1,879
and $379 as of December 31, 2008 and 2007, respectively.
110
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
(20)
|
FAIR
VALUE OF ASSETS AND LIABILITIES
|
In accordance with SFAS 157, the Groups financial
assets and financial liabilities measured at fair value are
categorized into three levels, based on the markets in which the
assets and liabilities are traded and the reliability of the
assumptions used to determine fair value. These levels are:
|
|
|
|
|
Level 1 Valuations based on unadjusted quoted
market prices in active markets for identical assets that the
Group has the ability to access. Since the valuations are based
on quoted prices that are readily and regularly available in an
active market, valuation of these securities does not entail a
significant amount or degree of judgment.
|
|
|
|
Level 2 Valuations based on quoted prices for
similar assets in active markets; quoted prices for identical or
similar assets 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 that are derived from
techniques in which one or more of the significant inputs are
unobservable, including broker quotes which are non-binding.
|
The Group uses quoted values and other data provided by a
nationally recognized independent pricing service (pricing
service) as inputs into its process for determining fair values
of its investments. The pricing service covers over 99% of all
asset classes, fixed-income and equity securities, domestic and
foreign.
The pricing service obtains market quotations and actual
transaction prices for securities that have quoted prices in
active markets. Fixed maturities other than U.S. Treasury
securities generally do not trade on a daily basis. For these
securities, the pricing service prepares estimates of fair value
measurements for these securities using its proprietary pricing
applications which include available relevant market
information, benchmark curves, benchmarking of like securities,
sector groupings and matrix pricing. Additionally, the pricing
service uses an Option Adjusted Spread model to develop
prepayment and interest rate scenarios.
Relevant market information, relevant credit information,
perceived market movements and sector news is used to evaluate
each asset class. The market inputs utilized in the pricing
evaluation include but are not limited to: 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.
The pricing service utilized by the Group has indicated that
they will only produce an estimate of fair value if there is
objectively verifiable information to produce a valuation. If
the pricing service discontinues pricing an investment, the
Group would be required to produce an estimate of fair value
using some of the same methodologies as the pricing service, but
would have to make assumptions for market based inputs that are
unavailable due to market conditions.
The Group reviews its securities measured at fair value and
discusses the proper classification of such investments with
industry contacts and others. A review process is performed on
prices received from the pricing service. In addition, a review
is performed of the pricing services processes, practices
and inputs, which include any number of financial models,
quotes, trades and other market indicators. Pricing of the
portfolio is reviewed on a monthly basis and securities with
changes in prices exceeding defined tolerances are verified to
other sources (e.g. broker, Bloomberg, etc.). Any price
challenges resulting from this review are based upon significant
supporting documentation which is provided to the pricing
service for their review. The Group does not adjust quotes or
prices obtained from the pricing service without first going
through this process of challenging the price with the pricing
service.
111
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The fair value estimates of most fixed maturity investments are
based on observable market information rather than market
quotes. Accordingly, the estimates of fair value for such fixed
maturities, other than U.S. Treasury securities, provided
by the pricing service are included in the amount disclosed in
Level 2 of the hierarchy. The estimated fair values of
U.S. Treasury securities are included in the amount
disclosed in Level 1 as the estimates are based on
unadjusted market prices. The Group determined that Level 2
securities would include corporate bonds, mortgage backed
securities, municipal bonds, asset-backed securities, certain
U.S. government agencies,
non-U.S. government
securities, certain short-term securities and investments in
mutual funds.
Securities are generally assigned to Level 3 in cases where
non-binding broker/dealer quotes are significant inputs to the
valuation and there is a lack of transparency as to whether
these quotes are based on information that is observable in the
marketplace. The Groups Level 3 securities consist of four
holdings totaling $1.8 million, or less than 0.5% of the
Groups total investment portfolio. These four securities
were valued primarily through the use of non-binding broker
quotes.
Equities that trade on a major exchange are assigned a
Level 1. Equities not traded on a major exchange are
assigned a Level 2 or 3 based on the criteria and hierarchy
described above. Short-term investments such as open ended
mutual funds where the fund maintains a constant net asset value
of one dollar, money market funds, cash and cash sweep accounts
and treasuries bills are classified as Level 1.
Level 2 short-term investments include commercial paper and
certificates of deposit, for which all inputs are observable.
Included in Level 2, Other Liabilities are interest rate
swap agreements which the Group is a party to in order to hedge
the floating interest rate on its Trust Preferred
Securities, thereby changing the variable rate exposure to a
fixed rate exposure for interest on these obligations. The
estimated fair value of the interest rate swaps is obtained from
the third-party financial institution counterparties.
The table below presents the balances of assets and liabilities
measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
|
Fixed-income securities, available for sale
|
|
$
|
334,087
|
|
|
$
|
4,362
|
|
|
$
|
327,958
|
|
|
$
|
1,767
|
|
Equity securities
|
|
|
10,203
|
|
|
|
9,941
|
|
|
|
216
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
344,290
|
|
|
$
|
14,303
|
|
|
$
|
328,174
|
|
|
$
|
1,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
1,879
|
|
|
$
|
|
|
|
$
|
1,879
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
1,879
|
|
|
$
|
|
|
|
$
|
1,879
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
MERCER
INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The changes in Level 3 assets and liabilities measured at
fair value on a recurring basis are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2008
|
|
|
|
Fixed-income
|
|
|
|
|
|
|
securities,
|
|
|
|
|
|
|
available
|
|
|
Equity
|
|
|
|
for sale
|
|
|
securities
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of year
|
|
$
|
2,399
|
|
|
$
|
823
|
|
Total net (losses) gains included in net income
|
|
|
(557
|
)
|
|
|
657
|
|
Total net gains (losses) included in other comprehensive income
|
|
|
9
|
|
|
|
(682
|
)
|
Purchases, sales, issuances and settlements, net
|
|
|
921
|
|
|
|
(752
|
)
|
Transfers out of level 3
|
|
|
(1,005
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
1,767
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008, there were no assets
or liabilities measured at fair value on a nonrecurring basis.
|
|
(21)
|
FINANCIAL
INSTRUMENTS WITH OFF-BALANCE SHEET RISK
|
The Group accepts various forms of collateral for issuance of
its surety bonds including cash, irrevocable letters of credit
and certificates of deposit. The Groups policy is to
record in the accompanying consolidated financial statements
only those funds received as cash deposits. The off-balance
sheet collateral held by the Group consists solely of
irrevocable letters of credit totaling $278 and $478 as of
December 31, 2008 and 2007, respectively.
|
|
(22)
|
QUARTERLY
FINANCIAL DATA (unaudited)
|
The Groups unaudited quarterly financial information is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007(1)
|
|
|
2008
|
|
|
2007(1)
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited, in thousands, except per share data)
|
|
|
Net premiums written
|
|
$
|
34,539
|
|
|
$
|
34,801
|
|
|
$
|
43,749
|
|
|
$
|
47,206
|
|
|
$
|
37,575
|
|
|
$
|
41,110
|
|
|
$
|
31,489
|
|
|
$
|
36,549
|
|
Net premiums earned
|
|
|
39,077
|
|
|
|
33,988
|
|
|
|
38,644
|
|
|
|
35,076
|
|
|
|
37,869
|
|
|
|
37,303
|
|
|
|
36,987
|
|
|
|
40,308
|
|
Net investment income earned
|
|
|
3,361
|
|
|
|
2,941
|
|
|
|
3,343
|
|
|
|
3,771
|
|
|
|
3,469
|
|
|
|
2,880
|
|
|
|
3,763
|
|
|
|
3,461
|
|
Net realized gains (losses)
|
|
|
(820
|
)
|
|
|
(47
|
)
|
|
|
157
|
|
|
|
680
|
|
|
|
(2,281
|
)
|
|
|
(366
|
)
|
|
|
(4,128
|
)
|
|
|
(243
|
)
|
Net income
|
|
|
2,592
|
|
|
|
2,553
|
|
|
|
3,233
|
|
|
|
5,790
|
|
|
|
1,780
|
|
|
|
3,012
|
|
|
|
629
|
|
|
|
2,880
|
|
Other comprehensive income (loss)
|
|
|
546
|
|
|
|
224
|
|
|
|
(3,561
|
)
|
|
|
(2,390
|
)
|
|
|
(3,954
|
)
|
|
|
2,751
|
|
|
|
4,567
|
|
|
|
1,496
|
|
Comprehensive income (loss)
|
|
$
|
3,138
|
|
|
$
|
2,777
|
|
|
$
|
(328
|
)
|
|
$
|
3,400
|
|
|
$
|
(2,174
|
)
|
|
$
|
5,763
|
|
|
$
|
5,196
|
|
|
$
|
4,376
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.42
|
|
|
$
|
0.42
|
|
|
$
|
0.52
|
|
|
$
|
0.95
|
|
|
$
|
0.28
|
|
|
$
|
0.49
|
|
|
$
|
0.10
|
|
|
$
|
0.46
|
|
Diluted
|
|
$
|
0.41
|
|
|
$
|
0.41
|
|
|
$
|
0.51
|
|
|
$
|
0.92
|
|
|
$
|
0.28
|
|
|
$
|
0.47
|
|
|
$
|
0.10
|
|
|
$
|
0.45
|
|
113
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
|
None.
ITEM 9A.
CONTROLS
AND PROCEDURES.
|
|
(a)
|
Evaluation
of Disclosure Controls and Procedures
|
Mercer Insurance Group, Incs Chief Executive Officer and
Chief Financial Officer have evaluated the effectiveness of the
design and operation of the Groups disclosure controls and
procedures as of December 31, 2008, and based on that
evaluation they have concluded that these controls and
procedures are effective as of that date.
|
|
(b)
|
Changes
in Internal Control Over Financial Reporting
|
There have been no changes in the Groups internal control
over financial reporting during the fourth quarter of 2008 that
have materially affected, or are reasonably likely to materially
affect, the Groups internal control over financial
reporting.
|
|
(c)
|
Managements
Annual Report on Internal Control Over Financial
Reporting
|
The management of Mercer Insurance Group, Inc. is responsible
for establishing and maintaining adequate internal control over
financial reporting for the Group. With the participation of the
Chief Executive Officer and the Chief Financial Officer, our
management conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework
and criteria established in
Internal Control
Integrated Framework,
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our
evaluation, our management has concluded that our internal
control over financial reporting was effective as of
December 31, 2008.
Mercer Insurance Group, Inc.s auditor, KPMG LLP, an
independent registered public accounting firm, has issued an
audit report on the effectiveness of our internal control over
financial reporting. This audit report appears below.
|
|
|
|
|
|
|
|
Mercer Insurance Group, Inc.
|
|
|
|
March 16, 2009
|
|
By:
/s/ Andrew
R. Speaker
Andrew
R. Speaker
President and Chief Executive Officer
|
|
|
|
March 16, 2009
|
|
By:
/s/ David
B. Merclean
David
B. Merclean
Senior Vice President of Finance and
Chief Financial Officer
|
114
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Mercer Insurance Group, Inc.:
We have audited Mercer Insurance Group. Inc.s internal
control over financial reporting as of December 31, 2008,
based on criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Mercer
Insurance Group, Inc.s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing other such
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion Mercer Insurance Group, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2008, based on criteria
established in
Internal Control Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Mercer Insurance Group, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of earnings, stockholders
equity, and cash flows for each of the years in the three-year
period ended December 31, 2008, and our report dated
March 16, 2009, expressed an unqualified opinion on those
consolidated financial statements.
/s/
KPMG LLP
Philadelphia, Pennsylvania
March 16, 2009
115
|
|
ITEM 9B.
|
OTHER
INFORMATION.
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|
The information required by Item 10 is incorporated by
reference to Registrants definitive proxy statement to be
filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, within 120 days after
December 31, 2008.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION.
|
The information required by Item 11 is incorporated by
reference to Registrants definitive proxy statement to be
filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, within 120 days after
December 31, 2008.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
|
The information required by Item 12 is incorporated by
reference to Registrants definitive proxy statement to be
filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, within 120 days after
December 31, 2008.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
The information required by Item 13 is incorporated by
reference to Registrants definitive proxy statement to be
filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, within 120 days after
December 31, 2008.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES.
|
The information required by Item 14 is incorporated by
reference to Registrants definitive proxy statement to be
filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, within 120 days after
December 31, 2008.
116
PART IV
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES.
|
(a) (1) The following consolidated financial
statements are filed as a part of this report in Item 8.
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Earnings for Each of the Years in the
Three-year Period Ended December 31, 2008
Consolidated Statements of Stockholders Equity for Each of
the Years in the Three-year Period Ended December 31, 2008
Consolidated Statements of Cash Flows for Each of the Years in
the Three-year Period Ended December 31, 2008
Notes to Consolidated Financial Statements
(2) The following consolidated financial statement
schedules for the years 2008, 2007 and 2006 are submitted
herewith:
Financial Statement Schedules:
Report of Independent Registered Public Accounting Firm
Schedule I. Summary of
Investments Other Than Investments in Related Parties
Schedule II. Condensed Financial
Information of Parent Company
Schedule III. Supplementary Insurance
Information
Schedule IV. Reinsurance
Schedule V. Allowance for Uncollectible
Premiums and other Receivables
Schedule VI. Supplemental Information
Schedule VI. Supplemental Insurance
Information Concerning Property and Casualty Subsidiaries
All other schedules are omitted because they are not applicable
or the required information is included in the financial
statements or notes thereto.
(3)
Exhibits:
The exhibits required by Item 601 of Regulation SK are
listed in the Exhibit Index. Documents not accompanying
this report are incorporated by reference as indicated on the
Exhibit Index.
117
EXHIBIT INDEX
|
|
|
|
|
Number
|
|
Title
|
|
|
3
|
.1
|
|
Articles of Incorporation of Mercer Insurance Group, Inc.
(incorporated by reference herein to the Companys
Pre-effective Amendment No. 3 on Form S-1, SEC File No.
333-104897.)
|
|
3
|
.2
|
|
Bylaws of Mercer Insurance Group, Inc. (incorporated by
reference herein to the Companys Annual Report on Form
10-K, SEC File No. 000-25425, for the fiscal year ended December
31, 2003.)
|
|
4
|
.1
|
|
Form of certificate evidencing shares of common stock of Mercer
Insurance Group, Inc. (incorporated by reference herein to the
Companys Pre-effective Amendment No. 3 on Form S-1, SEC
File
No. 333-104897.)
|
|
10
|
.1
|
|
Mercer Insurance Group, Inc. Employee Stock Ownership Plan
(incorporated by reference herein to the Companys
Pre-effective Amendment No. 3 on Form S-1, SEC File No.
333-104897.)
|
|
10
|
.2
|
|
Employment Agreement, dated as of April 1, 2004, among BICUS
Services Corporation, Mercer Insurance Company and Andrew R.
Speaker (incorporated by reference herein to the Companys
Annual Report on Form 10-K, SEC File No. 000-25425, for the
fiscal year ended December 31, 2003.)
|
|
10
|
.3
|
|
Employment Agreement, dated as of April 1, 2004, among BICUS
Services Corporation, Mercer Insurance Company and Paul D.
Ehrhardt (incorporated by reference herein to the
Companys Annual Report on Form 10-K, SEC File No.
000-25425, for the fiscal year ended December 31, 2003.)
|
|
10
|
.4
|
|
Amended and Restated Employment Agreement, dated as of March 15,
2007, among BICUS Services Corporation, Mercer Insurance Group,
Inc., Mercer Insurance Company and David B. Merclean
(incorporated by reference herein to the Companys Annual
Report on Form 10-K, SEC File
No. 000-25425,
for the fiscal year ended December 31, 2006.)
|
|
10
|
.5
|
|
Employment Agreement, dated as of October 1, 2006, among BICUS
Services Corporation, Mercer Insurance Group, Inc., Mercer
Insurance Company and Paul R. Corkery (incorporated by reference
herein to the Companys Quarterly Report on Form 10-Q, SEC
File No. 000-25425, for the quarter ended September 30, 2006.)
|
|
10
|
.6
|
|
Amendment No. 1 to Employment Agreement, dated as of March 15,
2007, among BICUS Services Corporation, Mercer Insurance Group,
Inc., Mercer Insurance Company and Paul R. Corkery (incorporated
by reference herein to the Companys Annual Report on Form
10-K, SEC File
No. 000-25425,
for the fiscal year ended December 31, 2006.)
|
|
10
|
.7
|
|
Mercer Mutual Insurance Company Executive Nonqualified
Excess Plan dated June 1, 2002 (incorporated by
reference herein to the Companys Pre-effective Amendment
No. 3 on Form S-1, SEC File No. 333-104897.)
|
|
10
|
.8
|
|
Mercer Mutual Insurance Company Benefit Agreement dated December
11, 1989, as amended (incorporated by reference herein to the
Companys Pre-effective Amendment No. 3 on Form S-1, SEC
File No. 333-104897.)
|
|
10
|
.9
|
|
Mercer Insurance Group, Inc. 2004 Stock Incentive Plan, as
amended through January 18, 2006 (incorporated by reference
herein to the Companys Annual Report on Form 10-K, SEC
File
No. 000-25425,
for the fiscal year ended December 31, 2005.)
|
|
10
|
.10
|
|
Mercer Insurance Group, Inc. 401(k) Mirror Plan (incorporated by
reference herein to the Companys Annual Report on Form
10-K, SEC File No. 000-25425, for the fiscal year ended December
31, 2006.)
|
|
14
|
.1
|
|
Code of Ethics (incorporated by reference herein to the
Companys Annual Report on Form 10-K, SEC File No.
000-25425, for the fiscal year ended December 31, 2003.)
|
|
23
|
|
|
Consent of independent registered public accounting firm (filed
herewith.)
|
|
31
|
.1
|
|
Certification of Chief Executive Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002, (filed herewith)
|
|
31
|
.2
|
|
Certification of Chief Financial Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002, (filed herewith)
|
|
32
|
.1
|
|
Certification of Chief Executive Officer in accordance with
Section 906 of the Sarbanes-Oxley Act of 2002, (filed herewith)
|
|
32
|
.2
|
|
Certification of Chief Financial Officer in accordance with
Section 906 of the Sarbanes-Oxley Act of 2002, (filed herewith)
|
118
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
Mercer Insurance Group, Inc.
|
|
|
|
March 16, 2009
|
|
By:
/s/ Andrew
R. Speaker
Andrew
R. Speaker
President and Chief Executive Officer
and a Director
|
|
|
|
March 16, 2009
|
|
By:
/s/ David
B. Merclean
David
B. Merclean
Senior Vice President of Finance
and Chief Financial Officer
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
date indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By
|
|
/s/ Roland
D. Boehm
Roland
D. Boehm
|
|
Vice Chairman of the Board of
Directors
|
|
March 16, 2009
|
|
|
|
|
|
|
|
By:
|
|
/s/ H.
Thomas Davis
H. Thomas Davis
|
|
Director
|
|
March 16, 2009
|
|
|
|
|
|
|
|
By:
|
|
/s/ William
V. R. Fogler
William
V. R. Fogler
|
|
Director
|
|
March 16, 2009
|
|
|
|
|
|
|
|
By:
|
|
/s/ William
C. Hart
William
C. Hart
|
|
Director
|
|
March 16, 2009
|
|
|
|
|
|
|
|
By:
|
|
/s/
George T. Hornyak, Jr.
George
T. Hornyak, Jr.
|
|
Chairman of the Board of Directors
|
|
March 16, 2009
|
|
|
|
|
|
|
|
By:
|
|
/s/ Samuel
J. Malizia
Samuel J. Malizia
|
|
Director
|
|
March 16, 2009
|
|
|
|
|
|
|
|
By:
|
|
/s/
Richard U. Niedt
Richard
U. Niedt
|
|
Director
|
|
March 16, 2009
|
|
|
|
|
|
|
|
By:
|
|
/s/ Andrew
R. Speaker
Andrew
R. Speaker
|
|
President and Chief Executive Officer and a Director
|
|
March 16, 2009
|
|
|
|
|
|
|
|
By:
|
|
/s/ Richard
G. Van Noy
Richard G. Van Noy
|
|
Director
|
|
March 16, 2009
|
119
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Mercer Insurance Group, Inc. and Subsidiaries:
Under date of March 16, 2009, we reported on the
consolidated balance sheets of Mercer Insurance Group, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of earnings, stockholders
equity, and cash flows for each of the years in the three-year
period ended December 31, 2008, which are included in the
annual report on
Form 10-K.
In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated
financial statement schedules in the annual report on
Form 10-K.
These financial statement schedules are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these financial statement schedules based on our
audits.
In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 16, 2009
120
Mercer
Insurance Group, Inc. and Subsidiaries
Schedule I
Summary of Investments Other than
Investments
in Related Parties as of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
|
|
|
|
Market
|
|
|
Balance
|
|
Type of Investment
|
|
Cost
|
|
|
Value
|
|
|
Sheet
|
|
|
|
(Dollars in thousands)
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government and government agencies and authorities
|
|
$
|
84,747
|
|
|
|
87,975
|
|
|
|
87,975
|
|
States, municipalities and political subdivisions
|
|
|
143,042
|
|
|
|
145,125
|
|
|
|
145,125
|
|
All Other
|
|
|
103,286
|
|
|
|
100,987
|
|
|
|
100,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds
|
|
|
331,075
|
|
|
|
334,087
|
|
|
|
334,087
|
|
Preferred stock
|
|
|
1,368
|
|
|
|
1,218
|
|
|
|
1,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
332,443
|
|
|
|
335,305
|
|
|
|
335,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trust and insurance companies
|
|
|
1,020
|
|
|
|
1,185
|
|
|
|
1,185
|
|
Industrial, miscellaneous and all other
|
|
|
6,844
|
|
|
|
7,800
|
|
|
|
7,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
7,864
|
|
|
|
8,985
|
|
|
|
8,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
340,307
|
|
|
|
344,290
|
|
|
|
344,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying report of independent registered public
accounting firm.
121
MERCER
INSURANCE GROUP, INC.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Condensed
Balance Sheet
December 31,
2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Investment in common stock of subsidiaries (equity method)
|
|
$
|
139,611
|
|
|
$
|
135,083
|
|
Investment in preferred stock of subsidiaries (equity method)
|
|
|
2,475
|
|
|
|
2,475
|
|
Cash and cash equivalents
|
|
|
1,644
|
|
|
|
2,404
|
|
Goodwill
|
|
|
1,797
|
|
|
|
1,797
|
|
Deferred tax asset
|
|
|
379
|
|
|
|
337
|
|
Other assets
|
|
|
512
|
|
|
|
801
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
146,418
|
|
|
$
|
142,897
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1
|
|
|
$
|
1
|
|
Other liabilities
|
|
|
9,147
|
|
|
|
9,490
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
9,148
|
|
|
|
9,491
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, no par value, authorized 5,000,000 shares,
no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, no par value, authorized 15,000,000 shares,
issued 7,074,333 shares and 7,075,333 shares,
outstanding 6,801,095 shares and 6,717,693 shares
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
71,369
|
|
|
|
70,394
|
|
Accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
Unrealized gains in investments, net of deferred income taxes
|
|
|
2,494
|
|
|
|
4,896
|
|
Retained Earnings
|
|
|
74,138
|
|
|
|
67,613
|
|
Unearned ESOP shares
|
|
|
(2,505
|
)
|
|
|
(3,131
|
)
|
Treasury stock, 621,773 and 505,814 shares
|
|
|
(8,226
|
)
|
|
|
(6,366
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
137,270
|
|
|
|
133,406
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
146,418
|
|
|
$
|
142,897
|
|
|
|
|
|
|
|
|
|
|
See accompanying report of independent registered public
accounting firm.
122
MERCER
INSURANCE GROUP, INC.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Condensed
Statement of Earnings
For the Years ended December 31, 2008, 2007 and
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of expenses
|
|
$
|
40
|
|
|
|
81
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
40
|
|
|
|
81
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
1,269
|
|
|
|
1,840
|
|
|
|
2,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,269
|
|
|
|
1,840
|
|
|
|
2,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax benefit
|
|
|
(1,229
|
)
|
|
|
(1,759
|
)
|
|
|
(2,549
|
)
|
Income tax benefit
|
|
|
(258
|
)
|
|
|
(374
|
)
|
|
|
(633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in income of subsidiaries
|
|
|
(971
|
)
|
|
|
(1,385
|
)
|
|
|
(1,916
|
)
|
Equity in income of subsidiaries
|
|
|
9,205
|
|
|
|
15,620
|
|
|
|
12,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,234
|
|
|
|
14,235
|
|
|
|
10,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying report of independent registered public
accounting firm.
123
MERCER
INSURANCE GROUP, INC.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Condensed
Statements of Cash Flows
For the Years ended December 31, 2008, 2007 and
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,234
|
|
|
|
14,235
|
|
|
|
10,635
|
|
Dividends from subsidiaries
|
|
|
2,275
|
|
|
|
1,500
|
|
|
|
1,125
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed income of subsidiaries
|
|
|
(9,205
|
)
|
|
|
(15,620
|
)
|
|
|
(12,551
|
)
|
ESOP share commitment
|
|
|
1,014
|
|
|
|
1,175
|
|
|
|
1,253
|
|
Amortization of restricted stock compensation
|
|
|
547
|
|
|
|
1,043
|
|
|
|
1,398
|
|
Deferred income tax
|
|
|
(42
|
)
|
|
|
(35
|
)
|
|
|
(169
|
)
|
Other
|
|
|
(54
|
)
|
|
|
(305
|
)
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
2,769
|
|
|
|
1,993
|
|
|
|
2,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from stock compensation plans
|
|
|
40
|
|
|
|
153
|
|
|
|
129
|
|
Dividends to shareholders
|
|
|
(1,709
|
)
|
|
|
(1,251
|
)
|
|
|
(902
|
)
|
Purchase of treasury stock
|
|
|
(1,860
|
)
|
|
|
(45
|
)
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(3,529
|
)
|
|
|
(1,143
|
)
|
|
|
(810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(760
|
)
|
|
|
850
|
|
|
|
1,247
|
|
Cash and cash equivalents at beginning of period
|
|
|
2,404
|
|
|
|
1,554
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,644
|
|
|
|
2,404
|
|
|
|
1,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying report of independent registered public
accounting firm.
124
Mercer
Insurance Group, Inc. and Subsidiaries
Schedule III
Supplementary Insurance Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
Column F
|
|
|
|
|
|
|
Future Policy
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Benefits,
|
|
|
|
|
|
Other Policy
|
|
|
|
|
|
|
Policy
|
|
|
Losses, Claims,
|
|
|
|
|
|
Claims and
|
|
|
Net
|
|
|
|
Acquisition
|
|
|
and Loss
|
|
|
Unearned
|
|
|
Benefits
|
|
|
Premium
|
|
Segment
|
|
costs
|
|
|
Expenses
|
|
|
Premiums
|
|
|
Payable
|
|
|
Earned
|
|
|
|
(Dollars in thousands)
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial lines
|
|
$
|
17,321
|
|
|
|
293,612
|
|
|
|
69,180
|
|
|
|
|
|
|
|
132,425
|
|
Personal lines
|
|
|
2,872
|
|
|
|
10,388
|
|
|
|
11,228
|
|
|
|
|
|
|
|
20,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,193
|
|
|
|
304,000
|
|
|
|
80,408
|
|
|
|
|
|
|
|
152,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial lines
|
|
$
|
17,679
|
|
|
|
263,571
|
|
|
|
76,489
|
|
|
|
|
|
|
|
125,427
|
|
Personal lines
|
|
|
2,849
|
|
|
|
10,828
|
|
|
|
11,535
|
|
|
|
|
|
|
|
21,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,528
|
|
|
|
274,399
|
|
|
|
88,024
|
|
|
|
|
|
|
|
146,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial lines
|
|
$
|
14,075
|
|
|
|
240,239
|
|
|
|
69,865
|
|
|
|
|
|
|
|
115,461
|
|
Personal lines
|
|
|
2,633
|
|
|
|
10,216
|
|
|
|
12,065
|
|
|
|
|
|
|
|
22,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,708
|
|
|
|
250,455
|
|
|
|
81,930
|
|
|
|
|
|
|
|
137,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column G
|
|
|
Column H
|
|
|
Column I
|
|
|
Column J
|
|
|
Column K
|
|
|
|
|
|
|
Benefits,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims,
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Losses and
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Investment
|
|
|
Settlement
|
|
|
Amortization
|
|
|
Operating
|
|
|
Premiums
|
|
|
|
Income
|
|
|
Expenses
|
|
|
of DPAC
|
|
|
Expenses
|
|
|
Written
|
|
|
|
(Dollars in thousands)
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial lines
|
|
|
|
|
|
|
81,223
|
|
|
|
36,073
|
|
|
|
10,883
|
|
|
|
127,418
|
|
Personal lines
|
|
|
|
|
|
|
13,996
|
|
|
|
5,611
|
|
|
|
1,968
|
|
|
|
19,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,936
|
|
|
|
95,219
|
|
|
|
41,684
|
|
|
|
12,851
|
|
|
|
147,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial lines
|
|
|
|
|
|
|
76,293
|
|
|
|
33,267
|
|
|
|
9,903
|
|
|
|
139,360
|
|
Personal lines
|
|
|
|
|
|
|
14,893
|
|
|
|
5,496
|
|
|
|
625
|
|
|
|
20,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,053
|
|
|
|
91,186
|
|
|
|
38,763
|
|
|
|
10,528
|
|
|
|
159,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial lines
|
|
|
|
|
|
|
73,529
|
|
|
|
27,397
|
|
|
|
10,435
|
|
|
|
123,829
|
|
Personal lines
|
|
|
|
|
|
|
14,168
|
|
|
|
5,297
|
|
|
|
2,807
|
|
|
|
21,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,070
|
|
|
|
87,697
|
|
|
|
32,694
|
|
|
|
13,242
|
|
|
|
145,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying report of independent registered public
accounting firm.
125
Mercer
Insurance Group, Inc. and Subsidiaries
Schedule IV
Reinsurance
For the
years ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
Column F
|
|
|
|
|
|
|
|
|
|
Assumed
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Ceded to
|
|
|
from
|
|
|
|
|
|
of Amount
|
|
|
|
Gross
|
|
|
Other
|
|
|
other
|
|
|
Net
|
|
|
Assumed
|
|
Premiums Earned
|
|
Amount
|
|
|
Companies
|
|
|
Companies
|
|
|
Amount
|
|
|
to Net
|
|
|
|
(Dollars in thousands)
|
|
|
For the year ended December 31, 2008
|
|
$
|
172,817
|
|
|
|
21,473
|
|
|
|
1,233
|
|
|
|
152,577
|
|
|
|
0.8
|
%
|
For the year ended December 31, 2007
|
|
$
|
176,395
|
|
|
|
31,521
|
|
|
|
1,801
|
|
|
|
146,675
|
|
|
|
1.2
|
%
|
For the year ended December 31, 2006
|
|
$
|
182,633
|
|
|
|
47,499
|
|
|
|
2,539
|
|
|
|
137,673
|
|
|
|
1.8
|
%
|
See accompanying report of independent registered public
accounting firm.
126
Mercer
Insurance Group, Inc. and Subsidiaries
Schedule V
Allowance for Uncollectible Premiums and Other Receivables
For the
years ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Balance, January 1
|
|
$
|
402
|
|
|
$
|
628
|
|
|
$
|
401
|
|
Additions
|
|
|
287
|
|
|
|
102
|
|
|
|
467
|
|
Deletions
|
|
|
(279
|
)
|
|
|
(328
|
)
|
|
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
410
|
|
|
$
|
402
|
|
|
$
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying report of independent registered public
accounting firm.
127
Mercer
Insurance Group, Inc. and Subsidiaries
Schedule VI
Supplemental Information
For the
years ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
Column F
|
|
|
Column G
|
|
|
|
Deferred
|
|
|
Reserve for
|
|
|
Discount
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy
|
|
|
Losses and
|
|
|
if any
|
|
|
|
|
|
Net
|
|
|
Net
|
|
|
|
Acquisition
|
|
|
Loss Adj.
|
|
|
Deducted in
|
|
|
Unearned
|
|
|
Earned
|
|
|
Investment
|
|
Affiliation with Registrant
|
|
Costs
|
|
|
Expenses
|
|
|
Column C
|
|
|
Premiums
|
|
|
Premiums
|
|
|
Income
|
|
|
|
(Dollars in thousands)
|
|
|
Year ended December 31, 2008
|
|
$
|
20,193
|
|
|
|
304,000
|
|
|
|
|
|
|
|
80,408
|
|
|
|
152,577
|
|
|
|
13,936
|
|
Year ended December 31, 2007
|
|
$
|
20,528
|
|
|
|
274,399
|
|
|
|
|
|
|
|
88,024
|
|
|
|
146,675
|
|
|
|
13,053
|
|
Year ended December 31, 2006
|
|
$
|
16,708
|
|
|
|
250,455
|
|
|
|
|
|
|
|
81,930
|
|
|
|
137,673
|
|
|
|
10,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column H
|
|
|
Column I
|
|
|
Column J
|
|
|
Column K
|
|
|
|
Losses and LAE
|
|
|
|
|
|
Paid
|
|
|
|
|
|
|
Incurred
|
|
|
|
|
|
Losses and
|
|
|
Net
|
|
|
|
Current
|
|
|
Prior
|
|
|
Amortization
|
|
|
Adjustment
|
|
|
Written
|
|
|
|
Year
|
|
|
Year
|
|
|
of DPAC
|
|
|
Expenses
|
|
|
Premiums
|
|
|
|
(Dollars in thousands)
|
|
|
Year ended December 31, 2008
|
|
$
|
89,088
|
|
|
|
6,131
|
|
|
|
41,684
|
|
|
|
69,274
|
|
|
|
147,352
|
|
Year ended December 31, 2007
|
|
$
|
83,015
|
|
|
|
8,171
|
|
|
|
38,763
|
|
|
|
63,691
|
|
|
|
159,667
|
|
Year ended December 31, 2006
|
|
$
|
79,275
|
|
|
|
8,422
|
|
|
|
32,694
|
|
|
|
56,110
|
|
|
|
145,791
|
|
See accompanying report of independent registered public
accounting firm.
128
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