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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
( X ) ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES ACT OF
1934 For the fiscal year ended December 31, 2003
or
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period of _____________to_______________
Commission file number 0-2500111
21ST CENTURY HOLDING COMPANY
----------------------------
(Exact name of registrant as specified in its Charter)
Florida 65-0248866
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No)
4161 N.W. 5TH STREET, PLANTATION, FLORIDA 33317
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (954) 581-9993
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-X is not contained herein, and will not be contained,
to the best of registrant's 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. [ X ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in the Exchange Act Rule 12b-2).
Yes No X
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The aggregate market value of the Issuer's common stock held by
non-affiliates (based on the last sale of the common stock as reported by the
Nasdaq National Market) on March 29, 2004 was: $54,565,264.
As of March 29, 2004, there were 3,779,931 shares of the common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
21st Century Holding Company's definitive proxy statement for its 2004 annual
meeting of shareholders will be filed with the SEC not later than 120 days after
the end of the fiscal year covered by this report on Form 10-K pursuant to
General Instruction G (3) of the Form 10-K. Information from such definitive
proxy statement will be incorporated by reference into Part III, Items 10, 11,
12,13 and 14 hereof.
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PART I....................................................................................................................5
ITEM 1. BUSINESS...................................................................................................5
GENERAL..............................................................................................................5
BUSINESS STRATEGY....................................................................................................5
INSURANCE OPERATIONS AND RELATED SERVICES............................................................................6
General...........................................................................................................6
Standard Automobile...............................................................................................7
Nonstandard Automobile............................................................................................7
Homeowners'.......................................................................................................7
Flood.............................................................................................................7
Mobile Home.......................................................................................................7
Commercial General Liability......................................................................................8
Future Products...................................................................................................8
Assurance MGA.....................................................................................................8
Superior Adjusting................................................................................................8
Federated Premium Finance.........................................................................................8
Tax Preparation Services and Ancillary Services..................................................................10
Franchise Operations.............................................................................................10
Marketing and Distribution..........................................................................................10
REINSURANCE.........................................................................................................11
LIABILITY FOR UNPAID LOSSES AND LAE.................................................................................12
COMPETITION.........................................................................................................15
REGULATION..........................................................................................................16
General..........................................................................................................16
Insurance Holding Company Regulation.............................................................................18
Finance Company Regulation.......................................................................................18
Franchise Company Regulation.....................................................................................18
Underwriting and Marketing Restrictions..........................................................................19
Legislation......................................................................................................19
Industry Ratings Services........................................................................................19
EMPLOYEES...........................................................................................................19
SENIOR MANAGEMENT...................................................................................................19
GLOSSARY OF SELECTED TERMS..........................................................................................19
ITEM 2. PROPERTIES...............................................................................................21
ITEM 3. LEGAL PROCEEDINGS........................................................................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................................22
PART II..................................................................................................................23
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................................23
(a) MARKET INFORMATION..........................................................................................23
(b) HOLDERS.....................................................................................................23
(c) DIVIDENDS...................................................................................................23
(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS..........................................23
ITEM 6. SELECTED FINANCIAL DATA...................................................................................24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL.........................................................25
CONDITION AND RESULTS OF OPERATIONS......................................................................................25
OVERVIEW............................................................................................................25
CRITICAL ACCOUNTING POLICIES........................................................................................26
ACCOUNTING CHANGES..................................................................................................26
ANALYSIS OF FINANCIAL CONDITION.....................................................................................27
AS OF DECEMBER 31, 2003 AS COMPARED TO DECEMBER 31, 2002.......................................................27
Investments.................................................................................................27
Receivable for investments sold.............................................................................27
Finance Contracts...........................................................................................27
Prepaid Reinsurance Premiums................................................................................27
Premiums Receivable.........................................................................................28
Reinsurance Recoverable - net...............................................................................28
Deferred Acquisition Costs - net............................................................................28
Income Tax Recoverable......................................................................................28
Property Plant and Equipment................................................................................28
Goodwill....................................................................................................28
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Other Assets................................................................................................28
Unpaid Losses and Loss Adjustment Expenses..................................................................29
Unearned Premium............................................................................................29
Income Taxes Payable........................................................................................29
Subordinated Debt...........................................................................................29
RESULTS OF OPERATIONS..........................................................................................29
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002..........................................29
Gross Premiums Written......................................................................................29
Gross Premiums Ceded........................................................................................29
Increase (Decrease) in Prepaid Reinsurance Premiums.........................................................30
Increase in Unearned Premiums...............................................................................30
Managing General Agent Fees.................................................................................30
Net Investment Income.......................................................................................30
Net Realized Investment Gains (Losses)......................................................................30
Losses and LAE..............................................................................................30
Salaries and Wages..........................................................................................31
Deferred Policy Acquisition Costs...........................................................................31
RESULTS OF OPERATIONS..........................................................................................31
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001..........................................31
Gross Premiums Written......................................................................................31
Gross Premiums Ceded........................................................................................31
Increase (Decrease) in Prepaid Reinsurance Premiums.........................................................31
Increase in Unearned Premiums...............................................................................31
Managing General Agent Fees.................................................................................31
Net Realized Investment Gains (Losses)......................................................................31
Losses and Loss Adjustment Expenses.........................................................................32
Deferred Policy Acquisition Costs...........................................................................32
Extraordinary Gain..........................................................................................32
LIQUIDITY AND CAPITAL RESOURCES..................................................................................32
IMPACT OF INFLATION AND CHANGING PRICES..........................................................................35
SELECTED QUARTERLY FINANCIAL DATA (Unaudited)....................................................................36
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.................................................37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................................39
INDEPENDENT AUDITORS' REPORT........................................................................................40
CONSOLIDATED BALANCE SHEETS......................................................................................42
CONSOLIDATED STATEMENTS OF OPERATIONS............................................................................43
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS).......................44
CONSOLIDATED STATEMENTS OF CASH FLOWS............................................................................45
CONSOLIDATED STATEMENTS OF CASH FLOWS............................................................................46
Notes to Consolidated Financial Statements.......................................................................47
(1) ORGANIZATION AND BUSINESS..................................................................................47
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES...................................................47
(a) CASH AND CASH EQUIVALENTS...............................................................................47
(b) INVESTMENTS.............................................................................................47
(c) PREMIUM REVENUE.........................................................................................48
(d) DEFERRED ACQUISITION COSTS..............................................................................48
(e) PREMIUM DEPOSITS........................................................................................48
(f) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES..............................................................48
(g) COMMISSION INCOME.......................................................................................49
(h) FINANCE REVENUE.........................................................................................49
(i) CREDIT LOSSES...........................................................................................49
(j) MANAGING GENERAL AGENT FEES.............................................................................49
(k) POLICY FEES.............................................................................................49
(l) REINSURANCE.............................................................................................49
(m) INCOME TAXES............................................................................................50
(n) CONTINGENT REINSURANCE COMMISSION.......................................................................50
(o) CONCENTRATION OF CREDIT RISK............................................................................50
(p) ACCOUNTING CHANGES......................................................................................50
(q) USE OF ESTIMATES........................................................................................50
(r) NATURE OF OPERATIONS....................................................................................51
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(s) FAIR VALUE..............................................................................................51
(t) GOODWILL................................................................................................51
(u) STOCK OPTION PLANS......................................................................................52
(v) PROPERTY, PLANT AND EQUIPMENT...........................................................................53
(w) RECLASSIFICATIONS.......................................................................................53
(3) INVESTMENTS................................................................................................53
(a) FIXED MATURITIES AND EQUITY SECURITIES..................................................................53
(b) MORTGAGE LOANS..........................................................................................55
(4) FINANCE CONTRACTS, CONSUMER LOANS AND PAY ADVANCES RECEIVABLE..............................................56
(5) PROPERTY, PLANT AND EQUIPMENT..............................................................................57
(6) REINSURANCE................................................................................................58
(7) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES.................................................................59
(8) REVOLVING CREDIT OUTSTANDING...............................................................................60
(9) INCOME TAXES...............................................................................................61
(10) REGULATORY REQUIREMENTS AND RESTRICTIONS..................................................................63
(11) COMMITMENTS AND CONTINGENCIES.............................................................................64
(12) LEASES....................................................................................................65
(13) RELATED PARTY TRANSACTIONS................................................................................65
(14) NET INCOME (LOSS) PER SHARE...............................................................................65
(15) SEGMENT INFORMATION.......................................................................................66
(16) STOCK COMPENSATION PLANS..................................................................................68
(17) EMPLOYEE BENEFIT PLAN.....................................................................................70
(18) ACQUISITIONS..............................................................................................70
(19) COMPREHENSIVE INCOME (LOSS)...............................................................................71
(20) AUTHORIZATION OF PREFERRED STOCK..........................................................................72
(21) 21ST CENTURY HOLDING COMPANY.............................................................................72
(22) SUBORDINATED DEBT.........................................................................................74
(23) SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS..................76
(24) SUBSEQUENT EVENTS.........................................................................................76
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................77
ITEM 9A. CONTROLS AND PROCEDURES...................................................................................77
(a) Evaluation of disclosure controls and procedures......................................................77
(b) CHANGES IN INTERNAL CONTROLS................................................................................77
PART III.................................................................................................................77
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................................77
ITEM 11. EXECUTIVE COMPENSATION....................................................................................77
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................77
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................77
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.................................................................77
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K...........................................78
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General information about 21st Century Holding Company can be found at
www.fedusa.com. We make our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to these reports filed or
furnished pursuant to Section 13 or 15(d) of the Securities and Exchange Act of
1934 available free of charge on our web site, as soon as reasonably practicable
after they are electronically filed with the SEC.
FORWARD-LOOKING STATEMENTS
Statements in this report or in documents that are incorporated by
reference that are not historical fact are forward-looking statements that are
subject to certain risks and uncertainties that could cause actual events and
results to differ materially from those discussed herein. Without limiting the
generality of the foregoing, words such as "may", "will", "expect", "believe",
"anticipate", "intend", "could", "would", "estimate", or "continue" or the
negative other variations thereof or comparable terminology are intended to
identify forward-looking statements. The risks and uncertainties include,
without limitation, uncertainties related to estimates, assumptions and
projections generally; inflation and other changes in economic conditions
(including changes in interest rates and financial markets); pricing competition
and other initiatives by competitors; ability to obtain regulatory approval for
requested rate changes and the timing thereof; legislative and regulatory
developments; the outcome of litigation pending against us; risks related to the
nature of our business; dependence on investment income and the composition of
our investment portfolio; the adequacy of our liability for loss and loss
adjustment expense ("LAE"); insurance agents; claims experience; ratings by
industry services; catastrophe losses; reliance on key personnel; weather
conditions (including the severity and frequency of storms, hurricanes,
tornadoes and hail); changes in driving patterns and loss trends; acts of war
and terrorist activities; courts decisions and trends in litigation and health
care and auto repair costs; and other matters described from time to time by us
in this report, and our other filings with the SEC. You are cautioned not to
place reliance on these forward-looking statements, which are valid only as of
the date they were made. We undertake no obligation to update or revise any
forward-looking statements to reflect new information or the occurrence of
unanticipated events or otherwise. In addition, investors should be aware that
generally accepted accounting principles prescribe when a company may reserve
for particular risks, including litigation exposures. Accordingly, results for a
given reporting period could be significantly affected if and when a reserve is
established for a major contingency. Reported results may therefore appear to be
volatile in certain accounting periods.
PART I
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ITEM 1. BUSINESS
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GENERAL
We are a vertically integrated insurance holding company, which, through
our subsidiaries, controls substantially all aspects of the insurance
underwriting, distribution and claims process. We underwrite personal automobile
insurance, general liability insurance, flood insurance, homeowners' insurance
and mobile home property and casualty insurance in Florida and Georgia through
our wholly owned subsidiaries, Federated National Insurance Company and American
Vehicle Insurance Company. American Vehicle was approved in August 2003 to be a
foreign insurer in the State of Georgia. During the year ended December 31,
2003, 67.5%, 23.0%, 2.4% and 7.1% of the policies we underwrote were for
personal automobile insurance, homeowners' property and casualty insurance,
mobile home property and casualty insurance and commercial general liability
insurance, respectively. We internally process claims made by our own and third
party insureds through our wholly owned claims adjusting company, Superior
Adjusting, Inc. We also offer premium financing to our own and third-party
insureds through our wholly owned subsidiary, Federated Premium Finance, Inc.
BUSINESS STRATEGY
Our strategy is to seek continued growth of our business by capitalizing
on the efficiencies of our vertical integration and by:
o expanding into additional states. Currently, we have applied to
obtain licenses to underwrite and sell our insurance products in
Alabama, North Carolina and Louisiana;
o a shift in emphasis of our product mix away from nonstandard
automobile to a emphasis on homowners' and commercial general
liability lines of insurance and by expanding our product offerings
to include other commercially viable insurance products, subject to
regulatory approval;
o expanding our agency network primarily through the sale of FedUSA
franchises;
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o employing our business practices developed and used in Florida in
our expansion to other selected states;
o maintaining a commitment to provide quality service to our agents
and insureds by emphasizing customer service;
o encouraging agents to place a high volume of quality business with
us by providing them with attractive commission structures tied to
premium levels and loss ratios; and
o expanding our EXPRESSTAX franchises to all 50 states.
INSURANCE OPERATIONS AND RELATED SERVICES
GENERAL.
We underwrite personal automobile insurance, homeowners' and mobile home
property insurance and casualty insurance through Federated National and
personal automobile and commercial general liability insurance through American
Vehicle. Federated National and American Vehicle are both currently licensed to
conduct business in Florida. American Vehicle is licensed to conduct business in
Georgia as a foreign insurer.
The following tables set forth the amount and percentages of our gross
premiums written, premiums ceded to reinsurers and net premiums written by line
of business for the periods indicated.
Years Ended December 31,
------------------------
2003 2002 2001
----------------- ----------------- -----------------
Premium Percent Premium Percent Premium Percent
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Gross written premiums:
Automobile $49,298 67.5% $52,586 83.4% $24,743 72.2%
Homeowners 16,804 23.0% 8,670 13.8% 7,662 22.4%
Mobile Home 1,739 2.4% 1,780 2.8% 1,866 5.4%
Commercial General Liability 5,150 7.1% -- 0.0% -- 0.0%
------- ----- ------- ----- ------- -----
Total gross written premiums $72,991 100.0% $63,036 100.0% $34,271 100.0%
======= ===== ======= ===== ======= =====
Ceded premiums:
Automobile $19,498 100.0% $25,286 100.0% $12,789 100.0%
Homeowners -- 0.0% -- 0.0% -- 0.0%
Mobile Home -- 0.0% -- 0.0% -- 0.0%
Commercial General Liability -- 0.0% -- 0.0% -- 0.0%
------- ----- ------- ----- ------- -----
Total ceded premiums $19,498 100.0% $25,286 100.0% $12,789 100.0%
======= ===== ======= ===== ======= =====
Net written premiums
Automobile $29,800 55.7% $27,300 72.3% $11,954 55.6%
Homeowners 16,804 31.4% 8,670 23.0% 7,662 35.7%
Mobile Home 1,739 3.3% 1,780 4.7% 1,866 8.7%
Commercial General Liability 5,150 9.6% -- 0.0% -- 0.0%
------- ----- ------- ----- ------- -----
Total net written premiums $53,493 100.0% $37,750 100.0% $21,482 100.0%
======= ===== ======= ===== ======= =====
We market our insurance products through a network of Company-owned
agencies, franchised agencies, independent agents and general agents.
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STANDARD AUTOMOBILE.
Standard personal automobile insurance is principally provided to
insureds who present an average risk profile in terms of driving record, vehicle
type and other factors. Limits on standard personal automobile insurance are
generally significantly higher than those for nonstandard coverage, but
typically provide for deductibles and other restrictive terms. We underwrite
standard personal automobile insurance policies providing coverage no higher
than $100,000 per individual, $300,000 per accident for bodily injury, $50,000
per accident for property damage and comprehensive and collision up to $50,000
per accident, with deductibles ranging from $200 to $1,000. The approximate
average premium on the policies currently in force is approximately $1,472.
NONSTANDARD AUTOMOBILE.
Nonstandard personal automobile insurance is principally provided to
insureds who are unable to obtain standard insurance coverage because of their
driving record, age, vehicle type or other factors, including market conditions.
Underwriting standards for preferred and standard coverage have become more
restrictive, thereby requiring more insureds to seek nonstandard coverage and
contributing to the increase in the size of the nonstandard automobile market.
Nonstandard automobile insurance, however, generally involves the potential for
increased loss exposure and higher claims experience. Loss exposure is mitigated
because premiums usually are written at higher rates than those written for
standard insurance coverage and because approximately 32% of the policies issued
by the company provide the minimum coverage required of the policyholder by
statute and provide no bodily injury coverage. We currently underwrite
nonstandard personal automobile insurance in Florida, where the minimum limits
are $10,000 per individual, $20,000 per accident for bodily injury, $10,000 per
accident for property damage and comprehensive and $50,000 for collision. The
average annual premium on policies currently in force is approximately $751.
Both Federated National and American Vehicle underwrite this coverage on an
annual and semi-annual basis.
Due to the purchasing habits of nonstandard automobile insureds (for
example, insureds seeking the least expensive insurance required of the
policyholder by statute which satisfies the requirements of state laws to
register a vehicle), policy renewal rates tend to be low compared to standard
policies. Our experience has been that a significant number of existing
nonstandard policyholders allow their policies to lapse and then reapply for
insurance as new policyholders. Our average policy renewal rate is 35% to 40% on
policies that mature to full term. The success of our nonstandard automobile
insurance program, therefore, depends in part on our ability to replace
non-renewing insureds with new policyholders through marketing efforts.
HOMEOWNERS'
We underwrite homeowners' insurance principally in Central and Southern
Florida. Homeowners' insurance generally protects an owner of real and personal
property against covered causes of loss to that property. Limits on homeowners'
insurance are generally significantly higher than those for mobile homes, but
typically provide for deductibles and other restrictive terms. Our property
insurance products typically provide maximum coverage in the amount of $200,000,
with the average policy limit being approximately $250,000. The average annual
premium on policies currently in force is approximately $1,050 and the typical
deductible is $1,000.
FLOOD.
We write flood insurance through the National Flood Insurance Program
("NFIP"). We write the policy for the Federal Flood program, which assumes 100%
of the flood risk while we retain a commission for our service. The average
flood policy premium is $300 with limits up to $250,000.
MOBILE HOME.
We underwrite homeowners' insurance for mobile homes, principally in
Central and Northern Florida, where we believe that the risk of catastrophe loss
from hurricanes is less than in other areas of the state. Homeowners' insurance
generally protects an owner of real or personal property against covered causes
of loss to that property. Homeowners' insurance for mobile homes generally
involves the potential for above-average loss exposure. In the absence of major
catastrophe losses, however, loss exposure is limited because premiums usually
are at higher rates than those charged for non-mobile home property and casualty
insurance. Additionally, our property lines typically provide maximum coverage
in the amount of $75,000, with the average policy limit being approximately
$31,000. In addition, we presently limit our mobile home coverage to no more
than 10% of our underwriting exposure. The average annual premium on policies
currently in force is approximately $315 and the typical deductible is $500.
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COMMERCIAL GENERAL LIABILITY.
We underwrite commercial general liability insurance for approximately
250 classes of artisan contracting trades (excluding home-builders and
developers) and certain special events liability. The limits of liability range
from $100,000 per occurrence and $200,000 policy aggregate to $1 million per
occurrence and $2 million policy aggregate. The average policy premium is
approximately $1,000 with deductibles of $250 to $500 per claim. We market the
commercial general liability insurance products through a limited number of
general agencies unaffiliated with the Company.
FUTURE PRODUCTS.
We currently intend to expand our product offerings by underwriting
additional insurance products and programs and marketing them through our
distribution network. Expansion of our product offerings will result in
increases in expenses due to additional costs incurred in actuarial rate
justifications, software and personnel. Offering additional insurance products
may also require regulatory approval, further increasing our costs.
ASSURANCE MGA
Assurance MGA acts as Federated National's and American Vehicle's
exclusive managing general agent. Assurance MGA currently provides all
underwriting policy administration, marketing, accounting and financial services
to Federated National, American Vehicle and our agencies and participates in the
negotiation of reinsurance contracts.
Assurance MGA generates revenue through policy fee income and other
administrative fees from the marketing of our products through our distribution
network. Although Assurance MGA recently diverted business from an unaffiliated
insurance company to American Vehicle, and ceased acting as a third party
administrator for this company, Assurance MGA plans to establish relationships
with additional carriers and add additional insurance products in the future
although there can be no assurances it will be able to do so.
SUPERIOR ADJUSTING
Superior processes claims made by insureds from Federated National,
American Vehicle and third party insurance companies. Our Company-owned agencies
and independent agents have no authority to settle claims or otherwise exercise
control over the claims process. Furthermore, we believe that the employment of
salaried claims personnel, as opposed to independent adjusters, results in
reduced ultimate loss payments, lower loss adjustment expenses and improved
customer service for most of our insurance products. Where this is not the case,
we retain independent appraisers and adjusters. We also employ an in-house
counsel department to cost-effectively manage claims-related litigation and to
monitor our claims handling practices for efficiency and regulatory compliance.
FEDERATED PREMIUM FINANCE
Federated Premium provides premium financing to Federated National's,
American Vehicle's and third-party's insureds. Premium financing is marketed
through our distribution network of Company-owned agencies, franchised agencies,
general agencies and a small number of independent agents whose customer base
and operational history meets our strict criteria for credit worthiness. Lending
operations are supported by Federated Premium's own capital base and are
currently leveraged through a credit facility with FlatIron Funding Company LLC,
which is described in more detail below.
Premiums for property and casualty insurance are typically payable at
the time a policy is placed in force or renewed. Federated Premium's services
allow the insured to pay a portion of the premium when the policy is placed in
force and the balance in monthly installments over a specified term, generally
between six and eight months. As security, Federated Premium retains a
contractual right, if a premium installment is not paid when due, to cancel the
insurance policy and to receive the unearned premium from the insurer, or in the
event of insolvency of an insurer, from the Florida Guarantee Association,
subject to a $100 per policy deductible. In the event of cancellation, Federated
Premium applies the unearned premium towards the payment obligation of the
insured.
At times, Federated Premium may advance funds for financed premiums to
independent insurance agencies that represent third-party insurers. A risk
exists if remittance is not made by the agency to the third-party insurer, as
advances made by Federated Premium may only be recoverable to the extent that
the agency's receipt of such advances is received by the third-party insurer. In
order to reduce this risk, we have in place strict criteria for the credit
worthiness of the agency's operational history and customer base. Additionally,
we closely monitor these agencies on an ongoing basis.
-8-
The following table sets forth the amount and percentages of premiums
financed for Federated National, American Vehicle and other insurers for the
periods indicated:
Years Ended December 31,
------------------------
2003 2002 2001
------------------ ------------------ ------------------
Premium Percent Premium Percent Premium Percent
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Federated National $19,227 49.9% $22,331 55.4% $20,174 43.9%
American Vehicle 15,519 40.3% 12,850 31.9% 1,066 2.3%
Other insurers 3,767 9.8% 5,124 12.7% 24,728 53.8%
------- ----- ------- ----- ------- -----
Total $38,513 100.0% $40,305 100.0% $45,968 100.0%
======= ===== ======= ===== ======= =====
Federated Premium's operations are funded by a revolving loan agreement
("Revolving Agreement") with FlatIron Funding Company LLC ("FlatIron"). The
Revolving Agreement is structured as a sale of contracts receivable under a sale
and assignment agreement with FPF, Inc. (a wholly-owned subsidiary of FlatIron),
which gives FPF Inc. the right to sell or assign these contracts receivable.
Federated Premium, which services these contracts, has recorded transactions
under the Revolving Agreement as secured borrowings. The Revolving Agreement,
which was amended and revised in September 2001, allowed for a maximum credit
commitment of $7.0 million plus an initial additional amount of $700,000 for the
transition from September 30, 2001 when the previous agreement expired. The line
declined by $100,000 each month beginning November 1, 2001. In September 2002
the line was amended and revised allowing for a maximum credit commitment of
$4.0 million.
Flatiron reduced the maximum credit commitment under the revolving loan
agreement due to the A.M. Best ratings of third party insurance carriers with
which we were financing policies at the time. Simultaneously, we began financing
only policies predominately underwritten by our insurance carriers (in 2003 we
began again to finance policies from a small number of independent agents whose
customer base and operational history meet our strict criteria for credit
worthiness). Additionally, during 2001, we implemented a direct bill program for
policies underwritten by our carriers. These changes markedly decreased credit
risks and made our reliance on the higher credit commitment previously offered
by FlatIron unnecessary.
Direct billing is where the insurance company accepts from the insured,
as a receivable, a promise to pay the premium, as opposed to requiring payment
of the full amount of the policy, either directly from the insured or from a
premium finance company. The direct billing program does not increase our risk
because the insurance policy, which serves as collateral, is managed by our
computer system. Underwriting criteria are designed with down payment
requirements and monthly payments that create policyholder equity, also called
unearned premium, in the insurance policy. The equity in the policy is
collateral for the extension of credit to the insured. Through our monitoring
systems, we track delinquent payments and, in accordance with the terms of the
extension of credit, cancel the policy before the policyholder's equity is
extinguished. If any excess premium remains after cancellation of the policy and
deduction of applicable penalties, this excess is refunded to the policyholder.
Premium financing which we offer to our own insureds involves limited credit
risk. By financing policies underwritten by our own insurance carriers, our
credit risks are reduced because we can more securely rely on the underwriting
processes of our own insurance carriers. Furthermore, the direct bill program
enables us to closely manage our risk while providing credit to our insureds.
The amount of FPF's advance is subject to availability under a borrowing
base calculation, with maximum advances outstanding not to exceed the maximum
credit commitment. The annual interest rate on advances under the Revolving
Agreement is the prime rate plus additional interest varying from 1.25% to 3.25%
based on the prior month's ratio of contracts receivable related to insurance
companies with an A. M. Best rating of B or worse to total contracts receivable.
The effective interest rate on this line of credit, based on our average
outstanding borrowings under the Revolving Agreement, was 5.63%, 6.23% and 7.84%
for the years ended December 31, 2003, 2002 and 2001, respectively. The
Revolving Agreement contains various operating and financial covenants, with
which the Company was in compliance at December 31, 2003 and 2002. The Revolving
Agreement, as amended, expires September 30, 2004 and we intend to negotiate a
similar agreement to replace the expiring agreement. Outstanding borrowings
under the Revolving Agreement as of December 31, 2003 and 2002 were
approximately $4.1 million and $4.3 million, respectively. Outstanding
borrowings in excess of the $4.0 million commitment totaled $98,786 and
$312,420, respectively for December 31, 2003 and 2002. The excess amounts are
permissible by reason of a compensating cash balance of $200,430 and $352,433,
respectively for December 31, 2003 and 2002 and are held for the benefit of FPF,
Inc. and are included in other assets. Interest expense on this revolving credit
line for the years ended December 31, 2003, 2002 and 2001 totaled approximately
$203,000, $342,000 and $592,000, respectively.
-9-
TAX PREPARATION SERVICES AND ANCILLARY SERVICES
We also offer other services at our Company-owned and franchised
agencies, including tax return preparation and electronic filing and the
issuance and renewal of license tags. In August 1999, we acquired an 80%
interest in Express Tax Services, Inc ("Express Tax"). Express Tax licenses tax
return preparation software to business locations throughout the United States
and also earns fees on all electronically filed returns. Express Tax licenses
its software to the Company's agencies.
FRANCHISE OPERATIONS
FedUSA franchises insurance and financial services. FedUSA commenced the
offering of franchises in December 2000 and as of December 31, 2003 had 38
operating franchises and 6 pending franchises.
The franchise agreement for each FedUSA franchise grants the franchisee
a license for the operation of a FedUSA insurance agency to open and operate a
center within an exclusive territory for a ten-year period, with two additional
ten-year options. FedUSA collects a non-refundable initial franchise fee of
$14,950, royalty fees, advertising fees, and other fees.
To facilitate franchising opportunities Express Tax formed a 100% owned
subsidiary EXPRESSTAX, Inc ("EXPRESSTAX") to offer franchises for income tax
preparation. In 2002, EXPRESSTAX began franchising its tax return preparation,
electronic filing and related financial products. The EXPRESSTAX franchise
agreement grants the franchisee a non-exclusive license to open and operate a
center for a ten-year period, with two additional ten-year options. EXPRESSTAX
may collect a non-refundable initial franchise fee in addition to royalty fees,
advertising fees, and other fees. As of December 31, 2003, 231 EXPRESSTAX
franchises have been granted.
MARKETING AND DISTRIBUTION
We market and distribute our own and third-party insurers' products and
our other services primarily in Central and South Florida through a network of
23 Company-owned agencies, 44 franchised agencies, a select group of general
agencies and approximately 125 independent agents. Each agency, whether
Company-owned or franchised, is designed to be a "one stop" shop for several
types of insurance, tax preparation and ancillary services.
Company-owned agencies are located in Miami-Dade, Broward, Palm Beach,
Martin, Orange, Osceola, Volusia and Seminole Counties, Florida. Franchised
agencies are located in Miami-Dade, Broward, Palm Beach, Martin, St. Lucie and
Orange Counties, Florida. Independent agents are located primarily in South
Florida. We support our agency network by advertising in various media in
conjunction with our franchised agencies.
Whether Company-employed, franchise-employed or independent, agents have
the authority to sell and bind insurance coverage in accordance with procedures
established by Assurance MGA. Assurance MGA reviews all coverage bound by the
agents promptly and generally accepts all coverage that falls within stated
underwriting criteria. For automobile and commercial general liability policies,
Assurance MGA also has the right, within a period of 60 days from a policy's
inception, to cancel any policy, upon 45 days' notice, even if the risk falls
within our underwriting criteria. For homeowner and mobile home policies
Assurance MGA has the right, within a period of 90 days from a policy's
inception, to cancel any policy upon 25 days' notice or after 90 days from
policy inception with 95 days' notice, even if the risk falls within our
underwriting criteria.
We believe that our integrated computer system, which allows for rapid
automated premium quotation and policy issuance by our agents, is a key element
in providing quality service to both our agents and insureds. For example, upon
entering a customer's basic personal information, the customer's driving record
is accessed and a premium rate is quoted. If the customer chooses to purchase
the insurance, the system generates the policy on-site. We believe that our
distribution system will ultimately enable us to lower our expense ratio and
operate with more favorable loss experience. A lower expense ratio will, in
turn, allow us to more effectively compete with larger providers of automobile
insurance as well as with providers of other forms of insurance.
The following table sets forth the amount and percentages of insurance
premiums written through Company-owned agencies, franchised agencies and
independent agents for the periods indicated:
-10-
Years Ended December 31,
------------------------
2003 2002 2001
----------------- ------------------ ------------------
Premium Percent Premium Percent Premium Percent
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Company-owned agencies 22,320 30.6% $20,403 32.3% $ 9,932 29.0%
Franchised agencies 11,630 15.9% 11,761 18.7% 2,659 7.7%
Independent agencies 39,041 53.5% 30,872 49.0% 21,680 63.3%
------ ----- ------- ----- ------- -----
Total 72,991 100.0% $63,036 100.0% $34,271 100.0%
====== ===== ======= ===== ======= =====
We plan to continue to expand our distribution network and market our
products and services in other regions of Florida and other states by
franchising additional insurance agencies and establishing relationships with
additional independent agents and general agents. As this occurs, we will seek
to replicate our distribution network in those states. There can be no
assurance, however, that we will be able to obtain the required regulatory
approvals to offer additional insurance products or expand into states other
than Florida and Georgia.
REINSURANCE
We follow industry practice of reinsuring a portion of our risks and
paying for that protection based upon premiums received on all policies subject
to such reinsurance. Reinsurance involves an insurance company transferring or
"ceding" all or a portion of its exposure on insurance underwritten by it to
another insurer, known as a "reinsurer." The reinsurer assumes a portion of the
exposure in return for a portion, or quota share, of the premium, and pays the
ceding company a commission based upon the amount of insurance ceded. The ceding
of insurance does not legally discharge the insurer from its primary liability
for the full amount of the policies. If the reinsurer fails to meet its
obligations under the reinsurance agreement, the ceding company is still
required to pay the loss.
Reinsurance is ceded under separate contracts or "treaties" for the
separate lines of business underwritten. The Company collectively ceded $19.4
million in premiums written for the year ended December 31, 2003. The Company's
reinsurance for automobile insurance is primarily ceded with Transatlantic
Reinsurance Company ("Transatlantic"), an A++ rated reinsurance company.
Federated National ceded 40%, 40%, and 50% of automobile premiums written and
losses incurred in 2003, 2002, and 2001, respectively, to Transatlantic.
American Vehicle currently reinsures all of its automobile insurance
with Transatlantic, and ceded 80% of its auto premiums written and losses
incurred during 2001. From January 2002 until November 2002 we reduced this
percentage to 70%. Beginning in November 2002, and continuing through December
31, 2003, this percentage was reduced to 40%.
The automobile quota-share reinsurance treaties for 2003 include loss
corridors with varying layers of coverage based on ultimate incurred loss ratio
results whereby the two insurance companies will retain 100% of the losses
between incurred loss ratios of 66% and 86% for policies with an effective date
of 2003. Despite the loss corridor, the reinsurer assumes significant insurance
risk under the reinsured portions of the underlying insurance contracts and it
is reasonably possible that the reinsurer may realize a significant loss from
the transaction.
During 2002, Federated National entered into a 10% quota-share agreement
with our affiliate American Vehicle. The agreement ceded 10% of its premium and
losses on all policies with an effective date of 2002. For presentation
purposes, and in accordance with the principles of consolidation, the agreement
between the two affiliated insurance companies has been eliminated.
We are selective in choosing a reinsurer and consider numerous factors,
the most important of which is the financial stability of the reinsurer, their
history of responding to claims and their overall reputation. In an effort to
minimize our exposure to the insolvency of a reinsurer, we evaluate the
acceptability and review the financial condition of the reinsurer at least
annually. Our current policy is to use only reinsurers that have an A.M. Best
rating of "A" (Excellent) or better.
In order to minimize the effect of a natural disaster, we purchase
catastrophic reinsurance from both the state-run Florida Hurricane Catastrophe
Fund and private re-insurers. We use actuarial models to determine what level of
reinsurance would be necessary to limit our total exposure under property
insurance policies to the total amount of claims that would result from an event
expected to occur no more often than once in every 100 years. As of December 31,
2003, Federated National would pay approximately $5.5 million in claims before
catastrophic reinsurance would take effect. After the first $5.5 million,
Federated National would pay all claims in excess of approximately $42.3
million.
-11-
LIABILITY FOR UNPAID LOSSES AND LAE
We are directly liable for loss and loss adjustment expense ("LAE")
payments under the terms of the insurance policies that we write. In many cases
there may be a time lag between the occurrence and reporting of an insured loss
and our payment of that loss. As required by insurance regulations and
accounting rules, we reflect the liability for the ultimate payment of all
incurred losses and LAE by establishing a liability for those unpaid losses and
LAE for both reported and unreported claims, which represent estimates of future
amounts needed to pay claims and related expenses.
When a claim involving a probable loss is reported, we establish a
liability for the estimated amount of our ultimate loss and LAE payments. The
estimate of the amount of the ultimate loss is based upon such factors as the
type of loss, jurisdiction of the occurrence, knowledge of the circumstances
surrounding the claim, severity of injury or damage, potential for ultimate
exposure, estimate of liability on the part of the insured, past experience with
similar claims and the applicable policy provisions.
All newly reported claims received with respect to personal automobile
policies are set up with an initial average liability. The average liability for
these claims is determined no less than annually by dividing the number of
reported claims into the total amount paid during the same period. If a claim is
open more than 45 days, that open case liability is evaluated and the liability
is adjusted upward or downward according to the facts and circumstances of that
particular claim.
In addition, management provides for a liability on an aggregate basis
to provide for losses incurred but not reported ("IBNR"). We utilize independent
actuaries to help establish liability for unpaid losses and LAE. We do not
discount the liability for unpaid losses and LAE for financial statement
purposes.
The estimates of the liability for unpaid losses and LAE are subject to
the effect of trends in claims severity and frequency and are continually
reviewed. As part of this process, we review historical data and consider
various factors, including known and anticipated legal developments, changes in
social attitudes, inflation and economic conditions. As experience develops and
other data become available, these estimates are revised, as required, resulting
in increases or decreases to the existing liability for unpaid losses and LAE.
Adjustments are reflected in results of operations in the period in which they
are made and the liabilities may deviate substantially from prior estimates.
Among our classes of insurance, the automobile and homeowners' liability claims
historically tend to have longer time lapses between the occurrence of the
event, the reporting of the claim and the final settlement, than do automobile
physical damage and homeowners' property claims. Liability claims often involve
parties filing suit and therefore may result in litigation. By comparison,
property damage claims tend to be reported in a relatively shorter period of
time and settled in a shorter time frame with less occurrence of litigation.
There can be no assurance that our liability for unpaid losses and LAE
will be adequate to cover actual losses. If our liability for unpaid losses and
LAE proves to be inadequate, we will be required to increase the liability with
a corresponding reduction in our net income in the period in which the
deficiency is identified. Future loss experience substantially in excess of
established liability for unpaid losses and LAE could have a material adverse
effect on our business, results of operations and financial condition.
The following table sets forth a reconciliation of beginning and ending
liability for unpaid losses and LAE as shown in our consolidated financial
statements for the periods indicated.
-12-
December 31,
------------
2003 2002 2001
---- ---- ----
(Dollars in Thousands)
Balance at January 1: $ 16,984 $ 11,005 $ 9,766
Less reinsurance recoverables (7,848) (4,798) (2,790)
-------- -------- --------
Net balance at January 1 $ 9,136 $ 6,207 $ 6,976
======== ======== ========
Incurred related to:
Current year $ 26,275 $ 15,896 $ 13,586
Prior years 1,234 91 2,569
-------- -------- --------
Total incurred $ 27,509 $ 15,987 $ 16,155
======== ======== ========
Paid related to:
Current year $ 14,205 $ 8,148 $ 8,769
Prior years 7,631 4,910 8,259
-------- -------- --------
Total paid $ 21,836 $ 13,058 $ 17,028
======== ======== ========
Balance, American Vehicle, at acquisition $ -- $ -- $ 103
======== ======== ========
Net balance at year-end $ 14,809 $ 9,136 $ 6,207
Plus reinsurance recoverables 9,761 7,848 4,798
-------- -------- --------
Balance at year-end $ 24,570 $ 16,984 $ 11,005
======== ======== ========
As shown above, as a result of our review of liability for losses and
LAE, which includes a re-evaluation of the adequacy of reserve levels for prior
year's claims, we increased the liability for loss and LAE for claims occurring
in prior years by $1,234,000, $91,000 and $2,569,000 for the years ended
December 31, 2003, 2002 and 2001, respectively. There can be no assurance
concerning future adjustments of reserves, positive or negative, for claims
through December 31, 2003.
Based upon consultations with our independent actuarial consultants and
their statement of opinion on losses and LAE, we believe that the liability for
unpaid losses and LAE is currently adequate to cover all claims and related
expenses which may arise from incidents reported and IBNR.
The following table presents total unpaid loss and LAE, net, and total
reinsurance recoverables shown in our consolidated financial statements for the
periods indicated.
As of December 31,
------------------
2003 2002
---- ----
Transatlantic Reinsurance Company (A++ A.M. Best Rated):
Unearned premiums $ 7,823,374 $ 11,251,193
Reinsurance recoverable on paid losses and loss
adjustment expenses 2,457,228 3,266,715
Unpaid losses and loss adjustment expenses 9,761,353 7,847,255
------------ ------------
$ 20,041,955 $ 22,365,163
============ ============
Amounts due from reinsurers consisted of amounts related to:
Unpaid losses and loss adjustment expenses $ 9,761,353 $ 7,847,255
Reinsurance recoverable on paid losses and loss
adjustment expenses 2,457,228 3,266,715
Reinsurance payable (1,339,162) (3,984,895)
------------ ------------
$ 10,879,419 $ 7,129,075
============ ============
-13-
The following table presents the liability for unpaid losses and LAE for
the years ended December 31, 1994 through 2003. The top line of the table shows
the estimated net liabilities for unpaid losses and LAE at the balance sheet
date for each of the periods indicated. These figures represent the estimated
amount of unpaid losses and LAE for claims arising in all prior years that were
unpaid at the balance sheet date, including losses that had been incurred but
not yet reported. The portion of the table labeled "Cumulative paid as of" shows
the net cumulative payments for losses and LAE made in succeeding years for
losses incurred prior to the balance sheet date. The lower portion of the table
shows the re-estimated amount of the previously recorded liability based on
experience as of the end of each succeeding year.
Years Ended December 31,
-----------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999 1998 1997 1996 1995 1994
------ ------- ------- ------- ------- ------ ------ ------ ------- ------
Dollars in Thousands
Balance Sheet Liability 14,809 $ 9,136 $ 6,207 $ 6,976 $ 4,428 $5,366 $4,635 $4,532 $ 3,688 $3,355
Cumulative paid as of:
One year later 7,622 5,275 8,228 4,289 3,460 2,694 2,850 3,250 2,412
Two years later 7,222 9,568 5,799 4,499 3,533 3,539 3,898 3,675
Three years later 10,101 6,328 5,111 3,972 3,882 4,164 3,901
Four years later 6,408 5,387 4,241 4,107 4,300 3,997
Five years later 5,227 4,325 4,223 4,404 4,054
Six years later 4,121 4,262 4,493 4,119
Seven years later 3,985 4,423 4,187
Eight years later 3,786 4,083
Nine years later 4,083
Re-estimated net
liability as of:
End of year 14,809 $ 9,136 $ 6,207 $ 6,976 $ 4,428 $5,366 $4,635 $4,532 $ 3,688 $3,355
One year later 10,900 6,954 9,445 5,875 4,676 4,360 4,332 4,728 3,654
Two years later 8,589 10,197 6,284 5,160 4,063 4,255 4,867 4,540
Three years later 12,894 6,605 5,352 4,317 4,102 4,872 4,613
Four years later 8,008 5,515 4,386 4,304 4,748 4,598
Five years later 4,694 4,395 4,321 4,899 4,516
Six years later 4,002 4,321 4,905 4,626
Seven years later 3,989 4,792 4,644
Eight years later 5,389 4,523
Nine years later 4,183
Cumulative redundancy
(deficiency) $ -- $ (1,764) $ (2,382) $ (5,918) $ (3,580) $ 672 $ 633 $ 543 $ (1,701) $ (828)
Cumulative redundancy -
deficiency as a % of
reserves originally
established -19.3% -38.4% -84.8% -80.8% 12.5% 13.7% 12.0% -46.1% -24.7%
The cumulative redundancy or deficiency represents the aggregate change
in the estimates over all prior years. A deficiency indicates that the latest
estimate of the liability for losses and LAE is higher than the liability that
was originally estimated and a redundancy indicates that such estimate is lower.
It should be emphasized that the table presents a run-off of balance sheet
liability for the periods indicated rather than accident or policy loss
development for those periods. Therefore, each amount in the table includes the
cumulative effects of changes in liability for all prior periods. Conditions and
trends that have affected liabilities in the past may not necessarily occur in
the future.
The table below sets forth the differences between loss and LAE reserves
as disclosed for GAAP basis compared to Statutory Accounting Principles ("SAP")
basis of presentation for the years ending 2003 and 2002.
-14-
Years Ended December 31,
------------------------
2003 2002
---- ----
GAAP basis Loss and LAE reserves 24,570 $16,984
Less unpaid Losses and LAE ceded 9,761 7,847
------- -------
Balance Sheet Liability 14,809 9,137
Add Insurance Apportionment Plan 505 285
------- -------
SAP basis Loss and LAE reserves $15,314 $ 9,422
======= =======
The table below sets forth the differences between loss and LAE incurred
as disclosed for GAAP basis compared to SAP basis presentation for the years
ending 2003, 2002 and 2001.
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
(Dollars in Thousands)
GAAP basis Loss and LAE incurred $27,509 $15,987 $16,155
Intercompany adjusting and other expenses 3,579 2,484 1,440
Insurance apportionment plan 1,940 700 --
Other -- -- 10
------- ------- -------
SAP basis Loss and LAE incurred $33,028 $19,171 $17,605
======= ======= =======
Underwriting results of insurance companies are frequently measured by
their Combined Ratios. However, investment income, Federal income taxes and
other non-underwriting income or expense are not reflected in the Combined
Ratio. The profitability of property and casualty insurance companies depends on
income from underwriting, investment and service operations. Underwriting
results are considered profitable when the Combined Ratio is under 100% and
unprofitable when the Combined Ratio is over 100%.
The following table sets forth Loss Ratios, Expense Ratios and Combined
Ratios for the periods indicated for the insurance business of Federated
National and American Vehicle for 2003 and 2002. The amount for 2001 is for
Federated National only. The ratios, inclusive of unallocated loss adjustment
expenses ("ULAE"), are shown in the table below, and are computed based upon
SAP.
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
Loss Ratio 67% 60% 82%
Expense Ratio 26% 25% 25%
-- -- ---
Combined Ratio 93% 85% 107%
== == ===
The 7% increase in the SAP loss ratio from 2002 to 2003 reflects an
increase in severity primarily associated with the personal injury protection
line of automobile insurance and can be attributed to the $1.2 million adverse
development incurred in 2003 relative to accidents that occurred prior to 2003.
The improved loss ratio for 2002 as compared to 2001 is attributed the $2.6
million adverse development experienced in 2001 where only $.09 million was
incurred in 2002. Main factors for the 2003 loss ratio include unanticipated
severity associated with adjusting personal injury protection claims which were
mitigated by favorable loss experience associated with the property and
commercial general liability lines of insurance. Additionally, during 2003, both
of the insurance companies revised their respective automobile rates and the
available deductibles limits. Main factors for the improved ratios between 2002
and 2001 include, but are not limited to the termination of unprofitable agency
relations, increased scrutiny over fraudulently asserted claims, streamlined
paperless claims processing system, new claims management supervision, in house
legal counsel, as well as overall stricter underwriting guidelines.
-15-
COMPETITION
We operate in highly competitive markets and face competition from both
national and regional insurance companies, many of whom are larger and have
greater financial and other resources, have better A.M. Best ratings and offer
more diversified insurance coverage. Our competitors include companies which
market their products through agents, as well as companies which sell insurance
directly to their customers. Large national writers may have certain competitive
advantages over agency writers, including increased name recognition, increased
loyalty of their customer base and reduced policy acquisition costs. We may also
face competition from new or temporary entrants in our niche markets. In some
cases, such entrants may, because of inexperience, desire for new business or
other reasons, price their insurance below ours. Although our pricing is
inevitably influenced to some degree by that of our competitors, we believe that
it is generally not in our best interest to compete solely on price. We instead
tend to compete on the basis of underwriting criteria, our distribution network
and superior service to our agents and insureds. With respect to automobile
insurance in Florida, we compete with more than 100 companies, which underwrite
personal automobile insurance. Comparable companies which compete with us in the
personal automobile insurance market include U.S. Security Insurance Company,
United Automobile Insurance Company, Direct General Insurance Company and
Security National Insurance Company, as well as major insurers such as
Progressive Casualty Insurance Company. Comparable companies which compete with
us in the homeowners' market include Florida Family Insurance Company, Florida
Select Insurance Company, Atlantic Preferred Insurance Company and Vanguard
Insurance Company. Comparable companies which compete with us in the general
liability insurance market include Century Surety Insurance Company, Atlantic
Casualty Insurance Company, Colony Insurance Company and Burlington/First
Financial Insurance Companies. Competition could have a material adverse effect
on our business, results of operations and financial condition.
REGULATION
GENERAL
We are subject to the laws and regulations in Florida and Georgia, and
will be subject to the laws and regulations of any other states in which we seek
to conduct business in the future. The regulations cover all aspects of our
business and are generally designed to protect the interests of insurance
policyholders, as opposed to the interests of shareholders. Such regulations
relate to authorized lines of business, capital and surplus requirements,
allowable rates and forms (particularly for the nonstandard auto segment),
investment parameters, underwriting limitations, transactions with affiliates,
dividend limitations, changes in control, market conduct, maximum amount
allowable for premium financing service charges and a variety of other financial
and non-financial components of our business. Our failure to comply with certain
provisions of applicable insurance laws and regulations could have a material
adverse effect on our business, results of operations or financial condition. In
addition, any changes in such laws and regulations, including the adoption of
consumer initiatives regarding rates charged for automobile or other insurance
coverage, could materially adversely affect our operations or our ability to
expand. We are, however, unaware of any consumer initiatives which could have a
material adverse effect on our business, results of operations or financial
condition.
Many states have also enacted laws which restrict an insurer's
underwriting discretion, such as the ability to terminate policies, terminate
agents or reject insurance coverage applications, and many state regulators have
the power to reduce, or to disallow increases in, premium rates. These laws may
adversely affect the ability of an insurer to earn a profit on its underwriting
operations.
Most states have insurance laws requiring that rate schedules and other
information be filed with the state's insurance regulatory authority, either
directly or through a rating organization with which the insurer is affiliated.
The regulatory authority may disapprove a rate filing if it finds that the rates
are inadequate, excessive or unfairly discriminatory. Rates, which are not
necessarily uniform for all insurers, vary by class of business, hazard covered,
and size of risk. Certain states have recently adopted laws or are considering
proposed legislation which, among other things, limit the ability of insurance
companies to effect rate increases or to cancel, reduce or non-renew insurance
coverage with respect to existing policies, particularly personal automobile
insurance. The Company's experience in Florida to date, however, has been that
although legislative proposals of this type have been considered from time to
time, none have yet been adopted. Nevertheless, the Florida legislature may
adopt laws of this type in the future, which could adversely affect the
Company's business.
Most states require licensure or regulatory approval prior to the
marketing of new insurance products. Typically, licensure review is
comprehensive and includes a review of a company's business plan, solvency,
reinsurance, character of our officers and directors, rates, forms and other
financial and non-financial aspects of a company. The regulatory authorities may
not allow entry into a new market by not granting a license or by withholding
approval.
All insurance companies must file quarterly and annual statements with
certain regulatory agencies and are subject to regular and special examinations
by those agencies. The last regulatory examination of Federated National covered
the three-year period ended on December 31, 2001. The last regulatory
examination of American Vehicle covered the three-year period ended on December
31, 2002. No material deficiencies were found during either of the regulatory
examinations. In some instances, various states routinely require deposits of
assets for the protection of policyholders either in those states or
-16-
for all policyholders. As of December 31, 2003, Federated National and American
Vehicle hold investment securities with a fair value of approximately $1,007,000
and $1,075,000, respectively, as deposits with the State of Florida.
Under Florida law, a domestic insurer may not pay any dividend or
distribute cash or other property to its shareholders except out of that part of
its available and accumulated capital surplus funds which is derived from
realized net operating profits on its business and net realized capital gains. A
Florida domestic insurer may not make dividend payments or distributions to
shareholders without prior approval of the Florida Department of Financial
Services if the dividend or distribution would exceed the larger of (i) the
lesser of (a) 10.0% of its capital surplus or (b) net income, not including
realized capital gains, plus a two-year carryforward, (ii) 10.0% of capital
surplus with dividends payable constrained to unassigned funds minus 25% of
unrealized capital gains or (iii) the lesser of (a) 10.0% of capital surplus or
(b) net investment income plus a three-year carryforward with dividends payable
constrained to unassigned funds minus 25.0% of unrealized capital gains.
Alternatively, a Florida domestic insurer may pay a dividend or distribution
without the prior written approval of the Florida Department of Financial
Services (i) if the dividend is equal to or less than the greater of (a) 10.0%
of the insurer's capital surplus as regards policyholders derived from realized
net operating profits on its business and net realized capital gains or (b) the
insurer's entire net operating profits and realized net capital gains derived
during the immediately preceding calendar year, (ii) the insurer will have
policy holder capital surplus equal to or exceeding 115.0% of the minimum
required statutory capital surplus after the dividend or distribution, (iii) the
insurer files a notice of the dividend or distribution with the Florida
Department of Financial Services at least ten business days prior to the
dividend payment or distribution and (iv) the notice includes a certification by
an officer of the insurer attesting that, after the payment of the dividend or
distribution, the insurer will have at least 115% of required statutory capital
surplus as to policyholders. Except as provided above, a Florida domiciled
insurer may only pay a dividend or make a distribution (i) subject to prior
approval by the Florida Department of Financial Services or (ii) 30 days after
the Florida Department of Financial Services has received notice of such
dividend or distribution and has not disapproved it within such time.
Under these laws, based on their respective 2003 surplus and income,
Federated National would be permitted to pay dividends of approximately $441,000
to 21st Century in 2004, and American Vehicle would be permitted to pay $116,000
in dividends in 2004. No dividends were paid by Federated National or American
Vehicle in 2003, 2002 or 2001, and none are anticipated in 2004. Although we
believe that amounts required to meet our financial and operating obligations
will be available from sources other than dividends from insurance subsidiaries,
there can be no assurance in this regard. Further, there can be no assurance
that, if requested, the Florida Department of Financial Services will allow any
dividends in excess of the amount available, to be paid by Federated National to
us in the future. The maximum dividends permitted by state law are not
necessarily indicative of an insurer's actual ability to pay dividends or other
distributions to a parent company, which also may be constrained by business and
regulatory considerations, such as the impact of dividends on capital surplus,
which could affect an insurer's competitive position, the amount of premiums
that can be written and the ability to pay future dividends. Further, state
insurance laws and regulations require that the statutory capital surplus of an
insurance company following any dividend or distribution by it be reasonable in
relation to its outstanding liabilities and adequate for its financial needs.
While the non-insurance company subsidiaries are not subject directly to
the dividend and other distribution limitations, insurance holding company
regulations govern the amount that any affiliate within the holding company
system may charge any of the insurance companies for service (e.g., management
fees and commissions). In order to enhance the regulation of insurer solvency,
the NAIC established risk-based capital requirements for insurance companies
that are designed to assess capital adequacy and to raise the level of
protection that statutory surplus provides for policy holders. These
requirements measure three major areas of risk facing property and casualty
insurers: (i) underwriting risks, which encompass the risk of adverse loss
developments and inadequate pricing; (ii) declines in asset values arising from
credit risk; and (iii) other business risks from investments. Insurers having
less statutory surplus than required will be subject to varying degrees of
regulatory action, depending on the level of capital inadequacy. The
requirements establish various levels of regulatory action. Based upon the 2003
statutory financial statements for Federated National and American Vehicle, each
company's statutory surplus exceeds all regulatory action levels established by
the NAIC. The Florida Department of Financial Services, which follows these
requirements, could require Federated National or American Vehicle to cease
operations in the event they fail to maintain the required statutory capital.
Based on Risk Based Capital requirements, the extent of regulatory
intervention and action increases as the ratio of an insurer's statutory surplus
to its Authorized Control Level ("ACL"), as calculated under the NAIC's
requirements, decreases. The first action level, the Company Action Level,
requires an insurer to submit a plan of corrective actions to the insurance
regulators if statutory surplus falls below 200.0% of the ACL amount. The second
action level, the Regulatory Action Level, requires an insurer to submit a plan
containing corrective actions and permits the insurance regulators to perform an
examination or other analysis and issue a corrective order if statutory surplus
falls below 150.0% of the ACL amount. The Authorized Control Level, the third
action level, allows the regulators to rehabilitate or liquidate an insurer in
addition to the aforementioned actions if statutory surplus falls below the ACL
amount. The fourth action level is the Mandatory Control Level, which requires
the regulators to rehabilitate or liquidate the insurer if statutory surplus
falls below
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70.0% of the ACL amount. Federated National's ratio of statutory surplus to its
ACL was 434.2%, 274.2% and 300.8% at December 31, 2003, 2002 and 2001,
respectively. American Vehicle's ratio of statutory surplus to its ACL was
585.2%, 401.6% and 3,113.8% at December 31, 2003, 2002 and 2001, respectively.
The NAIC has also developed Insurance Regulatory Information Systems
("IRIS") ratios to assist state insurance Department of Financial Services in
identifying companies which may be developing performance or solvency problems,
as signaled by significant changes in the companies' operations. Such changes
may not necessarily result from any problems with an insurance company, but may
merely indicate changes in certain ratios outside the ranges defined as normal
by the NAIC. When an insurance company has four or more ratios falling outside
"usual ranges," state regulators may investigate to determine the reasons for
the variance and whether corrective action is warranted.
As of December 31, 2003, Federated National was outside NAIC's usual
ranges with respect to its IRIS tests on five out of twelve ratios. The first
ratio relates to a larger than expected change in net writings, the second ratio
relates to higher surplus growth that stemmed from the parent company's capital
contributions totaling $3.9 million during the year and the third ratio relates
to an investment yield that was less than expected. The fourth and fifth ratios
involved the one and two year reserve development to policyholder surplus ratios
that were in excess of the "usual ranges" and relate to modest, but adverse,
development incurred in 2003 relating to 2002 and 2001 loss reserves.
As of December 31, 2003, American Vehicle was outside NAIC's usual
ranges for three out of twelve ratios. The first ratio relates to a larger than
expected change in net writings, the second ratio relates to higher surplus
growth that stemmed from the Parent company's capital contributions totaling
$5.9 million during the year and the third ratio relates to an investment yield
that was slightly less than expected.
We do not currently believe that the Florida Department of Financial
Services will take any significant action with respect to Federated National or
American Vehicle regarding the IRIS ratios, although there can be no assurance
that will be the case.
Effective January 1, 2001, our insurance subsidiaries adopted the
Codification of Statutory Accounting Principles guidance issued by the NAIC,
which provides guidance for areas where statutory accounting has been silent and
changes current accounting in some areas. The adoption of this codification did
not have a material effect on our consolidated financial statements.
INSURANCE HOLDING COMPANY REGULATION
We are subject to laws governing insurance holding companies in Florida
where Federated National and American Vehicle are domiciled. These laws, among
other things, (i) require us to file periodic information with the Florida
Department of Financial Services, including information concerning our capital
structure, ownership, financial condition and general business operations, (ii)
regulate certain transactions between us and our affiliates, including the
amount of dividends and other distributions and the terms of surplus notes and
(iii) restrict the ability of any one person to acquire certain levels of our
voting securities without prior regulatory approval. Any purchaser of 5% or more
of the outstanding shares of our Common Stock will be presumed to have acquired
control of Federated National and American Vehicle unless the Florida Office of
Insurance Regulation, upon application, determines otherwise.
FINANCE COMPANY REGULATION
Our financing program is also subject to certain laws governing the
operation of premium finance companies. These laws pertain to such matters as
books and records that must be kept, forms, licensing, fees and charges. For
example, in Florida, the maximum late payment fee Federated Premium may charge
is the greater of $10 per month or 5% of the amount of the overdue payment.
FRANCHISE COMPANY REGULATION
FedUSA and EXPRESSTAX are subject to Federal Trade Commission ("FTC")
regulation, and state and international laws which regulate the offer and sale
of franchises. FedUSA and EXPRESSTAX are also subject to a number of state laws
which regulate substantive aspects of the franchisor-franchisee relationship.
The FTC's Trade Regulation Rule on Franchising (the "FTC Rule") require FedUSA
and EXPRESSTAX to furnish to prospective franchisees a franchise offering
circular containing information prescribed by the FTC Rule.
State laws that regulate the offer and sale of franchises and the
franchisor-franchisee relationship presently exist in a substantial number of
states. Such laws often require registration of the franchise offering with
state authorities and regulate the franchise relationship by, for example,
requiring the franchisor to deal with our franchisees in good faith, prohibiting
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interference with the right of free association among franchisees, limiting the
imposition of standards of performance on a franchisee and regulating
discrimination among franchisees in charges, royalties or fees.
UNDERWRITING AND MARKETING RESTRICTIONS
During the past several years, various regulatory and legislative bodies
have adopted or proposed new laws or regulations to address the cyclical nature
of the insurance industry, catastrophic events and insurance capacity and
pricing. These regulations include (i) the creation of "market assistance plans"
under which insurers are induced to provide certain coverages, (ii) restrictions
on the ability of insurers to rescind or otherwise cancel certain policies in
mid-term, (iii) advance notice requirements or limitations imposed for certain
policy non-renewals and (iv) limitations upon or decreases in rates permitted to
be charged.
LEGISLATION
From time to time, new regulations and legislation are proposed to limit
damage awards, to control plaintiffs' counsel fees, to bring the industry under
regulation by the Federal government, to control premiums, policy terminations
and other policy terms and to impose new taxes and assessments. It is not
possible to predict whether, in what form or in what jurisdictions, any of these
proposals might be adopted, or the effect, if any, on us.
INDUSTRY RATINGS SERVICES
In 2003, A.M. Best Company assigned Federated National a B rating
("Fair," which is the seventh of 14 rating categories) and American Vehicle a B+
rating ("Very Good," which is the sixth of 14 rating categories). Federated
National and American Vehicle are rated "A" ("Unsurpassed," which is first of
six ratings) by Demotech, Inc. A.M. Best's and Demotech's ratings are based upon
factors of concern to agents, reinsurers and policyholders and are not primarily
directed toward the protection of investors.
EMPLOYEES
As of December 31, 2003, we had 249 employees, including five executive
officers. We are not a party to any collective bargaining agreement and we have
not experienced work stoppages or strikes as a result of labor disputes. We
consider relations with our employees to be satisfactory.
SENIOR MANAGEMENT
Set forth below is certain information concerning our executive officers
who are not also directors:
James A. Epstein was appointed Secretary of 21st Century in January
2002. Mr. Epstein joined 21st Century as General Counsel in September 2000. From
1997 to 1999, Mr. Epstein was an attorney with Conrad & Scherer in Fort
Lauderdale, Florida, and from June 1999 to September 2000, Mr. Epstein was
General Counsel for 186K.Net, Co., a private company in Boca Raton, Florida.
Kent M. Linder assumed the position of Chief Operating Officer of 21st
Century in September 2003. Prior to this position, Mr. Linder served 21st
Century as Director of Franchise Development and previous to that as the
President of Federated Agency Group, Inc. Prior to joining our management team,
Mr. Linder owned and operated a group of 18 insurance agencies in the Orlando,
Florida area. Mr. Linder acquired his management experience while spending 12
years with United Parcel Service, in which he served in various management
positions. Mr. Linder holds a bachelor's degree from the University of South
Florida in Finance and is a licensed 220 property and casualty agent and 215
life agent.
GLOSSARY OF SELECTED TERMS
CEDE To transfer to an insurer or reinsurer all
or part of the insurance written by an
insurance entity.
CEDING COMMISSION A payment by a reinsurer to the ceding
company, generally on a proportional basis,
to compensate the ceding company for its
policy acquisition costs.
COMBINED RATIO The total of the Loss Ratio plus the
Expense Ratio on either SAP or GAAP basis.
EXPENSE RATIO Under SAP, the ratio of underwriting
expenses to net written premiums. Using
GAAP basis, the ratio of underwriting
expenses to net premiums earned.
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GENERALLY ACCEPTED ACCOUNTING Accounting practices and principles, as
PRINCIPLES ("GAAP") defined principally by the American
Institute of Certified Public
Accountants, the Financial Accounting
Standards Board. GAAP is the method of
accounting typically used by the Company
for reporting to persons or entities other
than insurance regulatory authorities.
GROSS PREMIUMS WRITTEN The total of premiums received or to be
received for insurance written by an
insurer during a specific period of time
without any reduction for reinsurance
ceded.
HARD MARKET The portion of the market cycle of the
property and casualty insurance industry
characterized by constricted industry
capital and underwriting capacity,
increasing premium rates and, typically,
enhanced underwriting performance.
INCURRED BUT NOT REPORTED LOSSES The estimated liability of an insurer, at a
("IBNR") given point in time, with respect to losses
that have been incurred but not yet
reported to the insurer, and for potential
future developments on reported claims.
INSURANCE REGULATORY INFORMATION A system of ratio analysis developed by the
SYSTEM ("IRIS") NAIC primarily intended to assist state
insurance Department of Financial Services
in executing their statutory mandates to
oversee the financial condition of
insurance companies.
LOSS ADJUSTMENT EXPENSE ("LAE") The expense of investigating and settling
claims, including legal fees, outside
adjustment expenses and other general
expenses of administering the claims
adjustment process.
LOSS RATIO Under both SAP and GAAP, net losses and
LAE incurred, divided by net premiums
earned, expressed as a percentage.
LOSS RESERVES The estimated liability of an insurer, at a
given point in time, with respect to unpaid
incurred losses, including losses, which
are IBNR and related LAE.
LOSSES INCURRED The total of all policy losses sustained by
an insurance company during a period,
whether paid or unpaid. Incurred losses
include a provision for claims that have
occurred but have not yet been reported to
the insurer.
NATIONAL ASSOCIATION OF INSURANCE A voluntary organization of state insurance
COMMISSIONERS ("NAIC") officials that promulgates model laws
regulating the insurance industry, values
securities owned by insurers, develops and
modifies insurer financial reporting,
statements and insurer performance criteria
and performs other services with respect to
the insurance industry.
NET PREMIUMS EARNED The amount of net premiums written
allocable to the expired period of an
insurance policy or policies.
NET PREMIUMS WRITTEN The gross premiums written during a
specific period of time, less the portion
of such premiums ceded to (reinsured by)
other insurers.
NONSTANDARD Risks that generally have been found
unacceptable by standard lines insurers for
various underwriting reasons.
REINSURANCE A procedure whereby a primary insurer
transfers (or "cedes") a portion of its
risk to a reinsurer in consideration of a
payment of premiums by the primary insurer
to the reinsurer for their assumption of
such portion of the risk. Reinsurance can
be affected by a treaty or individual risk
basis. Reinsurance does not legally
discharge the primary insurer from its
liabilities with respect to its obligations
to the insured.
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REINSURERS Insurers (known as the reinsurer or
assuming company) who agree to indemnify
another insurer (known as the reinsured or
ceding company) against all or part of a
loss that the latter may incur under a
policy or policies it has issued.
RISK-BASED CAPITAL REQUIREMENTS Capital requirements for property and
("RBC") casualty insurance companies adopted by the
NAIC to assess minimum capital requirements
and to raise the level of protection that
statutory surplus provides for policy
holder obligations.
SOFT MARKET The portion of the market cycle of the
property and casualty insurance industry
characterized by heightened premium rate
competition among insurers, increased
underwriting capacity and, typically,
depressed underwriting performance.
STANDARD AUTOMOBILE INSURANCE Personal automobile insurance written for
those individuals presenting an average
risk profile in terms of loss history,
driving record, type of vehicle driven and
other factors.
STATUTORY ACCOUNTING PRACTICES Those accounting principles and practices
("SAP") which provide the framework for the
preparation of financial statements, and
the recording of transactions, in
accordance with the rules and procedures
adopted by regulatory authorities,
generally emphasizing solvency
consideration rather than a going concern
concept of accounting. The principal
differences between SAP and GAAP are as
follows: (a) under SAP, certain assets
(non-admitted assets) are eliminated from
the balance sheet; (b) under SAP, policy
acquisition costs are expensed upon policy
inception, while under GAAP they are
deferred and amortized over the term of the
policies; and (c) under SAP, certain
reserves are recognized which are not
recognized under GAAP.
UNDERWRITING The process whereby an underwriter reviews
applications submitted for insurance
coverage and determines whether it will
provide all or part of the coverage being
requested, and the price of such premiums.
Underwriting also includes an ongoing
review of existing policies and their
pricing.
UNDERWRITING EXPENSE The aggregate of policy acquisition costs,
including that portion of general and
administrative expenses attributable to
underwriting operations.
UNEARNED PREMIUMS The portion of premiums written
representing unexpired policy terms as of a
certain date.
ITEM 2. PROPERTIES
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As of December 31, 2003, Federated National owned and partially occupied
a three-story building with approximately 39,250 square feet of office space in
Lauderdale Lakes, Florida. During the fourth quarter of 2003 Federated National
sold its two-story, 13,960 square foot office building in Plantation, Florida to
unrelated investors for a gain on its investment of approximately $108,000.
Executive headquarters, underwriting and the mailroom departments remain located
there under a one-year lease arrangement with the new owners. Our operations,
including claims, accounting and premium finance, were relocated to the
Lauderdale Lakes property. Approximately 59.1% of the Lauderdale Lakes building
is occupied by our operations and 40.9% is leased to third parties or is vacant.
Our agencies are primarily located in leased locations pursuant to
leases expiring at various times through February 2007. The aggregate annual
rental for the facilities is approximately $799,000. Two of the locations are
owned by us.
We believe that these facilities are adequate for our current needs.
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ITEM 3. LEGAL PROCEEDINGS
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We are involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on our
consolidated financial position, results of operations, or liquidity.
In June 2000, a lawsuit was filed against us, our directors and our
executive officers seeking compensatory damages in an undisclosed amount on the
basis of allegations that our amended registration statement dated November 4,
1998 was inaccurate and misleading concerning the manner in which we recognized
ceded insurance commission income, in violation of Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934. The lawsuit was filed in the United States District Court for the
Southern District of New York. The plaintiff class purportedly includes
purchasers of our common stock between November 5, 1998 and August 13, 1999. The
Court recently granted the plaintiffs class status.
Specifically, the plaintiffs allege that we recognized ceded commission
income on a written basis, rather than amortized on a pro rata basis. The
plaintiffs allege that this was contrary to the Statement of Financial
Accounting Concepts Nos. 1, 2 and 5. We believe, however, that the lawsuit is
without merit and we have vigorously defended the action, because we reasonably
relied upon outside subject matter experts to make these determinations at the
time. We have also since accounted for ceded commission on a pro rata basis and
have done so since these matters were brought to our attention in 1998.
Nevertheless, we have also continued to actively participate in settlement
negotiations with the plaintiffs and have tentatively agreed to settle the case.
The parties are currently negotiating the final terms of a Memorandum of
Understanding, which will have to be executed by the parties and then approved
by the court. We have reserved and charged against current year earnings
$600,000 for the potential settlement and associated costs.
Prior to its acquisition in 2001, American Vehicle was involved in
litigation with a former officer and director. The litigation was adjudicated
and American Vehicle, among others, was found liable and paid the final
judgment. A petition was filed seeking costs of $136,000 and appellate attorneys
fees in excess of $2.0 million. American Vehicle's previous owners have agreed
to indemnify us against any such fees and costs and, the $500,000 purchase price
for American Vehicle is held in escrow pending settlement of the fees and costs
issued. On February 26, 2003, the 11th Judicial Circuit in Miami, Florida
entered an amended final judgment awarding the plaintiffs $1,140,387 in attorney
fees and costs. Both parties are appealing this judgment. Management anticipates
that there will be no costs associated with the settlement of this case;
consequently, no liability for fees and costs have been accrued.
As a direct premium writer in the State of Florida, we are required to
participate in certain insurer solvency pools under Florida Statutes
631.57(3)(a). Participation in these pools is based on our written premium by
line of business to total premiums written statewide by all insurers.
Participation may result in assessments against us. We were assessed $258,000
and $203,000, for the years ended December 31, 2002 and 2001, respectively.
There was no assessment made for the year ended December 31, 2003. We are
entitled to recover all of these assessments as permitted by the State of
Florida through policy surcharges. During 2002 we recovered $180,000 of the 2001
assessment and during 2003 we recovered the balance of the 2001 assessment and
$142,000 of the 2002 assessment. Of the 2002 assessment, $16,000 will not be
passed through as policy surcharges and $99,000 remains to be collected through
policy surcharges as of December 31, 2003.
Federated National and American Vehicle are also required to participate
in an insurance apportionment plan under Florida Statutes 627.351 referred to as
a Joint Underwriting Association Plan ("JUA Plan"). The "JUA Plan" shall provide
for the equitable apportionment of any profits realized, or losses and expenses
incurred, among participating insurers. In the event of an underwriting deficit
incurred by the "JUA Plan" and the deficit is not recovered through the
policyholders in the "JUA Plan", such deficit shall be recovered from the
companies participating in the "Plan" in the proportion that the net direct
premiums of each such member written during the preceding calendar year bear to
the aggregate net direct premiums written in this state by all members of the
joint underwriting "JUA Plan".
No assessments have been incurred by either insurance company through
the date of issuance of this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------------------
(A) MARKET INFORMATION
Our common stock has been listed for trading on the Nasdaq National
Market under the symbol "TCHC" since November 5, 1998. For the calendar quarters
indicated, the table below sets forth the high and low closing prices per share
of the common stock based on published financial resources.
QUARTER ENDED HIGH LOW
- ------------- ---- ---
March 31, 2003 $13.99 $9.00
June 30, 2003 $16.75 $10.46
September 30, 2003 $18.75 $13.90
December 31, 2003 $23.59 $14.00
March 31, 2002 $4.89 $3.04
June 30, 2002 $12.20 $4.55
September 30, 2002 $7.45 $4.29
December 31, 2002 $13.61 $6.68
(B) HOLDERS
As of March 29, 2004, there were approximately 43 holders of record of
our common stock. We believe that the number of beneficial owners of our common
stock is in excess of 2000.
(C) DIVIDENDS
We paid a quarterly dividend of $0.02 per share on our common stock from
the fourth quarter of 2000, until the third quarter of 2002. We declared a $0.05
per share dividend in the third quarter of 2002 and a $0.06 per share dividend
in the fourth quarter of 2002. During 2003, we declared a $0.07, $0.09, $0.10
and $0.12 dividend for the first, second, third and fourth quarters,
respectively. We expect to continue to pay a quarterly dividend in the future.
However, payment of dividends in the future will depend on our earnings and
financial position and such other factors, as our Board of Directors deems
relevant. Moreover, our ability to continue to pay dividends may be restricted
by regulatory limits on the amount of dividends that Federated National and
American Vehicle are permitted to pay to the parent company.
(D) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The section under the heading "Executive Compensation" entitled "Equity
Compensation Plan Information for Fiscal 2004" in our proxy statement for the
2004 annual meeting of shareholders is incorporated herein by reference.
For additional information concerning our capitalization please see Note
16, "Stock Compensation Plans" of the Notes to the Consolidated Financial
Statements included in Item 8.
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ITEM 6. SELECTED FINANCIAL DATA
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As of or for the year ended December 31,
----------------------------------------