UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission file number: 000-51127
NATIONAL ATLANTIC HOLDINGS CORPORATION
(Exact name of Registrant as specified in its charter)
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New Jersey
(State or other jurisdiction of
incorporation or organization)
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22-3316586
(I.R.S. Employer
Identification No.)
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4 Paragon Way
Freehold, NJ 07728
(732) 665-1100
(Address, including zip code, of
Registrants principal executive offices)
Registrants telephone number, including area code:
(732) 665-1100
Securities registered pursuant to Section 12(b) of the Act:
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Title of Class
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Name of Each Exchange on Which Registered
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Common Stock, no par value per share
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The Nasdaq Stock Market LLC
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Securities Registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
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No
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Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
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No
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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.
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Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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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 Exchange
Act Rule 12b-2). Yes
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No
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The aggregate market value of common shares held by non-affiliates of the registrant as
of June 30, 2007, was 107,122,291 based on the closing sale price of $13.89 per common share on the
The Nasdaq Stock Market LLC on that date. For purposes of this computation only, all officers,
directors, and 10% beneficial owners of the registrant are
deemed to be affiliates.
As of March 17, 2008, there were outstanding 11,007,487 common shares, no par value per
share, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement for the 2008 Annual General
Meeting of Shareholders are incorporated by reference into Part III of this report.
TABLE OF CONTENTS
PART I
The Company, National Atlantic, NAHC, we, us, and our refer to National
Atlantic Holdings Corporation and its consolidated subsidiaries, and Proformance refers to
Proformance Insurance Company, a wholly-owned insurance subsidiary of NAHC.
This Annual Report on Form 10-K (the Form 10-K) may contain certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These
forward-looking statements represent the Companys expectations or beliefs, including, but not
limited to, statements concerning the Companys operations and financial performance and condition.
In particular, statements using words such as may, should, estimate, expect, anticipate,
intend, believe, predict, potential, or words of similar import generally involve
forward-looking statements. For example, we have included certain forward-looking statements in
Managements Discussion and Analysis of Financial Condition and Results of Operations with regard
to trends in results, prices, volumes, operations, investment results, margins, risk management and
exchange rates. This Form 10-K also contains forward-looking statements with respect to our
business and industry, such as those relating to our strategy and management objectives and trends
in market conditions, market standing, product volumes, investment results and pricing conditions.
In light of the risks and uncertainties inherent in all future projections, the inclusion of
forward-looking statements in this Form 10-K should not be considered as a representation by us or
any other person that our objectives or plans will be achieved. Numerous factors could cause our
actual results to differ materially from those in forward-looking statements including, but not
limited to, those discussed in this Form 10-K, including in Risk Factors below. As a consequence,
current plans, anticipated actions and future financial condition and results may differ from those
expressed in any forward-looking statements made by or on behalf of the Company. Additionally,
forward-looking statements speak only as of the date they are made, and we undertake no obligation
to release publicly the results of any future revisions or updates we may make to forward-looking
statements to reflect new information or circumstances after the date hereof or to reflect the
occurrence of future events.
Item 1.
Business
Overview
We provide property and casualty insurance and insurance-related services to
individuals, families and businesses in the State of New Jersey. Our primary personal insurance
product is the packaged High Performance Policy (HPP), which includes private passenger
automobile, homeowners, and personal excess (umbrella) and specialty property liability coverage.
We also provide a low-cost monoline automobile insurance product known as BlueStar Car
Insurance
(SM)
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which is targeted to customers who do not require the more
comprehensive coverage offered by our HPP product. For businesses, we offer a range of commercial
insurance products, including commercial property, commercial general liability, and business auto,
as well as claims administrative services to self-insured corporations. We believe that our
competitive edge lies in our extensive knowledge of the New Jersey insurance market and regulatory
environment and our business model, which is designed to align our Partner Agents interests with
management by requiring many of them to retain an ownership stake in the Company.
As of December 31, 2007, our insurance subsidiary, Proformance Insurance Company, which
we refer to as Proformance, was the twelfth largest and one of the fastest growing providers of
private passenger auto insurance in New Jersey, based on direct written premiums of companies
writing more than $5 million of premiums annually over the past three years, according to A.M.
Best. From 2003 through 2007, we experienced a 2.3% compound annual growth rate, as our direct
written premiums for all lines of business we write, including homeowners and commercial lines,
increased from $163.2 million in 2003 to $178.7 million in 2007. As of December 31, 2007, our
stockholders equity was $144.2 million, up from stockholders equity of $49.8 million as of
December 31, 2003, reflecting a 30.4% compound annual growth rate. Included in stockholders
equity is $62.2 million as a result of our initial public offering, which was completed on
April 21, 2005.
On March 13, 2008, the Company entered into a merger agreement (the Merger Agreement)
with Palisades Safety and Insurance Association, an insurance exchange organized under NJSA 17:50-1
et seq.
(Palisades), and Apollo Holdings, Inc., a New Jersey corporation and a direct wholly
owned subsidiary of Palisades (Merger Sub). The Merger Agreement provides that, upon the terms
and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and
into the Company, with NAHC continuing as the surviving corporation (the Surviving Corporation)
and a direct wholly owned subsidiary of Palisades (the Merger).
At the effective time and as a result of the Merger, in exchange for their shares of issued
and outstanding Company common stock, Company shareholders shall receive $6.25 in cash for each of
their shares. The closing price of Companys shares on the NASDAQ on March 11, 2008 was $5.50.
In addition, at or prior to the effective time of the Merger, each outstanding option to
purchase Common Stock and each outstanding stock appreciation right (vested or unvested) will be
canceled and the holder will be entitled to receive an amount of cash equal to the difference
between the Merger Consideration and the exercise price of the applicable stock option, or the
difference between the Merger Consideration and the applicable per share base price of the stock
appreciation right, as applicable, less any required withholding taxes.
The Merger Agreement provides that the directors and officers of the Merger Sub immediately
prior to the effective time of the Merger will be the directors and officers of the Surviving
Corporation.
The Company and Palisades have made customary representations, warranties and covenants in the
Merger Agreement. The completion of the Merger is subject to approval by the shareholders of the
Company, obtaining regulatory approvals, including antitrust approval, and satisfaction or waiver
of other conditions.
The Merger is subject to various closing conditions, including the approval of the Companys
shareholders, the obtaining of certain regulatory approvals specified in the Merger Agreement, the
maintenance by the Company of certain stockholders equity and capital and surplus measures within
prescribed levels, the Company obtaining a directors and officers liability tail policy for a
specified cost and level of coverage, and the maintenance of the A.M. Best Financial Strength
Rating of Proformance Insurance Company within a prescribed rating.
The Merger Agreement contains certain termination rights for both the Company and Palisades
and further provides that, upon termination of the Merger Agreement under specified circumstances,
the Company may be required to pay Palisades a termination fee of up to $2,100,000 . Furthermore,
the Merger Agreement provides that, upon termination of the Merger Agreement under specified
circumstances unrelated to a failure of the closing conditions, Palisades may be required to pay the Company certain liquidated
damages based on the circumstances relating to such termination.
Simultaneously with the execution and delivery of the Merger Agreement, Palisades and James V.
Gorman, the Chief Executive Officer of the Company entered into a voting agreement (the Voting
Agreement). In the Voting Agreement, Mr. Gorman thereto agreed to vote, or provide his consent
with respect to, all shares of Company capital stock held by such him: (1) in favor of the
recommendation of the Board of Directors of the Company to the holders of Common Shares; and (2)
against any Acquisition Proposal, or any agreement providing for the consummation of a transaction
contemplated by any Acquisition Proposal (other than the Merger and other than following any Change
in Recommendation made by the Board of Directors pursuant to the requirements of the Merger
Agreement); and (3) in favor of any proposal to adjourn a shareholders meeting which the Company,
Merger Sub and Parent support.
The foregoing description of the Merger, the Merger Agreement and the Voting Agreement does
not purport to be complete and is qualified in its entirety by reference to (i) the complete text
of the Merger Agreement, which is attached hereto as Exhibit 2.1 and (ii) the complete text of the
Voting Agreement, which is attached hereto as Exhibit 4.1, which Merger Agreement and Voting
Agreement are incorporated herein by reference.
The Merger Agreement has been included to provide investors and shareholders with information
regarding its terms. It is not intended to provide any other factual information about the Company.
The Merger Agreement contains representations and warranties that the parties to the Merger
Agreement made to and solely for the benefit of each other. The assertions embodied in such
representations and warranties are qualified by information contained in confidential disclosure
letters that the parties exchanged in connection with signing the Merger Agreement. Accordingly,
investors and shareholders should not rely on such representations and warranties as
characterizations of the actual state of facts or circumstances, since they were only made as of
the date of the Merger Agreement and are modified in important part by the underlying disclosure
letters. Moreover, information concerning the subject matter of such representations and warranties
may change after the date of the Merger Agreement, which subsequent information may or may not be
fully reflected in the Companys public disclosures.
On March 13, 2008, the Company issued a press release announcing the execution of the Merger
Agreement. A copy of the press release is attached hereto as Exhibit 99.1 and is incorporated
herein by reference. In addition, on March 13, 2008, the Company provided communications to its
employees and certain other individuals announcing that it had entered into the Merger Agreement.
We believe the current conditions in the New Jersey property and casualty insurance
market represent an attractive opportunity for us. According to the U.S. Census Bureau, 2006
American Community Survey, New Jersey had the
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second highest median household incomes of the 50 states. According to A.M. Best, private passenger
auto direct written premiums in New Jersey for 2006 were $5.9 billion (ranking seventh among the
states and having grown 4% since 2002). Total property and casualty direct written premiums in New
Jersey for 2006 were $17.2 billion (ranking seventh among the 50 states.) We believe that these
market conditions provide us with the opportunity to profitably grow our business.
As other insurers have reduced their share or withdrawn from the New Jersey private
passenger auto insurance market in recent years, as a result of numerous factors that include the
regulatory environment, we have expanded our business through organic growth and through
replacement carrier transactions. Replacement carrier transactions allow insurers to withdraw from
the New Jersey insurance market by finding a replacement carrier, such as Proformance, that will
agree to offer insurance coverage upon renewal of the withdrawing carriers policies. We have
entered into six replacement carrier transactions and intend to opportunistically consider others
if they meet our profitability and growth objectives.
We distribute our products exclusively through licensed independent agents, many of whom
are Partner Agents who have purchased a minimum of $50,000 of the common stock of NAHC. By reason
of their ownership interest in NAHC, we believe that each Partner Agent has an incentive to provide
us with more profitable segments of the personal and commercial lines business in New Jersey. We
provide Partner Agents with advanced automation tools to reduce expenses, the opportunity to
qualify as Custom Agents with the ability to perform some of the basic underwriting and claims
processing for additional compensation, and eligibility to participate in our contingent commission
program which is based upon the volume and the profitability of the business produced by the agent
or agency. We believe that the Partner Agent system of distributing our products provides us with a
sustainable strategic advantage over our competitors in the areas of underwriting/risk selection
and operating expense control.
Proformance provides comprehensive packaged personal lines property and casualty
insurance. Our packaged personal lines policy, which we call the High Proformance Policy or
HPP, contains coverages for private passenger automobile, homeowners, personal excess
(umbrella) liability, and personal specialty property lines insurance covering jewelry, furs,
fine arts, cameras, electronic data processing equipment, boats, yachts and other high value items.
We believe that our packaged personal lines product provides several advantages over non-packaged
alternatives, including administrative expense savings, lower loss ratios, increased customer
convenience and higher policyholder retention. Part of our growth strategy is to convert individual
policies obtained through replacement carrier transactions or placed by our Partner Agents with
other carriers into our HPP product.
In 2007, Proformance launched a low-cost monoline automobile insurance product known as
BlueStar Car Insurance (SM), which is targeted to those customers of our Partner Agents who do not
require the broader coverage of our HPP product.
Proformance also offers commercial lines products, predominantly commercial automobile
liability and physical damage for small to medium-sized Main Street businesses, which we regard
as high frequency/low severity risks. In 2007, commercial lines business was 20.7% of our direct
written premiums. It is part of our long-term strategy to increase our penetration of the Main
Street commercial market, which in New Jersey is largely controlled by independent agents. Based
upon reports given to us by our Partner Agents, we believe that our Partner Agents write an
aggregate of approximately $3.1 billion of New Jersey property and casualty premiums per annum, of
which approximately $2.0 billion is commercial lines. As of December 31, 2007, we write only 4.56%
of the total premiums placed by our Partner Agents. We intend to increase our share of our agents
total business. In particular, we intend to increase the amount of commercial lines business we
write for Main Street business policyholders by capturing a larger share of this business placed
by our Partner Agents.
Our non-insurance subsidiaries provide Proformance and third parties with a variety of
services. Most of the services provided by our non-insurance subsidiaries generate fee-for-service
income. Our non-insurance subsidiaries include:
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Riverview Professional Services, Inc.
, which we refer to as Riverview,
which provides case management and medical treatment cost containment
to ensure cost-efficient service in the treatment of auto accident
victims and reduced claims expenses for Proformance. Riverview is also
a third party claims administrator providing claims handling services
to companies that self insure.
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National Atlantic Insurance Agency, Inc.
, which we refer to as NAIA,
which provides services to orphan policyholders no longer serviced
by their independent agents and policyholders acquired as part of our
replacement carrier transactions.
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For the years ended December 31, 2007, 2006 and 2005, NAHC, Proformance and our other
subsidiaries generated the following net income (loss) and revenues:
Net Income (Loss) and Revenues
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Net Income (Loss)
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Revenues
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For the year
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For the year
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ended
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ended
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December 31,
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December 31,
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2007
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2006
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2005
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2007
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2006
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2005
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Proformance Insurance Company
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$
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(6,295
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$
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15,613
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$
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8,530
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$
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183,916
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$
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174,783
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$
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186,277
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Riverview Professional Services
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187
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474
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485
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4,198
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5,654
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4,713
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National Atlantic Insurance Agency
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748
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910
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830
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2,078
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2,370
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2,234
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Mayfair Reinsurance Company Limited
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286
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(114
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(414
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1,564
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260
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152
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National Atlantic Holdings Corporation
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(1,120
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(2,501
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(2,995
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179
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677
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541
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Less intercompany eliminations
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(7,664
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(7,888
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)
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(6,576
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Total
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$
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(6,194
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$
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14,382
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$
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6,436
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$
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184,271
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$
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175,856
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$
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187,341
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Our principal executive offices are located at 4 Paragon Way, Freehold, NJ 07728. Our
telephone number is (732) 665-1100. Our internet address is
www.nationalatlantic.com.
Our Growth Strategies
Our goal is to grow our business and maximize shareholder value through the following
strategies:
Focusing on the New Jersey Market.
We will continue to focus our business
in the New Jersey property and casualty insurance market where we believe we
are able to achieve a competitive advantage through our knowledge and expertise
of the market and regulatory environment. We have expanded our business to
include a greater percentage of homeowners and commercial lines, and may
consider geographic expansion at the appropriate time.
and
Capturing a Larger Share of Our Agents Business.
We intend to maintain
and further develop our strong independent agent relationships by providing our
agents with a broader portfolio of insurance products and technology services
to enable us to capture a growing share of the total insurance business written
by our agents. Based upon reports given to us by our Partner Agents, we believe
they write an aggregate of approximately $3.1 billion of New Jersey property
and casualty premiums per annum, of which approximately $2.0 billion is
commercial lines. As of December 31, 2007, we write only 4.56% of the aggregate
business placed by our Partner Agents. We intend to expand that percentage. In
particular, we intend to increase the amount of commercial lines business we
write for small to medium-sized business Main Street policyholders by
capturing a larger share of this business written by our Partner Agents.
Converting Single Coverage Policies into Our Packaged Policies and
Opportunistically Growing Our Business through Replacement Carrier
Transactions.
We intend to continue to grow our homeowners and non-auto
businesses, principally by endorsing these additional coverages on policies
which currently cover only automobile insurance, such as the policies
transferred to us as part of the replacement carrier transactions, thereby
converting those policies into our packaged High Proformance Policies. In
addition, as opportunities arise we will enter into replacement carrier and
other transactions which we determine are consistent with our objectives.
Marketing the Services of Our Non-Insurance Subsidiaries to Third
Parties.
We intend to selectively market and sell to third parties the services
provided by Riverview. We believe Riverview provides a unique approach to
maintaining cost-efficient medical service and the management of medical
treatment to reduce frivolous and potentially fraudulent claims. We believe the
services of Riverview are especially marketable to those insurers with small
New Jersey books of business who do not have access to these claims and
cost-reduction services. We will market the services of NAIA to our agents who,
in exchange for NAIAs services to the designated policyholders of that agent,
will receive a commission from Proformance lower than our normal commission.
These services will generate fee income to these non-insurance subsidiaries.
Other Subsidiaries
NAHC was formed on July 29, 1994 as a New Jersey corporation to serve as a holding
company for Proformance. Proformance was formed as a New Jersey property and casualty insurance
company on September 26, 1994. In
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addition to Proformance, our other operating subsidiaries are
Riverview, NAIA and Mayfair.
Riverview Professional Services, Inc.
In 2002, we formed Riverview to address the problem of sharply increasing costs for
medical case management. We believe that appropriate and effective management of personal injury
treatment is important to our success in the auto insurance industry. As a result, we created
Riverview to provide Proformance with services relating to case management, medical treatment
management, bill and code review and pre-certification and decision point review. Riverview is also
a third party claims administrator that provides claims handling services.
Riverview deals with auto accident victims medical providers and screens requests for
medical treatment that it considers to be frivolous, non-compliant or potentially fraudulent.
Riverview pre-certifies all medically necessary services related to auto accident insureds through
qualified medical professionals and works on containing costs for its clients. We believe
Riverviews approach leads to a more cost-efficient service for the management of medical treatment
of auto accident victims and reduces claims expenses for its clients. Riverview also has a staff of
eight in-house attorneys, allowing Riverview to handle claims-related litigation more efficiently
and cost-effectively. Proformance pays Riverview an agreed upon flat fee per case handled.
We offer Riverviews claim adjustment services to third parties. In June 2003,
Riverview entered into a third party agreement to provide its services to AT&T on a countrywide
basis. The agreement provides that Riverview handle AT&Ts auto liability, auto physical damage and
general liability claims. The agreement expired on October 15, 2006, was not renewed and is
currently in run-off. We believe that the unique and effective nature of Riverviews services will
enable it to selectively expand its business and provide its services to additional third parties
on a competitive fee for service basis.
National Atlantic Insurance Agency, Inc.
In 1995, we formed our insurance agency subsidiary, NAIA. NAIA is a full service
insurance agency that provides agency services to Proformances orphan policyholders no longer
serviced by their independent agents. In addition, NAIA provides services to agents and/or
policyholders acquired as part of our replacement carrier transactions discussed below. NAIA also
provides services with respect to policyholders no longer receiving services from their agents of
record. NAIA does not solicit new insurance customers except as required by New Jersey insurance
laws and regulations.
NAIA receives a standard rate of commission, similar to that received by our Partner
Agents, in exchange for the services it provides. As of December 31, 2007, NAIA does not provide
agency services with respect to any other property casualty business other than Proformances
business, although we plan to market NAIAs services to agents who wish to have NAIA service such
agents customers.
Mayfair Reinsurance Company Limited
On November 7, 2003 we formed Mayfair in Bermuda to provide reinsurance on certain
blocks of business. Mayfair is classified as a Class 3 reinsurer in Bermuda and received its
reinsurance license on December 19, 2003 from the Bermuda Monetary Authority. Mayfair does not
reinsure business directly from Proformance.
For the year ending December 31, 2007, Mayfair did not issue any policies or assume any
reinsurance, and as of December 31, 2007, Mayfair had no policies in force.
Niagara Atlantic Holdings Corporation
We own an 80% interest in Niagara Atlantic Holdings Corporation, which we refer to as
Niagara Atlantic, a New York corporation. Niagara Atlantic was formed in December 1995 as a holding
company for the purpose of executing a
surplus debenture and service agreement with Capital Mutual Insurance Company. On June 5, 2000,
Capital Mutual Insurance Company went into liquidation and is currently under the supervision and
control of the New York State Insurance Department. Through loan guaranties, we lost approximately
$3.0 million in connection with our investment in Niagara Atlantic. As of December 31, 2007,
Niagara Atlantic is an inactive subsidiary.
The New Jersey Property and Casualty Insurance Market
Regulatory Environment
Proformance is licensed by the Commissioner of the Department of Banking and Insurance
to transact property and casualty insurance in New Jersey. All of Proformances business is
extensively regulated by the Commissioner, as
5
described below and elsewhere in this annual report
on Form 10-K.
New Jersey Market for Private Passenger Automobile Insurance
Private passenger automobile insurance is heavily regulated in New Jersey, and is in
many respects, unique in comparison with other states. Automobile insurers in New Jersey face
unusual regulatory conditions such as the take all comers requirement and the Automobile
Insurance Urban Enterprise Zone (UEZ) Program. For many insurance companies, these factors present
substantial challenges, but we believe they give us a competitive advantage because of our thorough
understanding of this market and our ability to take advantage of opportunities available under the
law.
Recent and Proposed Legislation
In 1990, the New Jersey legislature adopted the Fair Automobile Insurance Reform Act of
1990 (FAIR Act), which restricted the ability of insurance companies to refuse automobile insurance
applicants and to non-renew existing policies. In response to the FAIR Act, many insurance
companies withdrew from or reduced their market share in the New Jersey automobile insurance
market.
By the mid-1990s, the FAIR Act was deemed insufficient to meet the needs of the
marketplace. Auto insurance rates had become a major political issue, and the New Jersey
legislature passed the Automobile Insurance Cost Reduction Act of 1998 (AICRA).
AICRA attempted to control consumer costs by cutting auto rates by 15% across the board.
The loss of premiums to insurance carriers was to be made up by implementing strict measures to
reduce insurance fraud and abuse, especially in the areas of vehicle repair and medical case
management. Although the industry noted an increase in the efforts of the states law enforcement
personnel to combat insurance fraud, the impact of AICRA on the profitability of carriers was
viewed by the automobile insurance industry in New Jersey as being largely negative.
Recently, the New Jersey Department of Banking and Insurance (NJDOBI) proposed certain
amendments to its personal auto insurance regulations. Under the proposed regulations, New Jersey
insurance companies, such as Proformance, would be permitted to raise rates for certain drivers
above limitations that are currently in place and lower rates for certain other drivers. In
addition, the proposed regulations would permit insurance companies to use their own data to
develop rating maps. The proposal would permit up to 50 rating territories across New Jersey
compared to the 27 territories now recognized in New Jersey. There can be no assurance that the
proposed regulations will be adopted, nor can we be certain how these regulations, if adopted,
would impact our operations.
New Jersey Automobile Insurance Competition & Choice Act
On June 9, 2003, the New Jersey Automobile Insurance Competition & Choice Act (AICC Act)
was signed into law by the Governor of New Jersey to address the issues of auto insurance
availability and capacity. The new legislation was designed to attract competition in the New
Jersey auto insurance market and to provide consumers with coverage choices. Pursuant to the AICC
Act, the following regulatory changes have been adopted.
Rate Increases.
The AICC Act improves the ability of private passenger auto insurers to
achieve rate increases in a more timely fashion. The AICC Act increases the annual expedited rate
filing threshold from 3% per annum to 7% per annum. The AICC Act shortens the time periods for the
Commissioner to issue a decision with respect to an insurers proposal to increase rates by up to
7%. For a proposed rate increase of up to 3%, the Commissioner must issue a decision within 30 days
after receipt of the filing. For a proposed rate increase of more than 3%, but not more than 7%,
the Commissioner must issue a decision within 45 days after receipt of the filing.
Excess Profits.
Each insurer in New Jersey is required to file an annual report which
includes a calculation of
statutory profits on private passenger automobile business. If the insurer has excess statutory
profits as determined by a prescribed formula, the insurer is required to submit a plan for the
approval of the Commissioner to refund or credit the excess profits to policyholders. Prior to the
AICC Act, the calculation of statutory profits was based on the three-year period immediately prior
to the report, and the amount of actuarial gain an insurer could report without being considered to
have excess profits was limited to 2.5% of its earned premium, with actuarial gain defined as
underwriting income minus 3.5% of earned premium. The AICC Act extended the time period for the
calculation of statutory profits from three years to seven years to take into account market
fluctuations over a longer period of time. The AICC Act also changed the basis for determining
actuarial gains from earned premium to policyholder surplus. The term actuarial gain now means
underwriting income minus an allowance for profit and contingencies (which shall not exceed 12% of
policyholder surplus). The Commissioner is authorized to adjust this percentage biennially. The
calculation of statutory profits for 2007 will not be completed until the second quarter of 2008.
Therefore, the
6
determination as to whether we have exceeded the excess profit threshold for 2007
will not be known until that time. However, based upon our year end 2007 results, management
believes that the excess profit threshold has not been exceeded. As of December 31, 2006, we did
not exceed the excess profits threshold in respect of any prior look-back period.
Take All Comers Requirement.
The AICC Act phases out the take all comers requirement
over five years, to become inoperative on January 1, 2009. The AICC Act also exempts insurers from
the take all comers requirement in those rating territories in which the insurer has increased
its private passenger auto insurance non-fleet exposures by certain amounts. The exemption criteria
are applied every six months to determine if the insurer remains exempt. Insurers that increased
their private passenger auto insurance non-fleet exposures in a rating territory by 4% during the
one-year period ended on January 1, 2005 were exempt from the take all comers requirement in that
rating territory for the subsequent six-month period, at which time the 4% standard was applied to
determine if the insurer remains exempt. Insurers that increase their private passenger auto
insurance non-fleet exposures in a rating territory by the following amounts are also exempt from
the take all comers requirement in that rating territory, subject to review every six months: 3%
in the one-year period ended January 1, 2006, 2% in the one-year period ended January 1, 2007, and
1% in the one-year period ending January 1, 2008.
Tier Rating.
Under the tier rating system used to determine rates, drivers are assigned
to different rating tiers according to driving history and other risk characteristics including,
among others, driving record characteristics, experience and type of car. The tier rating system
requires insurers to take into account the entire record of the consumer, rather than penalizing
drivers for accidents and department of motor vehicle violations. Each insurer creates tiers based
on the risk characteristics that are important to it, which vary from insurer to insurer. By
establishing tiers, each insurer is able to target the risks which it prefers to underwrite.
Proformances tiering system seeks to charge low rates to good drivers and higher rates to drivers
with poor driving records.
Unsatisfied Claim and Judgment Fund.
The Unsatisfied Claim and Judgment Fund was created
to pay claims of victims of hit and run or uninsured motor vehicle accidents and to reimburse
insurers when medical expense benefits exceed $75,000 per person per accident. The AICC Act
eliminates reimbursement to insurers for medical claims in excess of $75,000 for policies issued on
or after January 1, 2004. The administration of these claims has been transferred from the
Unsatisfied Claim and Judgment Fund to the New Jersey Property-Liability Insurance Guaranty
Association, a private, nonprofit entity. This change is beneficial to us as the cost of this
facility to Proformance has historically exceeded its benefits to Proformance.
Insurance Fraud Detection Reward Program.
In an effort to enable efficient prosecution
of fraud against insurance companies, the AICC Act establishes the crime of insurance fraud to
criminalize the harmful conduct. To provide the public with incentives to come forward regarding
reasonable suspicion or knowledge of insurance crimes, the AICC Act also establishes the Insurance
Fraud Detection Reward Program to obtain information from the public.
Insurance Scenarios.
Starting in 2004, every insurer had to provide each new applicant
seeking automobile insurance, and each insured upon request, with three premium scenarios
illustrating the effect of different coverage choices. Insurers are required to explain how each
choice may affect costs and benefits in the event of an accident.
Automobile Insurance Urban Enterprise Zone Program
The Automobile Insurance Urban Enterprise Zone Program is an effort by the State of New
Jersey to increase the availability of insurance and decrease the number of uninsured motorists in
urban areas. New Jersey law requires each insurer to have its share of business in designated
urban enterprise zones across the state equal to its proportionate share of the auto insurance
market in the state as a whole. If an insurer does not achieve its quota, it is assigned
business by the state to fill the quota. As of December 31, 2007, Proformance satisfies its quota
in each urban enterprise zone primarily as a result of voluntary business it writes and the influx
of policies from its replacement carrier transactions.
Personal Automobile Insurance Plan
The Personal Automobile Insurance Plan, or PAIP, is a plan designed to provide personal
automobile coverage to drivers unable to obtain private passenger auto insurance in the voluntary
market and to provide for the equitable assignment of PAIP liabilities to all licensed insurers
writing personal automobile insurance in New Jersey. We may be assigned PAIP liabilities by the
state in an amount equal to the proportion that our net direct written premiums on personal auto
business for the prior calendar year bears to the corresponding net direct written premiums for all
personal auto business written in New Jersey for such year. For the years ended December 31, 2007,
2006 and 2005,
7
we were assigned $4,049,181, $2,125,472 and $12,643,014, respectively, of premium
by the State of New Jersey under the PAIP.
The State of New Jersey allows property and casualty companies to enter into Limited
Assignment Distribution (LAD) agreements to transfer PAIP assignments to another insurance carrier
approved by the State of New Jersey to handle this type of transaction. The LAD carrier is
responsible for handling all of the premium and loss transactions arising from the PAIP
assignments. In turn, the buy-out company pays the LAD carrier a fee based on a percentage of the
buy-out companys premium quota for a specific year. This transaction is not treated as a
reinsurance transaction on the buy-out companys books but as an expense. In the event the LAD
carrier does not perform its responsibilities, we will not have any further liability associated
with the assignments.
We have entered into LAD agreements with Clarendon National Insurance Company pursuant
to which we transfer to them the PAIP liabilities assigned to us by the state. Clarendon National
Insurance Company writes and services the business in exchange for an agreed upon fee. Upon the
transfer, we may have to assume that portion of the PAIP assignment obligation in the event no
other LAD carrier will perform these responsibilities.
Commercial Automobile Insurance Plan
The Commercial Automobile Insurance Plan, or CAIP, is a plan similar to PAIP, but
involving commercial auto insurance rather than private passenger auto insurance. Private passenger
vehicles cannot be insured by CAIP if they are eligible for coverage under PAIP or if they are
owned by an eligible person as defined under New Jersey law. We are assessed an amount in respect
of CAIP liabilities equal to the proportion that our net direct written premiums on commercial auto
business for the prior calendar year bears to the corresponding net direct written premiums for
commercial auto business written in New Jersey for that year.
Proformance records its CAIP assignment on its books as assumed business as required by
the State of New Jersey. For the years ended December 31, 2007, 2006 and 2005, Proformance has been
assigned $624,315, $992,659 and $1,968,016 of premiums and $1,030,143, $1,331,186 and $1,562,587 of
losses, respectively, by the State of New Jersey under the CAIP.
New Jersey Automobile Insurance Risk Exchange
The New Jersey Automobile Insurance Risk Exchange, or NJAIRE, is a plan designed to
compensate member companies for claims paid for non-economic losses and claims adjustment expenses
which would not have been incurred had the tort limitation option provided under New Jersey
insurance law been elected by the injured party filing the claim for non-economic losses. Our
participation in NJAIRE is mandated by the NJDOBI. As a member company of NJAIRE, we submit
information with respect to the number of claims reported to us that meet the criteria outlined
above. NJAIRE compiles the information submitted by all member companies and remits assessments to
each member company for this exposure. The assessments we receive from NJAIRE, are calculated by
NJAIRE based upon the information submitted by all member companies and represents our percentage
of the industry-wide total exposure for a specific reporting period. We have never received
compensation from NJAIRE as a result of our participation in the plan. The assessments that we
received required payment to NJAIRE for the amounts assessed.
For the years ended December 31, 2007, 2006 and 2005, we have been assessed $1,297,839,
$1,490,148 and $1,877,161, respectively, by NJAIRE. These assessments represent amounts to be paid
to NJAIRE as it relates to the Companys participation in its plan. For the years ended December
31, 2007, 2006 and 2005, the Company received additional assessments of prior periods in the amount
of $0, $362,499, and $0, respectively. For the years ended December 31, 2007, 2006 and 2005, the
Company received reimbursements of prior period assessments in the amount of $1,288,325, $1,231,059
and $1,642,563, respectively.
Summary of Replacement Carrier Transactions
Ohio Casualty Replacement Carrier Transaction
On December 18, 2001, NAHC and Proformance entered into a transaction with Ohio Casualty
of New Jersey, which we refer to as OCNJ, pursuant to which OCNJ transferred to Proformance the
obligation to renew all of OCNJs private passenger automobile business written in New Jersey and
OCNJ ceased writing private passenger automobile insurance in the State of New Jersey. As part of
the withdrawal, Proformance became the replacement carrier for all of OCNJs private passenger auto
insurance policies. OCNJ retained all rights and responsibilities related to the policies it
8
issued. Proformance offered renewal policies to all eligible OCNJ policyholders.
In connection with the transaction, OCNJ paid Proformance $41,100,000, of which $500,000
was paid at the contract date and $40,600,000 was paid in twelve equal monthly installments of
$3,383,333, with the first payment due on March 18, 2002. In connection with this transaction, Ohio
Casualty Insurance Company, which we refer to as OCIC, acquired a 19.71 percent interest (at the
time of the transaction) in NAHC by purchasing 867,955 shares of Class B nonvoting common stock. We
valued the stock issued as part of the transaction at $13,500,000, based on a valuation performed
for us as of January 1, 2002. The remaining $27,600,000 was earned evenly as replacement carrier
revenue over the twelve month period beginning on March 18, 2002. Further, OCNJ was required to pay
to Proformance up to an additional $15,600,000 in the aggregate to maintain a premium-to-surplus
ratio of 2.5 to 1 on the renewal business. A calculation of the premium-to-surplus ratio was made
annually to determine the amount of the additional payment, if any, for such year. The $15,600,000
conditional guaranty expired on December 18, 2004. We received payments of $2,521,000 on June 25,
2004 and $4,299,000 on July 14, 2004 for a total of $6,820,000 from OCNJ pursuant to this
requirement. In addition, on February 22, 2005 Proformance notified OCNJ that OCNJ owed Proformance
$7,762,000 for the 2004 year in connection with the requirement that a premium-to-surplus ratio of
2.5 to 1 be maintained on the OCNJ renewal business. Pursuant to our agreement, OCNJ had until
May 15, 2005 to make payment to us. Subsequent to the notification provided to OCIC and OCNJ, we
had several discussions with OCIC relating to certain components of the underlying calculation
which supports the amount owed to Proformance for the 2004 year.
As part of these discussions, OCIC had requested additional supporting documentation and
raised issues with respect to approximately $2,000,000 of loss adjustment expense, approximately
$800,000 of commission expense, and approximately $600,000 of NJAIRE assessments, or a total of
$3,412,000, allocated to OCNJ. We recorded $4,350,000 (the difference between the $7,762,000 we
notified OCNJ they owed us, and the $3,412,000 as outlined above) as replacement carrier revenue
from related parties in our consolidated statement of operationsfor the year ended December 31,
2004 with respect to the OCIC replacement carrier transaction. We recorded $4,350,000 because it
was managements best estimate of the amount for which we believed collectability was reasonably
assured based on several factors. First, the calculation to determine the amount owed by OCIC to us is complex and
certain elements of the calculation are significantly dependent on managements estimates and
judgment and thus more susceptible to challenge by OCIC. We also noted our experience in the past
in negotiating these issues with OCIC. For example, in 2003 we notified OCNJ that OCNJ owed
Proformance approximately $10,100,000 for 2003. After negotiations we ultimately received
$6,820,000. Accordingly, because of the nature of the calculation, the inherent subjectivity in
establishing certain estimates upon which the calculation is based, and our experience from 2003,
managements best estimate of the amount for 2004 for which we believed collectability from OCIC
was reasonably assured was $4,350,000. On June 27, 2005, we received $3,654,000 from OCIC in
settlement of the amounts due to Proformance, which differs from the $4,350,000 we had recorded as
a receivable due from OCIC as outlined above. The difference of $696,000 between the receivable we
had recorded ($4,350,000) due from OCIC and the actual settlement payment received from OCIC
($3,654,000) came as a result of a dispute between the Company and OCIC regarding $292,000 of
NJAIRE assessments and approximately $404,000 of commission expenses included in the underlying
calculation which supported the amounts due to Proformance for the 2004 year, the final year of our
three year agreement with OCIC. The $696,000 was recorded as a bad debt expense in the Companys
consolidated statement of operationsfor the year ended December 31, 2005.
As required under the December 18, 2001 agreement, on August 1, 2003, NAHC conducted a
private offering of its nonvoting common stock. The offering was made only to former personal
automobile agents of OCNJ, who met certain eligibility requirements as determined by NAHCs Board
of Directors. In connection with the offering, NAHC issued nonvoting common stock for an aggregate
price of $2,500,000.
As part of the transaction, Proformance issued approximately 67,000 private passenger
auto policies to OCNJ policyholders in New Jersey. Based on filings with the NJDOBI at the time of
the transaction, we estimated that the Proformance underwriting standards would result in an
overall rate increase of 16.8% to the OCNJ policyholders over three years, primarily attributable
to increases in the rating factors of the less attractive drivers.
On July 10, 2004, we entered into an agreement with OCNJ and OCIC pursuant to which we
agreed to include OCIC as the selling shareholder in our initial public offering and to use
commercially reasonable efforts to facilitate the sale by OCIC of shares of common stock of NAHC
owned by OCIC that have an aggregate value equal to at least 10% of the aggregate value of all
shares of common stock sold by NAHC and OCIC in our initial public offering. In exchange, OCIC
agreed to waive any rights it had or may have under the Investor Rights Agreement to require us to
9
redeem all of its shares of NAHC common stock as provided in that agreement. On December 23, 2005,
the Investor Rights Agreement between NAHC and OCIC was terminated.
Sentry Insurance Replacement Carrier Transaction
On October 21, 2003, Proformance consummated a replacement carrier transaction with
Sentry Insurance, a Wisconsin mutual company. Sentry Insurance agreed to not renew its personal
lines insurance business in New Jersey upon policy expiration dates and Proformance agreed to offer
replacement policies with substantially similar coverages and rates to the non-renewed Sentry
Insurance policyholders, and to be responsible for any statutory or regulatory obligations that
flow from the transfer of the business.
Sentry Insurance also agreed to support the business renewed by Proformance as a result
of this transaction by paying Proformance $3,500,000, paid in four equal installments. In addition,
in the event that the premium-to-surplus ratio for the Sentry Insurance business written by
Proformance exceeds 2.5 to 1 during a specified period, Sentry Insurance was obligated to pay to
Proformance such additional sums of money as necessary, up to an aggregate limit of $1,250,000, to
reduce the premium-to-surplus ratio for the Sentry Insurance business written by Proformance to not
less than 2.5 to 1. On February 22, 2005 Proformance notified Sentry Insurance that Sentry
Insurance owed Proformance $1,250,000 for the 2004 year in connection with this requirement. On
May 16, 2005, we received $1,250,000 from Sentry in settlement of the amounts owed to us.
As part of the transaction, NAIA agreed to provide general agency services to the
transferred Sentry Insurance customers.
Metropolitan Property and Casualty Replacement Carrier Transaction
On December 8, 2003, NAHC and Proformance consummated a replacement carrier transaction
with Metropolitan Property and Casualty Insurance Company, which we refer to as Met P&C, pursuant
to which Met P&C agreed to not renew its personal lines insurance business (except for the
Specialty Vehicle Automobile Program) produced by independent agents in New Jersey upon normal
policy expiration dates and Proformance agreed to offer replacement policies with substantially
similar coverages and rates to the non-renewed Met P&C policyholders, and to be responsible for any
statutory or regulatory obligations that flow from the transfer of the business.
Pursuant to their agreement, Proformance offered all agents terminated by Met P&C as a
result of this transaction, full or limited agency contracts with Proformance under terms and
conditions no less favorable than the terms and conditions of such agents contracts with Met P&C.
As part of this replacement carrier transaction, Proformance agreed, with respect to any
Met P&C policy renewed by Proformance pursuant to this transaction, not to impose an overall rate
increase greater than 15% per year for three years subject to a maximum aggregate rate increase of
52%. Met P&C agreed to support the business renewed by Proformance by making a payment (on an
after-tax basis) to Proformance totaling $6,660,000 which was paid at closing. In addition, at
closing Met P&C purchased nonvoting common stock of NAHC for $10,000,000.
The Hartford Financial Services Group, Inc. Replacement Carrier Transaction
On September 27, 2005, the Company announced that Proformance had entered into a
replacement carrier transaction with The Hartford Financial Services Group, Inc., which we refer to
as The Hartford, whereby certain subsidiaries of The Hartford (Hartford Fire Insurance Company,
Hartford Casualty Insurance Company, and Twin City Fire Insurance) would transfer their renewal
obligations for New Jersey homeowners, dwelling, fire, and personal excess liabilities policies
sold through independent agents to Proformance. Under the terms of the transaction, Proformance has offered renewal policies to approximately 8,500 qualified policyholders of The
Hartford. We received final approval of this transaction from the NJDOBI on November 22, 2005, the
closing date.
Upon the closing, Proformance was required to pay to The Hartford a one-time fee of
$150,000. In addition, on May 15, 2007, Proformance paid a one-time payment to the Hartford in the
amount of $253,392, which represented 5% of the written premium of the retained business at the end
of the twelve-month non-renewal period.
The Hartford is not liable for any fees and or other amounts to be paid to Proformance
and as such Proformance will not recognize any replacement carrier revenue from this transaction.
The revenue that will be recognized as part of this transaction will be from the premium generated
by the policies that renew with Proformance.
10
For the years ended December 31, 2007, 2006 and 2005, the direct written premium generated
from The Hartford renewal business was $4,724,728, $4,134,877 and $0, respectively.
Hanover Insurance Group Replacement Carrier Transaction
On February 21, 2006 the Company announced that Proformance had entered into a
replacement carrier transaction with Hanover Insurance Group, which we refer to as Hanover, whereby
Hanover would transfer their renewal obligations for New Jersey automobile, homeowners, dwelling
fire, personal excess liability and inland marine policies sold through independent agents to
Proformance. Under the terms of the transaction, Proformance offered renewal policies to
approximately 16,000 qualified policyholders of Hanover. NAHC and Proformance received approval of
this transaction from the NJDOBI on February 16, 2006.
Upon the Closing on February 21, 2006, Proformance paid Hanover a one-time fee of
$450,000 in connection with this transaction. In addition, within 30 days of the closing, $100,000
was due to Hanover to reimburse Hanover for its expenses associated with this transaction. In May
of 2007, the Company paid $666,129 to Hanover, representing the first of two annual payments equal
to 5% of the written premium of the retained business for the preceding twelve months, calculated
at the 12 month and 24 month anniversaries and payable to Hanover within 30 days of such
anniversary dates.
Hanover is not liable for any fees and or other amounts to be paid to Proformance and as
such Proformance will not recognize any replacement carrier revenue from this transaction. The
revenue that will be recognized as part of this transaction will be from the premium generated by
the policies that renew with Proformance.
For the years ended December 31, 2007 and 2006, the direct written premium generated from
Hanover renewal business was $12,491,300 and $11,080,943, respectively.
Products
High Proformance Policy
We attempt to attract and retain policyholders who are better insurance risks with a
packaged insurance product, which we refer to as the High Proformance Policy or HPP. HPP is a
comprehensive and differentiated policy which may contain the following property and casualty
coverages purchased by individuals:
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Private passenger automobile insurance, including bodily injury and property damage
liability, uninsured motorist coverage, personal injury protection, extended medical
payments, comprehensive fire and theft, collision, rental reimbursement, towing and
labor, and miscellaneous electronic device and mobile telephone coverages;
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Homeowners and condominium insurance coverage, including various endorsements for
extended coverage for eligible property and liability exposures;
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Personal excess (umbrella) liability insurance as an additional line of coverage; and
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Personal specialty property lines covering jewelry, furs, fine arts, cameras,
electronic data process equipment, boats, yachts and other high value items.
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The target market for our HPP is middle income and upper-middle income applicants. We believe
customers will continue to be attracted to the convenience of buying all of their personal
insurance coverages under one policy from one company, and the benefit of comprehensive coverage
designed not to leave gaps or create overlaps in coverage. We believe this design enhances our
renewal retention, provides convenient premium payment and improves our loss
ratios. Our historical underwriting experience further indicates that the policyholders who
purchase their auto and homeowners coverage from the same carrier are better risks than
policyholders who purchase only one kind of coverage.
Policyholders may purchase HPP coverage that initially includes only either the private
passenger automobile coverage or the homeowners coverage. The policyholder may add the other
coverages at their convenience as their existing policies for this other coverage expire. Many of
our competitors do not offer a packaged policy and of the few who do, they do not offer the
flexibility of sequentially adding coverage during the life of the policy. We believe that others
have been slow to introduce packaged policies in New Jersey because they are trying to reduce
market share and because it is difficult to convert a policy processing system designed to handle
single coverage policies into a system that can handle packaged policies.
11
Our HPP coverage excludes mold, mildew and pollution.
Other Products
We also offer commercial lines insurance products including commercial automobile,
commercial general liability, and commercial excess liability. Specifically, we underwrite
commercial automobile liability and physical damage and commercial inland marine for risks insuring
up to ten vehicles. In addition, we offer commercial liability, commercial inland marine and
commercial excess liability to our commercial automobile policyholders. Predominantly, Proformance
underwrites commercial automobile liability and physical damage for small to medium-sized Main
Street business policyholders, which we regard as high frequency/low severity risks.
During 2005, we initiated the underwriting of a new commercial line of business designed
to insure commercial property exposures on a multi-peril basis. For the years ended December 31,
2007, 2006 and 2005 we wrote $5.5 million, $3.5 million and $1.7 million of this type of business,
respectively.
During 2007, we launched a monoline automobile policy targeted to individuals who do not
currently own a home and, therefore, do not require the broader coverage of our HPP product.
Salesmarked Blue Star Car Insurance, this product is marketed to our Partner Agents existing
customers who fit into this demographic. For the year ended December 31, 2007, we wrote $8.7
million of this type of business.
The table below shows our direct written premiums in each of our product lines for the
periods indicated and the portions of our total direct written premiums each product line
represented.
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Years ended December 31,
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Direct Written Premium
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2007
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2006
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2005
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Private passenger auto
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$
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104,471
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58.5
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%
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$
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111,379
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65.1
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%
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$
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152,482
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77.0
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%
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Commercial auto
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18,385
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10.3
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%
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17,883
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10.5
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%
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17,921
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9.0
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%
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Homeowners
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37,244
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20.8
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%
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29,273
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17.1
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%
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20,925
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10.6
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%
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Other liability
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18,579
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|
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10.4
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%
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12,534
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7.3
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%
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6,721
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3.4
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%
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Total
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$
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178,679
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|
|
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100.0
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%
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$
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171,069
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|
|
100.0
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%
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$
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198,049
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|
|
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100.0
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%
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An emerging issue in the insurance industry is mold liability and property coverage under
homeowners and similar property-related policies. Property damage as a result of mold is uncommon
in New Jersey, unlike in the southern sections of the United States, most notably Texas. Although
our High Proformance Policies exclude mold coverage, some of our other products include such
coverage. Generally, insurance policies exclude mold coverage unless it is the result of a covered
loss. In the prior three years, we are aware of sixteen claims under our policies, totaling less
than $265,000, that involve mold liability as a result of a covered loss.
Distribution
Independent Agent Relationships
We distribute our products exclusively through licensed and contracted independent
agents. All of our agents have entered into agency agreements. We have two types of independent
agents, Partner Agents and Replacement Carrier Service Agents.
Partner Agents
Our Partner Agents are our independent agents who have purchased NAHC common stock with
a minimum purchase price of $50,000. As of December 31, 2007, our Partner Agents owned in the
aggregate approximately 12.8% of our outstanding common stock on a fully diluted basis. By reason
of their ownership interest in NAHC, we believe that each agent has an incentive to provide us with
more profitable segments of the personal and commercial lines business in New Jersey. We believe
this gives us a competitive advantage in the market. As of December 31, 2007, there are 106 Partner
Agents in 145 locations who enjoy the privileges of producing new and renewal insurance business in
all of Proformances product lines of business and are paid a standard commission. We intend to
continue requiring our agents to purchase shares of our common stock prior to selling our insurance
products.
12
Our Partner Agents service their customers through established agencies in their local
communities. The majority of the agencies of our Partner Agents have been established for more than
30 years, with the greatest concentration in the 30-50 year range. Based on information provided to
us by our Partner Agents, the majority of our Partner Agents have in recent years produced $5 to
$70 million of direct written premiums a
year for all insurance companies which they
represent. In 2007, our Partner Agents generated 74.4% of our total direct written premiums.
We provide Partner Agents with advanced automation tools to enable them to reduce the
redundant operations associated with the personal lines policy production and servicing process. In
addition, 90 Partner Agents have qualified for the elite Custom Agent designation enabling these
agents to perform some of the basic underwriting and claims processing for additional compensation,
thereby reducing our operating expenses. The Custom Agents underwriting activities are subject to
review by our underwriting department and our Peer Review Committee.
All Partner Agents are eligible to participate in our Partner Agents profit sharing
plan providing annual incentives based primarily on profit benchmarks as well as growth and product
mix of the business produced by each Partner Agent. We believe that the Partner Agent system of
distributing our products provides us with a sustainable strategic advantage as compared to our
competitors in the areas of underwriting/risk selection and operating expense control.
Replacement Carrier Service Agents
Replacement Carrier Service Agents are those independent agents who became associated
with Proformance through replacement carrier transactions. As of December 31, 2007, there are
approximately 487 Replacement Carrier Service Agents located in New Jersey. We converted 50
Replacement Carrier Service Agents who were former OCNJ agents to Partner Agent status in
connection with our private offering of NAHC common stock in 2003. We may offer additional
Replacement Carrier Service Agents the opportunity to become Partner Agents in the future. In
compliance with state regulations, Replacement Carrier Service Agents are paid the same rate of
basic commission as they were paid by the ceding carrier. Replacement Carrier Service Agents do not
enjoy Proformances standard Partner Agent commission levels, nor do they operate with any of the
advanced automation tools available to the Partner Agents.
We classify our Replacement Carrier Service Agents as Active Replacement Carrier
Service Agents, or Active RCS Agents, and Non-Active Replacement Carrier Service Agents, or
Non-Active RCS Agents. We have 89 Active RCS Agents and 398 Non-Active RCS Agents located in New
Jersey. Generally, we recognize a single location for each of our Replacement Carrier Service
Agents. Active RCS Agents have entered into a limited agency agreement with Proformance and are
authorized to write renewals and selective endorsements of private passenger auto business.
Proformance can discontinue new personal auto business production by any Active RCS Agent, with or
without cause, with 90 days advance written notice to the Active RCS Agent. Non-Active RCS Agents
are authorized to provide limited agency services to the transferred policyholders, but are not
authorized to produce any new business for Proformance.
Agency Agreements
All of our Partner Agents have entered into Partner Agent agency agreements, which
define the duties and obligations of Proformance and each Partner Agent. Under the agency
agreement, an agent who is a licensed New Jersey insurance agent agrees to purchase shares of NAHC
common stock and become an independent contractor selling Proformances products in exchange for commissions. The agency agreement can be terminated
by either party upon 90 days written notice and will automatically terminate if the insurance
agent loses its license, sells its business (provided, that Proformance, may at its discretion,
offer an agency agreement to the successor if it meets its suitability requirements) or in the
event of fraud, insolvency, abandonment, gross negligence or willful misconduct of the agent.
Peer Review Committee
Proformance has established a Peer Review Committee which monitors the underwriting and
risk selection activities of Partner Agents. As of December 31, 2007, the Peer Review Committee
consists of six Partner Agents. The members of the Committee generally serve for one-year terms and
are appointed by Proformances senior management team. It is our expectation that all Partner
Agents will have the opportunity to serve on the Committee at some point. The Committee evaluates
the performance of the Partner Agents to
ensure compliance with our underwriting guidelines
and marketing plans and can refer any issues to management of Proformance. Management of
Proformance further evaluates the issues and can take certain actions regarding the Partner Agent
under review, including, but not limited to, terminating the Partner Agent. At each meeting of the
Board of Directors of Proformance, the Committee reports any meetings it has held and any actions
it has taken. The Committee met four times in 2007 and once in 2006.
13
Marketing
Strategy
We believe that in the New Jersey personal lines property and casualty insurance
industry there is a strong relationship between the policyholder and the independent agent.
Therefore, we view the independent agents as our customers. Based on data of A.M. Best, we estimate
that more than 60% of the property and casualty insurance direct written premiums in the State of
New Jersey in 2006 were written through independent agency channels. As a result, our marketing
efforts focus on developing strong interdependent relationships with our Partner Agents and
providing them with the resources to write profitable business. We believe that our ability to
develop strong and mutually beneficial relationships with our agents is paramount to our success
and will enable us to capture a larger portion of our agents aggregate business.
Our principal marketing strategies are:
|
|
|
To offer a range of products, which we believe enables our agents to meet the insurance needs of their clients
who meet our target criteria;
|
|
|
|
|
To price our products competitively, including offering discounts when and where appropriate for policyholders
seeking to place all of their primary property and casualty insurance coverage with one carrier;
|
|
|
|
|
To offer agents competitive commissions, with incentives for placing their more profitable business with us; and
|
|
|
|
|
To provide a level of support and service that enhances the agents ability to do business with their clients
and with us while reducing operating costs, providing us with an ability to maintain our competitive pricing
position.
|
Agent Commissions and Incentive Plans
We employ several programs designed to compensate and provide incentives to our Partners
Agents to produce increasing volumes of profitable business for us.
|
|
|
Agent Commission Rates.
We pay agent commissions on new and renewal
business, which we believe are competitive in our marketplace.
|
|
|
|
|
Partner Agents Profit Sharing Plan.
Our Partner Agents profit
sharing plan rewards our Partner Agents by providing annual incentives
based primarily on profit benchmarks as well as growth and product mix
of the business produced by each Partner Agent.
|
|
|
|
|
Custom Agency Plan.
Our Custom Agents are our Partner Agents that
participate in the Custom Agency Plan. The Custom Agency Plan enables
Custom Agents to perform some of the basic underwriting, claims
processing and other functions for additional compensation. As of
December 31, 2007, 96.2% of our Partner Agents participate in the
Custom Agency Plan.
|
|
|
|
|
Investment Incentive.
All of our Partner Agents are shareholders of
NAHC. By reason of their ownership interest in NAHC, we believe that
each agent has an incentive to provide us with more profitable
segments of the personal and commercial lines business in New Jersey.
|
Service and Support
We believe that the level and quality of service and support we provide to our agents
helps differentiate us from other insurers. As of December 31, 2007, we have two field
representatives that monitor and assist our agents. In addition, we provide our agents with
software applications along with programs and services designed to strengthen and expand their
marketing, sales and service capabilities. Our Custom Agency Plan allows certain agencies to sell
new or service existing policyholders in a real-time environment by providing the agents with
certain access to our underwriting, claims and policy information. We believe that the array of
services we offer to our agents adds significant value to their business and enhances their
capabilities. We are an Associate Member of the Professional Insurance Agents Association of New
Jersey, and we support the Independent Insurance Agents and Brokers of New Jersey.
Underwriting
General
14
As of December 31, 2007, our underwriting department consists of 16 underwriters who are
supported by underwriting assistants and other policy administration personnel. The underwriting
department is responsible for pricing of our policies, management of the risk selection process and
monitoring of our various books of business. Our underwriting department has two divisions, one for
our personal lines business and one for our commercial lines business. Our personal lines
underwriting division consists of 3 teams. Each team services designated independent agencies on a
rotating basis.
Agent Underwriting Authority
Our Custom Agents are equipped with advanced automation tools to enable the agency to
perform the initial underwriting services. Agents are provided access to an electronic version of
our underwriting manuals, which include updated guidelines for acceptable risks, commission levels
and product pricing. This process enables our agents to perform certain underwriting and
administrative services on our behalf thereby reducing our operating expenses.
The underwriting activities of the Custom Agents are reviewed by our underwriting
department on a daily basis. The software employed by our underwriting department identifies for
our underwriting personnel any business underwritten by our Custom Agents which does not meet
certain criteria predetermined by our underwriting department. Our underwriting department may then
take appropriate actions in regards to such business underwritten, including amending or canceling
the policies in accordance with applicable laws and regulation.
Use of Credit Scoring
As permitted under New Jersey insurance laws and regulations, we employ insurance
scoring (sometimes referred to as credit scoring) in underwriting our homeowners policies and
our commercial lines policies. We use credit bureaus to obtain insurance scores for individuals who
apply for our homeowners or commercial lines coverage.
An insurance score is a measure of a persons financial responsibility based on
historical credit experience. The theory behind insurance scoring is that individuals with higher
scores are less likely to incur insured losses than those with lower credit scores. We do not rely
solely on credit scores to determine whether to provide coverage to an applicant or in determining
the coverage price. Rather, we use credit scores as an ancillary underwriting tool which assists us
in evaluating the underwriting risk of our applicants.
We believe that using credit scores to evaluate the underwriting risk of our applicants
in connection with our homeowners and commercial lines coverage improves our underwriting results
and increases our profitability.
Claims
Our claims department processes all claims that arise out of our insurance policies. As
of December 31, 2007, we have 62 employees in our claims department. Processing automation has
streamlined much of our claims function. We receive claims from our policyholders through our
agents or directly through our 1-800 toll free telephone number.
Claims received by our agents are forwarded to our claims department through our claims
systems. As agents
receive calls from claimants, our software permits the agent to immediately send information
related to the claims directly to us. Once we receive this information, the claim is directed to
the appropriate internal adjuster responsible for investigating the claim to determine liability.
We believe this process results in a shorter time period from when the claimant first contacts the
agent to when the claimant receives a claim payment, while enabling the agents to build credibility
with their clients by responding to claims in a timely and efficient manner.
As required under New Jersey insurance laws and regulations, we have formed a special
investigative unit, which employs seven individuals responsible for identifying and investigating
potential fraud and misrepresentation by claimants. All of our claims adjusters are carefully
trained to identify certain factors in the claims handling process that indicate a potentially
fraudulent claim or the presence of misrepresentation in the application or claims process. If a
claims adjuster identifies any such factor, he or she is required to notify our investigative unit.
A member of our investigative unit investigates the claim further to determine whether the claim is
fraudulent or whether the claimant made a misrepresentation in the application or claims process.
We believe the effectiveness of our investigative unit enables us to reduce the number of improper
claims and produce more profitable underwriting results.
In addition, we rely on Riverviews case management and medical treatment cost
containment to ensure cost-efficient service in the treatment of auto accident victims and reduce
our claims expenses. See Business Other Subsidiaries Riverview Professional Services, Inc.
15
Reserves
Significant periods of time can elapse between the occurrence of an insured loss, the
reporting of the loss to the insurer and the insurers final payment of that loss. To recognize
liabilities for unpaid losses, insurers establish reserves as balance sheet liabilities
representing estimates of amounts needed to pay reported and unreported losses and the expenses
associated with investigating and paying the losses, or loss adjustment expenses. We review our
reserves internally on a quarterly basis. We are required by law to annually obtain a certification
from a qualified actuary that our loss and loss adjustment expenses reserves are reasonable.
When a claim is reported, claims personnel establish a case reserve for the estimated
amount of the ultimate payment. The amount of the reserve is primarily based upon an evaluation of
the type of claim involved, the circumstances surrounding each claim and the policy provisions
relating to the loss. The estimate reflects informed judgment of such personnel based on general
insurance reserving practices and on the experience and knowledge of the claims personnel. During
the loss adjustment period, these estimates are revised as deemed necessary by our claims
department based on subsequent developments and periodic reviews of the cases.
In accordance with industry practice, we also maintain reserves for estimated losses
incurred but not yet reported. Incurred but not yet reported reserves are determined in accordance
with commonly accepted actuarial reserving techniques on the basis of our historical information
and experience. We make adjustments to incurred but not yet reported reserves quarterly to take
into account changes in the volume of business written, claims frequency and severity, our mix of
business, claims processing and other items that can be expected to affect our liability for losses
and loss adjustment expenses over time.
When reviewing reserves, we analyze historical data and estimate the impact of various
loss development factors, such as our historical loss experience and that of the industry,
legislative enactments, judicial decisions, legal developments in imposition of damages, and
changes and trends in general economic conditions, including the effects of inflation. There is no
precise method, however, for evaluating the impact of
any specific factor on the adequacy
of reserves, because the eventual development of reserves is affected by many factors. After taking
into account all relevant factors, we believe that our provision for unpaid losses and loss
adjustment expenses at December 31, 2007 is adequate to cover the ultimate net cost of losses and
claims incurred as of that date. The ultimate liability may be greater or less than reserves.
Establishment of appropriate reserves is an inherently uncertain process, and there can be no
certainty that currently established reserves will prove adequate in light of subsequent actual
experience. To the extent that reserves are inadequate and are strengthened, the amount of such
increase is treated as a charge to earnings in the period that the deficiency is recognized.
For the year ended December 31, 2007, we increased reserves for prior years by $19.6 million.
This increase was primarily due to increases in the prior year reserves for auto bodily injury
coverage which increased by $22.2 million. During the third quarter ended September 30,
2007, it was determined that the Companys policy related to claims handling procedures and
reserving practices had not been applied consistently, primarily within the bodily injury
claims unit. As part of the resolution of this matter, the Company retained an independent claims
consulting firm. Additionally, the Company restructured the processes of its bodily injury claims
unit during the third and fourth quarters of 2007.
16
The following table presents information on changes in the reserve for losses and loss
adjustment expenses of NAHC and its subsidiaries for the years ended December 31, 2007, 2006 and
2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Balance as of beginning of year
|
|
$
|
191,386
|
|
|
$
|
219,361
|
|
|
$
|
184,283
|
|
Less reinsurance recoverable on unpaid losses
|
|
|
(17,866
|
)
|
|
|
(28,069
|
)
|
|
|
(24,936
|
)
|
|
|
|
|
|
|
|
|
|
|
Net balance as of beginning of year
|
|
|
173,520
|
|
|
|
191,292
|
|
|
|
159,347
|
|
|
|
|
|
|
|
|
|
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
125,483
|
|
|
|
103,801
|
|
|
|
122,728
|
|
Prior period
|
|
|
19,602
|
|
|
|
23
|
|
|
|
10,066
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
145,085
|
|
|
|
103,824
|
|
|
|
132,794
|
|
|
|
|
|
|
|
|
|
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
49,020
|
|
|
|
38,009
|
|
|
|
42,301
|
|
Prior period
|
|
|
90,171
|
|
|
|
83,587
|
|
|
|
58,548
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
139,191
|
|
|
|
121,596
|
|
|
|
100,849
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as of December 31,
|
|
|
179,414
|
|
|
|
173,520
|
|
|
|
191,292
|
|
Plus reinsurance recoverable on unpaid losses
|
|
|
17,691
|
|
|
|
17,866
|
|
|
|
28,069
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
|
|
$
|
197,105
|
|
|
$
|
191,386
|
|
|
$
|
219,361
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007, we increased reserves for prior years by $19.6 million.
This increase was primarily due to increases in the prior year reserves for auto bodily injury
coverage which increased by $22.2 million. This increase was due to an inconsistent implementation of a revised claim reserving policy that
was uncovered in the third quarter of 2007. Prior year reserves for other liability increased by
$3.6 million. This was offset by favorable development of $4.6 million in no-fault coverages and
$1.6 million in commercial auto liability.
For the year ended December 31, 2006, we decreased reserves by $28.0 million primarily due to
a decrease in the loss and loss adjustment expense ratio for the same period. This decrease can be
attributed to a decline in earned premium, a reduction in claim frequency in private passenger
automobile coverage and significant growth in commercial lines business which in 2006, have
exhibited lower loss ratios. For the year ended December 31, 2006, prior year reserves increased
by $0.02 million. This increase was due to favorable development in bodily injury and no-fault
coverages offset by a reduction in ceded loss estimates for prior years.
For the year ended December 31, 2005, we increased reserves for prior years by $10.1 million.
This increase was due to increases in average severity for Personal Injury Protection (No-fault)
losses of $9.4 million, Commercial Auto Liability projected loss ratios for 2002-2004 due to the
fact that actual loss development was higher than expected for those years, resulting in an
increase of $1.8 million, Homeowners losses of $0.6 million and Other Liability losses of
$1.6 million. This development was partially offset by continued favorable trends in loss
development for Property Damage losses ($1.6 million), Auto Physical Damage losses ($1.2 million),
and Bodily Injury losses of ($0.5 million), as reported claims frequency has dropped significantly
and we reduced our projected loss ratios in recognition of this trend.
The following table represents the development of reserves, net of reinsurance, for
calendar years 1998 through 2007. The top line of the table shows the reserves at the balance sheet
date for each of the indicated years. This represents the estimated amounts of losses and loss
adjustment expenses for claims arising in all years that were unpaid at the balance sheet date,
including losses that had been incurred but not yet reported to us. The upper portion of the
17
table
shows the cumulative amounts paid as of the end of each successive year with respect to those
claims. The lower portion of the table shows the re-estimated amount of the previously recorded
reserves based on experience as of the end of each succeeding year, including cumulative payments
made since the end of the respective year. The estimate changes as more information becomes known
about the payments, frequency and severity of claims for individual years. Favorable loss
development, shown as a cumulative redundancy in the table, exists when the original reserve
estimate is greater than the re-estimated reserves at December 31, 2007.
Information with respect to the cumulative development of gross reserves (that is,
without deduction for reinsurance ceded) also appears at the bottom portion of the table.
In evaluating the information in the table, it should be noted that each amount entered
incorporates the effects of all changes in amounts entered for prior periods. Thus, if the 2000
estimate for a previously incurred loss was $150,000 and the loss was reserved at $100,000 in 1998,
the $50,000 deficiency (later estimate minus original estimate) would be included in the cumulative
redundancy (deficiency) in each of the years 2001-2004 shown in the table. It should further be
noted that the table does not present accident or policy year development data. In addition,
conditions and trends that have affected the development of liability in the past may not
necessarily recur in the future. Accordingly, it is not appropriate to extrapolate future
redundancies or deficiencies from the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31,
|
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Originally Estimated
|
|
|
14,965
|
|
|
|
15,484
|
|
|
|
20,386
|
|
|
|
30,014
|
|
|
|
66,041
|
|
|
|
112,872
|
|
|
|
159,347
|
|
|
|
191,292
|
|
|
|
173,520
|
|
|
|
179,414
|
|
As Re-estimated as of December
31, 2007
|
|
|
22,314
|
|
|
|
27,613
|
|
|
|
40,312
|
|
|
|
45,536
|
|
|
|
83,403
|
|
|
|
129,786
|
|
|
|
183,597
|
|
|
|
207,451
|
|
|
|
191,787
|
|
|
|
179,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year Later
|
|
|
15,261
|
|
|
|
17,901
|
|
|
|
25,588
|
|
|
|
32,028
|
|
|
|
74,671
|
|
|
|
112,200
|
|
|
|
169,414
|
|
|
|
191,315
|
|
|
|
191,787
|
|
|
|
|
|
Two Years Later
|
|
|
16,530
|
|
|
|
21,201
|
|
|
|
29,484
|
|
|
|
38,952
|
|
|
|
74,981
|
|
|
|
125,591
|
|
|
|
172,912
|
|
|
|
207,451
|
|
|
|
|
|
|
|
|
|
Three Years Later
|
|
|
18,471
|
|
|
|
23,740
|
|
|
|
33,720
|
|
|
|
40,999
|
|
|
|
82,583
|
|
|
|
126,571
|
|
|
|
183,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Years Later
|
|
|
20,203
|
|
|
|
25,797
|
|
|
|
35,905
|
|
|
|
43,875
|
|
|
|
81,737
|
|
|
|
129,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later
|
|
|
20,924
|
|
|
|
26,324
|
|
|
|
37,614
|
|
|
|
44,185
|
|
|
|
83,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later
|
|
|
21,339
|
|
|
|
26,880
|
|
|
|
38,847
|
|
|
|
46,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later
|
|
|
21,725
|
|
|
|
26,637
|
|
|
|
40,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later
|
|
|
21,730
|
|
|
|
27,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later
|
|
|
22,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten Years Later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Deficiency
(Redundancy)
|
|
|
7,349
|
|
|
|
12,129
|
|
|
|
19,926
|
|
|
|
15,522
|
|
|
|
17,362
|
|
|
|
16,914
|
|
|
|
24,250
|
|
|
|
16,159
|
|
|
|
18,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Amounts Paid as of :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year Later
|
|
|
6,770
|
|
|
|
6,437
|
|
|
|
11,147
|
|
|
|
13,819
|
|
|
|
23,695
|
|
|
|
44,398
|
|
|
|
58,562
|
|
|
|
83,496
|
|
|
|
90,173
|
|
|
|
|
|
Two Years Later
|
|
|
10,554
|
|
|
|
13,511
|
|
|
|
19,591
|
|
|
|
22,766
|
|
|
|
40,764
|
|
|
|
72,551
|
|
|
|
110,637
|
|
|
|
148,846
|
|
|
|
|
|
|
|
|
|
Three Years Later
|
|
|
15,178
|
|
|
|
18,926
|
|
|
|
25,518
|
|
|
|
32,609
|
|
|
|
55,683
|
|
|
|
102,585
|
|
|
|
156,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Years Later
|
|
|
18,050
|
|
|
|
21,944
|
|
|
|
30,969
|
|
|
|
40,054
|
|
|
|
68,019
|
|
|
|
122,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later
|
|
|
18,722
|
|
|
|
24,282
|
|
|
|
34,808
|
|
|
|
43,364
|
|
|
|
73,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later
|
|
|
20,091
|
|
|
|
25,498
|
|
|
|
37,196
|
|
|
|
46,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later
|
|
|
20,778
|
|
|
|
26,287
|
|
|
|
39,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later
|
|
|
21,354
|
|
|
|
27,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later
|
|
|
21,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten Years Later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31,
|
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
Percentage of intially estimated liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year Later
|
|
|
102
|
%
|
|
|
116
|
%
|
|
|
126
|
%
|
|
|
107
|
%
|
|
|
113
|
%
|
|
|
99
|
%
|
|
|
106
|
%
|
|
|
100
|
%
|
|
|
111
|
%
|
|
|
|
|
Two Years Later
|
|
|
110
|
%
|
|
|
137
|
%
|
|
|
145
|
%
|
|
|
130
|
%
|
|
|
114
|
%
|
|
|
111
|
%
|
|
|
109
|
%
|
|
|
108
|
%
|
|
|
|
|
|
|
|
|
Three Years Later
|
|
|
123
|
%
|
|
|
153
|
%
|
|
|
165
|
%
|
|
|
137
|
%
|
|
|
125
|
%
|
|
|
112
|
%
|
|
|
115
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Years Later
|
|
|
135
|
%
|
|
|
167
|
%
|
|
|
176
|
%
|
|
|
146
|
%
|
|
|
124
|
%
|
|
|
115
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later
|
|
|
140
|
%
|
|
|
170
|
%
|
|
|
185
|
%
|
|
|
147
|
%
|
|
|
126
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later
|
|
|
143
|
%
|
|
|
174
|
%
|
|
|
191
|
%
|
|
|
152
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later
|
|
|
145
|
%
|
|
|
172
|
%
|
|
|
198
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later
|
|
|
145
|
%
|
|
|
178
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later
|
|
|
149
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten Years Later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Deficiency
(Redundancy)
|
|
|
45
|
%
|
|
|
74
|
%
|
|
|
85
|
%
|
|
|
46
|
%
|
|
|
25
|
%
|
|
|
11
|
%
|
|
|
6
|
%
|
|
|
8
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Loss Adjustment Cumulative Paid as
a Percentage of Initially Estimated Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Amounts Paid as of :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year Later
|
|
|
45
|
%
|
|
|
42
|
%
|
|
|
55
|
%
|
|
|
46
|
%
|
|
|
36
|
%
|
|
|
39
|
%
|
|
|
37
|
%
|
|
|
44
|
%
|
|
|
52
|
%
|
|
|
|
|
Two Years Later
|
|
|
71
|
%
|
|
|
87
|
%
|
|
|
96
|
%
|
|
|
76
|
%
|
|
|
62
|
%
|
|
|
64
|
%
|
|
|
69
|
%
|
|
|
78
|
%
|
|
|
|
|
|
|
|
|
Three Years Later
|
|
|
101
|
%
|
|
|
122
|
%
|
|
|
125
|
%
|
|
|
109
|
%
|
|
|
84
|
%
|
|
|
91
|
%
|
|
|
98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Years Later
|
|
|
121
|
%
|
|
|
142
|
%
|
|
|
152
|
%
|
|
|
133
|
%
|
|
|
103
|
%
|
|
|
108
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later
|
|
|
125
|
%
|
|
|
157
|
%
|
|
|
171
|
%
|
|
|
144
|
%
|
|
|
111
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later
|
|
|
134
|
%
|
|
|
165
|
%
|
|
|
182
|
%
|
|
|
153
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later
|
|
|
139
|
%
|
|
|
170
|
%
|
|
|
192
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later
|
|
|
143
|
%
|
|
|
177
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later
|
|
|
147
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten Years Later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table is a reconciliation of net liability to gross liability for unpaid losses and
loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31,
|
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Originally Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Liability shown above
|
|
|
14,965
|
|
|
|
15,484
|
|
|
|
20,386
|
|
|
|
30,014
|
|
|
|
66,041
|
|
|
|
112,872
|
|
|
|
159,347
|
|
|
|
191,292
|
|
|
|
173,520
|
|
|
|
179,414
|
|
Add Reinsurance Recoverables
|
|
|
8,395
|
|
|
|
11,571
|
|
|
|
16,962
|
|
|
|
26,718
|
|
|
|
19,431
|
|
|
|
21,329
|
|
|
|
24,936
|
|
|
|
28,069
|
|
|
|
17,866
|
|
|
|
17,691
|
|
Gross Liability
|
|
|
23,360
|
|
|
|
27,055
|
|
|
|
37,348
|
|
|
|
56,732
|
|
|
|
85,472
|
|
|
|
134,201
|
|
|
|
184,283
|
|
|
|
219,361
|
|
|
|
191,386
|
|
|
|
197,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Re-estimated as of December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Liability Shown Above
|
|
|
22,314
|
|
|
|
27,613
|
|
|
|
40,312
|
|
|
|
38,952
|
|
|
|
74,671
|
|
|
|
129,786
|
|
|
|
183,597
|
|
|
|
207,451
|
|
|
|
191,787
|
|
|
|
179,414
|
|
Add Reinsurance Recoverables
|
|
|
17,960
|
|
|
|
24,609
|
|
|
|
23,259
|
|
|
|
34,673
|
|
|
|
20,548
|
|
|
|
20,422
|
|
|
|
17,772
|
|
|
|
17,860
|
|
|
|
14,474
|
|
|
|
17,691
|
|
Gross Liability
|
|
|
40,274
|
|
|
|
52,222
|
|
|
|
63,571
|
|
|
|
73,625
|
|
|
|
95,219
|
|
|
|
150,208
|
|
|
|
201,369
|
|
|
|
225,311
|
|
|
|
206,261
|
|
|
|
197,105
|
|
As a result of our focus on core business lines since our founding in 1994, we believe
we have no exposure to asbestos or environmental pollution liabilities, except for what we believe
is a small amount of liability with respect to
underground storage tanks pursuant to our homeowners policies.
Reinsurance
Third Party Reinsurance Program
The use of reinsurance has been an important part of our business strategy. As is
customary in the industry, we reinsure with other insurance companies a portion of our potential
liability under the policies we have underwritten; thereby protecting us against an unexpectedly
large loss or a catastrophic occurrence that could produce large losses. Reinsurance involves an
insurance company transferring (ceding) a portion of its exposure on insurance underwritten by it
to another insurer (reinsurer). The reinsurer assumes a portion of the exposure in return for a
share of the premium. Reinsurance does not legally discharge an insurance company from its primary
liability for the full amount of the policies, but it does make the reinsurer liable to the company
for the reinsured portion of any loss realized.
19
We are very selective in choosing our reinsurers, seeking only those companies that we
consider to be financially stable and adequately capitalized. The collectibility of reinsurance is
largely a function of the solvency of the reinsurers. As of December 31, 2007, our largest
reinsurance recoverables/receivables were due from the following unaffiliated reinsurers, with
their respective A.M. Best rating indicated below (in thousands):
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|
|
|
|
|
|
|
Reinsurance
|
|
|
|
|
Recoverables/
|
|
A.M. Best
|
|
|
Receivables
|
|
Rating (1)
|
QBE Reinsurance Company
|
|
$
|
7,044
|
|
|
|
A
|
|
Odyssey America Reinsurance
|
|
$
|
3,771
|
|
|
|
A
|
|
|
|
|
(1)
|
|
Ratings as of February 14, 2008
|
Effective December 31, 2002, Proformance entered into a Commutation and Release Agreement
with Odyssey America Reinsurance Corporation whereby Proformance received $3,379,500 in full
consideration for any past, current and future liabilities under a Multiple Line Loss Ratio
Reinsurance Contract effective as of July 1, 2001.
Effective March 26, 2003, Proformance entered into a Commutation and Mutual Release
Agreement with Gerling Global Reinsurance Corporation of America whereby Proformance received
$6,200,000 in full consideration for any past, current and future liabilities relating to all
reinsurance agreements with Gerling.
Effective December 31, 2003, Proformance exercised its right of commutation with Odyssey
America Reinsurance Corporation in accordance with the Multiple Line Loss Ratio Excess of Loss
Reinsurance Contract effective July 1, 2003 whereby Proformance received $10,050,000 in full
consideration for any past, current and future liabilities relating to said treaty.
Effective December 31, 2004, Proformance entered into a Commutation and Release
Agreement with Odyssey America Reinsurance Corporation whereby Proformance received $4,750,000 in
full consideration of any past, current and future liabilities under the Commercial and Personal
Excess Liability Excess of Loss Reinsurance contract effective January 1, 2004.
On January 1, 2005, Proformance entered into an Auto Physical Damage Quota Share
Contract with Odyssey America Reinsurance Corporation. On September 15, 2005, Proformance commuted
this contract with Odyssey Re. The commutation was initiated in September 2005 and all items
previously recorded in connection with the agreement were reversed as of that period.
Mayfair Reinsurance Company Limited
After September 11, 2001, the third party reinsurance market changed dramatically. In
renewing our reinsurance program for 2002 and 2003, we faced a market that continued to harden,
with reduced availability and coverage limits and increased prices. Due to these and other factors,
we concluded that our third party reinsurance program historically had not been maximizing our
profits or strengthening our financial position.
In response, on November 7, 2003 we formed Mayfair Reinsurance Company Limited. See
Business Other Subsidiaries Mayfair Reinsurance Company Limited.
Terrorism Risk Insurance Act of 2002
The Terrorism Risk Insurance Act of 2002, initially extended and amended by the
Terrorism Risk Insurance Extension Act of 2005, was extended and amended by the Terrorism Risk
Insurance Reauthorization Act of 2007, which was signed into law on December 26, 2007 and which we
collectively refer to as TRIA. As extended, TRIA will automatically expire at the end of 2014. The
intent of this legislation is to provide federal assistance to the insurance industry in order to
meet the needs of commercial insurance policyholders with the potential exposure for losses due to
acts of terrorism. This law requires insurers writing certain lines of property and casualty
insurance to offer coverage against certain acts of terrorism causing damage within the United
States or to United States flagged vessels or aircraft. In return, the law requires the federal
government to indemnify such insurers for 85% of insured losses for each year through the end of
2014 resulting from covered acts of terrorism subject to certain premium-based deductibles. These
premium-based deductibles are 20% for each year until the law expires at the end of 2014. In
addition, no federal compensation will be paid under TRIA unless the aggregate industry insured
losses resulting from the covered act of terrorism exceed $100.0 million for insured losses
occurring for each until TRIA expires.
20
Investments
We invest according to guidelines devised by an internal investment committee, comprised
of management of Proformance and a non-employee director of NAHC, focusing on what we believe are
investments that will produce an acceptable rate of return given the risk being assumed. Our
investment portfolio is managed by the investment officer at Proformance with oversight from our
chief financial officer and the assistance of outside investment advisors.
Our objectives are to seek the highest total investment return consistent with prudent
risk level by investing in a portfolio comprised of high quality investments including common
stock, convertible securities, bonds and money market funds in accordance with the asset
classifications set forth in Proformances Investment Policy Statement Guidelines and Objectives.
Proformances portfolio must be managed in accordance with New Jersey insurance
statutory requirements and guidelines, which restrict our investment options. In addition, the
terms of the Ohio Casualty replacement carrier transaction also limited us in our investment of
assets through 2004 as specified in the Investment Policy Statement Guidelines and Objectives.
Our Investment Policy Statement Guidelines and Objectives include the following
restrictions on investments, unless otherwise approved by the investment committee:
With respect to investments in equity securities, such investments:
|
|
|
Must not exceed 40% of policyholders surplus,
|
|
|
|
|
Must not exceed the lower of 20% of total portfolio in convertible securities or the maximum permitted by
New Jersey insurance regulations,
|
|
|
|
|
Investments in any one sector/industry group of the economy by reference to the S&P 500 Index must be no
more than 10% of portfolio, and
|
|
|
|
|
Investments in American Depository Receipts or foreign stocks must not exceed a maximum of 5% of portfolio;
|
|
|
|
|
All investments must be denominated in U.S. dollars;
|
|
|
|
|
All fixed income investments must be rated by the National Association of Insurance Commissioners, which
we refer to as the NAIC. In addition (a) average maturity of fixed income portfolio may not exceed
10 years and the weighted average credit quality of the portfolio must be rated at least A by Moodys or
at least A by Standard & Poors Ratings Services, which we refer to as Standard & Poors, and (b) the
portfolio must have a target duration of 3.5 years, but can range between 3 and 4 years (with the
exception that the 10-15 year municipal bonds may have duration of 8.5 years); and
|
|
|
|
|
Proformance may not make investments in (a) unincorporated businesses,
(b) guaranteed investment contracts or (c) commercial paper rated
below A-1 by Standard & Poors or P-1 by Moodys.
|
We have no investments in any collateralized securities collaterized by sub-prime or
alternative A, (ALT-A) loans. Our investments in this area are either collateralized mortgage
obligations, with AAA credit ratings (CMO), Mortgage Backed Securities, (MBS) with AAA credit
ratings and an implicit guarantee by the U.S. Government or Asset Backed Securities that have no
exposure to the aforementioned sub-prime or ALT-A loans.
Our aggregate investment in CMOs and/or MBS is less than 2% of invested assets.
21
The following table reflects the composition of our investment portfolio at December 31, 2007,
2006 and 2005 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
Amount
|
|
|
Portfolio
|
|
|
Amount
|
|
|
Portfolio
|
|
|
Amount
|
|
|
Portfolio
|
|
Fixed Income Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and
obligations of U.S. Government agencies
|
|
$
|
196,413
|
|
|
|
62.5
|
%
|
|
$
|
196,900
|
|
|
|
61.8
|
%
|
|
$
|
168,893
|
|
|
|
56.3
|
%
|
Obligations of states and
political subdivisions
|
|
|
66,618
|
|
|
|
21.2
|
%
|
|
|
74,202
|
|
|
|
23.3
|
%
|
|
|
69,290
|
|
|
|
23.1
|
%
|
Mortgage-backed securities
|
|
|
5,028
|
|
|
|
1.6
|
%
|
|
|
3,417
|
|
|
|
1.1
|
%
|
|
|
1,219
|
|
|
|
0.4
|
%
|
Corporate and other securities
|
|
|
45,047
|
|
|
|
14.4
|
%
|
|
|
41,826
|
|
|
|
13.1
|
%
|
|
|
47,782
|
|
|
|
15.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
313,106
|
|
|
|
99.7
|
%
|
|
|
316,345
|
|
|
|
99.2
|
%
|
|
|
287,184
|
|
|
|
95.7
|
%
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stocks
|
|
|
1,000
|
|
|
|
0.3
|
%
|
|
|
504
|
|
|
|
0.2
|
%
|
|
|
509
|
|
|
|
0.2
|
%
|
Common stocks
|
|
|
12
|
|
|
|
0.0
|
%
|
|
|
1,923
|
|
|
|
0.6
|
%
|
|
|
12,327
|
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
1,012
|
|
|
|
0.3
|
%
|
|
|
2,427
|
|
|
|
0.8
|
%
|
|
|
12,836
|
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
314,118
|
|
|
|
100.0
|
%
|
|
$
|
318,772
|
|
|
|
100.0
|
%
|
|
$
|
300,020
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The principal risks inherent in holding mortgage-backed securities and other pass-through
securities are prepayment and extension risks, which affect the timing of when cash flows will be
received. When interest rates decline, mortgages underlying mortgage-backed securities tend to be prepaid more rapidly than anticipated,
causing early repayments. When interest rates rise, the underlying mortgages tend to be prepaid at
a slower rate than anticipated, causing the principal repayments to be extended. Although early
prepayments may result in acceleration of income from recognition of any unamortized discount, the
proceeds typically are reinvested at a lower current yield, resulting in a net reduction of future
investment income.
The following table reflects our investment results for each year in the three-year
period ended December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Average invested assets
|
|
$
|
322,972
|
|
|
$
|
311,421
|
|
|
$
|
287,223
|
|
Net investment income
|
|
$
|
17,276
|
|
|
$
|
16,082
|
|
|
$
|
12,403
|
|
Net effective yield
|
|
|
5.3
|
%
|
|
|
5.2
|
%
|
|
|
4.3
|
%
|
Net realized capital gains
|
|
$
|
72
|
|
|
$
|
979
|
|
|
$
|
411
|
|
Effective yield including realized capital gains
|
|
|
5.4
|
%
|
|
|
5.5
|
%
|
|
|
4.5
|
%
|
22
Investment Results
The following table indicates the composition of our fixed income security portfolio (at fair
value) by rating as of December 31, 2007:
Composition of Fixed Income Security Portfolio by Rating
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Amount
|
|
|
Percent
|
|
|
(In thousands)
|
|
U.S. Government and Government Agency Fixed Income Securities
|
|
$
|
202,130
|
|
|
|
64.6
|
%
|
Aaa/ Aa
|
|
|
102,452
|
|
|
|
32.7
|
%
|
A
|
|
|
7,170
|
|
|
|
2.3
|
%
|
Baa
|
|
|
1,136
|
|
|
|
0.4
|
%
|
Ba
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
312,888
|
|
|
|
100
|
%
|
|
|
|
|
|
|
Moodys rating system utilizes nine symbols to indicate the relative investment quality of a
rated bond. Aaa rated bonds are judged to be of the best quality and are considered to carry the
smallest degree of investment risk. Aa rated bonds are also judged to be of high quality by all
standards. Together with Aaa rated bonds, these bonds comprise what are generally known as
high-grade bonds. Bonds rated A possess many favorable investment attributes and are
considered to be upper medium grade obligations. Baa rated bonds are considered as medium grade
obligations; they are neither highly protected nor inadequately secured. Bonds rated Ba or lower
(those rated B, Caa, Ca and C) are considered to be too speculative to be of investment
quality.
The Securities Valuation Office of the NAIC evaluates all public and private bonds
purchased as investments by insurance companies. The Securities Valuation Office assigns one of six
investment categories to each security it reviews. Category 1 is the highest quality rating and
Category 6 is the lowest. Categories 1 and 2 are the equivalent of investment grade debt as defined
by rating agencies such as Standard & Poors and Moodys, while Categories 3-6 are the equivalent
of below investment grade securities. Securities Valuation Office ratings are reviewed at least
annually. At December 31, 2007, all but one of our fixed maturity investments were rated
Category 1, the highest rating assigned by the Securities Valuation Office. The other security was
rated Category 2.
The following table indicates the composition of our fixed income security portfolio (at
fair value) by time to maturity as of December 31, 2007.
Composition of Fixed Income Security Portfolio by Maturity
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Amount
|
|
|
Percent
|
|
|
(In thousands)
|
|
1 year or less
|
|
$
|
5,902
|
|
|
|
1.9
|
%
|
Over 1 year through 5 years
|
|
|
25,261
|
|
|
|
8.1
|
%
|
Over 5 years through 10 years
|
|
|
190,617
|
|
|
|
60.9
|
%
|
Over 10 years through 20 years
|
|
|
85,857
|
|
|
|
27.4
|
%
|
Over 20 years
|
|
|
223
|
|
|
|
.1
|
%
|
Mortgage-backed securities(1)
|
|
|
5,028
|
|
|
|
1.6
|
%
|
|
|
|
|
|
|
Total
|
|
$
|
312,888
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Actual maturities of mortgage-backed securities may differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties. Prepayment rates are determined by a number of factors
that cannot be predicted with certainty, including the relative
sensitivity of the underlying mortgages or other collateral to
changes in interest rates, a variety of economic, geographic and
other factors, and the repayment priority of the securities in
the overall securitization structures.
|
23
Competition
The property and casualty insurance business is highly competitive and most established
companies in the field have greater financial resources, larger and more experienced agency
organizations, and longer relationships with agency and sales organizations and insureds than we
can expect to have for a number of years. As a result, established insurance companies have many
competitive advantages over us. We compete with both large national writers and smaller regional
companies.
Our competitors include other companies which, like us, serve the independent agency
market, as well as companies which sell insurance directly to customers. Based on data of A.M.
Best, we estimate that 40% of the property and casualty insurance direct written premiums in the
State of New Jersey in 2006 were written through direct marketing channels. Direct writers may have
certain competitive advantages over agency writers, including increased name recognition, loyalty
of the customer base to the insurers rather than to independent agencies and, potentially, lower
cost structures. A material reduction in the amount of business independent agents sell would
adversely affect us. In the past, competition in the New Jersey personal auto market has included
significant price competition, and there can be no assurance that these conditions will not recur.
We and others compete on the basis of product portfolio, product pricing, and the commissions and
other cash and non-cash incentives provided to agents. Although a number of national insurers that
are much larger than we are do not currently compete in a material way in the New Jersey property
and casualty market, if one or more of these companies decide to aggressively enter the market it
could have a material adverse effect on us. These companies include some that would be able to
sustain significant losses in order to acquire market share, as well as others which use
distribution methods that compete with the independent agent channel. There can be no assurance
that we will be able to compete effectively against these companies in the future.
Our principal competitor which serves the independent agency market and offers a
packaged personal lines property and casualty insurance product, is Encompass Insurance (an
affiliate of Allstate Insurance). Other competitors include First Trenton and Palisades Insurance.
In addition, we compete with companies such as Chubb Insurance that also offer a packaged personal
lines property and casualty insurance product.
The New Jersey private passenger auto insurance market has become more competitive in
recent years. In August 2003, Mercury General entered the New Jersey private passenger auto
insurance market. In August 2004, GEICO re-entered the New Jersey private passenger auto insurance
market and in October 2005, Progressive Casualty Insurance Company entered the New Jersey private
passenger auto insurance market. We believe this supports our view that current market conditions
in New Jersey for private passenger auto insurance companies have improved. However, competition,
especially from larger, more established insurers such as GEICO and Progressive, could cause
premium rate reductions, reduced profits or losses, or loss of market share, any of which could
have a material adverse effect on our business, results of operations and financial condition.
Although we compete with Mercury General, GEICO and Progressive, we believe our packaged High
Proformance Policy, which can include auto, home, boat and excess on one policy, provides us with a
competitive advantage as Mercury General, GEICO and Progressive do not offer packaged policies.
Ratings
One of the key comparisons between insurers is the relative rating by A.M. Best. A.M.
Best, which rates insurance companies based on factors of concern to policyholders, currently
assigns Proformance a secure B++ (Very Good) rating. Such rating is the fifth highest rating of
15 rating levels that A.M. Best assigns to insurance companies, which currently range from A++
(Superior) to D (Poor). Publications of A.M. Best indicate that the B++ rating is assigned to
those companies that in A.M. Bests opinion have a good ability to meet their current obligations
to policyholders, but are financially vulnerable to adverse changes in underwriting and economic
conditions. In evaluating a companys financial and operating performance, A.M. Best reviews the
companys profitability, leverage and liquidity, as well as its book of business, the adequacy and
soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of
its loss reserves, the adequacy of its surplus, its capital structure, the experience and
competence of its management and its market presence. A.M. Bests ratings reflect its opinion of an
insurance companys financial strength, operating performance and ability to meet its obligations
to policyholders and are not evaluations directed to purchasers of an insurance companys
securities.
On November 20, 2007, A.M. Best announced that it has placed the financial strength rating of
B++ (Very Good) and the issuer credit rating (ICR) of bbb of Proformance Insurance Company under
review with negative
24
implications. Concurrently, A.M. Best placed the ICR of bb of Proformances holding company,
National Atlantic Holdings Corporation under review with negative implications. A.M. Best stated
that its rating action was based on the ineffectiveness of certain oversight processes with respect
to Proformances bodily injury claims function and the subsequent deterioration in A.M. Bests view
of risk-adjusted capitalization. During the third quarter of 2007, management determined that
Proformances procedures related to bodily injury claims handling and reserving were not applied
consistently throughout the organization, which resulted in a significant increase in loss reserves
for the third quarter of 2007. Consequently, A.M. Best stated that risk-adjusted capitalization
declined to a level below the minimum required for Proformances ratings.
In addition, Proformance is rated A by Demotech, Inc. Demotech provides financial
stability ratings of property and casualty insurers. In addition to A.M. Best, Demotech is the only
other authorized rating agency recognized by federally insured lending institutions, such as
mortgage companies. Mortgage companies, as a condition to issuing a mortgage, generally require
borrowers to obtain adequate homeowners insurance. The mortgage companies often refer to Demotechs
financial stability rating prior to issuing a mortgage. We believe the A rating assigned by
Demotech is beneficial in connection with our homeowners and other lines of business.
Publications of Demotech indicate that its rating process provides an objective baseline
for assessing the solvency of an insurer. A Demotech financial stability rating summarizes its
opinion as to the insurers ability to insulate itself from the business cycle that exists in the
general economy as well as the underwriting cycle that exists in the industry.
An A rating is Demotechs third highest rating out of six possible rating
classifications for insurers with complete financial data. An A rating is assigned to insurers
that in Demotechs opinion possess exceptional financial stability related to maintaining positive
surplus as regards policyholders, regardless of the severity of a general economic downturn or
deterioration in the insurance cycle.
Our A.M. Best and our Demotech ratings are subject to change and are not recommendations
to buy, sell or hold securities. Any future decrease in our ratings could affect our competitive
position.
Properties
We are headquartered at 4 Paragon Way, Freehold, New Jersey. NAHC leases approximately
45,000 square feet of office space for a term ending June 1, 2009. NAHCs subsidiaries share the
cost of this space under the cost sharing agreement that they entered into with NAHC. On
September 11, 2004, we leased an additional 16,000 square feet of space at 3 Paragon Way, Freehold,
New Jersey.
Employees
As of December 31, 2007, we had 248 employees, of which 203 were employed by
Proformance, 30 were employed by Riverview, 8 were employed by NAIA and 7 were employed by NAHC.
None of our employees are represented by a labor union or are covered by collective bargaining
agreements. We have not experienced any labor disputes or work stoppages and we consider our
employee relations to be good.
Legal Proceedings
Proformance is party to a number of lawsuits arising in the ordinary course of its
insurance business. We believe that the ultimate resolution of these lawsuits will not,
individually or in the aggregate, have a material adverse effect on our consolidated financial
statements. We believe that the outcomes of most of these lawsuits will be favorable to us. With
respect to those lawsuits for which the outcome is not favorable to us, we believe that we have
adequate reserves to cover any losses we may incur. Other than these lawsuits, we are not involved
in any legal proceedings.
We are subject to regulation by the NJDOBI, and we must obtain prior approval for
certain corporate actions. We must comply with laws and regulations involving:
|
|
|
Transactions between an insurance company and any of its affiliates;
|
|
|
|
|
The payment of dividends;
|
|
|
|
|
The acquisition of an insurance company or of any company controlling an insurance company;
|
25
|
|
|
Approval or filing of premium rates and policy forms;
|
|
|
|
|
Solvency standards;
|
|
|
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Minimum amounts of capital and policyholders surplus which must be maintained;
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Limitations on types and amounts of investments;
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Restrictions on the size of risks which may be insured by a single company;
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Limitation of the right to cancel or non-renew policies in some lines;
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Regulation of the right to withdraw from markets or terminate involvement with agencies;
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Requirements to participate in residual markets;
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Licensing of insurers and agents;
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Deposits of securities for the benefit of policyholders;
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Reporting with respect to our financial condition, including the adequacy of our reserves
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Unfair trade and claims practices; and
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The type of accounting we must use.
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In addition, insurance department examiners from New Jersey perform periodic financial and
market conduct examinations of insurance companies. Such regulation is generally intended for the
protection of policyholders rather than security holders.
Insurance Holding Company Regulation.
Our principal operating subsidiary, Proformance,
is an insurance company, and therefore we are subject to certain laws and regulations in New Jersey
regulating insurance holding company systems. These laws require that we file annually a
registration statement with the Commissioner that discloses the identity, financial condition,
capital structure, ownership and management of each entity within our corporate structure and any
transactions among the members of our holding company system. In some instances, we must obtain the
prior approval of the Commissioner for material transactions between our insurance subsidiary and
other members of our holding company system. These holding company statutes also require, among
other things, prior approval of the payment of extraordinary dividends or distributions and any
acquisition of control of a domestic insurer.
Insurance Regulation Concerning Dividends.
We rely on dividends from Proformance for our
cash requirements. The insurance holding company law of New Jersey requires notice to the
Commissioner of any dividend to the shareholders of an insurance company. Proformance may not make
an extraordinary dividend until 30 days after the Commissioner has received notice of the
intended dividend and has not objected or has approved it in such time. An extraordinary dividend
is defined as any dividend or distribution whose fair market value together with that of other
distributions made within the preceding 12 months exceeds the greater of 10% of the insurers
surplus as of the preceding December 31, or the insurers net income (excluding realized capital
gains) for the 12-month period ending on the preceding December 31, in each case determined in
accordance with statutory accounting practices. Under New Jersey law, an insurer may pay dividends
that are not considered extraordinary only from its unassigned surplus, also known as its earned
surplus. The insurers remaining surplus must be both reasonable in relation to its outstanding
liabilities and adequate to its financial needs following payment of any dividend or distribution
to shareholders. As of December 31, 2007, Proformance is not permitted to pay dividends without the
approval of the Commissioner.
Acquisition of Control of a New Jersey Domiciled Insurance Company.
New Jersey law
requires prior approval by the Commissioner of any acquisition of control of an insurance company
that is domiciled in New Jersey. That law presumes that control exists where any person, directly
or indirectly, owns, controls, holds the power to vote or holds proxies representing 10% or more of
our outstanding voting stock. Even persons who do not acquire beneficial ownership of more than 10%
of the outstanding shares of our common stock may be deemed to have acquired control if the
Commission determines that control exists in fact. Any purchaser of shares of common stock
representing 10% or more of the voting power of our capital stock will be presumed to have acquired
control of our New Jersey insurance subsidiary unless, following application by that purchaser, the
Commissioner determines that the acquisition
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does not constitute a change of control or is otherwise not subject to regulatory review. These
requirements may deter, delay, or prevent transactions affecting the control of or the ownership of
our common stock, including transactions that could be advantageous to our shareholders.
Protection against Insurer Insolvency.
New Jersey law requires that property and
casualty insurers licensed to do business in New Jersey participate in the New Jersey
Property-Liability Insurance Guaranty Association, which we refer to as NJPLIGA. NJPLIGA must pay
any claim up to $300,000 of a policyholder of an insolvent insurer if the claim existed prior to
the declaration of insolvency or arose within 90 days after the declaration of insolvency. Members
of NJPLIGA are assessed the amount NJPLIGA deems necessary to pay its obligations and its expenses
in connection with handling covered claims. Subject to certain exceptions, assessments are made in
the proportion that each members net direct written premiums for the prior calendar year for all
property and casualty lines bear to the corresponding net direct written premiums for NJPLIGA
members for the same period. By statute, no insurer in New Jersey may be assessed in any year an
amount greater than 2% of that insurers net direct written premiums for the calendar year prior to
the assessment. In 2007, Proformance was assessed $2.0 million, as our portion of the losses due to
insolvencies of certain insurers. We anticipate that there will be additional assessments from time
to time relating to insolvencies of various insurance companies. We are allowed to re-coup these
assessments from our policyholders over time until we have recovered all such payments.
Risk-Based Capital Requirements.
The NAIC has adopted a formula and model law to
implement risk-based capital requirements for most property and casualty insurance companies, which
are designed to determine minimum capital requirements and to raise the level of protection that
statutory surplus provides for policyholder obligations. The risk-based capital formula for
property and casualty insurance companies measures three major areas of risk facing property and
casualty insurers: (i) underwriting, which encompasses the risk of adverse loss developments and
inadequate pricing; (ii) declines in asset values arising from market and/or credit risk; and
(iii) off-balance sheet risk arising from adverse experience from non-controlled assets, guarantees
for affiliates or other contingent liabilities and reserve and premium growth. Under New Jersey
law, insurers having less total adjusted capital than that required by the risk-based capital
calculation will be subject to varying degrees of regulatory action, depending on the level of
capital inadequacy.
The risk-based capital law provides four levels of regulatory action. The extent of
regulatory intervention and action increases as the level of total adjusted capital to risk-based
capital falls. The first level, the company action level as defined by the NAIC, requires an
insurer to submit a plan of corrective actions to the Commissioner if total adjusted capital falls
below 200% of the risk-based capital amount. The regulatory action level as defined by the NAIC
requires an insurer to submit a plan containing corrective actions and requires the Commissioner to
perform an examination or other analysis and issue a corrective order if total adjusted capital
falls below 150% of the risk-based capital amount. The authorized control level, as defined by the
NAIC, authorizes the Commissioner to take whatever regulatory actions he or she considers necessary
to protect the best interest of the policyholders and creditors of the insurer and the public,
which may include the actions necessary to cause the insurer to be placed under regulatory control
(i.e., rehabilitation or liquidation)
if total adjusted capital falls below 100% of the
risk-based capital amount. The fourth action level is the mandatory control level as defined by the
NAIC, which requires the Commissioner to place the insurer under regulatory control if total
adjusted capital falls below 70% of the risk-based capital amount.
The formulas have not been designed to differentiate among adequately capitalized
companies that operate with higher levels of capital. Therefore, it is inappropriate and
ineffective to use the formulas to rate or to rank these companies. As of December 31, 2007,
Proformance had total adjusted capital in excess of amounts requiring company or regulatory action
at any prescribed risk-based capital action level.
NAIC IRIS Ratios.
The NAIC has developed a set of financial relationships or tests
known as the Insurance Regulatory Information System that were designed for early identification of
companies which may require special attention or action by insurance regulatory authorities.
Insurance companies submit data annually to the NAIC which analyzes the data against defined usual
ranges. Generally, an insurance company will become subject to regulatory scrutiny if it falls
outside the usual ranges of four or more of the ratios. As of December 31, 2007, Proformance did
not fall outside of the usual range for any of the ratio tests.
Surplus and Capital Requirements.
The Commissioner has the discretionary authority, in
connection with the ongoing licensing of Proformance, to limit or prohibit the ability of
Proformance to issue new policies if, in the Commissioners judgment, Proformance is not
maintaining a minimum amount of surplus or is in hazardous financial condition. We do not believe
that the current or anticipated levels of statutory surplus of Proformance, present a material risk
that the Commissioner would limit the amount of new policies Proformance may issue.
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Regulation of Investments.
Proformance is subject to laws and regulations that require
diversification of its investment portfolio and limit the amount of investments in certain asset
categories, such as below investment grade fixed income securities, equity real estate, other
equity investments and derivatives. Failure to comply with these laws and regulations would cause
investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of
measuring surplus, and, in some instances, would require divestiture of such non-complying
investments. We believe that investments made by Proformance comply with these laws and
regulations.
Bermuda
Bermuda Restrictions on Dividend Payments.
Bermuda legislation imposes limitations on the
dividends that Mayfair may pay. Under the Bermuda Insurance Act 1978, Mayfair is required to
maintain a specified solvency margin and a minimum liquidity ratio and is prohibited from declaring
or paying any dividends if doing so would cause Mayfair to fail to meet its solvency margin and its
minimum liquidity ratio. Under the Insurance Act, Mayfair is prohibited from paying dividends of
more than 25% of its total statutory capital and surplus at the end of the previous fiscal year
unless it files an affidavit stating that the declaration of such dividends will not cause it to
fail to meet its solvency margin and minimum liquidity ratio. The Insurance Act also prohibits
Mayfair from declaring or paying dividends without the approval of the Bermuda Monetary Authority
if Mayfair fails to meet its solvency margin and minimum liquidity ratio on the last day of the
previous fiscal year. Additionally, under the Bermuda Companies Act 1981, Mayfair may declare or
pay a dividend only if it has no reasonable grounds for believing that it is, or would after the
payment be, unable to
pay its liabilities as they become due, or that the realizable value
of its assets would thereby be less than the aggregate of its liabilities and its issued share
capital and share premium accounts.
Item 1A.
Risk Factors
Numerous factors could cause our actual results to differ materially from those in the
forward-looking statements set forth in this Form 10-K and in other documents that we file with the
Securities and Exchange Commission. Those factors include the following:
Risks Related to Our Business
Because we are primarily a private passenger automobile insurance carrier, negative developments in
the economic, regulatory or competitive conditions in this industry could cause us to incur
additional costs and limit our flexibility in our underwriting process. This would reduce our
profitability and the impact of these changes would have a disproportionate effect on our ability
to operate profitably and successfully grow our business as compared to other more diversified
insurers.
For the years ended December 31, 2007, 2006 and 2005, approximately 58.5%, 65.1% and
77.0%, respectively, of our direct written premiums were generated from private passenger
automobile insurance policies. As a result of our focus on that line of business, negative
developments in the economic, competitive or regulatory conditions affecting the private passenger
automobile insurance industry could have a material adverse effect on our results of operations and
financial condition. For example, in 1998 the New Jersey legislature passed AICRA. AICRA attempted
to control consumer costs by cutting automobile insurance rates by 15%. Although AICRA attempted to
reduce costs to insurers by implementing strict measures to minimize fraud and abuse, our loss of
premiums from the mandated rate reductions was not offset by such measures. Accordingly, the impact
of this legislation reduced our profitability.
In addition, any of these or similar developments in the private passenger automobile
insurance industry would have a disproportionate effect on us, compared to more diversified
insurers that also sell a larger proportion of other types of property and casualty insurance
products.
Because we write insurance only in New Jersey, negative developments in the regulatory,
economic, demographic, competitive and weather conditions in the New Jersey market could cause us
to incur additional costs or limit our flexibility in our underwriting process and the impact of
these changes would have a disproportionate effect on us compared to insurers that operate in
multiple states.
All of our direct written premiums in 2007 were generated in New Jersey. Our revenues
and profitability are therefore subject to prevailing regulatory, economic, demographic,
competitive, weather and other conditions in New
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Jersey. Changes in any of these conditions could make it more costly or difficult for us to conduct
our business. For example, the ability of New Jersey insurers to obtain property and casualty
reinsurance at reasonable prices was limited as a result of Hurricane Andrew. Accordingly, it
became more costly for insurers to reduce risks through reinsurance. Because of the increased cost
of reinsurance, insurers were limited in their ability to operate profitably.
Adverse regulatory developments in New Jersey, such as AICRA, or others which could
include fundamental changes in the design or implementation of the New Jersey insurance regulatory
framework, could limit our ability to operate profitably by causing us to incur additional costs or
limiting our flexibility in our underwriting process. In addition, these developments would have a
disproportionate effect on us, compared to insurers which conduct operations in multiple states.
We have historically derived a substantial portion of our revenues from replacement carrier
transactions, and we may not be able to enter into those types of transactions in the future.
For the years ended December 31, 2007, 2006 and 2005, we derived no revenue from
replacement carrier transactions. Our strategy includes entering into additional replacement
carrier transactions as opportunities arise.
However, due to improvements in the New Jersey insurance market since 2005, it is not likely
that we will enter into replacement carrier transactions which have as significant an impact on our
operations or are comparable in size to those entered into prior to 2005.
We cannot be certain we will identify possible future replacement carrier transactions
with terms we view as being acceptable, or that we will be able to consummate any future
replacement carrier transactions. If we do enter into future replacement carrier transactions, we
cannot be certain as to the terms of those transactions. If we are unable to enter into future
replacement carrier transactions on terms acceptable to us, our revenues may decline. We believe
that during the current portion of the personal auto insurance cycle, which in our view is one of
growth, it may be more difficult than otherwise to identify acceptable replacement carrier
transactions.
We have exposure to claims related to severe weather conditions, which may result in an
increase in claims frequency and severity.
We are subject to claims arising out of severe weather conditions, such as rainstorms,
snowstorms and ice storms, that may have a significant effect on our results of operations and
financial condition. The incidence and severity of weather conditions are inherently unpredictable.
There is generally an increase in claims frequency and severity under the private passenger
automobile insurance we write when severe weather occurs because a higher incidence of vehicular
accidents and other insured losses tend to occur in severe weather conditions. In addition, we have
exposure to an increase in claims frequency and severity under the homeowners and other property
insurance we write because property damage may result from severe weather conditions.
Because some of our insureds live near the New Jersey coastline, we also have a
potential exposure to losses from hurricanes and major coastal storms such as Noreasters. For
example, in September 1999 we were impacted by Tropical Storm Floyd. Our direct written premiums in
1999 were approximately $40.2 million, but as a result of Tropical Storm Floyd we paid $1.1 million
in claims, of which $0.6 million was for physical damage coverage and $0.5 million was for insured
property losses.
Although we purchase catastrophe reinsurance to limit our exposure to these types of
natural catastrophes, in the event of a major catastrophe resulting in losses to us in excess of
$80 million, our losses would exceed the limits of our reinsurance coverage.
If we are not able to attract and retain independent agents, we would be limited in our
ability to sell our insurance products.
We market our insurance solely through independent agents. We do not rely on, nor are we
dependent upon, any one particular agent to sell our products. We compete with other insurance
carriers for the business of independent agents. Our agents also offer the products of our
competitors, some of which offer a larger variety of products, lower prices for insurance coverage
or higher commissions. Changes in commissions, services or products offered by our competitors
could make it harder for us to attract and retain independent agents to sell our insurance
products.
Established competitors with greater resources may make it difficult for us to market our
products effectively and
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offer our products at a profit.
In the past, competition in the New Jersey personal auto insurance market has included
significant price competition and there can be no assurance that these conditions will not recur.
Although we believe that price competition has not been as intense as in other states, in 1997 and
1998 price competition in the New Jersey personal lines property casualty insurance market
increased dramatically. As a result of the price competition during these periods, our profits were
reduced because we wrote policies with lower premiums and on terms less favorable to us. In
addition, the New Jersey commercial lines property casualty insurance market faced intense price
competition during 1998 and 1999. However, since the New Jersey commercial lines market is not
subject to some of the more burdensome regulatory aspects of the personal lines market, such as the
take
all comers requirement and the price reductions mandated by AICRA, our profits on
our commercial lines business were not as heavily impacted.
We and other insurance companies also compete on the basis of the commissions and other
cash and non-cash incentives provided to agents. Although a number of national insurers that are
much larger than we are do not currently compete in a material way in the New Jersey personal auto
insurance market, if one or more of these companies decide to aggressively enter the market, it
could reduce our market share in New Jersey and thereby have a material adverse effect on us. These
companies include some that would be able to sustain significant losses in order to acquire market
share, as well as others which use distribution methods that compete with the independent agent
channel we utilize.
Our principal competitor which serves the independent agency market and offers a
packaged personal lines property and casualty insurance product is Encompass Insurance (an
affiliate of Allstate Insurance). Other competitors in the personal lines insurance business
include First Trenton and Palisades Insurance. According to the NJDOBI statistics, as of December
31, 2006, based on vehicles in force, the respective share of the personal auto market, excluding
policies written in urban enterprise zones, of our principal competitors, Allstate/ Encompass
Insurance, Travelers of New Jersey and Palisades Insurance, were 15.71%, 5.07% and 2.75%,
respectively. Our share of the personal auto market as of such dates was 1.85%.
Although somewhat less competitive than other markets, the New Jersey private passenger
auto insurance market has become more competitive in recent years. We face significant competition
from large, well-capitalized national companies and we expect that there may be, from time to time,
further competition from market entrants. In August 2003, Mercury General entered the New Jersey
private passenger auto insurance market. In addition, in August 2004, GEICO re-entered the New
Jersey private passenger auto insurance market and in October 2005, Progressive Casualty Insurance
Company entered the New Jersey private passenger auto insurance market. Many of these companies may
have greater financial, marketing and management resources than we have. In addition, competitors
may offer consumers combinations of auto policies and other insurance products or financial
services which we do not offer. We could be adversely affected by a loss of business to competitors
offering similar insurance products at lower prices or offering bundled products or services and by
other competitor initiatives. Competition, especially from larger, more established insurers such
as GEICO and Progressive, could cause premium rate reductions, reduced profits or losses, or loss
of market share, any of which could have a material adverse effect on our business, results of
operations and financial condition.
Our failure to maintain a commercially acceptable financial strength rating would
significantly and negatively affect our ability to implement our business strategies and sell our
products.
A.M. Best has currently assigned Proformance a secure B++ (Very Good) rating. A B++
rating is A.M. Bests fifth highest rating out of 15 possible rating classifications for insurance
companies. A B++ rating is assigned to insurers that in A.M. Bests opinion have a good ability
to meet their current obligations to policyholders, but are financially vulnerable to adverse
changes in underwriting and economic conditions. A.M. Best bases its ratings on factors that
concern policyholders and not upon factors concerning investor protection. An important factor in
an insurers ability to compete effectively is its A.M. Best rating. Proformances A.M. Best rating
is lower than those of some of its competitors.
On November 20, 2007, A.M. Best announced that it has placed the financial strength rating of
B++ (Very Good) and the issuer credit rating (ICR) of bbb of Proformance Insurance Company under
review with negative implications. Concurrently, A.M. Best placed the ICR of bb of Proformances
holding company, National Atlantic Holdings Corporation under review with negative implications.
A.M. Best stated that its rating action was based on the ineffectiveness of certain oversight
processes with respect to Proformances bodily injury claims function and the
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subsequent deterioration in A.M. Bests view of risk-adjusted capitalization. During the third
quarter of 2007, management determined that Proformances procedures related to bodily injury
claims handling and reserving were not applied consistently throughout the organization, which
resulted in a significant increase in loss reserves for the third quarter of 2007. Consequently,
A.M. Best stated that risk-adjusted capitalization declined to a level below the minimum required
for Proformances ratings.
A decrease in our rating as assigned by A.M Best could limit our ability to operate
profitably and may have a significant effect on our results of operations and financial condition.
In addition, Proformance is rated A by Demotech, Inc. Demotech provides financial
stability ratings of property and casualty insurers. In addition to A.M. Best, Demotech is the only
other authorized rating agency recognized by federally insured lending institutions, such as
mortgage companies. Mortgage companies, as a condition to issuing a mortgage, generally require
borrowers to obtain adequate homeowners insurance. The mortgage companies often refer to Demotechs
financial stability rating prior to issuing a mortgage. We believe the A rating assigned by
Demotech is beneficial in connection with our homeowners business.
Publications of Demotech indicate that its rating process provides an objective baseline
for assessing the solvency of an insurer. A Demotech financial stability rating summarizes its
opinion as to the insurers ability to insulate itself from the business cycle that exists in the
general economy as well as the underwriting cycle that exists in the industry.
An A rating is Demotechs third highest rating out of six possible rating
classifications for insurers with complete financial data. An A rating is assigned to insurers
that in Demotechs opinion possess exceptional financial stability related to maintaining positive
surplus as regards policyholders, regardless of the severity of a general economic downturn or
deterioration in the insurance cycle.
Our A.M. Best and our Demotech ratings are subject to change and are not recommendations
to buy, sell or hold securities. Any future decrease in our ratings could affect our ability to
sell our products. See Business Ratings.
The agreements that we have entered into with our agents do not contain provisions that
would permit them to terminate the agreement in the event of a downgrade of our ratings. In
addition, our reinsurance agreements with third party reinsurers do not require us to transfer
funds into trust or otherwise provide security for the benefit of the reinsurers in the event of a
downgrade of our ratings.
If our losses and loss adjustment expenses exceed our reserves, we would have to increase our
reserves which would lower our earnings.
The reserves for losses and loss adjustment expenses that we have established are
estimates of amounts needed to pay reported and unreported claims and related expenses based on
facts and circumstances known to us as of the time we established the reserves. Reserves are based
on historical claims information, regulatory change, court decision, industry statistics and other
factors. The establishment of appropriate reserves is an inherently uncertain process. If our
reserves are inadequate and are increased, we would have to treat the amount of such increase as a
charge to our earnings in the period that the deficiency is recognized. As a result of these
factors, there can be no assurance that our ultimate liability will not materially exceed our
reserves, thereby reducing our profitability.
Due to the inherent uncertainty of estimating reserves, it has been necessary, and may
over time continue to be necessary, to revise estimated future liabilities as reflected in our
reserves for claims and policy expenses. For the year ended December 31, 2007, we increased
reserves for prior years by $19.6 million. This increase was primarily due to increases in the
prior year reserves for auto bodily injury coverage which increased by $22.2 million. This
increase was due to an inconsistent implementation of a revised claim reserving policy that was
uncovered in the third quarter of 2007. Prior year reserves for other liability increased by $3.6
million. This was offset by favorable development of $4.6 million in no-fault coverages and $1.6
million in commercial auto liability. For the year ended December 31, 2006, reserves decreased by
$28.0 million primarily due to a decrease in the loss and loss adjustment expense ratio for the
same period. This decrease can be attributed to a decline in earned premium, a reduction in claim
frequency in private passenger automobile coverage and significant growth in commercial lines
business, which in 2006, have exhibited lower loss ratios. For the year ended December 31, 2006,
prior year reserves increased by $0.02 million. This increase is due to favorable development in
bodily injury and no-fault coverages offset by a reduction in ceded loss estimates for prior years.
For the year ended December 31, 2005, we increased reserves for prior years by $10.1 million. This
increase was due to (i) increases in average severity for Personal Injury Protection (No-fault)
losses
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of $9.4 million (ii) higher Commercial Auto Liability projected loss ratios for 2002-2004 due to
the fact that actual loss development was higher than expected for those years, resulting in an
increase of $1.8 million and (iii) Homeowners losses of $0.6 million and Other Liability losses of
$1.6 million. This development was partially offset by continued favorable trends in loss
development for Property Damage losses ($1.6 million), Auto Physical Damage losses ($1.2 million),
and Bodily Injury losses of ($0.5 million), as reported claims frequency has dropped significantly
and we have reduced our projected loss ratios in recognition of this trend. For the year ended
December 31, 2004, we reduced reserves for prior years by $0.7 million because our actual loss
experience observed during the period, especially during the fourth quarter of 2004, was slightly
lower than expected due to a reduction in the frequency of claims reported during the fourth
quarter of 2004. Historically, Proformances reserves have shown a deficiency in every year from
1995 through 2006.
The historic development of reserves for losses and loss adjustment expenses may not
necessarily reflect future trends in the development of these amounts. Accordingly, it is not
appropriate to extrapolate redundancies or deficiencies based on historical information. See
Business Reserves.
If we lose key current personnel or are unable to recruit new qualified personnel, we could be
prevented from implementing our business strategy and our ability to capitalize on market
opportunities, grow our business and operate efficiently and profitably could be negatively
affected.
Our future success depends significantly upon the efforts of certain key management
personnel, including James V. Gorman, Chairman and Chief Executive Officer of NAHC and Proformance,
Peter A. Capello, Jr., Chief Financial Officer of Proformance, Frank J. Prudente, Executive Vice
President, Treasurer and Chief Financial Officer of NAHC, John E. Scanlan, Senior Vice President of
Proformance, Bruce C. Bassman, Chief Operating Officer and Chief Actuarial Officer of NAHC, and
Douglas A. Wheeler, Esq. General Counsel of NAHC and Proformance. We maintain a $2.5 million key
man life insurance policy on Mr. Gorman, as well as on other of our senior executives, the proceeds
of which are payable to us. NAHC has entered into employment agreements with James V. Gorman, Frank
J. Prudente, John E. Scanlan, and Bruce C. Bassman. In addition, Proformance has entered into
employment agreements with Peter A. Cappello, Jr. and Douglas A. Wheeler, Esq. Although we are not
aware of any impending departures or retirements, the loss of key personnel could prevent us from
fully implementing our business strategy and could negatively affect our ability to capitalize on
market opportunities, grow our business or operate efficiently and profitably. 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.
Market fluctuations and changes in interest rates could reduce the value of our investment
portfolio and our asset base which would limit our ability to underwrite more business.
Our results of operations depend in part on the performance of our invested assets. As
of December 31, 2007, 99.7% of our investment portfolio was invested in fixed income securities and
0.3% was invested in equity securities. As of December 31, 2007, approximately 64.6% of our fixed
income security portfolio was invested in U.S. government and government agency fixed income
securities, approximately 32.7% was invested in fixed income securities rated Aaa/Aa by Moodys
Investor Service, which we refer to as Moodys, approximately 2.3% was invested in fixed income
securities rated A by Moodys, and approximately 0.4% was invested in fixed income securities
rated Baa by Moodys. Certain risks are inherent in connection with fixed income securities
including loss upon default and price volatility in reaction to changes in interest rates and
general market factors. For example, the fair value of our fixed income securities can fluctuate
depending on changes in interest rates. Accordingly, changes in interest rates may result in
fluctuations in the income from, and the valuation of, our fixed income investments. Large
investments losses would significantly decrease our asset base, thereby affecting our ability to
underwrite new business. For the year ended December 31, 2007, 9.4%, or $17.3 million, of our total
revenue was derived from our invested assets.
We may not be able to successfully alleviate risk through reinsurance arrangements which could
cause us to reduce our premiums written in certain lines or could result in losses and we are
subject to credit risk with respect to our reinsurers.
In order to reduce risk and to increase our underwriting capacity, we have previously
purchased third party reinsurance. Although we expect to decrease our use of third party
reinsurance in the future, we may need to purchase additional third party reinsurance in the
future. The availability and the cost of reinsurance protection is subject to
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market conditions, which are outside of our control. As a result, we may not be able to
successfully alleviate risk through these arrangements. For example, if reinsurance capacity for
homeowners risks were reduced as a result of terrorist attacks or other causes, we may seek to
reduce the amount of homeowners business we write. In addition, we are subject to credit risk with
respect to our reinsurance because the transfer to reinsurers of insurance risks we underwrite does
not relieve us of our liability to our policyholders. A significant reinsurers insolvency,
inability or unwillingness to make payments under the terms of a reinsurance treaty could cause us
to incur losses and negatively affect our profits.
For the years ended December 31, 2007, 2006 and 2005 approximately 7.2%, 6.5% and 5.2%,
respectively, of our direct written premiums were transferred to third party reinsurers.
As of December 31, 2007, our largest reinsurance recoverables were due from QBE
Reinsurance and OdysseyRe. We do not believe we are substantially dependent on any of our third
party reinsurers. We have not experienced in the past the failure of a third party reinsurer to pay
any material claims that have been presented to the third party reinsurer.
Our agreements with our third party reinsurers do not permit the reinsurer to cancel the
reinsurance coverage mid-term in the event of any ratings downgrade of Proformance. Generally, our
reinsurance agreements are one-year agreements and are renegotiated annually. However, in the
event we were unable to reach an agreement with a current reinsurer of our business or a reinsurer
terminates our reinsurance agreement, we may encounter difficulties obtaining or negotiating
reinsurance coverage because we operate exclusively in New Jersey, a coastal state, and Proformance
is rated B++ by A.M. Best. If we were unable to maintain or obtain reinsurance coverage adequate
for our business, we would not be able to reduce our exposure to insurance risks which could cause
us to incur substantial losses and could cause us to write less new business.
Because we continue to reduce our use of third party reinsurance, we will retain more risk, which could result in more losses.
We currently use third party reinsurance primarily to increase our underwriting capacity
and to reduce our exposure to losses. See Business Reinsurance. Since we continue to reduce our
use of third party reinsurance in addition to using Mayfair, our reinsurance subsidiary, we will
retain more gross premiums written over time, but will also retain more of the related losses.
Reducing our third-party reinsurance will increase our risk and exposure to losses, which could
have a material adverse effect on our financial condition and results of operations.
We rely on our information technology and telecommunication systems, and the
failure of these systems could limit our ability to operate efficiently and
cause us to lose business.
Our business is highly dependent upon the successful and uninterrupted functioning of our
information technology and telecommunication systems. We rely on these systems to support our
direct and indirect marketing operations and our agents basic underwriting and claim-processing
efforts, as well as to process new and renewal business, provide customer service, make claims
payments, and facilitate collections and cancellations. These systems also enable us to perform
actuarial and other modeling functions necessary for underwriting and rate development. The failure
of these systems could interrupt our operations or materially impact our ability to evaluate and
write new business. In June of 2007, the Company began development of a new claims system and
premium processing system to be used in its workmans compensation line of business. We anticipate
the new system to cost approximately $250,000, of which we have capitalized and recorded as
property and equipment, $237,000 as of December 31, 2007. There is no assurance that we will
successfully complete this process or that we will not experience additional cost, implementation
delay, operation disruption or system failure in connection with this transition. In addition,
because our information technology and telecommunications systems interface with and depend on
third party systems, we could experience service denials if demand for such service exceeds
capacity or such third party systems fail or experience interruptions. If sustained or repeated, a
system failure or service denial could compromise our ability to write and process new and renewal
business, provide customer service or pay claims in a timely manner. This could cause us to lose
business. In March, 2007, The Company placed into service its new premium processing and claims
system which had been in development since December of 2004. As of December 31, 2007, we have
capitalized and recorded as property and equipment, $1,964,209 and recorded depreciation and
amortization expense related to the software in the amount of $492,253. For the years ended
December 31, 2006 and 2005, we had expensed $0 and $519,105 of the software development costs,
respectively.
33
Risks Related to Our Industry
As a result of cyclical changes, which may include periods of price
competition, excess capacity, high premium rates and shortages of underwriting
capacity in the personal auto insurance industry, our results may materially
fluctuate, affecting our ability to effectively market and price our products.
The personal auto insurance industry is historically cyclical in nature. The industry has been
characterized by periods of price competition and excess underwriting capacity followed by periods
of high premium rates and shortages of underwriting capacity. During periods of price competition
and excess capacity, such as in 1997 and 1998, our profitability is negatively impacted as we are
forced to issue insurance policies with lower premiums and on terms less favorable to us. The
personal auto insurance industry also experiences periods of higher premium rates during which we
may experience growth and increased profitability. During periods of higher premium rates or at
other times the New Jersey legislature may take action which negatively impacts our profitability.
In 1998, the New Jersey legislature adopted the AICRA in order to curtail the rising costs of
automobile insurance to New Jersey insureds. The adoption of AICRA negatively impacted our
profitability. Approximately four years ago, the New Jersey market experienced increasing bodily
injury loss costs which caused us to incur additional losses, thereby reducing our profitability.
The duration of the cycles experienced in the New Jersey personal automobile insurance industry is
subject to many variables, but historically have ranged from two to seven years. We believe the New
Jersey personal automobile market is currently in a period of growth and new competitors, such as
Mercury General, Progressive and GEICO, have entered the market. This market is exhibiting price
competition which may hinder our ability to operate profitably as we are forced to write policies
at lower premiums and on terms less favorable to us.
We expect that our business will continue to experience the effects of this cyclicality,
including periods of price competition, which, over the course of time, could result in material
fluctuations in our premium volume, revenues and expenses and make it difficult to effectively
market and price our products.
We are subject to comprehensive regulation in the State of New Jersey, particularly by the New
Jersey Department of Banking and Insurance, and we must obtain prior approval to take certain
actions which may limit our ability to take advantage of profitable opportunities.
General Regulation
We are subject to regulation by the NJDOBI, and we must obtain prior approval for certain
corporate actions. We must comply with laws and regulations involving:
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Transactions between an insurance company and any of its affiliates;
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The payment of dividends;
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The acquisition of an insurance company or of any company controlling an insurance company;
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Approval or filing of premium rates and policy forms;
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Solvency standards;
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Minimum amounts of capital and policyholders surplus which must be maintained;
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Limitations on types and amounts of investments;
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Restrictions on the size of risks which may be insured by a single company;
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Limitation of the right to cancel or non-renew policies in some lines;
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Regulation of the right to withdraw from markets or terminate involvement with agencies;
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Requirements to participate in residual markets;
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Licensing of insurers and agents;
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Deposits of securities for the benefit of policyholders;
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34
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Reporting with respect to our financial condition, including the adequacy of our reserves and provisions
for unearned premiums;
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Unfair trade and claims practices; and
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The type of accounting we must use at Proformance in order to comply with statutory reporting requirements.
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In addition, insurance department examiners from New Jersey perform periodic financial and
market conduct examinations of insurance companies. Such regulation is generally intended for the
protection of policyholders rather than security holders.
We are subject to assessments by the New Jersey Property-Liability Insurance Guaranty
Association, which assessments would reduce the capital available to us to operate our business.
New Jersey law requires that property and casualty insurers licensed to do business in New
Jersey participate in the New Jersey Property-Liability Insurance Guaranty Association, which we
refer to as NJPLIGA. NJPLIGA must pay any claim up to $300,000 of a policyholder of an insolvent
insurer if the claim existed prior to the declaration of insolvency or arose within 90 days after
the declaration of insolvency. Members of NJPLIGA are assessed the amount NJPLIGA deems necessary
to pay its obligations and its expenses in connection with handling covered claims. We are able to
recoup these assessments from our in-force policyholders. Subject to certain exceptions,
assessments are made in the proportion that each members net direct written premiums for the prior
calendar year for all property and casualty lines bear to the corresponding net direct written
premiums for NJPLIGA members for the same period. By statute, no insurer in New Jersey may be
assessed in any year an amount greater than 2% of that insurers net direct written premiums for
the calendar year prior to the assessment. In 2007, Proformance was assessed approximately
$2.0 million as its portion of the losses due to insolvencies of certain insurers. We anticipate
that there will be additional assessments from time to time relating to insolvencies of various
insurance companies. As a result of the timing difference between when we are assessed by NJPILGA
and the related funds are able to be collected from the policyholders by us, the difference between
the related receivable and payable balance could adversely impact our cash flow.
Our failure to meet risk based capital standards could subject us to examination or
corrective action by state regulators.
Proformance is subject to risk-based capital standards and other minimum capital and surplus
requirements imposed under the laws of the State of New Jersey. These risk-based capital standards,
based upon the Risk-Based Capital Model Act adopted by the NAIC, require Proformance to report its
results of risk-based capital calculations to the NJDOBI and the NAIC.
Failure to meet applicable risk-based capital requirements or minimum statutory capital
requirements could subject Proformance to further examination or corrective action imposed by state
regulators, including limitations on our writing of additional business or engaging in financing
activities, state supervision or even liquidation. Any changes in existing risk-based capital
requirements or minimum statutory capital requirements may require us to increase our statutory
capital levels, which we may be unable to do. As of December 31, 2007, Proformance maintained a
risk-based capital level in excess of the amount that would require any corrective actions on our
part.
35
The following table summarizes the risk-based capital of Proformance as of December 31,
2007, 2006 and 2005.
Proformance Insurance Company
Risk-Based Capital(1)
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As of December 31,
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2007
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2006
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2005
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Total Adjusted Capital
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$
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125,712
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$
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128,031
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$
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104,727
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Company Action Level = 200% of Authorized
Control Level
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38,806
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36,337
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58,985
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Regulatory Action Level = 150% of Authorized
Control Level
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29,105
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27,253
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44,239
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Authorized Control Level = 100% of Authorized
Control Level
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19,403
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18,168
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29,493
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Mandatory Control Level = 70% of Authorized
Control Level
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$
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13,582
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$
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12,718
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$
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20,645
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(1)
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For a description of the regulatory action that may be taken at each
level, see Business Supervision and Regulation Risk Based
Capital Requirements.
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If we fail to satisfy a sufficient number of IRIS Ratios, we would be subject to regulatory
action which could negatively affect our ability to operate our business efficiently and
profitably.
The NAIC has developed a set of financial relationships or tests known as the Insurance
Regulatory Information System, or IRIS that were designed to assist state insurance regulators in
the early identification of companies which may require special attention or action. Insurance
companies submit data annually to the NAIC which analyzes the data against defined usual ranges.
Generally, an insurance company will become subject to regulatory scrutiny if it falls outside the
usual ranges of four or more of the ratios. As of December 31, 2007, Proformance did not fall
outside of the usual range for any of the ratio tests.
New Jersey Personal Auto Insurance Regulation
We are subject to extensive regulation in the New Jersey personal auto insurance industry
which is subject to change, and we can give you no assurance that any changes in the regulations
would not significantly limit our ability to operate our business profitably.
We are subject to extensive regulation of the private passenger automobile insurance industry
in New Jersey. Such regulation is primarily for the benefit and protection of insurance
policyholders rather than shareholders, and could change at any time. Thus, government regulation,
which is subject to change, could significantly limit our profitability and may conflict with the
interests of our shareholders.
Recently, the NJDOBI proposed certain amendments to its personal auto insurance
regulations. Under the proposed regulations, New Jersey insurance companies, such as Proformance,
would be permitted to raise rates for certain drivers above limitations that are currently in place
and lower rates for certain other drivers. In addition, the proposed regulations would permit
insurance companies to use their own data to develop rating maps. The proposal would permit up to
50 rating territories across New Jersey compared to the 27 territories now recognized in New
Jersey. There can be no assurance that the proposed regulations will be adopted, nor can we be
certain how these regulations, if adopted, would impact our operations.
Recently, a number of governmental entities have launched investigations and filed
lawsuits involving certain practices in the insurance and broker industry relating to compensation
and other arrangements between brokers and insurers and their dealings with clients and insureds.
In addition, the Commissioner of the NJDOBI (whom we refer to as the Commissioner) has announced a
probe into the New Jersey insurance industry and broker practices. The
36
NJDOBI has established a task force which will work with the New Jersey Attorney Generals Office to look into
recent allegations of bid-rigging and other sales-related insurance activities. Although we believe
that these ongoing governmental investigations will not directly impact us, these investigations
could lead to regulatory or legislative changes that could affect the manner in which we conduct
our business or our profitability. Such investigations or a change in the regulatory environment
could also impact the stock prices of companies in the insurance industry such as NAHC.
The NAIC adopted model legislation in December 2004, implementing new disclosure
requirements with respect to compensation of insurance producers. The model legislation requires
that insurance producers obtain the consent of the insured and disclose to the insured, where such
producers receive any compensation from the insured, the amount of compensation from the insurer.
In those cases where the contingent commission is not known, producers would be required to provide
a reasonable estimate of the amount and method for calculating such compensation. Producers who
represent companies and do not receive compensation from the insured would have a duty to disclose
that relationship in certain circumstances. The NAIC directed its task force on broker activities
to give further consideration to the development of additional requirements for the model
legislation, such as recognition of a fiduciary responsibility of producers, disclosure of all
quotes received by a broker, and disclosures relating to agent-owned reinsurance arrangements.
There can be no assurance that the model legislation or any other legislation or regulation will be
adopted in New Jersey, nor can we be certain how such legislation or regulation, if adopted, would
impact our operations or financial condition.
We cannot be certain of the impact that the New Jersey Automobile Insurance
Competition & Choice Act or any future legislative initiatives will have on our business and
operations.
The New Jersey legislature adopted the Fair Automobile Insurance Reform Act of 1990 which
created a difficult insurance market environment and led to many insurers exiting or reducing their
auto insurance market share in New Jersey. To curtail the rising costs of automobile insurance to
consumers in New Jersey, the New Jersey legislature adopted AICRA which negatively affected the
profitability of automobile insurers in New Jersey. On June 9, 2003, the Governor of New Jersey
signed into law the New Jersey Automobile Insurance Competition & Choice Act, which we refer to as
the AICC Act. The AICC Act was enacted to bring new competition to the New Jersey auto insurance
markets and to provide consumers with choices for auto insurance. Regulatory changes adopted under
this new legislation include, but are not limited to, establishing a seven-year (replacing a
three-year) look-back period for an excess profits determination; phasing out the auto insurance
take all comers requirement (which required insurers to cover virtually all applicants);
increasing the annual expedited rate filing statewide average rate change maximum from 3% to 7%;
requiring insurers to provide three premium scenarios illustrating the effect of different coverage
choices to new applicants; establishing the Special Automobile Insurance Policy for low income
individuals; and establishing an Insurance Fraud Detection Reward Program to assist in the
prosecution of insurance frauds and permit enhanced cancellation of policies due to frauds. We
cannot be certain how these legislative changes or future legislative changes will affect our
operations, nor can we be sure whether any additional legislation would reverse the effect of the
AICC Act. The impact of these legislative changes and additional legislative changes, if any, could
reduce our profitability and limit our ability to grow our business.
We are subject to the New Jersey excess profits requirements which require us to
refund or credit excess profits to our policyholders.
Each insurer in New Jersey is required to file an annual report which includes a calculation
of statutory profits on private passenger automobile business. If the insurer has excess statutory
profits as determined by a prescribed formula, the insurer is required to submit a plan for the
approval of the Commissioner to refund or credit the excess profits to policyholders. Prior to the
AICC Act, the calculation of statutory profits was based on the three-year period immediately prior
to the report, and the amount of actuarial gain an insurer could report without being considered to
have excess profits was limited to 2.5% of its earned premium, with actuarial gain defined as
underwriting income minus 3.5% of earned premium. The AICC Act extended the time period for the
calculation of statutory profits from three years to seven years to take into account market
fluctuations over a longer period of time. The AICC Act also changed the basis for determining
actuarial gain from earned premium to policyholder surplus. The term actuarial gain now means
underwriting income minus an allowance for profit and contingencies (which shall not exceed 12% of
policyholder surplus). The Commissioner is authorized to adjust this percentage no less frequently
than biennially. The calculation of statutory profits for 2007 will not be completed until the
second quarter of 2008. Therefore, the determination as to whether we have exceeded the excess
profit threshold for 2007 will not be known until that time. However, based upon our year end 2007
results, management believes that the excess profit threshold has not been
37
exceeded. As of December 31, 2006, we did not exceed the excess profit threshold in respect to any prior look-back
period.
We are subject to New Jerseys Take All Comers requirements whereby we are not
permitted to refuse to issue policies in those rating territories to certain applicants which could
negatively impact our underwriting results.
Since 1992, with very few exceptions, auto insurers were not permitted to refuse coverage to
an eligible applicant. Under this take all comers requirement, insurers could not refuse to issue
a policy to an applicant who was deemed to be eligible if that applicant had not been convicted of
serious motor vehicle infractions such as driving while intoxicated or vehicular homicide in the
past three years. The AICC Act phases out the take all comers requirement over five years, to
become inoperative on January 1, 2009. Also, the AICC Act provides for an exemption from the take
all comers requirement for insurers that increase their private passenger auto insurance non-fleet
exposures by certain amounts. The exemption criteria are applied every six months to determine if
the insurer remains exempt. Insurers that increased their private passenger auto insurance
non-fleet exposures by 4% in a rating territory during the one-year period ended on January 1, 2005
are exempt from the take all comers requirement in that rating territory for the subsequent
six-month period, at which time the 4% standard is applied to determine if the insurer remains
exempt. Insurers that increase their private passenger auto insurance non-fleet exposures by the
following amounts in a rating territory will also be exempt from the take all comers requirement
in that rating territory, subject to review every six months, 3% in the one-year period ended
January 1, 2006, 2% in the one-year period ended January 1, 2007, and 1% in the one-year period
ending January 1, 2008.
We are subject to New Jerseys urban enterprise zone requirements. Unless we write
enough business in designated urban enterprise zones, we may be assigned business in those zones
by the State of New Jersey which could negatively impact our underwriting results.
New Jersey law requires auto insurers to have the same proportionate share of business in
designated urban enterprise zones across the state as is equal to their proportionate share of
the auto insurance market in the state as a whole. If an insurer does not achieve its minimum
requirements, it may be assigned business by the state to fill such requirements, which tends to be
unprofitable business. As of December 31, 2007, Proformance satisfies its requirements in each
urban enterprise zone primarily as a result of voluntary writings and the influx of policies from
our replacement carrier transactions. There can be no assurance that Proformance will continue to
satisfy its requirements in the future, in which case it may be assigned business by the state,
which could have a negative effect on our underwriting results.
Because we are unable to predict with certainty changes in the political, economic or
regulatory environments in New Jersey in the future, there can be no assurance that existing
insurance-related laws and regulations will not become more restrictive in the future or that new
restrictive laws or regulations will not be enacted and, therefore, it is not possible to predict
the potential effects of these laws and regulations on us. See Business General Regulation.
The continued threat of terrorism and ongoing military and other actions may result in
decreases in our net income, revenue and assets under management and may adversely affect our
investment portfolio.
The continued threat of terrorism, both within the United States and abroad, and the
ongoing 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, 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 Proformance, as well as a decrease in Proformances
surplus and net income and our consolidated stockholders equity, net income and/or revenue. The
Terrorism Risk Insurance Act of 2002, which was extended and amended by the Terrorism Risk
Insurance Extension Act of 2005, requires that some coverage for terrorist acts be offered by
primary property and casualty insurers such as Proformance and provides federal assistance for
recovery of claims through 2007.
In addition, some of the assets in our investment portfolio may be adversely 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. The assets in our equity
portfolio that we believe may be adversely affected based on threats of terrorism and increased
security measures are comprised principally of equity securities of companies in the energy,
insurance and transportation sectors. As of December 31, 2007, our equity portfolio had a current
fair value of $1.0 million. The equity portfolio constituted approximately 0.3% of our total
investment portfolio at that date. Our
38
equity portfolio at December 31, 2007 did not include any insurance, energy or transportation stocks.
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 potential decreased 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 cannot assure you 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.
Changes in insurance industry practices and regulatory, judicial and consumer conditions and
class action litigation are continually emerging in the automobile insurance industry, and these
new issues could adversely impact our revenues or our methods of doing business.
As automobile insurance industry practices and regulatory, judicial and consumer
conditions change, unexpected and unintended issues related to pricing, claims, coverages,
financing and business practices may emerge. The resolution and implication of these issues can
have an adverse effect on our business by changing the way we price our products, by extending
coverage beyond our underwriting intent, or by increasing the size of claims. For example, one
emerging issue in New Jersey relates to the judicial interpretation of New Jerseys no-fault and
uninsured motorist statutes. Since we have underwritten and priced our products based on current
judicial interpretations of New Jerseys no-fault and uninsured motorist statute, any changes in
the judicial interpretations may be inconsistent with our underwriting and pricing assumptions
which could cause us to incur more losses than we anticipated on those products. For example, on
June 14, 2005, the New Jersey Supreme Court in
Diprospero v. Penn, et. al.
interpreted the States
No-Fault Law, to allow non-economic pain and suffering lawsuits for automobile accident injuries
that are permanent but do not have a serious lifestyle impact. Absent a need to demonstrate both
serious lifestyle impact and permanent injuries, we expect an increase in the number of lawsuits
for minor injuries.
Recent court decisions and legislative activity may increase our exposure for litigation
claims. In some cases, substantial non-economic, treble or punitive damages may be sought. The loss
of even one claim, if it results in a significant punitive damages award, could significantly
worsen our financial condition or results of operations. This risk of potential liability may make
reasonable settlements of claims more difficult to obtain.
Risks Related to Our Common Stock
We have principal shareholders who have the ability to exert significant influence over our
operations, including controlling the election of directors.
As of December 31, 2007, James V. Gorman beneficially owned approximately 14.13% of the
total outstanding common stock of NAHC on a fully diluted basis. Mr. Gorman is also Chairman of the
Board of Directors and Chief Executive Officer of NAHC and Proformance. Until such time as
Mr. Gorman sells or disposes all or most of the common stock he holds, he would have the ability to
exert significant influence over our policies and affairs, including election of our directors and
significant corporation transactions. Mr. Gormans interests may differ from the interests of our
other shareholders.
As a holding company, NAHC is dependent on the results of operations of its operating
subsidiaries, particularly Proformance, and the ability of Proformance to pay a dividend to us is
limited by the insurance laws and regulations of New Jersey.
NAHC is a company and a legal entity separate and distinct from its subsidiaries,
including Proformance. As a holding company without significant operations of its own, the
principal sources of NAHCs funds are dividends and other distributions from its subsidiaries. Our
rights, and consequently your rights as shareholders, to participate in any distribution of assets
of Proformance are subject to prior claims of policyholders,
creditors and preferred
shareholders, if any, of Proformance. Consequently, our ability to pay debts, expenses and cash
dividends to our shareholders may be limited.
The payment of dividends and other distributions to NAHC by Proformance is regulated by
New Jersey insurance law and regulations. In general, dividends in excess of prescribed limits are
deemed extraordinary and require prior
39
insurance regulatory approval. See Business General Regulation Insurance Regulation Concerning Dividends.
Under New Jersey law, an insurer may pay dividends that are not considered extraordinary only from
its unassigned surplus, also known as its earned surplus. As of December 31, 2007, Proformance is
not permitted to pay dividends without the approval of the Commissioner as it has negative
unassigned surplus of $1.8 million. Pursuant to statutory accounting principles, net income or
loss from operations flows through the line item entitled unassigned surplus funds on
Proformances statutory surplus statement.
We believe that the current level of cash flow from operations provides us with
sufficient liquidity to meet our operating needs over the next 12 months. We expect to be able to
continue to meet our operating needs after the next 12 months from internally generated funds.
Since our ability to meet our obligations in the long term (beyond such 12-month period) is
dependent upon such factors as market changes, insurance regulatory changes and economic
conditions, we can give you no assurance that the available net cash flow will be sufficient to
meet our operating needs.
There are anti-takeover provisions contained in our organizational documents and in laws of
the State of New Jersey that could delay or impede the removal of our directors and management and
could make a merger, tender offer or proxy contest involving us more difficult, or could discourage
a third party from attempting to acquire control of us, even if such a transaction were beneficial
to the interest of our shareholders.
Our organizational documents and the New Jersey Business Corporation Act contain certain
provisions that could delay or impede the removal of directors and management and could make a
merger, tender offer or proxy contest involving us more difficult, or could discourage a third
party from attempting to acquire control of us, even if such a transaction were beneficial to the
interest of our shareholders. Our organizational documents have authorized 10,000,000 shares of
preferred stock, which we could issue without further shareholder approval and upon such terms and
conditions, and having such rights, privileges and preferences, as our Board of Directors may
determine. The issuance of preferred stock may have the effect of delaying or preventing a change
of control. For example, if in the due exercise of its fiduciary obligations, our Board of
Directors were to determine that a takeover proposal is not in our best interests, our Board of
Directors could cause shares of preferred stock to be issued without shareholder approval in one or
more private offerings or other transactions that might dilute the voting or other rights of the
proposed acquirer or insurgent shareholder or shareholder group. Such preferred stock could also
have the right to vote separately as a class with respect to a merger, takeover or other
significant corporate transactions. We have no current plans to issue any preferred stock. In
addition, our organizational documents provide for a classified Board of Directors with staggered
terms, provide that directors may be removed only for cause, prohibit shareholders from taking
action by written consent, prohibit shareholders from calling a special meeting of shareholders and
require advance notice of nominations for election to the Board of Directors or for proposing
business that can be acted upon by shareholders. These provisions could delay or impede the removal
of directors and management and could make a merger, tender offer or proxy contest involving us
more difficult.
We are also subject to Section 14A:10A-4 of the New Jersey Shareholders Protection Act,
which we refer to as the Protection Act, which prohibits certain New Jersey corporations from
engaging in business combinations (including mergers, consolidations, significant asset
dispositions and certain stock issuances) with any interested shareholder (defined to include,
among others, any person that becomes a beneficial owner of 10% or more of the affected
corporations voting power) for five years after such person becomes an interested shareholder,
unless the business combination is approved by the Board of Directors of the corporation prior to
the date the shareholder became an interested shareholder.
In addition, Section 14A:10A-5 of the Protection Act prohibits any business combination at any
time with an interested shareholder other than a transaction (i) that is approved by the Board of
Directors of the corporation prior to the date the interested shareholder became an interested
shareholder, or (ii) that is approved by the affirmative vote of the holders of two-thirds of the
voting stock not beneficially owned by the interested shareholder, or (iii) in which the
corporations common shareholders receive payment for their shares that meets certain fair price
standards prescribed in the statute. These provisions could have the effect of delaying, deferring
or preventing a change in control of us and prevent our shareholders from receiving the benefit of
any premium over the market price of our common stock offered by a bidder in a potential takeover.
Even in the absence of a takeover attempt, the existence of these provisions may adversely affect
the prevailing market price of our common stock if they are viewed as discouraging takeover
attempts in the future.
New Jersey insurance laws prohibit any person from acquiring control of us, and thus
indirect control of Proformance, without the prior approval of the Commissioner. Control is
presumed to exist when any person, directly
40
or indirectly, owns, controls, holds the power to vote or holds proxies representing 10% or more of our outstanding
voting stock. Even persons who do not acquire beneficial ownership of more than 10% of the
outstanding shares of our voting stock may be deemed to have acquired such control if the
Commissioner determines that such control exists in fact. Therefore, any person seeking to acquire
a controlling interest in us would face regulatory obstacles which could delay, deter or prevent an
acquisition that shareholders might consider in their best interests.
We may require additional capital in the future, which may not be available or may only be
available on unfavorable terms.
Our future capital requirements depend on many factors, including our ability to write
new business successfully and to establish premium rates and reserves at levels sufficient to cover
losses. Our additional needs for capital will depend on our actual claims experience, especially
with respect to any catastrophic or other unusual events.
It is our objective to maintain sufficient capital so that Proformance will have a ratio
of direct written premiums to statutory surplus of no more than 3 to 1. As of December 31, 2007,
the ratio was 1.42 to 1.0. We believe that the current level of cash flow from operations, as well
as the net proceeds from our initial public offering, provides us with sufficient capital to
achieve this ratio and to satisfy our operating needs over the next 12 months. We expect to be able
to continue to meet these capital needs after the next 12 months from internally generated funds.
Since our ability to meet our obligations in the long term (beyond such 12-month period) is
dependent upon such factors as market changes, insurance regulatory changes and economic
conditions, we can give you no assurance that the available net cash flow will be sufficient to
meet these needs. We may need to raise additional capital through equity or debt financing. Any
equity or debt financing, if available at all, may be on terms that are not favorable to us. In the
case of equity financings, dilution to our shareholders could result, and in any case such
securities may have rights, preferences and privileges that are senior to those of our common
stock. If we cannot obtain adequate capital on favorable terms or at all, we could be forced to
curtail our growth or reduce our assets.
Future sales of shares of our common stock by our existing shareholders, officers or employees
in the public market, or the possibility or perception of such future sales, could adversely affect
the market price of our stock.
As of December 31, 2007, James V. Gorman owned approximately 14.13% of the total outstanding
common stock of NAHC on a fully diluted basis. No prediction can be made as to the effect, if any,
that future sales of shares by our existing shareholders, or the availability of shares for future
sale, will have on the prevailing market price of our common stock from time to time. For instance,
in June 2005, we filed a registration statement on Form S-8 under the Securities Act of 1933, as
amended, which we refer to as the Securities Act, to register shares of our common stock issued or
reserved for issuance under our 2004 Stock and Incentive Plan. Subject to the exercise of issued
and outstanding options, shares registered under the registration statement on Form S-8 will be
available for sale into the public markets unless such shares are subject to vesting or legal
restrictions. In June 2005, we also filed a registration statement on Form S-8 under the Securities
Act to register shares of our Class B Nonvoting Stock issued or reserved for issuance under our
Nonstatutory Stock Option Plan. All of the shares reserved for issuance under the Nonstatutory
Stock Option Plan are fully vested and are available for sale into the public market.
Because we do not intend to pay dividends, you will not receive funds without selling shares and
you will only see a return on your investment if the value of the shares appreciates.
We have never declared or paid any cash dividends on our capital stock and do not intend
to pay cash dividends in the foreseeable future. We intend to invest our future earnings, if any,
to fund our growth. In addition, our ability to pay dividends is dependent upon, among other
things, the availability of dividends from our subsidiaries, including Proformance. The ability of
Proformance to pay dividends to us is restricted by New Jersey insurance law. See Business
General Regulation. As of December 31, 2007, Proformance is not permitted to pay dividends without
the approval of the Commissioner. Accordingly, since we do not anticipate paying dividends, our
shareholders will only see a return on their investment if the value of the shares appreciates. We
cannot assure our shareholders that they will receive a return on their investment when they sell
their shares or that they will not lose all or part of their investment.
Item 1B.
Unresolved Staff Comments
None.
41
Item 2.
Properties
We are headquartered at 4 Paragon Way, Freehold, New Jersey. NAHC leases approximately
45,000 square feet of office space for a term ending June 1, 2009. NAHCs subsidiaries share the
cost of this space under the cost sharing agreement that they entered into with NAHC. On
September 11, 2004, we leased an additional 16,000 square feet of space at 3 Paragon Way, Freehold,
New Jersey for a term ending September 11, 2008.
Item 3.
Legal Proceedings
Proformance is party to a number of lawsuits arising in the ordinary course of its
insurance business. We believe that the ultimate resolution of these lawsuits will not,
individually or in the aggregate, have a material adverse effect on our consolidated financial
statements. Other than these lawsuits, we are not involved in any legal proceedings.
Item 4.
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of National Atlantics shareholders during the
fourth quarter of 2007.
PART II
Item 5.
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common shares are listed on the Nasdaq National Market under the symbol NAHC. The
Company commenced its initial public offering of its common stock on April 20, 2005. Prior to that
time, there was no established trading market for the Companys common stock. The following table
shows the high and low per share sale prices of our common shares, as reported on the NAHC for the
periods indicated:
Price Range of Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
First Quarter
|
|
$
|
13.25
|
|
|
$
|
10.75
|
|
|
$
|
12.00
|
|
|
$
|
9.35
|
|
Second Quarter
|
|
$
|
14.12
|
|
|
$
|
11.51
|
|
|
$
|
10.90
|
|
|
$
|
8.02
|
|
Third Quarter
|
|
$
|
14.45
|
|
|
$
|
8.70
|
|
|
$
|
11.90
|
|
|
$
|
8.68
|
|
Fourth Quarter
|
|
$
|
10.34
|
|
|
$
|
3.66
|
|
|
$
|
13.70
|
|
|
$
|
10.86
|
|
On March 14, 2008, the last reported sale price for our common shares on the Nasdaq
National Market was $5.97 per share.
At
March 17, 2008, there were approximately 87 holders of record and
approximately 830 beneficial holders of our common shares.
The Company has never declared or paid any cash dividends on its capital stock and does
not anticipate paying any cash dividends in the foreseeable future. The Company currently intends
to retain future earnings to fund the development and growth of its business. The payment of
dividends in the future, if any, will be at the discretion of the Board of Directors. Our ability
to pay dividends is dependent upon, among other things, the availability of dividends from our
subsidiaries, including our insurance subsidiaries, Proformance and Mayfair. The ability of
Proformance to pay dividends to us is restricted by New Jersey insurance law. As of December 31,
2007, Proformance is not permitted to pay dividends without the approval of the Commissioner. In
addition, the payment of dividends and other distributions by Mayfair is regulated by Bermuda
insurance law and regulations. There are no restrictions on the payment of dividends by our
non-insurance subsidiaries other than customary state corporation laws regarding solvency.
Dividends from Proformance are subject to restrictions relating to statutory surplus and earnings.
See Business Supervision and Regulation.
42
The following table summarizes the securities authorized for issuance under the Companys
equity compensation plans as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
(a)
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities
|
|
|
(b)
|
|
|
Remaining Available for
|
|
|
|
to be Issued
|
|
|
Weighted Average
|
|
|
Issuance Under Equity
|
|
|
|
Upon Exercise of
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
Plan Category
|
|
Warrant and Rights
|
|
|
Warrant and Rights
|
|
|
Reflected in Column (a))
|
|
Equity compensation plans approved by
security holders
|
|
|
174,150
|
|
|
$
|
3.19
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved
by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
174,150
|
|
|
$
|
3.19
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
Use of Proceeds
On July 5, 2006, the Board of Directors of the Company authorized the repurchase of a
maximum of 1,000,000 shares and a minimum of 200,000 shares of capital stock of the Company within
the next twelve months. On May 24, 2007, the Board of Directors of the Company authorized a one
year extension of the buy-back program. As of December 31, 2007, the Company had repurchased
418,303 shares with an average price of $10.26. As of December 31, 2007, the Company is authorized
to repurchase an additional 581,697 shares. During the three months ended December 31, 2007, the
Company repurchased 26,200 shares with an average share price of $4.63.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Average
|
|
|
|
Maximum
|
|
|
Minimum
|
|
|
Price
|
|
Balance at September 30, 2007
|
|
|
607,897
|
|
|
|
|
|
|
|
|
|
Repurchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2007
|
|
|
607,897
|
|
|
|
|
|
|
|
|
|
Repurchased
|
|
|
7,000
|
|
|
|
|
|
|
|
5.39
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2007
|
|
|
600,897
|
|
|
|
|
|
|
|
|
|
Repurchased
|
|
|
19,200
|
|
|
|
|
|
|
$
|
4.36
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
581,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 6.
Selected Financial Data
The following table sets forth selected consolidated financial information for the
periods ended and as of the dates indicated. We derived the data as of December 31, 2007, 2006,
2005, 2004 and 2003, and for each of the five years in the period ended December 31, 2007, from our
consolidated financial statements. These financial statements were audited by Deloitte & Touche
LLP, an independent registered public accounting firm, through 2005, and by Beard Miller Company
LLP, an independent registered public accounting firm, in 2006 and 2007.
We have prepared the selected historical consolidated financial data, other than the
statutory data, in conformity with GAAP. We have derived the statutory data from the annual
statements of our insurance subsidiary, Proformance, filed with the NJDOBI prepared in accordance
with statutory accounting practices, which vary in certain respects from GAAP. You should read this
selected consolidated financial data together with our consolidated financial statements and the
related notes and the section of this Form 10-K entitled Managements Discussion and Analysis of
Financial Condition and Results of Operations.
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
($ in thousands, except share data)
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct written premiums
|
|
$
|
178,679
|
|
|
$
|
171,069
|
|
|
$
|
198,049
|
|
|
$
|
207,320
|
|
|
$
|
163,179
|
|
Net written premiums
|
|
|
166,210
|
|
|
|
161,125
|
|
|
|
189,634
|
|
|
|
193,192
|
|
|
|
147,045
|
|
Net earned premiums
|
|
|
165,220
|
|
|
|
157,354
|
|
|
|
172,782
|
|
|
|
179,667
|
|
|
|
143,156
|
|
Replacement carrier revenue from related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,880
|
|
|
|
13,298
|
|
Replacement carrier revenue from unrelated party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,089
|
|
|
|
661
|
|
Investment income
|
|
|
17,276
|
|
|
|
16,082
|
|
|
|
12,403
|
|
|
|
7,061
|
|
|
|
4,258
|
|
Net realized investment gains
|
|
|
72
|
|
|
|
979
|
|
|
|
411
|
|
|
|
1,931
|
|
|
|
1,373
|
|
Other income
|
|
|
1,703
|
|
|
|
1,441
|
|
|
|
1,745
|
|
|
|
2,044
|
|
|
|
929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
184,271
|
|
|
|
175,856
|
|
|
|
187,341
|
|
|
|
208,672
|
|
|
|
163,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses (1)
|
|
|
145,085
|
|
|
|
103,824
|
|
|
|
132,794
|
|
|
|
134,987
|
|
|
|
108,123
|
|
Underwriting, acquisition and insurance related expenses
|
|
|
49,652
|
|
|
|
48,275
|
|
|
|
42,264
|
|
|
|
46,771
|
|
|
|
26,055
|
|
Other operating and general expenses
|
|
|
539
|
|
|
|
2,268
|
|
|
|
3,989
|
|
|
|
580
|
|
|
|
484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
195,276
|
|
|
|
154,367
|
|
|
|
179,047
|
|
|
|
182,338
|
|
|
|
134,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(11,005
|
)
|
|
|
21,489
|
|
|
|
8,294
|
|
|
|
26,334
|
|
|
|
29,013
|
|
Income tax (benefit) expense
|
|
|
(4,811
|
)
|
|
|
7,107
|
|
|
|
1,858
|
|
|
|
8,886
|
|
|
|
9,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(6,194
|
)
|
|
$
|
14,382
|
|
|
$
|
6,436
|
|
|
$
|
17,448
|
|
|
$
|
19,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.56
|
)
|
|
$
|
1.28
|
|
|
$
|
0.70
|
|
|
$
|
3.53
|
|
|
$
|
4.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.56
|
)
|
|
$
|
1.26
|
|
|
$
|
0.68
|
|
|
$
|
3.11
|
|
|
$
|
3.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash & investments
|
|
$
|
342,216
|
|
|
$
|
345,060
|
|
|
$
|
339,856
|
|
|
$
|
252,993
|
|
|
$
|
179,696
|
|
Total assets
|
|
|
449,675
|
|
|
|
452,830
|
|
|
|
462,736
|
|
|
|
347,172
|
|
|
|
266,748
|
|
Unpaid losses and loss adjustment expenses
|
|
|
197,105
|
|
|
|
191,386
|
|
|
|
219,361
|
|
|
|
184,283
|
|
|
|
134,201
|
|
Total liabilities
|
|
$
|
305,499
|
|
|
$
|
301,942
|
|
|
$
|
324,527
|
|
|
$
|
279,333
|
|
|
$
|
216,961
|
|
Total
stockholders equity (2)
|
|
$
|
144,176
|
|
|
$
|
150,888
|
|
|
$
|
138,209
|
|
|
$
|
67,839
|
|
|
$
|
49,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders surplus (at period end) (2)(3)(4)
|
|
$
|
125,712
|
|
|
$
|
128,031
|
|
|
$
|
104,727
|
|
|
$
|
58,754
|
|
|
$
|
46,325
|
|
Loss ratio (1)
|
|
|
90.34
|
%
|
|
|
69.16
|
%
|
|
|
79.80
|
%
|
|
|
75.30
|
%
|
|
|
82.20
|
%
|
Expense ratio (1)
|
|
|
27.13
|
%
|
|
|
26.93
|
%
|
|
|
22.30
|
%
|
|
|
21.80
|
%
|
|
|
20.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio (1)
|
|
|
117.48
|
%
|
|
|
96.09
|
%
|
|
|
102.10
|
%
|
|
|
97.10
|
%
|
|
|
102.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The loss ratio, when calculated on a statutory basis, is the ratio of losses and loss adjustment expenses to
net earned premiums. The expense ratio, when calculated on a statutory accounting basis, is the ratio of
underwriting expenses to net written premiums. The expense ratio, when calculated on a GAAP basis, differs
from the statutory method specifically as it related to policy acquisition expenses. Policy acquisition
expenses are expensed as incurred under the statutory accounting method. However, for GAAP, policy
acquisition expenses are deferred and amortized over the period in which the related premiums are earned.
The combined ratio is the sum of the loss ratio and the expense ratio. Management considers the statutory
methods for calculating the loss, expense and combined ratios to compare our performance to benchmarks used
by rating agencies and regulatory bodies that monitor the insurance industry.
|
44
|
|
|
(2)
|
|
On April 21, 2005, an initial public offering of 6,650,000 shares of the Companys common stock (after the
43-for-1 stock split) was completed. The company sold 5,985,000 shares resulting in net proceeds to the
Company (after deducting issuance costs and the underwriters discount) of $62,198,255. The Company
contributed $43,000,000 to Proformance, which increased its statutory surplus.
|
|
(3)
|
|
On May 8, 2006, the Company contributed $9,000,000 to Proformance, thereby increasing its statutory surplus.
|
|
(4)
|
|
On May 16, 2007, the Company contributed $4,100,000 to Proformance, thereby increasing its statutory surplus.
|
Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition, changes in financial condition and
results of operations of NAHC should be read in conjunction with the audited Condensed Consolidated
Financial Statements and Notes thereto included elsewhere in this Form 10-K.
Overview
We provide property and casualty insurance and insurance-related services to
individuals, families and businesses in the State of New Jersey. We have been able to capitalize
upon what we consider an attractive opportunity in the New Jersey insurance market through:
|
|
|
our extensive knowledge of the New Jersey insurance market and regulatory environment;
|
|
|
|
|
our business model which is designed to align our Partner Agents interests with
management by requiring many of them to retain an ownership stake in us;
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our packaged product that includes private passenger automobile, homeowners, personal
excess (umbrella) and specialty property liability coverage; and
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our insurance related services businesses.
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In 2007, we made significant progress toward carrying out the business strategies we have
set out for National Atlantic as a public company. We continued to capture an increasingly larger
share of our Partner Agents existing customer base and to diversify our business portfolio of
automobile, homeowners and commercial lines policies. Our plan for future growth relates to
capturing an increasingly larger share of our Partner Agents business and cross-selling our
automobile, homeowners and business insurance products to their existing customers. We also plan
to capture more of our Partner Agents existing customers by reaching out to additional
demographics not currently suited to our HPP packaged product. Our new mono-line automobile
product, salesmarked BlueStar Car Insurance, was launched in early 2007 and is targeted to our
Partner Agents customers who do not require the broader coverage of our HPP product. During the
third quarter of 2007 it was determined that our policy related to claims handling procedures and
reserving practices was not applied consistently, primarily within the bodily injury claims unit.
As part of the resolution of this matter, we retained an independent claims consulting firm. As a
result, for the year ended December 31, 2007, we increased reserves for prior years by $19.6
million.
As of December 31, 2007, our insurance subsidiary, Proformance Insurance Company
(Proformance), was the twelfth largest and one of the fastest growing provider of private
passenger auto insurance in New Jersey, based on direct written premiums of companies writing more
than $5 million of premiums annually over the past three years, according to A.M. Best. From 2003
through 2007, we experienced a 2.3% compound annual growth rate, as our direct written premiums for
all lines of business we write, including homeowners and commercial lines, increased from
45
$163.2 million in 2003 to $178.7 million in 2007. As of December 31, 2007, our stockholders equity was
$144.2 million, up from stockholders equity of $49.8 million as of December 31, 2003, reflecting a
30.4% compound annual growth rate. Included in stockholders equity is $62.2 million as a result
of our initial public offering, which was completed on April 21, 2005.
Direct written premiums for the year ended December 31, 2007 increased by $7.6 million,
or 4.4%, to $178.7 million from $171.1 million in the comparable 2006 period.
For the year ended December 31, 2007, the increase is primarily due to the following: new
business generated by our partner agents increased by $3.0 million to $34.4 million from $31.4
million in the comparable 2006 period, including new business from our Blue Star auto insurance
product in the amount of $8.7 million. This was offset by attrition of existing business of
$9.5 million and $7.3 million, respectively, as well as a $17.3 million decrease in
premium as a result of decreases in renewal premiums during the period and a reduction in closed
agents business as a result of the continued increase in the competitive nature of the New Jersey
auto insurance marketplace.
We manage and report our business as a single segment based upon several factors.
Although our insurance subsidiary, Proformance Insurance Company writes private passenger
automobile, homeowners and commercial lines insurance, we consider those operating segments as one
operating segment due to the fact that the nature of the products are similar, the nature of the
production processes are similar, the type of class of customer for the products are similar, the
methods used to distribute the products are similar and the nature of the regulatory environment is
similar. In addition, these lines of business have historically demonstrated similar economic
characteristics and as such are aggregated and reported as a single segment. Also, in addition to
Proformance, all other operating segments wholly owned by the Company are aggregated and reported
as a single segment due to the fact that the nature of the products are similar, the nature of the
production processes are similar, the type of class of customer for the products are similar, the
methods used to distribute the products are similar and the nature of the regulatory environment is
similar.
As a densely populated state, a coastal state, and a state where automobile insurance
has historically been prominent in local politics, New Jersey has historically presented a
challenging underwriting environment for automobile and homeowners insurance coverage.
As a result of New Jerseys take all comers requirement, we are obligated to
underwrite a broad spectrum of personal automobile insurance risks. To address this potential
problem, since 1998 Proformance has utilized a tiered rating system to price its policies, which
includes five (5) rating tiers based upon the driving records of the policyholders. The purpose of
the rating tiers is to modify the premiums to be charged for each insured vehicle on the personal
automobile policy so that the premiums charged accurately reflect the underwriting exposures
presented to Proformance.
As of December 31, 2007, the rating tier modifiers and the distribution of risks within the
tiers were as follows:
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Premium
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Modifications
|
|
Percent of Total
|
Tier Designation
|
|
Factor
|
|
Vehicles
|
Tier A
|
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0.88
|
|
|
|
33.7
|
%
|
Tier One
|
|
|
1.00
|
|
|
|
58.9
|
%
|
Tier Two
|
|
|
1.70
|
|
|
|
6.6
|
%
|
Tier Three
|
|
|
2.25
|
|
|
|
0.2
|
%
|
Tier Four
|
|
|
2.60
|
|
|
|
0.69
|
%
|
Proformance applies the modification factor to each tier to produce a consistent loss
ratio across all tiers. Proformance does not segregate its loss reserves by tier, but rather by
line of business. Since the actual distribution of risk may vary from the distribution of risk
Proformance assumed in developing the modification factors, Proformance cannot be certain that an
underwriting profit will be produced collectively or in any tier.
Our financial results may be affected by a variety of external factors that indirectly
impact our premiums and/or claims expense. Such factors may include, but are not limited to:
46
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The recent rise in gasoline prices may serve to decrease the number of
miles driven by our policyholders and result in lower frequency of
automobile claims; and
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An evolving set of legal standards by which we are required to pay
claims may result in significant variability in our loss reserves over
time.
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We believe that proper recognition of emerging trends, and an active response to those trends,
is essential for our business. In addition, we believe that the recent entrants to the New Jersey
personal automobile insurance marketplace, such as Mercury General, GEICO and Progressive, will
provide a new level of competition not previously experienced by us or by our long-term
competitors, which could have a material effect on our ability to meet sales goals or maintain
adequate rates for our insurance products.
Since we operate in a coastal state and we underwrite property insurance, we are subject
to catastrophic weather events, which may have significant impact upon our claims expense or our ability to collect the
proceeds from our third party reinsurers. We also underwrite commercial insurance business and we
expect that the rate increases on those policies that we have experienced over the last three years
will moderate and that rate level reductions may ensue, impacting our ability to maintain our
underwriting margins on this business.
For the years ended December 31, 2007, 2006 and 2005, we paid $0.0 million, $0.6 million and
$0.2 million, respectively, in connection with fees paid in consideration of the acquisition of
policy renewal rights. Our strategy includes entering into additional replacement carrier
transactions as opportunities arise. However, due to improvements in the New Jersey insurance
market during 2005, it is not likely that we will enter into replacement carrier transactions which
have as significant an impact on our operations or are comparable in size to those entered into
prior to 2005.
As a result of these transactions, we increased the number of independent insurance
agencies who are shareholders in NAHC and who, with their aggregate premium volume, provide what we
believe are significant growth opportunities for us. Our strategy is to underwrite an increased
share of those agencies business now underwritten by competing carriers. Successful execution of
our intended plan will require an underwriting operation designed to attract and retain more of our
agencies clientele, and may be affected by lower-priced competing products or enhanced sales
incentive compensation plans by our competitors. These factors may require us to increase our new
business acquisition expenses from the levels currently experienced to achieve significant new
product sales.
In our replacement carrier transactions, we agreed to offer replacement coverage to the
subject policyholders at their next nominal policy renewal date. The policyholders are under no
obligation to accept our replacement coverage offer. Policyholders who accept our replacement
insurance coverage become policyholders of Proformance and enjoy the standard benefits of being a
Proformance policyholder. For example, these policyholders enjoy the limitation we provide on our
ability to increase annual premiums. We cannot increase the annual premiums paid by these
policyholders by more than fifteen percent for three years, unless there is an event causing a
change in rating characteristics, such as an auto accident. Those policyholders choosing not to
accept the Proformance replacement insurance coverage due to rate or coverage disparities or
individual consumer choice must seek replacement coverage with another carrier. Once the
Proformance replacement offer has been rejected by a policyholder, Proformance has no further
obligation to that policyholder.
On September 27, 2005, the Company announced that Proformance had entered into a
replacement carrier transaction with The Hartford Financial Services Group, Inc., which we refer to
as The Hartford, whereby certain subsidiaries of The Hartford (Hartford Fire Insurance Company,
Hartford Casualty Insurance Company, and Twin City Fire Insurance) would transfer their renewal
obligations for New Jersey homeowners, dwelling, fire, and personal excess liabilities policies
sold through independent agents to Proformance. Under the terms of the transaction, Proformance has
offered renewal policies to approximately 8,500 qualified policyholders of The Hartford. We
received final approval of this transaction from the NJDOBI on November 22, 2005, the closing date.
Upon the closing, Proformance was required to pay to The Hartford a one-time fee of
$150,000. In addition, on May 15, 2007, Proformance paid a one-time payment to The Hartford in the
amount $253,392, which represented 5% of the written premium of the retained business at the end of
the twelve-month non-renewal period.
The Hartford is not liable for any fees and or other amounts to be paid to Proformance
and as such Proformance will not recognize any replacement carrier revenue from this transaction.
The revenue that will be recognized as part of this transaction will be from the premium generated
by the policies that renew with Proformance.
47
For the years ended December 31, 2007, 2006 and 2005, the direct written premium generated
from The Hartford renewal business was $4,724,728, $4,134,877 and $0, respectively.
On February 21, 2006 the Company announced that Proformance had entered into a replacement
carrier transaction with Hanover Insurance Group, which we refer to as Hanover, whereby Hanover
would transfer their renewal obligations for New Jersey automobile, homeowners, dwelling fire,
personal excess liability and inland marine policies sold through independent agents to
Proformance. Under the terms of the transaction, Proformance is in the process of offering renewal
policies to approximately 16,000 qualified policyholders of Hanover. NAHC and Proformance received
approval of this transaction from the NJDOBI on February 16, 2006.
Upon the Closing, Proformance was required to pay to Hanover a one-time fee of $450,000,
and within 30 days of the closing, $100,000 was due to reimburse Hanover for its expenses
associated with this transaction. In May of 2007, the Company paid $666,129 to Hanover, representing the first of two annual payments equal to 5% of
the written premium of the retained business for the preceding twelve months, calculated at the
12 month and 24 month anniversaries.
Hanover is not liable for any fees and or other amounts to be paid to Proformance and as
such Proformance will not recognize any replacement carrier revenue from this transaction. The
revenue that will be recognized as part of this transaction will be from the premium generated by
the policies that renew with Proformance.
For the years ended December 31, 2007 and 2006, the direct written premium generated from
Hanover renewal business was $12,491,300 and $11,080,943, respectively.
With respect to our replacement carrier transaction for the 2004 year with OCIC and
OCNJ, on February 22, 2005 Proformance notified OCNJ that OCNJ owed Proformance $7,762,000 for the
2004 year in connection with the requirement that a premium-to-surplus ratio of 2.5 to 1 be
maintained on the OCNJ renewal business. Pursuant to our agreement, OCNJ had until May 15, 2005 to
make payment to us. Subsequent to the notification provided to OCIC and OCNJ, we had several
discussions with OCIC relating to certain components to the underlying calculation which supports
the amount owed to Proformance for the 2004 year. As part of these discussions, OCIC had requested
additional supporting documentation and raised issues with respect to approximately $2,000,000 of
loss adjustment expense, approximately $800,000 of commission expense, and approximately $600,000
of NJAIRE assessments, or a total of $3,412,000, allocated to OCNJ. We recorded $4,350,000 (the
difference between the $7,762,000 we notified OCNJ they owed us, and the $3,412,000 as outlined
above) as replacement carrier revenue from related party in our consolidated statement of
operations for the year ended December 31, 2004 with respect to the OCIC replacement carrier
transaction. We recorded $4,350,000 because it was managements best estimate of the amount for
which we believed collectability was reasonably assured based on several factors. First, the
calculation to determine the amount owed by OCIC to us is complex and certain elements of the
calculation are significantly dependent on managements estimates and judgment and thus more
susceptible to challenge by OCIC. We also note our experience in the past in negotiating these
issues with OCIC. For example, in 2003 we notified OCNJ that OCNJ owed Proformance approximately
$10,100,000 for 2003. After negotiations we ultimately received $6,820,000. Accordingly, because of
the nature of the calculation, the inherent subjectivity in establishing certain estimates upon
which the calculation is based, and our experience from 2003, managements best estimate of the
amount for 2004 for which we believed collectability from OCIC was reasonably assured was
$4,350,000. On June 27, 2005, we received $3,654,000 from OCIC in settlement of the amounts due to
Proformance, which differs from the $4,350,000 we had recorded as a receivable due from OCIC as
outlined above. The difference of $696,000 between the receivable we had recorded ($4,350,000) due
from OCIC and the actual settlement payment received from OCIC ($3,654,000) came as a result of a
dispute between the Company and OCIC regarding $292,000 of NJAIRE assessments and approximately
$404,000 of commission expenses included in the underlying calculation which supported the amounts
due to Proformance for the 2004 year, the final year of our three year agreement with OCIC. The
$696,000 was recorded as a bad debt expense in the Companys consolidated statement of operations
for the year ended December 31, 2005.
With respect to our replacement carrier transaction with Sentry Insurance, in the event
that the premium-to-surplus ratio for the Sentry Insurance business written by Proformance exceeded
2.5 to 1 during a specified period, Sentry Insurance was obligated to pay to Proformance such
additional sums of money as necessary, up to an aggregate limit of $1,250,000, to reduce the
premium-to-surplus ratio for the Sentry Insurance business written by Proformance to not less than
2.5 to 1. On February 22, 2005 Proformance notified Sentry Insurance that Sentry Insurance owed
Proformance $1,250,000 for the 2004 year in connection with the requirement. On May 16, 2005, we
received $1,250,000 from Sentry Insurance in settlement of the amounts owed to us.
48
Prior to the Companys initial public offering, the Company limited the amount of
business that Partner Agents could write with Proformance because of its limited capital. However,
following the Companys initial public offering on April 21, 2005, the Company contributed
additional capital to Proformance. Accordingly, on June 13, 2005, the Company held a meeting with
Partner Agents to inform them that the limitations historically placed on them with respect to
placing new business with Proformance were no longer applicable due to Proformances enhanced
capital adequacy.
In the New Jersey Supreme Courts decision in June of 2005 in
DiProspero v. Penn,
et al.
, the Court eliminated certain restrictions on the ability of plaintiffs to obtain
non-economic damages, such as for pain and suffering. As a result of this decision, we have
adjusted our reserves to include additional personal injury protection (no-fault) losses and legal
defense costs severities because of the potential for an increase in the number of litigated cases.
On March 15, 2005, the Board of Directors of the Company discussed extending the
exercise period of stock options to purchase 73,100 shares of the Companys common stock granted
under its Nonstatutory Stock Option Plan (the Plan) on June 15, 1995 to three individuals, two of
whom are currently executive officers and one of whom is currently a director of the Company. These
stock options were scheduled to expire on June 14, 2005, ten years after the date of issuance. The
Board of Directors discussed extending the expiration date of these stock options from June 14,
2005 until December 31, 2005, with the effective date of the extension being June 14, 2005. This
proposal to extend the exercise period for such stock options was approved by the Board of
Directors at its meeting held on June 13, 2005, subject to shareholder approval. The extension of
these options was approved by the Companys shareholders at the Companys Annual Meeting of
Shareholders which was held on September 19, 2005.
F.P. Skip Campion, the Companys former Vice Chairman and the former President of
Proformance, passed away on January 25, 2005. Under the terms of the Plan and the applicable stock
option agreements, if an optionee dies without having fully exercised any outstanding stock
options, the right to exercise such stock options expires ninety days following the optionees
death. Accordingly, the expiration date of Mr. Campions stock options (none of which had
previously been exercised) was accelerated to April 25, 2005. Since the estate of Mr. Campion did
not exercise these stock options on or prior to April 25, 2005, the stock options were forfeited.
On June 13, 2005, the Board of Directors of the Company approved, subject to shareholder approval,
a grant of new nonqualified stock options to the estate of Mr. Campion, to preserve the value of
Mr. Campions stock options that expired on April 25, 2005. The new stock options are subject to
the same terms and conditions as the forfeited stock options, including the exercise price and
number of shares subject to each option, except that the new stock options would expire on
December 31, 2005.
Approval of the extension of the options granted during 1995 and the grant of new stock
options to the estate of Mr. Campion was received at the Companys Annual Meeting of Shareholders
on September 19, 2005. The fair market value of the Companys stock on September 19, 2005 was
$11.47; therefore, the Company recognized $749,802 as compensation expense related to the extension
of options in its consolidated statement of operations for the year ended December 31, 2005. The
Company also recognized $1,937,198 as compensation expense related to the grant of new options in
its consolidated statement of operations for the year ended December 31, 2005.
On December 21, 2007, the Board of Directors of NAHC approved the Compensation Committees
recommendation to grant 60,000 stock appreciation rights (SARS) to certain executive officers under
the Companys 2004 Stock and Incentive Plan. The SARS were granted with a base price of $3.93 per
share, which was the closing price of the Companys common stock on the Nasdaq National Market on
the date of grant.
On March 20, 2007, the Board of Directors of NAHC approved the Compensation Committees
recommendation to grant 345,000 stock appreciation rights (SARS) to the executive officers and
other key employees under the Companys 2004 Stock and Incentive Plan. The SARS were granted with
a base price of $12.88 per share, which was the closing price of the Companys common stock on the
Nasdaq National Market on the date of grant.
On March 21, 2006, the Board of Directors of National Atlantic Holdings Corporation (NAHC)
approved the Compensation Committees recommendation to grant 343,000 stock appreciation rights
(SARS) to the executive officers and other key employees under the Companys 2004 Stock and
Incentive Plan. The SARS were granted with a base price of $9.94 per share, which was the closing
price of the Companys common stock on the Nasdaq National Market on the date of grant.
In accordance with SFAS 123R, the Company records share based compensation liabilities at
fair value or a portion
49
thereof (depending upon the percentage of requisite service that has been
rendered at the reporting date) based on the Black-Scholes valuation model and will remeasure the
liability at each reporting date through the date of settlement; consequently, compensation cost
recognized through each period of the vesting period (as well as each period throughout the date of
settlement) will vary based on the awards fair value and the vesting schedule.
The
Company has reported, as a component of other liabilities on the
consolidated balance sheet,
share-based compensation liability at December 31, 2007 and 2006, of $128,285 and $1,066,239,
respectively. For the year ended December 31, 2007 and 2006, the Company has reported, as a
component of other operating and general expenses on the consolidated statement of income,
share-based compensation expense of ($492,864), $1,066,239 and $0, respectively, related to stock
appreciation rights.
On January 1, 2005, Proformance entered into an Auto Physical Damage Quota Share
Contract with Odyssey America Reinsurance Corporation. Under the terms of this contract,
Proformance ceded $1,953,393 of written premiums and $2,047,576 of beginning unearned premium reserves to Odyssey Re with respect to
business written between January 1, 2005 and September 15, 2005. Ceded losses and loss adjustment
expenses were $374,143 and ceded reserves including incurred but not reported (IBNR) reserves was
$222,182.
On September 15, 2005, Proformance commuted the Auto Physical Damage Quota Share
Contract with Odyssey Re. The commutation was initiated in September 2005 and all items previously
recorded in connection with the agreement were reversed as of that period. The transaction was
recorded as a decrease of ceded written premium of $4,000,969, a decrease in ceded commissions of
$1,200,291 and a decrease in ceded unearned premiums of $2,426,517. The overall net effect of the
commutation is a loss of $160,039.
Revenues
We derive our revenues primarily from the net premiums we earn, net investment income we
earn on our invested assets and revenue associated with replacement carrier transactions. Net
earned premiums is the difference between the premiums we earn from the sales of insurance policies
and the portion of those premiums that we cede to our reinsurers.
The revenue we earned from replacement carrier transactions relates to the funds that we
received to assume the renewal obligations of those books of business. Revenues from replacement
carrier transactions are recognized pro-rata over the period that we complete our obligations under
the terms of the agreement, typically ranging from six months to a year, determined by the renewal
option period of the policyholders. Certain replacement carrier contracts require additional
consideration to be paid to us based on an evaluation of the ratio of premiums written to surplus.
The calculation is performed and related revenue is recognized as earned annually, pursuant to the
terms of the contract. Certain other transactions, such as the Hanover and Hartford transactions
described above, require us to pay additional consideration in the future. We did not record any
replacement carrier revenue for the years ended December 31, 2007, 2006 and 2005. Our strategy
includes entering into additional replacement carrier transactions as opportunities arise. However,
due to improvements in the New Jersey insurance market during 2005, it is not likely that we will
enter into replacement carrier transactions which have as significant an impact on the Companys
operations, or are comparable in size to those entered into prior to 2005.
Investment income consists of the income we earn on our fixed income and equity
investments as well as short term investments. The other income we earn consists of service fees
charged to insureds that pay on installment plans, commission received by National Atlantic
Insurance Agency from third party business, and revenue from our contract with AT&T under which we
provide claims handling and risk data reporting on general liability, automobile liability and
physical damage and household move claims.
Expenses
Our expenses consist primarily of three types: losses and loss adjustment expenses,
including estimates for losses and loss adjustment expenses incurred during the period and changes
in estimates from prior periods, less the portion of those insurance losses and loss adjustment
expenses that we cede to our reinsurers; and acquisition expenses, which consist primarily of
commissions we pay our agents. In addition, underwriting, acquisition and insurance related
expenses include premium taxes and company expenses related to the production and underwriting of
insurance policies, less ceding commissions that we receive under the terms of our reinsurance
contracts, and other operating and general expenses which include general and administrative
expenses.
50
The provision for unpaid losses and loss adjustment expenses includes: individual case
estimates, principally on the basis of reports received from claim adjusters employed by
Proformance, losses reported prior to the close of the period, and estimates with respect to
incurred but not reported losses and loss adjustment expenses, net of anticipated salvage and
subrogation. The method of making such estimates and for establishing the resulting reserves is
continually reviewed and updated, and adjustments are reflected in current operations. The
estimates are determined by management and are based upon industry data relating to loss and loss
adjustment expense ratios as well as Proformances historical data.
Underwriting, acquisition and insurance related expenses include policy acquisition
expenses which consist of commissions and other underwriting expenses, which are costs that vary
with and are directly related to the underwriting of new and renewal policies and are deferred and
amortized over the period in which the related premiums are earned. Also included in underwriting,
acquisition and related insurance expenses are NJAIRE assessments, professional fees and other
expenses relating to insurance operations.
Other operating and general expenses consist primarily of professional fees, stock based
compensation expense and other general expenses which are not directly associated with insurance
operations and relate primarily to costs incurred by our holding company.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires us to make
estimates and assumptions that affect amounts reported in our consolidated financial statements. As
additional information becomes available, these estimates and assumptions are subject to change and
thus impact amounts reported in the future. We have identified below two accounting policies that
we consider to be critical due to the amount of judgment and uncertainty inherent in the
application of these policies.
Unpaid Losses and Loss Adjustment Expenses
Significant periods of time can elapse between the occurrence of an insured loss, the
reporting to us of that loss and our final payment of that loss. To recognize liabilities for
unpaid losses, we establish reserves as balance sheet liabilities. Our reserves represent
actuarially determined best estimates of amounts needed to pay reported and unreported losses and
the expenses of investigating and paying those losses, or loss adjustment expenses. Every quarter,
we review our previously established reserves and adjust them, if necessary.
When a claim is reported, claims personnel establish a case reserve for the estimated
amount of ultimate payment. The amount of the reserve is primarily based upon an evaluation of the
type of claim involved, the circumstances surrounding each claim and the policy provisions relating
to the loss. The estimate reflects informed judgment of such personnel based on general insurance
reserving practices and on the experience and knowledge of the claims personnel. During the loss
adjustment period, these estimates are revised as deemed necessary by our claims department based
on subsequent developments and periodic reviews of the cases.
In accordance with industry practice, we also maintain reserves for estimated losses
incurred but not yet reported. Incurred but not yet reported reserves are determined in accordance
with commonly accepted actuarial reserving techniques on the basis of our historical information
and experience. We review incurred but not yet reported reserves quarterly and make adjustments if
necessary.
When reviewing reserves, we analyze historical data and estimate the impact of various
loss development factors, such as our historical loss experience and that of the industry, trends
in claims frequency and severity, our mix of business, our claims processing procedures,
legislative enactments, judicial decisions, legal developments in imposition of damages, and
changes and trends in general economic conditions, including the effects of inflation. A change in
any of these factors from the assumptions implicit in our estimate can cause our actual loss
experience to be better or worse than our reserves, and the difference can be material. There is no
precise method, however, for evaluating the impact of any specific factor on the adequacy of
reserves, because the eventual development of reserves and currently established reserves may not
prove adequate in light of subsequent actual experience. To the extent that reserves are inadequate
and are strengthened, the amount of such increase is treated as a charge to earnings in the period
that the deficiency is recognized. To the extent that reserves are redundant and are released, the
amount of the release is a credit to earnings in the period that redundancy is recognized.
For the year ended December 31, 2007, we increased reserves for prior years by $19.6 million.
This increase was primarily due to increases in the prior year reserves for auto bodily injury
coverage which increased by $22.2 million.
51
This increase was due to an inconsistent implementation of a revised claim reserving policy that
was uncovered in the third quarter of 2007. Prior year reserves for other liability increased by
$3.6 million. This was offset by favorable development of $4.6 million in no-fault coverages and
$1.6 million in commercial auto liability.
For the year ended December 31, 2006, we decreased reserves by $28.0 million primarily due to
a decrease in the loss and loss adjustment expense ratio for the same period. This decrease can be
attributed to a decline in earned premium, a reduction in claim frequency in private passenger
automobile coverage and significant growth in commercial lines business which in 2006, have
exhibited lower loss ratios. For the year ended December 31, 2006, prior year reserves increased
by $0.02 million. This increase was due to favorable development in bodily injury and no-fault
coverages offset by a reduction in ceded loss estimates for prior years.
For the year ended December 31, 2005, we increased reserves for prior years by $10.1 million.
This increase was due to increases in average severity for Personal Injury Protection (No-fault)
losses of $9.4 million, Commercial Auto Liability projected loss ratios for 2002-2004 due to the
fact that actual loss development was higher than expected for those years, resulting in an
increase of $1.8 million, Homeowners losses of $0.6 million and Other Liability losses of
$1.6 million. This development was partially offset by continued favorable trends in loss
development for Property Damage losses ($1.6 million), Auto Physical Damage losses ($1.2 million),
and Bodily Injury losses of ($0.5 million), as reported claims frequency has dropped significantly
and we reduced our projected loss ratios in recognition of this trend.
The table below sets forth the types of reserves we maintain for our lines of business
and indicates the amount of reserves as of December 31, 2007 for each line of business.
National Atlantic Holdings Corporation
Breakout of Reserves by Line of Business
As of December 31, 2007
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|
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|
|
|
|
|
|
Direct
|
|
Assumed
|
|
|
|
|
|
|
|
|
|
Total Balance
|
|
|
Case
|
|
Case
|
|
Direct
|
|
Assumed
|
|
Sheet
|
|
|
Reserves
|
|
Reserves
|
|
IBNR
|
|
IBNR
|
|
Reserves
|
|
|
(in thousands)
|
Line of Business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Fire
|
|
$
|
|
|
|
$
|
29
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
29
|
|
Allied
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Homeowners
|
|
|
6,741
|
|
|
|
|
|
|
|
9,168
|
|
|
|
|
|
|
|
15,909
|
|
Personal Auto
|
|
|
93,000
|
|
|
|
5
|
|
|
|
48,634
|
|
|
|
|
|
|
|
141,639
|
|
Commercial Auto
|
|
|
10,437
|
|
|
|
898
|
|
|
|
13,176
|
|
|
|
536
|
|
|
|
25,047
|
|
Other Liability
|
|
|
5,815
|
|
|
|
|
|
|
|
8,663
|
|
|
|
|
|
|
|
14,478
|
|
|
|
|
Total Reserves
|
|
$
|
115,993
|
|
|
$
|
935
|
|
|
$
|
79,641
|
|
|
$
|
536
|
|
|
$
|
197,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
Recoverables on
Unpaid Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
179,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In establishing our net reserves as of December 31, 2007, our Chief Actuarial Officer has
determined that the range of reserve estimates on a net basis, at that date, was between $163.8
million and $195.3 million. The amount of net reserves at December 31, 2007, which represents the
best estimate of management and our actuaries within that range, was $179.4 million. There are two
major factors that could result in ultimate losses below managements best estimate:
|
|
|
More effective claims processes have recently been put in place. If
the improvement in our claims handling process is better than
expected, losses could develop less than anticipated,
|
|
|
|
|
The rate of claims settlements has increased dramatically over the
past year. A continuation of this activity could produce ultimate
losses below our current estimate.
|
There are two major factors that could result in ultimate losses above managements best
estimate:
|
|
|
Claims for uninsured motorists generally have a longer development
period than other liability losses. If the frequency of uninsured
motorist claims increases beyond our current estimated levels, loss
emergence could be greater than what we projected in our loss
development analysis.
|
52
|
|
|
We believe that the claims department has improved its claims handling
practices with regard to claims reserving and settlement. These
improvements, if not effectively implemented, could result in adverse
loss development.
|
Investment Accounting Policy Impairment
In November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1 and FAS 124-1,
The Meaning of Other-Than-Temporary Impairment and Its Applications of Certain Investments (FSP
115-1), which provides guidance on determining when investments in certain debt and equity
securities are considered impaired, whether that impairment is other-than-temporary, and how to
measure such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the
recognition of an other-than-temporary impairment and requires certain disclosures about unrealized
losses that have not been recognized as other-than-temporary impairments.
Our principal investments are in fixed maturities, all of which are exposed to at least
one of three primary sources of investment risk: credit, interest rate and market valuation. The
financial statement risks are those associated with the recognition of impairments and income, as
well as the determination of fair values. Recognition of income ceases when a bond goes into
default. We evaluate whether impairments have occurred on a case-by-case basis. Management
considers a wide range of factors about the security issuer and uses its best judgment in
evaluating the cause and amount of decline in the estimated fair value of the security and in
assessing the prospects for near-term recovery. Inherent in managements evaluation of the security
are assumptions and estimates about the operations of the issuer and its future earnings potential.
Considerations we use in the impairment evaluation process include, but are not limited to: (i) the
length of time and the extent to which the market value has been below amortized cost; (ii) the
potential for impairments of securities when the issuer is experiencing significant financial
difficulties; (iii) the potential for impairments in an entire industry sector or subsection;
(iv) the potential for impairments in certain economically depressed geographic locations; (v) the
potential for impairment of securities where the issuer, series of issuers or industry has a
catastrophic type of loss or has exhausted natural resources; (vi) other subjective factors,
including concentrations and information obtained from regulators and rating agencies and
(vii) managements intent and ability to hold securities to recovery. In addition, the earnings on
certain investments are dependent upon market conditions, which could result in prepayments and
changes in amounts to be earned due to changing interest rates or equity markets.
Insurance Ratios
The property and casualty insurance industry uses the combined ratio as a measure of
underwriting profitability. The combined ratio is the sum of the loss ratio and the expense ratio.
The loss ratio is the ratio of losses and loss adjustment expenses to net earned premiums. The
expense ratio, when calculated on a statutory accounting basis, is the ratio of underwriting
expenses to net written premiums. The expense ratio, when calculated on a GAAP basis, differs from
the statutory method specifically as it relates to policy acquisition expenses. Policy acquisition
expenses are expensed as incurred under the statutory accounting method. However, for GAAP, policy
acquisition expenses are deferred and amortized over the period in which the related premiums are
earned. The combined ratio reflects only underwriting results and does not include fee for service
income or investment income. Underwriting profitability is subject to significant fluctuations due
to competition, catastrophic events, economic and social conditions and other factors.
Results of Operations
Direct written premiums for the year ended December 31, 2007 increased by $7.6 million, or
4.4%, to $178.7 million from $171.1 million in the comparable 2006 period. For the year ended
December 31, 2007, the increase is primarily due to the following: new business generated by our
partner agents increased by $3.0 million to $34.4 million from $31.4 million in the comparable 2006
period, including new business from our Blue Star auto insurance product in the amount of $8.7
million. This was offset by attrition of existing business of $9.5 million as well as a $17.3
million decrease in premium as a result of decreases in renewal premiums during the period and a
reduction in closed agents business as a result of the continued increase in the competitive nature
of the New Jersey auto insurance marketplace.
53
The table below shows certain of our selected financial results for the years ended
December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Direct written premiums
|
|
$
|
178,679
|
|
|
$
|
171,069
|
|
|
$
|
198,049
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums
|
|
|
166,210
|
|
|
|
161,125
|
|
|
|
189,634
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
165,220
|
|
|
$
|
157,354
|
|
|
$
|
172,782
|
|
Investment income
|
|
|
17,276
|
|
|
|
16,082
|
|
|
|
12,403
|
|
Net realized investment gains (losses)
|
|
|
72
|
|
|
|
979
|
|
|
|
411
|
|
Other income
|
|
|
1,703
|
|
|
|
1,441
|
|
|
|
1,745
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
184,271
|
|
|
$
|
175,856
|
|
|
$
|
187,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses incurred
|
|
$
|
145,085
|
|
|
$
|
103,824
|
|
|
$
|
132,794
|
|
Underwriting, acquisition and insurance
related expenses
|
|
|
49,652
|
|
|
|
48,275
|
|
|
|
42,264
|
|
Other operating and general expenses
|
|
|
539
|
|
|
|
2,268
|
|
|
|
3,989
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
195,276
|
|
|
|
154,367
|
|
|
|
179,047
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(11,005
|
)
|
|
|
21,489
|
|
|
|
8,294
|
|
Income taxes (benefit)
|
|
|
(4,811
|
)
|
|
|
7,107
|
|
|
|
1,858
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(6,194
|
)
|
|
$
|
14,382
|
|
|
$
|
6,436
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007, compared to the year ended December 31, 2006
Direct Written Premiums.
Direct written premiums for the year ended December 31, 2007 increased by
$7.6 million, or 4.4%, to $178.7 million from $171.1 million in the comparable 2006 period.
For the year ended December 31, 2007, the increase is primarily due to the following: new
business generated by our partner agents increased by $3.0 million to $34.4 million from $31.4
million in the comparable 2006 period, including new business from our Blue Star auto insurance
product in the amount of $8.7 million. This was offset by attrition of existing business of
$9.5 million, as well as a $17.3 million decrease in premium as a result of decreases in renewal
premiums during the period and a reduction in closed agents business as a result of the continued
increase in the competitive nature of the New Jersey auto insurance marketplace.
Net Written Premiums.
Net written premiums for the year ended December 31, 2007 increased by $5.1
million, or 3.2%, to $166.2 million from $161.1 million in the comparable 2006 period. Ceded
premiums as a percentage of direct written premium for the year ended December 31, 2007 was 7.2%,
as compared to 6.5%, in the same period in the prior year. The increase in net written premiums for
the year ended December 31, 2007 was due to the increase in direct written premiums for the same
period.
Net Premiums Earned.
Net premiums earned for the year ended December 31, 2007 increased by $7.8
million, or 5.0%, to $165.2 million from $157.4 million in the comparable 2006 period.
Investment Income.
Investment income for the year ended December 31, 2007 increased by $1.2
million, or 7.5%, to $17.3 million from $16.1 million in the comparable 2006 period. The increase
was primarily due to an increase in average invested assets. Average invested assets for the year
ended December 31, 2007 increased $11.6 million, or 3.7%, to $323.1 million from $311.4 million for
the same period in the prior year.
Net Realized Investment Gains.
Net realized investment gains for the years ended December 31, 2007
and 2006 were $0.1 million and $1.0 million, respectively.
54
Other Income.
Other income for the year ended December 31, 2007 and 2006 was $1.7 million and $1.4
million, respectively. The increase is primarily related to an increase in finance and service
fees charged to those paying on an installment basis. Finance and service fees for the years ended
December 31, 2007 and 2006 were $1.6 million and $1.2 million, respectively.
Losses and Loss Adjustment Expenses Incurred.
Loss and loss adjustment expenses incurred for the
year ended December 31, 2007 increased by $41.3 million, or 39.8%, to $145.1 million from $103.8
million in the comparable 2006 period. This increase can be attributed to an increase in claim
frequency in private passenger automobile coverage and strengthening of prior year reserves by
$19.6 million, due to the inconsistent implementation of a revised claim reserving policy that was
uncovered in the third quarter of 2007. As a percentage of net earned premiums, losses and loss
adjustment expenses incurred for the year ended December 31, 2007 were 87.8% compared to 66.0% for
the year ended December 31, 2006. The ratio of net incurred losses, excluding loss adjustment
expenses, to net earned premiums during 2007 was 76.3% compared to 61.5% for the comparable 2006
period.
Underwriting, Acquisition and Insurance Related Expenses.
Underwriting, acquisition and insurance
related expenses for the year ended December 31, 2007 increased by $1.4 million, or 2.9%, to $49.7
million from $48.3 million in the comparable 2006 period. As a percentage of net written premiums,
our underwriting, acquisition and insurance related expense ratio for the year ended December 31,
2007 was 29.9% as compared to 30.0% for the comparable 2006 period. Underwriting, acquisition and
insurance related expenses, excluding changes in deferred acquisition costs for the years ended
December 31, 2007 and 2006 were $50.0 million and $49.8 million, respectively. The effect of an
increase in the deferred acquisition cost asset is recorded as a reduction of underwriting,
acquisition and insurance related expenses. For the year ended December 31, 2007, the benefit
recorded as a result of the increase in the deferred acquisition cost asset decreased by $1.2
million to $0.3 million from $1.5 million in the comparable 2006 period. For the year ended
December 31, 2007, commission expense increased by $2.7 million to $26.6 million from $23.9 million
in the comparable 2006 period. Salary expense for year ended December 31, 2007 increased by $0.8
million to $17.6 million from $16.8 million in the comparable 2006 period. In addition,
depreciation and amortization expense for the year ended December 31, 2007 increased by $0.7
million to $1.1 million from $0.4 million in the comparable 2006 period as a result of the Diamond
4x software which was placed into service in March of 2007.
Other Operating and General Expenses.
Other operating and general expenses for the year ended
December 31, 2007 decreased by $1.8 million, or 78.3%, to $0.5 million from $2.3 million in the
comparable 2006 period. The decrease in other operating and general expenses for the year ended
December 31, 2007 is primarily related to a decrease in share based compensation expense. For the
years ended December 31, 2007 and 2006, share based compensation expense was ($0.5) million and
$1.1 million, respectively.
Income Tax (Benefit) Expense.
Income tax (benefit) expense for the year ended December 31, 2007
and 2006 was ($4.8) million and $7.1 million, respectively. The decrease in tax expense for the
year ended December 31, 2007, as compared to the same period in the prior year was due to a
decrease in income before income taxes.
Net (Loss) Income.
Net (loss) income for the years ended December 31, 2007 and 2006 was ($6.2)
million and $14.4 million, respectively. The decrease in net income for the year ended December
31, 2007 as compared to the same period in the prior year is a result of the factors discussed
above.
For the year ended December 31, 2006, compared to the year ended December 31, 2005
Direct Written Premiums.
Direct written premiums for the year ended December 31, 2006 decreased by
$26.9 million, or 13.6%, to $171.1 million from $198.0 million in the comparable 2005 period.
For the year ended December 31, 2006 the decrease is due to the following: our closed agents
business that was acquired as part of previous replacement carrier transactions with OCIC, Met P&C
and Sentry decreased by $51.0 million as a result of the continued increase in the competitive
nature of the New Jersey auto insurance market those agents were able to place that business with
other carriers in the New Jersey market. New business generated by our partner agents for the year
ended December 31, 2006 was $31.4 million, offset by attrition of existing business of $7.3
million. For the year ended December 31, 2006, direct written premium generated from The Hanover
and Hartford renewal business was approximately $11.1 and $4.1 million, respectively.
55
Net Written Premiums.
Net written premiums for the year ended December 31, 2006 decreased by $28.5
million, or 15.0%, to $161.1 million from $189.6 million in the comparable 2005 period. Ceded
premiums as a percentage of direct written premium for the year ended December 31, 2006 was 6.5%,
as compared to 5.2%, in the same period in the prior year. The decrease in net written premiums for
the year ended December 31, 2006 was due to the decrease in direct written premiums for the same
period.
Net Premiums Earned.
Net premiums earned for the year ended December 31, 2006 decreased by $15.4
million, or 8.9%, to $157.4 million from $172.8 million in the comparable 2005 period.
Investment Income.
Investment income for the year ended December 31, 2006 increased by $3.7
million, or 29.8%, to $16.1 million from $12.4 million in the comparable 2005 period. The increase
was primarily due to an increase in our average book yield to maturity which was 5.47% and 5.22% at
December 31, 2006 and 2005, respectively. The increase in yield was due to the purchase of
securities with higher yields. In addition, invested assets increased to $318.8 million at
December 31, 2006 from $300.0 million at December 31, 2005.
Net Realized Investment Gains.
Net realized investment gains for the year ended December 31, 2006
and 2005 were $1.0 million and $0.4 million, respectively.
Other Income.
Other income for the year ended December 31, 2006 and 2005 was $1.4 million and $1.7
million, respectively. The decrease in other income is primarily related to a decrease in revenue
related to claims handling services provided by Riverview in connection with the AT&T contract.
Claims handling revenue for the year ended December 31, 2006 was $0.3 million, as compared with
$0.4 million for the comparable 2005 period.
Losses and Loss Adjustment Expenses Incurred.
Loss and loss adjustment expenses incurred for the
year ended December 31, 2006 decreased by $29.0 million, or 21.8%, to $103.8 million from $132.8
million in the comparable 2005 period. This decrease can be attributed to a decline in earned
premium, a reduction in claim frequency in private passenger automobile coverage and significant
growth in commercial lines business which exhibit lower loss ratios. As a percentage of net earned
premiums, losses and loss adjustment expenses incurred for the year ended December 31, 2006 were
66.0% compared to 76.9% for the year ended December 31, 2005. The ratio of net incurred losses,
excluding loss adjustment expenses, to net earned premiums during 2006 was 61.5% compared to 65.6%
for the comparable 2005 period.
Underwriting, Acquisition and Insurance Related Expenses.
Underwriting, acquisition and insurance
related expenses for the year ended December 31, 2006 increased by $6.0 million, or 14.2%, to $48.3
million from $42.3 million in the comparable 2005 period. The increase is due to an increase in
salary expense in the amount of $1.3 million and a $4.7 million change in the amortization of
deferred acquisition costs in 2006 as compared to the comparable 2005 period. Underwriting,
acquisition and insurance related expenses, excluding deferred acquisition costs for the year ended
December 31, 2006 were $49.8 million, as compared with $48.5 million, in the comparable 2005
period. For the year ended December 31, 2006, the deferred acquisition cost asset increased by
$1.5 million, to $18.6 million as compared to an increase of $6.2 million to $17.1 million in the
comparable 2005 period. The effect of the increase in the deferred acquisition cost asset is
recorded as a reduction of underwriting, acquisition and insurance related expenses. As a
percentage of net written premiums, our underwriting, acquisition and insurance related expense
ratio for the year ended December 31, 2006 was 30.0% as compared to 22.4% for the comparable 2005
period. For the year ended December 31, 2006, unearned premiums increased $4.0 million, to $85.5
million from $81.5 million in the comparable 2005 period. Commission expense for the year ended
December 31, 2006 decreased by $1.8 million, or 7.0%, to $23.9 million from $25.7 million in the
comparable 2005 period. The ratio of commission expense to direct written premiums during 2006 was
14.0% compared to 13.0% for the comparable 2005 period.
Other Operating and General Expenses.
Other operating and general expenses for the year ended
December 31, 2006 decreased by $1.7 million, or 42.5%, to $2.3 million from $4.0 million in the
comparable 2005 period. The decrease in other operating and general expenses for the year ended
December 31, 2006 is primarily related to a decrease in stock based compensation expense offset by
an increase in deferred compensation expense. For the year ended December 31, 2006, stock based
compensation expense was $0.0 million, as compared to $3.1 million for the comparable 2005 period.
For the year ended December 31, 2006, share-based compensation expense was $1.1 million as compared
to $0.0 million for the comparable 2005 period.
56
Income Tax Expense.
Income tax expense for the year ended December 31, 2006 and 2005 was $7.1
million and $1.9 million, respectively. The increase in tax expense of $5.2 million for the year
ended December 31, 2006 as compared to the same period in the prior year was due to the increase in
income before income taxes for the same periods.
Net Income.
Net income for the year ended December 31, 2006 and 2005 was $14.4 million and $6.4
million, respectively. The increase in net income for the year ended December 31, 2006 as compared
to the same period in the prior year is a result of the factors discussed above.
Liquidity and Capital Resources
We are organized as a holding company with all of our operations being conducted by our
insurance subsidiaries, which underwrite the risks associated with our insurance policies, and our
non-insurance subsidiaries, which provide our policyholders and our insurance subsidiaries a
variety of services related to the insurance policies we provide. We have continuing cash needs for
taxes and administrative expenses. These ongoing obligations are funded with dividends from our
non-insurance subsidiaries. Our taxes are paid by each subsidiary through an inter-company tax
allocation agreement. In addition, a portion of the proceeds of our sale of common stock to our
Partner Agents had historically been used to pay taxes. We do not expect to sell common stock to
our Partner Agents in the future as any purchases subsequent to the initial public offering have
been and will continue to be made in the open market.
Proformances primary sources of funds are premiums received, investment income and
proceeds from the sale and redemption of investment securities. Our non-insurance subsidiaries
primary source of funds is policy service revenues. Our subsidiaries use funds to pay operating
expenses, make payments under the tax allocation agreement, and pay dividends to us. In addition,
Proformance uses funds to pay claims and purchase investments.
We have historically received much of our capital in connection with replacement carrier
transactions. As discussed more fully in the Overview section of this Managements Discussion
and Analysis of Financial Condition and Results of Operations, we cannot be certain that
replacement carrier transactions on acceptable terms will continue to be available to us. If we are
unable to enter into replacement carrier transactions on acceptable terms in the future, we may be
forced to seek other sources of capital (including the issuance in either a public offering or a
private placement of common stock or other equity or debt securities), which sources could be
unavailable to us, or if available, could be more costly to us.
On April 21, 2005, an initial public offering of 6,650,000 shares of the Companys common
stock (after the 43-for-1 stock split) was completed. The Company sold 5,985,000 shares resulting
in net proceeds to the Company (after deducting issuance costs and the underwriters discount) of
$62,198,255. The Company contributed $43,000,000 to Proformance, which increased its statutory
surplus. The additional capital will permit the Company to reduce its reinsurance purchases and to
retain more of the direct written premiums produced by its Partner Agents. On May 8, 2006 and May
16, 2007, the Company contributed an additional $9,000,000 and $4,100,000, respectively, to
Proformance, thereby further increasing its statutory surplus. The remainder of the capital raised
will be used for general corporate purposes, including but not limited to possible additional
increases to the capitalization of the existing subsidiaries.
For the years ended December 31, 2007, 2006 and 2005, our consolidated cash flows (used
in) provided by operations was ($0.2) million, $7.2 million and $28.1 million, respectively. The
decrease in cash flows provided by operations for the year ended December 31, 2007 as compared to
December 31, 2006 was due primarily to an increase in income taxes recoverable and decrease in
income taxes payable offset by increases in unpaid losses and loss adjustment expenses and a
decrease in reinsurance recoverables and receivables. For the year ended December 31, 2007, unpaid
losses and loss adjustment expenses increased $5.7 million as compared with a decrease of
$28.0 million which occurred during the same period in the prior year. For the year ended December
31, 2007 income taxes recoverable increased $8.5 million and income taxes payable decreased $3.0
million. For the year ended December 31, 2006, income taxes recoverable decreased $1.2 million and
income taxes payable increased $3.0 million. For the year ended December 31, 2007, the Company
made estimated tax payments of $6.9 million as compared with $4.1 million during the same period in
the prior year. In addition, reinsurance recoverable and receivables decreased $6.1 million for
the year ended December 31, 2007 as compared with a decrease of $14.1 million for the comparable
2006 period. The decrease in cash flows provided by operations for the year ended December 31,
2006 as compared to December 31, 2005 was due primarily to the a decrease in unpaid losses and loss
adjustment expenses , partially offset by a decrease in reinsurance recoverables and receivables
and increases in unearned premiums and income taxes payable. For the year ended December 31, 2006,
unpaid losses and loss adjustment expenses decreased $28.0 million
57
as compared with an increase of $35.1 million for the same period in 2005. Reinsurance
recoverables and receivables for the year ended December 31, 2006 decreased $14.1 million as
compared to an increase of $5.9 million for the same period in 2005.
For the years ended December 31, 2007, 2006 and 2005, our consolidated cash flows
provided by (used in) investing activities were $4.4 million, ($19.2) million and ($66.5) million,
respectively. The increase in cash provided by investing activities for the year ended December
31, 2007 as compared to the same period in the prior year is related primarily to the sale of fixed
maturity investments. The decrease in cash used in investing activities for the year ended
December 31, 2006 as compared to the same period in the prior year is related primarily due to the
conversion of our private passenger automobile business from six month to twelve month policies
which began on January 1, 2005. This conversion process led to an increase in premium writings for
the year ended December 31, 2005, which was subsequently invested by the Company along with the
continued investment of the capital received as part of the initial public offering which was
completed on April 21, 2005. Direct written premiums for the year ended December 31, 2006
decreased by $26.9 million, or 13.6%, to $171.1 million from $198.0 million in the comparable 2005
period. In addition, for the year ended December 31, 2006 our consolidated cash flow used in
investing activities was in excess of our cash provided by operations as Proformance invested the
$9 million which was contributed by the Company during the period.
For the years ended December 31, 2007, 2006 and 2005, our consolidated cash flows (used
in) provided by financing activities were ($2.3) million, ($1.6) million and $62.7 million,
respectively. The increase in our consolidated cash flows used in financing activities for the
year ended December 31, 2007 as compared to December 31, 2006 is primarily related to an increase
in the repurchase of capital stock. For the year ended December 31, 2007, the Company invested
$2.6 million in common stock held in treasury as compared with $1.7 million in the comparable
period in 2006. This was slightly offset by an increase in proceeds received by the Company from
the exercise of stock options. For the year ended December 31, 2007, the Company received $0.3
million from the exercise of stock options as compared with $0.1 million in the comparable 2006
period. The decrease in our consolidated cash flows from financing activities for the year ended
December 31, 2006 as compared to the year ended December 31, 2005 is related to the repurchase of
capital stock as authorized by the board of directors on July 5, 2006 as well as the capital
received during 2005 in connection with the Companys initial public offering which was completed
on April 21, 2005
The effective duration of our investment portfolio was 2.91 years as of December 31, 2007. By
contrast, our liability duration was approximately 3.5 years as of December 31, 2007. We do not
believe this difference in duration adversely affects our ability to meet our current obligations
because we believe our cash flows from operations are sufficient to meet those obligations.
Pursuant to our tax planning strategy, we invested the $40.6 million received from the OCIC
replacement carrier transaction in long-term bonds in accordance with Treasury Ruling
Regulation 1.362-2, which allows us to defer the payment of income taxes on the associated
replacement carrier revenue until the underlying securities are either sold or mature. The
effective duration of our investment portfolio, when excluding these securities, is reduced from
2.91 years to 2.45 years.
Management believes that the current level of cash flow from operations provides us with
sufficient liquidity to meet our operating needs over the next 12 months. We expect to be able to
continue to meet our operating needs after the next 12 months from internally generated funds.
Since our ability to meet our obligations in the long term (beyond such 12-month period) is
dependent upon such factors as market changes, insurance regulatory changes and economic
conditions, no assurance can be given that the available net cash flow will be sufficient to meet
our operating needs.
There are no restrictions on the payment of dividends by our non-insurance subsidiaries
other than customary state corporation laws regarding solvency. Dividends from Proformance are
subject to restrictions relating to statutory surplus and earnings. Proformance may not make an
extraordinary dividend until 30 days after the Commissioner of the NJDOBI (which we refer to as
the Commissioner) has received notice of the intended dividend and has not objected or has approved
it in such time. An extraordinary dividend is defined as any dividend or distribution whose fair
market value together with that of other distributions made within the preceding twelve months
exceeds the greater of 10% of the insurers surplus as of the preceding December 31, or the
insurers net income (excluding realized capital gains) for the twelve-month period ending on the
preceding December 31, in each case determined in accordance with statutory accounting practices.
Under New Jersey law, an insurer may pay dividends that are not considered extraordinary only from
its unassigned funds, also known as its earned surplus. The insurers remaining surplus must be
both reasonable in relation to its outstanding liabilities and adequate to its financial needs
following payment of any dividend or distribution to stockholders. As of December 31, 2007,
Proformance was not permitted to pay dividends without the approval of the Commissioner.
Proformance has not paid any dividends in the past and we do not anticipate that Proformance will
pay dividends in the foreseeable future because we wish to reduce our reinsurance
58
purchases in order to retain more of the gross premiums written we generate. We also seek stronger
financial strength ratings for Proformance, and both of these objectives require that the capital
of Proformance be increased. In addition, the payment of dividends and other distributions by
Mayfair is regulated by Bermuda insurance law and regulations.
The table below sets forth the aggregate amount of dividends paid to us by our
non-insurance subsidiaries during the years ended December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
NAIA
|
|
$
|
1,110,000
|
|
|
$
|
714,781
|
|
|
$
|
1,550,000
|
|
Riverview
|
|
$
|
450,000
|
|
|
$
|
188,760
|
|
|
$
|
950,000
|
|
NAFC
|
|
$
|
1,000,000
|
|
|
$
|
|
|
|
$
|
|
|
Because our non-insurance subsidiaries generate revenues, profits and net cash flows that are
generally unrestricted as to their availability for the payment of dividends, we expect to use
those revenues to service all of our corporate financial obligations, such as shareholder
dividends, if declared. The percentage of our total revenues generated by our non-insurance
subsidiaries for the years ended December 31, 2007, 2006 and 2005 were 3.4%, 5.1% and 4.1%,
respectively.
The Company has entered into a seven-year lease agreement for the use of office space and
equipment. The most significant obligations under the lease terms other than the base rent are the
reimbursement of the Companys share of the operating expenses of the premises, which include real
estate taxes, repairs and maintenance, utilities, and insurance. Net rent expense for 2007, 2006
and 2005 was $973,655, $958,279 and $945,391, respectively.
The Company entered into a four-year lease agreement for the use of additional office
space and equipment commencing on September 11, 2004. Rent expense for 2007, 2006 and 2005 was
$212,400, respectively.
Aggregate minimum rental commitments of the Company as of December 31, 2007 are as
follows:
|
|
|
|
|
Year
|
|
Amount
|
|
2008
|
|
$
|
796,799
|
|
2009
|
|
|
545,999
|
|
2010
|
|
|
|
|
2011
|
|
|
|
|
2012 and thereafter
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,342,798
|
|
|
|
|
|
In connection with the lease agreement, the Company obtained a letter of credit in the
amount of $300,000 as security for payment of the base rent.
As of December 31, 2007, we did not have any material commitments for capital
expenditures.
Proformances historic trends of net paid losses compared to net premiums collected for
calendar years 2007, 2006 and 2005 reflect ratios of 81.9%, 75.8% and 60.8%, respectively.
The asset/liability match of the revenue generated in the OCIC replacement carrier
transaction was contemplated based on the premiums to surplus leverage it was intended to support.
We do not anticipate that the payment of claims will be affected by these longer-term investments
based on sufficient cash flow provided from the collection of premiums and therefore we do not
intend to sell any securities in such surplus funds prior to maturity. Future liquidity and
operating income could be impacted if the fixed income securities are sold prior to maturity
exposing them to market rate risk.
59
Investments
As of December 31, 2007 and December 31, 2006, the Company maintained a high quality
investment portfolio.
As of December 31, 2007 and December 31, 2006, we did not hold any securities that were
not publicly traded, because our investment policy prohibits us from purchasing those securities.
In addition, at those dates, we did not have any non-investment grade fixed income securities.
As more fully described above under Critical Accounting Policies Investment
Accounting Policy Impairment, in accordance with the guidance of paragraph 16 of SFAS 115,
should an other-than-temporary impairment be determined, we recognize such loss on the consolidated
statement of operations and we write down the value of the security and treat the adjusted value as
the new cost basis of the security.
Our gross unrealized losses represented 0.29% of cost or amortized cost of the investment
portfolio as of December 31, 2007. Fixed maturities represented 99.7% of the investment portfolio
and 99.8% of the unrealized losses as of December 31, 2007.
Unrealized losses on held-to-maturity securities, aged less than and greater than twelve
months, as of December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
Greater than 12 months
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State, local government
and agencies
|
|
$
|
2,612,228
|
|
|
$
|
(3,338
|
)
|
|
$
|
223,182
|
|
|
$
|
(3,682
|
)
|
|
$
|
2,835,410
|
|
|
$
|
(7,020
|
)
|
Industrial and miscellaneous
|
|
|
|
|
|
|
|
|
|
|
18,379,026
|
|
|
|
(585,430
|
)
|
|
|
18,379,026
|
|
|
|
(585,430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments -
Held-to-Maturity
|
|
$
|
2,612,228
|
|
|
$
|
(3,338
|
)
|
|
$
|
18,602,208
|
|
|
$
|
(589,112
|
)
|
|
$
|
21,214,436
|
|
|
$
|
(592,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Company has 2 held to maturity securities in the less than twelve
month category and 18 held to maturity securities in the twelve months or more categories. The
unrealized losses reflect changes in interest rates subsequent to the acquisition of specific
securities. Management believes that the unrealized losses represent temporary impairment of the
securities, as the Company has the intent and ability to hold these investments until maturity or
market price recovery.
Unrealized losses on available-for-sale securities, aged less than and greater than twelve
months, as of December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
Greater than 12 months
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government,
government agencies
and authorities
|
|
$
|
12,677,756
|
|
|
$
|
(24,009
|
)
|
|
$
|
8,304,808
|
|
|
$
|
(93,914
|
)
|
|
$
|
20,982,564
|
|
|
$
|
(117,923
|
)
|
State, local government
and agencies
|
|
|
2,653,290
|
|
|
|
(4,296
|
)
|
|
|
9,651,873
|
|
|
|
(43,239
|
)
|
|
|
12,305,163
|
|
|
|
(47,535
|
)
|
Industrial and miscellaneous
|
|
|
2,123,989
|
|
|
|
(50,125
|
)
|
|
|
2,890,698
|
|
|
|
(76,522
|
)
|
|
|
5,014,687
|
|
|
|
(126,647
|
)
|
Mortgage-backed securities
|
|
|
1,638,460
|
|
|
|
(6,284
|
)
|
|
|
1,006,540
|
|
|
|
(1,990
|
)
|
|
|
2,645,000
|
|
|
|
(8,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
19,093,495
|
|
|
|
(84,714
|
)
|
|
|
21,853,919
|
|
|
|
(215,665
|
)
|
|
|
40,947,414
|
|
|
|
(300,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
12,464
|
|
|
|
(1,386
|
)
|
|
|
|
|
|
|
|
|
|
|
12,464
|
|
|
|
(1,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments -
Available-for-Sale
|
|
$
|
19,105,959
|
|
|
$
|
(86,100
|
)
|
|
$
|
21,853,919
|
|
|
$
|
(215,665
|
)
|
|
$
|
40,959,878
|
|
|
$
|
(301,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Company has 25 available for sale securities in the less than
twelve month category
60
and 57 available for sale securities in the greater than twelve months
category. The unrealized losses reflect changes in interest rates subsequent to the acquisition of
specific securities. Management believes that the unrealized losses represent temporary impairment
of the securities, as the Company has the intent and ability to hold these investments until
maturity or market price recovery.
Unrealized losses on held-to-maturity securities, aged less than and greater than twelve
months, as of December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
Greater than 12 months
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government,
government agencies
and authorities
|
|
$
|
645,084
|
|
|
$
|
(9,978
|
)
|
|
$
|
5,889,375
|
|
|
$
|
(243,106
|
)
|
|
$
|
6,534,459
|
|
|
$
|
(253,084
|
)
|
State, local government
and agencies
|
|
|
2,788,654
|
|
|
|
(57,768
|
)
|
|
|
|
|
|
|
|
|
|
|
2,788,654
|
|
|
|
(57,768
|
)
|
Industrial and miscellaneous
|
|
|
10,364,364
|
|
|
|
(159,399
|
)
|
|
|
20,094,937
|
|
|
|
(302,849
|
)
|
|
|
30,459,301
|
|
|
|
(462,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments -
Held-to-Maturity
|
|
$
|
13,798,102
|
|
|
$
|
(227,145
|
)
|
|
$
|
25,984,312
|
|
|
$
|
(545,955
|
)
|
|
$
|
39,782,414
|
|
|
$
|
(773,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Company has 15 held to maturity securities in the less than
twelve month category and 20 held to maturity securities in the twelve months or more categories.
The unrealized losses reflect changes in interest rates subsequent to the acquisition of specific
securities. Management believes that the unrealized losses represent temporary impairment of the
securities, as the Company has the intent and ability to hold these investments until maturity or
market price recovery.
Unrealized losses on available-for-sale securities, aged less than and greater than twelve
months, as of December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
Greater than 12 months
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government,
government agencies
and authorities
|
|
$
|
36,677,390
|
|
|
$
|
(121,768
|
)
|
|
$
|
142,710,619
|
|
|
$
|
(1,738,102
|
)
|
|
$
|
179,388,009
|
|
|
$
|
(1,859,870
|
)
|
State, local government
and agencies
|
|
|
17,505,739
|
|
|
|
(49,894
|
)
|
|
|
24,555,792
|
|
|
|
(241,685
|
)
|
|
|
42,061,531
|
|
|
|
(291,579
|
)
|
Industrial and miscellaneous
|
|
|
4,230,424
|
|
|
|
(26,377
|
)
|
|
|
3,860,237
|
|
|
|
(130,487
|
)
|
|
|
8,090,661
|
|
|
|
(156,864
|
)
|
Mortgage-backed securities
|
|
|
488,032
|
|
|
|
(2,572
|
)
|
|
|
1,002,400
|
|
|
|
(12,576
|
)
|
|
|
1,490,432
|
|
|
|
(15,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
58,901,585
|
|
|
|
(200,611
|
)
|
|
|
172,129,048
|
|
|
|
(2,122,850
|
)
|
|
|
231,030,633
|
|
|
|
(2,323,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
877,488
|
|
|
|
(111,057
|
)
|
|
|
877,488
|
|
|
|
(111,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments -
Available-for-Sale
|
|
$
|
58,901,585
|
|
|
$
|
(200,611
|
)
|
|
$
|
173,006,536
|
|
|
$
|
(2,233,907
|
)
|
|
$
|
231,908,121
|
|
|
$
|
(2,434,518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Company has 132 available-for sale securities in the less than
twelve month category and 306 available-for-sale securities in the twelve months or more
categories. The unrealized losses reflect changes in interest rates subsequent to the acquisition
of specific securities. Management believes that the unrealized losses represent temporary
impairment of the securities, as the Company has the intent and ability to hold these investments
until maturity or market price recovery.
Our fixed income securities in an unrealized loss position have an average AA1 credit rating
by Moodys, with extended maturity dates, which have been adversely impacted by the increase in
interest rates after the purchase date. As part of our ongoing security monitoring process by our
investment manager and investment committee, it was concluded that no securities in the portfolio
were considered to be other-than-temporarily impaired as of December 31, 2007 and 2006. We believe,
with the investment committees confirmation, that securities that are temporarily impaired that
continue to pay principal and interest in accordance with their contractual terms, will continue to
do so.
61
Management considers a number of factors when selling securities. For fixed income
securities, management considers realizing a loss if the interest payments are not made on schedule
or the credit quality has deteriorated. Management also considers selling a fixed income security
in order to increase liquidity. Management considers selling an equity security at a loss if it
believes that the fundamentals,
i.e
., earnings growth, earnings guidance, prospects of dividends,
and management quality have deteriorated. Management considers selling equity securities at a gain
for liquidity purposes. Our investment manager is restricted with respect to the sales of all
securities in an unrealized loss position. These transactions require the review and approval by
senior management prior to execution.
We review our unrealized gains and losses on at least a quarterly basis to determine if
the investments are in compliance with our interest rate forecast and the equity modeling process.
Specifically, in the current economic environment, we would consider selling securities if we can
reallocate the sales proceeds to more suitable investments as it relates to either our interest
rate forecast or equity model.
In addition, we conduct a sensitivity analysis of our fixed income portfolio on at
least a quarterly basis to determine the market value impact on our fixed income portfolio of an
increase or decrease in interest rates of 1%. Based on this analysis, we will continue to hold
securities in an unrealized gain or loss position if the payments of principal and interest are not
delinquent and are being made consistent with the investments repayment schedule. The related
impact on the investment portfolio is realized should we decide to sell a particular investment at
either a gain or a loss.
Furthermore, if we believe that the yield to maturity determined by the price of the
fixed income security can be attained or exceeded by an alternative investment that decreases our
interest rate risk and/or duration, we may sell the fixed income security. This may initially
increase or decrease our investment income and allow us to reallocate the proceeds to other
investments. Our decision to purchase and sell investments is also dependent upon the economic
conditions at a particular point in time.
Our policy states that if the fair value of a security is less than the amortized cost,
the security will be considered impaired. For investments classified as available for sale, we need
to consider writing down the investment to its fair value if the impairment is considered
other-than-temporary. If a security is considered other-than-temporarily impaired pursuant to this
policy, the cost basis of the individual security will be written down to the current fair value.
The amount of the write-down will be calculated as the difference between cost and fair value and
accounted for as a realized loss for accounting purposes which negatively impacts future earnings.
As of December 31, 2007 and as of December 31, 2006, our fixed income portfolio was
64.9% and 63.5% and respectively, concentrated in U.S. government securities and securities of
government agencies and authorities that carry an Aaa rating from Moodys, respectively.
There were no securities that were considered other-than-temporarily impaired as of
December 31, 2007 or 2006. The following summarizes our unrealized losses by designated category as
of December 31, 2007.
Securities in an Unrealized Loss Position for Less than 12 Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
Amortized
|
|
|
|
|
|
Unrealized
|
|
Unrealized
|
|
|
Cost
|
|
Fair Value
|
|
Losses
|
|
Loss
|
Investment Grade Fixed Income
|
|
$
|
21,793,774
|
|
|
$
|
21,705,722
|
|
|
$
|
(88,052
|
)
|
|
|
(.40)
|
%
|
Equities
|
|
$
|
13,850
|
|
|
$
|
12,464
|
|
|
$
|
(1,386
|
)
|
|
|
(10.01)
|
%
|
Securities in an Unrealized Loss Position for greater than 12 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
Amortized
|
|
|
|
|
|
Unrealized
|
|
Unrealized
|
|
|
Cost
|
|
Fair Value
|
|
Losses
|
|
Loss
|
Investment Grade Fixed Income
|
|
$
|
41,260,903
|
|
|
$
|
40,456,126
|
|
|
$
|
(804,777
|
)
|
|
|
(1.95)
|
%
|
62
Securities with a Decline in Fair Value Below Carrying Values Less than 20%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
Amortized
|
|
|
|
|
|
Unrealized
|
|
Unrealized
|
|
|
Cost
|
|
Fair Value
|
|
Losses
|
|
Loss
|
Investment Grade Fixed Income
|
|
$
|
63,054,677
|
|
|
$
|
62,161,848
|
|
|
$
|
(892,829
|
)
|
|
|
(1.42)
|
%
|
Equities
|
|
$
|
13,850
|
|
|
$
|
12,464
|
|
|
$
|
(1,386
|
)
|
|
|
(10.01)
|
%
|
Contractual Obligations
The following table summarizes our long-term contractual obligations and credit-related
commitments as of December 31, 2007.
Contractual Obligations and Credit-Related Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
1 - 3
|
|
3 - 5
|
|
More Than
|
|
|
|
|
1 Year
|
|
Years
|
|
Years
|
|
5 Years
|
|
Total
|
Loss and Loss Adjustment
Expenses(1)
|
|
$
|
102,494,478
|
|
|
$
|
66,030,096
|
|
|
$
|
25,623,619
|
|
|
$
|
2,956,571
|
|
|
$
|
197,104,764
|
|
Operating Lease Obligations(2)
|
|
$
|
796,799
|
|
|
$
|
545,999
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,342,798
|
|
|
|
|
(1)
|
|
As of December 31, 2007 we had unpaid loss and loss adjustment
expenses of $197.1 million. The amounts and timing of these
obligations are not set contractually. Nonetheless, based on
cumulative property and casualty claims paid over the last ten years,
we anticipate that approximately 52.0% will be paid within a year, an
additional 33.5% between one and three years, 13.0% between three and
five years and 1.5% in more than five years. While we believe that
historical performance of loss payment patterns is a reasonable
source for projecting future claim payments, there is inherent
uncertainty in this payment estimate because of the potential impact
from changes in:
|
|
|
|
The legal environment whereby court decisions and changes in backlogs in the court system could influence claim payout
patterns.
|
|
|
|
|
Our mix of business because property and first-party claims settle more quickly than bodily injury claims.
|
|
|
|
|
Claims staffing levels claims may be settled at a different rate based on the future staffing levels of the claim department.
|
|
|
|
|
Reinsurance programs changes in Proformances retention will influence the payout of the liabilities. As Proformances net
retention increases, the liabilities will take longer to settle than in past years.
|
|
|
|
|
Loss cost trends increases/decreases in inflationary factors (legal and economic) will influence ultimate claim payouts and
their timing.
|
|
|
|
|
|
|
(2)
|
|
Represents our minimum rental commitments as of December 31, 2007
pursuant to our seven-year lease agreement for the use of our office
space and equipment at 4 Paragon Way, Freehold, NJ 07728 and our
four-year lease agreement for the use of our office space and
equipment at 3 Paragon Way, Freehold, NJ 07728.
|
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements (as that term is defined in applicable
SEC rules) that have had or are reasonably likely to have a current or future material effect on
our financial condition, changes in financial condition, results of operations, revenues or
expenses, liquidity, capital expenditures or capital resources.
Adoption of New Accounting Pronouncements
In September 2005, the AICPA issued Statement of Position 05-1, Accounting by Insurance
Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of
Insurance Contracts (SOP 05-1). SOP 05-1 provides guidance on accounting by insurance enterprises
for deferred acquisition costs in connection with modifications or exchanges of insurance contracts
other than those specifically described in FASB 97, Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments. The Company has complied with the requirements of SOP 05-1, which were effective for
periods which began after December 15, 2006.
On July 13, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48) which provides guidance on accounting for a tax position taken or expected to
be taken in a tax return. The Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure, and transition.
The guidance in FIN 48 is effective for fiscal years beginning after December 15, 2006. The
provisions of FIN 48 are to be applied to all tax positions upon initial adoption, with the
cumulative effect
63
adjustment reported as an adjustment to the opening balance of retained earnings.
The Company has determined that the adoption did not have a material impact on the Companys
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS 157). This
statement defines fair value, establishes a framework for measuring fair value, and enhances
disclosures about fair value measurements. The provisions of SFAS 157 are effective for financial
statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating
the method of adoption and whether that adoption will have a material impact on the Companys
consolidated financial statements.
In December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b, Effective Date of
FASB Statement No. 157, that would permit a one-year deferral in applying the measurement
provisions of Statement No. 157 to non-financial assets and non-financial liabilities
(non-financial items) that are not recognized or disclosed at fair value in an entitys financial
statements on a recurring basis (at least annually). Therefore, if the change in fair value of a
non-financial item is not required to be recognized or disclosed in the financial statements on an
annual basis or more frequently, the effective date of application of Statement 157 to that item is
deferred until fiscal years beginning after
November 15, 2008 and interim periods within those fiscal years. This deferral does not apply,
however, to an entity that applies Statement 157 in interim or annual financial statements before
proposed FSP 157-b is finalized. The Company is currently evaluating the impact, if any, that the
adoption of FSP 157-b will have on the Companys operating income or net earnings.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of SFAS 115 (SFAS 159). SFAS 159 permits all
entities to choose, at specified election dates, to measure eligible items at fair value. An
entity shall report unrealized gains and losses for which the fair value option has been elected in
earnings at each subsequent reporting date. The fair value option is to be applied on an
instrument by instrument basis and is irrevocable unless a new election date occurs and is applied
only to an entire instrument. The provisions of SFAS 159 are effective for financial statements
issued for fiscal years beginning after November 15, 2007. We are currently evaluating the method
of adoption and whether that adoption will have a material impact on the Companys consolidated
financial statements.
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised
2004),
Share-Based Payment
(SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123) and supercedes APB Opinion No. 25,
Accounting for Stock Issued to
Employees
. SFAS 123R requires all share-based payments to employees, including grants of employee
stock options and stock appreciation rights, to be recognized in the financial statements based on
their fair values and the recording of such expense in the consolidated statements of operations.
In March 2005, the SEC issued Staff Accounting Bulletin (SAB) 107, which expresses views of the SEC
staff regarding the application of SFAS 123R. SAB 107 provides interpretive guidance related to the
interaction between SFAS 123R and certain SEC rules and regulations, as well as provides the SEC
staffs views regarding the valuation of share-based payment arrangements for public companies. In
April 2005, the SEC amended compliance dates for SFAS 123R to allow companies to implement SFAS
123R at the beginning of their next fiscal year, instead of the next fiscal reporting period that
began after June 15, 2005. The Company adopted the provisions of SFAS 123R effective January 1,
2006 at which time the pro forma disclosures previously permitted under SFAS 123 were no longer an
alternative to financial statement recognition. Under SFAS 123R, the Company was required to
determine the appropriate fair value model to be used for valuing share-based payments, the
amortization method for compensation cost and the transition method to be used at date of adoption.
For further details, please refer to Note 9 Share-based Compensation.
In November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1 and FAS 124-1,
The Meaning of Other-Than-Temporary Impairment and Its Applications of Certain Investments (FSP
115-1), which provides guidance on determining when investments in certain debt and equity
securities are considered impaired, whether that impairment is other-than-temporary, and how to
measure such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the
recognition of an other-than-temporary impairment and requires certain disclosures about unrealized
losses that have not been recognized as other-than-temporary impairments. FSP 115-1 supersedes
Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment
and Its Applications of Certain Investments (EITF 03-1) and EITF Topic D-44, Recognition of
Other-Than-Temporary Impairment on the Planned Sale of a Security Whose Cost Exceeds Fair Value
(Topic D-44) and nullifies the accounting guidance on the determination of whether an investment
is other-than-temporarily impaired as set forth in EITF 03-1. FSP 115-1 is required to be applied
to reporting periods beginning after December 15, 2005 and management has determined that the
effect of adopting FSP 115-1 did not have a material impact on the Companys
64
consolidated financial
statements. The Company has complied with the disclosure requirements of EITF-03-1, which were
effective December 31, 2003 and remain in effect.
In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization
Period for Leasehold Improvements (EITF 05-6). EITF 05-6 provides guidance on determining the
amortization period for leasehold improvements acquired in a business combination or acquired
subsequent to lease inception. The Company has complied with the requirements of EITF-05-6, which
were effective for periods which began after June 29, 2005.
In September 2005, the AICPA issued Statement of Position 05-1, Accounting by Insurance
Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of
Insurance Contracts (SOP 05-1). SOP 05-1 provides guidance on accounting by insurance enterprises
for deferred acquisition costs in connection with modifications or exchanges of insurance contracts
other than those specifically described in FASB 97, Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments. The guidance in SOP 05-1 is effective for internal replacements occurring in fiscal
years beginning after December 15, 2006. The Company has determined that the adoption will not have
a material impact on
the Companys consolidated financial statements.
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 market risk through our investment activities and our financing
activities. Our primary market risk exposure is to changes in interest rates. We have not entered,
and do not plan to enter, into any derivative financial transactions for trading or speculative
purposes.
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. Our fixed maturity investments include U.S. and foreign
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.
All of our investing is done by our insurance subsidiary, Proformance. We invest
according to guidelines devised by an internal investment committee, comprised of management of
Proformance and an outside director of NAHC, focusing on investments that we believe will produce
an acceptable rate of return given the risks assumed. Our investment portfolio is managed by the
investment officer at Proformance with oversight from our Chief Accounting Officer and the
assistance of outside investment advisors. Our objectives are to seek the highest total investment
return consistent with prudent risk level by investing in a portfolio comprised of high quality
investments including common stock, preferred stock, bonds and money market funds in accordance
with the asset classifications set forth in Proformances Investment Policy Statement Guidelines
and Objectives.
The tables below show the interest rate sensitivity of our fixed income and preferred
stock financial instruments measured in terms of fair value for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
-100 Basis
|
|
|
|
|
|
+100 Basis
|
|
|
Point
|
|
As of
|
|
Point
|
|
|
Change
|
|
December 31, 2007
|
|
Change
|
|
|
($ in thousands)
|
Fixed maturities and preferred stocks
|
|
$
|
323,026
|
|
|
$
|
313,888
|
|
|
$
|
304,750
|
|
Cash and cash equivalents
|
|
$
|
28,098
|
|
|
$
|
28,098
|
|
|
$
|
28,098
|
|
Total
|
|
$
|
351,124
|
|
|
$
|
341,987
|
|
|
$
|
332,848
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-100 Basis
|
|
|
|
|
|
+100 Basis
|
|
|
Point
|
|
As of
|
|
Point
|
|
|
Change
|
|
December 31, 2006
|
|
Change
|
|
|
($ in thousands)
|
Fixed maturities and preferred stocks
|
|
$
|
328,947
|
|
|
$
|
316,082
|
|
|
$
|
303,218
|
|
Cash and cash equivalents
|
|
$
|
26,288
|
|
|
$
|
26,288
|
|
|
$
|
26,288
|
|
Total
|
|
$
|
355,235
|
|
|
$
|
342,370
|
|
|
$
|
329,506
|
|
Equity Risk
Equity risk is the risk that we will incur economic losses due to adverse changes in the
prices of equity securities in our investment portfolio. Our exposure to changes in equity prices
primarily result from our holdings of common stocks and other equities. One means of assessing
exposure to changes in equity market prices is to estimate the potential changes in market values
of our equity investments resulting from a hypothetical broad-based decline in equity market prices
of 10%. Under this model, with all other factors constant, we estimate that such a decline in
equity market prices would decrease the market value of our equity investments by approximately
$101,246 and $242,740 respectively, based on our equity positions as of December 31, 2007 and
December 31, 2006.
As of December 31, 2007, approximately 0.3% of our investment portfolio was invested in
equity securities. We continuously evaluate market conditions regarding equity securities. We
principally manage equity price risk through industry and issuer diversification and asset
allocation techniques.
Credit Risk
We have exposure to credit risk as a holder of fixed income securities. We attempt to manage
our credit risk through issuer and industry diversification. We regularly monitor our overall
investment results and review compliance with our investment objectives and guidelines to reduce
our credit risk. As of December 31, 2007, approximately 64.6% of our fixed income security
portfolio was invested in U.S. government and government agency fixed income securities, 32.7% was
invested in other fixed income securities rated Aaa/Aa by Moodys, and 2.3 % was invested in
fixed income securities rated A by Moodys, and .4 % was invested in fixed income securities
rated Baa by Moodys. As of December 31, 2007, we had one security with a rating of Baa1.
We are also subject to credit risks with respect to our third-party reinsurers. Although
reinsurers are liable to us to the extent we cede risks to them, we are ultimately liable to our
policyholders on all these risks. As a result, reinsurance does not limit our ultimate obligation
to pay claims to policyholders and we may not be able to recover claims made to our reinsurers.
Effects of Inflation
We do not believe that inflation has had a material effect on our consolidated results
of operations, except insofar as inflation may affect interest rates and claim costs.
Item 8.
Financial Statements and Supplementary Data
Our consolidated financial statements and independent auditors report thereon appear
beginning on page F-2. See index to such consolidated financial statements and reports on page F-1.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of disclosure controls and procedures
As of the end of the period covered by this report on form 10-K, we, under the
supervision and with the participation of our management, including our Chairman and Chief
Executive Officer, our Chief Financial Officer and our Executive Vice President, carried out an
evaluation of the effectiveness of our disclosure controls and procedures as defined in
Rules 13a-15(e) of the Securities Exchange Act of 1934, as amended. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective in timely alerting them to material information relating to us (including
our consolidated subsidiaries) required to be disclosed in our periodic filings with the Securities
and Exchange Commission.
66
Managements Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate
internal control over financial reporting, as such item is defined in Exchange Act Rule 13a-15(f).
During 2007, we restructured the process of our bodily injury claims unit. Under the supervision
and with the participation of management, including the Companys Chief Executive Officer and Chief
Financial Officer, an evaluation of the effectiveness of the Companys internal control over
financial reporting was conducted based upon the framework in
Internal Control Integrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based upon that evaluation, the Companys internal controls over financial reporting were effective
as of December 31, 2007.
Beard Miller Company LLP, an independent registered public accounting firm, has issued an
audit report on the effectiveness of the Companys internal control over financial reporting as of
December 31, 2007, which is included herein.
Changes to Internal Control over Financial Reporting
During the fourth quarter of 2007, we continued to restructure the processes of our bodily
injury claims unit.
Item 9B.
Other Information
None.
PART III
Item 10.
Directors and Executive Officers of the Registrant
The information required by this Item relating to our directors and executive officers
is incorporated herein by reference to the headings Information Regarding Nominees and Directors,
Information Regarding Executive Officers and Section 16(a) Beneficial Ownership Reporting
Compliance of our definitive proxy statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2006 Annual General Meeting of Shareholders (Proxy Statement). The Company
intends to file the Proxy Statement prior to April 29, 2008.
Code of Ethics
The Company has adopted a Code of Business Conduct and Ethics within the meaning of
Item 406 of Regulation S-K of the Exchange Act. The Companys Code of Business Conduct and Ethics
applies to its principal executive officer, principal financial and principal accounting officer. A
copy of the Companys Code of Business Conduct and Ethics is posted on our website at
www.national-atlantic.com.
In the event that the Company makes any amendments to, or grants
any waiver from, a provision of the Code of Ethics that requires disclosure under Item 10 of
Form 8-K, the Company will post such information on its website. We will provide to any person
without charge, upon request, a copy of our Code of Business Conduct and Ethics.
Item 11.
Executive Compensation
The information required by this Item relating to executive compensation is incorporated
herein by reference to the heading Executive Compensation Summary of our Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management
The information required by this Item relating to security ownership of certain
beneficial owners and management and related shareholder matters is incorporated herein by
reference to the headings Security Ownership of Certain Beneficial Owners and Management and
Security Ownership of Management of our Proxy Statement.
Item 13.
Certain Relationships and Related Transactions
The information required by this Item relating to certain relationships and related
transactions is incorporated herein by reference to the heading Certain Related Party
Transactions of our Proxy Statement.
Item 14.
Principal Accountant Fees and Services
The information required by this Item relating to principal accountant fees and services
is incorporated herein by reference to Proposal 2 Ratification of Selection of Independent
Registered Public Accounting Firm of our Proxy Statement.
67
PART IV
Item 15.
Exhibit and Financial Statement Schedules
(a) The following documents are filed as part of this report:
1.
Financial statements
Reports of Independent Registered Accounting Firms.
Consolidated Balance Sheets as of December 31, 2007 and 2006.
Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005.
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2007, 2006 and 2005.
Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2007, 2006 and
2005.
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005.
Notes to Consolidated Financial Statements.
2.
Financial statement schedules required to be filed by Item 8 of this form:
Reports of Independent Registered Public Accounting Firms on Financial Statement Schedules
Condensed Financial Information of Registrant Balance Sheet as of December 31, 2007 and 2006.
Condensed Financial Information of Registrant Statements of Operations
Condensed Financial Information of Registrant -Statements of Cash Flows
Supplementary Insurance Information
Reinsurance
Valuation and Qualifying Accounts.
Supplementary Information Concerning Property and Casualty Insurance Operations
3.
Exhibits
|
3.1
|
|
Form of Amended and Restated Certificate of Incorporation of the Registrant**
|
|
|
3.2
|
|
Form of Amended and Restated Bylaws of the Registrant**
|
|
|
4.1
|
|
Form of Stock Certificate for the Common Stock**
|
|
|
10.1
|
|
Form of Agency Agreements between Proformance Insurance Company and Partner
Agents of Proformance Insurance Company**
|
|
|
10.2
|
|
Form of Limited Agency Agreements between Proformance Insurance Company and
Non-Active Replacement Carrier Service Agents of Proformance Insurance
Company**
|
|
|
10.3
|
|
Replacement Carrier Agreement, dated December 18, 2001, among the
Registrant, Proformance Insurance Company and Ohio Casualty of New Jersey,
Inc.**
|
|
|
10.4
|
|
Non-Competition Agreement, dated December 18, 2001, among the Registrant,
Proformance Insurance Company, The Ohio Casualty Insurance Company and Ohio
Casualty of New Jersey**
|
68
|
10.5
|
|
Letter Agreement, dated July 10, 2004, among the Registrant, Proformance
Insurance Company and The Ohio Casualty Insurance Company and Ohio Casualty
of New Jersey**
|
|
|
10.6
|
|
Replacement Carrier Agreement, dated December 8, 2003, between the
Registrant and Metropolitan Property and Casualty Insurance Company**
|
|
|
10.7
|
|
Share Repurchase Agreement, dated December 8, 2003, between the Registrant
and Metropolitan Property and Casualty Insurance Company**
|
|
|
10.8
|
|
Replacement Carrier Agreement, dated March 14, 2003, between Proformance
Insurance Company and Sentry Insurance**
|
|
|
10.9
|
|
Replacement Carrier Agreement, dated May 6, 2005, between Proformance
Insurance Company and The Hartford Financial Services Group, Inc.*****
|
|
|
10.9.1
|
|
First Amendment to the Replacement Carrier Agreement, dated June 28, 2005,
between Proformance Insurance Company and The Hartford Financial Services
Group, Inc.*****
|
|
|
10.10
|
|
Limited Assignment Distribution Agreement, effective January 1, 2004, between Proformance
Insurance Company and The Clarendon National Insurance Company**
|
|
|
10.11
|
|
Limited Assignment Distribution Agreement, effective January 1, 2004, between Proformance
Insurance Company and AutoOne Insurance Company**
|
|
|
10.12
|
|
2004 Stock and Incentive Plan of the Registrant**
|
|
|
10.13
|
|
National Atlantic Holdings Corp. Annual Bonus Plan**
|
|
|
10.14
|
|
Form of Employment Agreement between the Registrant and James V. Gorman, Frank J.
Prudente, John E. Scanlan and Bruce C. Bassman**
|
|
|
10.15
|
|
Form of Employment Agreement between Proformance Insurance Company and Peter A.
Cappello, Jr.**
|
|
|
10.16
|
|
Commutation and Release Agreement, effective as of December 31, 2002, between Odyssey
America Reinsurance Corporation and Proformance Insurance Company**
|
|
|
10.17
|
|
Form of Agency Agreements between Proformance Insurance Company and Active Replacement
Carrier Service Agents of Proformance Insurance Company**
|
|
|
10.18
|
|
Form of Indemnification Agreement between the Registrant and its directors and officers**
|
|
|
10.19
|
|
Letter Agreement, dated December 7, 2004, among the Registrant, Proformance Insurance
Company, The Ohio Casualty Insurance Company and Ohio Casualty of New Jersey**
|
|
|
10.20
|
|
Commutation and Mutual Release Agreement, effective as of March 26, 2003, between
Proformance Insurance Company and Gerling Global Reinsurance Corporation of America**
|
|
|
10.21
|
|
Form of Underwriting Agreement among the Company, the Ohio Casualty Insurance Company as
Selling Shareholder and the Underwriters named therein**
|
|
|
10.22
|
|
Form of Employee Stock Option Agreement for the Companys Nonstatutory Stock Option Plan***
|
69
|
10.23
|
|
Form of Amendment to Employee Stock Option Agreement for Certain Options Granted to
Messrs. James V. Gorman, Peter A. Capello, Jr. and Steven V. Stallone***
|
|
|
10.24
|
|
Form of Nonstatutory Stock Option Agreement for Certain Stock Options Granted to the
Estate of Mr. Frank Campion***
|
|
|
10.25
|
|
Form of Amendment to Employment Agreement for James V. Gorman, Frank J. Prudente, John E.
Scanlan, Bruce C. Bassman and Peter A. Cappello, Jr. ****
|
|
|
10.26
|
|
Replacement Carrier Agreement, dated November 7, 2005, between Proformance Insurance Company and The Hanover Insurance Company.*****
|
|
|
14.1
|
|
Code of Ethics *
|
|
|
21.1
|
|
Subsidiaries of the Registrant**
|
|
|
23.1
|
|
Consent of Beard Miller Company LLP *
|
|
|
23.2
|
|
Consent of Deloitte & Touche LLP*
|
|
|
31.1
|
|
Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act
of 1934, as amended*
|
|
|
31.2
|
|
Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act
of 1934, as amended*
|
|
|
32.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002*
|
|
|
32.2
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002*
|
|
|
99
|
|
Reports of Independent Registered Public Accounting Firms
|
|
|
|
*
|
|
Filed herewith
|
|
**
|
|
Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-117804). Initially filed July 30, 2004.
|
|
***
|
|
Incorporated by reference from National Atlantic Holdings
Corporations Report on Form 8-K, filed with the SEC on September 23,
2005.
|
|
****
|
|
Incorporated by reference from National Atlantic Holdings
Corporations Report on Form 8-K, filed with the SEC on September 1,
2006.
|
|
*****
|
|
Incorporated by reference from National Atlantic Holdings
Corporations annual report for the year ended December 31, 2006.
|
70
NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
INDEX
|
|
|
|
|
|
|
Page(s)
|
|
Consolidated Financial Statement:
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
|
|
|
|
F-3
|
|
As of December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2007, 2006 and 2005
|
|
|
F-4
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2007, 2006 and 2005
|
|
|
F-5
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2007, 2006 and 2005
|
|
|
F-6
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2007, 2006 and 2005
|
|
|
F-7
|
|
|
|
|
|
|
|
|
|
F-8
|
|
F-1
Report
of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
National Atlantic Holdings Corporation
Freehold, New Jersey
We have audited the accompanying consolidated balance sheets of National Atlantic Holdings
Corporation and subsidiaries (the Company) as of December 31, 2007
and 2006, and the related
consolidated statements of operations, comprehensive income (loss), changes in stockholders equity and
cash flows for the years then ended. The Companys management is responsible for these consolidated
financial statements. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits. The 2005 consolidated financial statements were audited by other auditors whose
report, dated March 24, 2006, expressed an unqualified opinion on those statements.
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 2007 and 2006 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of National Atlantic Holdings Corporation and
subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for
the years then ended in conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 9 to the
consolidated financial statements, the Company changed its method
of accounting for share-based payments in 2006.
We also have audited, in accordance with
the standards of the Public Company Accounting
Oversight Board (United States), National Atlantic Holdings Corporations internal control over financial
reporting as of December 31, 2007, based on criteria established in
Internal ControlIntegrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 13, 2008 expressed an unqualified opinion.
/s/ Beard Miller Company LLP
Beard Miller Company LLP
Harrisburg, Pennsylvania
March 13, 2008
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
National Atlantic Holdings Corporation and Subsidiaries
Freehold, NJ 07728
We have audited the accompanying consolidated statements of operations, stockholders equity, and
cash flows of National Atlantic Holdings Corporation and Subsidiaries (the Company) for the year
ended December 31, 2005. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements 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 the financial statements are free of material misstatement. The
Company was not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion
.
An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such consolidated statements of operations, stockholders equity, and cash flows
present fairly, in all material respects, the results of the Companys operations and their cash
flow for the year ended December 31, 2005, in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 24, 2006
F-3
Report
of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
National Atlantic Holdings Corporation
Freehold, New Jersey
We have audited National Atlantic Holdings Corporations (the Company) internal control over
financial reporting as of December 31, 2007, based on criteria
established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). National Atlantic Holdings Corporations 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 Report on Internal Controls 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 of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other
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, National Atlantic Holdings Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007, based on criteria
established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
F-4
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets as of December 31, 2007 and
2006 and the related consolidated statements of operations, comprehensive income (loss),
changes in stockholders equity, and cash flows for the years then ended, and the 2007 and 2006
consolidated financial statement schedules of National Atlantic Holdings Corporation, and our
reports dated March 13, 2008 expressed an unqualified opinion.
/s/ Beard Miller Company LLP
Beard Miller Company LLP
Harrisburg, Pennsylvania
March 13, 2008
F-5
NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Investments: (Note 2)
|
|
|
|
|
|
|
|
|
Fixed maturities held-to-maturity (fair value at December 31, 2007 and 2006
|
|
$
|
42,130
|
|
|
$
|
42,168
|
|
was $41,913 and $41,401, respectively)
|
|
|
|
|
|
|
|
|
Fixed maturities available-for-sale (amortized cost at December 31, 2007 and 2006
|
|
|
270,519
|
|
|
|
273,724
|
|
was $269,784 and $275,810, respectively)
|
|
|
|
|
|
|
|
|
Equity securities (cost at December 31, 2007 and 2006 was $1,014 and $2,288, respectively)
|
|
|
1,012
|
|
|
|
2,427
|
|
Short-term investments (cost at December 31, 2007 and 2006, was $457 and $453, respectively)
|
|
|
457
|
|
|
|
453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
314,118
|
|
|
|
318,772
|
|
Cash and cash equivalents
|
|
|
28,098
|
|
|
|
26,288
|
|
Accrued investment income
|
|
|
3,950
|
|
|
|
4,122
|
|
Premiums receivable
|
|
|
47,753
|
|
|
|
49,976
|
|
Reinsurance recoverables and receivables (Note 4)
|
|
|
20,831
|
|
|
|
26,914
|
|
Deferred acquisition costs
|
|
|
18,934
|
|
|
|
18,601
|
|
Property and equipment net (Note 7)
|
|
|
3,143
|
|
|
|
1,988
|
|
Income taxes recoverable (Note 6)
|
|
|
8,455
|
|
|
|
|
|
Other assets
|
|
|
4,393
|
|
|
|
6,169
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
449,675
|
|
|
$
|
452,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity:
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses (Note 5)
|
|
$
|
197,105
|
|
|
$
|
191,386
|
|
Unearned premiums
|
|
|
86,823
|
|
|
|
85,523
|
|
Accounts payable and accrued expenses
|
|
|
2,446
|
|
|
|
2,420
|
|
Deferred income taxes (Note 6)
|
|
|
10,829
|
|
|
|
9,967
|
|
Income taxes payable (Note 6)
|
|
|
|
|
|
|
3,026
|
|
Other liabilities
|
|
|
8,296
|
|
|
|
9,620
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
305,499
|
|
|
|
301,942
|
|
|
|
|
|
|
|
|
Commitments and Contingencies: (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common Stock, no par value (50,000,000 shares authorized; 11,425,790 issued, 11,007,487 outstanding
|
|
|
97,820
|
|
|
|
97,570
|
|
as of December 31, 2007; 11,288,190 issued, 11,121,941 outstanding as of December 31, 2006, respectively)
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
50,541
|
|
|
|
56,735
|
|
Accumulated other comprehensive income (loss)
|
|
|
107
|
|
|
|
(1,694
|
)
|
Common stock held in treasury, at cost (418,303 and 166,249 shares held as of December 31, 2007
and 2006, respectively)
|
|
|
(4,292
|
)
|
|
|
(1,723
|
)
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
144,176
|
|
|
|
150,888
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
449,675
|
|
|
$
|
452,830
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-6
NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
165,220
|
|
|
$
|
157,354
|
|
|
$
|
172,782
|
|
Net investment income
|
|
|
17,276
|
|
|
|
16,082
|
|
|
|
12,403
|
|
Net realized investment gains
|
|
|
72
|
|
|
|
979
|
|
|
|
411
|
|
Other income
|
|
|
1,703
|
|
|
|
1,441
|
|
|
|
1,745
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
184,271
|
|
|
|
175,856
|
|
|
|
187,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses incurred
|
|
|
145,085
|
|
|
|
103,824
|
|
|
|
132,794
|
|
Underwriting, acquisition and insurance
related expenses
|
|
|
49,652
|
|
|
|
48,275
|
|
|
|
42,264
|
|
Other operating and general expenses
|
|
|
539
|
|
|
|
2,268
|
|
|
|
3,989
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
195,276
|
|
|
|
154,367
|
|
|
|
179,047
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(11,005
|
)
|
|
|
21,489
|
|
|
|
8,294
|
|
(Benefit) provision for income taxes
|
|
|
(4,811
|
)
|
|
|
7,107
|
|
|
|
1,858
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
$
|
(6,194
|
)
|
|
$
|
14,382
|
|
|
$
|
6,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share Common Stock -
Basic
|
|
$
|
(0.56
|
)
|
|
$
|
1.28
|
|
|
$
|
0.70
|
|
Net (loss) income per share Common Stock -
Diluted
|
|
$
|
(0.56
|
)
|
|
$
|
1.26
|
|
|
$
|
0.68
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-7
NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net (Loss) Income
|
|
$
|
(6,194
|
)
|
|
$
|
14,382
|
|
|
$
|
6,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net holding gains (losses) arising during the
period
|
|
|
1,388
|
|
|
|
(462
|
)
|
|
|
(1,806
|
)
|
Reclassification adjustment for realized losses
included in net income
|
|
|
354
|
|
|
|
311
|
|
|
|
22
|
|
Amortization of unrealized loss recorded on
transfer
of fixed income securities to held-to-maturity
|
|
|
59
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
1,801
|
|
|
|
(92
|
)
|
|
|
(1,784
|
)
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (Loss) Income
|
|
$
|
(4,393
|
)
|
|
$
|
14,290
|
|
|
$
|
4,652
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-8
NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
For the years ended December 31, 2007, 2006, and 2005
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Common Stock
|
|
Common Stock
|
|
Common Stock
|
|
Retained
|
|
Comprehensive
|
|
Treasury Stock
|
|
Stockholders
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Earnings
|
|
Income (Loss)
|
|
Shares
|
|
Amount
|
|
Equity
|
Balance at December 31, 2004
|
|
|
2,747,743
|
|
|
$
|
3,002
|
|
|
|
2,194,247
|
|
|
$
|
28,738
|
|
|
|
|
|
|
$
|
|
|
|
$
|
35,917
|
|
|
$
|
182
|
|
|
|
|
|
|
|
|
|
|
$
|
67,839
|
|
Issuance of Common Stock
related to IPO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,985,000
|
|
|
|
62,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,198
|
|
Conversion of Class A and
Class B Common Stock
|
|
|
(2,747,743
|
)
|
|
|
(3,002
|
)
|
|
|
(2,194,247
|
)
|
|
|
(28,738
|
)
|
|
|
4,941,990
|
|
|
|
31,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275,200
|
|
|
|
470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
470
|
|
Amortization of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,050
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,436
|
|
Other comprehensive (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,784
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,202,190
|
|
|
$
|
97,458
|
|
|
$
|
42,353
|
|
|
$
|
(1,602
|
)
|
|
|
|
|
|
|
|
|
|
$
|
138,209
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,000
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,382
|
|
Other comprehensive (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
(92
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,249
|
|
|
|
(1,723
|
)
|
|
|
(1,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,288,190
|
|
|
$
|
97,570
|
|
|
$
|
56,735
|
|
|
|
($1,694
|
)
|
|
|
166,249
|
|
|
|
($1,723
|
)
|
|
$
|
150,888
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,600
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,194
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,801
|
|
|
|
|
|
|
|
|
|
|
|
1,801
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
252,054
|
|
|
|
(2,569
|
)
|
|
|
(2,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,425,790
|
|
|
$
|
97,820
|
|
|
$
|
50,541
|
|
|
$
|
107
|
|
|
|
418,303
|
|
|
|
($4,292
|
)
|
|
$
|
144,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-9
NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(6,194
|
)
|
|
$
|
14,382
|
|
|
$
|
6,436
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,052
|
|
|
|
413
|
|
|
|
493
|
|
Amortization of premium/discount on bonds
|
|
|
908
|
|
|
|
875
|
|
|
|
1,079
|
|
Share-based compensation expense
|
|
|
(493
|
)
|
|
|
1,063
|
|
|
|
3,050
|
|
Payments on exercise of stock appreciation rights
|
|
|
(445
|
)
|
|
|
|
|
|
|
|
|
Realized gains on investment sales
|
|
|
(72
|
)
|
|
|
(979
|
)
|
|
|
(411
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(108
|
)
|
|
|
(1,014
|
)
|
|
|
(7
|
)
|
Premiums receivable
|
|
|
2,223
|
|
|
|
(50
|
)
|
|
|
(18,741
|
)
|
Reinsurance recoverables and receivables
|
|
|
6,083
|
|
|
|
14,143
|
|
|
|
(5,913
|
)
|
Receivable from Ohio Casualty
|
|
|
|
|
|
|
|
|
|
|
4,350
|
|
Receivable from Sentry
|
|
|
|
|
|
|
|
|
|
|
1,250
|
|
Deferred acquisition costs
|
|
|
(333
|
)
|
|
|
(1,467
|
)
|
|
|
(6,262
|
)
|
Accrued investment income
|
|
|
172
|
|
|
|
(562
|
)
|
|
|
(1,475
|
)
|
Income taxes recoverable
|
|
|
(8,455
|
)
|
|
|
1,152
|
|
|
|
(1,152
|
)
|
Other assets
|
|
|
1,776
|
|
|
|
1,820
|
|
|
|
(714
|
)
|
Unpaid losses and loss adjustment expenses
|
|
|
5,719
|
|
|
|
(27,975
|
)
|
|
|
35,078
|
|
Accounts payable and accrued expenses
|
|
|
26
|
|
|
|
(158
|
)
|
|
|
(4,943
|
)
|
Unearned premiums
|
|
|
1,300
|
|
|
|
3,977
|
|
|
|
17,376
|
|
Income taxes payable
|
|
|
(3,026
|
)
|
|
|
3,026
|
|
|
|
(1,601
|
)
|
Other liabilities
|
|
|
(385
|
)
|
|
|
(1,419
|
)
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(252
|
)
|
|
|
7,227
|
|
|
|
28,104
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment net
|
|
|
(2,207
|
)
|
|
|
(339
|
)
|
|
|
(537
|
)
|
Purchases of fixed maturity securities available for sale
|
|
|
(150,677
|
)
|
|
|
(94,749
|
)
|
|
|
(164,897
|
)
|
Sales and maturities of fixed maturity investments available-for-sale
|
|
|
155,969
|
|
|
|
56,247
|
|
|
|
93,460
|
|
Purchases of equity securities
|
|
|
(2,828
|
)
|
|
|
|
|
|
|
(21,366
|
)
|
Sales of equity securities
|
|
|
4,128
|
|
|
|
11,327
|
|
|
|
21,842
|
|
(Purchases) sales of short-term investments net
|
|
|
(4
|
)
|
|
|
8,347
|
|
|
|
5,020
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
4,381
|
|
|
|
(19,167
|
)
|
|
|
(66,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stocknet
|
|
|
250
|
|
|
|
115
|
|
|
|
62,668
|
|
Purchases of common stock held in treasury
|
|
|
(2,569
|
)
|
|
|
(1,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(2,319
|
)
|
|
|
(1,608
|
)
|
|
|
62,668
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
1,810
|
|
|
|
(13,548
|
)
|
|
|
24,294
|
|
Cash and cash equivalents beginning of year
|
|
|
26,288
|
|
|
|
39,836
|
|
|
|
15,542
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of year
|
|
$
|
28,098
|
|
|
$
|
26,288
|
|
|
$
|
39,836
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
6,867
|
|
|
$
|
3,649
|
|
|
$
|
4,717
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-10
NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
1. Nature of Operations and Significant Accounting Policies
National Atlantic Holdings Corporation (NAHC) was incorporated in New Jersey, on July 29,
1994, with its subsidiaries referred to as the Company. NAHC is a holding company for Proformance
Insurance Company (Proformance), its wholly-owned subsidiary. Proformance is domiciled in the State
of New Jersey and writes property and casualty insurance, primarily personal auto. NAHCs initial
capitalization was pursuant to private placement offerings. The initial stockholders paid $1.16 per
share for 2,812,200 shares of Class A common stock.
On February 14, 1995 the Board of Directors approved the offering of up to 645,000 shares at
$2.33 per share of nonvoting Class B common stock. At the end of 1995, 283,112 shares were issued
at $2.33 per share to new agents and at 105% of the net book value to the officers and directors
under a one-time stock purchase program. The average per share price for both issuances of this
Class B common stock was approximately $2.05 per share. On April 7, 1995, the Certificate of
Incorporation was amended to authorize the issuance of up to 4,300,000 shares of nonvoting common
stock.
NAHC also has a controlling interest (80 percent) in Niagara Atlantic Holdings Corporation and
Subsidiaries (Niagara), which is a New York corporation. Niagara was incorporated on December 29,
1995. The remaining interest (20 percent) is owned by New York agents. Niagara was established as a
holding company in order to execute a surplus debenture and service agreement with Capital Mutual
Insurance (CMI). As of June 5, 2000, CMI has gone into liquidation and is under the control of the
New York State Insurance Department. CMI is no longer writing new business and therefore neither is
Niagara. Niagara had $0 equity value as of December 31, 2007 and 2006. NAHC has no remaining
obligations as it relates to the agreement.
In addition, NAHC has another wholly owned subsidiary, Riverview Professional Services, Inc.,
which was established in 2002 for the purpose of providing case management and medical cost
containment services to Proformance and other unaffiliated clients.
In December 2001, NAHC established National Atlantic Financial Corporation (NAFC), to offer
general financing services to its agents and customers. In November 2003, NAFC established a wholly
owned subsidiary, Mayfair Reinsurance Company Limited, for the purpose of providing reinsurance
services to unaffiliated clients.
Another wholly owned subsidiary of NAHC is National Atlantic Insurance Agency, Inc. (NAIA),
which was incorporated on April 5, 1995. The Company purchased all 1,000 shares of NAIAs
authorized common stock at $1 per share. NAIA obtained its license to operate as an insurance
agency in December 1995. The agency commenced operations on March 20, 1996. The primary purpose of
this entity is to service any direct business written by Proformance and to provide services to
agents and policyholders acquired as part of replacement carrier transactions.
On April 21, 2005, an initial public offering of 6,650,000 shares of the Companys common
stock (after the 43-for-1 stock split) was completed. The Company sold 5,985,000 shares resulting
in net proceeds to the Company (after deducting issuance costs and the underwriters discount) of
$62,198,255. The Company contributed $43,000,000 to Proformance, which increased its statutory
surplus. The additional capital allowed the Company to reduce its reinsurance purchases and to
retain more of the direct written premiums produced by its Partner Agents. On May 8, 2006 and May
16, 2007, the Company contributed an additional $9,000,000 and
$4,100,000, respectively, to Proformance, thereby further increasing its statutory surplus. The
remainder of the capital raised will be used for general corporate purposes, including but not
limited to possible additional increases to the capitalization of the existing subsidiaries.
On July 5, 2006, the Board of Directors of the Company authorized the repurchase of a maximum
of 1,000,000 shares and a minimum of 200,000 shares of capital stock of the Company within the next
twelve months. On May 24, 2007, the Board of Directors of the Company authorized a one year
extension of the buy-back program. As of December 31, 2007, the Company had repurchased 418,303
shares with an average price of $10.26. As of December 31, 2007, the Company is authorized to
repurchase an additional 581,697 shares.
The significant accounting policies followed by the Company in the preparation of the
accompanying consolidated financial statements are as follows:
Basis of Presentation
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of America (GAAP)
which differ materially from statutory accounting practices prescribed or permitted for insurance
companies by regulatory agencies. All significant intercompany transactions and balances have been
eliminated.
F-11
Segment Disclosure
We manage and report our business as a single segment based upon several
factors. Although our insurance subsidiary, Proformance writes private passenger automobile,
homeowners and commercial lines insurance, we consider those operating segments as one operating
segment due to the fact that the nature of the products are similar, the nature of the production
processes are similar, the type of class of customer for the products are similar, the methods used
to distribute the products are similar and the nature of the regulatory environment is similar. In
addition, these lines of business have historically demonstrated similar economic characteristics
and as such are aggregated and reported as a single segment. Also, in addition to Proformance, all
other operating segments wholly owned by the Company are aggregated and reported as a single
segment due to the fact that the nature of the products are similar, the nature of the production
processes are similar, the type of class of customer for the products are similar, the methods used
to distribute the products are similar and the nature of the regulatory environment is similar.
A summary of our consolidated revenues is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Proformance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal lines insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal auto
|
|
$
|
103,717,243
|
|
|
|
56.28
|
%
|
|
$
|
109,854,722
|
|
|
|
62.47
|
%
|
|
$
|
140,845,822
|
|
|
|
75.18
|
%
|
Homeowners
|
|
|
30,270,618
|
|
|
|
16.42
|
%
|
|
|
21,264,484
|
|
|
|
12.09
|
%
|
|
|
16,066,193
|
|
|
|
8.58
|
%
|
Commerical lines insurance
|
|
|
31,232,101
|
|
|
|
16.95
|
%
|
|
|
26,234,594
|
|
|
|
14.92
|
%
|
|
|
15,870,049
|
|
|
|
8.47
|
%
|
Riverview
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Case Management
|
|
|
4,178,806
|
|
|
|
2.27
|
%
|
|
|
5,638,235
|
|
|
|
3.21
|
%
|
|
|
4,704,598
|
|
|
|
2.51
|
%
|
NAIA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance brokerage
|
|
|
2,075,896
|
|
|
|
1.13
|
%
|
|
|
2,365,851
|
|
|
|
1.35
|
%
|
|
|
2,230,989
|
|
|
|
1.19
|
%
|
Intercompany elimination entries
|
|
|
(7,663,696
|
)
|
|
|
(4.16
|
)%
|
|
|
(7,888,461
|
)
|
|
|
(4.49
|
)%
|
|
|
(6,576,113
|
)
|
|
|
(3.51
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
163,810,968
|
|
|
|
|
|
|
|
157,469,425
|
|
|
|
|
|
|
|
173,141,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
17,275,953
|
|
|
|
9.38
|
%
|
|
|
16,081,895
|
|
|
|
9.14
|
%
|
|
|
12,403,235
|
|
|
|
6.62
|
%
|
Net realized investment gains
|
|
|
71,877
|
|
|
|
0.04
|
%
|
|
|
979,007
|
|
|
|
0.56
|
%
|
|
|
410,635
|
|
|
|
0.22
|
%
|
Other income
|
|
|
3,112,522
|
|
|
|
1.69
|
%
|
|
|
1,325,586
|
|
|
|
0.75
|
%
|
|
|
1,385,588
|
|
|
|
0.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Revenue
|
|
$
|
184,271,320
|
|
|
|
100.00
|
%
|
|
$
|
175,855,913
|
|
|
|
100.00
|
%
|
|
$
|
187,340,996
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts in our financial statements. As
additional information becomes available, these estimates and assumptions are subject to change and
thus impact amounts reported in the future. The primary estimates made by management involve the
establishment of unpaid loss and loss adjustment expense reserves. Management also employs
estimates in the application of its investment accounting policy for other-than-temporary
impairment.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company
considers short-term investments with an initial maturity of three months or less to be cash
equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization is provided under the straight-line method based upon the following estimated useful
lives:
|
|
|
|
|
|
|
Estimated
|
Description
|
|
Life (Years)
|
Automobiles
|
|
|
5
|
|
Furniture and fixtures
|
|
|
7
|
|
Computer software and electronic data equipment
|
|
|
3
|
|
Leasehold improvements
|
|
|
*
|
|
|
|
|
*
|
|
Amortized over the remaining life of the lease from the date placed in service.
|
F-12
Major replacements of, or improvements to, property and equipment are capitalized. Minor
replacements, repairs and maintenance are charged to expense as incurred. Upon retirement or sale,
the cost of the assets disposed and the related accumulated depreciation and amortization are
removed from the accounts and any resulting gain or loss is recorded in operations. The recoverable
value of property and equipment assets are evaluated at least annually.
Investments
Management determines the appropriate classification of securities at the time
of purchase. Fixed maturity investments which may be sold in response to, among other things,
changes in interest rates, prepayment risk, income tax strategies or liquidity needs, are
classified as available-for-sale and are carried at fair value. Equity securities, which are
classified as available-for-sale, are also carried at fair value. Changes in fair value for fixed
maturity investments and equity securities classified as available-for-sale are credited or charged
to stockholders equity as other comprehensive income (loss). Fixed maturity investments which
management has the positive intent and ability to hold to maturity are classified as
held-to-maturity and carried at cost, adjusted for amortization of premiums and accretion of
discounts using an effective interest method. Short-term securities are carried at cost, which
approximates fair value. Fair values are based on quoted market prices. For mortgage-backed
securities for which there is a prepayment risk, prepayment assumptions are evaluated and revised
as necessary. Any adjustments required due to the resultant change in effective yields and
maturities are recognized on a prospective basis through yield adjustments. Realized investment
gains and losses are recorded on the specific identification method. All security transactions are
recorded on a trade date basis.
The Company considers a number of factors in the evaluation of whether a decline in value is
other-than-temporary including: (a) the financial condition and near term prospects of the issuer;
(b) the Companys ability and intent to retain the investment for a period of time sufficient to
allow for an anticipated recovery in value; and (c) the period and degree to which the fair value
has been below cost. A fixed maturity security is other-than-temporarily impaired if it is probable
that the Company will not be able to collect all the amounts due under the securitys contractual
terms. Equity investments are considered to be impaired when it becomes apparent that the Company
will not recover its cost after considering the severity and duration of the unrealized loss,
compared with general market conditions. These adjustments are recorded as realized investment
losses.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk include cash balances and marketable fixed maturity securities. The
Company places its temporary cash investments with creditworthy financial institutions. The Company
holds bonds and notes issued by the United States government and corporations. By policy, these
investments are kept within limits designed to prevent risks caused by concentration. Consequently,
as of December 31, 2007 and 2006, the Company does not believe it has significant concentrations of
credit risks. The Company is exposed to a concentration of credit risk with respect to amounts due
from reinsurers.
Deferred Policy Acquisition Costs
Deferred acquisition costs, which consist of commissions
and other underwriting expenses, are costs that vary with and are directly related to the
underwriting of new and renewal policies and are deferred and amortized over the period in which
the related premiums are earned. Anticipated investment income is considered in the determination
of the recoverability of deferred acquisition costs. The Company determines whether acquisition
costs are recoverable considering future losses and loss adjustment expenses, maintenance costs and
anticipated investment income. To the extent that acquisition costs are not recoverable, the
deficiency is charged to income in the period identified.
Amortization of deferred acquisition costs for the years ended December 31, 2007, 2006 and
2005 was $43,893,816, $40,405,621 and $34,505,776, respectively, which is reported as a component
of underwriting, acquisition and insurance related expenses.
Insurance Liabilities/Unpaid Losses and Loss Adjustment Expenses
The provision for unpaid
losses and loss adjustment expenses includes individual case estimates, principally on the basis of
reports received from claim adjusters engaged by the Company for losses reported prior to the close
of the year and estimates with respect to incurred but not reported (IBNR) losses and loss
adjustment expenses, net of anticipated salvage and subrogation. The method of making such
estimates and for establishing the resulting reserves is continually reviewed and updated, and
adjustments resulting therefrom are reflected in current operations. The estimates are determined
by management and are based upon industry data relating to loss and loss adjustment expense ratios
as well as the Companys historical data. The unpaid losses and unpaid loss adjustment expenses
presented in these financial statements have not been discounted
This liability is subject to the impact of changes in claim severity, frequency and other
factors which may be outside of the Companys control. Despite the variability inherent in such
estimates, management believes that the liability for unpaid losses and loss adjustment expenses is
adequate and represents its best estimate of the ultimate cost of investigating, defending and
settling claims. However, the Companys actual future experience may not conform to the assumptions
inherent in the determination of this liability. Accordingly, the ultimate settlement of these
losses and the related loss adjustment expenses may vary significantly from the amounts included in
the accompanying consolidated financial statements.
F-13
Recognition of Premium Revenues
Premiums written or assumed are earned on either the daily
pro-rata basis or mid-month method over the estimated life of the policy or reinsurance contract.
Unearned premiums are established and represent the portion of net premiums which is applicable to
the unexpired terms of policies in force.
Allowance for Doubtful Accounts
The Company creates a reserve for premium receivables that
may become uncollectible. The amount of the reserve is based upon managements assessment of
collectibility in reviewing aging experience.
Replacement Carrier Transaction Fees
The Company accounts for fees paid in consideration
for the acquisition of policy renewal rights as intangible assets and amortizes the assets as a
charge to income over the related renewal period.
Accounting for Reinsurance
The Company accounts for reinsurance in conformity with
Statement of Financial Accounting Standards No. 113,
Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts.
This standard requires the Company to report assets
and liabilities relating to reinsured contracts gross of the effects of reinsurance. The standard
also establishes the conditions required for a contract with a reinsurer to be accounted for as
reinsurance and prescribes accounting and reporting standards for such contracts.
The Company contracts with insurance companies, which assume portions of the risk undertaken.
The Company remains the primary obligor to the extent any reinsurer is unable to meet its
obligations under the existing reinsurance agreements. The reinsurance contracts are accounted for
on a basis consistent with that used in the accounting of the direct policies issued by the
Company.
Capitalization of Costs of Software for Internal Use
We have capitalized certain costs for
the development of internal-use software under the guidelines of SOP 98-1,
Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use.
These capitalized costs are included
in the accompanying consolidated balance sheets as a component of property and equipment net.
Capitalized costs, net of amortization, totaled $1,964,209 and $856,202 as of December 31, 2007 and
2006, respectively.
Income Taxes
The Company files a consolidated federal tax return. Under the tax allocation
agreement, current federal income tax expense (benefit) is computed on a separate return basis and
provides that members shall make payments (receive reimbursements) to the extent that their income
(losses and other credit) contributes to (reduces) consolidated federal income tax expense. The
member companies are reimbursed for the tax attributes they have generated when utilized in the
consolidated return.
The Company recognizes taxes payable or refundable for the current year, and deferred taxes
for the future tax consequences of differences between the financial reporting and tax basis of
assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years the temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes are expected to reverse.
Share-based Compensation
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123 (revised 2004),
Share-Based Payment
(SFAS 123R), which replaces SFAS
No. 123, Accounting for Stock-Based Compensation (SFAS 123) and supercedes APB Opinion No. 25,
Accounting for Stock Issued to
Employees
. SFAS 123R requires all share-based payments to employees, including grants of employee
stock options and stock appreciation rights, to be recognized in the financial statements based on
their fair values and the recording of such expense in the consolidated statements of operations.
In March 2005, the SEC issued Staff Accounting Bulletin (SAB) 107, which expresses views of the SEC
staff regarding the application of SFAS 123R. SAB 107 provides interpretive guidance related to the
interaction between SFAS 123R and certain SEC rules and regulations, as well as provides the SEC
staffs views regarding the valuation of share-based payment arrangements for public companies. In
April 2005, the SEC amended compliance dates for SFAS 123R to allow companies to implement SFAS
123R at the beginning of their next fiscal year, instead of the next fiscal reporting period that
began after June 15, 2005. The Company adopted the provisions of SFAS 123R effective January 1,
2006 at which time the pro forma disclosures previously permitted under SFAS 123 were no longer an
alternative to financial statement recognition. Under SFAS 123R, the Company was required to
determine the appropriate fair value model to be used for valuing share-based payments, the
amortization method for compensation cost and the transition method to be used at date of adoption.
For further details, please refer to Note 9 Share-based Compensation.
F-14
Adoption of New Accounting Pronouncements
In September 2005, the AICPA issued Statement of Position 05-1, Accounting by Insurance
Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of
Insurance Contracts (SOP 05-1). SOP 05-1 provides guidance on accounting by insurance enterprises
for deferred acquisition costs in connection with modifications or exchanges of insurance contracts
other than those specifically described in FASB 97, Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments. The Company has complied with the requirements of SOP 05-1, which were effective for
periods which began after December 15, 2006.
On July 13, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48) which provides guidance on accounting for a tax position taken or expected to be
taken in a tax return. The Interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. The guidance in
FIN 48 is effective for fiscal years beginning after December 15, 2006. The provisions of FIN 48
are to be applied to all tax positions upon initial adoption, with the cumulative effect adjustment
reported as an adjustment to the opening balance of retained earnings. The Company adopted, as a
change in accounting principle, the provisions of FIN 48, effective January 1, 2007. The Company
has determined that the adoption did not have a material impact on the Companys consolidated
financial statements. For further details please refer to Note 6 Income Taxes.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS 157). This
statement defines fair value, establishes a framework for measuring fair value, and enhances
disclosures about fair value
measurements. The provisions of SFAS 157 are effective for financial statements issued for fiscal
years beginning after November 15, 2007. We are currently evaluating the method of adoption and
whether that adoption will have a material impact on the Companys consolidated financial
statements.
In December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b, Effective Date of
FASB Statement No. 157, that would permit a one-year deferral in applying the measurement
provisions of Statement No. 157 to non-financial assets and non-financial liabilities
(non-financial items) that are not recognized or disclosed at fair value in an entitys financial
statements on a recurring basis (at least annually). Therefore, if the change in fair value of a
non-financial item is not required to be recognized or disclosed in the financial statements on an
annual basis or more frequently, the effective date of application of Statement 157 to that item is
deferred until fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years. This deferral does not apply, however, to an entity that applies Statement 157 in
interim or annual financial statements before proposed FSP 157-b is finalized. The Company is
currently evaluating the impact, if any, that the adoption of FSP 157-b will have on the Companys
operating income or net earnings.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of SFAS 115 (SFAS 159). SFAS 159 permits all
entities to choose, at specified election dates, to measure eligible items at fair value. An
entity shall report unrealized gains and losses for which the fair value option has been elected in
earnings at each subsequent reporting date. The fair value option is to be applied on an
instrument by instrument basis and is irrevocable unless a new election date occurs and is applied
only to an entire instrument. The provisions of SFAS 159 are effective for financial statements
issued for fiscal years beginning after November 15, 2007. We are currently evaluating the method
of adoption and whether that adoption will have a material impact on the Companys consolidated
financial statements.
Retirement Plans
The Company has a contributory savings plan for salaried employees meeting
certain service requirements, which qualifies under Section 401(k) of the Internal Revenue Code of
1986. Retirement plan expense for the years ended December 31, 2007, 2006 and 2005 amounted to
$390,003, $353,740 and $255,440, respectively.
Guaranty Fund Assessments
As more fully described in Note 10, New Jersey law requires that
property and casualty insurers licensed to do business in New Jersey participate in the New Jersey
Property-Liability Insurance Guaranty Association (which we refer to as NJPLIGA). Proformance
accounts for its participation in the NJPLIGA in accordance with Statement of Position 97-3,
Accounting by Insurance and Other Enterprises for Insurance Related Assessments
(SOP 97-3). In this
regard, Proformance records a liability when writing the premiums, as direct written premiums are
the basis for the state assessment and are considered the obligating event that establishes the
liability. The percentage of written premium recorded as a liability is equal to the surcharge
percentage mandated by the state to be charged to each policyholder. This surcharge percentage is
likewise determined based on the relationship between the Companys direct written premium to that
of the industry as a whole as determined by the state. As such, Proformance also records a
corresponding receivable from policyholders in recognition of the fact that New Jersey law allows
for Proformance to fully recoup amounts assessed through policyholder surcharges. There is no
earnings impact because as SOP 97-3 outlines, policyholder surcharges that are required as a pass
through to the state regulatory body should be accounted for in a manner such that amounts
collected or receivable are not recorded as revenues and amounts due or paid are not expensed.
F-15
Also, as more fully described in Note 10, the Company may be assigned business by the State of
New Jersey relating to the Personal Automobile Insurance Plan (PAIP) and the Commercial Automobile
Insurance Plan (CAIP). With regard to PAIP, the State of New Jersey allows for the Company to enter
into Limited Assignment Distribution (LAD) arrangements whereby for a fee, the Companys portion of
PAIP business is transferred to the LAD carrier such that Proformance has no responsibility for the
PAIP business. Proformance records its CAIP liability assignment on its books as assumed business
as required by the State of New Jersey.
The New Jersey Automobile Insurance Risk Exchange, or NJAIRE, is a plan designed to compensate
member companies for claims paid for non-economic losses and claims adjustment expenses which would
not have been incurred had the tort limitation option provided under New Jersey insurance law been
elected by the injured party filing the claim for non-economic losses. As a member company of
NJAIRE, we submit information with respect to the number of claims reported to us that meet the
criteria outlined above. NJAIRE compiles the information submitted by all member companies and
remits assessments to each member company for this exposure. The Company, since its inception, has
never received compensation from NJAIRE as a result of its participation in the plan. The Companys
participation in NJAIRE is mandated by the New Jersey Department of Banking and Insurance (NJDOBI).
The assessments that the Company has received required payment to NJAIRE for the amounts assessed.
The Company records the assessments received as underwriting, acquisition and insurance related
expenses.
2. Investments
On January 1, 2006, the Company transferred certain fixed income securities previously
classified as available-for-sale to held-to-maturity. The Company had previously classified these
investments as available-for-sale in accordance with paragraph 6 of SFAS 115, Accounting for
Certain Investments in Debt and Equity Securities (SFAS 115) which states that, At acquisition, an
enterprise shall classify debt and equity securities into one of three categories:
held-to-maturity, available-for-sale and trading. At each reporting date, the appropriateness of
the classification shall be reassessed. Management has determined that as of January 1, 2006, the
securities should be transferred to the held-to-maturity category as the Company has the positive
intent and ability to hold these securities to maturity.
As outlined in paragraph 15 of SFAS 115, the transfer of securities between categories of
investments shall be reported at fair value. At the date of transfer, the unrealized holding gain
or loss, for a debt security transferred into the held-to-maturity category from the
available-for-sale category, shall continue to be reported in a separate component of stockholders
equity, but shall be amortized over the remaining life of the individual securities.
On January 1, 2006, the Company reduced the cost basis of the transferred securities to the
fair value as of that date. The Company recorded, as a component of accumulated other comprehensive
loss on the consolidated balance sheet, an unrealized loss on the transfer of securities to
held-to-maturity from available-for-sale in the amount of $750,917. On January 1, 2006, the Company
began to amortize over the life of the investments as an adjustment of yield, in a manner
consistent with the amortization of any premium or discount on the consolidated statement of
operations and accumulated other comprehensive loss on the consolidated balance sheet, amortization
of the unrealized loss. For each of the years ended December 31, 2007 and 2006, the Company
amortized $90,524, respectively, of the unrealized loss.
The amortized cost and estimated fair value of the held-to-maturity investment portfolio,
classified by category, as of December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Value
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government,
government agencies
and authorities
|
|
$
|
6,783,210
|
|
|
$
|
231,889
|
|
|
$
|
|
|
|
$
|
7,015,099
|
|
State, local government
and agencies
|
|
|
2,842,430
|
|
|
|
|
|
|
|
(7,020
|
)
|
|
|
2,835,410
|
|
Industrial and miscellaneous
|
|
|
32,504,281
|
|
|
|
143,341
|
|
|
|
(585,430
|
)
|
|
|
32,062,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments Held-to-Maturity
|
|
$
|
42,129,921
|
|
|
$
|
375,230
|
|
|
$
|
(592,450
|
)
|
|
$
|
41,912,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
The amortized cost and estimated fair value of the available-for-sale investment portfolio,
classified by category, as of December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost/
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Value
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government,
government agencies
and authorities
|
|
$
|
189,217,646
|
|
|
$
|
529,936
|
|
|
$
|
(117,923
|
)
|
|
$
|
189,629,659
|
|
State, local government
and agencies
|
|
|
63,368,016
|
|
|
|
454,957
|
|
|
|
(47,535
|
)
|
|
|
63,775,438
|
|
Industrial and miscellaneous
|
|
|
12,176,793
|
|
|
|
35,730
|
|
|
|
(126,647
|
)
|
|
|
12,085,876
|
|
Mortgage-backed securities
|
|
|
5,021,895
|
|
|
|
14,154
|
|
|
|
(8,274
|
)
|
|
|
5,027,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
269,784,350
|
|
|
|
1,034,777
|
|
|
|
(300,379
|
)
|
|
|
270,518,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
456,821
|
|
|
|
|
|
|
|
|
|
|
|
456,821
|
|
Equity securities
|
|
|
1,013,850
|
|
|
|
|
|
|
|
(1,386
|
)
|
|
|
1,012,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments Available-for-Sale
|
|
$
|
271,255,021
|
|
|
$
|
1,034,777
|
|
|
$
|
(301,765
|
)
|
|
$
|
271,988,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of the held-to-maturity investment portfolio,
classified by category, as of December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Value
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government,
government agencies
and authorities
|
|
$
|
6,787,542
|
|
|
$
|
|
|
|
$
|
(253,084
|
)
|
|
$
|
6,534,458
|
|
State, local government
and agencies
|
|
|
2,846,423
|
|
|
|
|
|
|
|
(57,768
|
)
|
|
|
2,788,655
|
|
Industrial and miscellaneous
|
|
|
32,533,860
|
|
|
|
5,979
|
|
|
|
(462,248
|
)
|
|
|
32,077,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments-Held-to Maturity
|
|
$
|
42,167,825
|
|
|
$
|
5,979
|
|
|
$
|
(773,100
|
)
|
|
$
|
41,400,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
The amortized cost and estimated fair value of the available-for-sale investment portfolio,
classified by category, as of December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost/
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Value
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government,
government agencies
and authorities
|
|
$
|
191,929,393
|
|
|
$
|
42,805
|
|
|
$
|
(1,859,870
|
)
|
|
$
|
190,112,328
|
|
State, local government
and agencies
|
|
|
71,460,810
|
|
|
|
186,607
|
|
|
|
(291,578
|
)
|
|
|
71,355,839
|
|
Industrial and miscellaneous
|
|
|
8,994,746
|
|
|
|
979
|
|
|
|
(156,865
|
)
|
|
|
8,838,860
|
|
Mortgage-backed securities
|
|
|
3,425,451
|
|
|
|
6,435
|
|
|
|
(15,148
|
)
|
|
|
3,416,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
275,810,400
|
|
|
|
236,826
|
|
|
|
(2,323,461
|
)
|
|
|
273,723,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
453,000
|
|
|
|
|
|
|
|
|
|
|
|
453,000
|
|
Equity securities
|
|
|
2,287,743
|
|
|
|
250,710
|
|
|
|
(111,057
|
)
|
|
|
2,427,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments Available-for-Sale
|
|
$
|
278,551,143
|
|
|
$
|
487,536
|
|
|
$
|
(2,434,518
|
)
|
|
$
|
276,604,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on held-to-maturity securities, aged less than and greater than twelve
months, as of December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
Greater than 12 months
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State, local government
and agencies
|
|
$
|
2,612,228
|
|
|
$
|
(3,338
|
)
|
|
$
|
223,182
|
|
|
$
|
(3,682
|
)
|
|
$
|
2,835,410
|
|
|
$
|
(7,020
|
)
|
Industrial and miscellaneous
|
|
|
|
|
|
|
|
|
|
|
18,379,026
|
|
|
|
(585,430
|
)
|
|
|
18,379,026
|
|
|
|
(585,430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
Held-to-Maturity
|
|
$
|
2,612,228
|
|
|
$
|
(3,338
|
)
|
|
$
|
18,602,208
|
|
|
$
|
(589,112
|
)
|
|
$
|
21,214,436
|
|
|
$
|
(592,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Company has 2 held-to-maturity securities in the less than twelve
month category and 18 held-to-maturity securities in the twelve months or more categories. The
unrealized losses reflect changes in interest rates subsequent to the acquisition of specific
securities. Management believes that the unrealized losses represent temporary impairment of the
securities, as the Company has the intent and ability to hold these investments until maturity or
market price recovery.
F-18
Unrealized losses on available-for-sale securities, aged less than and greater than twelve
months, as of December 31, 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
Greater than 12 months
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government,
government agencies
and authorities
|
|
$
|
12,677,756
|
|
|
$
|
(24,009
|
)
|
|
$
|
8,304,808
|
|
|
$
|
(93,914
|
)
|
|
$
|
20,982,564
|
|
|
$
|
(117,923
|
)
|
State, local government
and agencies
|
|
|
2,653,290
|
|
|
|
(4,296
|
)
|
|
|
9,651,873
|
|
|
|
(43,239
|
)
|
|
|
12,305,163
|
|
|
|
(47,535
|
)
|
Industrial and miscellaneous
|
|
|
2,123,989
|
|
|
|
(50,125
|
)
|
|
|
2,890,698
|
|
|
|
(76,522
|
)
|
|
|
5,014,687
|
|
|
|
(126,647
|
)
|
Mortgage-backed securities
|
|
|
1,638,460
|
|
|
|
(6,284
|
)
|
|
|
1,006,540
|
|
|
|
(1,990
|
)
|
|
|
2,645,000
|
|
|
|
(8,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
19,093,495
|
|
|
|
(84,714
|
)
|
|
|
21,853,919
|
|
|
|
(215,665
|
)
|
|
|
40,947,414
|
|
|
|
(300,379
|
)
|
Other Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
12,464
|
|
|
|
(1,386
|
)
|
|
|
|
|
|
|
|
|
|
|
12,464
|
|
|
|
(1,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
Available-for-Sale
|
|
$
|
19,105,959
|
|
|
$
|
(86,100
|
)
|
|
$
|
21,853,919
|
|
|
$
|
(215,665
|
)
|
|
$
|
40,959,878
|
|
|
$
|
(301,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Company has 25 available-for-sale securities in the less than twelve
month category and 57 available-for-sale securities in the greater than twelve months category.
The unrealized losses reflect changes in interest rates subsequent to the acquisition of specific
securities. Management believes that the unrealized losses represent temporary impairment of the
securities, as the Company has the intent and ability to hold these investments until maturity or
market price recovery.
Unrealized losses on held-to-maturity securities, aged less than and greater than twelve months, as
of December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
Greater than 12 months
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government,
government agencies
and authorities
|
|
$
|
645,084
|
|
|
$
|
(9,978
|
)
|
|
$
|
5,889,375
|
|
|
$
|
(243,106
|
)
|
|
$
|
6,534,459
|
|
|
$
|
(253,084
|
)
|
State, local government
and agencies
|
|
|
2,788,654
|
|
|
|
(57,768
|
)
|
|
|
|
|
|
|
|
|
|
|
2,788,654
|
|
|
|
(57,768
|
)
|
Industrial and miscellaneous
|
|
|
10,364,364
|
|
|
|
(159,399
|
)
|
|
|
20,094,937
|
|
|
|
(302,849
|
)
|
|
|
30,459,301
|
|
|
|
(462,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
Held-to-Maturity
|
|
$
|
13,798,102
|
|
|
$
|
(227,145
|
)
|
|
$
|
25,984,312
|
|
|
$
|
(545,955
|
)
|
|
$
|
39,782,414
|
|
|
$
|
(773,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on available-for-sale securities, aged less than and greater than twelve
months, as of December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
Greater than 12 months
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
|
Fair Value
|
|
|
Unrealized (Losses)
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government,
government agencies
and authorities
|
|
$
|
36,677,390
|
|
|
$
|
(121,768
|
)
|
|
$
|
142,710,619
|
|
|
$
|
(1,738,102
|
)
|
|
$
|
179,388,009
|
|
|
$
|
(1,859,870
|
)
|
State, local government
and agencies
|
|
|
17,505,739
|
|
|
|
(49,894
|
)
|
|
|
24,555,792
|
|
|
|
(241,684
|
)
|
|
|
42,061,531
|
|
|
|
(291,578
|
)
|
Industrial and miscellaneous
|
|
|
4,230,424
|
|
|
|
(26,377
|
)
|
|
|
3,860,237
|
|
|
|
(130,488
|
)
|
|
|
8,090,661
|
|
|
|
(156,865
|
)
|
Mortgage-backed securities
|
|
|
488,032
|
|
|
|
(2,572
|
)
|
|
|
1,002,400
|
|
|
|
(12,576
|
)
|
|
|
1,490,432
|
|
|
|
(15,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
58,901,585
|
|
|
|
(200,611
|
)
|
|
|
172,129,048
|
|
|
|
(2,122,850
|
)
|
|
|
231,030,633
|
|
|
|
(2,323,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
877,488
|
|
|
|
(111,057
|
)
|
|
|
877,488
|
|
|
|
(111,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
Available-for-Sale
|
|
$
|
58,901,585
|
|
|
$
|
(200,611
|
)
|
|
$
|
173,006,536
|
|
|
$
|
(2,233,907
|
)
|
|
$
|
231,908,121
|
|
|
$
|
(2,434,518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
As more fully described above under Critical Accounting Policies Investment
Accounting Policy Impairment, in accordance with the guidance of paragraph 16 of SFAS 115,
should an other-than-temporary impairment be determined, we recognize such loss on the consolidated
statement of operations as a component of net realized investment gains and we write down the value
of the security and treat the adjusted value as the new cost basis of the security.
There were no securities that were considered to be other-than-temporarily impaired as of
December 31, 2007 and 2006.
The amortized cost and fair values of held-to-maturity securities at December 31, 2007 by
contractual maturity are shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without prepayment
penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Due in five years through ten years
|
|
$
|
32,229,670
|
|
|
$
|
32,305,617
|
|
Due in ten through twenty years
|
|
|
9,673,388
|
|
|
|
9,383,902
|
|
Due in over twenty years
|
|
|
226,863
|
|
|
|
223,182
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,129,921
|
|
|
$
|
41,912,701
|
|
|
|
|
|
|
|
|
The amortized cost and fair values of available-for-sale securities at December 31, 2007 by
contractual maturity are shown below. Expected maturities of mortgaged-backed securities may
differ from contractual maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Due in one year or less
|
|
$
|
5,908,832
|
|
|
$
|
5,902,303
|
|
Due in one year through five years
|
|
|
25,293,862
|
|
|
|
25,261,089
|
|
Due in five years through ten years
|
|
|
157,813,032
|
|
|
|
158,311,666
|
|
Due in ten through twenty years
|
|
|
76,203,550
|
|
|
|
76,472,736
|
|
Mortgage-backed securities
|
|
|
5,021,895
|
|
|
|
5,027,775
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
270,241,171
|
|
|
$
|
270,975,569
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2007 and 2006, the Company held no investments that were
below investment grade or not rated by an independent rating agency.
The Company has placed securities on deposit having a fair value of $200,000 at December 31,
2007 and 2006, respectively, in order to comply with New Jersey insurance regulatory requirements.
Proceeds from sales and maturities of fixed maturity and equity securities and gross realized
gains and losses on sales as well as other-than-temporary impairment charges for the years ended
December 31, 2007, 2006 and 2005 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Proceeds
|
|
$
|
160,099,384
|
|
|
$
|
67,574,328
|
|
|
$
|
115,302,759
|
|
Gross realized gains
|
|
|
328,601
|
|
|
|
1,091,487
|
|
|
|
991,807
|
|
Gross realized losses
|
|
|
(256,724
|
)
|
|
|
(112,480
|
)
|
|
|
(581,172
|
)
|
F-20
The components of net investment income earned were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
17,229,642
|
|
|
$
|
15,902,694
|
|
|
$
|
11,807,190
|
|
Dividend income
|
|
|
119,935
|
|
|
|
275,190
|
|
|
|
744,592
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
17,349,577
|
|
|
|
16,177,884
|
|
|
|
12,551,782
|
|
Investment expenses
|
|
|
(73,624
|
)
|
|
|
(95,989
|
)
|
|
|
(148,547
|
)
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
17,275,953
|
|
|
$
|
16,081,895
|
|
|
$
|
12,403,235
|
|
|
|
|
|
|
|
|
|
|
|
F-21
3.
|
|
Replacement Carrier Transactions
|
Ohio Casualty
On December 18, 2001 the Company entered into a replacement carrier agreement with Ohio
Casualty Insurance Company (OCIC) and Ohio Casualty of New Jersey, Inc. (OCNJ) pursuant to which
OCNJ transferred to the Company the obligation to offer renewals for all of OCNJs New Jersey
private passenger automobile business, effective March 18, 2002. In accordance with the agreement,
OCNJ ceased issuing private passenger automobile policies in the State of New Jersey. As part of
the withdrawal, the Company became the replacement carrier for OCNJ, providing OCNJs policyholders
with a guaranteed option to renew their policies over a twelve month period. OCNJ retained all
rights and responsibilities related to policies issued by OCNJ and was responsible for issuing any
endorsements in the ordinary course of business prior to the renewal date. Under the terms of the
contract, the offers of renewal were processed over a twelve month period. As part of the
transaction, OCNJ paid the Company $41,100,000, of which $500,000 was paid at the contract date and
$40,600,000 was paid in twelve equal monthly installments of $3,383,333, with the first payment due
on March 18, 2002.
In connection with this transaction, OCIC acquired a 19.71 percent interest (at the time
of the transaction) in the Company by purchasing 867,955 shares of Class B nonvoting common stock.
The Company valued the stock issued as part of the transaction at $13,500,000, based on a valuation
performed for the Company as of January 1, 2002. The remaining $27,600,000 was earned evenly
as replacement carrier revenue over the twelve month period beginning on March 18, 2002, consistent
with the terms of the contract.
In addition, as part of the agreement, there was also a provisional amount due to the
Company pursuant to which OCNJ would pay to the Company up to $15,600,000 of additional
consideration as necessary to reduce the premium-to-surplus ratio to 2.5 to 1 on the renewal
business for a three year period based on calculations performed at each calendar year-end. As the
additional consideration was dependent on factors that did not exist or were not measurable at the
inception of the agreement, they were considered contingent and the additional consideration was
recognized as actual results reflected a premium-to-surplus ratio of greater than 2.5 to 1.
With respect to our replacement carrier transaction for the 2004 year with Ohio Casualty
Insurance Company (OCIC) and Ohio Casualty of New Jersey (OCNJ), on February 22, 2005 the Company
notified OCNJ that OCNJ owed the Company $7,762,000 for the 2004 year in connection with the
requirement that a premium-to-surplus ratio of 2.5 to 1 be maintained on the OCNJ renewal business.
Pursuant to our agreement, OCNJ had until May 15, 2005 to make payment to us. Subsequent to the
notification provided to OCIC and OCNJ, we had several discussions with OCIC relating to certain
components to the underlying calculation which supports the amount owed to the Company for the
2004 year. As part of these discussions, OCIC had requested additional supporting documentation and
raised issues with respect to approximately $2,000,000 of loss adjustment expense, approximately
$800,000 of commission expense, and approximately $600,000 of New Jersey Automobile Insurance Risk
Exchange (NJAIRE) assessments, or a total of $3,412,000, allocated to OCNJ. We recorded $4,350,000
(the difference between the $7,762,000 we notified OCNJ they owed us, and the $3,412,000 as
outlined above) as replacement carrier revenue from related parties in our consolidated statement
of operations for the year ended December 31, 2004 with respect to the OCIC replacement carrier
transaction. We recorded $4,350,000 because it was managements best estimate of the amount for
which we believed collectability was reasonably assured based on several factors. First, the
calculation to determine the amount owed by OCIC to us is complex and certain elements of the
calculation are significantly dependent on managements estimates and judgment and thus more
susceptible to challenge by OCIC. We also noted our experience in the past in negotiating these
issues with OCIC. For example, in 2003 we notified OCNJ that OCNJ owed the Company approximately
$10,100,000 for 2003. After negotiations we ultimately received $6,820,000. Accordingly, because of
the nature of the calculation, the inherent subjectivity in establishing certain estimates upon
which the calculation is based, and our experience from 2003, managements best estimate of the
amount for 2004 for which we believed collectability from OCIC was reasonably assured was
$4,350,000. On June 27, 2005, we received $3,654,000 from OCIC in settlement of the amounts due to
the Company, which differs from the $4,350,000 we had recorded as a receivable due from OCIC as
outlined above. The difference of $696,000 between the receivable we had recorded ($4,350,000) due
from OCIC and the actual settlement payment received from OCIC ($3,654,000) came as a result of a
dispute between the Company and OCIC regarding $292,000 of NJAIRE assessments and approximately
$404,000 of commission expenses included in the underlying calculation which supported the amounts
due to the Company for the 2004 year, the final year of our three year agreement with OCIC. The
$696,000 has been recorded as a bad debt expense in the Companys consolidated statement of
operations for the year ended December 31, 2005.
F-22
Sentry Insurance Company
The Company entered into a replacement carrier agreement on March 14, 2003 with Sentry
Insurance Mutual Company (Sentry) pursuant to which Sentry would transfer to the Company the
obligation to offer renewals for all of Sentrys New Jersey personal lines business, effective
October 24, 2003. In accordance with the agreement, Sentry ceased issuing new personal lines
policies in the State of New Jersey. As part of the withdrawal, the Company became the replacement
carrier for Sentry, providing Sentrys policyholders with a guaranteed option to renew their
policies over a twelve month period. As part of the transaction, Sentry was required to pay the
Company $3,500,000 in four equal quarterly installments of $875,000 with the first payment on
October 24, 2003. At December 31, 2003 amounts due from Sentry relating to the transaction amounted
to $2,625,000. The Company recognized $661,111 in replacement carrier revenue for the year ended
December 31, 2003. In addition, deferred revenue relating to the contract amounted to $2,838,889 at
December 31, 2003.
In addition, as part of the agreement, there was also a provisional amount due to the
Company pursuant to which Sentry would pay to the Company up to $1,250,000 of additional
consideration as necessary to reduce the premium-to-surplus ratio to 2.5 to 1 on the renewal
business for a three year period based on calculations preformed at each calendar year-end. As the
additional consideration was dependent on factors that did not exist or were not measurable at the
inception of the agreement they were considered contingent and the additional consideration was
recognized as actual results reflected a premium-to-surplus ratio of greater than 2.5 to 1. For the
years ended December 31, 2004 and 2003, the Company recognized additional consideration of
$1,250,000 and $0, respectively, as replacement carrier revenue in accordance with the terms of the
contract. At December 31, 2004 the amount due from Sentry relating to the transaction was
$1,250,000. On February 22, 2005 the Company notified Sentry that Sentry owed the Company
$1,250,000 for the 2004 year in connection with the requirements that a premium-to-surplus ratio of
2.5 to 1 be maintained on the Sentry Renewal business, as discussed more fully in Business
Recent Transactions Sentry Insurance Replacement Carrier Transaction. On May 16, 2005, we
received $1,250,000 from Sentry in settlement of the amounts owed to us.
The Hartford
On September 27, 2005 the Company announced that it had entered into a replacement
carrier transaction with The Hartford Financial Services Group, Inc (The Hartford) whereby
certain subsidiaries of The Hartford (Hartford Fire Insurance Company, Hartford Casualty Insurance
Company, and Twin City Fire Insurance) transferred their renewal obligations for New Jersey
homeowners, dwelling fire, and personal excess liabilities policies sold through independent agents
to the Company. Under the terms of the transaction, the Company offered renewal policies to
approximately 8,500 qualified policyholders of The Hartford. The Company received preliminary
approval of this transaction when they received a draft of the final consent order from the New
Jersey Department of Banking and Insurance (NJDOBI) on September 27, 2005. Final approval of the
transaction was received from the NJDOBI on November 22, 2005.
Upon the Closing, the Company was required to pay to The Hartford a one-time fee of $150,000.
In addition, on May 15, 2007, the Company paid a one-time payment to The Hartford in the amount
$253,392, which represented 5% of the written premium of the retained business at the end of the
twelve-month non-renewal period. Each of these payment types are consideration for the acquisition
of the policy renewal rights as stipulated in the replacement carrier agreement, and have been or
will be recorded as intangible assets and amortized over the course of the renewal period which
began in March 2006. For the years ended December 31, 2007 and 2006, the Company amortized $25,000
and $125,000 of the one-time fee paid to The Hartford. For the years ended December 31, 2007 and
2006, the Company amortized $113,507 and $139,885, respectively of the payment made to The Hartford
in May 2007 which was based on 5% of the direct written premium.
The Hartford is not liable for any fees and or other amounts to be paid to the Company
and as such the Company will not recognize any Replacement Carrier Revenue from this transaction.
The revenue that will be recognized as part of this transaction will be from the premium generated
by the policies that renew with the Company.
Hanover Insurance Company
On February 21, 2006 the Company announced that its subsidiary, the Company, had entered
into a replacement carrier transaction with Hanover Insurance Company (Hanover) whereby Hanover
transferred its renewal obligations for New Jersey auto, homeowners, dwelling fire, personal excess
liability and inland marine policies sold through independent agents to the Company. Under the
terms of the transaction, the Company offered renewal policies to approximately 16,000 qualified
policyholders of Hanover. The Company received approval of this transaction from the NJDOBI on
February 16, 2006.
F-23
Upon the Closing on February 21, 2006, the Company paid Hanover a one-time fee of
$450,000 in connection with this transaction. In addition, within 30 days of the closing, $100,000
was due to Hanover to reimburse Hanover for its expenses associated with this transaction. In May
of 2007, the Company paid $666,129 to Hanover, representing the first of two annual payments equal
to 5% of the written premium of the retained business for the preceding twelve months, calculated
at the 12 month and 24 month anniversaries. Each of these payment types are consideration for the
acquisition of the policy renewal rights as stipulated in the replacement carrier agreement, and
have been or will be recorded as intangible assets and amortized over the course of the renewal
period which began in March 2006. For the years ended December 31, 2007 and 2006, the Company
amortized $275,000 and $229,167, respectively of the one-time fee and other expenses paid to
Hanover. As of December 31, 2007 and 2006, the Company recorded commissions payable to Hanover in
the amount of $512,483 and $666,129, respectively. For the years ended December 31, 2007 and 2006,
the Company amortized $805,644 and $143,215, respectively of the payment due Hanover based on 5% of
the direct written premium.
Hanover is not liable for any fees and or other amounts to be paid to the Company and as
such the Company will not recognize any Replacement Carrier Revenue from this transaction. The
revenue that will be recognized as part of this transaction will be from the premium generated by
the policies that the Company writes upon renewal.
In the ordinary course of business, the Company reinsures certain risks with other companies.
Such arrangements serve to limit the Companys maximum loss from catastrophes, large risks and
unusually hazardous risks. To the extent that any reinsuring company is unable to meet its
obligations, the Company would be liable for its respective participation in such defaulted
amounts. The Company does not require or hold any collateral to secure the amounts recoverable. In
addition the Company does not have any reinsurance treaties with retroactive adjustments or
contingent commissions.
For the years ended December 31, 2007, 2006 and 2005, the Company reinsured its business
through various excess of loss reinsurance agreements and catastrophe reinsurance agreements. The
various excess of loss agreements provide protection for losses and loss adjustment expenses in
excess of $500,000 per occurrence for the years ended December 31, 2007, 2006 and 2005,
respectively.
A summary of reinsurance transactions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
Direct
|
|
$
|
178,678,748
|
|
|
$
|
177,231,856
|
|
|
$
|
171,069,389
|
|
|
$
|
166,785,769
|
|
|
$
|
198,048,757
|
|
|
$
|
180,378,535
|
|
Assumed
|
|
|
462,998
|
|
|
|
609,484
|
|
|
|
1,171,615
|
|
|
|
1,478,232
|
|
|
|
1,913,775
|
|
|
|
2,208,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
179,141,746
|
|
|
|
177,841,340
|
|
|
|
172,241,004
|
|
|
|
168,264,001
|
|
|
|
199,962,532
|
|
|
|
182,587,455
|
|
Ceded
|
|
|
(12,931,507
|
)
|
|
|
(12,621,378
|
)
|
|
|
(11,115,747
|
)
|
|
|
(10,910,201
|
)
|
|
|
(10,328,654
|
)
|
|
|
(9,805,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
166,210,239
|
|
|
$
|
165,219,962
|
|
|
$
|
161,125,257
|
|
|
$
|
157,353,800
|
|
|
$
|
189,633,878
|
|
|
$
|
172,782,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
Reinsurance assumed relates to mandated premiums from the New Jersey Commercial Automobile
Insurance Plan, (CAIP) and the New Jersey Fair Access to Insurance Requirements Plan (FAIR).
The Company reported reinsurance recoverables on paid losses and loss adjustment
expenses of approximately $2,232,000,
$6,367,000 and $11,169,000 at December 31, 2007, 2006 and 2005, respectively, which is recorded as
a component of reinsurance recoverables and receivables.
The Company also reported reinsurance recoverables on unpaid losses and loss adjustment
expenses of approximately $17,691,000, $17,866,000 and $28,069,000 at December 31, 2007, 2006 and
2005, respectively, which is recorded as a component of reinsurance recoverables and receivables.
The Company also reported prepaid reinsurance amounts of approximately $1,506,000,
$1,195,000 and $990,000 at December 31, 2007, 2006 and 2005, respectively, which is recorded as a
component of reinsurance recoverables and receivables.
The Company also reported reinsurance (receivable) payable of approximately $(597,000),
$1,485,000 and $828,000 at December 31, 2007, 2006 and 2005, respectively, which is recorded as a
component of reinsurance recoverables and receivables.
Incurred losses and loss adjustment expenses ceded to reinsurers totaled $1,666,000,
$(2,927,000) and $13,239,000 at December 31, 2007, 2006 and 2005, respectively.
Reinsurance recoverables on ceded paid and unpaid losses, loss adjustment expenses and
ceded unearned premiums and reinsurance receivable from individual reinsurers in excess of
3 percent of the Companys equity were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
QBE Reinsurance Company
|
|
$
|
7,044
|
|
|
$
|
5,663
|
|
|
$
|
|
|
Odyssey America Reinsurance
|
|
|
3,771
|
|
|
|
4,115
|
|
|
|
4,022
|
|
Scor Reinsurance Company
|
|
|
|
|
|
|
7,673
|
|
|
|
10,022
|
|
Folksamerica Reinsurance Company
|
|
|
|
|
|
|
2,430
|
|
|
|
|
|
American Reinsurance Company
|
|
|
|
|
|
|
1,170
|
|
|
|
|
|
Wellington Syndicate
|
|
|
|
|
|
|
1,115
|
|
|
|
5,756
|
|
PMA Capital Insurance Company
|
|
|
|
|
|
|
640
|
|
|
|
|
|
On January 1, 2004, Proformance entered into a Commercial and Personal Excess Liability Excess
of Loss Reinsurance Contract with Odyssey America Reinsurance Corporation (OdysseyRe). Under the
terms of this contract, Proformance ceded $5,555,556 of written premiums to OdysseyRe as of
December 31, 2004. On January 1, 2004, Mayfair entered into a reinsurance agreement with OdysseyRe
whereby Mayfair would accept 100% of OdysseyRes share in the interests and liabilities under the
contract issued to Proformance. Total assumed written premiums under this contract was $5,000,000
as of December 31, 2004.
On December 31, 2004, Proformance commuted the Commercial and Personal Excess Liability
Excess of Loss Reinsurance Contract with OdysseyRe. The commutation was initiated and accrued for
in December 2004 and the return premium was received on January 21, 2005 in the amount of
$4,750,000. The transaction was recorded as a decrease in ceded written premiums in the amount of
$5,555,556 and a decrease in ceded commissions of $555,556. Proformance recognized a loss of
$250,000 in connection with this transaction. On December 31, 2004, the reinsurance agreement
between OdysseyRe and Mayfair was commuted. The transaction was recorded as a decrease in assumed
written premiums in the amount of $5,000,000.
On January 1, 2005, Proformance entered into an Auto Physical Damage Quota Share
Contract with OdysseyRe. Under the terms of this contract, Proformance ceded $1,953,000 of written
premiums and $2,048,000 of beginning unearned premium reserves to OdysseyRe as of the first quarter
2005. Ceded losses and loss adjustment expenses were $374,000 and ceded reserves including IBNR was
$222,000. On September 15, 2005, Proformance commuted the Auto Physical Damage Quota Share Contract
with OdysseyRe. The commutation was initiated and accrued for in September 2005 in the amount of
$160,000, which represents the reinsurers home office expense. The transaction was recorded as a
decrease of ceded written premium of $4,001,000 and a decrease in ceded commissions of $1,200,000.
F-25
5.
|
|
Unpaid Losses and Loss Adjustment Expenses
|
The changes in unpaid losses and loss adjustment expenses are summarized as follows (000s
omitted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Balance as of beginning of year
|
|
$
|
191,386
|
|
|
$
|
219,361
|
|
|
$
|
184,283
|
|
Less reinsurance recoverable on unpaid losses
|
|
|
(17,866
|
)
|
|
|
(28,069
|
)
|
|
|
(24,936
|
)
|
|
|
|
|
|
|
|
|
|
|
Net balance as of beginning of year
|
|
|
173,520
|
|
|
|
191,292
|
|
|
|
159,347
|
|
|
|
|
|
|
|
|
|
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
125,483
|
|
|
|
103,801
|
|
|
|
122,728
|
|
Prior period
|
|
|
19,602
|
|
|
|
23
|
|
|
|
10,066
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
145,085
|
|
|
|
103,824
|
|
|
|
132,794
|
|
|
|
|
|
|
|
|
|
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
49,020
|
|
|
|
38,009
|
|
|
|
42,301
|
|
Prior period
|
|
|
90,171
|
|
|
|
83,587
|
|
|
|
58,548
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
139,191
|
|
|
|
121,596
|
|
|
|
100,849
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as of December 31,
|
|
|
179,414
|
|
|
|
173,520
|
|
|
|
191,292
|
|
Plus reinsurance recoverable on unpaid losses
|
|
|
17,691
|
|
|
|
17,866
|
|
|
|
28,069
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
|
|
$
|
197,105
|
|
|
$
|
191,386
|
|
|
$
|
219,361
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007, we increased reserves for prior years by $19.6 million.
This increase was primarily due to increases in the prior year reserves for auto bodily injury
coverage which increased by $22.2 million. This increase was due to an inconsistent implementation
of a revised claim reserving policy that was uncovered in the third quarter of 2007. Prior year
reserves for other liability increased by $3.6 million. This was partially offset by favorable
development of $4.6 million in no-fault coverages and $1.6 million in commercial auto liability.
For the year ended December 31, 2006, we decreased reserves by $28.0 million primarily due to
a decrease in the loss and loss adjustment expense ratio for the same period. This decrease can be
attributed to a decline in earned premium, a reduction in claim frequency in private passenger
automobile coverage and significant growth in commercial lines business which in 2006, have
exhibited lower loss ratios. For the year ended December 31, 2006, prior year reserves increased
by $0.02 million. This increase was due to favorable development in bodily injury and no-fault
coverages offset by a reduction in ceded loss estimates for prior years.
For the year ended December 31, 2005, we increased reserves for prior years by $10.1 million.
This increase was due to increases in average severity for Personal Injury Protection (No-fault)
losses of $9.4 million, Commercial Auto Liability projected loss ratios for 2002-2004 due to the
fact that actual loss development was higher than expected for those years, resulting in an
increase of $1.8 million, Homeowners losses of $0.6 million and Other Liability losses of
$1.6 million. This development was partially offset by continued favorable trends in loss
development for Property Damage losses ($1.6 million), Auto Physical Damage losses ($1.2 million),
and Bodily Injury losses of ($0.5 million), as reported claims frequency has dropped significantly
and we reduced our
projected loss ratios in recognition of this trend.
F-26
Environmental Reserves
The Companys exposure to environmental claims arises solely from
the sale of Homeowners policies. The exposure to environmental claims which may also be referred to
as pollution, hazardous waste, or environmental impairment liability was due to leakage of
underground fuel storage tanks, which contaminated the surrounding soil and ground water.
The Company establishes full case reserves for all reported environmental claims. Reserves for
losses incurred but not reported (IBNR) include a provision for development of reserves on reported
losses. The Companys IBNR reserves are established based on a review of a number of actuarial
analyses.
The table balance represents the loss activity related to environmental exposures for the
periods ended December 31, 2007, 2006 and 2005 (000s omitted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Environmental, Gross of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Reserves including case, bulk and IBNR, and LAE
|
|
$
|
2,616
|
|
|
$
|
1,897
|
|
|
$
|
892
|
|
Losses and LAE incurred
|
|
|
2,369
|
|
|
|
1,629
|
|
|
|
1,734
|
|
Calendar year payments for losses and LAE
|
|
|
685
|
|
|
|
910
|
|
|
|
729
|
|
|
|
|
|
|
|
|
|
|
|
Ending reserves including case, bulk and IBNR, and LAE
|
|
$
|
4,300
|
|
|
$
|
2,616
|
|
|
$
|
1,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental, net of reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Reserves including case, bulk and IBNR, and LAE
|
|
$
|
2,066
|
|
|
$
|
1,552
|
|
|
$
|
634
|
|
Losses and LAE incurred
|
|
|
2,249
|
|
|
|
1,405
|
|
|
|
1,599
|
|
Calendar year payments for losses and LAE
|
|
|
694
|
|
|
|
891
|
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
|
Ending reserves including case, bulk and IBNR, and LAE
|
|
$
|
3,621
|
|
|
$
|
2,066
|
|
|
$
|
1,552
|
|
|
|
|
|
|
|
|
|
|
|
F-27
6. Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return.
The components of the (benefit) provision for income taxes for the years ended December 31,
2007, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(Benefit) taxes on (loss) income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current taxes
|
|
$
|
(4,703,158
|
)
|
|
$
|
8,120,442
|
|
|
$
|
1,865,715
|
|
Deferred taxes
|
|
|
(107,747
|
)
|
|
|
(1,013,603
|
)
|
|
|
(7,829
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(4,810,905
|
)
|
|
$
|
7,106,839
|
|
|
$
|
1,857,886
|
|
|
|
|
|
|
|
|
|
|
|
The components of deferred tax assets and deferred tax liabilities are as follows as of
December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
20% unearned premium adjustment
|
|
$
|
5,972,215
|
|
|
$
|
5,902,895
|
|
Loss reserve discount
|
|
|
4,579,366
|
|
|
|
4,482,136
|
|
Depreciation
|
|
|
22,204
|
|
|
|
27,386
|
|
Bad debt reserve
|
|
|
189,100
|
|
|
|
186,847
|
|
Unrealized losses on investments
|
|
|
|
|
|
|
912,582
|
|
Share based compensation
|
|
|
302,507
|
|
|
|
855,523
|
|
Organizational costs
|
|
|
|
|
|
|
5,084
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
11,065,392
|
|
|
|
12,372,453
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred acquisition costs
|
|
|
6,626,749
|
|
|
|
6,510,486
|
|
Intangible asset
|
|
|
96,455
|
|
|
|
288,233
|
|
Accrual of bond discount
|
|
|
77,694
|
|
|
|
79,987
|
|
Deferred revenues special surplus funds
|
|
|
14,682,071
|
|
|
|
15,130,758
|
|
Prepaid expenses
|
|
|
205,171
|
|
|
|
301,211
|
|
Unrealized gains on investments
|
|
|
57,100
|
|
|
|
|
|
Due & accrued dividends
|
|
|
|
|
|
|
2,589
|
|
Depreciation
|
|
|
148,739
|
|
|
|
25,841
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
21,893,979
|
|
|
|
22,339,105
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(10,828,587
|
)
|
|
$
|
(9,966,652
|
)
|
|
|
|
|
|
|
|
F-28
The income tax rate reconciliation for the years ended December 31, 2007, 2006 and 2005 is as
follows (000s omitted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(Loss) income before income taxes
|
|
$
|
(11,005
|
)
|
|
|
|
|
|
$
|
21,489
|
|
|
|
|
|
|
$
|
8,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax statutory rate
|
|
|
(3,852
|
)
|
|
|
(35.00
|
)%
|
|
|
7,521
|
|
|
|
35.00
|
%
|
|
|
2,820
|
|
|
|
34.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior years return to provision
|
|
|
(351
|
)
|
|
|
(3.19
|
)%
|
|
|
(247
|
)
|
|
|
(1.15
|
%)
|
|
|
(478
|
)
|
|
|
(5.76
|
%)
|
Tax exempt interest
|
|
|
(849
|
)
|
|
|
(7.71
|
)%
|
|
|
(804
|
)
|
|
|
(3.74
|
%)
|
|
|
(693
|
)
|
|
|
(8.36
|
%)
|
Dividends received deduction
|
|
|
(16
|
)
|
|
|
(0.15
|
)%
|
|
|
(84
|
)
|
|
|
(0.39
|
%)
|
|
|
(34
|
)
|
|
|
(0.41
|
%)
|
Proration
|
|
|
129
|
|
|
|
1.17
|
%
|
|
|
133
|
|
|
|
0.62
|
%
|
|
|
109
|
|
|
|
1.31
|
%
|
Life insurance expense
|
|
|
42
|
|
|
|
0.38
|
%
|
|
|
42
|
|
|
|
0.20
|
%
|
|
|
27
|
|
|
|
0.33
|
%
|
State taxes
|
|
|
122
|
|
|
|
1.11
|
%
|
|
|
132
|
|
|
|
0.61
|
%
|
|
|
60
|
|
|
|
0.72
|
%
|
Other
|
|
|
(36
|
)
|
|
|
(0.32
|
)%
|
|
|
414
|
|
|
|
1.93
|
%
|
|
|
47
|
|
|
|
0.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense
|
|
$
|
(4,811
|
)
|
|
|
43.71
|
%
|
|
$
|
7,107
|
|
|
|
33.07
|
%
|
|
$
|
1,858
|
|
|
|
22.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company adopted the provisions of FIN 48, effective January 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in a companys financial statements in
accordance with SFAS 109. FIN 48 requires that an uncertain tax position should be recognized only
if it is more likely than not that the position is sustainable based on its technical merits.
Recognizable tax positions should then be measured to determine the amount of benefit recognized in
the financial statements. The Companys adoption of FIN 48 did not have a material impact on its
financial condition or results from operations.
The Company files income tax returns in the U.S. federal jurisdiction and in the State of New
Jersey. With few exceptions, the Company is no longer subject to U.S. Federal, state and local, or
non-U.S. income tax examinations by tax authorities for years before 2002. The Company is
currently not under examination by any tax authority. The Company does not anticipate any
significant
changes to its total unrecognized tax benefits within the next twelve months. The Company will
recognize, as applicable, interest and penalties related to unrecognized tax positions as part of
income taxes.
The Companys federal income tax returns are subject to audit by the Internal Revenue Service
(IRS). No tax years are currently under audit by the IRS.
F-29
7. Property and Equipment
A summary of property and equipment is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Automobiles
|
|
$
|
539,553
|
|
|
$
|
591,675
|
|
Computer Software
|
|
|
3,670,034
|
|
|
|
1,937,541
|
|
Furniture & fixtures
|
|
|
634,374
|
|
|
|
634,374
|
|
Leasehold improvements
|
|
|
143,966
|
|
|
|
143,966
|
|
Electronic data equipment
|
|
|
2,076,373
|
|
|
|
1,549,454
|
|
|
|
|
|
|
|
|
|
|
|
7,064,300
|
|
|
|
4,857,010
|
|
Less: Accumulated depreciation
|
|
|
3,920,881
|
|
|
|
2,868,559
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
3,143,419
|
|
|
$
|
1,988,451
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense amounted to $1,052,322, $413,029 and $492,657 for the
years ended December 31, 2007, 2006 and 2005, respectively. For the years ended December 31, 2007,
2006 and 2005, the Company recorded an impairment charge of $0, $0 and $734,000, respectively,
related to the development of internal use software.
8. Capital Transactions
As discussed further in Note 3, the Company sold 867,955 shares of Class B Non-voting Common
shares to OCIC which was valued by the Company at $13,500,000 at the time of the transaction. This
represented 19.71 percent of the outstanding shares of the Company at December 18, 2001.
Pursuant to an investor rights agreement entered into between OCIC and NAHC on December 18,
2001, OCIC had a right to require NAHC to redeem all equity securities of NAHC owned by OCIC for
fair market value at any time (i) on or after December 18, 2006 or (ii) prior to December 18, 2006
if NAHC delivers notice of a change in control event as defined in the agreement. On July 10, 2004,
OCIC and NAHC entered into an agreement which would facilitate the sale by OCIC of shares of common
stock of NAHC owned by OCIC that have an aggregate value of equal to at least 10% of the aggregate
value of all shares of common stock sold by NAHC as part of an initial public offering. In exchange
for the foregoing, OCIC agreed to waive its redemption right. As such, the related common stock is
considered capital.
On April 21, 2005, an initial public offering of 6,650,000 shares of the Companys common
stock (after the 43-for-1 stock split) was completed. The Company sold 5,985,000 shares resulting
in net proceeds to the Company (after deducting issuance costs and the underwriters discount) of
$62,198,255.
On July 5, 2006, the Board of Directors of the Company authorized the repurchase of a maximum
of 1,000,000 shares and a minimum of 200,000 shares of capital stock of the Company within the next
twelve months. On May 24, 2007, the Board of Directors of the Company authorized a one year
extension of the buy-back program. As of December 31, 2007, the Company had repurchased 418,303
shares with an average price of $10.26. As of December 31, 2007, the Company is authorized to
repurchase an additional 581,697 shares.
For the years ended December 31, 2007, 2006 and 2005, 137,600, 86,000 and 275,200 options,
respectively, were exercised and converted to the Companys common stock. The Company received
additional consideration of $250,153, $115,154 and $469,109, respectively, from the exercise of the
options.
F-30
9. Share-Based Compensation
Effective January 1, 2006, using the modified prospective method, The Company adopted
Statement of Financial Accounting Standards No. 123R,
Share-Based Payment
(SFAS 123R) to account
for its share-based compensation plans. SFAS 123R requires share-based compensation expense
recognized since January 1, 2006, to be based on the following: a) grant date fair value estimated
in accordance with the original provisions of SFAS 123 for unvested options granted prior to the
adoption date; and b) grant date fair value estimated in accordance with the provisions of SFAS
123R for unvested options granted subsequent to the adoption date. Prior to January 1, 2006, the
Company accounted for share-based payments using the intrinsic-value-based recognition method
prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25) as permitted by Financial Accounting Standards No. 123,
Accounting for Stock-Based
Compensation
(SFAS 123), which the Company had adopted in 1996.
The following table presents the Companys pro forma net income for the year ended December
31, 2005,
assuming the Company had used the fair value method (SFAS No. 123) to recognize compensation
expense with respect to its options:
|
|
|
|
|
|
|
For the year ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
Net income as reported
|
|
$
|
6,435,950
|
|
Plus: Compensation expense recorded
against income
|
|
|
3,050,057
|
|
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all awards,
net of related tax effects
|
|
|
(3,136,602
|
)
|
|
|
|
|
Pro forma net income
|
|
$
|
6,349,405
|
|
|
|
|
|
|
|
|
|
|
Net income per weighted average shareholding
|
|
|
|
|
Basic as reported
|
|
$
|
0.70
|
|
Basic proforma
|
|
$
|
0.69
|
|
Diluted as reported
|
|
$
|
0.68
|
|
Diluted proforma
|
|
$
|
0.67
|
|
The adoption of SFAS 123Rs fair value method has not resulted in additional share-based
expense (a component of other operating and general expenses) in relation to stock options for the
years ended December 31, 2007 and 2006 as all outstanding options were fully vested as of January
1, 2006. Therefore, for the years ended December 31, 2007 and 2006, the adoption of SFAS 123R in
relation to stock options has not affected net (loss) income or (loss) earnings per share.
F-31
The above pro forma information has been determined as if the Company had accounted for its
employees stock options under the fair value method. The fair value of stock options was estimated
at the date of grant using the Black-Scholes valuation model with the following weighted-average
assumptions:
|
|
|
|
|
|
|
2005
|
Volatility factor
|
|
|
31.1
|
%
|
Risk-free interest yield
|
|
|
4.0
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
Average life
|
|
3 years
|
The following table summarizes information with respect to stock options outstanding as of December
31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
Balance Outstanding at January 1, 2005
|
|
|
672,950
|
|
|
$
|
2.06
|
|
|
|
|
|
|
|
|
Granted
|
|
|
275,200
|
|
|
|
1.71
|
|
Exercised
|
|
|
(275,200
|
)
|
|
|
(1.71
|
)
|
Forfeited
|
|
|
(275,200
|
)
|
|
|
(1.71
|
)
|
|
|
|
|
|
|
|
Balance Outstanding at December 31, 2005
|
|
|
397,750
|
|
|
|
2.31
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(86,000
|
)
|
|
|
(1.34
|
)
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Outstanding at December 31, 2006
|
|
|
311,750
|
|
|
|
2.58
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(137,600
|
)
|
|
|
(1.82
|
)
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Outstanding at December 31, 2007
|
|
|
174,150
|
|
|
$
|
3.19
|
|
|
|
|
|
|
|
|
Options Available for Grant
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
During 1995, the Company developed a stock option plan for key management employees and
directors. Options are exercisable when the earliest of the following events occur: three years
from date of issuance, date of retirement or expiration of the Directors term, date of change of
control, or the date of an offering of its shares through an initial public offering. The options
expire 10 years after the date of grant. The options are also nontransferable and contain further
restrictions imposed after the options have vested. If options are exercised then the shareholders
cannot transfer their shares unless the transfer is permitted by the Company and the Company has
first right to purchase all or any of the shares offered for sale. These restrictions have been
taken into account when determining the fair value of the stock.
On March 15, 2005, the board of directors of the Company discussed extending the exercise
period of stock options to purchase 73,100 shares of the Companys common stock granted under its
Non-statutory Stock Option Plan (the Plan) on June 15, 1995 to three individuals, two of whom are
currently executive officers and one of whom is currently a director of the Company. These stock
options were scheduled to expire on June 14, 2005, ten years after the date of issuance. The board
of directors discussed extending the expiration date of these stock options from June 14, 2005
until December 31, 2005, with the effective date of the extension being June 14, 2005. This
proposal to extend the exercise period for such stock options was approved by the board of
directors at its meeting held on June 13, 2005, subject to shareholder approval. The extension of
these options was presented to the Companys shareholders for shareholder approval at the Companys
annual shareholder meeting which was held on September 19, 2005.
F-32
F.P. Skip Campion, the Companys former Vice Chairman and the former President of
Proformance, passed away on January 25, 2005. Under the terms of the Plan and the applicable stock
option agreements, if an optionee dies without having fully exercised any outstanding stock
options, the right to exercise such stock options expires ninety days following the optionees
death. Accordingly, the expiration date of Mr. Campions stock options (none of which had
previously been exercised) was accelerated to April 25, 2005. Since the estate of Mr. Campion did
not exercise these stock options on or prior to April 25, 2005, the stock options were forfeited.
On June 13, 2005, the board of directors of the Company approved, subject to shareholder approval,
a grant of new nonqualified stock options to the estate of Mr. Campion, to preserve the value of
Mr. Campions stock options that expired on April 25, 2005. The new stock options are subject to
the same terms and conditions as the forfeited stock options, including the exercise price and
number of shares subject to each option, except that the new stock options would expire on December
31, 2005. As of December 31, 2005, all of the Companys options were fully vested and the
Company did not award any options during the years ended December 31, 2007 and 2006.
Approval of the extension of the options granted during 1995 and the grant of new stock
options to the estate of Mr. Campion was received at the Companys Annual Meeting of Shareholders
on September 19, 2005. The fair value of the Companys stock on September 19, 2005 was $11.47;
therefore, the Company recognized $749,802 as compensation expense related to the extension of
options in its consolidated statement of operations for the year ended December 31, 2005. The
Company also recognized $1,937,198 as compensation expense related to the grant of new options,
with a grant price less than a market value, in the money in its consolidated statement of
operations for the year ended December 31, 2005. These amounts are reported as a component of
underwriting, acquisition and insurance related expenses in the consolidated statement of
operations.
The following table summarizes information with respect to stock options outstanding as of December
31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
Range of
|
|
Number of Stock
|
|
Contractual Life
|
|
Weighted Average
|
|
Intrinsic Value
|
|
Number of Stock
|
|
Weighted Average
|
|
Intrinsic Value
|
Exercise Prices
|
|
Options
|
|
(in yrs)
|
|
Exercise Price
|
|
of Options
|
|
Options
|
|
Exercise Price
|
|
of Options
|
.98 - 1.29
|
|
|
36,550
|
|
|
|
3.54
|
|
|
|
0.98
|
|
|
|
3.45
|
|
|
|
36,550
|
|
|
|
0.98
|
|
|
|
3.45
|
|
2.50 - 2.89
|
|
|
94,600
|
|
|
|
0.80
|
|
|
|
2.70
|
|
|
|
1.73
|
|
|
|
94,600
|
|
|
|
2.70
|
|
|
|
1.73
|
|
6.14
|
|
|
43,000
|
|
|
|
5.28
|
|
|
|
6.14
|
|
|
|
(1.71
|
)
|
|
|
43,000
|
|
|
|
6.14
|
|
|
|
(1.71
|
)
|
|
|
|
|
|
|
174,150
|
|
|
|
2.48
|
|
|
$
|
3.19
|
|
|
$
|
1.24
|
|
|
|
174,150
|
|
|
$
|
3.19
|
|
|
$
|
1.24
|
|
|
|
|
The aggregate intrinsic value of options outstanding at December 31, 2007 was $216,345, based
on a fair value of the Companys stock of $4.43 per share as of December 31, 2007.
The following table summarizes information with respect to stock options outstanding as of December
31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
Range of
|
|
Number of Stock
|
|
Contractual Life
|
|
Weighted Average
|
|
Intrinsic Value
|
|
Number of Stock
|
|
Weighted Average
|
|
Intrinsic Value
|
Exercise Prices
|
|
Options
|
|
(in yrs)
|
|
Exercise Price
|
|
of Options
|
|
Options
|
|
Exercise Price
|
|
of Options
|
$0.60
|
|
|
43,000
|
|
|
|
5.44
|
|
|
$
|
0.60
|
|
|
$
|
11.06
|
|
|
|
43,000
|
|
|
$
|
0.60
|
|
|
$
|
11.06
|
|
.98 - 1.29
|
|
|
47,300
|
|
|
|
4.54
|
|
|
|
0.98
|
|
|
|
10.68
|
|
|
|
47,300
|
|
|
|
0.98
|
|
|
|
10.68
|
|
2.50 - 2.89
|
|
|
178,450
|
|
|
|
1.26
|
|
|
|
2.63
|
|
|
|
9.03
|
|
|
|
178,450
|
|
|
|
2.63
|
|
|
|
9.03
|
|
6.14
|
|
|
43,000
|
|
|
|
6.28
|
|
|
|
6.14
|
|
|
|
5.52
|
|
|
|
43,000
|
|
|
|
6.14
|
|
|
|
5.52
|
|
|
|
|
|
|
|
311,750
|
|
|
|
3.28
|
|
|
$
|
2.58
|
|
|
$
|
9.08
|
|
|
|
311,750
|
|
|
$
|
2.58
|
|
|
$
|
9.08
|
|
|
|
|
F-33
The number of exercisable stock options outstanding at December 31, 2007, 2006 and 2005 were
174,150, 311,750 and 397,750, respectively. The weighted average exercise price of exercisable
stock options outstanding at December 31, 2007, 2006 and 2005 was $3.19, $2.58 and $2.31,
respectively.
Compensation expense recorded in connection with the options extended during 2005 was $0, $0
and $749,802 for the years ended December 31, 2007, 2006 and 2005, respectively. The unamortized
deferred compensation in connection with these options was $0 as of December 31, 2007, 2006 and
2005.
Compensation expense recorded in connection with the options issued during 2005 was $0, $0 and
$1,937,198 for the years ended December 31, 2007, 2006 and 2005, respectively. The unamortized
deferred compensation in connection with these options was $0 as of December 31, 2007, 2006 and
2005.
Compensation expense recorded in connection with the options issued during 2003 was $0, $0 and
$245,340 for the years ended December 31, 2007, 2006 and 2005, respectively. The unamortized
deferred compensation in connection with these options was $0, $0 and $61,335 as of December 31,
2007, 2006 and 2005, respectively.
Compensation expense recorded in connection with the options issued during 2002 was $0, $0 and
$117,717 for the years ended December 31, 2007, 2006 and 2005, respectively. The unamortized
deferred compensation in connection with these options was $0 as of December 31, 2007, 2006 and
2005, respectively.
During the years ended December 31, 2007, 2006 and 2005, 137,600, 86,000 and 275,200 options,
respectively, were exercised and converted to the Companys common stock. The Company received
additional consideration of $250,153, $115,154 and $469,109, respectively, from the exercise of the
options.
On December 21, 2007, the Board of Directors of NAHC approved the Compensation Committees
recommendation to grant 60,000 stock appreciation rights (SARS) to certain executive officers under
the Companys 2004 Stock and Incentive Plan. The SARS were granted with a base price of $3.93 per
share, which was the closing price of the Companys common stock on the Nasdaq National Market on
the date of grant.
On March 20, 2007, the Board of Directors of NAHC approved the Compensation Committees
recommendation to grant 345,000 stock appreciation rights (SARS) to the executive officers and
other key employees under the Companys 2004 Stock and Incentive Plan. The SARS were granted with
a base price of $12.88 per share, which was the closing price of the Companys common stock on the
Nasdaq National Market on the date of grant.
On March 21, 2006, the Board of Directors of National Atlantic Holdings Corporation NAHC)
approved the Compensation Committees recommendation to grant 343,000 stock appreciation rights
(SARS) to the executive officers and other key employees under the Companys 2004 Stock and
Incentive Plan. The SARS were granted with a base price of $9.94 per share, which was the closing
price of the Companys common stock on the Nasdaq National Market on the date of grant and vest in
six equal semi-annual installments over a period of three years, commencing on June 30, 2006.
The following table summarizes information with respect to stock appreciation rights outstanding as
of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
SARS
|
|
|
Grant Price
|
|
Balance Outstanding at January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
343,000
|
|
|
$
|
9.94
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(5,000
|
)
|
|
|
(9.94
|
)
|
|
|
|
|
|
|
|
Balance Outstanding at December 31, 2006
|
|
|
338,000
|
|
|
$
|
9.94
|
|
|
|
|
|
|
|
|
Granted
|
|
|
405,000
|
|
|
$
|
11.55
|
|
Exercised
|
|
|
(117,664
|
)
|
|
|
(9.94
|
)
|
Forfeited
|
|
|
(83,334
|
)
|
|
|
(11.70
|
)
|
|
|
|
|
|
|
|
Balance Outstanding at December 31, 2007
|
|
|
542,002
|
|
|
$
|
10.87
|
|
|
|
|
|
|
|
|
F-34
In accordance with SFAS 123R, the Company records share based compensation liabilities at fair
value or a portion thereof (depending upon the percentage of requisite service that has been
rendered at the reporting date) based on the Black-Scholes valuation model and will remeasure the
liability at each reporting date through the date of settlement; consequently, compensation cost
recognized through each period of the vesting period (as well as each period throughout the date of
settlement) will vary based on the awards fair value and the accelerated vesting schedule.
The fair-value of stock-based compensation awards (SARS) granted on December 21, 2007 was
estimated at the date of grant using the Black-Scholes valuation model, and was re-measured with
the following weighted average assumptions as of December 31, 2007:
|
|
|
|
|
|
|
As of
|
|
|
December 31,
|
|
|
2007
|
Volatility factor
|
|
|
35.83
|
%
|
Risk-free interest yield
|
|
|
3.55
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Average life
|
|
5.9 years
|
The fair-value of stock-based compensation awards (SARS) granted on March 20, 2007 was
estimated at the date of grant using the Black-Scholes valuation model, and was re-measured with
the following weighted average assumptions as of December 31, 2007:
|
|
|
|
|
|
|
As of
|
|
|
December 31,
|
|
|
2007
|
Volatility factor
|
|
|
35.83
|
%
|
Risk-free interest yield
|
|
|
3.49
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Average life
|
|
5.0 years
|
The fair-value of stock-based compensation awards (SARS) granted on March 21, 2006 was
estimated at the date of grant using the Black-Scholes valuation model, and was re-measured with
the following weighted average assumptions as of December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
|
December 31,
|
|
December 31,
|
|
|
2007
|
|
2006
|
Volatility factor
|
|
|
35.83
|
%
|
|
|
29.56
|
%
|
Risk-free interest yield
|
|
|
3.31
|
%
|
|
|
4.72
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Average life
|
|
4.0 years
|
|
5.0 years
|
Volatility factor
This is a measure of the amount by which a price has fluctuated or is
expected to fluctuate. We use actual historical changes in the market value of our stock weighted
with other similar publicly traded companies in the insurance industry to calculate the volatility
assumption, as it is managements belief that this is the best indicator of future volatility.
Risk free interest yield
This is the implied yield currently available on U.S. Treasury
zero-coupon issues with equal remaining term.
Dividend yield
The expected dividend yield is based on the Companys current dividend yield and
the best estimate of projected dividend yields for future periods within the expected life of the
option.
Average life
This is the expected term, which is based on the simplified method.
F-35
As a result of the adoption of SFAS 123R, the Company has reported, as a component of other
liabilities on the consolidated balance sheets, share-based compensation liability at December 31,
2007 and 2006, of $128,285 and $1,066,239, respectively. For the year ended December 31, 2007 and
2006, the Company has reported, as a component of other operating and general expenses on the
consolidated statements of operations, share-based compensation expense of ($492,864) and
$1,066,239. For the year ended December 31, 2007, this additional share-based compensation
decreased pre-tax loss by $492,864, decreased net loss by $320,362, and decreased basic loss per
share by $0.03. For the year ended December 31, 2006, this additional share-based compensation
lowered pre-tax earnings by $1,066,239, lowered net income by $693,055, respectively, and lowered
basic earnings per share by $0.06.
During year ended December 31, 2007, 117,664 were exercised, resulting in payments of
$445,091. The aggregate intrinsic value of the exercised SARS was $445,091. No SARS were
exercised during the year ended December 31, 2006.
At December 31, 2007, the aggregate fair value of all outstanding SARS was approximately
$295,546 with a weighted-average remaining contractual term of 8.96 years. The total compensation
cost related to non-vested awards not yet recognized was approximately $167,261 with an expense
recognition period of 3 years.
At December 31, 2006, the aggregate fair value of all outstanding SARS was approximately
$1,744,283 with a weighted-average remaining contractual term of 9.22 years. The total compensation
cost related to non-vested awards not yet recognized was approximately $678,044 with an expense
recognition period of 2 years.
10. Contingencies and Commitments
Litigation
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. The Company accounts for such activity through the establishment
of unpaid claims and claim adjustment expense reserves. Management does not believe that the
outcome of any of those matters will have a material adverse effect on the Companys financial
position, operating results or cash flows.
Operating Leases
The Company has entered into a seven-year lease agreement for the use of
office space and equipment. The most significant obligations under the lease terms other than the
base rent are the reimbursement of the Companys share of the operating expenses of the premises,
which include real estate taxes, repairs and maintenance, utilities, and insurance. Net rent
expense for 2007, 2006 and 2005 was $973,655, $958,279 and $945,391, respectively.
The Company entered into a four-year lease agreement for the use of additional office space
and equipment commencing on September 11, 2004. Rent expense for 2007, 2006 and 2005 was $212,400,
for each of the years.
Aggregate minimum rental commitments of the Company as of December 31, 2007 are as follows:
|
|
|
|
|
Year
|
|
Amount
|
|
2008
|
|
$
|
796,799
|
|
2009
|
|
|
545,999
|
|
2010
|
|
|
|
|
2011
|
|
|
|
|
2012 and thereafter
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,342,798
|
|
|
|
|
|
In connection with the lease agreement, the Company executed a letter of credit in the amount
of $300,000 as security for payment of the base rent.
Guaranty Funds and Assessments
The Company is subject to guaranty fund and other assessments
by the State of New Jersey. The Company is also assigned private passenger automobile and
commercial automobile risks by the State of New Jersey for those who cannot obtain insurance in the
primary market.
F-36
New Jersey law requires that property and casualty insurers licensed to do business in New
Jersey participate in the New Jersey Property-Liability Insurance Guaranty Association (which we
refer to as NJPLIGA). Members of NJPLIGA are assessed the amount NJPLIGA deems necessary to pay its
obligations and its expenses in connection with handling covered claims. Assessments are made in
the proportion that each members direct written property and casualty premiums for the prior
calendar year compared to the corresponding direct written premiums for NJPLIGA members for the
same period. NJPLIGA notifies the insurer of the surcharge to the policyholders, which is used to
fund the assessment as a percentage of premiums on an annual basis. The Company collects these
amounts on behalf of the NJPLIGA and there is no impact to earnings. Historically, requests for
remittance of the assessments are levied 12-14 months after the end of a policy year. The Company
remits the amount to NJPLIGA within 45 days of the assessment request.
For the years ended December 31, 2007, 2006 and 2005, the Company was assessed $1,963,302,
$3,006,527 and $4,886,128, respectively, as its portion of the losses due to insolvencies of
certain insurers. We anticipate that there will be additional assessments from time to time
relating to insolvencies of various insurance companies. We are allowed to re-coup these
assessments from our policyholders over time until we have recovered all such payments. In the
event that the required assessment is greater than the amount accrued for via surcharges, the
Company has the ability to increase its surcharge percentage to re-coup that amount.
A summary of the activity related to the change in our NJPLIGA recoverable is as follows:
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
2007
|
|
2006
|
Collected
|
|
$
|
2,810,826
|
|
|
$
|
2,791,015
|
|
Paid
|
|
|
1,963,302
|
|
|
|
3,006,527
|
|
Recoverable
|
|
|
1,364,237
|
|
|
|
2,211,761
|
|
The Board of Directors of the NJPLIGA reviewed the funding needs of the Unsatisfied Claim and
Judgment Fund (UCJF) and NJPLIGA and authorized assessments for each entity in 2007, 2006 and 2005.
The Board of Directors of NJPLIGA determined it was necessary to assess carriers for the UCJF
uninsured motorist and pedestrian personal injury protection responsibilities with a 1.00%
assessment of each carriers automobile liability net direct written premium. The UCJF, as of
January 2004, is responsible for payment of pedestrian PIP claims previously paid directly by auto
insurers. These assessments reflect the cost of those claims and will be adjusted accordingly going
forward. For the years ended December 31, 2007, 2006 and 2005, the Company was assessed $810,833,
$1,009,652 and $1,226,964, respectively. This amount is reflected as reinsurance payable and ceded
written premiums and is not recoverable by the Company.
The Personal Automobile Insurance Plan, or PAIP, is a plan designed to provide personal
automobile coverage to drivers unable to obtain private passenger auto insurance in the voluntary
market and to provide for the equitable assignment of PAIP liabilities to all licensed insurers
writing personal automobile insurance in New Jersey. We may be assigned PAIP business by the state
in an amount equal to the proportion that our net direct written premiums on personal auto business
for the prior calendar year compares to the
corresponding net direct written premiums for all personal auto business written in New Jersey for
such year.
The State of New Jersey allows property and casualty companies to enter into Limited
Assignment Distribution (LAD) agreements to transfer PAIP assignments to another insurance carrier
approved by the State of New Jersey to handle this type of transaction. The LAD carrier is
responsible for handling all of the premium and loss transactions arising from PAIP assignments. In
turn, the buy-out company pays the LAD carrier a fee based on a percentage of the buy-out companys
premium quota for a specific year. This transaction is not treated as a reinsurance transaction on
the buy-out companys book but as an expense. In the event the LAD carrier does not perform its
responsibilities, the Company may have to assume that portion of the PAIP assignment obligation in
the event no other LAD carrier will perform these responsibilities.
As of December 31, 2006 we have entered into a LAD agreement pursuant to which the PAIP
business assigned to us by the State of New Jersey is transferred to Clarendon National Insurance
Company (which assigned its rights and obligations under the LAD agreement to Praetorian Insurance
Company, effective May 1, 2007) which write and service the business in exchange for an agreed upon
fee.
F-37
For the years ended December 31, 2007, 2006 and 2005, the Company was assessed LAD fees of
$242,951, $81,496 and $451,500, respectively, in connection with payments to Clarendon National
Insurance Company under the LAD agreement. For the years ended December 31, 2007, 2006 and 2005,
the Company was assessed an additional $0, $10,713 and $0, respectively, in connection with
payments made to Clarendon National Insurance Company during the prior year. For the years ended
December 31, 2007, 2006 and 2005, the Company was reimbursed $81,452, $0 and $81,804, respectively,
in connection with payments made to Clarendon National Insurance Company during the prior year.
For the years ended December 31, 2007, 2006 and 2005, the Company was assessed LAD fees of $0,
$24,778 and $144,521, respectively, in connection with payments to Auto One Insurance Company under
the LAD agreement. For the years ended December 31, 2007, 2006 and 2005, the Company was assessed
an additional $0, $12,699 and $0, respectively, in connection with payments made to Auto One
Insurance Company during the prior year. For the years ended December 31, 2007, 2006 and 2005, the
Company received reimbursements of $8,572, $15,636 and $26,141, respectively, in connection with
payments made to Auto One Insurance Company. For the years ended December 31, 2007, 2006 and 2005,
the Company would have been assigned $4,049,181, $2,125,472 and $12,643,014 of premium,
respectively, by the State of New Jersey under PAIP, if not for the LAD agreements that were in
place. These amounts served as the basis for the fees to be paid to the LAD carriers.
The Commercial Automobile Insurance Plan, or CAIP, is a plan similar to PAIP, but involving
commercial auto insurance rather than private passenger auto insurance. Private passenger vehicles
cannot be insured by CAIP if they are eligible for coverage under PAIP or if they are owned by an
eligible person as defined under New Jersey law. We are assessed an amount in respect of CAIP
liabilities equal to the proportion that our net direct written premiums on commercial auto
business for the prior calendar year compares to the corresponding direct written premiums for
commercial auto business written in New Jersey for such year.
The Company records its CAIP assignment on its books as assumed business as required by the
State of New Jersey. For the years ended December 31, 2007, 2006 and 2005 the Company has been
assigned $624,315, $992,659 and $1,968,016 of premiums, and $1,030,143, $1,331,186 and $1,562,587
of losses, respectively, by the State of New Jersey under the CAIP. On a quarterly basis, the State
of New Jersey remits a member participation report and cash settlement report. The net result of
premiums assigned less paid losses, losses and loss adjustment expenses and other expenses plus
investment income results in a net cash settlement due to or from the participating member. The
reserving related to these assignments is calculated by the State of New Jersey with corresponding
entries recorded on the Companys consolidated financial statements.
New Jersey Automobile Insurance Risk Exchange
The New Jersey Automobile Insurance Risk Exchange, or NJAIRE, is a plan designed to compensate
member companies for claims paid for non-economic losses and claims adjustment expenses which would
not have been incurred had the tort limitation option provided under New Jersey insurance law been
elected by the injured party filing the claim for non-economic losses. As a member company of
NJAIRE, we submit information with respect to the number of claims reported to us that meet the
criteria outlined above. NJAIRE compiles the information submitted by all member companies and
remits assessments to each member company for this exposure. The Company, since its inception, has
never received compensation from NJAIRE as a result of its participation in the plan. The Companys
participation in NJAIRE is mandated by the New Jersey Department of Banking and Insurance. The
assessments that the Company has received required payment to NJAIRE for the amounts assessed. The
Company
records the assessments received as underwriting, acquisition and insurance related expenses.
For the years ended December 31, 2007, 2006 and 2005, we have been assessed $1,297,839,
$1,490,148 and $1,877,161, respectively, by NJAIRE. These assessments represent amounts to be paid
to NJAIRE as it relates to the Companys participation in its plan. For the years ended December
31, 2007, 2006 and 2005, the Company received additional assessments of prior periods in the amount
of $0, $362,499 and $0, respectively. For the years ended December 31, 2007, 2006 and 2005, the
Company received reimbursements of prior period assessments in the amount of $1,288,325, $1,231,059
and $1,642,563, respectively.
F-38
11. Other Comprehensive Income (Loss)
The tax effect of other comprehensive income (loss) is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax
|
|
|
Tax
|
|
|
Net of Tax
|
|
for the year ended December 31, 2007
|
|
Amount
|
|
|
Effect
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Net holding gains arising during the year
|
|
$
|
2,136
|
|
|
$
|
(748
|
)
|
|
$
|
1,388
|
|
Less: reclassification adjustment for net
realized losses included in net loss
|
|
|
544
|
|
|
|
(190
|
)
|
|
|
354
|
|
Amortization of unrealized loss recorded on transfer
of fixed income securities to held-to-maturity
|
|
|
91
|
|
|
|
(32
|
)
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
$
|
2,771
|
|
|
$
|
(970
|
)
|
|
$
|
1,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax
|
|
|
Tax
|
|
|
Net of Tax
|
|
for the year ended December 31, 2006
|
|
Amount
|
|
|
Effect
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Net holding losses arising during the year
|
|
$
|
(741
|
)
|
|
$
|
279
|
|
|
$
|
(462
|
)
|
Less: reclassification adjustment for net
realized losses included in net income
|
|
|
469
|
|
|
|
(158
|
)
|
|
|
311
|
|
Amortization of unrealized loss recorded on transfer
of fixed income securities to held-to-maturity
|
|
|
91
|
|
|
|
(32
|
)
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
$
|
(181
|
)
|
|
$
|
89
|
|
|
$
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax
|
|
|
Tax
|
|
|
Net of Tax
|
|
for the year ended December 31, 2005
|
|
Amount
|
|
|
Effect
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Net holding losses arising during the year
|
|
$
|
(2,736
|
)
|
|
$
|
930
|
|
|
$
|
(1,806
|
)
|
Less: reclassification adjustment for net
realized losses included in net income
|
|
|
33
|
|
|
|
(11
|
)
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
$
|
(2,703
|
)
|
|
$
|
919
|
|
|
$
|
(1,784
|
)
|
|
|
|
|
|
|
|
|
|
|
F-39
12. Statutory Surplus
Proformance, which is domiciled in New Jersey, prepares its statutory financial statements in
accordance with accounting principles and practices prescribed or permitted by the NJDOBI, the
recognized authority for determining solvency under the New Jersey insurance law. The commissioner
of the NJDOBI has the right to permit other practices that may deviate from prescribed practices.
Prescribed statutory accounting practices are those practices that are incorporated directly or by
reference in state laws, regulations, and general administrative rules applicable to all insurance
enterprises domiciled in New Jersey. Permitted statutory accounting practices that are not
prescribed may differ from company to company within a state, and may change in the future.
GAAP differs in certain respects from the accounting practices prescribed or permitted by
insurance regulatory authorities (statutory basis). Based on amounts included in the original
filings of the annual statements for the respective years, statutory surplus was $125,711,839 and
$128,031,273 at December 31, 2007 and 2006, respectively.
Proformances statutory financial statements are presented on the basis of accounting
practices prescribed or permitted by the NJDOBI. New Jersey has adopted the National Association of
Insurance Commissioners statutory accounting practices as its statutory accounting practices,
except that it has retained the prescribed practice of writing off goodwill immediately to
statutory surplus in the year of acquisition. In addition, the commissioner of the NJDOBI has the
right to permit other specific practices that may deviate from prescribed practices.
13. Dividends from Subsidiaries
The funding of the cash requirements of the Company is primarily provided by cash dividends
received from its subsidiaries. Dividends paid by Proformance are restricted by regulatory
requirements of the State of New Jersey. Generally, the maximum dividend that may be paid without prior regulatory approval is limited to the greater of 10 percent
of statutory surplus (stockholders equity on a statutory basis) or 100 percent of net income
(excluding realized capital gains) for the prior year. Dividends exceeding these limitations can be
made subject to approval by the NJDOBI. In addition, dividends must be paid from unassigned funds
which must not reflect a deficit. As of December 31, 2007 Proformance was not permitted to pay any
dividends without the approval of the Commissioner as it had negative unassigned surplus of
$(1,767,038) as a result of historical underwriting losses. As of December 31, 2006, Proformance
was permitted to pay dividends without the approval of the Commissioner as it had unassigned
surplus of $3,420,432. No dividends from Proformance were paid for the years ended December 31,
2007 and 2006. In addition, Bermuda legislation imposes limitations on the dividends Mayfair is
permitted to pay, based on minimum capital and solvency requirements. In connection with these
limitations, Mayfair paid dividends for the years ended December 31, 2007 and 2006 in the amount of
$0 and $0, respectively. The non-insurance subsidiaries paid cash dividends to the Company of
$2,560,000 and $903,541 in 2007 and 2006, respectively.
F-40
14. Fair Value of Financial Instruments
SFAS No. 107,
Disclosure About Fair Value of Financial Instruments
, requires the Company to
disclose the estimated fair value of financial instruments, both assets and liabilities, recognized
and not recognized in the consolidated balance sheets for which it is practical to estimate fair
value.
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value:
Cash and Short Term Investments.
For short-term instruments, the carrying amount is a
reasonable estimate of fair value.
Investment in Securities.
For investments in securities, fair values are based on quoted
market prices or dealer quotes, if available. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities.
The carrying amount and estimated fair value of financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as of December 31,
|
|
|
2007
|
|
2006
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
Fixed maturity held-to-maturity
|
|
$
|
42,129,921
|
|
|
$
|
41,912,701
|
|
|
$
|
42,167,825
|
|
|
$
|
41,400,704
|
|
Fixed maturity available-for-sale
|
|
|
269,784,350
|
|
|
|
270,518,748
|
|
|
|
275,810,400
|
|
|
|
273,723,765
|
|
Short-term investments
|
|
|
456,821
|
|
|
|
456,821
|
|
|
|
453,000
|
|
|
|
453,000
|
|
Equity Securities
|
|
|
1,013,850
|
|
|
|
1,012,464
|
|
|
|
2,287,743
|
|
|
|
2,427,396
|
|
Cash and cash equivalents
|
|
|
28,098,468
|
|
|
|
28,098,468
|
|
|
|
26,288,127
|
|
|
|
26,288,127
|
|
F-41
15. Net (Loss) Earnings Per Share
Basic net (loss) earnings per share is computed based on the weighted average number of shares
outstanding during the year. Diluted net income per share includes the dilutive effect of
outstanding options, using the treasury stock method. Under the treasury stock method, exercise of
options is assumed with the proceeds used to purchase common stock at the average price for the
period. The difference between the number of shares issued and the number of shares purchased
represents the dilutive shares.
The following table sets forth the computation of basic and diluted (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net (Loss) Income applicable to common
stockholders
|
|
$
|
(6,194,001
|
)
|
|
$
|
14,382,394
|
|
|
$
|
6,435,950
|
|
Weighted average common shares basic
|
|
|
11,078,064
|
|
|
|
11,213,463
|
|
|
|
9,166,683
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
236,623
|
|
|
|
315,885
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares diluted
|
|
|
11,078,064
|
|
|
|
11,450,086
|
|
|
|
9,482,568
|
|
|
|
|
|
|
|
|
|
|
|
Basic (Loss) Earnings Per Share
|
|
$
|
(0.56
|
)
|
|
$
|
1.28
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (Loss) Earnings per Share
|
|
$
|
(0.56
|
)
|
|
$
|
1.26
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, the effect of 122,942 stock options were excluded from the computation
of diluted earnings per share because they would have been anti-dilutive.
16. Related Party Disclosure
In connection with the Ohio Casualty replacement carrier transaction, the Company
entered into a non-competition agreement with OCIC which prohibited Proformance from writing
commercial lines insurance policies until December 31, 2004 where the expiring policy was issued by
Ohio Casualty Group.
The Company cancelled certain outdated shareholder agreements, effective December 23,
2005. These agreements, which included shareholder agreements between the Company and its
shareholder agents and also its Chief Executive Officer, were developed in 1994 prior to the
formation of the Company and related primarily to voting control of the Company as a privately held
organization. In addition, the investor rights agreement between the Company and the Ohio Casualty
Insurance Company was terminated. The Board of Directors determined that these agreements were no
longer applicable to a public company and voted unanimously to terminate these agreements.
Accordingly, the Company has executed the cancellation of these agreements.
The Company has also made payments to insurance agencies affiliated with certain of the
Companys directors.
For the years ended December 31, 2007, 2006 and 2005, Proformance paid to Liberty Insurance
Associates, Inc. commissions of $197,049, $135,405 and $229,831, respectively. Mr. Andrew Harris,
who was a member of our board of directors until June 13, 2005, when he resigned his position and
was appointed President of Proformance, is Chief Executive Officer of Liberty Insurance Associates.
Mr. Thomas J. Sharkey, a member of our board of directors, was Chairman of Banc of
America Corporate Insurance Agency, LLC (formerly, Fleet Insurance Services) until February 3,
2007. For the period ended February 3, 2007, Proformance paid commissions of $5,557 to Banc of
America Corporate Insurance Agency, LLC. For the years ended December 31, 2006 and 2005,
Proformance paid to Banc of America Corporate Insurance Agency, LLC commissions of $67,038 and
$105,723, respectively.
In connection with the Commercial and Personal Excess Liability Excess of Loss
Reinsurance Contract between Proformance and OdysseyRe and the reinsurance agreement between
OdysseyRe and Mayfair as outlined in Note 4, these transactions are eliminated for GAAP reporting
purposes as part of the Companys consolidated financial results.
F-42
17. Subsequent Events
On March 13, 2008, the Company entered into a merger agreement (the Merger Agreement) with
Palisades Safety and Insurance Association, an insurance exchange organized under NJSA 17:50-1
et
seq.
(Palisades), and Apollo Holdings, Inc., a New Jersey corporation and a direct wholly owned
subsidiary of Palisades (Merger Sub). The Merger Agreement provides that, upon the terms and
subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into
the Company, with NAHC continuing as the surviving corporation (the Surviving Corporation) and a
direct wholly owned subsidiary of Palisades (the Merger).
At the effective time and as a result of the Merger, in exchange for their shares of issued
and outstanding Company common stock, Company shareholders shall receive $6.25 in cash for each of
their shares. The closing price of Companys shares on the NASDAQ on March 11, 2008 was $5.50.
In addition, at or prior to the effective time of the Merger, each outstanding option to
purchase Common Stock and each outstanding stock appreciation right (vested or unvested) will be
canceled and the holder will be entitled to receive an amount of cash equal to the difference
between the Merger Consideration and the exercise price of the applicable stock option, or the
difference between the Merger Consideration and the applicable per share base price of the stock
appreciation right, as applicable, less any required withholding taxes.
The Merger Agreement provides that the directors and officers of the Merger Sub immediately
prior to the effective time of the Merger will be the directors and officers of the Surviving
Corporation.
The Company and Palisades have made customary representations, warranties and covenants in the
Merger Agreement. The completion of the Merger is subject to approval by the shareholders of the
Company, obtaining regulatory approvals, including antitrust approval, and satisfaction or waiver
of other conditions.
The Merger is subject to various closing conditions, including the approval of the Companys
shareholders, the obtaining of certain regulatory approvals specified in the Merger Agreement, the
maintenance by the Company of certain stockholders equity and capital and surplus measures within
prescribed levels, the Company obtaining a directors and officers liability tail policy for a
specified cost and level of coverage, and the maintenance of the A.M. Best Financial Strength
Rating of Proformance Insurance Company within a prescribed rating.
The Merger Agreement contains certain termination rights for both the Company and Palisades
and further provides that, upon termination of the Merger Agreement under specified circumstances,
the Company may be required to pay Palisades a termination fee of up to $2,100,000 . Furthermore,
the Merger Agreement provides that, upon termination of the Merger Agreement under specified
circumstances unrelated to a failure
of the closing conditions, Palisades may be required to pay the Company certain liquidated
damages based on the circumstances relating to such termination.
Simultaneously with the execution and delivery of the Merger Agreement, Palisades and James V.
Gorman, the Chief Executive Officer of the Company entered into a voting agreement (the Voting
Agreement). In the Voting Agreement, Mr. Gorman thereto agreed to vote, or provide his consent
with respect to, all shares of Company capital stock held by such him: (1) in favor of the
recommendation of the Board of Directors of the Company to the holders of Common Shares; and (2)
against any Acquisition Proposal, or any agreement providing for the consummation of a transaction
contemplated by any Acquisition Proposal (other than the Merger and other than following any Change
in Recommendation made by the Board of Directors pursuant to the requirements of the Merger
Agreement); and (3) in favor of any proposal to adjourn a shareholders meeting which the Company,
Merger Sub and Parent support.
18. Quarterly Financial Information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
44,449
|
|
|
$
|
45,423
|
|
|
$
|
47,151
|
|
|
$
|
47,248
|
|
Income before income taxes
|
|
|
5,797
|
|
|
|
1,821
|
|
|
|
(14,715
|
)
|
|
|
(3,908
|
)
|
Net income (loss)
|
|
|
3,956
|
|
|
|
1,175
|
|
|
|
(9,190
|
)
|
|
|
(2,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) Basic
|
|
$
|
0.36
|
|
|
$
|
0.11
|
|
|
$
|
(0.83
|
)
|
|
$
|
(0.19
|
)
|
Net income (loss) Diluted
|
|
$
|
0.35
|
|
|
$
|
0.10
|
|
|
$
|
(0.83
|
)
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
43,191
|
|
|
$
|
42,999
|
|
|
$
|
44,425
|
|
|
$
|
45,241
|
|
Income before income taxes
|
|
|
5,967
|
|
|
|
4,598
|
|
|
|
6,078
|
|
|
|
4,846
|
|
Net income
|
|
|
3,985
|
|
|
|
3,027
|
|
|
|
4,381
|
|
|
|
2,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income Basic
|
|
$
|
0.36
|
|
|
$
|
0.27
|
|
|
$
|
0.39
|
|
|
$
|
0.27
|
|
Net income Diluted
|
|
$
|
0.35
|
|
|
$
|
0.26
|
|
|
$
|
0.38
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
50,330
|
|
|
$
|
45,218
|
|
|
$
|
47,228
|
|
|
$
|
44,565
|
|
Income before income taxes
|
|
|
6,461
|
|
|
|
2,315
|
|
|
|
(2,245
|
)
|
|
|
1,763
|
|
Net income (loss)
|
|
|
4,373
|
|
|
|
1,565
|
|
|
|
(1,638
|
)
|
|
|
2,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) Basic
|
|
$
|
0.88
|
|
|
$
|
0.16
|
|
|
$
|
(0.15
|
)
|
|
$
|
0.19
|
|
Net income (loss) Diluted
|
|
$
|
0.78
|
|
|
$
|
0.15
|
|
|
$
|
(0.15
|
)
|
|
$
|
0.19
|
|
F-43
Report
of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
National Atlantic Holdings Corporation
Freehold, New Jersey
We have audited the consolidated financial statements of National Atlantic Holdings Corporation
and subsidiaries (the Company) as of December 31, 2007 and 2006, and for the years then ended
and the Companys internal control over financial reporting as of December 31, 2007, and have
issued our reports thereon dated March 13, 2008; such reports are included elsewhere in the Form
10-K. Our audits included the 2007 and 2006 consolidated financial statement schedules of the
Company listed in Item 15. These consolidated financial statement schedules are the
responsibility of the Companys management. Our responsibility is to express an opinion based
on our audits. In our opinion, the 2007 and 2006 consolidated 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 herein. The financial statement
schedules for the year ended December 31, 2005 were audited by other auditors. Those auditors
expressed an opinion, in their report dated March 24, 2006, that such 2005 consolidated financial
statement schedules, when considered in relation to the 2005 basic consolidated financial
statements taken as a whole, presented fairly, in all material respects, the information set forth
therein.
/s/ Beard Miller Company LLP
Beard Miller Company LLP
Harrisburg, Pennsylvania
March 13, 2008
F-44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
National Atlantic Holdings Corporation and Subsidiaries
Freehold, NJ
We have audited the financial statements of National Atlantic Holdings Corporation and Subsidiaries
(the Company) for the year ended December 31, 2005 and have issued our report thereon dated March
24, 2006 (included elsewhere in this Annual Report on Form 10-K). Our audit also included the
related financial statement schedules listed in Item 15 of this Annual Report on Form 10-K. These
financial statement schedules are the responsibility of the Companys management. Our
responsibility is to express an opinion based on our audit. In our opinion, such financial
statement schedules, when considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 24, 2006
F-45
NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN AFFILIATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
Amount at
|
|
|
|
Amortized
|
|
|
|
|
|
|
which shown
|
|
Type of Investment
|
|
Cost
|
|
|
Fair Value
|
|
|
on Balance Sheet
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S Government, government agencies
and authorities
|
|
$
|
6,783,210
|
|
|
$
|
7,015,099
|
|
|
$
|
6,783,210
|
|
State, local government and agencies
|
|
|
2,842,430
|
|
|
|
2,835,410
|
|
|
|
2,842,430
|
|
Industrial and miscellaneous
|
|
|
32,504,281
|
|
|
|
32,062,192
|
|
|
|
32,504,281
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
42,129,921
|
|
|
|
41,912,701
|
|
|
|
42,129,921
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments Held-to-Maturity
|
|
$
|
42,129,921
|
|
|
$
|
41,912,701
|
|
|
$
|
42,129,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
Cost/
|
|
|
|
|
|
|
Amount at
|
|
|
|
Amortized
|
|
|
|
|
|
|
which shown
|
|
Type of Investment
|
|
Cost
|
|
|
Fair Value
|
|
|
on Balance Sheet
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S Government, government agencies
and authorities
|
|
$
|
189,217,646
|
|
|
$
|
189,629,659
|
|
|
$
|
189,629,659
|
|
State, local government and agencies
|
|
|
63,368,016
|
|
|
|
63,775,438
|
|
|
|
63,775,438
|
|
Industrial and miscellaneous
|
|
|
12,176,793
|
|
|
|
12,085,876
|
|
|
|
12,085,876
|
|
Mortgage-backed securities
|
|
|
5,021,895
|
|
|
|
5,027,775
|
|
|
|
5,027,775
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
269,784,350
|
|
|
|
270,518,748
|
|
|
|
270,518,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and preferred stock
|
|
|
1,013,850
|
|
|
|
1,012,464
|
|
|
|
1,012,464
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
1,013,850
|
|
|
|
1,012,464
|
|
|
|
1,012,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
456,821
|
|
|
|
456,821
|
|
|
|
456,821
|
|
|
|
|
|
|
|
|
|
|
|
Total other investments
|
|
|
456,821
|
|
|
|
456,821
|
|
|
|
456,821
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments Available-for-Sale
|
|
$
|
271,255,021
|
|
|
$
|
271,988,033
|
|
|
$
|
271,988,033
|
|
|
|
|
|
|
|
|
|
|
|
S-1
NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN AFFILIATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
Amount at
|
|
|
|
Amortized
|
|
|
|
|
|
|
which shown
|
|
Type of Investment
|
|
Cost
|
|
|
Fair Value
|
|
|
on Balance Sheet
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S Government, government agencies
and authorities
|
|
$
|
6,787,542
|
|
|
$
|
6,534,458
|
|
|
$
|
6,787,542
|
|
State, local government and agencies
|
|
|
2,846,423
|
|
|
|
2,788,655
|
|
|
|
2,846,423
|
|
Industrial and miscellaneous
|
|
|
32,533,860
|
|
|
|
32,077,591
|
|
|
|
32,533,860
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
42,167,825
|
|
|
|
41,400,704
|
|
|
|
42,167,825
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments Held-to-Maturity
|
|
$
|
42,167,825
|
|
|
$
|
41,400,704
|
|
|
$
|
42,167,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
Cost/
|
|
|
|
|
|
|
Amount at
|
|
|
|
Amortized
|
|
|
|
|
|
|
which shown
|
|
Type of Investment
|
|
Cost
|
|
|
Fair Value
|
|
|
on Balance Sheet
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S Government, government agencies
and authorities
|
|
$
|
191,929,393
|
|
|
$
|
190,112,328
|
|
|
$
|
190,112,328
|
|
State, local government and agencies
|
|
|
71,460,810
|
|
|
|
71,355,839
|
|
|
|
71,355,839
|
|
Industrial and miscellaneous
|
|
|
8,994,746
|
|
|
|
8,838,860
|
|
|
|
8,838,860
|
|
Mortgage-backed securities
|
|
|
3,425,451
|
|
|
|
3,416,738
|
|
|
|
3,416,738
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
275,810,400
|
|
|
|
273,723,765
|
|
|
|
273,723,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and preferred stock
|
|
|
2,287,743
|
|
|
|
2,427,396
|
|
|
|
2,427,396
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
2,287,743
|
|
|
|
2,427,396
|
|
|
|
2,427,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
453,000
|
|
|
|
453,000
|
|
|
|
453,000
|
|
|
|
|
|
|
|
|
|
|
|
Total other investments
|
|
|
453,000
|
|
|
|
453,000
|
|
|
|
453,000
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments Available-for-Sale
|
|
$
|
278,551,143
|
|
|
$
|
276,604,161
|
|
|
$
|
276,604,161
|
|
|
|
|
|
|
|
|
|
|
|
S-2
NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
2007
|
|
|
2006
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
624
|
|
|
$
|
7,675
|
|
Investment in subsidiaries
|
|
|
144,965
|
|
|
|
145,827
|
|
Deferred tax asset
|
|
|
292
|
|
|
|
843
|
|
Fixed assets, net of depreciation
|
|
|
3
|
|
|
|
5
|
|
Taxes recoverable
|
|
|
8,579
|
|
|
|
|
|
Intercompany receivable
|
|
|
|
|
|
|
574
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
154,463
|
|
|
$
|
154,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
434
|
|
|
$
|
1,051
|
|
Taxes payable
|
|
|
|
|
|
|
2,984
|
|
Intercompany payable
|
|
|
9,853
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,287
|
|
|
|
4,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, no par value
|
|
|
97,820
|
|
|
|
97,570
|
|
Retained earnings
|
|
|
50,541
|
|
|
|
56,735
|
|
Accumulated other comprehensive income (loss)
|
|
|
107
|
|
|
|
(1,694
|
)
|
Common stock held in treasury
|
|
|
(4,292
|
)
|
|
|
(1,723
|
)
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
144,176
|
|
|
|
150,888
|
|
|
|
|
|
|
|
|
Total liabilitites and stockholders equity
|
|
$
|
154,463
|
|
|
$
|
154,924
|
|
|
|
|
|
|
|
|
Note: Dividends payable from Proformance Insurance Company, a significant subsidiary, are
restricted by the State of New Jersey Department of Banking and Insurance.
S-3
NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
$
|
179
|
|
|
$
|
677
|
|
|
$
|
542
|
|
|
|
|
|
|
|
|
|
|
|
Total Income
|
|
|
179
|
|
|
|
677
|
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
Cost and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary Expense
|
|
|
1,158
|
|
|
|
1,458
|
|
|
|
302
|
|
Professional fees
|
|
|
680
|
|
|
|
926
|
|
|
|
789
|
|
Other expenses
|
|
|
556
|
|
|
|
2,103
|
|
|
|
3,833
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2,394
|
|
|
|
4,487
|
|
|
|
4,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before federal income taxes and equity in net
(Loss) income of subsidiaries
|
|
|
(2,215
|
)
|
|
|
(3,810
|
)
|
|
|
(4,383
|
)
|
Income tax (benefit)
|
|
|
(1,094
|
)
|
|
|
(1,309
|
)
|
|
|
(1,388
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in net income of subsidiaries
|
|
|
(1,121
|
)
|
|
|
(2,501
|
)
|
|
|
(2,995
|
)
|
Equity in net (loss) income of subsidiaries
|
|
|
(5,073
|
)
|
|
|
16,884
|
|
|
|
9,431
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(6,194
|
)
|
|
$
|
14,382
|
|
|
$
|
6,436
|
|
|
|
|
|
|
|
|
|
|
|
S-4
NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION
STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(6,194
|
)
|
|
$
|
14,382
|
|
|
$
|
6,436
|
|
Undistributed net loss (income) of subsidiaries
|
|
|
5,073
|
|
|
|
(16,884
|
)
|
|
|
(9,431
|
)
|
Amortization of share options
|
|
|
|
|
|
|
(3
|
)
|
|
|
3,050
|
|
Changes in current assets and liabilities net
|
|
|
(1,201
|
)
|
|
|
1,198
|
|
|
|
(1,309
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,322
|
)
|
|
|
(1,307
|
)
|
|
|
(1,254
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributions to subsidiaries
|
|
|
(4,970
|
)
|
|
|
(11,451
|
)
|
|
|
(43,866
|
)
|
Dividends received
|
|
|
2,560
|
|
|
|
904
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,410
|
)
|
|
|
(10,547
|
)
|
|
|
(41,366
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of stock
|
|
|
250
|
|
|
|
115
|
|
|
|
62,668
|
|
Stock repurchase
|
|
|
(2,569
|
)
|
|
|
(1,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(2,319
|
)
|
|
|
(1,608
|
)
|
|
|
62,668
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(7,051
|
)
|
|
|
(13,462
|
)
|
|
|
20,048
|
|
Cash, beginning of year
|
|
|
7,675
|
|
|
|
21,137
|
|
|
|
1,089
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
624
|
|
|
$
|
7,675
|
|
|
$
|
21,137
|
|
|
|
|
|
|
|
|
|
|
|
S-5
NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and
|
|
|
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
and Loss
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Adjustment
|
|
|
Policy
|
|
|
|
|
|
|
Net
|
|
|
|
Acquisition
|
|
|
Adjustment
|
|
|
Unearned
|
|
|
Earned
|
|
|
Investment
|
|
|
Expenses
|
|
|
Acquisition
|
|
|
Other
|
|
|
Written
|
|
|
|
Costs
|
|
|
Expense
|
|
|
Premiums
|
|
|
Premiums
|
|
|
Income
|
|
|
Incurred
|
|
|
Costs
|
|
|
Expenses
|
|
|
Premiums
|
|
at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
18,934
|
|
|
$
|
197,105
|
|
|
$
|
86,823
|
|
|
$
|
165,220
|
|
|
$
|
17,276
|
|
|
$
|
145,085
|
|
|
$
|
43,894
|
|
|
$
|
6,297
|
|
|
$
|
166,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
18,934
|
|
|
$
|
197,105
|
|
|
$
|
86,823
|
|
|
$
|
165,220
|
|
|
$
|
17,276
|
|
|
$
|
145,085
|
|
|
$
|
43,894
|
|
|
$
|
6,297
|
|
|
$
|
166,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
18,601
|
|
|
$
|
191,386
|
|
|
$
|
85,523
|
|
|
$
|
157,354
|
|
|
$
|
16,082
|
|
|
$
|
103,824
|
|
|
$
|
40,406
|
|
|
$
|
10,133
|
|
|
$
|
161,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
18,601
|
|
|
$
|
191,386
|
|
|
$
|
85,523
|
|
|
$
|
157,354
|
|
|
$
|
16,082
|
|
|
$
|
103,824
|
|
|
$
|
40,406
|
|
|
$
|
10,133
|
|
|
$
|
161,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
17,134
|
|
|
$
|
219,361
|
|
|
$
|
81,546
|
|
|
$
|
172,782
|
|
|
$
|
12,403
|
|
|
$
|
132,794
|
|
|
$
|
34,506
|
|
|
$
|
11,747
|
|
|
$
|
189,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
17,134
|
|
|
$
|
219,361
|
|
|
$
|
81,546
|
|
|
$
|
172,782
|
|
|
$
|
12,403
|
|
|
$
|
132,794
|
|
|
$
|
34,506
|
|
|
$
|
11,747
|
|
|
$
|
189,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
10,872
|
|
|
$
|
184,283
|
|
|
$
|
64,170
|
|
|
$
|
179,667
|
|
|
$
|
7,061
|
|
|
$
|
134,987
|
|
|
$
|
39,586
|
|
|
$
|
7,766
|
|
|
$
|
193,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
10,872
|
|
|
$
|
184,283
|
|
|
$
|
64,170
|
|
|
$
|
179,667
|
|
|
$
|
7,061
|
|
|
$
|
134,987
|
|
|
$
|
39,586
|
|
|
$
|
7,766
|
|
|
$
|
193,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
9,788
|
|
|
$
|
134,201
|
|
|
$
|
51,813
|
|
|
$
|
143,156
|
|
|
$
|
4,258
|
|
|
$
|
108,123
|
|
|
$
|
25,547
|
|
|
$
|
992
|
|
|
$
|
147,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
9,788
|
|
|
$
|
134,201
|
|
|
$
|
51,813
|
|
|
$
|
143,156
|
|
|
$
|
4,258
|
|
|
$
|
108,123
|
|
|
$
|
25,547
|
|
|
$
|
992
|
|
|
$
|
147,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
8,778
|
|
|
$
|
85,472
|
|
|
$
|
46,018
|
|
|
$
|
75,654
|
|
|
$
|
1,593
|
|
|
$
|
69,491
|
|
|
$
|
14,887
|
|
|
$
|
3,605
|
|
|
$
|
110,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
8,778
|
|
|
$
|
85,472
|
|
|
$
|
46,018
|
|
|
$
|
75,654
|
|
|
$
|
1,593
|
|
|
$
|
69,491
|
|
|
$
|
14,887
|
|
|
$
|
3,605
|
|
|
$
|
110,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-6
NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Ceded to
|
|
|
Assumed
|
|
|
|
|
|
|
of Amount
|
|
|
|
Gross
|
|
|
Other
|
|
|
From Other
|
|
|
Net
|
|
|
Assumed to
|
|
|
|
Amount
|
|
|
Companies
|
|
|
Companies
|
|
|
Amount
|
|
|
Net
|
|
For the year ended ended December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance premiums
|
|
$
|
177,232
|
|
|
$
|
12,621
|
|
|
$
|
609
|
|
|
$
|
165,220
|
|
|
|
0.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Premiums
|
|
$
|
177,232
|
|
|
$
|
12,621
|
|
|
$
|
609
|
|
|
$
|
165,220
|
|
|
|
0.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended ended December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance premiums
|
|
$
|
166,786
|
|
|
$
|
10,910
|
|
|
$
|
1,478
|
|
|
$
|
157,354
|
|
|
|
0.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Premiums
|
|
$
|
166,786
|
|
|
$
|
10,910
|
|
|
$
|
1,478
|
|
|
$
|
157,354
|
|
|
|
0.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended ended December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance premiums
|
|
$
|
180,378
|
|
|
$
|
9,805
|
|
|
$
|
2,209
|
|
|
$
|
172,782
|
|
|
|
1.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Premiums
|
|
$
|
180,378
|
|
|
$
|
9,805
|
|
|
$
|
2,209
|
|
|
$
|
172,782
|
|
|
|
1.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-7
NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
As of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
costs and
|
|
|
|
|
|
|
|
|
|
Balance at end
|
Description
|
|
beginning of period
|
|
expenses
|
|
Charged to other accounts -describe
|
|
Deductions - describe
|
|
of period
|
|
Valuation Allowance for State Receivable
|
|
$
|
500
|
|
|
$
|
|
|
|
NY State Receivable
|
|
$
|
|
|
|
$
|
500
|
|
Allowance for Doubtful Accounts
|
|
|
34
|
|
|
|
6
|
|
|
Premiums Receivable
|
|
|
|
|
|
|
40
|
|
Valuation Allowance for Reinsurance
|
|
|
|
|
|
|
|
|
|
Reinsurance Recoverable
|
|
|
|
|
|
|
|
|
Valuation Allowance for Notes Receivable
|
|
|
|
|
|
|
|
|
|
Notes Receivable
|
|
|
|
|
|
|
|
|
|
|
|
$
|
534
|
|
|
$
|
6
|
|
|
|
|
|
|
$
|
|
|
|
$
|
540
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
costs and
|
|
|
|
|
|
|
|
|
|
Balance at end
|
Description
|
|
beginning of period
|
|
expenses
|
|
Charged to other accounts -describe
|
|
Deductions - describe
|
|
of period
|
|
Valuation Allowance for State Receivable
|
|
$
|
500
|
|
|
$
|
|
|
|
NY State Receivable
|
|
$
|
|
|
|
$
|
500
|
|
Allowance for Doubtful Accounts
|
|
|
34
|
|
|
|
|
|
|
Premiums Receivable
|
|
|
|
|
|
|
34
|
|
Valuation Allowance for Reinsurance
|
|
|
|
|
|
|
|
|
|
Reinsurance Recoverable
|
|
|
|
|
|
|
|
|
Valuation Allowance for Notes Receivable
|
|
|
227
|
|
|
|
|
|
|
Notes Receivable
|
|
|
227
|
|
|
|
|
|
|
|
|
$
|
761
|
|
|
$
|
|
|
|
|
|
|
|
$
|
227
|
|
|
$
|
534
|
|
|
S-8
NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
SCHEDULE VI
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY
AND CASUALTY INSURANCE OPERATIONS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and Loss
|
|
Paid Losses
|
|
|
Adjustment Expenses
|
|
and Loss
|
|
|
Incurred Related to:
|
|
Adjustment
|
|
|
Current Year
|
|
Prior Years
|
|
Expenses
|
Years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
125,483
|
|
|
$
|
19,602
|
|
|
$
|
139,191
|
|
2006
|
|
$
|
103,801
|
|
|
$
|
23
|
|
|
$
|
121,596
|
|
2005
|
|
$
|
122,728
|
|
|
$
|
10,066
|
|
|
$
|
100,849
|
|
S-9
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
NATIONAL ATLANTIC HOLDINGS
CORPORATION
|
|
|
By:
|
/s/ James V. Gorman
|
|
|
|
Name:
|
James V. Gorman
|
|
|
|
Title:
|
Chairman of the Board of Directors and Chief Executive Officer
|
|
|
Dated: March 17, 2008
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 dates indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ James V. Gorman
James V. Gorman
|
|
Chairman of the
Board of Directors
and Chief
Executive
Officer (Principle Executive
Officer)
|
|
March 17, 2008
|
|
|
|
|
|
/s/ Frank J. Prudente
Frank J. Prudente
|
|
Executive Vice
President ,
Treasurer and
Chief Financial
Officer
|
|
March 17, 2008
|
|
|
|
|
|
/s/ Peter A. Cappello, Jr.
Peter A. Cappello, Jr.
|
|
Director
|
|
March 17, 2008
|
|
|
|
|
|
/s/ Martin I. Krupnick, Psy. D
Martin I. Krupnick, Psy. D
|
|
Director
|
|
March 17, 2008
|
|
|
|
|
|
/s/ Thomas M. Mulhare
Thomas M. Mulhare
|
|
Director
|
|
March 17, 2008
|
|
|
|
|
|
/s/ Thomas J. Sharkey, Sr.
Thomas J. Sharkey, Sr.
|
|
Director
|
|
March 17, 2008
|
|
|
|
|
|
/s/ Steven V. Stallone
Steven V. Stallone
|
|
Director
|
|
March 17, 2008
|
|
|
|
|
|
/s/ Candace L. Straight
Candace L. Straight
|
|
Director
|
|
March 17, 2008
|
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