UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|
|
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|
|
|
|
|
EXCHANGE ACT OF 1934 |
|
|
|
|
For the fiscal year ended December 31, 2009 |
|
|
|
|
Or |
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934 |
|
|
|
|
For the transition period from to |
|
|
Commission File Number: 000-50990
Tower Group, Inc.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
13-3894120 |
|
|
|
(State or other jurisdiction of |
|
(I.R.S. Employer Identification No.) |
incorporation or organization)
|
|
|
120 Broadway, 31st Floor |
|
|
New York, New York
|
|
10271 |
|
|
|
(Address of principal executive offices)
|
|
(Zip Code) |
(212) 655-2000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
Title of each class
|
|
Name of each exchange on which registered |
|
|
|
Common Stock, $0.0l par value per share
|
|
NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
|
|
|
|
|
|
|
|
|
|
Large accelerated filer þ
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
|
|
|
|
(Do not check if a smaller reporting company) |
|
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate market value of the registrants common stock held by non-affiliates on June 30, 2009
(based on the closing price on the NASDAQ Global Select Market on such date) was approximately
$902,254,519.
As of
February 25, 2010, the registrant had 44,987,732 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Form 10-K incorporates by reference certain information from the registrants
definitive Proxy Statement with respect to the registrants 2010 Annual Meeting of Shareholders, to
be filed not later than 120 days after the close of the registrants fiscal year (the Proxy
Statement).
PART I
Item 1. Business
Overview
As used in this Form 10-K, references to the Company, we, us, or our refer to Tower Group,
Inc. (Tower) and its subsidiaries, Tower Insurance Company of New York (TICNY), Tower National
Insurance Company (TNIC), Preserver Insurance Company (PIC), Mountain Valley Indemnity Company
(MVIC), North East Insurance Company (NEIC), CastlePoint Insurance Company (CPIC),
CastlePoint Florida Insurance Company (CPFL), Hermitage Insurance Company (HIC), Kodiak
Insurance Company (KIC), and CastlePoint National Insurance Company (still operating in some
jurisdictions as SUA Insurance Company) (CPNIC), Tower Risk Management Corp. (TRM), CastlePoint
Management Corp. (CPM), Specialty Underwriters Alliance, Inc. (SUA) and CastlePoint Risk
Management of Florida, Corp. (still operating in some jurisdictions as AequiCap CP Services Group,
Inc.) (CPRMFL) unless the context suggests otherwise. The term Insurance Subsidiaries refers to
TICNY, TNIC, PIC, MVIC, NEIC, CPIC, CPFL, HIC, KIC and CPNIC.
References to CastlePoint refer to Ocean I Corp. (formerly known as CastlePoint Holdings, Ltd.)
and its subsidiaries, which include CastlePoint Management Corp., CastlePoint Bermuda Holdings,
Ltd., CastlePoint Reinsurance Company, Ltd. (CastlePoint Reinsurance), CPFL and CPIC, unless the
context suggests otherwise. Tower completed the acquisition of CastlePoint on February 5, 2009.
Through our Insurance Subsidiaries, we offer a broad range of commercial, personal and specialty
property and casualty insurance products and services to businesses in various industries and to
individuals throughout the United States. With the exception of CPNIC, which is currently rated B+ (Good),
all of our Insurance Subsidiaries are currently rated A- (Excellent) by A.M. Best Company, Inc.
(A.M. Best Company). We provide these products on both an admitted and an excess and surplus
(E&S) lines basis. Insurance companies writing on an admitted basis are licensed by the states in
which they sell policies and are required to offer policies using premium rates and forms that are
filed with state insurance regulators. Non-admitted carriers writing in the E&S market are not
bound by most of the rate and form regulations imposed on standard market companies, allowing them
the flexibility to change the coverage offered and the rate charged without the time constraints
and financial costs associated with the filing process.
Through our Brokerage Insurance segment, we provide commercial lines products comprised of
commercial package, commercial property, inland marine, general liability, workers compensation,
commercial auto and commercial umbrella policies to businesses such as residential and commercial
building owners, retail and wholesale stores, food service establishments, including restaurants,
artisan contractors and automotive service operations. We also provide personal lines products that
insure modestly valued homes and dwellings as well as personal automobiles. These products are
distributed through an extensive network of retail and wholesale agents throughout the United
States and serviced through 18 branch offices. As a result of the acquisitions of CastlePoint and
SUA, we have expanded our commercial product offerings to target narrowly-defined, homogenous
classes of business that we refer to as specialty businesses through our Specialty Business
segment. These products are distributed through 20 program underwriting agents throughout the
United States that provide insurance coverages to classes of business such as auto dealerships,
professional employers organizations, temporary staffing firms, public entities and specialty auto
and trucking.
Competitive Strengths and Strategies
We believe our diversified business platform, market segmentation expertise, underwriting
expertise, effective use of capital and acquisitions capability provide us with competitive
strengths, as described below.
Diversified Business Platform and Market Segmentation Expertise. We have established a
diversified business platform comprised of a broad range of commercial, specialty and personal
lines products tailored to meet the needs of businesses in various industries and individuals
throughout the United States. We also segment our products into different pricing and coverage
tiers as well as different premium size categories to meet the specific needs of our customers. We
position our products in preferred, standard and non-standard segments of the admitted market as
well as in the E&S lines market segment. We generally deliver preferred and standard products
through our retail agents, non-standard and E&S lines products through our wholesale agents and
specialty products through our program underwriting agents. We believe our diversified business
platform and market segmentation expertise provide us with a competitive advantage by allowing us
to access profitable market segments with significant premium volume opportunities to support our
growth.
Underwriting Expertise. We have generated favorable underwriting results as demonstrated by our
average combined ratio of 83.3% during the period from 2005 to 2009. We have been able to achieve
these underwriting results using our diversified business platform to allocate our capital to the most profitable
1
market segments in response to
changing market conditions. In addition, we have historically focused on customers that present low
to moderate hazard risks and utilized our in-house claims and legal defense capabilities to adjust
and defend claims effectively. We also apply this underwriting approach when we analyze and
integrate any company business that we acquire from other insurance companies into our Brokerage
Insurance segment or when we consider expanding our brokerage business into any new territory or
product classification. With respect to our specialty business, we focus on underwriting
established books of narrowly defined homogenous classes of business with a demonstrated track
record of underwriting profitability written through highly skilled program underwriting agents.
Effective Use of Capital. We utilize a business model under which we (i) retain premiums to
generate investment and underwriting income through the use of our own capital and (ii) transfer
premiums to reinsurers and produce business for other insurance companies to generate commission
and fee income. Our business model allows us to create and support a significantly larger premium
base and a more robust and efficient infrastructure than otherwise would be achievable through only
net retained premium. By doing so, we have been able to achieve a return on average equity that we
believe is higher than many other insurance companies with a traditional business model. From 2005
to 2009 our average annual return on average equity was 19.2%, excluding net realized investment
gains or losses and acquisition-related transaction costs. Although the acquisition of CastlePoint
consolidates and eliminates the commission and fee income that we previously earned from ceding
premiums to CastlePoint, we anticipate that as we increase our premium volume and place additional
business with reinsurers and insurance companies other than CastlePoint we will generate commission
and fee income from those companies. If the pending acquisition of OneBeacon Insurance Groups
(OneBeacon) personal lines division (the Personal Lines Division) is approved and completed, we
expect to generate fee income from managing the reciprocal insurance companies in 2010.
Acquisitions Capability. We acquired and integrated insurance companies and renewal books of
business to expand our diversified business platform. Over the past six years, we have successfully
executed this acquisition strategy by (i) expanding our distribution and servicing capability
nationally, (ii) expanding into difference product lines and classes of business, and (iii)
improving the profitability of the acquired companies through increased financial strength, expense
reduction, re-underwriting and cross-selling. Due to the increased premium volume resulting from
these acquisitions, we also are able to be selective and prudent in underwriting our business while
meeting our growth objectives. We believe that the continuation of the soft property and casualty
market environment is causing some competitors to consider various strategic initiatives including
the sale of their companies. Because these sellers continue to be challenged by poor operating
fundamentals, valuations for potential acquisition targets have become more reasonable. For these
reasons, we anticipate that we will continue to seek acquisitions in the foreseeable future by
applying our advantages which include our strong capitalization, track record and management
expertise in execution and integration.
Strategic Relationship and Agreements with CastlePoint: February 2006 - February 2009
We acquired CastlePoint on February 5, 2009. Prior to that date, we had a strategic relationship
with CastlePoint. Also, in addition to his positions at the Company, Michael H. Lee served as
Chairman and Chief Executive Officer of CastlePoint Holdings, Ltd.
We organized and sponsored CastlePoint with an initial investment of $15.0 million on February 6,
2006. After CastlePoint raised $249.9 million in a private placement stock offering in 2006 and
$114.8 million in a public stock offering in 2007, the Companys investment ownership in
CastlePoint as of December 31, 2008 was approximately 6.7%. In addition, the Company received a
warrant from CastlePoint on April 6, 2006 to purchase an additional 1,127,000 shares of common
stock.
CastlePoint was a Bermuda holding company organized to provide property and casualty insurance and
reinsurance business solutions, products and services primarily to small insurance companies and
program underwriting agents in the United States. Program underwriting agents are insurance
intermediaries that aggregate insurance business from retail and wholesale agents and manage
business on behalf of insurance companies. Their functions may include some or all of risk
selection, underwriting, premium collection, policy form and design, and client service.
CastlePoint operated through a number of subsidiaries, including CastlePoint Reinsurance, a Bermuda
reinsurance company; CPIC, a New York domiciled insurance company; CPM, which provides insurance
services, and CPFL, which became licensed to sell workers compensation and commercial auto
liability lines only in Florida in February 2009.
In April 2006, we entered into various agreements with CastlePoint such that CastlePoint would
manage the program business, which we now refer to as specialty business, and we would manage the
brokerage business. Under the agreements with CastlePoint, we managed the brokerage business and
ceded reinsurance or earned management fees for the brokerage business that was expected to result
in approximately a 95% combined ratio for CastlePoint. Also, CastlePoint managed the programs and
other specialty business, and we participated in that business through various reinsurance
agreements that was expected to result in approximately a 93% combined ratio for us. We had entered
into service and expense sharing agreements with CastlePoint under which CPM was entitled to
purchase from us, and we were entitled to purchase from CPM, certain
insurance company services, such as claims adjustment, policy
2
administration, technology solutions, underwriting, and
risk management services. The reimbursement for these charges has been recorded as Other
administration revenues in our Insurance Services segment.
Acquisitions
In addition to the acquisition of CastlePoint on February 5, 2009 as described above, the Company
completed, or as indicated below has agreed to complete, the following acquisitions.
Hermitage
On February 27, 2009, the Company completed the acquisition of HIG, Inc. (Hermitage), a property
and casualty insurance holding company, pursuant to a stock purchase agreement, from a subsidiary
of Brookfield Asset Management Inc. for cash consideration of $130.1 million. Hermitage offers both
admitted and E&S lines products. This transaction further expanded the Companys wholesale
distribution system nationally and established a network of retail agents in the Southeast.
AequiCap
On October 14, 2009, the Company completed the acquisition of the renewal rights to the workers
compensation business of AequiCap Program Administrators Inc. (AequiCap), an underwriting agency
based in Fort Lauderdale, Florida. The acquired business primarily consists of small, low to
moderate hazard workers compensation policies in Florida. During 2009, we entered into an agreement
with AequiCap to provide claims handling services for workers compensation claims. Most of the
employees of AequiCap involved in the servicing of the workers compensation business became
employees of the Company. The acquisition of this business expands the Companys regional presence
in the Southeast.
Specialty Underwriters Alliance
On November 13, 2009, the Company completed the acquisition of 100% of the issued and outstanding
common stock of Specialty Underwriters Alliance, Inc. (SUA), a holding company, for
approximately $107 million of the Companys common stock, pursuant to the terms and conditions of
an Amended and Restated Agreement and Plan of Merger executed on July 22, 2009 and effective as of
June 21, 2009, by and among the Company, Tower S.F. Merger Corporation and SUA. In connection with
the closing of the transaction, the Company issued an aggregate of 4,460,098 shares of its common
stock to SUA stockholders. SUA, a Delaware corporation headquartered in Chicago, Illinois, was
incorporated in April 2003, and through its wholly-owned subsidiary, SUA Insurance Company, offers
specialty commercial property and casualty insurance products through program underwriting agents
that serve niche groups of insureds. After the acquisition, SUA Insurance Company was renamed
CastlePoint National Insurance Company, which name change is still pending in some jurisdictions.
The acquisition of SUA strengthens the Companys Specialty Business segment and its regional
presence in the Midwest.
OneBeacon Personal Lines Division
On February 2, 2010 the Company announced the signing of a definitive agreement to acquire the
Personal Lines Division of OneBeacon, subject to customary closing conditions and regulatory
approvals. For the purchase price of $32.5 million plus book value, Tower will acquire
Massachusetts Homeland Insurance Company, York Insurance Company of Maine and two management
companies. The management companies are the attorneys-in-fact for Adirondack Insurance Exchange, a
New York reciprocal insurer, and New Jersey Skylands Insurance Association, a New Jersey reciprocal
insurer, and its New Jersey domiciled stock insurance subsidiary, New Jersey Skylands Insurance
Company. Tower will also purchase the surplus notes issued by the two reciprocal insurers for an
amount equal to the statutory surplus in the exchanges (approximately $103 million at December 31,
2009). This transaction is subject to approvals by the appropriate regulatory agencies and is
expected to close at the end of the second quarter of 2010. The insurance companies write
approximately $250 million of annual premiums, and the management companies are attorneys-in-fact
that manage approximately $250 million in annual premium written through two reciprocal insurance
exchanges. Tower will write and manage the private passenger automobile, homeowners and package
policies through the companies currently issuing these policies and combine its existing personal
lines operations, which is currently reflected in our Brokerage Insurance segment, with the
business being acquired. Excluded from this transaction are AutoOne, specialty collector car and
boat businesses, and Houston General companies. The Personal Lines Division writes business in the
Northeastern United States with offices in: Canton, Massachusetts; South Portland, Maine; and
Williamsville, New York.
Business Segments
The Company has changed the presentation of its business results, beginning January 1, 2009. We had
previously reported business results for two segments: Insurance and Insurance Services. As of
January 1, 2009, we present three segments as a result of
splitting the results of the Insurance segment into
3
Brokerage Insurance and Specialty Business
segments. The prior period segment disclosures have been restated to conform to the current
presentation.
The Company currently operates three business segments: Brokerage Insurance, Specialty Business and
Insurance Services. Upon the closing of the acquisition of OneBeacons Personal Lines Division, the
Company intends to separately manage its personal lines business and will separate the Brokerage
Insurance segment into a Commercial Business segment and a Personal Business segment.
Brokerage Insurance Segment
Through our Brokerage Insurance segment, we offer a broad and diversified range of property and
casualty insurance products and services to small to mid-sized businesses and to individuals
throughout the United States. We also segment our business into different pricing and coverage
tiers as well as different premium size categories to meet the specific needs of our customers.
These products are underwritten and serviced through our 18 offices and distributed through
approximately 1,173 retail agents and 196 wholesale agents. Approximately 71% of the direct
premiums written by the Brokerage Insurance segment in 2009 was from the Northeast. However, in the
past several years we have expanded our brokerage business beyond the Northeast through
acquisitions and by appointing wholesale agents in California, Texas and Florida.
Using our broad product line offering, we are able to provide a comprehensive product solution to
our producers and allow them to place more business with us. In addition, our diversified business
platform allows us to allocate our capital to profitable market segments and avoid unprofitable
market segments. We provide commercial lines products comprised of commercial package, general
liability, workers compensation, commercial auto and commercial umbrella policies to businesses in
different industries. We have generally focused on specific classes of business in the real estate,
retail, wholesale and service industries such as retail and wholesale stores, residential and
commercial buildings, restaurants and artisan contractors. We target these classes of business
because we believe that they are less complex and have reduced potential for loss severity. We also
offer personal lines products that provide coverage for modestly valued homes and dwellings as well
as personal automobiles for individuals located predominately in the Northeast.
We offer our products on an admitted basis in the preferred, standard, and non-standard pricing and
coverage tiers and on a non-admitted basis using our E&S coverage and pricing tier. For each of the
preferred, standard, non-standard and E&S coverage and pricing tiers, we have developed different
pricing, coverage and underwriting guidelines. For example, the pricing for the preferred risk
segment is generally the lowest, followed by the pricing for the standard, non-standard and E&S
segments. The underwriting guidelines are correspondingly stricter for preferred risks in order to
justify the lower premium rates charged for these risks with underwriting guidelines becoming
progressively less restrictive for standard, non-standard and E&S risks. We generally distribute
policies for risks with preferred and standard underwriting characteristics through our retail
agents and policies for risks with non-standard and E&S underwriting characteristics through our
wholesale agents. In addition to segmenting our products into various pricing and coverage tiers,
we further classify our products into the following premium size segments: under $25,000 (small),
$25,000 to $150,000 (medium) and over $150,000 (large).
While we have succeeded in underwriting business in all market segments, we have experienced
particular success in targeting nonstandard risks that do not fit the underwriting criteria of
standard risk carriers due to factors such as type of business, location and premium per policy.
For example, we have historically targeted risks located in urban areas such as New York City that
require special underwriting expertise and have generally been avoided by other insurance
companies. We have also historically had more success in the small premium size segment due to our
focus on reducing our underwriting expenses by realizing economies of scale, utilizing technology
and developing efficient business processes. We believe that due to the lack of flexibility in the
underwriting of small policies, other insurance companies have not been able to price competitively
in this underserved segment. Our expense advantage has allowed us to maintain adequate rates
through industry cycles. With the softening market conditions that were experienced throughout
2009, our primary business segments were less impacted by the competitive rate pressures that
affected premium adequacy on larger risks within the upper middle market segment.
4
The following table shows the direct premiums written for the Brokerage Insurance segment as of
December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
($ in millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Commercial package |
|
|
$ 287.1 |
|
|
|
$ 202.3 |
|
|
|
$ 190.6 |
|
Landlord |
|
|
27.3 |
|
|
|
20.3 |
|
|
|
22.4 |
|
Business owners |
|
|
38.5 |
|
|
|
32.6 |
|
|
|
23.0 |
|
|
|
Total commercial multiple-peril |
|
|
352.9 |
|
|
|
255.2 |
|
|
|
236.0 |
|
Monoline commercial general liability |
|
|
90.2 |
|
|
|
50.5 |
|
|
|
51.9 |
|
Workers compensation |
|
|
83.6 |
|
|
|
17.5 |
|
|
|
37.5 |
|
Commercial automobile |
|
|
71.4 |
|
|
|
72.6 |
|
|
|
60.2 |
|
Personal automobile |
|
|
10.6 |
|
|
|
9.9 |
|
|
|
7.5 |
|
Homeowners |
|
|
167.1 |
|
|
|
85.0 |
|
|
|
85.1 |
|
Fire and allied Lines |
|
|
30.7 |
|
|
|
19.3 |
|
|
|
19.7 |
|
|
|
All lines |
|
|
$ 806.5 |
|
|
|
$ 510.0 |
|
|
|
$ 497.9 |
|
|
|
Specialty Business Segment
Following the previously discussed acquisition of SUA on November 13, 2009, we consolidated the
specialty insurance business we obtained through the CastlePoint acquisition with the business of
SUA to form a single Specialty Business segment operating out of the Chicago office. Our specialty
business consists of insurance covering narrowly defined, homogeneous classes of business including
Long-term Healthcare workers, Specialty Transportation, Professional Employers Organizations,
Temporary Staffing Firms, Public Entities, Commercial Construction and Auto Dealerships.
Our specialty business is produced through a select number of program underwriting agents, who have
specialized underwriting expertise in the classes they underwrite and who have established books of
business with proven track records. We rely on our program underwriting agents for industry
insight, regional underwriting knowledge and understanding of the specific risks in the niche
markets we serve. We couple that knowledge with our disciplined underwriting practices, leading
edge technology and systems capabilities to provide insurance programs and products customized to
the needs of the specialty markets we serve.
Our focus in the specialty market is on those classes of business traditionally underserved by
standard property and casualty insurers due to the complex business knowledge, awareness of
regional market conditions and investment required to achieve attractive underwriting profits. We
believe this segment of the market is attractive because competition is based primarily on customer
service, availability and continuity of insurance capacity, specialized policy forms, efficient
claims handling and other value-added considerations, rather than just price.
Further, we believe that our operating structure and systems capabilities afford us a distinct
competitive advantage in underwriting specialty program business. Specifically, our systems enable
us to provide a full underwriting processing and claims support interface in those situations where
it is required, while the existence of a dedicated specialty claims unit provides an attractive
alternative to the use of third party administrators in situations where the program underwriting
agent does not provide such services.
Our Specialty Business segment in 2009 also included a limited amount of reinsurance business that
we acquired from CastlePoint. We provided a limited amount of quota share, excess and catastrophe
reinsurance business to primarily small insurance companies. After the CastlePoint acquisition, we
began non-renewing this business and allocated the capital previously used to support this business
to finance our acquisitions and support our growth in the Brokerage Insurance and Specialty
Business segments. While we may retain a few reinsurance accounts after 2009, we do not anticipate
that this business will have a material impact on our overall results.
The following table shows Gross Premiums Written in our Specialty Business segment broken down by
program business and reinsurance for the years ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
($ in millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Programs |
|
|
$ 213.4 |
|
|
|
$ 124.8 |
|
|
|
$ 26.1 |
|
Reinsurance |
|
|
50.8 |
|
|
|
- |
|
|
|
- |
|
|
|
Total |
|
|
$ 264.2 |
|
|
|
$ 124.8 |
|
|
|
$ 26.1 |
|
|
|
Insurance Services Segment
In our Insurance Services segment, we generate fees from performing various aspects of insurance
company functions for other insurance companies, including underwriting, claims administration,
reinsurance intermediary, operational and technology services. We provide these services through
our managing general agencies, TRM, CPM and CPRMFL. Prior to the acquisition of CastlePoint in
February of 2009, TRM generated fees from managing brokerage business on behalf of CPIC, whereas
CPM generated fees from managing program business on behalf of Tower. After CastlePoint was
acquired by Tower in February of 2009, these fees earned by TRM and CPM were eliminated. Tower
generates fees from placing Towers business with other insurers and reinsurers, although
5
as a result of the CastlePoint acquisition, the amount of fee
income was limited to $5.1 million for 2009 as compared to $68.5 million in 2008. Upon the closing
of the acquisition of OneBeacons Personal Lines Division, we will generate additional fee income
from managing the two reciprocal exchanges, which we plan to reflect in the Insurance Services
segment.
The following shows premiums managed by TRM, CPM and CPRMFL and the fee income derived from those
managed premiums for the years ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
($ in millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Managed Premiums |
|
|
$ 11.7 |
|
|
|
$ 175.4 |
|
|
|
$ 85.1 |
|
Fee Income |
|
|
$ 5.1 |
|
|
|
$ 68.5 |
|
|
|
$ 33.3 |
|
Products and Services
Our diversified business platform allows us to provide a broad range of products in all states in
the U.S. Our products include the following:
|
|
Commercial Multiple-peril Packages. Coverage offered under our commercial package and
business owners policies combines property, liability (including general liability and
products and completed operations), business interruption, equipment breakdown, fidelity and
inland marine coverages tailored for commercial businesses and enterprises. Commercial
packages and business owners policies are generally offered by our Brokerage Insurance
segment. |
|
|
|
Fire and Allied Lines and Inland Marine. We write fire and allied lines policies for
individuals and businesses. Individual dwelling policies generally include personal property
with optional liability coverage that provide an alternative to the homeowners policy for the
personal lines customer. Commercial fire and allied lines policies provide protection for
damage to commercial buildings and their contents, and these policies may be utilized in
selected circumstances as an alternative to a commercial package policy. We write inland
marine insurance protection for the property of businesses that is not at a fixed location and
for items of personal property that are easily transportable, typically including builders
risk, contractors equipment and installation, domestic transit and transportation, fine arts,
property floaters and leased property. These products are offered by our Brokerage Insurance
segment and our Specialty Business segment through their respective distribution systems. |
|
|
|
Other Liability. In our Brokerage Insurance segment, we write other liability policies for
individuals and business owners including mono-line commercial general liability (generally
for risks that do not have property exposure or whose property exposure is insured elsewhere)
and commercial umbrella policies. Also, in our Specialty Business segment we write General
Liability policies for businesses in programs that are tailored to narrowly defined industry
classes, such as small public entities. |
|
|
|
Workers Compensation. We write workers compensation policies, which are a statutory
coverage requirement in almost every state to protect employees in case of injury on the job,
and the employer from liability for an accident involving an employee. In our Brokerage
Insurance segment we write workers compensation policies generally for small and medium
businesses, and in our Specialty Business segment we write workers compensation policies in
programs targeted to specific industry classes, such as workers in the healthcare industry. |
|
|
|
Commercial Automobile. We write coverage for automobile policies by providing automobile
liability, collision and comprehensive insurance including commercial and personal automobile
policies for both fleet and non-fleet risks (personal automobile business is described in the
bullet below). We write commercial Automobile policies through our Brokerage Insurance segment
that focuses on business automobiles and small trucks for businesses other than transportation
companies. Our Specialty Business segment focuses on trucking businesses and other specialty
transportation businesses. |
|
|
|
Personal Automobile. We write personal automobile policies on a limited basis in our
Brokerage Insurance segment, and we intend to increase our personal automobile business after
the acquisition of the OneBeacon Personal Lines Division. We also write a limited amount of
non-standard personal automobile business in our Specialty Business segment through several
targeted programs for this market tier. |
|
|
|
Homeowners and Personal Dwellings. Our homeowners policy is a multiple-peril policy,
providing property and liability coverages for one and two-family, owner-occupied residences
or additional coverage to the homeowner for personal
umbrella and personal inland marine. We write this business through our Brokerage Insurance
segment. |
6
The following table shows total Gross Premiums Earned and Gross Loss Ratio by product line for the
years ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Premium |
|
|
Gross Loss |
|
|
Premium |
|
|
Gross Loss |
|
|
Premium |
|
|
Gross Loss |
|
($ in millions) |
|
Earned |
|
|
Ratio |
|
|
Earned |
|
|
Ratio |
|
|
Earned |
|
|
Ratio |
|
|
Commercial multiple-peril |
|
|
$ 349.6 |
|
|
|
52.0 |
% |
|
|
$ 242.2 |
|
|
|
51.5 |
% |
|
|
$ 221.1 |
|
|
|
51.8 |
% |
Other liability |
|
|
150.9 |
|
|
|
52.3 |
% |
|
|
63.2 |
|
|
|
42.6 |
% |
|
|
72.9 |
|
|
|
64.2 |
% |
Workers Compensation |
|
|
216.2 |
|
|
|
54.4 |
% |
|
|
88.4 |
|
|
|
47.6 |
% |
|
|
54.1 |
|
|
|
34.1 |
% |
Commercial Automobile |
|
|
122.4 |
|
|
|
58.5 |
% |
|
|
77.8 |
|
|
|
61.1 |
% |
|
|
54.3 |
|
|
|
54.6 |
% |
Homeowners |
|
|
145.9 |
|
|
|
48.9 |
% |
|
|
83.2 |
|
|
|
35.5 |
% |
|
|
92.7 |
|
|
|
39.9 |
% |
Fire and allied lines and inland marine |
|
|
26.6 |
|
|
|
42.5 |
% |
|
|
16.9 |
|
|
|
57.7 |
% |
|
|
19.1 |
|
|
|
53.5 |
% |
Personal auto |
|
|
34.7 |
|
|
|
98.7 |
% |
|
|
6.6 |
|
|
|
116.0 |
% |
|
|
7.9 |
|
|
|
101.9 |
% |
|
All Lines |
|
|
$ 1,046.3 |
|
|
|
54.2 |
% |
|
|
$ 578.3 |
|
|
|
49.9 |
% |
|
|
$ 522.1 |
|
|
|
50.7 |
% |
|
Organizational Structure
In 2009, we redesigned our organizational structure to support our national presence and expansion
from two to three business segments. In addition, our corporate functions are divided into three
areas: corporate, profit and service centers. The corporate functions are performed from our
headquarters located in downtown New York City and are comprised of Legal, Corporate Communications
& Marketing, Corporate Development & Investor Relations, Financial Operations, Human Resources &
Corporate Administration and Actuarial. The service center functions encompass Operations,
Technology and Claims. The profit center functions include the three business segments, Corporate
Underwriting, Business Development and oversight of the field offices in the five regions.
We have established our field offices into five regions throughout the United States, the
Northeast, Southeast, Midwest, Southwest, and West, to provide business development, underwriting,
policyholders services and claims functions to the Brokerage Insurance and Specialty Business
segments. The Northeast region is comprised of Connecticut, Delaware, Maine, Maryland,
Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont. The
West region is comprised of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon,
and Washington. The Southeast region includes Alabama, Florida, Georgia, Mississippi, North
Carolina, South Carolina, Tennessee, Virginia, and West Virginia. The Southwest region states
include: Arkansas, Colorado, Kansas, Louisiana, Nebraska, New Mexico, Oklahoma, Texas, Utah, and
Wyoming. Towers Midwest region is comprised of Illinois, Indiana, Iowa, Kentucky, Michigan,
Minnesota, Missouri, North Dakota, Ohio, South Dakota, and Wisconsin.
The Northeast Region is headquartered in New York and has eight branches. The Southeast Region has
branches in Atlanta, GA, Fort Lauderdale, FL, Maitland, FL and Mobile, AL. The Midwest Region will
be headquartered in Chicago, IL, co-located with our Specialty Business segment office, and this
region is expected to grow beginning in 2010. The West Region is headquartered in Irvine, CA and
has a branch office in Palm Springs, CA. The Southwest Region consists of business mostly from
Texas. This business is currently underwritten and managed by our office in New York while the
claims function operates out of the branch office in Irving, TX.
The following table shows the direct premiums written by region for the years ended December 31,
2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
($ in millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Northeast Region |
|
|
$ 724.4 |
|
|
|
$ 469.5 |
|
|
|
$ 501.3 |
|
Southeast Region |
|
|
80.0 |
|
|
|
23.5 |
|
|
|
11.3 |
|
Midwest Region |
|
|
18.6 |
|
|
|
6.2 |
|
|
|
3.5 |
|
Southwest Region |
|
|
32.6 |
|
|
|
11.7 |
|
|
|
0.5 |
|
West Region |
|
|
164.2 |
|
|
|
123.9 |
|
|
|
7.4 |
|
|
|
Total |
|
|
$ 1,019.8 |
|
|
|
$ 634.8 |
|
|
|
$ 524.0 |
|
|
|
7
Distribution
We generate business through independent retail, wholesale and program underwriting agents, whom we
refer to collectively as producers. These producers sell policies for us as well as for other
insurance companies. We carefully select our producers by evaluating several factors such as their
need for our products, premium production potential, loss history with other insurance companies
that they represent, product and market knowledge, and the size of the agency. We generally appoint
producers with a total annual premium volume greater than $10,000,000. We expect a new producer to
be able to produce at least $500,000 in annual premiums for us during the first year and $1 million
in annual premiums after three years. We select our program underwriting agents based upon their
underwriting expertise in specific niche markets, type of business, size and profitability of the
existing book of business.
Commissions incurred in 2009 and 2008 averaged 19.4% and 18.3% of gross premiums earned,
respectively. Our commission schedules are 1 to 2.5 points higher for wholesale than retail agents.
Our commissions are also higher for program underwriting agents that perform additional
underwriting and processing services on our behalf, including premium collection, policy issuance
and data collection. In our Brokerage Insurance segment we also have a profit sharing plan that
added approximately 1 / 2 of 1 percent to overall commission rates in the past several years. In
our Specialty Business segment we typically have contingent commissions that are tied to the loss
ratio performance for each program.
To ensure that we obtain profitable business from our producers, we attempt to position ourselves
as our producers primary provider within the product segments that we offer. We manage the results
of our producers through periodic reviews to monitor premium volume and profitability. We have
access to online premium and loss ratio reports by producer and we estimate each producers
profitability at least annually using actuarial techniques. We continuously monitor the performance
of our producers by assessing leading indicators and metrics that signal the need for corrective
action. Corrective action may include increased frequency of producer meetings and more detailed
business planning. If loss ratio issues arise, we increase the monitoring of individual risks and
consider reducing that producers binding authority. Review and enforcement of the agency agreement
requirements can be used to address inadequate adherence to administrative duties and
responsibilities. Noncompliance can lead to reduction of authority and potential termination.
In 2009, approximately 45% of the Companys total business was generated by wholesale agents, 30%
from retail producers and 20% from program underwriting agents with the remaining 5% from third
party reinsurance. The pending acquisition of OneBeacons Personal Lines Division transaction is
expected to provide access to over 900 retail agents, approximately one-half of which will be new
to the Company.
Our largest producers in 2009 were Northeast Agencies and Morstan General Agency. In the year ended
December 31, 2009, these producers accounted for 9% and 8%, respectively, of the total of our gross
premiums written and produced. No other producer was responsible for more than 3% of our gross
premiums written. Approximately 45% of the 2009 gross premiums written and managed in the Brokerage
Insurance segment were produced by our top 18 producers representing 1.3% of our active agents,
brokers and program underwriting agents. These producers each have annual written premiums of
$5,000,000 or more. As we build a broader distribution base, the number of producers with
significant premium volume with Tower is increasing, particularly with the addition of producers
through acquisitions and territorial expansion in the Northeast, Southeast and Midwest regions.
The number of agencies from which we receive business has increased over the past several years as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Retail Agencies |
|
|
1,173 |
|
|
|
940 |
|
|
|
857 |
|
Wholesale Agencies |
|
|
196 |
|
|
|
102 |
|
|
|
69 |
|
Program Underwriting Agents |
|
|
20 |
|
|
|
8 |
|
|
|
5 |
|
|
|
Total |
|
|
1,389 |
|
|
|
1,050 |
|
|
|
931 |
|
|
|
Underwriting
The underwriting strategy for controlling our loss ratio is to seek diversification in our products
and an appropriate business mix for any given year, emphasizing profitable lines of business and
de-emphasizing unprofitable lines. At the beginning of each year, we establish target loss ratios
for each line of business, which we monitor throughout the year on a monthly basis. If any line of
business fails to meet its target loss ratio, a cross-functional team comprised of personnel from
line underwriting, corporate underwriting, actuarial, claims and loss control departments meet to
develop corrective action plans that may involve revising underwriting guidelines, non-renewing
unprofitable segments or entire lines of business and/or implementing
rate increases. During
8
the period of time that a corrective action plan is being implemented with
respect to any product line that fails to meet its target loss ratio, premium for that product line
is reduced or maintained depending upon its effect on our total loss ratio. To offset the reduction
or lack of growth in premium volume for the products that are undergoing corrective action, we seek
to expand our premium writings in existing profitable lines of business or add new lines of
business with better underwriting profit potential.
We generally use actuarial loss costs promulgated by the Insurance Services Office, a company
providing statistical, actuarial and underwriting claims information and related services to
insurers, as a benchmark in the development of pricing for our products. We further tailor pricing
to each specific product we underwrite (other than workers compensation), taking into account our
historical loss experience and individual risk and coverage characteristics. For workers
compensation policies, we use individual state administered rates, loss costs or rates promulgated
by the National Council on Compensation Insurance, Inc. in developing our pricing, subject to
individual requirements.
Brokerage business
With respect to the business written through our Brokerage Insurance segment, we establish
underwriting guidelines for all the products that we underwrite to ensure a uniform approach to
risk selection, pricing and risk evaluation among our underwriters and to achieve underwriting
profitability. Our underwriting process involves securing an adequate level of underwriting
information from our producers, inspections and surveys to identify and evaluate risk exposures and
subsequently pricing the risks we choose to accept. For certain approved classes of commercial
risks and most personal lines policies, we allow our producers to initially bind these risks
utilizing rating criteria that we provide to them. Also, our web-based platforms, webPlus
(webPlus ® ) and Preserver Online, provide our producers with the capability to submit and
receive quotes over the internet and contain our risk selection and pricing logic, thereby enabling
us to streamline our initial submission and screening process. If the individual risk does not meet
the initial submission and screening parameters contained within webPlus or Preserver Online, the
risk is automatically referred to our assigned underwriter for specific offline review. See
BusinessTechnology.
Once a risk is bound by our underwriter or producer, our internal or outside loss control
representatives conduct physical inspections of the insured premises to validate the information
provided by our producers and provide a loss control report to our underwriters to make a final
evaluation of the risk. With the exception of a few typically low risk classes of business such as
offices, all of the new risks that are bound are physically inspected or subject to a telephone
survey, generally within 60 days from the effective date of the policy, and generally reviewed by
underwriting within that 60 day period. If the inspection reveals that the risk insured under the
policy does not meet our established underwriting guidelines, the policy is typically cancelled
within the first 60 days from its effective date. If the inspection reveals that the risk meets our
established underwriting guidelines but the policy was bound with incorrect rating information, the
policy is amended through an endorsement based upon the correct information. We supplement the
inspection by using online data sources to further evaluate the building value, claim experience,
financial history and catastrophe exposures of the insured. In addition, we specifically tailor
coverage to match the insureds exposure and premium requirements. We complete internal file
reviews and audits on a monthly, quarterly and annual basis to confirm that underwriting standards
and pricing programs are being consistently followed. Our property risks are generally comprised of
residential buildings, retail stores and restaurants covered under policies with low building and
content limits. We carefully underwrite potential catastrophe exposures to terrorism losses. Our
underwriting guidelines are designed to avoid properties designated as, or in close proximity to,
high profile or target risks, individual buildings over 25 stories and any site within 500 feet of
major transportation centers, bridges, tunnels and other governmental or institutional buildings.
In addition, we monitor the concentration of employees insured under our workers compensation
policies and avoid writing risks with more than 100 employees in any one building. Please see Risk
Factors-Risks Related to Our Business. We may face substantial exposure to losses from terrorism
and we are currently required by law to offer coverage against such losses.
We underwrite our products through our underwriting business units that are each headed by an
underwriting manager, having on average 26 years of experience in the property and casualty
industry. These underwriting offices are supported by professionals in the corporate underwriting,
actuarial, operations, business development and loss control departments. The corporate
underwriting department is responsible for managing and analyzing the profitability of our entire
book of business, supporting line underwriting with technical assistance, developing underwriting
guidelines, granting underwriting authority, training, developing new products and monitoring
underwriting quality control through audits. The actuarial department is responsible for monitoring
rate adequacy for all of our products and analyzing loss data on a monthly basis. The underwriting
operations department is responsible for developing workflows, conducting operational audits and
providing technical assistance to the underwriting teams. The loss control department conducts loss
control inspections on nearly all new commercial and personal lines business written, utilizing
in-house loss control representatives and outside vendors. The business development department
works with the underwriting teams to manage relationships with our producers.
9
Specialty business
The underwriting process utilized for the specialty business is based on our understanding of best
industry practices and, as such, we consider the appropriateness of insuring the client by
evaluating the quality of its management, its risk management strategy and its track record. In
addition, we require each program that we underwrite in the specialty business segment to include
significant information regarding the nature of the perils to be included and detailed aggregate
information pertaining to the location(s) of the risks covered. We obtain available information on
the clients loss history for the perils being insured or reinsured, together with relevant
underwriting considerations. In conjunction with testing each proposed program against our
underwriting criteria, our underwriters evaluate the proposal in terms of its risk/reward profile
to assess the adequacy of the proposed pricing and its potential impact on our overall return on
capital and corporate risk objectives. Our underwriting process integrates the actuarial and
underwriting disciplines. We utilize our in-house actuarial staff as well as rely on outside
consultants as necessary. The actuarial and underwriting estimates that we develop in our
underwriting and pricing analyses are explicitly tracked by program on a continuous basis through
our underwriting audit and actuarial reserving processes. We require significant amounts of data
from our clients and accept business for which the data provided to us is sufficient for us to make
an appropriate analysis. We may supplement the data provided to us by our clients with information
from the Insurance Services Offices, Inc., the National Council on Compensation Insurance, Inc.,
other advisory rate-making associations and other organizations that provide projected loss cost
data to their members.
Claims Management
We manage the claims function through our regional claims offices throughout the United States. We
also utilize third party administrators who specialize in handling certain types of claims,
generally for our specialty business. In some situations in our specialty business, the program
underwriting agent is also appointed by us as the third party administrator for claims for a
particular program.
Our claims adjustors are assigned to cases based upon their expertise for various types of claims,
and we monitor the results of the adjusters handling the claims using peer reviews, claim file
audits and results monitoring. We monitor claims adjusting performed by third-party administrators
similarly to how we monitor claims adjusting conducted by our own personnel. We maintain databases
of the claims experience of each of our products, territories, and programs results, and our claims
managers work with our underwriters and actuaries to assess results and trends.
We also obtain claims adjustment and legal defense or claims audit services for various types of
claims for which additional expertise is needed. We maintain working relationships with claims
defense firms in key locations throughout the U.S.
We establish case loss reserves for each claim based upon all of the facts available at the time to
record our best estimate of the ultimate potential loss of each claim. We also establish reserves
on a case-by-case basis for the estimated legal defense costs of third-party claims, sometimes
referred to as allocated loss adjustment expense reserves. In addition, we establish reserves to
record, on an overall basis, the costs of adjusting claims that have occurred but have not yet been
settled, sometimes referred to as unallocated loss adjustment expense reserves.
Competition
The insurance industry is highly competitive. Each year we attempt to assess and project the market
conditions when we develop prices for our products, but we cannot fully know our profitability
until all claims have been reported and settled.
We compete with many insurance companies in each segment in which we write business, and we compete
within our producers offices to write the types of business that we desire. Some of our
competitors have more, and in some cases substantially more, capital and greater marketing and
management resources than we have, and some of our competitors have greater name and brand
recognition than we have, especially in areas outside of the Northeast where we have more
experience.
Competition in the types of business that we underwrite and intend to underwrite is based on many
factors, including:
|
|
multiple solution capability; |
|
|
strength of client relationships; |
|
|
perceived financial strength and financial ratings assigned by independent rating agencies; |
|
|
managements experience in the product, territory, or program; |
|
|
premiums charged and other terms and conditions offered; |
10
|
|
services provided, products offered and scope of business, both by size and geographic
location; and |
|
|
reputation for claims handling. |
Increased competition could result in fewer applications for coverage, lower premium rates and less
favorable policy terms, which could adversely affect us. We are unable to predict the extent to
which new, proposed or potential initiatives may affect the demand for our products or the risks
that may be available for us to consider underwriting.
In our commercial and personal lines admitted business segments, we compete with major U.S.
insurers and certain underwriting syndicates, including large national companies such as Travelers
Companies, Inc., Allstate Insurance Company and State Farm Insurance; regional insurers such as
Selective Insurance Company, Harleysville Insurance Company, Hanover Insurance and Peerless
Insurance Company and smaller, more local competitors such as Greater New York Mutual, Magna Carta
Companies and Utica First Insurance Company. Our non-admitted binding authority and brokerage
business with general agents competes with Scottsdale Insurance Company, Admiral Insurance Company,
Mt. Hawley Insurance Company, Navigators Group, Inc., Essex Insurance Company, Colony Insurance
Company, Century Insurance Group, Nautilus Insurance Group, RLI Corp., United States Liability
Insurance Group and Burlington Insurance Group, Inc. In our program business, we compete against
companies that write program business such as QBE Insurance Group Limited, Delos Insurance Group,
Am Trust Financial Services, Inc., RLI Corp., Chartis Inc., W.R. Berkley Corporation, Markel
Corporation, Great American Insurance Group and Philadelphia Insurance Companies.
Loss and Loss Adjustment Expense Reserves
We are required to establish reserves for incurred losses that are unpaid, including reserves for
claims and loss adjustment expenses, which represent the expenses of settling and adjusting those
claims. These reserves are balance sheet liabilities representing estimates of future amounts
required to pay losses and loss expenses for insured and/or reinsured claims that have occurred at
or before the balance sheet date, whether already known to us or not yet reported. Our policy is to
establish these losses and loss reserves prudently after considering all information known to us as
of the date they are recorded.
Loss reserves fall into two categories: case reserves for reported losses and loss expenses
associated with a specific reported insured claim, and reserves for incurred but not reported
(IBNR) losses and loss adjustment expenses. We establish these two categories of loss reserves as
follows:
|
|
Reserves for reported losses - When a claim is received from an insured, broker or ceding
company, or claimant we establish a case reserve for the estimated amount of its ultimate
settlement and its estimated loss expenses. We establish case reserves based upon the known
facts about each claim at the time the claim is reported and may subsequently increase or
reduce the case reserves as our claims department deems necessary based upon the development
of additional facts about the claim. |
|
|
IBNR reserves - We also estimate and establish reserves for loss and loss adjustment expense
(LAE) amounts incurred but not yet reported, including expected development of reported
claims. IBNR reserves are calculated as ultimate losses and LAE less reported losses and LAE.
Ultimate losses are projected by using generally accepted actuarial techniques. |
Loss reserves represent our best estimate, at a given point in time, of the ultimate settlement and
administration cost of claims incurred. For workers compensation, our reserves are discounted for
claims that are settled or expected to be settled as long-term annuity payments, and as of December
31, 2009 the total amount of this discount was $4.5 million. To estimate loss reserves, we utilize
information from our pricing analyses, actuarial analysis of claims experience by product and
segment, and relevant insurance industry information such as loss settlement patterns for the type
of business being reserved.
Since the process of estimating loss reserves requires significant judgment about a number of
variables, such as fluctuations in inflation, judicial trends, legislative changes and changes in
claims handling procedures, our ultimate liability may exceed or be less than these estimates. We
revise reserves for losses and loss expenses as additional information becomes available and
reflect adjustments, if any, in earnings in the periods in which they are determined.
We engage independent external actuarial specialists, from time to time, to review specific pricing
and reserving methods and results. We also engage an independent external actuarial specialist to
opine on the statutory reserves that are recorded at our Insurance Subsidiaries.
Reconciliation of Loss and Loss Adjustment Expenses
The table below shows the reconciliation of loss and LAE on a gross and net basis for each of the
last three calendar years, reflecting changes in losses incurred and paid losses:
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
($ in millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Balance at January 1 |
|
|
$ 535.0 |
|
|
|
$ 501.2 |
|
|
|
$ 302.5 |
|
Less reinsurance recoverables on unpaid losses |
|
|
(222.2 |
) |
|
|
(189.5 |
) |
|
|
(110.0 |
) |
|
|
|
|
312.8 |
|
|
|
311.7 |
|
|
|
192.5 |
|
Net reserves, at fair value, of acquired companies |
|
|
549.9 |
|
|
|
- |
|
|
|
85.1 |
|
Incurred related to: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
477.8 |
|
|
|
171.6 |
|
|
|
159.5 |
|
Prior years |
|
|
(2.3 |
) |
|
|
(8.9 |
) |
|
|
(1.6 |
) |
|
Total incurred |
|
|
475.5 |
|
|
|
162.7 |
|
|
|
157.9 |
|
Paid related to: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
154.2 |
|
|
|
59.2 |
|
|
|
55.3 |
|
Prior years |
|
|
251.7 |
|
|
|
102.4 |
|
|
|
68.5 |
|
|
Total paid |
|
|
405.9 |
|
|
|
161.6 |
|
|
|
123.8 |
|
|
Net balance at end of year |
|
|
932.3 |
|
|
|
312.8 |
|
|
|
311.7 |
|
Add reinsurance recoverables on unpaid losses |
|
|
199.7 |
|
|
|
222.2 |
|
|
|
189.5 |
|
|
Balance at December 31 |
|
|
$ 1,132.0 |
|
|
|
$ 535.0 |
|
|
|
$ 501.2 |
|
|
Our claims reserving practices are designed to set reserves that in the aggregate are adequate
to pay all claims at their ultimate settlement value. We discount a portion of our workers
compensation reserves and our consolidated loss and LAE reserves are net of a $4.5 million discount
at December 31, 2009. With respect to companies that are acquired, we also determine a Reserves
Risk Premium that reflects the present value of cash flows and required statutory capital as the
loss reserves are run off. The Reserves Risk Premium is amortized based upon the projected paid
losses underlying the acquired companys reserves.
Loss Reserve Development
Shown below is the loss reserve development for business written each year from 1999 through 2009.
The table portrays the changes in our loss and LAE reserves in subsequent years from the prior loss
estimates based on experience as of the end of each succeeding year.
The first line of the table shows, for the years indicated, our net reserve liability including the
reserve for incurred but not reported losses as originally estimated. For example, as of December
31, 2000 we estimated that $7.9 million would be a sufficient reserve to settle all claims not
already settled that had occurred prior to December 31, 2000 whether reported or unreported to us.
The next section of the table shows, by year, the cumulative amounts of losses and loss adjustment
expenses paid as of the end of each succeeding year. For example, with respect to the net losses
and loss expense reserve of $7.9 million as of December 31, 2000, by December 31, 2009 (nine years
later) $8.9 million had actually been paid in settlement of the claims.
The next section of the table sets forth the re-estimations in later years of incurred losses,
including payments, for the years indicated. For example, as reflected in that section of the
table, the original reserve of $7.9 million was re-estimated to be $10.4 million at December 31,
2009. The increase from the original estimate is caused by a combination of factors, including: (1)
claims being settled for amounts different than originally estimated, (2) reserves being increased
or decreased for claims remaining open as more information becomes known about those individual
claims and (3) more or fewer claims being reported after December 31, 2000 than anticipated.
The cumulative redundancy/ (deficiency) represents, as of December 31, 2009, the difference
between the latest re-estimated liability and the reserves as originally estimated. A redundancy
means the original estimate was higher than the current estimate; a deficiency means that the
current estimate is higher than the original estimate. For example, as of December 31, 2009 and
based upon updated information, we re-estimated that the reserves which were established as of
December 31, 2008 were $0.3 million redundant ($312.5 million net re-estimated liability less
$312.8 million original net liability).
The bottom part of the table shows the impact of reinsurance reconciling the net reserves shown in
the upper portion of the table to gross reserves.
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
($ in millions) |
|
1999 |
|
|
2000 |
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
Original Net Liability |
|
|
6.8 |
|
|
|
7.9 |
|
|
|
8.6 |
|
|
|
15.5 |
|
|
|
24.4 |
|
|
|
36.9 |
|
|
|
101.7 |
|
|
|
192.5 |
|
|
|
311.7 |
|
|
|
312.8 |
|
|
|
932.3 |
|
Cumulative payments as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
|
2.6 |
|
|
|
3.4 |
|
|
|
2.9 |
|
|
|
4.1 |
|
|
|
7.5 |
|
|
|
10.9 |
|
|
|
13.7 |
|
|
|
49.5 |
|
|
|
102.4 |
|
|
|
111.4 |
|
|
|
|
|
Two years later |
|
|
4.8 |
|
|
|
5.4 |
|
|
|
4.9 |
|
|
|
6.7 |
|
|
|
11.9 |
|
|
|
4.5 |
|
|
|
36.7 |
|
|
|
90.9 |
|
|
|
163.8 |
|
|
|
|
|
|
|
|
|
Three years later |
|
|
6.2 |
|
|
|
7.0 |
|
|
|
6.4 |
|
|
|
9.1 |
|
|
|
2.9 |
|
|
|
16.8 |
|
|
|
60.6 |
|
|
|
120.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
|
6.9 |
|
|
|
7.9 |
|
|
|
7.2 |
|
|
|
4.5 |
|
|
|
11.7 |
|
|
|
30.2 |
|
|
|
73.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
|
7.2 |
|
|
|
8.3 |
|
|
|
6.7 |
|
|
|
8.9 |
|
|
|
17.8 |
|
|
|
34.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later |
|
|
7.5 |
|
|
|
8.7 |
|
|
|
7.8 |
|
|
|
11.7 |
|
|
|
20.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later |
|
|
7.7 |
|
|
|
9.0 |
|
|
|
8.3 |
|
|
|
13.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later |
|
|
7.9 |
|
|
|
9.1 |
|
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later |
|
|
8.0 |
|
|
|
8.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later |
|
|
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability re-estimated as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
|
7.5 |
|
|
|
9.7 |
|
|
|
11.5 |
|
|
|
15.6 |
|
|
|
24.2 |
|
|
|
36.6 |
|
|
|
101.0 |
|
|
|
191.1 |
|
|
|
303.9 |
|
|
|
312.5 |
|
|
|
|
|
Two years later |
|
|
8.7 |
|
|
|
11.7 |
|
|
|
11.3 |
|
|
|
14.7 |
|
|
|
24.8 |
|
|
|
40.7 |
|
|
|
101.5 |
|
|
|
178.3 |
|
|
|
288.1 |
|
|
|
|
|
|
|
|
|
Three years later |
|
|
9.5 |
|
|
|
11.5 |
|
|
|
10.5 |
|
|
|
16.5 |
|
|
|
29.0 |
|
|
|
48.3 |
|
|
|
99.5 |
|
|
|
171.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
|
9.2 |
|
|
|
10.8 |
|
|
|
11.9 |
|
|
|
19.6 |
|
|
|
36.2 |
|
|
|
45.3 |
|
|
|
96.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
|
9.0 |
|
|
|
11.9 |
|
|
|
13.3 |
|
|
|
25.1 |
|
|
|
33.6 |
|
|
|
40.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later |
|
|
10.0 |
|
|
|
12.7 |
|
|
|
15.7 |
|
|
|
23.0 |
|
|
|
27.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later |
|
|
10.6 |
|
|
|
12.7 |
|
|
|
13.8 |
|
|
|
17.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later |
|
|
10.6 |
|
|
|
11.7 |
|
|
|
10.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later |
|
|
9.6 |
|
|
|
10.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later |
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Net redundancy/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(deficiency) |
|
|
(1.8 |
) |
|
|
(2.5 |
) |
|
|
(2.2 |
) |
|
|
(1.5 |
) |
|
|
(3.5 |
) |
|
|
(3.2 |
) |
|
|
5.1 |
|
|
|
21.1 |
|
|
|
23.6 |
|
|
|
0.3 |
|
|
|
|
|
Reinsurance Commutations |
|
|
- |
|
|
|
- |
|
|
|
1.2 |
|
|
|
3.2 |
|
|
|
7.2 |
|
|
|
9.2 |
|
|
|
9.2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Cumulative net redundancy/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(deficiency) excluding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Commutations |
|
|
(1.8 |
) |
|
|
(2.5 |
) |
|
|
(0.9 |
) |
|
|
1.7 |
|
|
|
3.6 |
|
|
|
5.9 |
|
|
|
14.3 |
|
|
|
21.1 |
|
|
|
23.6 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves |
|
|
6.8 |
|
|
|
7.9 |
|
|
|
8.6 |
|
|
|
15.5 |
|
|
|
24.4 |
|
|
|
36.9 |
|
|
|
101.7 |
|
|
|
192.5 |
|
|
|
311.7 |
|
|
|
312.8 |
|
|
|
932.3 |
|
Ceded reserves |
|
|
17.4 |
|
|
|
20.6 |
|
|
|
29.0 |
|
|
|
50.2 |
|
|
|
75.1 |
|
|
|
91.8 |
|
|
|
97.0 |
|
|
|
110.0 |
|
|
|
189.5 |
|
|
|
222.2 |
|
|
|
199.7 |
|
|
|
Gross reserves |
|
|
24.2 |
|
|
|
28.5 |
|
|
|
37.6 |
|
|
|
65.7 |
|
|
|
99.5 |
|
|
|
128.7 |
|
|
|
198.7 |
|
|
|
302.5 |
|
|
|
501.2 |
|
|
|
535.0 |
|
|
|
1,132.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-estimated |
|
|
8.7 |
|
|
|
10.4 |
|
|
|
10.8 |
|
|
|
17.0 |
|
|
|
27.9 |
|
|
|
40.2 |
|
|
|
96.6 |
|
|
|
171.4 |
|
|
|
288.1 |
|
|
|
312.5 |
|
|
|
|
|
Ceded re-estimated |
|
|
25.0 |
|
|
|
28.1 |
|
|
|
34.8 |
|
|
|
48.8 |
|
|
|
70.8 |
|
|
|
86.6 |
|
|
|
86.5 |
|
|
|
93.6 |
|
|
|
163.8 |
|
|
|
212.3 |
|
|
|
|
|
|
|
|
|
|
|
Gross re-estimated |
|
|
33.7 |
|
|
|
38.5 |
|
|
|
45.6 |
|
|
|
65.8 |
|
|
|
98.7 |
|
|
|
126.8 |
|
|
|
183.1 |
|
|
|
265.0 |
|
|
|
451.9 |
|
|
|
524.8 |
|
|
|
|
|
|
|
|
|
|
|
Cumulative gross redundancy/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(deficiency) |
|
|
(9.5 |
) |
|
|
(10.0 |
) |
|
|
(8.0 |
) |
|
|
(0.1 |
) |
|
|
0.8 |
|
|
|
1.9 |
|
|
|
15.6 |
|
|
|
37.5 |
|
|
|
49.3 |
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The cumulative payments and the net liabilities are affected by commutations. We commuted
several reinsurance treaties in 2001 that had the effect of lowering the cumulative payments
by $0.6 million in 2001, $6.8 million in 2002, and $10.1 million in 2003, 2004, 2005 and
2006. |
|
(2) |
|
The net redundancies reflected in the above table for 2009 and 2008 resulted primarily from
the following:
Reserve reductions in 2009 from commercial multi-peril liability and other liability.
Reserve reductions in 2008 from commercial multi-peril liability, workers compensation, other
liability and property lines of business in accident year 2006. |
(3) |
|
The net deficiencies reflected in the above table for years 2004 and prior resulted
primarily from the reinsurance commutation impact of $1.2 million, $3.2 million, $7.2
million, and $9.2 million for 2001, 2002, 2003, and 2004, respectively. |
(4) |
|
Net re-estimated for the year ended December 31, 2008 excludes favorable development of
$2.0 pertaining to CastlePoint and Hermitage. Total favorable development recorded in 2009
on 2008 and prior accident years totaled $2.3 million, which includes CastlePoint and
Hermitage reserve development recognized after the acquisitions. |
13
Analysis of Reserves
The following table shows our estimated net outstanding case loss reserves and IBNR by line of
business as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Case Loss |
|
|
|
|
|
|
|
($ in millions) |
|
Reserves |
|
|
IBNR |
|
|
Total |
|
|
|
Commercial Multiple Peril |
|
|
$ 189.3 |
|
|
|
$ 103.8 |
|
|
|
$ 293.1 |
|
Other Liability |
|
|
110.0 |
|
|
|
127.3 |
|
|
|
237.3 |
|
Workers Compensation |
|
|
118.5 |
|
|
|
85.3 |
|
|
|
203.8 |
|
Commercial Automobile |
|
|
63.5 |
|
|
|
48.3 |
|
|
|
111.8 |
|
Homeowners |
|
|
38.9 |
|
|
|
17.7 |
|
|
|
56.6 |
|
Fire and Allied Lines |
|
|
6.6 |
|
|
|
2.3 |
|
|
|
8.9 |
|
Personal Automobile |
|
|
13.4 |
|
|
|
7.4 |
|
|
|
20.8 |
|
|
|
All Lines |
|
|
$ 540.2 |
|
|
|
$ 392.1 |
|
|
|
$ 932.3 |
|
|
|
In 2009 we recognized favorable development in our net losses from prior accident years of $2.3
million including $2.0 million pertaining to CastlePoint and Hermitage recognized after the
acquisitions.
We carefully monitor our gross, ceded and net loss reserves by segment and line of business to
ensure that they are adequate, since a deficiency in reserves may result in or indicate inadequate
pricing on our products and may impact our financial condition.
Loss development methods, the Bornhuetter-Ferguson (B-F) method, and loss ratio projections are
the predominant methodologies that our actuaries utilize to project losses and corresponding
reserves. Based upon these methods our actuaries determine a best estimate of the loss reserves.
All of these methods are standard actuarial approaches. Loss development factors are derived from
our data, as well as in some cases from claims experience obtained from other carriers or based
upon industry experience, and the loss development factors are utilized in each of the actuarial
methods. The loss ratio projection method applies loss development factors to older accident years
and projects the loss ratio to the most recent periods based upon trend factors for inflation and
pricing changes. Generally, the loss ratio projection method is given the most weight for the
recent accident year when there is high volatility in the development patterns, since this method
gives little or no weight to immature claims experience that may be unrepresentative of ultimate
loss activity. The B-F method combines the loss ratio method and the loss development method to
determine loss reserves by adding an expected development (loss ratio times premium times percent
unreported) to the reported reserves, and is generally given more weight as each accident year
matures. The loss development methods utilize reported paid and incurred claims experience and loss
development factors, and these methods are given increasing weight as each accident year matures.
The incurred method relies on historical development factors derived from changes in our incurred
estimates of claims paid and case reserves over time. The paid method relies on our claim payment
patterns and ultimate claim costs. The incurred method is sensitive to changes in case reserving
practices over time. Thus, if case reserving practices change over time, the incurred method may
produce significant variations in estimates of ultimate losses. The paid method relies on actual
claim payments and therefore is not sensitive to changes in case reserve estimates.
The table below shows the range of the reserves estimates by line of business. The low end of the
range of our sensitivity analysis was derived by giving more weight to the lowest estimate among
the alternative methods for each line of business and accident year. Similarly, the high end of the
range of our sensitivity analysis was derived by giving more weight to the highest estimate among
the alternative methods for each line of business and accident year. We believe that changing the
weighting for the four methods by line of business and accident year reflects reasonably likely
outcomes, although even further variation could result based upon changes in various inputs within
each method, such as variation in loss development patterns or variation in expected loss ratios.
We believe the results of the sensitivity analysis, which are summarized in the table below,
constitute a reasonable range of expected outcomes of our reserves for net loss and LAE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Reserve Estimates |
|
($ in millions) |
|
High |
|
|
Low |
|
|
Carried |
|
|
|
Commercial Multiple Peril |
|
|
$ 310.8 |
|
|
|
$ 269.7 |
|
|
|
$ 293.1 |
|
Other Liability |
|
|
260.6 |
|
|
|
210.8 |
|
|
|
237.3 |
|
Workers Compensation |
|
|
217.0 |
|
|
|
188.3 |
|
|
|
203.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Auto |
|
|
119.2 |
|
|
|
98.1 |
|
|
|
111.8 |
|
Homeowners. |
|
|
59.4 |
|
|
|
53.7 |
|
|
|
56.6 |
|
Fire and Allied Lines |
|
|
9.3 |
|
|
|
8.4 |
|
|
|
8.9 |
|
Personal Auto |
|
|
22.2 |
|
|
|
18.7 |
|
|
|
20.8 |
|
|
|
All Lines |
|
|
$ 998.5 |
|
|
|
$ 847.7 |
|
|
|
$ 932.3 |
|
|
|
14
The resulting range derived from our sensitivity analysis would have increased net reserves by
$66.1 million, or 7.1%, and or decreased net reserves by $84.6 million, or 9.7%.
We are not aware of any claims trends that have emerged or that would cause future adverse
development that have not already been considered in existing case reserves and in our current loss
development factors.
In New York State, lawsuits for negligence, subject to certain limitations, must be commenced
within three years from the date of the accident or are otherwise barred. Accordingly, our exposure
to IBNR for accident years 2005 and prior is limited although there remains the possibility of
adverse development on reported claims.
Due to the close monitoring and analysis of reserves, we believe our loss reserves are adequate.
This is reflected by the favorable loss development that we have experienced in each of the past
several years. However, there are no assurances that future loss development and trends will be
consistent with our past loss development history, and so adverse loss reserve development remains
a risk factor to our business. See Risk FactorsRisks Related to Our BusinessIf our actual loss
and LAE exceed our loss reserves, our financial condition and results of operations could be
significantly adversely affected. See Managements Discussion and Analysis of Financial Condition
and Results of OperationsCritical Accounting PoliciesLoss and Loss Adjustment Expense
Reserves.
Investments
Our investment guidelines specify minimum criteria for overall credit quality, liquidity and
risk-return characteristics of our investment portfolio and include limitations on the size of
particular holdings, as well as restrictions on investments in different asset classes. We utilize
several independent investment advisors to effect investment transactions, render investment
accounting services and provide investment advice. We also have retained and may retain other
investment advisors to manage or advise us regarding portions of our overall investment portfolio.
The Companys investment strategy supports the Companys overall business strategy. The investment
strategy seeks to achieve the appropriate balance among providing stability of principal to meet
future policyholder obligations, providing income to enhance profitability, maintaining liquidity
to sustain operations and growing the stockholders equity over time.
The Companys investment strategy will manage investment risk based on the organizations ability
to accept such risk. The investment strategy will:
|
|
|
Maintain adequate liquidity and capital to meet the organizations responsibility to
policyholders, |
|
|
|
|
Provide a consistent level of income to support the Companys profitability and
operating goals, |
|
|
|
|
Seek to grow the value of assets over time, thereby increasing the Companys capital
strength, and |
|
|
|
|
Manage the investment risk based on the Companys ability to accept such risk. |
We monitor the quality of investments, duration, sector mix, and actual and expected investment
returns. Investment decision-making is guided by general economic conditions as well as
managements forecast of our cash flows, including the nature and timing of our expected liability
payouts and the possibility that we may have unexpected cash demands, for example, to satisfy
claims due to catastrophic losses. We expect our investment portfolio will continue to consist
mainly of highly rated and liquid fixed-income securities; however, we may invest a portion of our
funds in other asset types including common equity investments and non-investment grade bonds.
Our investment guidelines require compliance with applicable government regulations and laws.
Without the approval of our board of directors, we cannot purchase, and we have not purchased,
financial futures, options or other derivatives. We expect the majority of our investment holdings
to continue to be denominated in U.S. dollars. We report overall investment results to the board of
directors on a quarterly basis.
15
Ratings
Ratings by independent agencies are an important factor in establishing the competitive position of
insurance and reinsurance companies and are important to our ability to market and sell our
products. Rating organizations continually review the financial positions of insurers. A.M. Best is
one of the most important rating agencies for insurance and reinsurance companies. A.M. Best
maintains a letter scale rating system ranging from A++ (Superior) to F (In liquidation). In
evaluating a companys financial strength, A.M. Best reviews the companys profitability, leverage
and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the
quality and estimated market value of its assets, the adequacy of its loss and loss expense
reserves, the adequacy of its surplus, its capital structure, the experience and competence of its
management and its market presence.
The objective of A.M. Bests ratings system is to provide an opinion of an insurers or reinsurers
financial strength and ability to meet ongoing obligations to its policyholders. These ratings
reflect the ability to pay policyholder claims and are not a recommendation to buy, sell or hold
the shares of a particular company. These ratings are subject to periodic review by, and may be
revised or revoked at the sole discretion of A.M. Best.
With the exception of CPNIC, which is currently rated B+ (Good), A.M. Best has assigned each of our insurance
company subsidiaries a Financial Strength rating of A- (Excellentassigned to companies that have,
in their opinion, an excellent ability to meet their ongoing obligations to policyholders), which
is the fourth highest of fifteen rating levels
Our Insurance Subsidiaries are also rated by Demotech, Inc. (Demotech), and have received a
Financial Stability Rating of A (A Prime), which is the second highest of Demotechs six ratings.
Demotechs rating process is designed to provide an objective baseline for assessing solvency which
in turn provides insight into changes in financial stability. Demotechs Financial Stability
Ratings are based upon a series of quantitative ratios and quantitative considerations which
together comprise a Financial Stability Analysis Model.
Regulatory Matters
Our Insurance Subsidiaries are subject to extensive governmental regulation and supervision in the
U.S., and our reinsurance subsidiary, CastlePoint Reinsurance, is subject to governmental
regulation in Bermuda. Most insurance regulations are designed to protect the interests of
policyholders rather than shareholders and other investors. These regulations, generally
administered by a department of insurance in each jurisdiction relate to, among other things:
|
|
approval of policy forms and premium rates for our primary insurance operations; |
|
|
standards of solvency, including risk-based capital measurements; |
|
|
licensing of insurers and their agents; |
|
|
restrictions on the nature, quality and concentration of investments; |
|
|
restrictions on the ability to pay dividends to us; |
|
|
restrictions on transactions between insurance company subsidiaries and their affiliates; |
|
|
restrictions on the size of risks insurable under a single policy; |
|
|
requiring deposits for the benefit of policyholders; |
|
|
requiring certain methods of accounting; |
|
|
periodic examinations of our operations and finances; |
|
|
establishment of trust funds for the protection of policyholders; |
|
|
prescribing the form and content of records of financial condition required to be filed; and |
|
|
requiring reserves for unearned premium, losses and other purposes. |
Our Insurance Subsidiaries also are subject to state laws and regulations that require
diversification of investment portfolios and that limit types of permitted investments and the
amount of investments in certain investment categories. Failure to comply with these laws and
regulations may cause non-conforming investments to be treated as non-admitted assets for purposes
of measuring statutory capital and surplus and, in some instances, would require divestiture.
Insurance departments also conduct periodic examinations of the affairs of insurance companies and
require the filing of annual
and other reports relating to financial condition, holding company issues and other matters.
16
In addition, regulatory authorities have relatively broad discretion to deny or revoke insurance
licenses for various reasons, including the violation of regulations. We base some of our practices
on our interpretations of regulations or practices that we believe are generally followed by the
industry. These practices may turn out to be different from the interpretations of regulatory
authorities. If we do not have the requisite licenses and approvals or do not comply with
applicable regulatory requirements, insurance regulatory authorities could preclude or temporarily
suspend us from carrying on some or all of our activities or otherwise penalize us. This could
adversely affect us. Further, changes in the level of regulation of the insurance or reinsurance
industry or changes in laws or regulations themselves or interpretations by regulatory authorities
could adversely affect us.
Regulation
U.S. Insurance Holding Company Regulation of Tower
Tower, as the parent of the Insurance Subsidiaries, is subject to the insurance holding company
laws of New York, Florida, Illinois, Maine, Massachusetts, New Hampshire and New Jersey, the
domestic jurisdictions of the Insurance Subsidiaries. In addition, for certain limited purposes,
some Insurance Subsidiaries may have to comply with the laws of jurisdictions of commercial
domicile, as defined by state law, including California. These laws generally require the Insurance
Subsidiaries to register with their respective domiciliary state Insurance Department (Insurance
Department) and to furnish annually financial and other information about the operations of
companies within the holding company system. Generally under these laws, all material transactions
among companies in the holding company system to which an Insurance Subsidiary is a party,
including sales, loans, reinsurance agreements and service agreements, must be fair and reasonable
and, if material or of a specified category, require prior notice and approval or non-disapproval
by the Insurance Department.
Changes of Control
Before a person can acquire control of an Insurance Subsidiary, prior written approval must be
obtained from the Superintendent or the Commissioner of the Insurance Department (Superintendent)
of the Insurance Subsidiarys domestic jurisdiction or jurisdiction of commercial domicile. Prior
to granting approval of an application to acquire control of an insurer, the Superintendent
considers such factors as: the financial strength of the applicant, the integrity and management of
the applicants Board of Directors and executive officers, the acquirers plans for the future
operations of the domestic insurer and any anti-competitive results that may arise from the
consummation of the acquisition of control. Pursuant to insurance holding company laws, control
means the possession, direct or indirect, of the power to direct or cause the direction of the
management and policies of the company, whether through the ownership of voting securities, by
contract (except a commercial contract for goods or non-management services) or otherwise. Control
is presumed to exist if any person directly or indirectly owns, controls or holds with the power to
vote a certain threshold percentage of the voting securities of the company. In the domestic
jurisdictions of all but one of the Insurance Subsidiaries, the threshold percentage of voting
securities that triggers a presumption of control is 10% or more. In Florida, the threshold
percentage that triggers a presumption of control is 5% of the voting securities. The Insurance
Department, after notice and a hearing, may determine that a person or entity which directly or
indirectly owns, controls or holds with the power to vote less than the threshold percentage of the
voting securities of the company, controls the company. Because a person acquiring 10% or more of
our common stock would indirectly control the same percentage of the stock of the Insurance
Subsidiaries, the insurance company change of control laws of New York, California, Illinois, New
Jersey, New Hampshire, Maine and Massachusetts would likely apply to such a transaction. The
insurance company change of control laws of Florida would likely apply to an acquisition of 5% or
more of our voting stock.
These laws may discourage potential acquisition proposals and may delay, deter or prevent a change
of control of Tower, including through transactions, and in particular unsolicited transactions,
that some or all of the stockholders of Tower might consider to be desirable.
Legislative Changes
From time to time, various regulatory and legislative changes have been proposed in the insurance
industry. Among the proposals that have in the past been or are at present being considered are the
possible introduction of Federal regulation in addition to, or in lieu of, the current system of
state regulation of insurers and proposals in various state legislatures (some of which proposals
have been enacted) to conform portions of their insurance laws and regulations to various model
acts adopted by the National Association of Insurance Commissioners (NAIC). We are unable to
predict whether any of these laws and regulations will be adopted, the form in which any such laws
and regulations would be adopted, or the effect, if any, these developments would have on our
operations and financial condition.
In 2002, the Federal government enacted legislation designed to ensure the availability of
insurance coverage for terrorist acts in the United States of America and established a Federal
assistance program. Subsequent laws were enacted in 2005 and 2007 extending and modifying the prior
legislation. For a discussion of this legislation, see
BusinessReinsuranceTerrorism Reinsurance.
As a result of this legislation, potential losses from a terrorist attack could be
17
substantially
larger than previously expected, could also adversely affect our ability to obtain
reinsurance on favorable terms, including pricing, and may affect our underwriting strategy,
rating, and other elements of our operation.
State Insurance Regulation
State insurance authorities have broad regulatory powers with respect to various aspects of the
business of U.S. insurance companies. The primary purpose of such regulatory powers is to protect
individual policyholders. The extent of such regulation varies, but generally has its source in
statutes that delegate regulatory, supervisory and administrative power to state Insurance
Departments. Such powers relate to, among other things, licensing to transact business,
accreditation of reinsurers, admittance of assets to statutory surplus, regulating unfair trade and
claims practices, establishing reserve requirements and solvency standards, regulating investments
and dividends, approving policy forms and related materials in certain instances and approving
premium rates in certain instances. State insurance laws and regulations require an insurance
company to file financial statements with Insurance Departments everywhere it will be licensed to
conduct insurance business, and its operations are subject to examination by those departments.
Our Insurance Subsidiaries prepare statutory financial statements in accordance with Statutory
Accounting Principles (SAP) and procedures prescribed or permitted by their state of domicile. As
part of their regulatory oversight process, Insurance Departments conduct periodic detailed
examinations of the books and records, financial reporting, policy filings and market conduct of
insurance companies domiciled in their states, generally once every three to five years.
Examinations are generally carried out in cooperation with the Insurance Departments of other
states under guidelines promulgated by the NAIC.
The terms and conditions of reinsurance agreements generally are not subject to regulation by any
U.S. state Insurance Department with respect to rates or policy terms. As a practical matter,
however, the rates charged by primary insurers do have an effect on the rates that can be charged
by reinsurers.
Insurance Regulatory Information System Ratios
The Insurance Regulatory Information System, or IRIS, was developed by the NAIC and is intended
primarily to assist state Insurance Departments in executing their statutory mandates to oversee
the financial condition of insurance companies operating in their respective states. IRIS
identifies thirteen industry ratios and specifies usual values for each ratio. Departure from the
usual values on four or more of the ratios can lead to inquiries from individual state insurance
commissioners as to certain aspects of an insurers business.
In 2009, TICNY, CPIC and CNIC s results were outside the usual values for one IRIS ratio and
within the usual values for twelve IRIS ratios. The one IRIS ratio that was outside the usual value
was adjusted liabilities to liquid assets. The ratio outside of the usual value was caused by
intercompany pooling liabilities between Towers insurance company pool members. The ratio would
have been within the usual balance if we excluded these intercompany payables from the calculation.
TICNY and its insurance company subsidiaries were members of an intercompany pooling arrangement in
2009 and 2008. NEICs IRIS results were outside the usual values for two IRIS ratios and within the
usual values for twelve IRIS ratios. The two ratios that were outside the usual values were
adjusted liabilities to liquid assets and change in net premium written which were caused by the
intercompany pooling arrangement. The Tower intercompany pool experienced significant premium
growth as a result of the CastlePoint, SUA and Hermitage acquisitions in 2009. These ratios would
have been within the usual balances on a combined pool basis. PIC, MVIC, and KICs IRIS results
were outside the usual values for three IRIS ratios and within the usual values for ten IRIS
ratios. The three IRIS ratios that were outside the usual values were changes in change in net
premiums written, adjusted liabilities to liquid assets and estimated current reserve deficiency to
policyholders surplus. The change in net premiums and the estimated current reserve deficiency to
policyholders surplus was caused by growth in premium which resulted from the 2009 insurance
company acquisitions, while the adjusted liabilities to liquid assets was due to the aforementioned
reasons. KIC also reinsured all of its inforce premium and new and renewal business to PIC
effective July 1, 2009 which caused significant changes in both KIC and PIC. These ratios would
have been within the usual balances on a combined pool basis. HICs results were outside the usual
values for three IRIS ratios and within the usual values for ten IRIS ratios. The three IRIS ratios
that were outside the usual values were changes in change in net premiums written, adjusted
liabilities to liquid assets and change in adjusted policyholders surplus The change in net
premiums and the adjusted liabilities to liquid assets was due to the aforementioned reasons. The
change in adjusted policyholders surplus resulted from unrealized gains on investments, profitable
underwriting results assumed from the intercompany pool and an increase in admitted deferred tax
assets. These ratios would have been within the usual balances on a combined pool basis. TNICs
IRIS results were outside the usual values for four IRIS ratios and within the usual values for
nine IRIS ratios. The four IRIS ratios that were outside the usual values were gross premiums
written to policyholders surplus, change in net premiums written, investment yield and adjusted
liabilities to liquid assets. The ratios outside of the usual values were caused by growth in
TNICs direct premium written, as well as the growth in its net premium written which resulted from
changes made to the intercompany pooling arrangement which was amended in 2009 as Tower acquired
new insurance companies. The IRIS ratio was also outside the usual value for the adjusted
liabilities to liquid assets, which also was caused by intercompany pooling liabilities which were
owed by TNIC to the pool manager, TICNY. The ratio would have been within the usual balance if we excluded
18
these intercompany payables from
the ratio. CPFLs IRIS results were outside the usual values for six IRIS ratios and within the
usual values for seven IRIS ratios. The six IRIS ratios that were outside the usual values were
change in net premiums written, two-year operating ratio, investment yield, gross change in
policyholders surplus, change in adjusted policyholders surplus and gross agents balances to
policyholders surplus. The ratios outside of the usual values primarily resulted from CPFL
commencing its operations in 2009 which caused significant growth in 2009.
State Dividend Limitations
Towers ability to receive dividends from its Insurance Subsidiaries is restricted by the state
laws and insurance regulations of the Insurance Subsidiaries domiciliary states. TICNYs ability
to pay dividends is subject to restrictions contained in the insurance laws and related regulations
of New York. Under New York law, TICNY may pay dividends out of statutory earned surplus. In
addition, the New York Insurance Department must approve any dividend declared or paid by TICNY
that, together with all dividends declared or distributed by TICNY during the preceding 12 months,
exceeds the lesser of (1) 10% of TICNYs policyholders surplus as shown on its latest statutory
financial statement filed with the New York Insurance Department or (2) 100% of adjusted net
investment income during the preceding twelve months. TICNY declared approximately $2.0 million,
$5.2 million and $8.5 million in dividends to Tower in 2009, 2008 and 2007, respectively. As of
December 31, 2009, the maximum distribution that our Insurance Subsidiaries could pay without prior
regulatory approval was approximately $52.8 million. The other Insurance Subsidiaries are subject
to similar restrictions, usually related to policyholders surplus, unassigned funds or net income,
and notice requirements of their domiciliary state.
Risk-Based Capital Regulations
The Insurance Departments require domestic property and casualty insurers to report their
risk-based capital based on a formula developed and adopted by the NAIC that attempts to measure
statutory capital and surplus needs based on the risks in the insurers mix of products and
investment portfolio. The formula is designed to allow the Insurance Departments to identify
potential weakly-capitalized companies. Under the formula, a company determines its risk-based
capital by taking into account certain risks related to the insurers assets (including risks
related to its investment portfolio and ceded reinsurance) and the insurers liabilities (including
underwriting risks related to the nature and experience of its insurance business). At December 31,
2009, risk-based capital levels of our Insurance Subsidiaries exceeded the minimum level that would
trigger regulatory attention. In their 2009 statutory statements, our Insurance Subsidiaries
complied with the NAICs risk-based capital reporting requirements.
Statutory Accounting Principles
Each U.S. insurance company is required to file quarterly and annual statements that conform to
SAP. SAP is a basis of accounting developed to assist insurance regulators in monitoring and
regulating the solvency of insurance companies. It is primarily concerned with measuring an
insurers surplus to policyholders. Accordingly, statutory accounting focuses on valuing assets and
liabilities of insurers at financial reporting dates in accordance with appropriate insurance law
and regulatory provisions applicable in each insurers domiciliary state.
GAAP is concerned with a companys solvency, but it is also concerned with other financial
measurements, such as income and cash flows. Accordingly, GAAP gives more consideration to
appropriate matching of revenue and expenses and accounting for managements stewardship of assets
than does SAP. As a direct result, different assets and liabilities and different amounts of assets
and liabilities will be reflected in financial statements prepared in accordance with GAAP as
opposed to SAP.
Statutory accounting practices established by the NAIC and adopted, in part, by the state
regulators determine, among other things, the amount of statutory surplus and statutory net income
of the Insurance Subsidiaries and thus determine, in part, the amount of funds that are available
to pay dividends.
Loss Reserve Specialist and Statements of Actuarial Opinion
Each U.S. insurance company is required to provide a Statement of Actuarial Opinion concerning the
adequacy of its loss and loss expense reserves. Similarly, CastlePoint Reinsurance is required to
submit an opinion of its approved loss reserve specialist with its statutory financial return in
respect of its loss and LAE provisions.
Statements of Actuarial Opinion are prepared and signed by the designated actuary for each U.S.
company, and by the loss reserve specialist in the case a Bermuda company such as CastlePoint
Reinsurance. The designated actuary and loss reserve specialist normally is a qualified casualty
actuary, and in the case of
CastlePoint Reinsurance, must be approved by the Bermuda Monetary Authority.
19
An independent external actuarial firm provides Statements of Actuarial Opinions for all of our
Insurance Subsidiaries. This firm
utilizes Fellows of the Casualty Actuarial Society and Members of the American Academy of Actuaries
to provide the service necessary for the Statements of Actuarial Opinion.
Guaranty Associations
In most of the jurisdictions where the Insurance Subsidiaries are currently licensed to transact
business there is a requirement that property and casualty insurers doing business within the
jurisdiction participate in guaranty associations, which are organized to pay contractual benefits
owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. These
associations levy assessments, up to prescribed limits, on all member insurers in a particular
state on the basis of the proportionate share of the premium written by member insurers in the
lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit
member insurers to recover assessments paid through full or partial premium tax offsets.
In none of the past five years has the assessment in any year levied against our Insurance
Subsidiaries been material. Property and casualty insurance company insolvencies or failures may
result in additional security fund assessments to our Insurance Subsidiaries at some future date.
At this time we are unable to determine the impact, if any such assessments may have on the
consolidated financial position or results of operations. We have established liabilities for
guaranty fund assessments with respect to insurers that are currently subject to insolvency
proceedings and assessments by the various workers compensation funds. See Note 17 Commitments
and Contingencies in the notes to our audited consolidated financial statements included elsewhere
in this report.
Residual Market Plans
Our Insurance Subsidiaries are required to participate in various mandatory insurance facilities or
in funding mandatory pools, which are generally designed to provide insurance coverage for
consumers who are unable to obtain insurance in the voluntary insurance market. These pools
generally provide insurance coverage for workers compensation, personal and commercial automobile
and property-related risks.
TRM, CPM and CPRMFL
The activities of TRM, CPM and CPRMFL are subject to licensing requirements and regulation under
the laws of New York, New Jersey and the other states where they operate. The businesses of TRM,
CPM and CPRMFL business depend on the validity of, and continued good standing under, the licenses
and approvals pursuant to which they operate, as well as compliance with pertinent regulations.
TRM, CPM and CPRMFL therefore devote significant effort toward maintaining their licenses to ensure
compliance with a diverse and complex regulatory structure.
Reinsurance
We purchase reinsurance to reduce our net liability on individual risks, to protect against
possible catastrophes, to achieve a target ratio of net premiums written to policyholders surplus
and to expand our underwriting capacity. Reinsurance coverage can be purchased on a facultative
basis when individual risks are reinsured, or on a treaty basis when a class or type of business is
reinsured. We purchase facultative reinsurance to provide limits in excess of the limits provided
by our treaty reinsurance. Treaty reinsurance falls into three categories: quota share (also called
pro rata), excess of loss and catastrophe treaty reinsurance. Under our quota share reinsurance
contracts, we cede a predetermined percentage of each risk for a class of business to the reinsurer
and recover the same percentage of losses and LAE on the business ceded. We pay the reinsurer the
same percentage of the original premium, less a ceding commission. The ceding commission rate is
based upon the ceded loss ratio on the ceded quota share premiums earned and in certain contracts
is adjusted for loss experience under those contracts. See Managements Discussion and Analysis of
Financial Condition and Results of Operations-Critical Accounting Policies-Ceding commissions
earned. Under our excess of loss treaty reinsurance, we cede all or a portion of the liability in
excess of a predetermined deductible or retention. We also purchase catastrophe reinsurance on an
excess of loss basis to protect ourselves from an accumulation of net loss exposures from a
catastrophic event or series of events such as terrorist acts, riots, windstorms, hailstorms,
tornadoes, hurricanes, earthquakes, blizzards and freezing temperatures. We do not receive any
commission for ceding business under excess of loss or catastrophe reinsurance agreements.
The type, cost and limits of reinsurance we purchase can vary from year to year based upon our
desired retention levels and the availability of quality reinsurance at acceptable prices, terms
and conditions. Our excess of loss reinsurance program was renewed on January 1, 2010 and our
catastrophe reinsurance program was renewed July 1, 2009.
In recent years, the reinsurance industry has undergone very dramatic changes. Soft market
conditions created by years of inadequate pricing brought poor results, which were exacerbated by
the events of September 11, 2001. As a result, market capacity was reduced significantly.
Reinsurers exited lines of business, significantly raised rates and imposed much tighter terms and
conditions, where coverage was offered, to limit or reduce their exposure to loss. The hurricanes
that struck Florida and the Gulf coast in 2004 and 2005 contributed to this trend, particularly in regard to catastrophe
reinsurance. These conditions abated somewhat during 2007 but continued in 2008 and 2009 as the
Gulf coast was again impacted by hurricane activity in 2008.
20
In an effort to maintain quota share capacity for our business with favorable commission levels, we
have accepted loss ratio caps in our reinsurance treaties. Loss ratio caps cut off the reinsurers
liability for losses above a specified loss ratio. These provisions have been structured to provide
reinsurers with some limit on the amount of potential loss being assumed, while maintaining the
transfer of significant insurance risk with the possibility of a significant loss to the
reinsurers. We believe our reinsurance arrangements qualify for reinsurance accounting in
accordance with GAAP and SAP guidance. The loss ratio caps for our quota share treaties were 95.0%
in 2005, 95.0% in 2004, 92.0% in 2003 and 97.5% in 2002. In 2008, we accepted a loss ratio cap from
the Swiss Re America quota share agreement. This loss ratio was capped at 120% of earned premium
and the agreement expired on December 31, 2008. In 2009, we accepted a loss ratio cap of 110% under
a brokerage liability quota share agreement effective October 1, 2009.
Regardless of type, reinsurance does not legally discharge the ceding insurer from primary
liability for the full amount due under the reinsured policies. However, the assuming reinsurer is
obligated to indemnify the ceding company to the extent of the coverage ceded. To protect our
company from the possibility of a reinsurer becoming unable to fulfill its obligations under the
reinsurance contracts, we attempt to select financially strong reinsurers with an A.M. Best Company
rating of A- (Excellent) or better and continue to evaluate their financial condition and monitor
various credit risks to minimize our exposure to losses from reinsurer insolvencies.
To further minimize our exposure to reinsurance recoverables, the 2009 and 2010 brokerage quota
share agreements were placed on a funds withheld basis under which ceded premiums written are
deposited in segregated trust funds from which we receive payments for losses and ceding commission
adjustments. Our reinsurance receivables from non-admitted reinsurers are collateralized either by
Letter of Credit or New York Regulation 114 compliant trust accounts.
The following table summarizes our reinsurance exposures by reinsurer as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds Held, |
|
Amounts in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid |
|
Ceded Payables |
|
Trust Accounts |
|
Net |
|
|
|
|
|
|
Recoverable on |
|
and Return |
|
and Deferred |
|
or Secured by |
|
Exposure |
|
|
A.M. Best |
|
Paid |
|
|
|
|
|
Reinsurance |
|
Ceding |
|
Letters of |
|
to |
($ in millions) |
|
Rating |
|
Losses |
|
Reserves |
|
Premium |
|
Commission |
|
Credit |
|
Reinsurer |
|
Reinsurer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Beacon Insurance |
|
|
A |
|
|
|
$ - |
|
|
|
$ 42.8 |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ 42.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endurance Reinsurance Corp of
America |
|
|
A |
|
|
|
- |
|
|
|
10.1 |
|
|
|
2.7 |
|
|
|
2.2 |
|
|
|
- |
|
|
|
10.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Syndicates |
|
|
A |
|
|
|
- |
|
|
|
9.8 |
|
|
|
2.6 |
|
|
|
2.0 |
|
|
|
- |
|
|
|
10.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Axis Reinsurance Co. |
|
|
A |
|
|
|
- |
|
|
|
8.9 |
|
|
|
2.6 |
|
|
|
1.3 |
|
|
|
- |
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hannover Ruckversicherungs AG |
|
|
A |
|
|
|
0.3 |
|
|
|
8.2 |
|
|
|
4.1 |
|
|
|
2.6 |
|
|
|
- |
|
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Platinum Underwriters
Reinsurance Inc. |
|
|
A |
|
|
|
0.2 |
|
|
|
7.3 |
|
|
|
3.6 |
|
|
|
2.3 |
|
|
|
- |
|
|
|
8.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Munich Reinsurance America Inc |
|
|
A+ |
|
|
|
3.7 |
|
|
|
7.0 |
|
|
|
- |
|
|
|
2.2 |
|
|
|
- |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Westport Insurance Corp. |
|
|
A |
|
|
|
- |
|
|
|
6.2 |
|
|
|
- |
|
|
|
(0.7 |
) |
|
|
- |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QBE Reinsurance Corporation |
|
|
A |
|
|
|
0.2 |
|
|
|
4.8 |
|
|
|
1.2 |
|
|
|
0.7 |
|
|
|
- |
|
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Others |
|
|
|
|
|
|
10.4 |
|
|
|
94.6 |
|
|
|
78.0 |
|
|
|
84.6 |
|
|
|
73.2 |
|
|
|
25.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
14.8 |
|
|
$ |
199.7 |
|
|
$ |
94.8 |
|
|
$ |
97.2 |
|
|
$ |
73.2 |
|
|
$ |
138.9 |
|
|
Terrorism Reinsurance
In 2002, in response to the tightening of supply in certain insurance and reinsurance markets
resulting from, among other things, the September 11, 2001, terrorist attacks, the Terrorism Risk
Insurance Act (TRIA) was enacted. TRIA is designed to ensure the availability of insurance
coverage for foreign terrorist acts in the United States of America. This law established a federal
assistance program through the end of 2005 to help the commercial property and casualty insurance
industry cover claims related to future terrorism-related losses and requires such companies to
offer coverage for certain acts of terrorism.
On December 17, 2005, Congress passed a two-year extension of TRIA though December 31, 2007 with
the passage of the Terrorism Risk Insurance Extension Act (TRIEA). Under the terms of TRIEA, the
minimum size of the triggering event increased and Towers deductible increased. Under TRIEA, federal assistance for insured terrorism
losses has been reduced as compared to the assistance previously available under TRIA. As a
consequence of these changes, potential losses from a terrorist attack could be substantially
larger than previously expected.
21
On December 26, 2007, the President signed the Terrorism Risk Insurance Program Reauthorization Act
of 2007 (the 2007 Act) which extends TRIA for seven years through December 31, 2014. The 2007 Act
maintains the same triggering event size of $100 million, company deductible of 20%, industry
retention of $27.5 billion, federal share of 85% and program aggregate insured loss limit of
$100 billion put in place by TRIEA. The 2007 Act extends coverage to domestic terrorism and
requires additional notice to policyholders regarding the $100 billion program limit.
Technology
We seek to continue our success in the area of technology as we grow by continuing to redesign
business processes in order to gain operating efficiencies and effectiveness. We have benefited in
recent years from our advanced technology strategy in the areas of the application, data, and
infrastructure environments.
Over the last several years, we have implemented and advanced a number of technological
improvements and redesigned business processes, including an online imaging system, a data
warehouse that houses both claims and underwriting data to provide management and financial
reporting, and a web-based platform, webPlus, for quoting and capturing policy submissions directly
from our producers. An additional significant advancement was the deployment of the ImageRight
electronic document repository, which allows the organization to be less dependent on paper
previously needed for records of policies and claims, as well as less dependent on soft and hard
copy format generally. We are well positioned so that other functions within the organization can
gain ease of electronic availability. Other departments will begin their paperless conversion
strategy, including the finance department. Furthermore, the WorkSiteMP and IManage systems will
migrate to ImageRight in 2010.
During 2009, we expanded our use of the webPlus platform and POINT-IN Policy Administration system
in connection with workers compensation policies to forty-seven states, which provides us with a
highly competitive advantage for the Brokerage Insurance segment. We also extended our use of the
Commercial Package Policy to eight states in the Southeast region, which has allowed us to retire
the Insurity Policy Administration systems previously used by our subsidiary, KIC. These system
deployments have also resulted in a major reduction in the use of the Phoenix system in connection
with the commercial lines of business. Similarly, the use of the webPlus platform and POINT-IN
Policy Administration system has replaced the agent and internal user population who previously
generated policies manually for the lines of business in the northeast office locations acquired
from the Hermitage acquisition. These deployments have enhanced our cost reduction and replacement
system strategy.
In 2009, we began a significant business and technology initiative called ProgramIQ for specialty
business as a result of the CastlePoint acquisition. The initiative is centered on data automation
integration and collection of data into the internal organization data warehouse for managing
general agents and third party administrators who have qualified technology platforms for policy
and claims administration. We are completing this work with the partnership of AgencyPort, Inc.,
who co-develops the webPlus system with the internal technology development staff. This initiative
will help us collect data in a more efficient manner for the purposes of underwriting, claims,
actuarial, finance and external bureau reporting, and will create a more efficient financial
closing process for the Company
In connection with the SUA acquisition in 2009, we acquired two important technological products:
Policy+, which was co-developed by the SUA technology team and external resources from Duck Creek
Technologies; and Claims+, a Guidewire based product. We use Claims+ as the claims system strategy
for the entire user population of our organization. We use Policy+, coupled with the development
team in Chicago, as an advantageous tool to expand the brokerage system capabilities in an
expeditious fashion.
All mission critical systems run on fully redundant hardware in an off-site secure facility with
fully redundant power, air conditioning, communications and 24-hour support. Systems and data are
backed up to tape daily and are taken to an offsite facility by an outside vendor. We have acquired
access to another data center in the Chicago area in connection with the SUA acquisition, which
provides us with a state-of-the-art disaster recovery facility for all of our critical technology
systems. As advancement in the area of disaster recovery for smaller remote office locations, we
have implemented Agility Technologies, which allows for portable trailer office configurations to
be set up as support for temporary office displacement via the use of commercial satellite
communication.
Our technology plan envisions that we will continue to expand our use of webPlus/POINT-IN, Policy+,
Claims+, and ProgramIQ for additional product processing, improved business functionality, and
efficiency. We also intend to exploit technological improvements and economies of scale realized
through premium growth to continue to lower our underwriting expense ratio while offering a strong
value proposition to our producer base.
22
Employees
As of December 31, 2009, we had 987 full-time employees. None of these employees is covered by a
collective bargaining agreement. We have employment agreements with a number of our senior
executive officers. The remainder of our employees consists of at-will employees.
Available Information
We file periodic reports, proxy statements and other information with the SEC. Such reports, proxy
statements and other information may be viewed at the SECs website at www.sec.gov or viewed or
obtained at the SEC Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information
pertaining to the operation of the Public Reference Room can be obtained by calling 1-800-SEC-0330.
The address for our internet website is www.twrgrp.com. We make available, free of charge, through
our internet site, our annual report on Form 10-K, annual report to shareholders, quarterly reports
on Form 10-Q and current reports on Form 8-K and all amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably
practicable after we electronically file such materials with, or furnish it to, the SEC.
Glossary of Selected Insurance Terms
|
|
|
Accident year
|
|
The year in which an event occurs, regardless of when any policies covering it are
written, when the event is reported, or when the associated claims are closed and paid. |
|
|
|
Acquisition expense
|
|
The cost of acquiring both new and renewal insurance business, including commissions to
agents or brokers and premium taxes. |
|
|
|
Agent
|
|
One who negotiates insurance contracts on behalf of an insurer. The agent receives a
commission for placement and other services rendered. |
|
|
|
Broker
|
|
One who negotiates insurance or reinsurance contracts between parties. An insurance
broker negotiates on behalf of an insured and a primary insurer. A reinsurance broker
negotiates on behalf of a primary insurer or other reinsured and a reinsurer. The broker
receives a commission for placement and other services rendered. |
|
|
|
Case reserves
|
|
Loss reserves established by claims personnel with respect to individual reported claims. |
|
|
|
Casualty insurance and/or
reinsurance
|
|
Insurance and/or reinsurance that is concerned primarily with the losses caused by
injuries to third persons (in other words, persons other than the policyholder) and the legal liability imposed on the insured resulting therefrom. |
|
|
|
Catastrophe reinsurance
|
|
A form of excess of loss property reinsurance that, subject to a specified limit,
indemnifies the ceding company for the amount of loss in excess of a specified retention
with respect to an accumulation of losses resulting from a catastrophic event. |
|
|
|
Cede; ceding company
|
|
When an insurance company reinsures its risk with another, it cedes business and is
referred to as the ceding company. |
|
|
|
Combined ratio
|
|
The sum of losses and LAE, acquisition expenses, operating expenses and policyholders
dividends, all divided by net premiums earned. |
|
|
|
Direct premiums written
|
|
The amounts charged by a primary insurer for the policies that it underwrites. |
|
|
|
Excess and surplus lines
|
|
Excess insurance refers to coverage that attaches for an insured over the limits of a
primary policy or a stipulated self-insured retention. Policies are bound or accepted by
carriers not licensed in the jurisdiction where the risk is located, and generally are
not subject to regulations governing premium rates or policy language. Surplus lines
risks are those risks not fitting normal underwriting patterns, involving a degree of
risk that is not commensurate with standard rates and/or policy forms, or that will not
be written by standard carriers because of general market conditions. |
|
|
|
Excess of loss reinsurance
|
|
The generic term describing reinsurance that indemnifies the reinsured against all or a
specified portion of losses on underlying insurance policies in excess of a specified
dollar amount, called a layer or retention. Also known as non-proportional
reinsurance. |
23
|
|
|
|
|
|
Funds held
|
|
The holding by a ceding company of funds usually representing the unearned premium
reserve or the outstanding loss reserves applied to the business it cedes to a
reinsurer. |
|
|
|
Gross premiums written
|
|
Total premiums for direct insurance and reinsurance assumed during a given period. |
|
|
|
Incurred but not reported
(IBNR) reserves
|
|
Loss reserves for estimated losses that have been incurred but not yet reported to the
insurer or reinsurer. |
|
|
|
Incurred losses
|
|
The total losses sustained by an insurance company under a policy or policies, whether
paid or unpaid. Incurred losses include a provision for claims that have occurred but
have not yet been reported to the insurer (IBNR). |
|
|
|
Loss adjustment expenses
(LAE)
|
|
The expenses of settling claims, including legal and other fees and the portion of
general expenses allocated to claim settlement costs. |
|
|
|
Loss and LAE ratio
|
|
Loss and LAE ratio is equal to losses and LAE incurred divided by earned premiums. |
|
|
|
Loss reserves
|
|
Liabilities established by insurers and reinsurers to reflect the estimated cost of
claims payments that the insurer or reinsurer believes it will ultimately be required to
pay with respect to insurance or reinsurance it has written. Reserves are established
for losses and for LAE and consist of case reserves and IBNR. Reserves are not, and
cannot be, an exact measure of an insurers ultimate liability. |
|
|
|
Managing general agent
|
|
A person or firm authorized by an insurer to transact insurance business who may have
authority to bind the insurer, issue policies, appoint producers, adjust claims and
provide administrative support for the types of insurance coverage pursuant to an agency
agreement. |
|
|
|
Net premiums earned
|
|
The portion of net premiums written that is earned during a period and recognized for
accounting purposes as revenue. |
|
|
|
Net premiums written
|
|
Gross premiums written for a given period less premiums ceded to reinsurers or
retrocessionaires during such period. |
|
|
|
Primary insurer
|
|
An insurance company that issues insurance policies to consumers or businesses on a
first dollar basis, sometimes subject to a deductible. |
|
|
|
Pro rata, or quota share,
reinsurance
|
|
A form of reinsurance in which the reinsurer shares a proportional part of the ceded
insurance liability, premiums and losses of the ceding company. Pro rata, or quota
share, reinsurance also is known as proportional reinsurance or participating
reinsurance. |
|
|
|
Program underwriting agent
|
|
An insurance intermediary that underwrites program business by aggregating business from
retail and wholesale agents and performs certain functions on behalf of insurance
companies, including underwriting, premium collection, policy form design and other
administrative functions to policyholders. |
|
|
|
Property insurance and/or
reinsurance
|
|
Insurance and/or reinsurance that indemnifies a person with an insurable interest in
tangible property for his property loss, damage or loss of use. |
|
|
|
Reinsurance
|
|
A transaction whereby the reinsurer, for consideration, agrees to indemnify the
reinsured company against all or part of the loss the company may sustain under the
policy or policies it has issued. The reinsured may be referred to as the original or
primary insurer or the ceding company. |
|
|
|
Renewal retention rate
|
|
The current period renewal premium, excluding pricing, exposure and policy form changes,
as a percentage of the total premium available for renewal. |
|
|
|
Retention, retention layer
|
|
The amount or portion of risk that an insurer or reinsurer retains for its own account.
Losses in excess of the retention layer are reimbursed to the insurer or reinsurer by
the reinsurer or retrocessionaire. In proportional treaties, the retention may be a
percentage of the original policys limit. In excess of loss business, the retention is
a dollar amount of loss, a loss ratio or a percentage. |
|
|
|
Retrocession;
retrocessionaire
|
|
A transaction whereby a reinsurer cedes to another reinsurer, known as a
retrocessionaire, all or part of the reinsurance it has assumed. Retrocession does not
legally discharge the ceding reinsurer from its liability with respect to its
obligations to the reinsured |
|
|
|
Statutory accounting
principles (SAP)
|
|
Recording transactions and preparing financial statements in accordance with the rules
and procedures prescribed or permitted by state insurance regulatory authorities and the
NAIC. |
24
|
|
|
Statutory or
policyholders surplus;
statutory capital and
surplus
|
|
The excess of admitted assets over total liabilities (including loss reserves),
determined in accordance with SAP. |
|
|
|
Third party administrator
|
|
A service group who provides various claims administration, risk management, loss
prevention and related services, primarily to self-insured clients under a fee
arrangement or to insurance carriers on an unbundled basis. No insurance risk is
undertaken in the arrangement. |
|
|
|
Treaty reinsurance
|
|
The reinsurance of a specified type or category of risks defined in a reinsurance
agreement (a treaty) between a primary insurer or other reinsured and a reinsurer.
Typically, in treaty reinsurance, the primary insurer or reinsured is obligated to offer
and the reinsurer is obligated to accept a specified portion of all agreed upon types or
categories of risks originally written by the primary insurer or reinsured. |
|
|
|
Underwriting
|
|
The insurers/reinsurers process of reviewing applications submitted for insurance
coverage, deciding whether to accept all or part of the coverage requested and
determining the applicable premiums. |
|
|
|
Unearned premium
|
|
The portion of a premium representing the unexpired portion of the exposure period as of
a certain date. |
|
|
|
Unearned premium reserve
|
|
Liabilities established by insurers and reinsurers to reflect unearned premiums which
are usually refundable to policyholders if an insurance or reinsurance contract is
canceled prior to expiration of the contract term. |
Note on Forward-Looking Statements
Some of the statements under Risk Factors, Managements Discussion and Analysis of Financial
Condition and Results of Operations, Business and elsewhere in this Form 10-K may include
forward-looking statements that reflect our current views with respect to future events and
financial performance. These statements include forward-looking statements both with respect to us
specifically and to the insurance sector in general. Statements that include the words expect,
intend, plan, believe, project, estimate, may, should, anticipate, will and
similar statements of a future or forward-looking nature identify forward-looking statements for
purposes of the Federal securities laws or otherwise.
All forward-looking statements address matters that involve risks and uncertainties. Accordingly,
there are or will be important factors that could cause our actual results to differ materially
from those indicated in these statements. We believe that these factors include, but are not
limited to, those described under Risk Factors and the following:
|
|
ineffectiveness or obsolescence of our business strategy due to changes in current or
future market conditions; |
|
|
|
developments that may delay or limit our ability to enter new markets as quickly as we
anticipate; |
|
|
|
increased competition on the basis of pricing, capacity, coverage terms or other factors; |
|
|
|
greater frequency or severity of claims and loss activity, including as a result of natural
or man-made catastrophic events, than our underwriting, reserving or investment practices
anticipate based on historical experience or industry data; |
|
|
|
the effects of acts of terrorism or war; |
|
|
|
developments in the worlds financial and capital markets that adversely affect the
performance of our investments; |
|
|
|
changes in regulations or laws applicable to us, our subsidiaries, brokers or customers; |
|
|
|
changes in acceptance of our products and services, including new products and services; |
|
|
|
changes in the availability, cost or quality of reinsurance and failure of our reinsurers
to pay claims timely or at all; |
|
|
|
changes in the percentage of our premiums written that we cede to reinsurers; |
|
|
|
decreased demand for our insurance or reinsurance products; |
|
|
|
loss of the services of any of our executive officers or other key personnel; |
|
|
|
the effects of mergers, acquisitions and divestitures; |
|
|
|
changes in rating agency policies or practices; |
|
|
|
changes in legal theories of liability under our insurance policies;
|
25
|
|
changes in accounting policies or practices; |
|
|
|
changes in general economic conditions, including inflation, interest rates and other
factors; |
|
|
|
unanticipated difficulties in combining Tower and SUA; |
|
|
|
disruptions in Towers business arising from the integration of Tower with acquired
businesses and the anticipation of potential and pending acquisitions or mergers; and |
|
|
|
currently pending or future litigation or governmental proceedings. |
The foregoing review of important factors should not be construed as exhaustive and should be read
in conjunction with the other cautionary statements that are included in this Form 10-K. We
undertake no obligation to publicly update or review any forward-looking statement, whether as a
result of new information, future developments or otherwise.
If one or more of these or other risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results may vary materially from what we project. Any
forward-looking statements you read in this Form 10-K reflect our views as of the date of this
Form 10-K with respect to future events and are subject to these and other risks, uncertainties and
assumptions relating to our operations, results of operations, growth strategy and liquidity. All
subsequent written and oral forward-looking statements attributable to us or individuals acting on
our behalf are expressly qualified in their entirety by this paragraph. Before making an investment
decision, you should specifically consider all of the factors identified in this Form 10-K that
could cause actual results to differ.
Item 1A. Risk Factors
An investment in our common stock involves a number of risks. You should carefully consider the
following information about these risks, together with the other information contained in this
Form 10-K, in considering whether to invest in or hold our common stock. Additional risks not
presently known to us, or that we currently deem immaterial may also impair our business or results
of operations. Any of the risks described below could result in a significant or material adverse
effect on our financial condition or results of operations, and a corresponding decline in the
market price of our common stock. You could lose all or part of your investment.
This Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in the forward-looking statements as
a result of certain factors, including the risks described below and elsewhere in this Form 10-K.
See BusinessNote on Forward-Looking Statements.
Risks Related to Our Business
If our actual loss and loss adjustment expenses exceed our loss reserves, our financial
condition and results of operations could be significantly adversely affected.
Our results of operations and financial condition depend upon our ability to estimate the potential
losses associated with the risks that we insure and reinsure. We estimate loss and loss adjustment
expense reserves to cover our estimated liability for the payment of all losses and loss adjustment
expenses incurred under the policies that we write. Loss reserves include case reserves, which are
established for specific claims that have been reported to us, and reserves for claims that have
been incurred but not reported (or IBNR). To the extent that loss and loss adjustment expenses
exceed our estimates, we will be required to immediately recognize the less favorable experience
and increase loss and loss adjustment expense reserves, with a corresponding reduction in our net
income in the period in which the deficiency is identified. For example, over the past ten years we
have experienced adverse development of reserves for losses and loss adjustment expenses incurred
in prior years.
Although loss reserves on property lines of business tend to be relatively predictable from an
actuarial standpoint, the reserving process for losses on the liability coverage portions of our
commercial and personal lines policies possesses characteristics that make case and IBNR reserving
inherently less susceptible to accurate actuarial estimation. Unlike property losses, liability
losses are claims made by third parties of which the policyholder may not be aware and therefore
may be reported a significant amount of time, sometimes years, after the occurrence. As liability
claims most often involve claims of bodily injury, assessment of the proper case reserve is a far
more subjective process than claims involving property damage. In addition, the determination of a
case reserve for a liability claim is often without the benefit of information, which develops
slowly over the life of the claim and can subject the case reserve to substantial modification well
after the claim was first reported. Numerous factors impact the liability case reserving process,
including venue, the amount of monetary damage, the permanence of the injury, and the age of the
claimant among other factors.
26
Estimating an appropriate level of loss and loss adjustment expense reserves is an inherently
uncertain process. Accordingly, actual loss and loss adjustment expenses paid will likely deviate,
perhaps substantially, from the reserve estimates reflected in our consolidated financial
statements. It is possible that claims could exceed our loss and loss adjustment expense reserves
and have a material adverse effect on our financial condition or results of operations.
Many of our quota share reinsurance agreements contain provisions for a ceding commission under
which the commission rate that we receive varies inversely with the loss ratio on the ceded
premiums, with higher commission rates corresponding to lower loss ratios and vice versa. The loss
ratio depends on our estimate of the loss and loss adjustment expense reserves on the ceded
business. As a result, the same uncertainties associated with estimating loss and loss adjustment
expense reserves affect the estimates of ceding commissions earned. If and to the extent that we
have to increase our reserves on the business that is subject to these reinsurance agreements, we
may have to reduce the ceding commission rate, which would amplify the reduction in our net income
in the period in which the increase in our reserves is made.
A substantial amount of our business currently comes from a limited geographical area. Any
single catastrophe or other condition affecting losses in this area could adversely affect our
results of operations.
Our Insurance Subsidiaries currently write the bulk of their business in the Northeast United
States. As a result, a single catastrophe occurrence, destructive weather pattern, terrorist
attack, regulatory development or other condition or general economic trend affecting the region
within which we conduct our business could adversely affect our financial condition or results of
operations more significantly than that of other insurance companies that conduct business across a
broader geographical area. During our history, we have not experienced any single event that
materially affected our results of operations. The most significant catastrophic event was
Hurricane Ike, which occurred during the third quarter of 2008 in the Gulf of Mexico area, in which
we suffered $1,800,000 in net losses (entities acquired by us since this event have not suffered
substantial losses).
The incidence and severity of catastrophes are inherently unpredictable and our losses from
catastrophes could be substantial. The occurrence of claims from catastrophic events is likely to
result in substantial volatility in our financial condition or results of operations for any fiscal
quarter or year and could have a material adverse effect on our financial condition or results of
operations and our ability to write new business. Increases in the values and concentrations of
insured property may increase the severity of such occurrences in the future. Although we attempt
to manage our exposure to such events, including through the use of reinsurance, the frequency or
severity of catastrophic events could exceed our estimates. As a result, the occurrence of one or
more catastrophic events could have a material adverse effect on our financial condition or results
of operations.
If we cannot obtain adequate reinsurance protection for the risks we have underwritten, we may
be exposed to greater losses from these risks or we may reduce the amount of business we
underwrite, which will reduce our revenues.
Under state insurance law, insurance companies are required to maintain a certain level of capital
in support of the policies they issue. In addition, rating agencies will reduce an insurance
companys ratings if the companys premiums exceed specified multiples of its capital. As a result,
the level of our Insurance Subsidiaries statutory surplus and capital limits the amount of
premiums that they can write and on which they can retain risk. Historically, we have utilized
reinsurance to expand our capacity to write more business than our Insurance Subsidiaries surplus
would have otherwise supported.
From time to time, market conditions have limited, and in some cases have prevented, insurers from
obtaining the types and amounts of reinsurance that they consider adequate for their business
needs. These conditions could produce unfavorable changes in prices, reduced ceding commission
revenue or other potentially adverse changes in the terms of reinsurance. Accordingly, we may not
be able to obtain our desired amounts of reinsurance. In addition, even if we are able to obtain
such reinsurance, we may not be able to obtain such reinsurance from entities with satisfactory
creditworthiness or negotiate terms that we deem appropriate or acceptable.
Even if we are able to obtain reinsurance, our reinsurers may not pay losses in a timely
fashion, or at all, which may cause a substantial loss and increase our costs.
As of December 31, 2009, we had a net balance due us from our reinsurers of $309.3 million,
consisting of $199.7 million in reinsurance recoverables on unpaid losses, $14.8 million in
reinsurance recoverables on paid losses and $94.8 million in prepaid reinsurance premiums. Since
October 1, 2003, we have sought to manage our exposure to our reinsurers by placing our quota share
reinsurance on a funds withheld basis and requiring any non-admitted reinsurers to collateralize
their share of unearned premium and loss reserves. However, we have recoverables from our
pre-October 1, 2003 reinsurance arrangements that are uncollateralized, in that they are not
supported by letters of credit, trust accounts, funds withheld arrangements or similar mechanisms
intended to protect us against a reinsurers inability or unwillingness to pay. Our net exposure to
our reinsurers totaled $139.1 million as of December 31, 2009. As of December 31, 2009, our largest
net exposure to any one reinsurer was approximately $42.8 million, related to OneBeacon Insurance
which is rated A by A. M. Best Company. Because we remain primarily liable to our policyholders for
the payment of their claims, in the event that one of our reinsurers under an
27
uncollateralized treaty became insolvent or refused to reimburse us for losses paid, or delayed in
reimbursing us for losses paid, our cash flow and financial results could be materially and
adversely affected. As of December 31, 2009, our largest balance due from any one reinsurer was
approximately $94.2 million, which was due from Swiss Reinsurance America Corp. which is rated A+
by A. M. Best Company.
A decline in the ratings assigned by A. M. Best or other rating agencies to our insurance
subsidiaries could affect our standing among brokers, agents and insureds and cause our sales and
earnings to decrease.
Ratings have become an increasingly important factor in establishing the competitive position of
insurance companies. A.M. Best Company maintains a letter scale rating system ranging from A++
(Superior) to F (In Liquidation). With the exception of CPNIC, A.M. Best has assigned each of our
insurance company subsidiaries a Financial Strength rating of A- (Excellent) which is the fourth
highest of fifteen rating levels. However, there is no assurance that any additional U.S. licensed
insurance companies that we may acquire will receive such rating. These ratings are subject to,
among other things, A.M. Bests evaluation of our capitalization and performance on an ongoing
basis including our management of terrorism and natural catastrophe risks, loss reserves and
expenses, and there is no guarantee that our Insurance Subsidiaries will maintain their respective
ratings.
Our ratings are subject to periodic review by, and may be revised downward or revoked at the sole
discretion of, A.M. Best. A decline in a companys ratings indicating reduced financial strength or
other adverse financial developments can cause concern about the viability of the downgraded
insurer among its agents, brokers and policyholders, resulting in a movement of business away from
the downgraded carrier to other stronger or more highly rated carriers. Because many of our agents
and brokers (whom we refer to as producers) and policyholders purchase our policies on the basis
of our current ratings, the loss or reduction of any of our ratings will adversely impact our
ability to retain or expand our policyholder base. The objective of the rating agencies rating
systems is to provide an opinion of an insurers financial strength and ability to meet ongoing
obligations to its policyholders. Our ratings reflect the rating agencies opinion of our financial
strength and are not evaluations directed to investors in our common stock, nor are they
recommendations to buy, sell or hold our common stock.
The failure of any of the loss limitation methods we employ could have a material adverse
effect on our financial condition or our results of operations.
Various provisions of our policies, such as limitations or exclusions from coverage or choice of
forum, which have been negotiated to limit our risks, may not be enforceable in the manner we
intend. At the present time we employ a variety of endorsements to our policies that limit exposure
to known risks, including but not limited to exclusions relating to coverage for lead paint
poisoning, asbestos and most claims for bodily injury or property damage resulting from the release
of pollutants.
In addition, the policies we issue contain conditions requiring the prompt reporting of claims to
us and our right to decline coverage in the event of a violation of that condition. Our policies
also include limitations restricting the period in which a policyholder may bring a breach of
contract or other claim against us, which in many cases is shorter than the statutory limitations
for such claims in the states in which we write business. While these exclusions and limitations
reduce the loss exposure to us and help eliminate known exposures to certain risks, it is possible
that a court or regulatory authority could nullify or void an exclusion or legislation could be
enacted modifying or barring the use of such endorsements and limitations in a way that would
adversely effect our loss experience, which could have a material adverse effect on our financial
condition or results of operations.
We may face substantial exposure to losses from terrorism and we are currently required by law
to provide coverage against such losses.
Our location and amount of business written in New York City and adjacent areas by our Insurance
Subsidiaries may expose us to losses from terrorism. U.S. insurers are required by state and
Federal law to offer coverage for terrorism in certain lines.
Although our Insurance Subsidiaries are protected by the federally funded terrorism reinsurance,
there is a substantial deductible that must be met, the payment of which could have an adverse
effect on our results of operations. SeeBusinessReinsurance. As a consequence of this
legislation, potential losses from a terrorist attack could be substantially larger than previously
expected, could also adversely affect our ability to obtain reinsurance on favorable terms,
including pricing, and may affect our underwriting strategy, rating, and other elements of our
operation.
The effects of emerging claim and coverage issues on our business are uncertain.
As industry practices and legal, judicial, social and other environmental conditions change,
unexpected and unintended issues related to claims and coverage may emerge. These issues may
adversely affect our business by either extending coverage beyond our underwriting intent or by
increasing the number or size of claims. In some instances, these
changes may not become apparent until some time after we have issued insurance or reinsurance contracts that are
28
affected by the
changes. As a result, the full extent of liability under our insurance or reinsurance contracts may
not be known for many years after a contract is issued.
Since we depend on a core of selected producers for a large portion of our revenues, loss of
business provided by any one of them could adversely affect us.
Our products are marketed by independent producers. In our Brokerage Insurance segment, these
independent producers are comprised of retail agents and wholesale agents who aggregate business
from retail agents. In our Specialty Business segment, these independent producers are comprised
of managing general agencies who handle various underwriting and policy issuance tasks on our
behalf and who generally accept submissions from various other independent producers.
Other insurance companies compete with us for the services and allegiance of these producers. These
producers may choose to direct business to our competitors, or may direct less desirable risks to
us. In our Brokerage Insurance segment, approximately 45% of the 2009 gross premiums written,
including premiums produced by TRM on behalf of its issuing companies, were produced by our top 18
producers, representing 1.3% of our active agents and brokers. These producers each have annual
written premiums of $5.0 million or more. As we build a broader territorial base, the number of
producers with significant premium volumes with Tower in each of our segments is increasing.
Our largest producers in 2009 were Northeast Agencies and Morstan General Agency. In the year ended
December 31, 2009, these producers accounted for 9% and 8%, respectively, of the total of our gross
premiums written. No other producer was responsible for more than 3% of our gross premiums written.
With the closing of the CastlePoint transactions and the SUA transaction, we have also added
program underwriting agents who may become significant producers. A significant decrease in
business from, or the entire loss of, our largest producer or several of our other large producers
would cause us to lose premium and require us to seek alternative producers or to increase
submissions from existing producers. In the event we are unable to find replacement producers or
increase business produced by our existing producers, our premium revenues would decrease and our
business and results of operations would be materially and adversely affected.
Our reliance on producers subjects us to their credit risk.
With respect to the premiums produced by TRM for its issuing companies and a limited amount of
premium volume written by our Insurance Subsidiaries, producers collect premium from the
policyholders and forward them to TRM and our Insurance Subsidiaries. In most jurisdictions, when
the insured pays premiums for these policies to producers for payment over to TRM or our Insurance
Subsidiaries, the premiums are considered to have been paid under applicable insurance laws and
regulations and the insured will no longer be liable to us for those amounts, whether or not we
have actually received the premiums from the producer. Consequently, we assume a degree of credit
risk associated with producers. Although producers failures to remit premiums to us have not
caused a material adverse impact on us to date, there have been instances where producers collected
premium but did not remit it to us, and we were nonetheless required under applicable law to
provide the coverage set forth in the policy despite the absence of premium. Because the
possibility of these events is dependent in large part upon the financial condition and internal
operations of our producers, which in most cases is not public information, we are not able to
quantify the exposure presented by this risk. If we are unable to collect premiums from our
producers in the future, our financial condition and results of operations could be materially and
adversely affected.
We operate in a highly competitive environment. If we are unsuccessful in competing against
larger or more well-established rivals, our results of operations and financial condition could be
adversely affected.
The property and casualty insurance industry is highly competitive and has historically been
characterized by periods of significant pricing competition alternating with periods of greater
pricing discipline, during which competition focuses on other factors. Beginning in 2000, the
market environment was increasingly favorable as rates increased significantly. During the latter
part of 2004 and throughout 2005, increased competition in the marketplace became evident and, as a
result, average annual rate increases became moderate. The catastrophe losses of 2004 and 2005
produced increased pricing and reduced capacity for insurance of catastrophe-exposed property.
However, a softening of the non-catastrophe-exposed market in 2006 through 2009 has led to more
aggressive pricing in specific segments of the commercial lines business, particularly in those
lines of business and accounts with larger annual premiums. The Insurance Information Institute
indicates that the industry-wide change in net premiums written in the Property & Casualty industry
in 2007 decreased to a zero growth (0.0 percent) condition. A.M. Best Company reported that the
industry-wide change in net premiums written in the property and casualty industry was -2.0% in
2008 compared to -0.7% in 2007 and is estimated to have declined -4.2% in 2009.
The new capacity that had entered the market had placed more pressure on production and
profitability targets. A. M. Best had stated that industry policyholder surplus grew for five
consecutive years; 2003-2007, but declined in 2008. However,
policyholder surplus is estimated to have increased by 9.4% in 2009 to
29
$519.3 billion from 2008.
This places the premium-to-surplus ratio at 0.8:$1.00 at year-end 2009.
Competition driven by strong earnings and capital gains can be projected to moderate as economic
conditions impacting those sources deteriorate. Overall capacity and declining underwriting profits
may result in a lessening of competitive pressure from other insurers that previously sought to
expand the types or amount of business they write. This may cause a shift in focus by some insurers
from an interest in market share to increase their concentration on underwriting discipline. We
attempt to compete based primarily on products offered, service, experience, the strength of our
client relationships, reputation, speed of claims payment, financial strength, ratings, scope of
business, commissions paid and policy and contract terms and conditions. There are no assurances
that in the future we will be able to retain or attract customers at prices which we consider to be
adequate.
In our commercial and personal lines admitted business segments, we compete with major U.S.
insurers and certain underwriting syndicates, including large national companies such as Travelers
Companies, Inc., Allstate Insurance Company and State Farm Insurance; regional insurers such as
Selective Insurance Company, Harleysville Insurance Company, Hanover Insurance and Peerless
Insurance Company and smaller, more local competitors such as Greater New York Mutual, Magna Carta
Companies and Utica First Insurance Company. Our non-admitted binding authority and brokerage
business with general agents competes with Scottsdale Insurance Company, Admiral Insurance Company,
Mt. Hawley Insurance Company, Navigators Group, Inc., Essex Insurance Company, Colony Insurance
Company, Century Insurance Group, Nautilus Insurance Group, RLI Corp., United States Liability
Insurance Group and Burlington Insurance Group, Inc. In our program business, we compete against
competitors that write program business such as QBE Insurance Group Limited, Delos Insurance Group,
Am Trust Financial Services, Inc., RLI Corp., Chartis Inc., W.R. Berkley Corporation, Markel
Corporation, Great American Insurance Group and Philadelphia Insurance Companies.
Many of these companies have greater financial, marketing and management resources than we do. Many
of these competitors also have more experience, better ratings and more market recognition than we
do. We seek to distinguish ourselves from our competitors by providing a broad product line
offering and targeting those market segments that provide us with the best opportunity to earn an
underwriting profit. We also compete with other companies by quickly and opportunistically
delivering products that respond to our producers needs.
In addition to competition in the operation of our business, we face competition from a variety of
sources in attracting and retaining qualified employees. We also face competition because of
entities that self-insure, primarily in the commercial insurance market. From time to time,
established and potential customers may examine the benefits and risks of self-insurance and other
alternatives to traditional insurance.
We may experience difficulty in expanding our business, which could adversely affect our
results of operations and financial condition.
In addition to our recent acquisitions of Hermitage, CastlePoint, AequiCap and SUA, we plan to
continue to expand our licensing or acquire other insurance companies with multi-state property and
casualty licensing in order to expand our product and service offerings geographically. We also
intend to continue to acquire books of business that fit our underwriting competencies from
competitors, managing agents and other producers and to acquire other insurance companies. This
expansion strategy may present special risks:
|
|
We have achieved our prior success by applying a disciplined approach to underwriting and
pricing in select markets that are not well served by our competitors. We may not be able to
successfully implement our underwriting, pricing and product strategies in companies or books
of business we acquire or over a larger operating region; |
|
|
We may not be successful in obtaining the required regulatory approvals to offer additional
insurance products or expand into additional states; and |
|
|
We may have difficulty in efficiently combining an acquired company or block of business
with our present financial, operational and management information systems. |
We cannot assure you that we will be successful in expanding our business or that any new business
will be profitable. If we are unable to expand our business or to manage our expansion effectively,
our results of operations and financial condition could be adversely affected.
Our acquisitions could result in integration difficulties, unexpected expenses, diversion of
managements attention and other negative consequences.
As part of our growth strategy, we have made numerous acquisitions in recent years. Assuming we
have access to adequate levels of debt and equity capital, we plan to continue to acquire
complementary businesses as a key element of our growth strategy. We must integrate the technology, operations, systems
30
and personnel of acquired businesses with our
own and attempt to grow the acquired businesses as part of our company. The integration of other
businesses is a complex process and places significant demands on our management, financial,
technical and other resources. The successful integration of businesses we have acquired in the
past and may acquire in the future is critical to our future success. If we are unsuccessful in
integrating these businesses, our financial and operating performance could suffer. The risks and
challenges associated with the acquisition and integration of acquired businesses include:
|
|
We may be unable to efficiently consolidate our financial, operational and administrative
functions with those of the businesses we acquire; |
|
|
Our managements attention may be diverted from other business concerns; |
|
|
We may be unable to retain and motivate key employees of an acquired company; |
|
|
We may enter markets in which we have little or no prior direct experience; |
|
|
Litigation, indemnification claims and other unforeseen claims and liabilities may arise
from the acquisition or operation of acquired businesses; |
|
|
The costs necessary to complete integration may exceed our expectations or outweigh some of
the intended benefits of the transactions we complete; |
|
|
We may be unable to maintain the customers or goodwill of an acquired business; and |
|
|
The costs necessary to improve or replace the operating systems, products and services of
acquired businesses may exceed our expectations. |
We may be unable to integrate our acquisitions successfully with our operations on schedule or at
all. We can provide no assurances that we will not incur large expenses in connection with business
units we acquire. Further, we can provide no assurances that acquisitions will result in cost
savings or sufficient revenues or earnings to justify our investment in, or our expenses related
to, these acquisitions.
In recent years we have successfully created shareholder value through acquisitions of
insurance entities. We may not be able to continue to create shareholder value through such
transactions in the future.
In the past several years, we have completed numerous acquisitions of insurance entities, many of
which have contributed significantly to our growth in book value. Failure to identify and complete
future acquisition opportunities could limit our ability to achieve our target returns. Even if we
were to identify and complete future acquisition opportunities, there is no assurance that such
acquisitions will ultimately achieve their anticipated benefits.
Failure to complete, or complete on a timely basis, a pending merger or acquisition may
negatively impact our business, financial condition, results of operation, prospects and stock
price.
We regularly evaluate merger and acquisition opportunities, and as a result, future mergers or
acquisitions may occur at any time. A pending merger or acquisition is typically subject to the
satisfaction or waiver of a number of conditions, including the receipt of required regulatory
approvals, satisfactory due diligence and other customary closing conditions. There can be no
assurance that the conditions to the completion of a pending merger or acquisition will be
satisfied or waived. If a pending merger or acquisition is delayed or not completed, we would not
realize the anticipated benefits of having completed, or having completed on a timely basis, as the
case may be, such merger or acquisition, which may adversely affect our business, financial
condition, results of operation, prospects and stock price.
We could be adversely affected by the loss of one or more principal employees or by an
inability to attract and retain staff.
Our success will depend in substantial part upon our ability to attract and retain qualified
executive officers, experienced underwriting talent and other skilled employees who are
knowledgeable about our business. We rely substantially upon the services of our executive
management team. If we were to lose the services of members of our key management team, our
business could be adversely affected. We believe we have been successful in attracting and
retaining key personnel throughout our history. We have employment agreements with Michael H. Lee,
our Chairman of the Board, President and Chief Executive Officer, and other members of our senior
management team. We do not currently maintain key man life insurance policies with respect to our
employees except for Michael H. Lee.
31
Our investment performance may suffer as a result of adverse capital market developments or
other factors, which may affect our financial results and ability to conduct business.
We invest the premium we receive from policyholders until it is needed to pay policyholder claims
or other expenses. At December 31, 2009, our invested assets consisted of $1.8 billion in fixed
maturity securities and $76.7 million in equity securities at fair value. Additionally, we held
$201.4 million in cash and cash equivalents and short-term investments. In 2009, we earned $74.9
million of net investment income representing 7.6% of our total revenues and 44.7% of our pre-tax
income. At December 31, 2009, we had unrealized gains of $53.2 million which could change
significantly depending on changes in market conditions. Our funds are invested by outside
professional investment advisory management firms under the direction of our management team in
accordance with detailed investment guidelines set by us. Although our investment policies stress
diversification of risks, conservation of principal and liquidity, our investments are subject to a
variety of investment risks, including risks relating to general economic conditions, market
volatility, interest rate fluctuations, liquidity risk and credit and default risk. (Interest rate
risk is discussed below under the heading, We may be adversely affected by interest rate
changes.) In particular, the volatility of our claims may force us to liquidate securities, which
may cause us to incur capital losses. If we do not structure our investment portfolio so that it is
appropriately matched with our insurance and reinsurance liabilities, we may be forced to liquidate
investments prior to maturity at a significant loss to cover such liabilities. Investment losses
could significantly decrease our asset base and statutory surplus, thereby affecting our ability to
conduct business. We recognized net realized capital gains for 2009 which amounted to $1.5 million
yet included OTTI charges of $23.5 million. The OTTI charges were primarily the result of
mortgage-backed securities and, to a lesser extent, corporate bonds. As a result of the market
volatility, we may experience difficulty in determining accurately the value of our various
investments.
We may be adversely affected by interest rate changes.
Our operating results are affected, in part, by the performance of our investment portfolio.
General economic conditions affect the markets for interest-rate-sensitive securities, including
the level and volatility of interest rates and the extent and timing of investor participation in
such markets. Unexpected changes in general economic conditions could create volatility or
illiquidity in these markets in which we hold positions and harm our investment return. Our
investment portfolio contains interest rate sensitive instruments, such as bonds, which may be
adversely affected by changes in interest rates. A significant increase in interest rates could
have a material adverse effect on our financial condition or results of operations. Generally, bond
prices decrease as interest rates rise. Changes in interest rates could also have an adverse effect
on our investment income and results of operations. For example, if interest rates decline,
investment of new premiums received and funds reinvested may earn less than expected.
As of December 31, 2009, mortgage-backed securities constituted approximately 25.2% of our invested
assets, including cash and cash equivalents. As with other fixed income investments, the fair
market value of these securities fluctuates depending on market and other general economic
conditions and the interest rate environment. Changes in interest rates can expose us to prepayment
risks on these investments. When interest rates fall, mortgage-backed securities may be prepaid
more quickly than expected and the holder must reinvest the proceeds at lower interest rates.
Certain of our mortgage-backed securities currently consist of securities with features that reduce
the risk of prepayment, but there is no guarantee that we will not invest in other mortgage-backed
securities that lack this protection. In periods of increasing interest rates, mortgage-backed
securities are prepaid more slowly, which may require us to receive interest payments that are
below the interest rates then prevailing for longer than expected.
Interest rates are highly sensitive to many factors, including governmental monetary policies,
domestic and international economic and political conditions and other factors beyond our control.
We may require additional capital in the future, which may not be available or may only be
available on unfavorable terms.
Our future capital requirements depend on many factors, including our ability to write new business
successfully and to establish premium rates and reserves at levels sufficient to cover losses. To
the extent that our present capital is insufficient to meet future operating requirements and/or
cover losses, we may need to raise additional funds through financings or curtail our growth. Based
on our current operating plan, we believe our current capital will support our operations without
the need to raise additional capital. However, we cannot provide any assurance in that regard,
since many factors will affect our capital needs and their amount and timing, including our growth
and profitability, our claims experience, and the availability of reinsurance, as well as possible
acquisition opportunities, market disruptions and other unforeseeable developments. If we had to
raise additional capital, equity or debt financing may not be available at all or may be available
only on terms that are not favorable to us. In the case of equity financings, dilution to our
stockholders could result, and in any case such securities may have rights, preferences and
privileges that are senior to those of holders of our common stock. Historically, we have raised
additional capital through the offering of trust preferred securities. As a result of the recent
crisis in the global capital markets, financing through the offering of trust preferred securities
may not be available at all or may be available only on terms that are not favorable to us. If we
cannot obtain adequate capital on favorable terms or at all, our business, liquidity needs,
financial condition or results of operations could be materially adversely affected.
32
The regulatory system under which we operate, and potential changes thereto, could have a
material adverse effect on our business.
Our Insurance Subsidiaries are subject to comprehensive regulation and supervision in their
respective jurisdictions of domicile. The purpose of the insurance laws and regulations is to
protect insureds, not our stockholders. These regulations are generally administered by the
Insurance Departments in which the individual insurance companies are domiciled and relate to,
among other things:
|
|
standards of solvency, including risk based capital measurements; |
|
|
restrictions on the nature, quality and concentration of investments; |
|
|
required methods of accounting; |
|
|
rate and form regulation pertaining to certain of our insurance businesses; |
|
|
mandating certain insurance benefits; |
|
|
potential assessments for the provision of funds necessary for the settlement of covered
claims under certain policies provided by impaired, insolvent or failed insurance companies;
and |
|
|
transactions with affiliates. |
Significant changes in these laws and regulations could make it more expensive to conduct our
business. The Insurance Subsidiaries domiciliary state Insurance Departments, and, with respect to
the acquisition of CastlePoint, the Bermuda Monetary Authority, also conduct periodic examinations
of the affairs of their domiciled insurance companies and require the filing of annual and other
reports relating to financial condition, holding company issues and other matters. These regulatory
requirements may adversely affect or inhibit our ability to achieve some or all of our business
objectives.
Our Insurance Subsidiaries may not be able to obtain or maintain necessary licenses, permits,
authorizations or accreditations in new states we intend to enter, or may be able to do so only at
significant cost. In addition, we may not be able to comply fully with or obtain appropriate
exemptions from, the wide variety of laws and regulations applicable to insurance companies or
holding companies. Failure to comply with or to obtain appropriate authorizations and/or exemptions
under any applicable laws could result in restrictions on our ability to do business or engage in
certain activities that are regulated in one or more of the jurisdictions in which we operate and
could subject us to fines and other sanctions, which could have a material adverse effect on our
business. In addition, changes in the laws or regulations to which our operating subsidiaries are
subject could adversely affect our ability to operate and expand our business or could have a
material adverse effect on our financial condition or results of operations.
In recent years, the U.S. insurance regulatory framework has come under increased Federal scrutiny,
and some state legislators have considered or enacted laws that may alter or increase state
regulation of insurance and reinsurance companies and holding companies. Moreover, state insurance
regulators regularly re-examine existing laws and regulations, often focusing on modifications to
holding company regulations, interpretations of existing laws and the development of new laws.
Changes in these laws and regulations or the interpretation of these laws and regulations could
have a material adverse effect on our financial condition or results of operations. The highly
publicized investigations of the insurance industry by state and other regulators and government
officials in recent years have led to, and may continue to lead to, additional legislative and
regulatory requirements for the insurance industry and may increase the costs of doing business.
The activities of TRM, CPM and CPRMFL are subject to licensing requirements and regulation under
the laws of New York, New Jersey and other states where they do business. The businesses of TRM,
CPM and CPRMFL depend on the validity of, and continued good standing under, the licenses and
approvals pursuant to which they operate, as well as compliance with pertinent regulations. As of
February 5, 2009, the date of closing of our acquisition of CastlePoint, our activities became
subject to certain licensing requirements and regulation under the laws of Bermuda.
Licensing laws and regulations vary from jurisdiction to jurisdiction. In all jurisdictions, the
applicable licensing laws and regulations are subject to amendment or interpretation by regulatory
authorities. Generally such authorities are vested with relatively broad and general discretion as
to the granting, renewing and revoking of licenses and approvals. Licenses may be denied or revoked
for various reasons, including the violation of such regulations, conviction of crimes and the
like. Possible sanctions which may be imposed include the suspension of individual employees,
limitations on engaging in a particular business for specified periods of time, revocation of
licenses, censures, redress to clients and fines. In some instances, TRM follows practices based on
its or its counsels interpretations of laws and regulations, or those generally followed by the
industry, which may prove to be different from those of regulatory authorities.
33
As industry practices and legal, judicial, social and other environmental conditions change,
unexpected issues related to claims and coverage may emerge. These issues may adversely affect us
by either extending coverage beyond our underwriting intent or by increasing the number or size of
claims. In some instances, these changes may not become apparent until some time after we have
issued insurance or reinsurance contracts that are affected by the changes. As a result, the full
extent of liability under our insurance or reinsurance contracts may not be known for many years
after a contract is issued. The effects of this and other unforeseen emerging claim and coverage
issues are extremely hard to predict and could adversely affect us.
If the assessments we are required to pay are increased drastically, our results of operations
and financial condition will suffer.
Our Insurance Subsidiaries are required to participate in various mandatory insurance facilities or
in funding mandatory pools, which are generally designed to provide insurance coverage for
consumers who are unable to obtain insurance in the voluntary insurance market. Our Insurance
Subsidiaries are subject to assessments in the states where we do business for various purposes,
including the provision of funds necessary to fund the operations of the Insurance Department and
insolvency funds. In 2009, the Insurance Subsidiaries were assessed approximately $11.8 million by
various state insurance-related agencies. These assessments are generally set based on an insurers
percentage of the total premiums written in a state within a particular line of business. The
Company is permitted to assess premium surcharges on workers compensation policies that are based
on statutorily enacted rates. We rely upon our systems, as well as. As of December 31, 2009, the
liability for the various workers compensation funds, which includes amounts assessed on workers
compensation policies, was $11.6 million for our Insurance Subsidiaries. As our company grows, our
share of any assessments may increase. However, we cannot predict with certainty the amount of
future assessments because they depend on factors outside our control, such as insolvencies of
other insurance companies. Significant assessments could have a material adverse effect on our
financial condition or results of operations.
Our ability to meet ongoing cash requirements and pay dividends may be limited by our holding
company structure and regulatory constraints.
Tower is a holding company and, as such, has no direct operations of its own. Tower does not expect
to have any significant operations or assets other than its ownership of the shares of its
operating subsidiaries. Dividends and other permitted payments from our operating subsidiaries are
expected to be our primary source of funds to meet ongoing cash requirements, including any future
debt service payments and other expenses, and to pay dividends, if any, to our stockholders. As of
December 31, 2009, the maximum amount of distributions that our operating subsidiaries could pay to
Tower without approval was $52.8 million. The inability of our operating subsidiaries to pay
dividends and other permitted payments in an amount sufficient to enable us to meet our cash
requirements at the holding company level would have a material adverse effect on our operations
and our ability to pay dividends to our stockholders. Accordingly, if you require dividend income
you should carefully consider these risks before making an investment in our company.
Although we have paid cash dividends in the past, we may not pay cash dividends in the future.
We have a history of paying dividends to our stockholders when sufficient cash is available, and we
currently intend to pay dividends in each quarter of 2010. However, future cash dividends will
depend upon our results of operations, financial condition, cash requirements and other factors,
including the ability of our subsidiaries to make distributions to us, which ability is restricted
in the manner previously discussed in this section. Also, there can be no assurance that we will
continue to pay dividends even if the necessary financial conditions are met and if sufficient cash
is available for distribution.
We rely on our information technology and telecommunications systems to conduct our business.
Our business is dependent upon the functioning of our information technology and telecommunication
systems. We rely upon our systems, as well as the systems of our vendors to underwrite and process
our business, make claim payments, provide customer service, provide policy administration
services, such as, endorsements, cancellations and premium collections, comply with insurance
regulatory requirements and perform actuarial and other analytical functions necessary for pricing
and product development. Our operations are dependent upon our ability to timely and efficiently
process our business and protect our information and telecommunications systems from physical loss,
telecommunications failure or other similar catastrophic events, as well as from security breaches.
While we have implemented business contingency plans and other reasonable and appropriate internal
controls to protect our systems from interruption, loss or security breaches, a sustained business
interruption or system failure could adversely impact our ability to process our business, provide
customer service, pay claims in a timely manner or perform.
The operations and maintenance of our policy, billing and claims administration systems have been
outsourced to Computer Sciences Corporation to minimize deployment time and operational cost, as
well as for scalability and business continuity. The CSC technology deployment will be implemented
over a multi-year period that began in 2008. Until these systems are
fully migrated over to the CSC platform, we must depend on existing technology platforms that
34
require
more manual or duplicate processing.
Combining Tower and SUA may be more difficult than expected.
The Tower and SUA merger closed in November 2009. The companies agreed to merge their businesses
with the expectation that the merger would result in various benefits, including, among other
things, (a) the opportunity for Tower and SUA to share profit center resources in the specialty
property and casualty insurance market and consolidate certain functions, resulting in cost savings
to the combined company, (b) the opportunity to create long-term stockholder value by increasing
SUAs growth by cross-selling products with Tower and accessing Towers higher A.M. Best Company
rating and capital base, (c) the ability to manage market cycles through diversity of lines of
business and geography while maintaining a culture of disciplined underwriting and pricing, (d) the
opportunity to achieve enhanced growth opportunities and leverage SUAs scalable infrastructure,
(e) access to a large pool of capital at an attractive cost of capital, (f) the expansion of
Towers underwriting capacity in the specialty property and casualty insurance market, which will
further broaden Towers product offerings, and (g) the opportunity for Tower to utilize SUAs
office headquarters to develop Towers brokerage business written through retail and wholesale
agents in the Midwestern United States. Achieving the anticipated benefits of the merger is subject
to a number of uncertainties, including whether Tower and SUA are integrated in an efficient and
effective manner, and general competitive factors in the marketplace. Failure to achieve these
anticipated benefits could result in increased costs, decreases in the amount of expected revenues
and diversion of managements time and energy and could negatively impact the combined companys
business, financial condition, results of operations, prospects and stock price.
In addition, employees and producers may experience uncertainty about their future roles with the
combined company, which might adversely affect our ability to retain key executives, managers and
other employees and producers.
Adverse economic factors including recession, inflation, periods of high unemployment or lower
economic activity could result in the combined company selling fewer policies than expected and/or
an increase in premium defaults which, in turn, could affect the combined companys growth and
profitability.
Negative economic factors may also affect the combined companys ability to receive the appropriate
rate for the risk it insures with its policyholders and may impact its policy flow. In an economic
downturn, the degree to which prospective policyholders apply for insurance and fail to pay all
balances owed may increase. Existing policyholders may exaggerate or even falsify claims to obtain
higher claims payments. These outcomes would reduce the combined companys underwriting profit to
the extent these effects are not reflected in the rates charged by the combined company.
Currently pending or future litigation or governmental proceedings could result in material
adverse consequences, including injunctions, judgments or settlements.
We are and from time to time become involved in lawsuits, regulatory inquiries and governmental and
other legal proceedings arising out of the ordinary course of its business. Many of these matters
raise difficult and complicated factual and legal issues and are subject to uncertainties and
complexities. The timing of the final resolutions to these types of matters is often uncertain.
Additionally, the possible outcomes or resolutions to these matters could include adverse judgments
or settlements, either of which could require substantial payments, adversely affecting our
business, financial condition, results of operations, prospects and stock price.
It may be difficult for a third party to acquire Tower, even if doing so may be beneficial to
Tower stockholders.
Certain provisions of Towers amended and restated certificate of incorporation and amended and
restated by-laws may discourage, delay or prevent a change in control of Tower that a stockholder
may consider favorable. These provisions include, among other things, the following:
|
|
classifying its board of directors with staggered three-year terms, which may lengthen the
time required to gain control of Towers board of directors; |
|
|
prohibiting stockholder action by written consent, thereby requiring all stockholder
actions to be taken at a meeting of the stockholders; |
|
|
limiting who may call special meetings of stockholders; |
|
|
establishing advance notice requirements for nominations of candidates for election to its
board of directors or for proposing matters that can be acted upon by stockholders at
stockholder meetings; and |
35
|
|
the existence of authorized and unissued Tower common stock which would allow Towers board
of directors to issue shares to persons friendly to current management. |
Furthermore, Towers ownership of U.S. insurance company subsidiaries can, under applicable state
insurance company laws and regulations, delay or impede a change of control of Tower. Such
regulations might limit the possibility of a change of control, leading to depressed market prices
for Tower common stock, and may deter a change in control that would be beneficial to Tower
stockholders.
Risks Related to Our Industry
The threat of terrorism and military and other actions may adversely affect our investment
portfolio and may result in decreases in our net income, revenue and assets under management.
The threat of terrorism, both within the United States and abroad, and military and other actions
and heightened security measures in response to these types of threats, may cause significant
volatility and declines in the equity markets in the United States, Europe and elsewhere, as well
as loss of life, property damage, additional disruptions to commerce and reduced economic activity.
Some of the assets in our investment portfolio may be adversely affected by declines in the equity
markets and economic activity caused by the continued threat of terrorism, ongoing military and
other actions and heightened security measures.
We can offer no assurances that terrorist attacks or the threat of future terrorist events in the
United States and abroad or military actions by the United States will not have a material adverse
effect on our business, financial condition or results of operations.
Our results of operations and revenues may fluctuate as a result of many factors, including
cyclical changes in the insurance industry, which may cause the price of Tower securities issued to
investors to be volatile.
The results of operations of companies in the property and casualty insurance industry historically
have been subject to significant fluctuations and uncertainties. Our profitability can be affected
significantly by:
|
|
rising levels of loss costs that we cannot anticipate at the time we price our
products; |
|
|
volatile and unpredictable developments, including man-made, weather-related and
other natural catastrophes or terrorist attacks; |
|
|
changes in the level of reinsurance capacity and insurance capacity; |
|
|
changes in the amount of loss and loss adjustment expense reserves resulting from
new types of claims and new or changing judicial interpretations relating to the scope of
insurers liabilities; and |
|
|
fluctuations in equity markets and interest rates, inflationary pressures,
conditions affecting the credit markets, segments thereof or particular asset classes and
other changes in the investment environment, which affect returns on invested assets and may
impact the ultimate payout of losses. |
The supply of insurance is related to prevailing prices, the level of insured losses and the level
of industry surplus which, in turn, may fluctuate in response to changes in rates of return on
investments being earned in the insurance and reinsurance industry. As a result, the insurance
business historically has been a cyclical industry characterized by periods of intense price
competition due to excessive underwriting capacity alternating with periods when shortages of
capacity permitted favorable premium levels. Significant amounts of new capital flowing into the
insurance and reinsurance sectors could lead to a significant reduction in premium rates, less
favorable policy terms and fewer submissions for our underwriting services. In addition to these
considerations, changes in the frequency and severity of losses suffered by insureds and insurers
may affect the cycles of the insurance business significantly, and we expect to experience the
effects of such cyclicality.
This cyclicality could have a material adverse effect on our results of operations and revenues,
which may cause the price of Tower securities issued to investors to be volatile.
Changing climate conditions may adversely affect our financial condition or profitability.
There is an emerging scientific consensus that the earth is getting warmer. Climate change, to the
extent it produces rising temperatures and changes in weather patterns, may affect the frequency
and severity of storms and other weather events, the affordability, availability and underwriting
results of homeowners and commercial property insurance and, if frequency and severity patterns
increase, could negatively affect our financial results.
36
Risk Factors Relating to Disruptions in the Financial Markets
Adverse capital and credit market conditions may significantly affect our ability to meet
liquidity needs, access to capital and cost of capital.
The capital and credit markets have been experiencing volatility and disruption in certain market
sectors.
We need liquidity to pay claims, reinsurance premiums, operating expenses, interest on our debt and
dividends on our capital stock. Without sufficient liquidity, we will be forced to curtail our
operations, and our business will suffer. The principal sources of our liquidity are insurance
premiums, reinsurance recoveries, ceding commissions, fee revenues, cash flow from our investment
portfolio and other assets, consisting mainly of cash or assets that are readily convertible into
cash. Other sources of liquidity in normal markets also include a variety of instruments, including
medium- and long-term debt, junior subordinated debt securities and stockholders equity.
In the event current resources do not satisfy our needs, we may have to seek additional financing.
The availability of additional financing will depend on a variety of factors such as market
conditions, the general availability of credit, the volume of trading activities, the overall
availability of credit to the financial services industry, our credit ratings and credit capacity,
as well as the possibility that customers or lenders could develop a negative perception of our
long- or short-term financial prospects if we incur large investment losses or if the level of our
business activity decreased due to a market downturn. Similarly, our access to funds may be
impaired if regulatory authorities or rating agencies take negative actions against us. Our
internal sources of liquidity may prove to be insufficient, and in such case, we may not be able to
successfully obtain additional financing on favorable terms, or at all.
Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access
to capital required to operate our business. Such market conditions may limit our ability to
satisfy statutory capital requirements, generate fee income and access the capital necessary to
grow our business. As such, we may be forced to delay raising capital, issue shorter tenor
securities than we prefer, or bear an unattractive cost of capital which could decrease our
profitability and significantly reduce our financial flexibility. Our results of operations,
financial condition, cash flows and statutory capital position could be materially adversely
affected by disruptions in the financial markets.
Difficult conditions in the global capital markets and the economy generally may materially
adversely affect our business and results of operations and we do not expect these conditions to
improve in the near future.
Our results of operations are materially affected by conditions in the capital markets and the
economy generally. The stress experienced by capital markets that began in the second half of 2007
continued throughout 2009 and has continued into 2010. Recently, concerns over inflation, energy
costs, geopolitical issues, the availability and cost of credit, the mortgage market and a
declining real estate market have contributed to increased volatility and diminished expectations
for the economy and markets going forward. These concerns and the continuing market upheavals may
have an adverse effect on us. Our revenues may decline in such circumstances and our profit margins
could erode. In addition, in the event of extreme prolonged market disruptions we could incur
significant losses. Even in the absence of a market downturn, we are exposed to substantial risk of
loss due to market volatility.
Factors such as consumer spending, business investment, government spending, the volatility and
strength of the capital markets, and inflation all affect the business and economic environment
and, ultimately, the amount and profitability of our business. In an economic downturn
characterized by higher unemployment, lower family income, lower corporate earnings, lower business
investment and lower consumer spending, the demand for our insurance products could be adversely
affected. In addition, we may experience an elevated incidence of claims. Adverse changes in the
economy could affect earnings negatively and could have a material adverse effect on our business,
results of operations and financial condition. The current mortgage crisis has also raised the
possibility of future legislative and regulatory actions that could further impact our business. We
cannot predict whether or when such actions may occur, or what impact, if any, such actions could
have on our business, results of operations and financial condition.
The impairment of other financial institutions could adversely affect us.
We have exposure to many different industries and counterparties, and routinely execute
transactions with counterparties in the financial services industry, including brokers and dealers,
commercial banks, investment banks, reinsurers and other institutions. Many of these transactions
expose us to credit risk in the event of default of our counterparty. We also have exposure to
various financial institutions in the form of unsecured debt instruments and equity investments and
unsecured debt instruments issued by various state and local municipal authorities. There can be no
assurance that any such losses or impairments to the carrying value of these assets would not
materially and adversely affect our business and results of operations.
37
We are exposed to significant financial and capital markets risk which may adversely affect
our results of operations, financial condition and liquidity, and our net investment income can
vary from period to period.
We are exposed to significant financial and capital markets risk, including changes in interest
rates, credit spreads, equity prices, real estate values, market volatility, the performance of the
economy in general, the performance of the specific obligors included in our portfolio and other
factors outside our control. Our exposure to interest rate risk relates primarily to the market
price and cash flow variability associated with changes in interest rates. A rise in interest rates
will increase the net unrealized loss position of our investment portfolio. Our investment
portfolio contains interest rate sensitive instruments, such as fixed income securities, which may
be adversely affected by changes in interest rates from governmental monetary policies, domestic
and international economic and political conditions and other factors beyond our control. A rise in
interest rates would increase the net unrealized loss position of our investment portfolio, offset
by our ability to earn higher rates of return on funds reinvested. Conversely, a decline in
interest rates would decrease the net unrealized loss position of our investment portfolio, offset
by lower rates of return on funds reinvested.
Our exposure to credit spreads primarily relates to market price associated with changes in credit
spreads. A widening of credit spreads will increase the net unrealized loss position of the
investment portfolio and, if issuer credit spreads increase significantly or for an extended period
of time, would likely result in higher other-than-temporary impairments. Credit spread tightening
will reduce net investment income associated with new purchases of fixed maturities. Our investment
portfolio also has significant exposure to risks associated with mortgage-backed securities. As
with other fixed income investments, the fair market value of these securities fluctuates depending
on market and other general economic conditions and the interest rate environment.
In addition, market volatility can make it difficult to value certain of our securities if trading
becomes less frequent. As such, valuations may include assumptions or estimates that may have
significant period to period changes which could have a material adverse effect on our consolidated
results of operations or financial condition. Continuing challenges include continued weakness in
the real estate market and increased mortgage delinquencies, investor anxiety over the economy,
rating agency downgrades of various structured products and financial issuers, unresolved issues
with structured investment vehicles, deleveraging of financial institutions and hedge funds and a
serious dislocation in the inter-bank market. If significant, continued volatility, changes in
interest rates, changes in credit spreads and defaults, a lack of pricing transparency, market
liquidity and declines in equity prices, individually or in tandem, could have a material adverse
effect on our results of operations, financial condition or cash flows through realized losses,
impairments, and changes in unrealized positions.
Our valuation of fixed maturity and equity securities may include methodologies, estimations
and assumptions which are subject to differing interpretations and could result in changes to
investment valuations that may materially adversely affect our results of operations or financial
condition.
We have categorized our fixed maturity and equity securities into a three-level hierarchy, based on
the priority of the inputs to the respective valuation technique. The fair value hierarchy gives
the highest priority to quoted prices in active markets for identical assets or liabilities (Level
1) and the lowest priority to unobservable inputs (Level 3). An asset or liabilitys classification
within the fair value hierarchy is based on the lowest level of significant input to its valuation.
The relevant GAAP guidance defines the input levels as follows:
Level 1 Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets
or liabilities traded in active markets. Included are those investments traded on an active
exchange, such as the NASDAQ Global Select Market.
Level 2 Inputs to the valuation methodology include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar assets or liabilities in
markets that are not active, inputs other than quoted prices that are observable for the asset or
liability and market-corroborated inputs. Included are investments in U.S. Treasury securities and
obligations of U.S. government agencies, together with municipal bonds, corporate debt securities,
commercial mortgage and asset-backed securities and certain residential mortgage-backed securities
that are generally investment grade.
Level 3 Inputs to the valuation methodology are unobservable for the asset or liability and are
significant to the fair value measurement. Material assumptions and factors considered in pricing
investment securities may include projected cash flows, collateral performance including
delinquencies, defaults and recoveries, and any market clearing activity or liquidity circumstances
in the security or similar securities that may have occurred since the prior pricing period.
Included in this valuation methodology are investments in certain mortgage-backed and asset-backed
securities.
At December 31, 2009, approximately 4.8%, 94.5%, and 0.7% of these securities represented Level 1,
Level 2 and Level 3, respectively. The availability of observable inputs varies and is affected by
a wide variety of factors. When the valuation is based on models or inputs that are less observable
or unobservable in the market, the determination of fair value requires significantly more
judgment. The degree of judgment exercised by management in determining fair value is greatest for
investments
38
During periods of market disruption including periods of significantly rising or high interest
rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain of our
securities, for example, non-agency residential mortgage backed securities if trading becomes less
frequent and/or market data becomes less observable. There may be certain asset classes that were
in active markets with significant observable data that become illiquid due to the current
financial environment. In such cases, more securities may fall to Level 3 and thus require more
subjectivity and management judgment. As such, valuations may include inputs and assumptions that
are less observable or require greater estimation as well as valuation methods which are more
sophisticated or require greater estimation thereby resulting in values which may be less than the
value at which the investments may be ultimately sold. Further, rapidly changing and unprecedented
credit and equity market conditions could materially impact the valuation of securities as reported
within our consolidated financial statements and the period-to-period changes in value could vary
significantly. Decreases in value may have a material adverse effect on our results of operations
or financial condition.
Some of our investments are relatively illiquid and are in asset classes that have been
experiencing significant market valuation fluctuations.
We hold certain investments that may lack liquidity, such as non-agency residential mortgage backed
securities, subprime mortgage backed securities and certain commercial mortgage backed securities,
rated below AA. These asset classes represented 4.9% of the carrying value of our total cash and
invested assets as of December 31, 2009.
The reported values of our less liquid asset classes described in the paragraph above do not
necessarily reflect the lowest current market price for the asset. If we were forced to sell
certain of our assets in the current market, there can be no assurance that we would be able to
sell them for the prices at which we have recorded them and we may be forced to sell them at lower
prices.
The determination of the amount of impairments taken on our investments is highly subjective
and could materially impact our results of operations or financial position.
The determination of the amount of allowances and impairments varies by investment type and is
based upon our periodic evaluation and assessment of known and inherent risks associated with the
respective asset class. Such evaluations and assessments are revised as conditions change and new
information becomes available. Management updates its evaluations regularly and reflects changes in
allowances and impairments in operations as such evaluations are revised. There can be no assurance
that our management has accurately assessed the level of impairments taken in our financial
statements. Furthermore, additional impairments may need to be taken in the future. Historical
trends may not be indicative of future impairments.
For example, the cost of our fixed maturity and equity securities is adjusted for impairments in
value deemed to be other-than-temporary in the period in which the determination is made. The
assessment of whether impairments have occurred is based on managements case-by-case evaluation of
the underlying reasons for the decline in fair value.
Our management regularly reviews our fixed-maturity and equity securities portfolios to evaluate
the necessity of recording impairment losses for other-than-temporary declines in the fair value of
investments. In evaluating potential impairment, management considers, among other criteria:
(i) the current fair value compared to amortized cost or cost, as appropriate; (ii) the length of
time the securitys fair value has been below amortized cost or cost; (iii) specific credit issues
related to the issuer such as changes in credit rating, reduction or elimination of dividends or
non-payment of scheduled interest payments; (iv) managements intent and ability to retain the
investment for a period of time sufficient to allow for any anticipated recovery in value to cost;
(v) specific cash flow estimations for certain mortgage-backed securities; and (vi) current
economic conditions.
Gross unrealized losses may be realized or result in future impairments.
Our gross unrealized losses on fixed maturity securities at December 31, 2009 were $17.9 million
pre-tax, and the amount of gross unrealized losses on securities that have been in an unrealized
loss position for twelve months or more is approximately $14.1 million pre-tax. Realized losses or
impairments may have a material adverse impact on our results of operation and financial position.
If our business does not perform well, we may be required to recognize an impairment of our
goodwill, intangible or other long-lived assets or to establish a valuation allowance against the
deferred income tax asset, which could adversely affect our results of operations or financial
condition.
Goodwill represents the excess of the amounts we paid to acquire subsidiaries and other businesses
over the fair value of their net assets at the date of acquisition. We test goodwill at least
annually for impairment. Impairment testing is performed based upon estimates of the fair value of
the reporting units to which the goodwill relates. The estimated fair value of the acquired net
assets is impacted by the ongoing performance of the related business. If it is determined that the
goodwill has been impaired, we must write down the goodwill by the amount of the impairment, with a corresponding charge
39
to income.
Such write downs could have a material adverse effect on our results of operations or financial
position.
Intangible assets represent the amount of fair value assigned to certain assets when we acquire a
subsidiary or a book of business. Intangible assets are classified as having either a finite or an
indefinite life. We test the recoverability of indefinite life intangibles at least annually. We
test the recoverability of finite life intangibles whenever events or changes in circumstances
indicate that the carrying value of a finite life intangible may not be recoverable. An impairment
is recognized if the carrying value of an intangible asset is not recoverable and exceeds its fair
value in which circumstances we must write down the intangible asset by the amount of the
impairment, with a corresponding charge to income. Such write downs could have a material adverse
effect on our results of operations or financial position.
Deferred income tax represents the tax effect of the differences between the book and tax
basis of assets and liabilities. Deferred tax assets are assessed periodically by management to
determine if they are realizable. Factors in managements determination include the performance of
the business including the ability to generate taxable capital gains. If based on available
information, it is more likely than not that the deferred income tax asset will not be realized,
then a valuation allowance must be established with a corresponding charge to net income. Such
charges could have a material adverse effect on our results of operations or financial position.
Item 1B. Unresolved Staff Comments
The Company has no unresolved staff comments as of December 31, 2009.
Item 2. Properties
We lease approximately 118,500 square feet of space at 120 Broadway, New York, New York, which
consists of the 30th and 31st floors and part of the 29th floor. The lease will end on December 31,
2021. See Note 17Commitments and Contingencies in the notes to our audited consolidated
financial statements included elsewhere in this report.
We also lease office space in Paramus, New Jersey; Melville, New York; Buffalo, New York; Quincy,
Massachusetts; Scarborough, Maine; Bedford, New Hampshire; Maitland, Florida; Irving, Texas; Lisle,
Illinois; White Plains, New York; Mobile, Alabama; Irvine, California; Palm Springs, California;
Glastonbury, Connecticut; Atlanta, Georgia; Chicago, Illinois; and Hamilton, Bermuda.
Item 3. Legal Proceedings
From time to time, we are involved in various legal proceedings in the ordinary course of business.
For example, to the extent a claim asserted by a third party in a lawsuit against one of our
insureds is covered by a particular policy, we may have a duty to defend the insured party against
the claim. These claims may relate to bodily injury, property damage or other compensable injuries
as set forth in the policy. Thus, when such a lawsuit is submitted to us, in accordance with our
contractual duty we appoint counsel to represent any covered policyholders named as defendants in
the lawsuit. In addition, from time to time we may take a coverage position (e.g., denying
coverage) on a submitted property or liability claim with which the policyholder is in
disagreement. In such cases, we may be sued by the policyholder for a declaration of its rights
under the policy and/or for monetary damages, or we may institute a lawsuit against the
policyholder requesting a court to confirm the propriety of our position. We do not believe that
the resolution of any currently pending legal proceedings, either individually or taken as a whole,
will have a material adverse effect on our business, results of operations or financial condition.
In addition to litigation arising from the policies we issue, as with any company actively engaged
in business, from time to time we may be involved in litigation involving non-policyholders such as
vendors or other third parties with whom we have entered into contracts and out of which disputes
have arisen, or litigation arising from employment-related matters, such as actions by employees
claiming unlawful treatment or improper termination.
On May 28, 2009, Munich Reinsurance America, Inc. (Munich) commenced an action against TICNY in
the United States District Court for the District of New Jersey seeking, inter alia, to recover
approximately $6.1 million under various retrocessional contracts pursuant to which TICNY reinsures
Munich. On June 22, 2009, TICNY filed its answer, in which it, inter alia, asserted two separate
counterclaims seeking to recover approximately $2.8 million under various reinsurance contracts
pursuant to which Munich reinsures TICNY. On June 17, 2009, Munich commenced a separate action
against TICNY in the United States District Court for the District of New Jersey seeking a
declaratory judgment that Munich is entitled to access to TICNYs books and records pertaining to
various quota share agreements, to which TICNY filed its answer on July 7, 2009. Because the
litigation is only in its preliminary stage, management is unable to assess the likelihood of any
particular outcome,
including what amounts, if any, will be recovered by the parties from each other under the
reinsurance and retrocession contracts that are at issue. Accordingly, an estimate of the possible
range of loss, if any, cannot be made.
Item 4. Reserved
40
PART II
Item 5. Market For Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Shareholders
Our common stock is traded on the NASDAQ Global Select Market (NASDAQ) under the ticker symbol
TWGP. We have one class of authorized common stock for 100,000,000 shares at a par value of $0.01
per share.
As of
February 25, 2010, there were 44,987,732 common shares issued and outstanding that were
held by 159 shareholders of record.
Price Range of Common Stock and Dividends Declared
The high and low sales prices for quarterly periods from January 1, 2008 through December 31, 2009
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
High |
|
|
Low |
|
|
Declared |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
|
$31.05 |
|
|
|
$19.70 |
|
|
|
$0.050 |
Second quarter |
|
|
28.32 |
|
|
|
22.70 |
|
|
|
0.070 |
Third quarter |
|
|
26.10 |
|
|
|
22.88 |
|
|
|
0.070 |
Fourth quarter |
|
|
25.78 |
|
|
|
22.29 |
|
|
|
0.070 |
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
|
$33.73 |
|
|
|
$23.17 |
|
|
|
$0.050 |
Second quarter |
|
|
28.26 |
|
|
|
21.03 |
|
|
|
0.050 |
Third quarter |
|
|
27.53 |
|
|
|
17.83 |
|
|
|
0.050 |
Fourth quarter |
|
|
28.69 |
|
|
|
15.76 |
|
|
|
0.050 |
Dividend Policy
The Company paid quarterly dividends of $0.05 per share on March 16, 2009 and $0.07 on June 15,
2009, September 14, 2009 and December 14, 2009. Any future determination to pay dividends will be
at the discretion of our Board of Directors and will be dependent upon our results of operations
and cash flows, our financial position and capital requirements, general business conditions,
legal, tax, regulatory and any contractual restrictions on the payment of dividends and any other
factors our Board of Directors deems relevant.
Tower is a holding company and has no direct operations. Its ability to pay dividends depends, in
part, on the ability of our Insurance Subsidiaries and TRM to pay dividends to it. Our Insurance
Subsidiaries are subject to significant regulatory restrictions limiting their ability to declare
and pay dividends. See BusinessRegulation and Managements Discussion and Analysis of Financial
Condition and Results of Operations.
Pursuant to the terms of the subordinated debentures underlying our trust preferred securities, we
and our subsidiaries cannot declare or pay any dividends if we are in default of or if we have
elected to defer payments of interest on those debentures. The Company declared dividends on common
stock as follows:
|
|
|
|
|
|
|
|
|
(in $ thousands) |
|
2009 |
|
|
2008 |
|
|
Common stock dividends declared |
|
$ |
10,740 |
|
|
$ |
4,608 |
|
In 2009, the Company purchased 38,268 shares of its common stock from employees in connection
with the vesting of restricted stock issued in connection with its 2004 Long Term Equity
Compensation Plan (the Plan). The shares were withheld at
the direction of the employees as permitted under the Plan
41
in order to pay the minimum amount of tax
liability owed by the employee from the vesting of those shares.
The following table summarizes the Companys stock repurchases for the three-month period ended
December 31, 2009, and represents employees withholding tax obligations on the vesting of
restricted stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares |
|
|
Maximum Number |
|
|
|
Total |
|
|
|
|
|
|
Purchased as Part |
|
|
(or Approximate |
|
|
|
Number |
|
|
Average |
|
|
of Publically |
|
|
Dollar Value) of |
|
|
|
of Shares |
|
|
Price Paid |
|
|
Announced Plans |
|
|
Shares that May Yet |
|
Period |
|
Purchased |
|
|
per Share |
|
|
or Programs |
|
|
be Purchased Under |
|
|
October 1 - 31, 2009 |
|
|
3,365 |
|
|
|
$24.68 |
|
|
|
|
|
|
|
|
November 1 - 30, 2009 |
|
|
11,395 |
|
|
|
24.62 |
|
|
|
|
|
|
|
|
December 1 - 31, 2009 |
|
|
5,719 |
|
|
|
23.53 |
|
|
|
|
|
|
|
|
|
Total |
|
|
20,479 |
|
|
|
$24.32 |
|
|
|
|
|
|
|
|
|
42
Item 6. Selected Consolidated Financial Information
The selected consolidated income statement data for the years ended December 31, 2009, 2008, 2007,
and the balance sheet data as of December 31, 2009 and 2008 are derived from our audited financial
statements included elsewhere in this document, which have been prepared in accordance with GAAP
and have been audited by Johnson Lambert & Co. LLP, our independent registered public accounting
firm. You should read the following selected consolidated financial information along with the
information contained in this document, including Managements Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated financial statements and
related notes included elsewhere in this Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
($ in millions, except per share amounts) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
Income Statement Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written |
|
|
$1,070.7 |
|
|
|
$634.8 |
|
|
|
$524.0 |
|
|
|
$432.7 |
|
|
|
$300.1 |
|
Ceded premiums written |
|
|
184.5 |
|
|
|
290.8 |
|
|
|
264.8 |
|
|
|
187.6 |
|
|
|
88.3 |
|
|
Net premiums written |
|
|
886.2 |
|
|
|
344.0 |
|
|
|
259.2 |
|
|
|
245.1 |
|
|
|
211.8 |
|
|
Net premiums earned |
|
|
854.7 |
|
|
|
314.6 |
|
|
|
286.1 |
|
|
|
224.0 |
|
|
|
164.4 |
|
Ceding commission revenue |
|
|
43.9 |
|
|
|
79.1 |
|
|
|
71.0 |
|
|
|
43.1 |
|
|
|
25.2 |
|
Insurance services revenue |
|
|
5.1 |
|
|
|
68.2 |
|
|
|
33.3 |
|
|
|
8.0 |
|
|
|
14.1 |
|
Policy billing fees |
|
|
3.0 |
|
|
|
2.3 |
|
|
|
2.0 |
|
|
|
1.1 |
|
|
|
0.9 |
|
Net investment income |
|
|
74.9 |
|
|
|
34.6 |
|
|
|
36.7 |
|
|
|
23.0 |
|
|
|
15.0 |
|
Net realized gains (losses) on investments |
|
|
1.5 |
|
|
|
(14.4 |
) |
|
|
(17.5 |
) |
|
|
- |
|
|
|
0.1 |
|
|
Total revenues |
|
|
983.1 |
|
|
|
484.4 |
|
|
|
411.6 |
|
|
|
299.2 |
|
|
|
219.7 |
|
Losses and loss adjustment expenses |
|
|
475.5 |
|
|
|
162.7 |
|
|
|
157.9 |
|
|
|
135.1 |
|
|
|
96.6 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct and ceding commission expenses |
|
|
204.6 |
|
|
|
132.5 |
|
|
|
101.0 |
|
|
|
60.5 |
|
|
|
43.8 |
|
Other
operating expenses (1) |
|
|
129.9 |
|
|
|
91.5 |
|
|
|
77.3 |
|
|
|
53.7 |
|
|
|
42.6 |
|
Acquisition-related transaction costs |
|
|
14.0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Interest expense |
|
|
18.1 |
|
|
|
8.4 |
|
|
|
9.3 |
|
|
|
6.9 |
|
|
|
4.9 |
|
|
Total expenses |
|
|
842.1 |
|
|
|
395.1 |
|
|
|
345.5 |
|
|
|
256.2 |
|
|
|
187.9 |
|
Other Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in unconsolidated affiliate |
|
|
(0.8 |
) |
|
|
0.3 |
|
|
|
2.4 |
|
|
|
0.9 |
|
|
|
- |
|
Gain from issuance of common stock
by unconsolidated affiliate |
|
|
- |
|
|
|
- |
|
|
|
2.7 |
|
|
|
7.9 |
|
|
|
- |
|
Gain on investment in acquired unconsolidated affiliate |
|
|
7.4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Gain on bargain purchase |
|
|
13.2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Warrant received from unconsolidated affiliate |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4.6 |
|
|
|
- |
|
|
Income before income taxes |
|
|
160.8 |
|
|
|
89.6 |
|
|
|
71.2 |
|
|
|
56.4 |
|
|
|
31.8 |
|
Income tax expense |
|
|
51.5 |
|
|
|
32.1 |
|
|
|
26.1 |
|
|
|
19.7 |
|
|
|
11.1 |
|
|
Net income |
|
|
$109.3 |
|
|
|
$57.5 |
|
|
|
$45.1 |
|
|
|
$36.7 |
|
|
|
$20.7 |
|
|
Net income available to common stockholders |
|
|
$109.3 |
|
|
|
$57.5 |
|
|
|
$44.4 |
|
|
|
$36.6 |
|
|
|
$20.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share (9) |
|
|
$2.78 |
|
|
|
$2.47 |
|
|
|
$1.94 |
|
|
|
$1.83 |
|
|
|
$1.05 |
|
Diluted earnings per share (9) |
|
|
$2.76 |
|
|
|
$2.45 |
|
|
|
$1.92 |
|
|
|
$1.79 |
|
|
|
$1.01 |
|
Weighted
average outstanding (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
39,363 |
|
|
|
23,291 |
|
|
|
22,927 |
|
|
|
19,932 |
|
|
|
19,756 |
|
Diluted |
|
|
39,581 |
|
|
|
23,485 |
|
|
|
23,128 |
|
|
|
20,511 |
|
|
|
20,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Insurance Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
ratio (2) |
|
|
54.2% |
|
|
|
49.9% |
|
|
|
50.7% |
|
|
|
55.0% |
|
|
|
56.8% |
|
Gross
underwriting expense ratio (3) |
|
|
30.9% |
|
|
|
30.4% |
|
|
|
29.2% |
|
|
|
28.7% |
|
|
|
30.8% |
|
|
Gross
combined ratio (4) |
|
|
85.1% |
|
|
|
80.3% |
|
|
|
79.9% |
|
|
|
83.7% |
|
|
|
87.6% |
|
|
Net loss
ratio (5) |
|
|
55.6% |
|
|
|
51.7% |
|
|
|
55.2% |
|
|
|
60.3% |
|
|
|
58.8% |
|
Net
underwriting expense ratio (6) |
|
|
32.7% |
|
|
|
30.7% |
|
|
|
28.5% |
|
|
|
27.3% |
|
|
|
29.3% |
|
|
Net combined
ratio (7) |
|
|
88.3% |
|
|
|
82.4% |
|
|
|
83.7% |
|
|
|
87.6% |
|
|
|
88.1% |
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
($ in millions, except per share amounts) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
Summary Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
$164.9 |
|
|
|
$136.3 |
|
|
|
$77.7 |
|
|
|
$100.6 |
|
|
|
$38.8 |
|
Investments at fair value |
|
|
1,896.8 |
|
|
|
541.0 |
|
|
|
619.1 |
|
|
|
464.0 |
|
|
|
357.2 |
|
Reinsurance recoverable |
|
|
214.5 |
|
|
|
272.6 |
|
|
|
207.8 |
|
|
|
118.0 |
|
|
|
104.8 |
|
Deferred acquisition costs, net |
|
|
170.7 |
|
|
|
53.1 |
|
|
|
39.3 |
|
|
|
35.8 |
|
|
|
29.2 |
|
Total assets |
|
|
3,313.0 |
|
|
|
1,538.4 |
|
|
|
1,355.6 |
|
|
|
954.1 |
|
|
|
657.5 |
|
Loss and loss adjustment expenses |
|
|
1,132.0 |
|
|
|
535.0 |
|
|
|
501.2 |
|
|
|
302.5 |
|
|
|
198.7 |
|
Unearned premium |
|
|
658.9 |
|
|
|
328.8 |
|
|
|
272.8 |
|
|
|
227.0 |
|
|
|
157.8 |
|
Long-term debt and redeemable preferred stock |
|
|
235.1 |
|
|
|
101.0 |
|
|
|
101.0 |
|
|
|
68.0 |
|
|
|
47.4 |
|
Total stockholders equity |
|
|
1,050.5 |
|
|
|
335.2 |
|
|
|
309.4 |
|
|
|
223.9 |
|
|
|
144.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share(8) |
|
|
$23.35 |
|
|
|
$14.36 |
|
|
|
$13.34 |
|
|
|
$9.23 |
|
|
|
$7.29 |
|
Dividends declared per share-common stock |
|
|
$0.26 |
|
|
|
$0.20 |
|
|
|
$0.15 |
|
|
|
$0.10 |
|
|
|
$0.10 |
|
|
|
|
|
(1) |
|
Includes acquisition expenses and other underwriting expenses (which are general administrative expenses related to
underwriting operations in our Insurance Subsidiaries) as well as other insurance services expenses (which are
general administrative expenses related to insurance services operations). |
|
(2) |
|
The gross loss ratio is calculated by dividing gross losses (consisting of losses and loss adjustment expenses) by
gross premiums earned. |
|
(3) |
|
The gross underwriting expense ratio is calculated by dividing gross underwriting expenses (consisting of direct
commission expenses and other underwriting expenses net of policy billing fees) by gross premiums earned. |
|
(4) |
|
The gross combined ratio is the sum of the gross loss ratio and the gross underwriting expense ratio. |
|
(5) |
|
The net loss ratio is calculated by dividing net losses and loss adjustment expenses by net premiums earned. |
|
(6) |
|
The net underwriting expense ratio is calculated by dividing net underwriting expenses (consisting of direct
commission expenses and other underwriting expenses net of policy billing fees and ceding commission revenue) by
net premiums earned. Historically, the ceding commission revenue we earn on our ceded premiums has been higher than
our expenses incurred to produce those premiums; our extensive use of quota share reinsurance has caused our net
underwriting expense ratio in certain periods to be lower than our gross underwriting expense ratio under GAAP. |
|
(7) |
|
The net combined ratio is the sum of the net loss ratio and the net underwriting expense ratio. |
|
(8) |
|
Book value per share is based on total common stockholders equity divided by common shares outstanding at year end. |
|
(9) |
|
Prior year earnings per share have been restated for new GAAP guidance adopted in 2009 which requires unvested
share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents be considered
participating securities and included in the computation of earnings per share. |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our consolidated audited financial statements and accompanying notes
which appear elsewhere in this Form 10-K. It contains forward-looking statements that involve risks
and uncertainties. See BusinessNote on Forward-Looking Statements for more information. Our
actual results could differ materially from those anticipated in these forward-looking statements
as a result of various factors, including those discussed below and elsewhere in this Form 10-K,
particularly under the headings BusinessRisk Factors and BusinessNote on Forward-Looking
Statements.
Overview
Tower, through its subsidiaries, offers a broad range of commercial, personal and specialty
property and casualty insurance products and services to businesses in various industries and to
individuals. We provide coverage for many different market segments, including non-standard risks
that do not fit the underwriting criteria of standard risk carriers due to factors such as type of
business, location and premium per policy. We provide these products on both an admitted and excess
and surplus (E&S) basis.
44
Our consolidated results of operations reflect significant changes in 2009 as a result of
acquisitions completed in the year. During the first quarter of 2009, we closed on the acquisitions
of CastlePoint and Hermitage on February 5, 2009 and February 27, 2009, respectively. During the
fourth quarter of 2009, we closed on the renewal rights acquisition of AequiCaps workers
compensation business and the acquisition of SUA. The acquisitions completed in 2009, expanded our
distribution platform. As a result of the acquisitions of CastlePoint and SUA, we have expanded our
commercial product offerings to target narrowly defined homogeneous classes of business that we
refer to as specialty business through our Specialty Business segment. We have expanded our excess
and surplus lines distribution through Hermitage in our Brokerage segment.
As a result of the significant changes in our business, we have changed the presentation of our
business results by allocating our previously reported insurance segment into our Brokerage
Insurance and Specialty Business segments based on the way management organizes the segments for
making operating decisions and assessing profitability. Accordingly, we now report results for
three segments: Brokerage Insurance, Specialty Business and Insurance Services. The prior year
segment disclosures have been restated to conform to the current presentation. Because we do not
manage our assets by segments, our investment income is not allocated among our segments. Operating
expenses incurred by each segment are recorded in such segment directly. General corporate overhead
not incurred by an individual segment is allocated based upon the methodology deemed to be most
appropriate which may include employee head count, policy count and premiums earned in each
segment.
We offer our products and services through our Insurance Subsidiaries, which include TICNY, TNIC,
PIC, NEIC, MVIC, CPIC, CPFL, HIC, KIC and CPNIC (operating as SUA in some jurisdictions) as well as
our management services subsidiaries, which include TRM, CPM and CPRMFL (operating as AequiCap CP
Services Group, Inc. in some jurisdictions). Results for our Insurance Subsidiaries are reported in
our Brokerage Insurance segment for products distributed through our network of retail and
wholesale agents and in our Specialty Business segment for products distributed through program
underwriting agents and reinsurance. Results for our Management Services subsidiaries are reported
in our Insurance Services segment.
Our commercial lines products include commercial multiple-peril (provides both property and
liability insurance), monoline general liability (insures bodily injury or property damage
liability), commercial umbrella, monoline property (insures buildings, contents or business
income), workers compensation and commercial automobile policies. Our personal lines products
consist of homeowners, dwelling, personal automobile and other liability policies.
In our Insurance Services segment, we generate management fees and commission income from our
managing general agencies by producing premiums on behalf of issuing companies, and we generate
fees by providing claims administration and reinsurance intermediary services.
Acquisitions
Specialty Underwriters Alliance, Inc.
On November 13, 2009, the Company completed the acquisition of SUA, a specialty property and
casualty insurance company for approximately $107 million. SUA offers specialty commercial property
and casualty insurance products through independent program underwriting agents that serve niche
groups of insureds. The acquisition of SUA expands the Companys Specialty Business segment and its
regional presence in the Midwest.
AequiCap
On October 14, 2009, the Company completed the acquisition of the renewal rights to the workers
compensation business of AequiCap Program Administrators Inc. (AequiCap), an underwriting agency based
in Fort Lauderdale, Florida. The acquired business primarily consists of small, low to moderate
hazard workers compensation policies in Florida. During 2009, we entered into an agreement with
AequiCap to provide claims handling services for workers compensation claims. Most of the
employees of AequiCap involved in the servicing of the workers compensation business became
employees of the Company. The acquisition of this business expands the Companys regional presence
in the Southeast.
Hermitage
On February 27, 2009, the Company completed the acquisition of Hermitage, a property and casualty
insurance holding company. Hermitage offers both admitted and excess and surplus lines (E&S)
products. This transaction further expands the Companys wholesale distribution system nationally
and establishes a network of retail agents in the Southeast.
45
CastlePoint
On February 5, 2009, the Company completed the acquisition of 100% of the issued and outstanding
common stock of CastlePoint Holdings, Ltd. (CastlePoint), a Bermuda exempted corporation,
pursuant to an Agreement and Plan of Merger, dated as of August 4, 2008, between the Company and
CastlePoint. CastlePoint was a Bermuda holding company organized to provide property and casualty
insurance and reinsurance business solutions, products and services primarily to small insurance
companies and program underwriting managers in the United States.
See Footnote 3 Acquisitions for further details. Prior to the acquisition, we had an investment
in CastlePoint which was revalued at acquisition resulting in a $7.4 million pre-tax gain in 2009.
Preserver
On April 10, 2007, we completed the acquisition of 100% of the issued and outstanding common stock
of Preserver. The transaction had a base purchase price of approximately $64.7 million. In
addition, we assumed $12 million of Preservers trust preferred securities at the closing.
Preserver was a privately-held holding company for a regional insurance company group specializing
in small commercial and personal lines insurance in the Northeast. The acquisition gave the Company
access to 250 new retail agencies and accelerated our Northeast expansion plans.
Principal Revenue and Expense Items
We generate revenue from four primary sources:
|
|
Ceding commission revenue, |
|
|
Insurance Service revenue, and |
|
|
Net investment income and realized gains and losses on investments. |
We incur expenses from four primary sources:
|
|
Losses and loss adjustment expenses, |
Each of these is discussed below.
Net premiums earned. Premiums written include all premiums received in an accounting period.
Premiums are earned over the term of the related policy. The portion of the premium that relates to
the policy term that has not yet expired is included in the balance sheet as unearned premium to be
earned in subsequent accounting periods. Premiums can be assumed from or ceded to reinsurers.
Direct premiums combined with assumed premiums are referred to as gross premiums and subtracting
premiums ceded to reinsurers results in net premiums.
Ceding commission revenue. We earn ceding commission revenue (generally a percentage of the
premiums ceded) on the gross premiums written that we cede to reinsurers under quota share
reinsurance agreements.
Insurance Service revenue. We earn fee income in the form of commissions generated by TRM, CPM and
CPRMFL on premiums produced by their managing general agencies and fees earned from their claims
administration, other administration services and reinsurance intermediary services. We also earn
fee income in the form of policy billing fees arising in the course of collecting premiums from our
policyholders.
Net investment income and realized gains and losses on investments. We invest our available funds
in cash, cash equivalents and securities. Our investment income includes interest and dividends
earned on our invested assets. Realized gains and losses on invested assets are reported separately
from net investment income. We earn realized gains when invested assets are sold for an amount
greater than their amortized cost, in the case of fixed maturity securities, and cost, in the case
of equity securities, and we recognize realized losses when invested assets are written down or
sold for an amount less than their amortized cost or actual cost, as applicable.
Losses and loss adjustment expenses. We establish loss and loss adjustment expense (LAE) reserves
in an amount equal to our estimate of the ultimate liability for claims under our insurance
policies and the cost of adjusting and settling those claims. Loss and loss adjustment expenses recorded in a period include estimates for losses incurred during the
period and changes in estimates for prior periods.
46
Operating expenses. In our Brokerage Insurance and Specialty Business segments, we refer to the
operating expenses that we incur to underwrite risks as underwriting expenses. These include direct
and ceding commission expenses (payments to our producers for the premiums that they generate for
us) and other underwriting expenses. In our Insurance Services segment, operating expenses consist
of direct commissions paid to producers and other insurance service expenses.
Interest expense. We pay interest on our loans, on our subordinated debentures and on segregated
assets placed in trust accounts on a funds withheld basis in order to collateralize reinsurance
recoverables. In addition, interest expense includes amortization of any debt issuance costs over
the remaining term of our subordinated debentures.
Income taxes. We pay Federal, state and local income taxes and other taxes.
Measurement of Results
We use various measures to analyze the growth and profitability of our business segments. In our
Brokerage Insurance and Specialty Business segments, we measure growth in terms of gross, ceded and
net premiums written, and we measure underwriting profitability by examining our loss, expense and
combined ratios. We also measure our gross and net written premiums to surplus ratios to measure
the adequacy of capital in relation to premiums written. In the Insurance Services segment, we
measure growth in terms of premiums produced by TRM, CPM and CPRMFL on behalf of other insurance
companies as well as fee and commission revenue received, and we analyze profitability by
evaluating income before taxes and the size of such income relative to our Insurance Subsidiaries
net premiums earned. On a consolidated basis, we measure profitability in terms of net income and
return on average equity.
Premiums written. We use gross premiums written to measure our sales of insurance products and, in
turn, our ability to generate ceding commission revenues from premiums that we cede to reinsurers.
Gross premiums written also correlates to our ability to generate net premiums earned.
Loss ratio. The loss ratio is the ratio of losses and LAE incurred to premiums earned and measures
the underwriting profitability of a companys insurance business. We measure our loss ratio on a
gross (before reinsurance) and net (after reinsurance) basis. We also measure the loss ratio on the
ceded portion (the difference between gross and net premiums) for our Brokerage Insurance and
Specialty Business segments. We use the gross loss ratio as a measure of the overall underwriting
profitability of the insurance business we write and to assess the adequacy of our pricing. We use
the loss ratio on the ceded portion of our insurance business to measure the experience on the
premiums that we cede to reinsurers, including the premiums ceded under our quota share treaties.
Since 2001, the loss ratio on such ceded business is considered in determining the ceding
commission rate that we earn on ceded premiums. Our net loss ratio is meaningful in evaluating our
financial results, which are net of ceded reinsurance, as reflected in our consolidated financial
statements. In addition, we use accident year and calendar year loss ratios to measure our
underwriting profitability. An accident year loss ratio measures losses and LAE for insured events
occurring in a particular year, regardless of when they are reported, as a percentage of premiums
earned during that particular accident year. A calendar year loss ratio measures losses and LAE for
insured events occurring during a particular year and the changes in estimates in loss and LAE
reserves from prior accident years as a percentage of premiums earned during that particular
calendar year.
Underwriting expense ratio. The gross underwriting expense ratio is the ratio of direct commission
expenses and other underwriting expenses less policy billing fees to gross premiums earned. The
gross underwriting expense ratio measures a companys operational efficiency in producing,
underwriting and administering its insurance business. Due to our historically high levels of
reinsurance, we also calculate our underwriting expense ratio after the effect of ceded
reinsurance. Ceding commission revenue is applied to reduce our underwriting expenses in our
insurance company operation. Because the ceding commission rate we earn on our premiums ceded has
historically been higher than our underwriting expense ratio on those premiums, our extensive use
of quota share reinsurance has, in certain periods, caused our net underwriting expense ratio in
certain periods to be lower than our gross expense ratio.
Combined ratio. We use the combined ratio to measure our underwriting performance. The combined
ratio is the sum of the loss ratio and the underwriting expense ratio. We analyze the combined
ratio on a gross (before the effect of reinsurance) and net (after the effect of reinsurance)
basis. If the combined ratio is at or above 100%, an insurance company is not underwriting
profitably and may not be profitable unless investment income is sufficient to offset underwriting
losses.
Premiums produced by TRM, CPM and CPRMFL. These companies operate managing general agencies that
earn commissions on written premiums produced on behalf of their issuing companies. Although TRM is
not an insurance company, we have historically utilized TRMs access to its issuing companies as a
means to expand our ability to generate premiums in states where our Insurance Subsidiaries were
not yet licensed.
47
Net income and return on average equity. We use net income to measure our profits and return on
average equity to measure our effectiveness in utilizing our stockholders equity to generate net
income on a consolidated basis. In determining return on average equity for a given year, net
income is divided by the average of stockholders equity for that year.
Operating income. Operating income excludes realized gains and losses and acquisition-related
transaction costs, net of tax. This is a common measurement for property and casualty insurance
companies. We believe this presentation enhances the understanding of our results of operations by
highlighting the underlying profitability of our insurance business. Additionally, these measures
are a key internal management performance standard.
The following table provides a reconciliation of operating income to net income on a GAAP basis.
The operating income is used to calculate operating earnings per share and operating return on
average equity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
(in $ thousands) |
|
2009 |
|
2008 |
|
2007 |
|
|
Operating income |
|
|
$ 119,820 |
|
|
|
$ 66,803 |
|
|
|
$ 56,464 |
|
Net realized gains (losses) on investments, net of tax |
|
|
976 |
|
|
|
(9,330 |
) |
|
|
(11,382 |
) |
Acquisition-related transaction costs, net of tax |
|
|
(11,466 |
) |
|
|
- |
|
|
|
- |
|
|
|
Net Income |
|
|
$ 109,330 |
|
|
|
$ 57,473 |
|
|
|
$ 45,082 |
|
|
|
Critical Accounting Estimates
In preparing our consolidated financial statements, management is required to make estimates and
assumptions that affect reported assets, liabilities, revenues and expenses and the related
disclosures as of the date of the financial statements. Management considers an accounting estimate
to be critical if it requires assumptions to be made that involve uncertainty at the time the
estimate is made and, had different assumptions been selected, the changes in the outcome could
have a significant effect on our financial statements. We review our critical accounting estimates
and assumptions quarterly. Actual results may differ, perhaps substantially, from the estimates.
Our most critical accounting estimates involve the reporting of reserves for losses (including
losses that have occurred but had not been reported by the financial statement date) and LAE,
establishing fair value of losses and LAE for acquired businesses, net earned premiums, the
reporting of ceding commissions earned, the amount and recoverability of reinsurance recoverable
balances, deferred acquisition costs, investment impairments and potential impairments of goodwill
and intangible assets.
Loss and LAE reserves. The reserving process for loss and LAE reserves provides our best estimate
at a particular point in time of the ultimate unpaid cost of all losses and LAE incurred, including
settlement and administration of losses, and is based on facts and circumstances then known and
including losses that have been incurred but not yet reported. The process includes using actuarial
methodologies to assist in establishing these estimates, judgments relative to estimates of future
claims severity and frequency, the length of time before losses will develop to their ultimate
level and the possible changes in the law and other external factors that are often beyond our
control. There are various actuarial methods that are appropriate for the different lines of
business, and our actuaries use of a particular method or weighting of methods depends in part on
the maturity of each accident year by line of business, the limits of liability covered under the
policies, the presence or absence of large claims in the experience, and other factors. In general,
the various actuarial methods can be grouped into three categories: loss ratio projection, incurred
loss projection, and the Bornhuetter-Ferguson (B-F) method. For the most recent accident year and
for liability lines of business the actuarial method given the most weight is usually the loss
ratio method, since the percentage of ultimate claims reported to date is expected to be low and
the immature reported claims experience is not a reliable indicator of ultimate losses for that
accident year. For property lines of business for the most recent accident year the B-F method is
usually given the most weight, because experience typically shows that there is a small percentage
of claims reported in the subsequent period due to normal lags in reporting and processing of
claims in these lines of business that can be relatively reliably estimated as a percentage of
premiums, which is reflected in the B-F method. For each line of business, the actuarial reserving
method usually given the most weight shifts from the loss ratio projection to the B-F method to the
incurred loss projection as each accident year matures. These methods are described in
BusinessLoss and Loss Adjustment Expense Reserves.
This process helps management set carried loss reserves based upon the actuaries best estimates,
using estimates made by segment, product or line of business, territory, and accident year. The
actuaries also separately estimate loss reserves from LAE reserves and within LAE reserves
estimates are made for defense and cost containment expenses or Allocated Loss Adjustment Expenses
(ALAE) and for other claims adjusting expenses or Unallocated Loss Adjustment Expenses (ULAE).
The amount of loss and LAE reserves for reported claims is based primarily upon a case-by-case
evaluation of coverage, liability, injury severity, and any other information considered pertinent
to estimating the exposure presented by the claim. The amounts of loss and LAE reserves for
unreported claims are determined using historical information by line of business as adjusted to
current conditions. Since our process
48
produces loss reserves set by management based upon the actuaries
best estimate, there is no explicit or implicit provision for uncertainty in the carried loss
reserves, except for required provisions in connection with acquisitions which are separately
determined.
Due to the inherent uncertainty associated with the reserving process, the ultimate liability may
differ, perhaps substantially, from the original estimate. Such estimates are regularly reviewed
and updated and any resulting adjustments are included in the current years results. Reserves are
closely monitored and are recomputed periodically using the most recent information on reported
claims and a variety of statistical techniques. Specifically, on at least a quarterly basis, we
review, by line of business, existing reserves, new claims, changes to existing case reserves and
paid losses with respect to the current and prior years. See BusinessLoss and Loss Adjustment
Expense Reserves for additional information regarding our loss and LAE reserves.
We segregate our data for estimating loss reserves. The property lines include Fire, Homeowners,
CMP Property, Multi-Family Dwellings and Auto Physical Damage. The casualty lines include CMP
Liability, Other Liability, Workers Compensation, Commercial Auto Liability, and Personal Auto
Liability. Brokerage Insurance segment reserves are estimated separately from Specialty Business
segment reserves. For the Brokerage Insurance segment we analyze reserves by line of business and,
where appropriate, we further segregate the data for analysis purposes between small, middle and
large policies sizes and by state or region. We also analyze various producers business separately
where the volume of business from those producers is considered significant and the characteristics
of the business from those particular producers are perceived to be different. Within the Specialty
Business segment, we estimate loss and loss expenses reserves utilizing similar line of business
breakdowns, and generally we also estimate the loss and loss expense reserves by program and within
the reinsurance business by treaty.
Two key assumptions that materially impact the estimate of loss reserves are the loss ratio
estimate for the current accident year and the loss development factor selections for all accident
years. The loss ratio estimate for the current accident year is selected after reviewing historical
accident year loss ratios adjusted for rate and price changes, trend, mix of business, and other
factors.
In most cases, our data is sufficiently credible to determine loss development factors utilizing
our own data. In some cases, we supplement our own loss development experience with industry data
and utilizing historical loss development experience for particular books of business, programs or
treaties obtained from our sources. The loss development factors are reviewed at least annually,
and whenever there is a significant change in the underlying business. Each quarter we test the
loss development by analyzing actual emerging claims compared to expected development.
The chart below shows the average number of years by product line when we expect approximately 50%,
90% and 99% of losses to be reported for a given accident year, although these reporting lags may
differ significantly by territory and for differences in underlying coverage characteristics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of years |
Segment |
|
50% |
|
90% |
|
99% |
|
Fire |
|
< 1 year |
|
< 1 year |
|
2 years |
Homeowners |
|
< 1 year |
|
< 2 years |
|
3 years |
Multi-Family Dwelling |
|
< 2 years |
|
< 2 years |
|
5 years |
CMP Property |
|
< 1 year |
|
1 year |
|
2 years |
CMP Liability |
|
< 2 years |
|
5 years |
|
9 years |
Workers Compensation |
|
< 1 year |
|
2 years |
|
5 years |
Other Liability |
|
3 years |
|
4 years |
|
9 years |
Commercial Auto Liability |
|
< 1 year |
|
3 years |
|
4 years |
Auto Physical Damage |
|
< 1 year |
|
< 1 year |
|
1 year |
Personal Auto Liability |
|
< 1 year |
|
< 2 years |
|
4 years |
We estimate ALAE reserves separately for claims that are defended by in-house attorneys, claims
that are handled by other attorneys that are not employees, and miscellaneous ALAE costs such as
witness fees and court costs.
For claims that are defended by in-house attorneys, we estimate the defense cost per claim, and we
attribute to each of these claims a fixed fee for defense work. We allocate to each of these
litigated claims 50% of the fixed fee when litigation on a particular claim begins and 50% of the
fee when the litigation is closed. The fee is determined actuarially based upon the projected
number of litigated claims and expected closing patterns at the beginning of each year as well as
the projected budget for our in-house attorneys, and these amounts are calibrated each quarter to
reimburse our in-house legal department for all of their costs.
49
For LAE stemming from defense by other attorneys who are not our employees, we implemented
automated legal fee auditing in the fourth quarter of 2008 that we believe has become relatively
common in the insurance industry and has been shown to reduce external attorneys bills by 5% to
10%.
ULAE for claims that are handled in-house by our claims adjusters utilize a similar process to that
described above for ALAE. We determine fixed fees per claim by line of business, and assign these
costs to line of business and accident year, with 50% of the fixed fee attributed to claims when a
claim is opened and 50% attributed to claims when they are closed. The IBNR portion of ULAE for
these claims is based upon 50% of the fixed fee per claims for in-house ULAE multiplied by the
number of claims open and by 100% of the fixed fee multiplied by the estimated number of claims to
be reported for prior accident dates.
For some types of claims and for some programs where we utilize third-party administrators (TPA)
to adjust claims, we pay them fees which are included in ULAE. In some cases, we arrange for fixed
percentages of premiums earned to be the fee for claims administration, and in other cases we
arrange for fixed fees per claim or hourly charges for ULAE services. The reserves for ULAE for
these situations is estimated based upon the particular arrangement for these types of claims by
product or program.
Establishing fair value of loss and LAE reserves for acquired companies. At acquisition date, loss
and LAE reserves must be set to fair value. As there are no readily observable markets for these
liabilities, we use a valuation model that estimates net nominal future cash flows related to the
loss and LAE reserve. This valuation is adjusted for the time value of money and a risk margin to
compensate the Company for bearing the risk associated with the liabilities.
Net premiums earned. Insurance policies issued or reinsured by us are short-duration contracts.
Accordingly, premium revenue, including direct writings and reinsurance assumed, net of premiums
ceded to reinsurers, is recognized as earned in proportion to the amount of insurance protection
provided, on a pro-rata basis over the terms of the underlying policies. Unearned premiums
represent premiums applicable to the unexpired portions of in-force insurance contracts at the end
of each year. Prepaid reinsurance premiums represent the unexpired portion of reinsurance premiums
ceded.
Ceding commissions earned. We have historically relied on quota share, excess of loss and
catastrophe reinsurance to manage our regulatory capital requirements and limit our exposure to
loss. Generally, we have ceded a significant portion of our insurance premiums to reinsurers in
order to maintain our net leverage ratio at our desired target level.
Ceding commissions under a quota share reinsurance agreement are based on the agreed upon
commission rate applied to the amount of ceded premiums written. Ceding commissions are realized as
income as ceded premiums written are earned. The ultimate commission rate earned on our quota share
reinsurance contracts is determined by the loss ratio on the ceded premiums earned. If the
estimated loss ratio decreases from the level currently in effect, the commission rate increases
and additional ceding commissions are earned in the period in which the decrease is recognized. If
the estimated loss ratio increases, the commission rate decreases, which reduces ceding commissions
earned. As a result, the same uncertainties associated with estimating loss and LAE reserves affect
the estimates of ceding commissions earned. We monitor the ceded ultimate loss ratio on a quarterly
basis to determine the effect on the commission rate of the ceded premiums earned that we accrued
during prior accounting periods. The estimated ceding commission income relating to prior years
recorded in 2009, 2008, and 2007 was a decrease of $2.2 million, a decrease of $1.8 million and a
decrease of $0.5 million, respectively.
Reinsurance recoverables. Reinsurance recoverable balances are established for the portion of
paid and unpaid loss and LAE that is assumed by reinsurers. Prepaid reinsurance premiums represent
unearned premiums that are ceded to reinsurers. Reinsurance recoverables and prepaid reinsurance
premiums are reported on our balance sheet separately as assets, instead of netted against the
related liabilities, since reinsurance does not relieve us of our legal liability to policyholders
and ceding companies. We are required to pay losses even if a reinsurer fails to meet its
obligations under the applicable reinsurance agreement. Consequently, we bear credit risk with
respect to our individual reinsurers and may be required to make judgments as to the ultimate
recoverability of our reinsurance recoverables. Additionally, the same uncertainties associated
with estimating loss and LAE reserves affect the estimates of the amount of ceded reinsurance
recoverables. We continually monitor the financial condition and rating agency ratings of our
reinsurers. Non-admitted reinsurers are required to collateralize their share of unearned premium
and loss reserves either by placing funds in a trust account meeting the requirements of New York
Regulation 114 or by providing a letter of credit. In addition, from October 2003 to December 31,
2005, we placed our quota share treaties on a funds withheld basis, under which TICNY retained
the ceded premiums written and placed that amount in segregated trust accounts from which TICNY may
withdraw amounts due to it from the reinsurers.
Deferred acquisition costs, net. We defer certain expenses and commission revenues that vary with
and are directly related to the acquisition of new and renewal insurance business, including
commission expense on gross premiums written, commission income on ceded premiums written, premium
taxes and certain other costs related to the acquisition of insurance contracts. These costs and
revenues are capitalized and the resulting asset, deferred acquisition costs, net, is amortized and
charged to expense or income in future periods as gross and ceded premiums written are earned. The
method followed in computing deferred acquisition costs, net, limits the amount of such deferred amounts to its estimated realizable
value. The ultimate recoverability of deferred acquisition
50
costs is dependent on the continued
profitability of our insurance underwriting. We also consider anticipated invested income in
determining the recoverability of these costs. If our insurance underwriting ceases to be
profitable, we may have to write off a portion of our deferred acquisition costs, resulting in a
further charge to income in the period in which the underwriting losses are recognized. The value
of business acquired (VOBA) is an intangible asset relating to the estimated fair value of the
unexpired insurance policies acquired in a business combination. VOBA is determined at the time of
a business combination and is reported on the consolidated balance sheet with DAC and is amortized
in proportion to the timing of the estimated underwriting profit associated with the in force
policies acquired. The cash flow or interest component of VOBA is amortized in proportion to the
expected pattern of future cash flows. The Company considers anticipated investment income in
determining the recoverability of these costs and believes they are fully recoverable.
Impairment of invested assets. Impairment of investment securities results in a charge to
operations when a market decline below cost is deemed to be other-than-temporary. We regularly
review our fixed-maturity and equity securities portfolios to evaluate the necessity of recording
impairment losses for other-than-temporary declines in the fair value of investments. In evaluating
potential impairment, we consider, among other criteria:
|
|
the overall financial condition of the issuer; |
|
|
|
the current fair value compared to amortized cost or cost, as appropriate; |
|
|
|
the length of time the securitys fair value has been below amortized cost or cost; |
|
|
|
specific credit issues related to the issuer such as changes in credit rating, reduction or
elimination of dividends or non-payment of scheduled interest payments; |
|
|
|
whether management intends to sell the security and, if not, whether it is more likely than
not that the Company will be required to sell the security before recovery of its amortized
cost basis; |
|
|
|
specific cash flow estimations for mortgage-backed securities and |
|
|
|
current economic conditions. |
If an other-than-temporary-impairment (OTTI) loss is determined for a fixed-maturity security,
the credit portion is recorded in the income statement as net realized losses on investments and
the non-credit portion is recorded in accumulated other comprehensive income. The credit portion
results in a permanent reduction in the cost basis of the underlying investment. The determination
of OTTI is a subjective process and different judgments and assumptions could affect the timing of
loss realization. We recorded OTTI losses in our fixed maturity and equity securities in the
amounts of $44.2 million, $22.7 million and $10.1 million in 2009, 2008, and 2007, respectively.
Since total unrealized losses are a component of stockholders equity, any recognition of
additional OTTI losses would have no effect on our comprehensive income or stockholders equity.
See
Business-Investments and Note 4 Investments in the notes to consolidated financial
statements for additional detail regarding our investment portfolio at December 31, 2009, including
disclosures regarding other than temporary declines in investment value.
Goodwill and intangible assets and potential impairment. The costs associated with a group of
assets acquired in a transaction are allocated to the individual assets, including identifiable
intangible assets, based on their relative fair values. Purchase consideration in excess of the
fair value of tangible and intangible assets is recorded as goodwill.
Identifiable intangible assets with a finite useful life are amortized over the period in which the
asset is expected to contribute directly or indirectly to our future cash flows. Identifiable
intangible assets with finite useful lives are tested for recoverability whenever events or changes
in circumstances indicate that a carrying amount may not be recoverable. Identifiable intangible
assets with indefinite useful lives and goodwill are not amortized. Rather, they are tested for
recoverability at least annually or whenever events or changes in circumstances indicate that a
carrying amount may not be recoverable
An impairment loss is recognized if the carrying value of an intangible asset or goodwill is not
recoverable and its carrying amount exceeds its fair value. No impairment losses were recognized in
2009, 2008, and 2007. Significant changes in the factors we consider when evaluating our intangible
assets and goodwill for impairment losses could result in a significant charge for impairment
losses reported in our consolidated financial statements. See
Note 6 Goodwill and Intangible
Assets in the notes to consolidated financial statements.
Consolidated Results of Operations
As noted in the Overview section of Managements Discussion and Analysis of Financial Condition
and Results of Operations, we completed the acquisitions of CastlePoint on February 5, 2009,
Hermitage on February 27, 2009, AequiCap on October 14, 2009 and SUA on November 13, 2009.
51
Accordingly, our consolidated revenues and expenses reflect
significant changes as a result of these acquisitions particularly through the expansion of our
distribution platform that now includes all of the specialty business produced through program
underwriting agents and small insurance companies through CastlePoint and SUA, as reported in our
Specialty Business segment, and excess and surplus lines distribution through Hermitage, as
reported in our Brokerage Insurance segment.
Our results of operations are discussed below in two parts. The first part discusses the
consolidated results of operations. The second part discusses the results of each of our three
segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
($ in millions) |
|
2009 |
|
Change |
|
% |
|
2008 |
|
Change |
|
% |
|
2007 |
|
Brokerage insurance segment underwriting profit |
|
|
$ 75.6 |
|
|
|
$ 21.9 |
|
|
|
41 |
% |
|
|
$ 53.7 |
|
|
|
$ 7.3 |
|
|
|
16 |
% |
|
|
$ 46.4 |
|
Specialty business segment underwriting profit |
|
|
24.2 |
|
|
|
22.7 |
|
|
NM |
|
|
1.5 |
|
|
|
1.3 |
|
|
NM |
|
|
0.2 |
|
Insurance services segment pretax income |
|
|
0.9 |
|
|
|
(23.1 |
) |
|
|
-96 |
% |
|
|
24.0 |
|
|
|
12.8 |
|
|
|
114 |
% |
|
|
11.2 |
|
Net investment income |
|
|
74.9 |
|
|
|
40.3 |
|
|
|
117 |
% |
|
|
34.6 |
|
|
|
(2.1 |
) |
|
|
-6 |
% |
|
|
36.7 |
|
Net realized
gains (losses) on investments, including
other-than-temporary
impairments |
|
|
1.5 |
|
|
|
15.9 |
|
|
|
-110 |
% |
|
|
(14.4 |
) |
|
|
3.1 |
|
|
|
-18 |
% |
|
|
(17.5 |
) |
Corporate expenses |
|
|
(3.8 |
) |
|
|
(2.2 |
) |
|
|
134 |
% |
|
|
(1.6 |
) |
|
|
- |
|
|
|
2 |
% |
|
|
(1.6 |
) |
Acquisition-related transaction costs |
|
|
(14.0 |
) |
|
|
(14.0 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Interest expense |
|
|
(18.1 |
) |
|
|
(9.7 |
) |
|
|
114 |
% |
|
|
(8.4 |
) |
|
|
0.9 |
|
|
|
-9 |
% |
|
|
(9.3 |
) |
Other income (loss) |
|
|
19.6 |
|
|
|
19.4 |
|
|
NM |
|
|
0.2 |
|
|
|
(4.9 |
) |
|
|
-95 |
% |
|
|
5.1 |
|
|
Income before taxes |
|
|
160.8 |
|
|
|
71.2 |
|
|
|
199 |
% |
|
|
89.6 |
|
|
|
18.4 |
|
|
|
4 |
% |
|
|
71.2 |
|
Income tax expense |
|
|
51.5 |
|
|
|
19.4 |
|
|
|
60 |
% |
|
|
32.1 |
|
|
|
6.0 |
|
|
|
23 |
% |
|
|
26.1 |
|
|
Net income |
|
|
$ 109.3 |
|
|
|
$ 51.8 |
|
|
|
92 |
% |
|
|
$ 57.5 |
|
|
|
$ 12.4 |
|
|
|
30 |
% |
|
|
$ 45.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Measures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written and produced: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written by Brokerage and Specialty
Insurance Segments |
|
|
$ 1,070.7 |
|
|
|
$ 435.9 |
|
|
|
68.7 |
% |
|
|
$ 634.8 |
|
|
|
$ 110.8 |
|
|
|
21.1 |
% |
|
|
$ 524.0 |
|
Produced by Insurance Services Segment |
|
|
11.7 |
|
|
|
(163.7 |
) |
|
|
-93.3 |
% |
|
|
175.4 |
|
|
|
90.3 |
|
|
|
106.1 |
% |
|
|
85.1 |
|
Assumed premiums |
|
|
- |
|
|
|
5.2 |
|
|
|
-100.4 |
% |
|
|
(5.2 |
) |
|
|
(4.5 |
) |
|
NM |
|
|
(0.7 |
) |
|
Total |
|
|
$ 1,082.4 |
|
|
|
$ 277.4 |
|
|
|
34.5 |
% |
|
|
$ 805.0 |
|
|
|
$ 196.6 |
|
|
|
32.3 |
% |
|
|
$ 608.4 |
|
NM is shown where percentage change exceeds 500%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
Percent of total revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
|
86.9 |
% |
|
|
64.9 |
% |
|
|
69.5 |
% |
Commission and fee income |
|
|
5.3 |
% |
|
|
30.9 |
% |
|
|
25.8 |
% |
Net investment income |
|
|
7.6 |
% |
|
|
7.2 |
% |
|
|
8.9 |
% |
Net realized investment gains (losses) |
|
|
0.2 |
% |
|
|
-3.0 |
% |
|
|
-4.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios for Brokerage Insurance and Specialty Business Segments Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
54.2 |
% |
|
|
49.9 |
% |
|
|
50.7 |
% |
Net |
|
|
55.6 |
% |
|
|
51.7 |
% |
|
|
55.2 |
% |
Accident Year Loss Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
55.2 |
% |
|
|
53.6 |
% |
|
|
51.5 |
% |
Net |
|
|
55.9 |
% |
|
|
54.5 |
% |
|
|
55.8 |
% |
Underwriting Expense Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
30.9 |
% |
|
|
30.4 |
% |
|
|
29.2 |
% |
Net |
|
|
32.7 |
% |
|
|
30.7 |
% |
|
|
28.5 |
% |
Combined Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
85.1 |
% |
|
|
80.3 |
% |
|
|
79.9 |
% |
Net |
|
|
88.3 |
% |
|
|
82.4 |
% |
|
|
83.7 |
% |
Return on average equity (1) |
|
|
13.9 |
% |
|
|
17.8 |
% |
|
|
18.0 |
% |
|
|
|
|
|
(1) |
|
The impact of net realized investment gains (losses) and
acquisition-related transaction costs, net of tax lowered the return on average equity by 1.3%,
2.9% and 4.6% for the years ended December 31, 2009, 2008 and 2007, respectively. |
52
Consolidated Results of Operations 2009 Compared to 2008
Total revenues. Total revenues increased due to significant increases in net premiums earned and
net investment income stemming primarily from the acquisitions of CastlePoint and Hermitage that
occurred in the first quarter of 2009. Net premiums earned also increased due to the inclusion of
Brokerage Insurance premiums managed by Tower but previously placed with CastlePoint Insurance
Company. These sources of growth in total revenues were partially offset by reductions in
commission and fee income due to lower ceding quota share reinsurance in 2009 as compared to prior
years. Taken together, these changes caused net premiums earned to be a significantly higher
percentage of total revenues in 2009 as compared to 2008. This is discussed more fully under
Brokerage Insurance Segment Results of Operations and Specialty Business Segment Results of
Operations below. The following table shows the effects of the various acquisitions on our gross
premiums written in 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
($ in millions) |
|
Amount |
|
Change |
|
Gross premiums written for the year ended December 31, 2008 |
|
|
$ 634.8 |
|
|
|
|
|
Gross premiums written from companies acquired during year |
|
|
346.3 |
|
|
|
55 |
% |
Organic growth during year |
|
|
89.6 |
|
|
|
14 |
% |
|
Gross premiums written for the year ended December 31, 2009 |
|
|
$ 1,070.7 |
|
|
|
69 |
% |
|
We measure organic growth by including CPIC gross premiums written as if we owned CPIC in the
comparable prior year period. We believe this is meaningful because CPIC wrote brokerage business
that was managed by Tower and Tower wrote program business that was managed by CPIC. Organic
growth, as defined, was 14% for the year ended December 31, 2009 and resulted from expansion of the
brokerage business outside of the Northeast, the growth of programs that began in late 2008 in the
Specialty Business segment and the addition of several new programs within the Specialty Business
segment in 2009.
Premiums earned. Gross premiums earned increased significantly due to the CastlePoint and Hermitage
acquisitions. Net premiums earned by CastlePoint and Hermitage since the respective acquisition
dates were $351.2 million and $56.0 million, respectively, for the year ended December 31, 2009.
Net premiums earned also increased relative to gross premiums earned, because, as a result of the
additional capital obtained via the CastlePoint acquisition, as well as increased retained
earnings, we did not cede as much premiums for year ended December 31, 2009 compared to the same
period of 2008. Ceded premiums earned reflect runoff of quota share ceded premiums written in 2008,
excess of loss and property catastrophe ceded premiums and a quota share reinsurance contract
ceding our Brokerage Insurance segments liability business to Swiss Re and Allianz entered into in
the fourth quarter of 2009. Under this quota share agreement, we ceded 50% of earned premiums and
incurred losses on Brokerage Insurance segment liability lines that are part of Commercial
Multi-Peril policies and Other Liability policies. We did not have any other quota share treaties
in force in 2009. For periods prior to 2009 the quota share ceding percentages on our policies
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Ceded |
Dates |
|
Quota Share Reinsurance Agreement With |
|
Amount |
|
January 1, 2007 - March 31, 2007 |
|
CastlePoint Reinsurance |
|
|
49 |
% |
April 1 2007 - June 30, 2007 |
|
CastlePoint Reinsurance |
|
|
40 |
% |
April 1 2007 - June 30, 2007 |
|
CastlePoint Insurance Company |
|
|
9 |
% |
July 1, 2007 - December 31, 2007 (2) |
|
CastlePoint Reinsurance |
|
|
40 |
% |
January 1, 2008 - March 31, 2008 (2) |
|
CastlePoint Reinsurance |
|
|
40 |
% |
April 1, 2008 - June 30, 2008 (2) |
|
CastlePoint Reinsurance |
|
|
35 |
% |
July 1, 2008 - September 30, 2008 |
|
CastlePoint Reinsurance |
|
|
25 |
% |
April 1, 2008 - September 30, 2008 |
|
Swiss Re America Corporation |
|
|
5 |
% |
October 1, 2008 - December 31, 2008 |
|
CastlePoint Reinsurance |
|
|
17.5 |
% |
October 1, 2008 - December 31, 2008 |
|
Swiss Re America Corporation |
|
|
28.0 |
% |
July 1, 2009 to December 31, 2009 |
|
CastlePoint Reinsurance |
|
|
50.0 |
% |
October 1, 2009 - December 31, 2009 (3) |
|
Swiss Re America Corporation |
|
|
37.5 |
% |
October 1, 2009 - December 31, 2009 (3) |
|
Allianz Risk Transfer AG (Bermuda) |
|
|
12.5 |
% |
53
|
|
|
(1) |
|
Multi year quota share reinsurance agreements with CastlePoint Reinsurance began April 6, 2006. |
|
(2) |
|
On July 1, 2008, we reduced the ceding percentage under our brokerage business quota share reinsurance agreement with CastlePoint
Reinsurance to 25% applicable to both the ceded unearned premium reserve as of July 1, 2008 and new and renewal premiums
written in the third quarter of 2008. |
|
(3) |
|
Quota share reinsures brokerage liability business for commercial multi-line and other liability. |
Commission and fee income. Commission and fee income decreased primarily due to our decision to
not cede as much brokerage premiums in 2009 as discussed above. Ceding commission revenue in 2009
represents commissions on ceded premiums earned from quota share reinsurance contracts written in
2008 and continuing to earn in 2009, as well as ceding commission earned on the brokerage liability
quota share agreement described above, effective October 1, 2009. TRM also ceased producing
business on behalf of CPIC subsequent to the CastlePoint acquisition date. Commission and fee
income during 2008 included $55.4 million in fee income earned from CPIC and $71.2 million earned
on quota share ceded premiums from CastlePoint Re (CPRe). In 2009, the effects of transactions
between Tower and CastlePoint are eliminated in consolidation.
Net investment income and net realized gains (losses). Net investment income was $74.9 million for
2009 compared to $34.6 million in 2008. The increase in net investment income resulted from an
increase in cash and invested assets to approximately $2.1 billion as of December 31, 2009 compared
to $677 million as of December 31, 2008. The increase in cash and invested assets resulted
primarily from the acquisitions of CastlePoint, Hermitage, SUA, and from cash provided from
operations of $214.7 million in 2009, partially offset by $130.1 million of cash used to acquire
Hermitage in the first quarter of 2009. The positive cash flow from operations was the result of
the aforementioned acquisitions and an increase in premiums resulting from the growth of our book
of business. Net investment income attributable to CastlePoint, Hermitage and SUA was $33.8
million, $7.5 million, and $1.5 million, respectively for 2009. The tax equivalent investment
yield, including cash, was 5.5% at December 31, 2009 compared with 4.6% at December 31, 2008. The
higher yield is generally due to the acquisition of CastlePoint, whose investment portfolio had a
market yield, excluding cash, on the date of acquisition of 7.0%. CastlePoints investment
portfolios market yield became Towers book yield due to business combination accounting rules.
Book yields on the Tower portfolios, excluding the businesses acquired, were higher by 5.2 basis
points in 2009 as compared to 2008 primarily due to the reinvestment of cash in the Tower
portfolios in the fourth quarter of 2009.
Net realized investment gains were $1.5 million for 2009 compared to losses of $14.4 million in
2008. Included in the 2009 realized investment gains are approximately $23.5 million of
credit-related OTTI losses. The $23.5 million of OTTI losses are comprised of $21.6 million related
to certain structured securities and $1.9 million related to the impairment of our bond holdings of
CIT Group, Inc.
Realized capital gains in 2009 were primarily from opportunistic sales of commercial and
residential mortgage-backed securities, primarily purchased in the first and second quarters when
yield spreads were wide and sold in the third quarter when yield spreads narrowed, as well as sales
of corporate bonds which were positively affected by spread tightening. Proceeds were generally
invested in corporate bonds and financial preferred stocks with better relative value.
Loss and loss adjustment expenses. The gross and net loss ratio increased for 2009 compared to
2008, due to a greater degree of favorable reserve development in 2008 and the inclusion of
specialty business acquired from CastlePoint and SUA in the current period which had a higher loss
ratio. The net accident year loss ratio increased over the prior period by 1.4 percentage points,
which was comprised of approximately 1.4 percentage points increase due to the soft market
conditions and 0.6 percentage points due to the increased mix of specialty business, offset by a
favorable impact of 0.6 percentage points due to the amortization of the reserve risk premium on
loss reserves in accordance with GAAP for the business combinations occurring during 2009.
For 2009 we had favorable prior year reserve development of $2.3 million, comprised of $4.8 million
of favorable development in the Brokerage Insurance segment offset by $2.5 million of unfavorable
development in the Specialty Business segment compared to favorable prior year reserve development
of $8.9 million in the Brokerage Insurance segment in 2008. See Brokerage Insurance Segment
Results of Operations and Specialty Business Segment Results of Operations.
Operating expenses. Operating expenses in 2009 increased compared to 2008 primarily resulting from
increased underwriting expenses due to the growth in premiums earned, primarily relating to the
CastlePoint and Hermitage acquisitions and additional depreciation costs related to our increased
investment in technology. See Brokerage Insurance Segment Results of Operations and Specialty
Business Segment Results of Operations for further discussion.
Acquisition-related transaction costs. Acquisition-related transaction costs in 2009 relate to the
acquisition of CastlePoint and, to a lesser extent, the acquisitions of Hermitage and SUA.
54
Interest expense. Interest expense increased by $9.7 million in 2009 compared to 2008. The increase
was mainly due to $10.6 million of interest expense on $130 million of subordinated debentures
which were assumed as a result of our 2009 acquisitions.
Other income. Other income for 2009 includes a gain of $7.4 million on the revaluation of the
shares owned in CastlePoint at the time of the acquisition, as well as a gain on bargain purchase
of $13.2 million related to the acquisition of SUA. Our equity in net income (loss) of CastlePoint
also decreased by $0.8 million due to CastlePoints operating loss during 2009 compared to 2008. As
a result of the acquisition of CastlePoint on February 5, 2009, we only recorded equity in
CastlePoints net income (loss) for the period of January 1, 2009 through February 5, 2009.
Income tax expense. Income tax expense increased as a result of an increase in income before income
taxes. The effective income tax rate (including state and local taxes) was 32.0% for 2009, compared
to 35.8% for 2008.
The decrease in the effective tax rate for the year ended December 31, 2009 primarily relates to
the gain on bargain purchase of SUA of $13.2 million, which is not subject to tax, an increase in
our tax exempt municipal investments, and, to a lesser extent, lower state and local income taxes
because of the decline in pre-tax earnings in the Insurance Services segment. The reduction in the
effective tax rate was partially offset by the limited amount of acquisition-related transaction
costs that are tax deductible.
Net income and return on average equity. Net income and return on average equity were $109.3
million and 13.9%, respectively, for 2009 compared to $57.5 million and 17.8%, respectively, for
2008. For 2009, the return on average equity was calculated by dividing net income of $109.3
million by average common stockholders equity of $787.9 million. For 2008, the return on average
equity was calculated by dividing net income of $57.5 million by an average common stockholders
equity of $322.3 million. Net income for 2009 was negatively impacted by $11.5 million, net of tax,
of acquisition-related transaction expenses pertaining to the acquisitions of CastlePoint and SUA
which reduced the return on average equity by 1.3 percentage points for the year ended December 31,
2009.
Consolidated Results of Operations 2008 Compared to 2007
Total revenues. The increase is primarily due to the increase in net premiums earned and insurance
services revenue. Net premiums earned increased 9.9% as compared to 2007. Net premiums earned
decreased as a percentage of revenue due to the significant increase in commission and fee income.
This was the result of an increase in direct commission revenue on premiums produced by TRM on
behalf of CPIC. Net premiums earned increased principally due to reducing the quota share cession
to CPRe on brokerage business. Neither CPIC nor CPRe were wholly owned and consolidated
subsidiaries in 2008 or 2007. Net investment income decreased in 2008 primarily due to lower
investment yields. Net realized investment losses were $14.4 million in 2008 compared to $17.5
million in 2007. Net realized investment losses in 2008 and 2007 included OTTI losses of $22.7
million and $10.1 million, respectively. In 2008, we also had realized gains on sales of securities
of $8.3 million, while in 2007 we had losses on sales of securities of $7.4 million.
Premiums earned. The 9.9% increase in net premiums earned in 2008 as compared to 2007 was due to
the effect of the 10.8% increase in gross premiums earned, offset in part by an 11.9% increase in
ceded premiums earned for 2008 compared to 2007. Other items affecting the year to year comparison
are shown below:
During 2008 we ceded $201.9 million of our premiums earned to CastlePoint as compared to $189.8
million in 2007. In 2008, we also ceded $9.3 million of ceded premiums earned to Swiss Re America.
The quota share ceding percentages on our policies are noted in the table included in the
Consolidated Results of Operations 2009 Compared to 2008 above.
Policies in-force for our brokerage business, including business managed by us and produced on
behalf of CPIC, increased by 23.7% as of December 31, 2008 compared to December 31, 2007. During
2008, premiums on renewed business increased 3.4% in personal lines and decreased 2.0% in
commercial lines. The retention rate including brokerage business renewed by TRM on behalf of CPIC
was 86% for personal lines and 78% for commercial lines. Gross premiums written and produced
increased 32.3% to $805.0 million in 2008 compared to $608.4 million in 2007.
Commission and fee income. Ceding commission revenue earned increased as a result of the overall
increase in ceded premiums earned as discussed above as well as an increase in the ceding
commission rate on business ceded to Swiss Re America. Also, as discussed above, in 2008 and 2007
our managing general agency subsidiary, TRM, produced premiums of $171.7 million and $84.2 million,
respectively, on behalf of CPIC and earned $55.4 million and $27.0 million, respectively, in direct
commission revenue.
Net investment income and realized gains (losses). Net investment income decreased from 2007 to
2008 due to a decrease in investment yields, particularly yields on mortgage-backed securities.
Total invested assets, including cash and cash equivalents, were approximately the same at $677.2
million and $696.8 million for 2008 and 2007, respectively. Net
cash flows provided by operations were $61.7 million in 2008. On a tax equivalent basis, the book yield
55
was 4.6% as of
December 31, 2008 and 5.6% as of December 31, 2007.
Net realized investment losses were $14.4 million and $17.5 million in 2008 and 2007, respectively.
Net realized investment gains and (losses), excluding OTTI, were $8.3 million and ($7.4) million in
2008 and 2007, respectively. The realized loss in 2007 was primarily related to the sale of a
closed-end investment fund that invested in mortgage-backed and asset-backed securities. In
addition we recognized $22.7 million and $10.1 million of OTTI losses in 2008 and 2007,
respectively. The OTTI losses in 2008 related principally to lower rated residential
mortgage-backed securities with projected adverse cash flows as well as the impairment of three
Lehman Brothers fixed maturity securities and the impairment of an asset backed security which held
collateralized bank debt. The OTTI losses in 2007 included all of our equity investments in REITs,
as well as certain asset-backed sub-prime securities.
Loss and loss adjustment expenses. The gross loss ratio for 2008 improved to 49.8% as compared to
50.7% for 2007, and the net loss ratio improved to 51.7% for 2008 as compared to 55.2% for 2007.
These improvements resulted from favorable reserves development in 2008. The net accident year loss
ratio improved to 54.6% for 2008 as compared to 55.7% for 2007.
Operating expenses. Operating expenses increased by 25.6% to $223.9 million for 2008 from $178.3
million for 2007. The increase was due primarily to the increase in underwriting expenses resulting
from the growth in premiums earned, increased commission expense on traditional and specialty
program business and depreciation expense of $10.5 million related to our increased investment in
technology assets.
Interest expense. Our interest expense decreased approximately $0.2 million due to lower rates on
our floating rate debt and approximately $0.6 million on the amounts credited to reinsurers on
funds withheld in segregated trust accounts as collateral for reinsurance recoverables due to
reductions in the corresponding reinsured losses.
Other income. Our equity in net income of CastlePoint, which was not a wholly owned and
consolidated subsidiary in 2008 or 2007, decreased $2.2 million due to a decrease in CastlePoints
operating income, combined with $15.1 million of CastlePoints OTTI losses, of which our share was
approximately $1.0 million, recorded in 2008.
Income tax expense. Our income tax expense was $32.1 million for 2008 compared to $26.2 million
for 2007. The increased income tax expense was due primarily to the increase in income before
income taxes, an increase in pre-tax income of TRM, which is taxed at both a local and state level
resulting in a higher effective tax rate, offset by an increase in tax exempt interest received in
2008. The 2008 tax expense was also favorably impacted by changes recorded when we filed the final
2007 tax returns. The effective income tax rate was 35.8% for 2008 compared to 36.7% for 2007.
Net income and return on average equity. Our net income and return on average equity were $57.5
million and 17.8%, respectively, for 2008 compared to $45.1 million and 18.0%, respectively, for
2007. Excluding net realized investment losses, our return on average equity for 2008 and 2007
would have increased 2.9% and 4.6%, respectively. For 2008, the return on average equity was
calculated by dividing net income of $57.5 million by average stockholders equity of $323.5
million. For 2007, the return on average equity was calculated by dividing net income, after
deducting $0.7 million of preferred stock dividends and excess consideration paid for the
redemption of preferred stock in January 2007, of $44.4 million, by average stockholders equity of
$246.9 million.
56
Brokerage Insurance Segment Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
($ in millions) |
|
2009 |
|
Change |
|
Percent |
|
2008 |
|
Change |
|
Percent |
|
2007 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums earned |
|
|
$ 774.9 |
|
|
|
$ 274.5 |
|
|
|
54.9 |
% |
|
|
500.4 |
|
|
$ |
(4.5 |
) |
|
|
(0.9 |
%) |
|
|
$ 504.9 |
|
Less: ceded premiums earned |
|
|
(149.9 |
) |
|
|
53.8 |
|
|
|
(26.4 |
%) |
|
|
(203.7 |
) |
|
|
17.0 |
|
|
|
(7.7 |
%) |
|
|
(220.7 |
) |
|
Net premiums earned |
|
|
625.0 |
|
|
|
328.3 |
|
|
|
110.6 |
% |
|
|
296.7 |
|
|
|
12.5 |
|
|
|
4.4 |
% |
|
|
284.2 |
|
Ceding commission revenue |
|
|
34.2 |
|
|
|
(26.9 |
) |
|
|
(43.9 |
%) |
|
|
61.1 |
|
|
|
(5.4 |
) |
|
|
(8.1 |
%) |
|
|
66.5 |
|
Policy billing fees |
|
|
3.0 |
|
|
|
1.0 |
|
|
|
46.9 |
% |
|
|
2.0 |
|
|
|
(0.1 |
) |
|
|
(4.8 |
%) |
|
|
2.1 |
|
|
Total revenue |
|
|
662.2 |
|
|
|
302.4 |
|
|
|
84.1 |
% |
|
|
359.8 |
|
|
|
7.0 |
|
|
|
2.0 |
% |
|
|
352.8 |
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss and loss adjustment expenses |
|
|
405.2 |
|
|
|
161.9 |
|
|
|
66.5 |
% |
|
|
243.3 |
|
|
|
(11.6 |
) |
|
|
(4.5 |
%) |
|
|
254.9 |
|
Less: ceded
loss and loss adjustment expenses |
|
|
(65.2 |
) |
|
|
25.6 |
|
|
|
(28.2 |
%) |
|
|
(90.8 |
) |
|
|
7.3 |
|
|
|
(7.5 |
%) |
|
|
(98.1 |
) |
|
Net loss and loss adjustment expenses |
|
|
340.0 |
|
|
|
187.5 |
|
|
|
0.0 |
% |
|
|
152.5 |
|
|
|
(4.3 |
) |
|
|
0.0 |
% |
|
|
156.8 |
|
Underwriting expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct commission expenses |
|
|
143.1 |
|
|
|
58.5 |
|
|
|
69.1 |
% |
|
|
84.6 |
|
|
|
2.0 |
|
|
|
2.4 |
% |
|
|
82.6 |
|
Other underwriting expenses |
|
|
103.5 |
|
|
|
34.5 |
|
|
|
50.2 |
% |
|
|
69.0 |
|
|
|
2.0 |
|
|
|
2.8 |
% |
|
|
67.0 |
|
|
Total underwriting expenses |
|
|
246.6 |
|
|
|
93.1 |
|
|
|
60.6 |
% |
|
|
153.6 |
|
|
|
4.0 |
|
|
|
2.6 |
% |
|
|
149.6 |
|
|
Underwriting profit |
|
|
$ 75.6 |
|
|
|
$ 21.9 |
|
|
|
40.7 |
% |
|
|
$ 53.7 |
|
|
|
$ 7.3 |
|
|
|
15.8 |
% |
|
|
$ 46.4 |
|
|
Key Measures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written |
|
|
$ 806.5 |
|
|
|
$ 296.5 |
|
|
|
58.1 |
% |
|
|
$ 510.0 |
|
|
|
$ 12.1 |
|
|
|
2.4 |
% |
|
|
$ 497.9 |
|
Less: ceded premiums written |
|
|
(149.7 |
) |
|
|
44.7 |
|
|
|
(23.0 |
%) |
|
|
(194.4 |
) |
|
|
48.6 |
|
|
|
(20.0 |
%) |
|
|
(243.0 |
) |
|
Net premiums written |
|
|
$ 656.8 |
|
|
|
$ 341.2 |
|
|
|
108.1 |
% |
|
|
$ 315.6 |
|
|
|
$ 60.7 |
|
|
|
23.8 |
% |
|
|
$ 254.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Ceded premiums as a percent of gross premiums |
|
|
|
|
|
|
|
|
|
|
|
|
Written |
|
|
18.6 |
% |
|
|
38.1 |
% |
|
|
48.8 |
% |
Earned |
|
|
19.3 |
% |
|
|
40.7 |
% |
|
|
43.7 |
% |
Loss Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
52.3 |
% |
|
|
48.6 |
% |
|
|
50.5 |
% |
Net |
|
|
54.4 |
% |
|
|
51.4 |
% |
|
|
55.2 |
% |
Accident Year Loss Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
53.9 |
% |
|
|
53.0 |
% |
|
|
51.3 |
% |
Net |
|
|
55.2 |
% |
|
|
54.4 |
% |
|
|
55.7 |
% |
Underwriting Expense Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
31.4 |
% |
|
|
30.3 |
% |
|
|
29.2 |
% |
Net |
|
|
33.5 |
% |
|
|
30.5 |
% |
|
|
28.5 |
% |
Combined Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
83.7 |
% |
|
|
78.9 |
% |
|
|
79.7 |
% |
Net |
|
|
87.9 |
% |
|
|
81.9 |
% |
|
|
83.7 |
% |
|
Brokerage Insurance Segment Results of Operations 2009 Compared to 2008
Gross premiums. Brokerage Insurance gross premiums written increased during 2009 as compared to
2008 primarily due to the acquisitions of CastlePoint and Hermitage on February 5, 2009 and
February 27, 2009, respectively, which added $214.7 million and $55.9 million in gross premiums
earned, respectively, for the year ended December 31, 2009. Our acquisition of Hermitage added
significantly to our retail distribution particularly in the Southeast and to our non-admitted
wholesale capabilities while the acquisition of CastlePoint broadened our Specialty business. Our
organic growth was primarily from territorial expansion in commercial business and an increase in
homeowners business. As measured to include business placed in CPIC in 2008, but excluding the
effect of the Hermitage acquisition in 2009, this growth was 8.6% during the year ended December
31, 2009.
57
During 2009, premiums on renewed business increased 2.9% in personal lines and decreased 1.4%
in commercial lines. Brokerage renewal retention overall was 80% for 2009, which was comprised of a
renewal retention for personal lines of 88% and for commercial lines of 75%, compared to 86% and
78%, respectively, for 2008. In commercial lines we increased pricing on middle and large accounts
that had the effect of lowering the renewal retention for those size categories, although these
underwriting actions were largely offset by strong renewal retentions for small commercial
policies.
Excluding Hermitage, policies in force for our brokerage business increased by 19.3% in 2009
compared to 2008.
Ceded premiums. Ceded premiums written and earned were significantly lower for 2009 compared to
2008 as a result of our decision to retain most of our business following the increase in our
capital after the CastlePoint acquisition. In 2008 we had either placed with CPIC or ceded to CPRe
a substantial portion of the brokerage premiums written, $171.7 million and $112.7 million,
respectively, and for policies written during the first nine months of 2009 we did not cede
premiums written to third party reinsurers on a quota share basis. In the fourth quarter of 2009 we
ceded 50% of our new and renewal written and earned premiums on Commercial Multi-Peril and Other
Liability policies to third party reinsurers amounting to $86.9 million and $27.2 million,
respectively.
Catastrophe reinsurance ceded premiums were $37.6 million for 2009 compared to $16.9 million for
2008. The increase in catastrophe costs in 2009 was due primarily to increased gross premiums
written from increased property exposures arising from the aforementioned acquisitions and higher
cost of catastrophe coverage when our ceded catastrophe reinsurance treaty was renewed on July 1,
2009.
Net premiums. As a result of the increase in gross premiums and the decrease in ceded premiums
described above, net premiums earned increased $328.3 million in 2009 compared to 2008. The
increase in net premiums earned was consistent with the increase in net premiums written.
Ceding commission revenue. Ceding commission revenue decreased in 2009 by 43.9% compared to 2008.
The decrease was due to the lower cession of quota share premiums described above and a reduction
in the ceding commission rate. Ceding commission revenue also decreased by $2.2 million during 2009
as a result of increases in ceded loss ratios on prior years quota share treaties, compared to a
decrease of $1.8 million for 2008.
Loss and loss adjustment expenses and loss ratio. We had favorable prior year reserve development
that lowered our loss ratio on both a gross and net basis in 2009 amounting to $4.8 million as
compared to favorable prior year development experienced in 2008 of $8.9 million, thus the benefit
in the loss ratio from prior year reserves development was less than in 2008. The favorable
development that we experienced in 2009 was largely due to savings in loss adjustment expenses from
shifting our in house attorneys from hourly billing to fixed fee per claim billing for CastlePoint
and Hermitage, which did not utilize this practice prior to our acquisition. We also implemented
legal fee auditing of external attorneys bills for these newly acquired companies. Fixed fee
billing limits both the overall amounts that can be billed on any one claim and the amount of
development for ALAE.
The accident year loss ratio increased slightly by 0.9 points on a gross basis and by 0.8 points on
a net basis as compared to the prior year. The increase in the accident year loss ratio reflects
softer market conditions, although we mitigated some of the weaker insurance pricing by shifting
our business mix towards small policies and more profitable lines of business, especially
homeowners. We further mitigated the net accident year loss ratio through a quota share reinsurance
contract in the fourth quarter of 2009 to cede 50% of our new and renewal premiums on liability
lines. In addition, the net accident year loss ratio was favorably impacted by 0.6 percentage
points due to the amortization of the reserve risk premium on loss reserves in accordance with GAAP
for the business combinations occurring during 2009.
Underwriting expenses and underwriting expense ratio. Underwriting expenses include direct
commissions and other underwriting expenses. The increase in underwriting expenses was due to the
increase in gross premiums earned, which was primarily due to the CastlePoint and Hermitage
acquisitions. Our gross underwriting expense ratio was 31.4% for 2009 as compared to 30.3% for
2008.
The commission portion of the gross underwriting expense ratio was 18.5% for 2009 compared to 16.9
% for the prior year. Our producer commissions did not vary significantly in 2009. The increase in
the commission ratio resulted from the amortization of CastlePoints VOBA which was based on
CastlePoints higher commission ratio. See Note 3 Acquisitions to the financial statements
elsewhere in this Form 10-K for information on VOBA.
The other underwriting expense (OUE), which includes boards, bureaus and taxes, portion of the
gross underwriting expense ratio was 13.0% for 2009 compared to 13.4% for the prior year. We
continue to focus on improving cost efficiencies, particularly through our continuing investments
in technology and reducing expenses of acquired companies. The acquisitions in 2009 provided
increased economies of scale and the additional amount of premiums contributed to a lower OUE
ratio. Offsetting the benefit of the additional premium volume, we recorded $2.2 million of New
York State workers compensation assessments that exceeded
amounts we were originally permitted to assess policyholders based on statutorily enacted rates in 2009 compared to $0 in 2008.
58
The net underwriting expense ratio was 33.5% and 30.5% for 2009 and 2008, respectively. The
increase was due in part to the increase in the commission expense ratio but more so due to the
decrease in ceding commission revenue which reduced the net expense ratio less in 2009 than in
2008.
Underwriting profit and combined ratio. The net combined ratio was 87.9% for 2009, an increase of
6.0 percentage points compared to 2008. The increase in the combined ratio resulted from increases
in the net loss ratio described above due to relatively less favorable development in the 2009
calendar year as compared to 2008 and softer market conditions, as well as increases in the net
expense ratio due primarily to the change in ceding commission revenue described above.
Underwriting profits increased 40.7% for the year ended December 31, 2009 compared to the prior
year. This increase was driven by the increase in net premiums earned, but was partially offset by
the increase in the combined ratio described above.
Brokerage Insurance Segment Results of Operations 2008 Compared to 2007
Gross premiums. Brokerage Insurance gross premiums written increased by 2.4% in 2008 as compared to
2007 as a result of various initiatives to appoint wholesale and other agents outside of the
Northeast region. We had written excess and surplus lines business in Florida and Texas in the
prior period, which was expanded to include California on an admitted basis in 2008.
Ceded premiums. Ceded premiums written decreased in 2008 as compared to 2007, because of a lower
quota share ceding percentage in the second half of 2008. The reduction in ceding percentage to
CastlePoint Re was offset by an increase in managed premiums that we placed in CastlePoint
Insurance Company that benefited our Insurance Services segment.
Net premiums. Net premiums written increased 23.8% in 2008 as compared to 2007, primarily as a
result of the decrease in ceded premiums written. Net premiums earned increased by 4.4% in 2008 as
compared to 2007, and this increase was less than for net premiums written due to timing
differences as the change to the ceding percentages occurred in the last half of 2008.
Ceding commission revenue. The decrease in ceding commission revenue in 2008 as compared to 2007
was due to the reduction in quota share premiums ceded in 2008 as described above
Loss and loss adjustment expenses and loss ratio. The decrease in the gross and net loss ratios for
2008 compared to 2007 was primarily due to lower than expected loss emergence for workers
compensation, general liability, and homeowners lines of business. The decrease also was affected
by the decrease in loss adjustment expenses as a result of changing to fixed fee billing for our
in-house attorneys. Fixed fee billing both limits the overall amounts that can be billed on any one
claim, and also limits the amount of development for ALAE. The prior year reserves developed
favorably by $8.9 million, of which $4.0 million was attributable to the improvement in loss
adjustment expense reserves.
Underwriting expenses and underwriting expense ratio. Underwriting expenses include direct
commissions and other underwriting expenses. Direct commissions increased to 16.9% for 2008
compared to 16.4% for 2007, while other underwriting expenses increased to 13.4% for 2008 compared
to 12.9% for 2007, respectively.
The net underwriting expense ratio increased to 30.5% in 2008 compared to 28.5% in 2007, although
this increase was offset by increases in management fee income in the Insurance Services segment
from increasing the amount of brokerage business placed into CastlePoint Insurance Company,
particularly during the latter half of 2008.
Underwriting profit and combined ratio. The net combined ratio improved to 81.9% in 2008 from 83.7%
due to the improvement in loss ratio described above, which was partially offset by the increase in
the expense ratio.
59
Specialty Business Segment Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
($ in millions) |
|
2009 |
|
|
Change |
|
|
Percent |
|
|
2008 |
|
|
Change |
|
|
Percent |
|
|
2007 |
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums earned |
|
|
$ 271.4 |
|
|
|
$ 193.4 |
|
|
|
248.1% |
|
|
|
$ 78.0 |
|
|
|
$ 61.0 |
|
|
|
358.8% |
|
|
|
$ 17.0 |
|
Less: ceded premiums earned |
|
|
(41.6) |
|
|
|
18.5 |
|
|
|
-30.7% |
|
|
|
(60.1) |
|
|
|
(45.0) |
|
|
|
298.1% |
|
|
|
(15.1) |
|
|
|
Net premiums earned |
|
|
229.8 |
|
|
|
211.9 |
|
|
NM |
|
|
|
17.9 |
|
|
|
16.0 |
|
|
NM |
|
|
|
1.9 |
|
Ceding commission revenue |
|
|
9.7 |
|
|
|
(8.4) |
|
|
|
-46.4% |
|
|
|
18.1 |
|
|
|
13.6 |
|
|
|
304.4% |
|
|
|
4.5 |
|
|
|
Total |
|
|
239.5 |
|
|
|
203.5 |
|
|
NM |
|
|
|
36.0 |
|
|
|
29.6 |
|
|
|
464.3% |
|
|
|
6.4 |
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss and loss adjustment expenses |
|
|
161.6 |
|
|
|
116.6 |
|
|
|
258.8% |
|
|
|
45.0 |
|
|
|
35.1 |
|
|
|
356.4% |
|
|
|
9.9 |
|
Less: ceded
loss and loss adjustment expenses |
|
|
(26.1) |
|
|
|
8.7 |
|
|
|
-25.1% |
|
|
|
(34.8) |
|
|
|
(26.0) |
|
|
|
298.1% |
|
|
|
(8.8) |
|
|
|
Net loss and loss adjustment expenses |
|
|
135.5 |
|
|
|
125.3 |
|
|
NM |
|
|
|
10.2 |
|
|
|
9.1 |
|
|
NM |
|
|
|
1.1 |
|
Underwriting expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct commission expense |
|
|
59.7 |
|
|
|
38.7 |
|
|
|
184.1% |
|
|
|
21.0 |
|
|
|
16.6 |
|
|
|
380.7% |
|
|
|
4.4 |
|
Other underwriting expenses |
|
|
20.1 |
|
|
|
16.8 |
|
|
NM |
|
|
|
3.3 |
|
|
|
2.6 |
|
|
|
388.2% |
|
|
|
0.7 |
|
|
|
Total underwriting expenses |
|
|
79.8 |
|
|
|
55.5 |
|
|
|
228.5% |
|
|
|
24.3 |
|
|
|
19.2 |
|
|
|
381.7% |
|
|
|
5.1 |
|
|
|
Underwriting profit |
|
|
$ 24.2 |
|
|
|
$ 22.7 |
|
|
NM |
|
|
|
$ 1.5 |
|
|
|
$ 1.3 |
|
|
NM |
|
|
|
$ 0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Measures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written |
|
|
$ 264.2 |
|
|
|
$ 139.4 |
|
|
|
111.7% |
|
|
|
$ 124.8 |
|
|
|
$ 98.7 |
|
|
|
378.0% |
|
|
|
$ 26.1 |
|
Less: ceded premiums written |
|
|
(34.9) |
|
|
|
61.5 |
|
|
|
-63.8% |
|
|
|
(96.4) |
|
|
|
(74.6) |
|
|
|
341.9% |
|
|
|
(21.8) |
|
|
|
Net premiums written |
|
|
$ 229.3 |
|
|
|
$ 200.9 |
|
|
NM |
|
|
|
$ 28.4 |
|
|
|
$ 24.1 |
|
|
NM |
|
|
|
$ 4.3 |
|
|
|
NM is shown where percentage change exceeds 500% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Ceded premiums as a percent of gross premiums |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.2% |
|
|
|
77.2% |
|
|
|
83.6% |
|
Earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.4% |
|
|
|
77.1% |
|
|
|
88.9% |
|
Loss Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59.5% |
|
|
|
57.7% |
|
|
|
58.0% |
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59.0% |
|
|
|
57.2% |
|
|
|
59.1% |
|
Accident Year Loss Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58.9% |
|
|
|
57.7% |
|
|
|
58.0% |
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57.9% |
|
|
|
57.2% |
|
|
|
59.1% |
|
Underwriting Expense Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29.4% |
|
|
|
31.1% |
|
|
|
29.7% |
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30.5% |
|
|
|
34.6% |
|
|
|
29.7% |
|
Combined Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88.9% |
|
|
|
88.9% |
|
|
|
87.7% |
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89.5% |
|
|
|
91.8% |
|
|
|
88.8% |
|
Specialty Business Segment Results of Operations 2009 Compared to 2008
Gross premiums. Total Specialty Business gross premiums written increased in 2009 as compared to
the prior year primarily as a result of our acquisitions of CastlePoint and SUA. Also, during 2009
we began to write new programs focusing on workers compensation for extended living facilities
workers, auto dealerships, and specialty auto trucking liability. On an adjusted basis including
CastlePoint gross premiums written, but excluding SUA gross premiums written, our gross premiums
written grew by 25.6% in 2009. Growth in program business in the U.S. was offset by a reduction in
assumed reinsurance business in CPRe, as we shifted capital from CPRe to support primary specialty
business.
60
Ceded premiums. Ceded premiums written and earned were reduced as a result of Towers acquisition
of CastlePoint on February 5, 2009, as Tower had ceded a significant portion of the specialty
programs business to CastlePoint Re in 2008. On certain specific programs we cede reinsurance on a
quota share or excess of loss basis to reduce our risk, including quota share reinsurance to
insurance companies affiliated with the program underwriting manager handling such program
business, which we term risk sharing. As a result, ceded premiums written were $34.9 million and
$96.4 million for 2009 and 2008, respectively. Ceded premiums as a percentage of gross premiums
earned are lower in 2009 because of the termination and elimination of the reinsurance agreements
with CPRe.
Net premiums. Net premiums written increased from $28.4 million to $229.3 million for 2009, as
compared to the prior year. The increase reflects the increases in gross premiums written and
decreases in ceded premiums written described above.
The increase in net premiums earned for the year ended December 31, 2009 mirrors the growth in net
premiums written.
Loss and loss adjustment expenses. The loss ratio increased on both a gross and net basis for 2009
compared to last year. We had unfavorable development of approximately $2.5 million stemming from
the runoff of specialty business in CastlePoint Re. On an accident year basis the gross and net
loss ratios increased due to the inclusion of reinsurance business and other programs underwritten
by CastlePoint and SUA that impacted the business mix in the current period. In addition, the net
accident year loss ratio was favorably impacted by 0.6 percentage points due to the amortization of
the reserve risk premium on loss reserves in accordance with GAAP for the business combinations
occurring during 2009.
Underwriting expenses and underwriting expense ratio. The net underwriting expenses ratio decreased
significantly from 34.6% for 2009 to 30.5% for 2008, reflecting the shift in business mix to
decrease assumed reinsurance and increase programs business which has significantly lower
commission costs. This shift resulted in the commission portion of the gross underwriting expense
ratio decreasing 5 percentage points to 22.0% in 2009.
The OUE portion of the gross underwriting expense ratio was 7.4% for 2009 compared to 4.2% in 2008.
The increase in the OUE ratio resulted from absorbing the CastlePoint staff costs. Prior to the
acquisition, CastlePoint managed all specialty business and the staff costs were recorded by them,
and we recorded a higher commission expense to reflect these costs.
Underwriting profit and combined ratio. The increase in underwriting profit for the year ended
December 31, 2009 primarily resulted from the acquisition of CastlePoint in the first quarter of
2009 which increased net premiums earned significantly. Our net combined ratio improved by 2.3
points reflecting improved expense ratios that more than offset the 1.8 point increase in our loss
ratio.
Specialty Business Segment Results of Operations 2008 Compared to 2007
Gross premiums. Gross premiums written increased in 2008 from our participation in the specialty
business managed by CastlePoint. The increased premiums were generated by CastlePoint from several
programs that concentrated on small policies in low to moderate classes of workers compensation,
particularly in California.
Ceded premiums. The increase in ceded premiums written was due to our agreements with CastlePoint
to cede significant portions of the specialty and traditional programs that CastlePoint managed and
underwrote utilizing our insurance subsidiaries paper. The increase in ceded premiums from $21.8
million in 2007 to $96.4 million in 2008 was commensurate with the growth in gross premiums
written.
Net premiums. Net premiums written increased from $4.3 million in 2007 to $28.4 million for 2008,
in line with the increases in gross premiums written described above.
Loss and loss adjustment expenses. The gross loss ratio was relatively unchanged between 2008 and
2007, while the net loss ratio improved to 57.2% for 2008 compared to 59.1% for 2007. The decline
in the net loss ratio was due to retaining a larger percentage of workers compensation programs
which had lower loss ratios in comparison to other programs.
Underwriting expenses and underwriting expense ratio. The gross and net underwriting expense ratios
increased in 2008 due to an increase in the amount paid to CPM for specialty and traditional
business managed and produced. We incurred a 5% additional commission on CPM managed business in
2008. This increase was partially offset as the mix of business changed and we wrote workers
compensation program which had a lower commission rate.
Underwriting profit and combined ratio. The increase in underwriting profit for 2008 was generated
from the significant increase in net premiums earned, although the combined ratio increased to
91.8% for 2008 compared to 88.8% for 2007 primarily due to the increase in expense ratio as
described above.
61
Insurance Services Segment Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
($ in millions) |
|
2009 |
|
|
Change |
|
|
Percent |
|
|
2008 |
|
|
Change |
|
|
Percent |
|
|
2007 |
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct commission revenue from
managing general agency |
|
|
$ 1.6 |
|
|
|
$ (56.6) |
|
|
$ |
-97.3% |
|
|
|
$ 58.2 |
|
|
|
$ 29.4 |
|
|
|
102.2% |
|
|
|
$ 28.8 |
|
Claims administration revenue |
|
|
1.5 |
|
|
|
(3.9) |
|
|
|
-72.5% |
|
|
|
5.4 |
|
|
|
3.1 |
|
|
|
133.0% |
|
|
|
2.3 |
|
Other administration revenue |
|
|
0.5 |
|
|
|
(3.1) |
|
|
|
-84.0% |
|
|
|
3.6 |
|
|
|
2.2 |
|
|
|
150.5% |
|
|
|
1.4 |
|
Reinsurance intermediary fees |
|
|
1.5 |
|
|
|
0.5 |
|
|
|
50.3% |
|
|
|
1.0 |
|
|
|
0.2 |
|
|
|
28.6% |
|
|
|
0.8 |
|
Policy billing fees |
|
|
- |
|
|
|
(0.3) |
|
|
|
-94.0% |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
NM |
|
|
|
- |
|
|
|
Total revenue |
|
|
5.1 |
|
|
|
(63.4) |
|
|
|
-92.5% |
|
|
|
68.5 |
|
|
|
35.2 |
|
|
|
105.5% |
|
|
|
33.3 |
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct commission expenses paid
to producers |
|
|
1.7 |
|
|
|
(25.1) |
|
|
|
-93.6% |
|
|
|
26.8 |
|
|
|
12.7 |
|
|
|
90.7% |
|
|
|
14.1 |
|
Other insurance services expenses |
|
|
1.4 |
|
|
|
(10.9) |
|
|
|
-88.3% |
|
|
|
12.3 |
|
|
|
6.6 |
|
|
|
113.1% |
|
|
|
5.7 |
|
Claims expense reimbursement to TICNY |
|
|
1.1 |
|
|
|
(4.3) |
|
|
|
-79.0% |
|
|
|
5.4 |
|
|
|
3.1 |
|
|
|
134.2% |
|
|
|
2.3 |
|
|
|
Total |
|
|
4.2 |
|
|
|
(40.3) |
|
|
|
-90.4% |
|
|
|
44.5 |
|
|
|
22.4 |
|
|
|
101.1% |
|
|
|
22.1 |
|
|
|
Insurance services pre-tax income |
|
|
$ 0.9 |
|
|
|
$ (23.1) |
|
|
|
-96.4% |
|
|
|
$ 24.0 |
|
|
|
$ 12.8 |
|
|
|
114.3% |
|
|
|
$ 11.2 |
|
|
|
Premiums produced by TRM on behalf
of issuing companies |
|
|
$ 11.7 |
|
|
|
$ (163.7) |
|
|
|
-93.3% |
|
|
|
$ 175.4 |
|
|
|
$ 90.3 |
|
|
|
106.1% |
|
|
|
$ 85.1 |
|
|
|
NM is shown where percentage change exceeds 500%
Insurance Services Segment Results of Operations 2009 Compared to 2008
Total revenues. The decrease in total revenues, of which direct commission revenue is the principal
component, for 2009 compared to 2008 was primarily due to the acquisition of CastlePoint in
February 2009. Premiums produced and managed by TRM on behalf of CPIC decreased to $10.7 million in
2009 compared to $85.1 million for 2008. As a result of the decrease in premiums produced, revenues
declined to $5.1 million in 2009 compared to $68.5 million in 2008. Claims administration and other
administration revenues earned in 2008 were primarily earned from CPIC managed business and
declined in 2009 as intercompany transactions between us and CPIC were eliminated. The decline in
both claims and other administration revenues was partially offset as a result of entering into two
new agreements in 2009. During 2009 we recorded $0.4 million of claims administration revenues as a
result of entering into an agreement with AequiCap to provide claims handling services for workers
compensation claims. The decline in other administration revenue was also offset as a result of the
Hermitage acquisition. Hermitage provides administrative services to an insurance company and
earned $0.3 million in 2009.
Direct commission expense. The decrease in direct commission expenses was a result of the decrease
in business produced by TRM on behalf of CPIC. Subsequent to the completion of the CastlePoint
acquisition all of CPICs underwriting expenses were included in the Brokerage Insurance segment.
Other insurance services expenses. The decrease in other insurance expenses resulted from the
decline in premium produced. The amount of reimbursement for underwriting expenses by TRM to TICNY
for the year ended December 31, 2009 was $1.4 million as compared to $12.3 million for 2008.
Claims expense reimbursement. The amount of reimbursement by TRM for claims administration is based
on the terms of the expense sharing agreement with TICNY. Claims expense reimbursement has declined
as a result of the CastlePoint acquisition as a majority of these reimbursements were due from
CPIC.
Pre-tax income. Pre-tax income decreased to $0.9 million for the year ended December 31, 2009 as
compared to $24.0 million in 2008. The decrease was primarily due to the decrease in premiums
produced.
If the acquisition of OneBeacons Personal Lines Division is approved and completed, we expect to
reflect fee income in this segment from managing the reciprocal insurance companies in 2010.
62
Insurance Services Segment Results of Operations 2008 Compared to 2007
Total revenues. The increase in 2008 revenues resulted from business produced by TRM on behalf of
CPIC of $171.7 million for 2008 compared to $84.2 million for the same period last year. As a
result of the increase in premiums produced, direct commission revenue increased to $58.2 million
for the year ended December 31, 2008 as compared to $28.8 million for the prior year. Direct
commission revenue also benefitted from favorable loss development on premiums produced in prior
years of $1.9 million for 2008 compared to $1.8 million for the same period last year. Claims
administration revenues increased to $5.4 million for 2008 compared to $2.3 million in 2007 as a
result of the increased volume of claims handled on behalf of issuing carriers. Policies in-force
for our brokerage business managed by us and produced on behalf of CPIC increased 221.4% as of
December 31, 2008 compared to December 31, 2007. During 2008, premiums on renewed business
increased 3.4%.
Direct commission expense. TRMs direct commission expense paid to producers increased as a result
of the increase in business produced by TRM on behalf of CPIC. The direct commission expense ratio
decreased to 15.3% for 2008, compared to 16.5% for the comparable period in 2007, as a result of a
change in the mix of business placed with CPIC in 2008 to include a greater proportion of
homeowners and workers compensation lines that typically have lower commission rates. The CPIC
book of business is produced through the same agents who produce brokerage business written through
our Insurance Subsidiaries and TRMs commission rates are similar to the commission rates in our
Insurance subsidiaries for similar lines of business.
Other insurance services expenses. The amount of reimbursement for underwriting expenses by TRM to
TICNY for 2008 was $12.3 million compared to $5.8 million for the same period in 2007. The increase
resulted from the increase in premiums produced.
Claims expense reimbursement. The increased amount of reimbursement by TRM for claims
administration pursuant to the terms of the expense sharing agreement with TICNY for 2008 resulted
from an increase in the number of claims handled related to the CPIC book of business.
Pre-tax income. As a result of the factors discussed above, pre-tax income increased to
$24.0 million for 2008 compared to $11.1 million for 2007.
Investments
Portfolio Summary
We classify our investments in fixed maturity securities as available for sale and report these
securities at their estimated fair values based on quoted market prices or, in circumstances where
quoted market prices are unavailable, based upon other observable or unobservable inputs including
matrix pricing, benchmark interest rates, market comparables and other relevant inputs. Changes in
unrealized gains and losses on these securities are reported as a separate component of
comprehensive net income and accumulated unrealized gains and losses are reported as accumulated
other comprehensive income, a component of stockholders equity. Realized gains and losses are
charged or credited to income in the period in which they are realized.
The aggregate fair value of our invested assets as of December 31, 2009 was $1.9 billion. Our
fixed maturity securities as of this date had a fair value of $1.8 billion and an amortized cost of
$1.7 billion. Equity securities carried at fair value were $76.7 million with a cost of $
78.3 million as of December 31, 2009.
Impairment of investment securities results in a charge to net income when a market decline below
cost is deemed to be other-than-temporary. We review our fixed-maturity and equity securities
portfolios to evaluate the necessity of recording impairment losses for other-than-temporary
declines in the fair value of investments. We recorded OTTI losses in our fixed maturity and equity
securities in the amounts of $44.2 million and $22.7 million in 2009 and 2008, respectively.
63
The following table presents a breakdown of the cost or amortized cost, gross unrealized gains and
losses and aggregate fair value by investment type as of December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
Gross |
|
|
Gross Unrealized Losses |
|
|
|
|
|
|
% of |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Less than 12 |
|
|
More than 12 |
|
|
Fair |
|
|
Fair |
|
($ in thousands) |
|
Cost |
|
|
Gains |
|
|
Months |
|
|
Months |
|
|
Value |
|
|
Value |
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
|
$ 73,281 |
|
|
|
$ 235 |
|
|
|
$ (225) |
|
|
|
$ - |
|
|
|
$ 73,291 |
|
|
|
3.9% |
|
U.S. Agency securities |
|
|
40,063 |
|
|
|
134 |
|
|
|
(214) |
|
|
|
- |
|
|
|
39,983 |
|
|
|
2.1% |
|
Municipal bonds |
|
|
508,204 |
|
|
|
18,241 |
|
|
|
(587) |
|
|
|
(143) |
|
|
|
525,715 |
|
|
|
27.7% |
|
|
|
Corporate and other bonds |
|
|
589,973 |
|
|
|
27,934 |
|
|
|
(1,054) |
|
|
|
(1,732) |
|
|
|
615,121 |
|
|
|
32.4% |
|
Commercial, residential and
asset-backed securities |
|
|
517,596 |
|
|
|
25,834 |
|
|
|
(1,691) |
|
|
|
(12,253) |
|
|
|
529,486 |
|
|
|
27.9% |
|
|
|
Total fixed-maturity securities |
|
|
1,729,117 |
|
|
|
72,378 |
|
|
|
(3,771) |
|
|
|
(14,128) |
|
|
|
1,783,596 |
|
|
|
94.0% |
|
Equity securities |
|
|
78,051 |
|
|
|
997 |
|
|
|
(1,591) |
|
|
|
(724) |
|
|
|
76,733 |
|
|
|
4.1% |
|
Short-term investments |
|
|
36,500 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
36,500 |
|
|
|
1.9% |
|
|
|
Total |
|
|
$ 1,843,668 |
|
|
|
$ 73,375 |
|
|
|
$ (5,362) |
|
|
|
$ (14,852) |
|
|
|
$ 1,896,829 |
|
|
|
100.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
|
$ 26,482 |
|
|
|
$ 524 |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ 27,006 |
|
|
|
4.9% |
|
U.S. Agency securities |
|
|
361 |
|
|
|
38 |
|
|
|
- |
|
|
|
- |
|
|
|
399 |
|
|
|
0.1% |
|
Municipal bonds |
|
|
179,734 |
|
|
|
2,865 |
|
|
|
(2,485) |
|
|
|
(166) |
|
|
|
179,948 |
|
|
|
33.3% |
|
Corporate and other bonds |
|
|
210,006 |
|
|
|
932 |
|
|
|
(13,948) |
|
|
|
(10,015) |
|
|
|
186,975 |
|
|
|
34.6% |
|
Commercial, residential and
asset-backed securities |
|
|
164,885 |
|
|
|
1,838 |
|
|
|
(10,603) |
|
|
|
(20,289) |
|
|
|
135,831 |
|
|
|
25.1% |
|
|
|
Total fixed-maturity securities |
|
|
581,468 |
|
|
|
6,197 |
|
|
|
(27,036) |
|
|
|
(30,470) |
|
|
|
530,159 |
|
|
|
98.0% |
|
Equity securities |
|
|
12,726 |
|
|
|
5 |
|
|
|
(60) |
|
|
|
(1,857) |
|
|
|
10,814 |
|
|
|
2.0% |
|
|
|
Total |
|
|
$ 594,194 |
|
|
|
$ 6,202 |
|
|
|
$ (27,096) |
|
|
|
$ (32,327) |
|
|
|
$ 540,973 |
|
|
|
100.0% |
|
|
|
Credit Rating of Fixed-Maturity Securities
The average credit rating of our fixed-maturity securities, using ratings assigned to securities by
Standard & Poors, was AA- at December 31, 2009 and 2008. The following table shows the ratings
distribution of our fixed-maturity portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
Percentage of |
|
($ in thousands) |
|
Fair Value |
|
|
Fair Value |
|
|
Fair Value |
|
|
Fair Value |
|
|
|
Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
|
$ 73,291 |
|
|
|
4.1% |
|
|
|
$ 27,006 |
|
|
|
5.1% |
|
AAA |
|
|
597,932 |
|
|
|
33.5% |
|
|
|
187,377 |
|
|
|
35.3% |
|
AA |
|
|
377,283 |
|
|
|
21.2% |
|
|
|
110,601 |
|
|
|
20.9% |
|
A |
|
|
400,638 |
|
|
|
22.4% |
|
|
|
113,651 |
|
|
|
21.4% |
|
BBB |
|
|
165,173 |
|
|
|
9.3% |
|
|
|
62,566 |
|
|
|
11.8% |
|
Below BBB |
|
|
169,278 |
|
|
|
9.5% |
|
|
|
28,958 |
|
|
|
5.5% |
|
|
|
Total |
|
|
$ 1,783,596 |
|
|
|
100.0% |
|
|
|
$ 530,159 |
|
|
|
100.0% |
|
|
|
Fixed Maturity InvestmentsTime to Maturity
The following table shows the composition of our fixed maturity portfolio by remaining time to
maturity at December 31, 2009 and 2008. For securities that are redeemable at the option of the
issuer and have a market price that is greater than redemption value, the maturity used for the
table below is the earliest redemption date. For securities that are redeemable at the option of
the issuer and have a market price that is less than redemption value, the maturity used for the
table below is the final maturity date:
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
Percentage of |
|
|
|
Fair Market |
|
|
Fair Market |
|
|
Fair Market |
|
|
Fair Market |
|
($ in thousands) |
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Less than one year |
|
|
$ 30,465 |
|
|
|
1.7% |
|
|
|
$ 8,789 |
|
|
|
2.1% |
|
One to five years |
|
|
355,402 |
|
|
|
19.9% |
|
|
|
112,514 |
|
|
|
19.4% |
|
Five to ten years |
|
|
492,517 |
|
|
|
27.6% |
|
|
|
176,218 |
|
|
|
31.0% |
|
More than ten years |
|
|
375,726 |
|
|
|
21.1% |
|
|
|
96,807 |
|
|
|
13.7% |
|
Mortgage and asset-backed securities |
|
|
529,486 |
|
|
|
29.7% |
|
|
|
135,831 |
|
|
|
33.8% |
|
|
Total |
|
|
$ 1,783,596 |
|
|
|
100.0% |
|
|
|
$ 530,159 |
|
|
|
100.0% |
|
|
Fixed Maturity Investments with Third Party Guarantees
At December 31, 2009, $208 million of our municipal bonds, at fair value, were guaranteed by third
parties from the total of $1.8 billion of fixed-maturity securities held by us. We do not have any
direct exposure to guarantors and the amount of securities guaranteed by third parties along with
the credit rating with and without the guarantee is as follows:
|
|
|
|
|
|
|
|
|
|
|
With |
|
|
Without |
|
($ in thousands) |
|
Guarantee |
|
|
Guarantee |
|
|
|
AAA |
|
|
$ 3,905 |
|
|
|
$ 2,032 |
|
AA |
|
|
142,856 |
|
|
|
115,090 |
|
A |
|
|
60,217 |
|
|
|
79,455 |
|
BBB |
|
|
- |
|
|
|
2,536 |
|
BB |
|
|
978 |
|
|
|
978 |
|
No underlying rating |
|
|
- |
|
|
|
7,865 |
|
|
|
Total |
|
|
$ 207,956 |
|
|
|
$ 207,956 |
|
|
|
The securities guaranteed by guarantor are as follows:
|
|
|
|
|
|
|
|
|
|
|
Guaranteed |
|
|
Percent |
|
($ in thousands) |
|
Amount |
|
|
of Total |
|
|
|
National Public Finance Guarantee Corp. |
|
|
$ 91,069 |
|
|
|
44% |
|
Assured Guaranty Municipal Corp. |
|
|
53,280 |
|
|
|
25% |
|
Ambac Financial Corp. |
|
|
33,695 |
|
|
|
16% |
|
Berkshire Hathaway Assurance Corp. |
|
|
5,628 |
|
|
|
3% |
|
FGIC Corp. |
|
|
5,444 |
|
|
|
3% |
|
Others |
|
|
18,840 |
|
|
|
9% |
|
|
|
Total |
|
|
$ 207,956 |
|
|
|
100% |
|
|
|
Fair Value Consideration
As disclosed in Note 5 Fair Value Measurements in the notes to the consolidated financial
statements, effective January 1, 2008, we adopted new GAAP guidance, which provides a revised
definition of fair value, establishes a framework for measuring fair value and expands financial
statements disclosure requirements for fair value. Under this guidance, fair value is defined as
the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants (an exit price). The statement establishes a fair value
hierarchy that distinguishes between inputs based on market data from independent sources
(observable inputs) and a reporting entitys internal assumptions based upon the best information
available when external market data is limited or unavailable (unobservable inputs). The fair
value hierarchy in GAAP prioritizes fair value measurements into three levels based on the nature
of the inputs. Quoted prices in active markets for identical assets have the highest priority
(Level 1), followed by observable inputs other than quoted prices including prices for similar
but not identical assets or liabilities (Level 2), and unobservable inputs, including the
reporting entitys estimates of the assumption that market participants would use, having the
lowest priority (Level 3).
65
As of December 31, 2009, 99% of the investment portfolio recorded at fair value was priced based
upon quoted market prices or other observable inputs. For investments in active markets, we used
the quoted market prices provided by the outside pricing services to determine fair value. In
circumstances where quoted market prices were unavailable, we used fair value estimates based upon
other observable inputs including matrix pricing, benchmark interest rates, market comparables and
other relevant inputs. When observable inputs were adjusted to reflect managements best estimate
of fair value, such fair value measurements are considered a lower level measurement in the GAAP
fair value hierarchy.
Our process to validate the market prices obtained from the outside pricing sources includes, but
is not limited to, periodic evaluation of model pricing methodologies and analytical reviews of
certain prices. We also periodically perform testing of the market to determine trading activity,
or lack of trading activity, as well as evaluating the variability of market prices. Securities
sold during the quarter are also back-tested (i.e., the sales price is compared to the previous
month end reported market price to determine reasonableness of the reported market price).
In addition, in certain instances, given the market dislocation, we deemed it necessary to utilize
Level 3 pricing over prices available through pricing services resulting in transfers from Level 2
to Level 3. In periods of market dislocation, the ability to observe stable prices and inputs may
be reduced for many instruments as currently is the case for non-investment grade non-agency
residential mortgage-backed securities.
A number of our Level 3 investments have been written down as a result of our impairment analysis.
At December 31, 2009, there were 66 securities that were priced in Level 3 with a fair value of
$13.6 million and an unrealized gain of $0.7 million.
As more fully described in Note 4 Investments Impairment Review in the notes to the
consolidated financial statements, we completed a detailed review of all our securities in a
continuous loss position, including but not limited to residential and commercial mortgage-backed
securities, and concluded that the unrealized losses in these asset classes are the result of a
decline in estimated cash flows resulting generally from weakened economic conditions.
Specifically, Residential Mortgage-backed Securities (RMBS) cash flows are negatively impacted by
a decline in home prices and a high unemployment rate while Commercial Mortgage-backed Securities
(CMBS) cash flows are negatively impacted by higher projected delinquencies. These unrealized
losses are deemed to be temporary in nature.
Refer to Note 5 Fair Value Measurement in the notes to the consolidated financial statements for
a description of the valuation methodology utilized to value Level 3 assets, how the valuation
methodology is validated and an analysis of the change in fair value of Level 3 assets. As of
December 31, 2009, the fair value of Level 3 assets as a percentage of our total assets carried at
fair value was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Assets |
|
|
Assets Carried at |
|
Fair Value |
|
as a Percentage of |
|
|
Fair Value at |
|
of Level 3 |
|
Total Assets Carried |
($ in thousands) |
|
December 31, 2009 |
|
Assets |
|
at Fair Value |
|
Fixed-maturity investments |
|
|
$ 1,783,596 |
|
|
|
$ 13,595 |
|
|
|
0.8% |
|
Equity investments |
|
|
76,733 |
|
|
|
- |
|
|
|
|
|
Short-term investments |
|
|
36,500 |
|
|
|
- |
|
|
|
|
|
|
Total investments available for sale |
|
|
1,896,829 |
|
|
|
13,595 |
|
|
|
0.7% |
|
Cash and cash equivalents |
|
|
164,882 |
|
|
|
- |
|
|
|
|
|
|
Total |
|
|
$ 2,061,711 |
|
|
|
$ 13,595 |
|
|
|
0.7% |
|
|
Unrealized Losses
In 2009, U.S. Government and Agency securities underperformed against other fixed income classes, a
reversal of the trend in 2008. One of the major themes for 2009 was the reversal of the
flight-to-quality trend seen in 2008. As such, high yielding bonds were the strongest performing
sector in 2009. Corporate bonds, especially in the financial institution sector, extended gains
throughout 2009. CMBS garnered solid returns, fueled by strong demand resulting from the TALF
program and from investors in search for yield. The continued strong rally had a pronounced effect
on Towers investment portfolio as net unrealized losses were $53.2 million at December 31, 2008
and improved to net unrealized gains of $52.4 million at December 31, 2009.
Changes in interest rates directly impact the fair value of our fixed maturity portfolio. We
regularly review both our fixed-maturity and equity portfolios to evaluate the necessity of
recording impairment losses for other-than temporary declines in the fair value of investments.
66
The following table presents information regarding our invested assets that were in an unrealized
loss position at December 31, 2009 and December 31, 2008 by amount of time in a continuous
unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or Longer |
|
|
Total |
|
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
($ in thousands) |
|
No. |
|
|
Value |
|
|
Losses |
|
|
No. |
|
|
Value |
|
|
Losses |
|
|
No. |
|
|
Value |
|
|
Losses |
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
|
24 |
|
|
|
$ 43,421 |
|
|
|
$ (225) |
|
|
|
- |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
24 |
|
|
|
$ 43,421 |
|
|
|
$ (225) |
|
U.S. Agency securities |
|
|
21 |
|
|
|
27,652 |
|
|
|
(214) |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
21 |
|
|
|
27,652 |
|
|
|
(214) |
|
Municipal bonds |
|
|
42 |
|
|
|
50,526 |
|
|
|
(587) |
|
|
|
5 |
|
|
|
2,569 |
|
|
|
(143) |
|
|
|
47 |
|
|
|
53,095 |
|
|
|
(730) |
|
Corporate and other
bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance |
|
|
32 |
|
|
|
28,342 |
|
|
|
(291) |
|
|
|
20 |
|
|
|
14,906 |
|
|
|
(1,099) |
|
|
|
52 |
|
|
|
43,248 |
|
|
|
(1,390) |
|
Industrial |
|
|
104 |
|
|
|
69,475 |
|
|
|
(726) |
|
|
|
25 |
|
|
|
14,563 |
|
|
|
(608) |
|
|
|
129 |
|
|
|
84,038 |
|
|
|
(1,334) |
|
Utilities |
|
|
6 |
|
|
|
3,575 |
|
|
|
(37) |
|
|
|
2 |
|
|
|
625 |
|
|
|
(25) |
|
|
|
8 |
|
|
|
4,200 |
|
|
|
(62) |
|
Commercial mortgage- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
backed securities |
|
|
20 |
|
|
|
25,810 |
|
|
|
(598) |
|
|
|
27 |
|
|
|
22,904 |
|
|
|
(8,138) |
|
|
|
47 |
|
|
|
48,714 |
|
|
|
(8,736) |
|
Residential mortgage- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
43 |
|
|
|
79,005 |
|
|
|
(963) |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
43 |
|
|
|
79,005 |
|
|
|
(963) |
|
Non-agency backed |
|
|
4 |
|
|
|
1,081 |
|
|
|
(14) |
|
|
|
37 |
|
|
|
19,672 |
|
|
|
(2,910) |
|
|
|
41 |
|
|
|
20,753 |
|
|
|
(2,924) |
|
Asset-backed securities |
|
|
5 |
|
|
|
334 |
|
|
|
(116) |
|
|
|
11 |
|
|
|
2,962 |
|
|
|
(1,205) |
|
|
|
16 |
|
|
|
3,296 |
|
|
|
(1,321) |
|
|
|
Total fixed-maturity
securities |
|
|
301 |
|
|
|
329,221 |
|
|
|
(3,771) |
|
|
|
127 |
|
|
|
78,201 |
|
|
|
(14,128) |
|
|
|
428 |
|
|
|
407,422 |
|
|
|
(17,899) |
|
Preferred stocks |
|
|
87 |
|
|
|
59,243 |
|
|
|
(1,441) |
|
|
|
6 |
|
|
|
4,827 |
|
|
|
(724) |
|
|
|
93 |
|
|
|
64,070 |
|
|
|
(2,165) |
|
Common stocks |
|
|
4 |
|
|
|
31 |
|
|
|
(150) |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
31 |
|
|
|
(150) |
|
|
|
Total |
|
|
392 |
|
|
|
$ 388,495 |
|
|
|
$ (5,362) |
|
|
|
133 |
|
|
|
$ 83,028 |
|
|
|
$ (14,852) |
|
|
|
525 |
|
|
|
$ 471,523 |
|
|
|
$ (20,214) |
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds |
|
|
53 |
|
|
|
$ 49,879 |
|
|
|
$ (2,485) |
|
|
|
1 |
|
|
|
$ 371 |
|
|
|
$ (166) |
|
|
|
54 |
|
|
|
$ 50,250 |
|
|
|
$ (2,651) |
|
Corporate and other
bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance |
|
|
55 |
|
|
|
42,007 |
|
|
|
(6,003) |
|
|
|
38 |
|
|
|
20,575 |
|
|
|
(4,173) |
|
|
|
93 |
|
|
|
62,582 |
|
|
|
(10,176) |
|
Industrial |
|
|
110 |
|
|
|
72,787 |
|
|
|
(7,740) |
|
|
|
32 |
|
|
|
17,701 |
|
|
|
(5,639) |
|
|
|
142 |
|
|
|
90,488 |
|
|
|
(13,379) |
|
Utilities |
|
|
5 |
|
|
|
1,974 |
|
|
|
(205) |
|
|
|
2 |
|
|
|
446 |
|
|
|
(204) |
|
|
|
7 |
|
|
|
2,420 |
|
|
|
(409) |
|
Commercial mortgage-backed securities |
|
|
15 |
|
|
|
13,997 |
|
|
|
(4,399) |
|
|
|
22 |
|
|
|
16,431 |
|
|
|
(16,626) |
|
|
|
37 |
|
|
|
30,427 |
|
|
|
(21,026) |
|
Residential mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
6 |
|
|
|
3,408 |
|
|
|
(16) |
|
|
|
1 |
|
|
|
582 |
|
|
|
(19) |
|
|
|
7 |
|
|
|
3,990 |
|
|
|
(36) |
|
Non-agency backed |
|
|
32 |
|
|
|
12,676 |
|
|
|
(3,536) |
|
|
|
16 |
|
|
|
9,953 |
|
|
|
(3,594) |
|
|
|
48 |
|
|
|
22,629 |
|
|
|
(7,130) |
|
Asset-backed securities |
|
|
20 |
|
|
|
6,481 |
|
|
|
(2,652) |
|
|
|
2 |
|
|
|
551 |
|
|
|
(51) |
|
|
|
22 |
|
|
|
7,032 |
|
|
|
(2,701) |
|
|
|
Total fixed-maturity
securities |
|
|
296 |
|
|
|
203,208 |
|
|
|
(27,036) |
|
|
|
114 |
|
|
|
66,610 |
|
|
|
(30,472) |
|
|
|
410 |
|
|
|
269,818 |
|
|
|
(57,508) |
|
Preferred stocks |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6 |
|
|
|
3,694 |
|
|
|
(1,857) |
|
|
|
6 |
|
|
|
3,694 |
|
|
|
(1,857) |
|
Common stocks |
|
|
1 |
|
|
|
1,440 |
|
|
|
(60) |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
1,440 |
|
|
|
(60) |
|
|
|
Total |
|
|
297 |
|
|
|
$ 204,648 |
|
|
|
$ (27,096) |
|
|
|
120 |
|
|
|
$ 70,304 |
|
|
|
$ (32,328) |
|
|
|
417 |
|
|
|
$ 274,952 |
|
|
|
$ (59,424) |
|
|
|
At December 31, 2009, the unrealized losses for fixed-maturity securities were primarily in our
investments in mortgage and asset-backed securities.
The following table shows the number of securities, fair value, unrealized loss amount and
percentage below amortized cost and the percentage of fair value by security rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
Fair Value by Security Rating |
|
|
|
|
|
|
|
Fair |
|
|
|
|
|
|
Amortized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB or |
|
($ in thousands) |
|
Count |
|
|
Value |
|
|
Amount |
|
|
Cost |
|
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
Lower |
|
|
|
U.S. Treasury securities |
|
|
24 |
|
|
|
$ 43,421 |
|
|
|
$ (225) |
|
|
|
-1% |
|
|
|
100% |
|
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
U.S. Agency securities |
|
|
21 |
|
|
|
27,652 |
|
|
|
(214) |
|
|
|
-1% |
|
|
|
73% |
|
|
|
9% |
|
|
|
12% |
|
|
|
6% |
|
|
|
0% |
|
Municipal bonds |
|
|
47 |
|
|
|
53,095 |
|
|
|
(730) |
|
|
|
-1% |
|
|
|
21% |
|
|
|
41% |
|
|
|
26% |
|
|
|
8% |
|
|
|
4% |
|
Corporate and other bonds |
|
|
189 |
|
|
|
131,487 |
|
|
|
(2,786) |
|
|
|
-2% |
|
|
|
1% |
|
|
|
14% |
|
|
|
49% |
|
|
|
16% |
|
|
|
20% |
|
Commercial mortgage-backed securities |
|
|
47 |
|
|
|
48,714 |
|
|
|
(8,736) |
|
|
|
-15% |
|
|
|
31% |
|
|
|
2% |
|
|
|
46% |
|
|
|
6% |
|
|
|
15% |
|
Residential mortgage-backed securities |
|
|
41 |
|
|
|
20,753 |
|
|
|
(2,924) |
|
|
|
-12% |
|
|
|
26% |
|
|
|
4% |
|
|
|
35% |
|
|
|
9% |
|
|
|
26% |
|
Asset-backed securities |
|
|
16 |
|
|
|
3,296 |
|
|
|
(1,321) |
|
|
|
-29% |
|
|
|
16% |
|
|
|
7% |
|
|
|
13% |
|
|
|
0% |
|
|
|
64% |
|
Equities |
|
|
97 |
|
|
|
64,101 |
|
|
|
(2,315) |
|
|
|
-4% |
|
|
|
0% |
|
|
|
0% |
|
|
|
50% |
|
|
|
24% |
|
|
|
26% |
|
67
Corporate and other bonds
The following tables show the fair value and unrealized loss by sector and credit quality rating of
our corporate and other bonds in an unrealized loss position at December 31, 2009:
Corporate and Other Bonds
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB or |
|
|
Fair |
|
($ in thousands) |
|
AAA |
|
|
AA |
|
|
A |
|
|
B |
|
|
lower |
|
|
value |
|
|
Sector |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
$ - |
|
|
|
$ 5,251 |
|
|
|
$ 23,574 |
|
|
|
$ 10,559 |
|
|
|
$ 3,864 |
|
|
|
$ 43,248 |
|
Industrial |
|
|
928 |
|
|
|
12,921 |
|
|
|
38,672 |
|
|
|
9,856 |
|
|
|
21,661 |
|
|
|
84,038 |
|
Utilities |
|
|
- |
|
|
|
- |
|
|
|
2,679 |
|
|
|
- |
|
|
|
1,521 |
|
|
|
4,200 |
|
|
Total fair value |
|
|
$ 928 |
|
|
|
$ 18,172 |
|
|
|
$ 64,925 |
|
|
|
$ 20,415 |
|
|
|
$ 27,046 |
|
|
|
$ 131,486 |
|
|
% of fair value |
|
|
1% |
|
|
|
14% |
|
|
|
49% |
|
|
|
16% |
|
|
|
21% |
|
|
|
100% |
|
|
Unrealized Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB or |
|
|
Unrealized |
|
($ in thousands) |
|
AAA |
|
|
AA |
|
|
A |
|
|
B |
|
|
lower |
|
|
Loss |
|
|
Sector |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
$ - |
|
|
|
$ (16) |
|
|
|
$ (427) |
|
|
|
$ (774) |
|
|
|
$ (173) |
|
|
|
(1,390) |
|
Industrial |
|
|
(7) |
|
|
|
(233) |
|
|
|
(282) |
|
|
|
(178) |
|
|
|
(633) |
|
|
|
(1,333) |
|
Utilities |
|
|
- |
|
|
|
- |
|
|
|
(10) |
|
|
|
- |
|
|
|
(52) |
|
|
|
(62) |
|
|
Total unrealized loss |
|
|
$ (7) |
|
|
|
$ (249) |
|
|
|
$ (719) |
|
|
|
$ (952) |
|
|
|
$ (858) |
|
|
|
$ (2,785) |
|
|
% of book value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2%) | |
|
The majority of our corporate bonds that are in an unrealized loss position are rated below AA.
Based on our analysis of these securities and current market conditions, we expect price recovery
on these over time, and we have determined that these securities are temporarily impaired as of
December 31, 2009.
Securitized assets
The following tables show the fair value and unrealized loss by credit quality rating and
deal origination year of our commercial, residential non-agency-backed and asset-backed
securities in an unrealized loss position at December 31, 2009:
Commercial Mortgage-backed Securities
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating |
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB or |
|
|
Fair |
|
Deal Origination Year |
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
Lower |
|
|
Value |
|
|
2002 |
|
|
$ - |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ 180 |
|
|
|
$ 180 |
|
2005 |
|
|
2,937 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,270 |
|
|
|
5,207 |
|
2006 |
|
|
3,407 |
|
|
|
- |
|
|
|
- |
|
|
|
363 |
|
|
|
73 |
|
|
|
3,843 |
|
2007 |
|
|
8,580 |
|
|
|
970 |
|
|
|
22,295 |
|
|
|
2,685 |
|
|
|
4,955 |
|
|
|
39,484 |
|
|
Total fair value |
|
|
$ 14,924 |
|
|
|
$ 970 |
|
|
|
$ 22,295 |
|
|
|
$ 3,048 |
|
|
|
$ 7,478 |
|
|
|
$ 48,714 |
|
|
% of fair value |
|
|
31% |
|
|
|
2% |
|
|
|
46% |
|
|
|
6% |
|
|
|
15% |
|
|
|
100% |
|
|
Unrealized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating |
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB or |
|
|
Unrealized |
|
Deal Origination Year |
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
Lower |
|
|
Loss |
|
|
2002 |
|
|
$ - |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ (294) |
|
|
|
$ (294) |
|
2005 |
|
|
(52) |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(67) |
|
|
|
(119) |
|
2006 |
|
|
(64) |
|
|
|
- |
|
|
|
- |
|
|
|
(1,526) |
|
|
|
(52) |
|
|
|
(1,642) |
|
2007 |
|
|
(410) |
|
|
|
(983) |
|
|
|
(410) |
|
|
|
(498) |
|
|
|
(4,382) |
|
|
|
(6,683) |
|
|
Total unrealized loss |
|
|
$ (526) |
|
|
|
$ (983) |
|
|
|
$ (410) |
|
|
|
$ (2,024) |
|
|
|
$ (4,795) |
|
|
|
$ (8,738) |
|
|
% of book value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15%) | |
|
68
Non-agency Residential Mortgage-backed Securities
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating |
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB or |
|
|
Fair |
|
Deal Origination Year |
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
Lower |
|
|
Value |
|
|
2002 |
|
|
$ 278 |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ 278 |
|
2003 |
|
|
743 |
|
|
|
- |
|
|
|
171 |
|
|
|
- |
|
|
|
563 |
|
|
|
1,477 |
|
2004 |
|
|
4,318 |
|
|
|
- |
|
|
|
- |
|
|
|
399 |
|
|
|
1,508 |
|
|
|
6,225 |
|
2005 |
|
|
- |
|
|
|
855 |
|
|
|
2,125 |
|
|
|
613 |
|
|
|
317 |
|
|
|
3,910 |
|
2006 |
|
|
- |
|
|
|
- |
|
|
|
1,648 |
|
|
|
- |
|
|
|
235 |
|
|
|
1,883 |
|
2007 |
|
|
- |
|
|
|
- |
|
|
|
3,320 |
|
|
|
820 |
|
|
|
2,840 |
|
|
|
6,980 |
|
|
Total fair value |
|
|
$ 5,339 |
|
|
|
$ 855 |
|
|
|
$ 7,264 |
|
|
|
$ 1,832 |
|
|
|
$ 5,463 |
|
|
|
$ 20,753 |
|
|
% of fair value |
|
|
26% |
|
|
|
4% |
|
|
|
35% |
|
|
|
9% |
|
|
|
26% |
|
|
|
100% |
|
|
Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating |
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB or |
|
|
Unrealized |
|
Deal Origination Year |
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
Lower |
|
|
Loss |
|
|
2002 |
|
|
$ (74) |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ (74) |
|
2003 |
|
|
(109) |
|
|
|
- |
|
|
|
(2) |
|
|
|
- |
|
|
|
(93) |
|
|
|
(204) |
|
2004 |
|
|
(113) |
|
|
|
- |
|
|
|
- |
|
|
|
(52) |
|
|
|
(441) |
|
|
|
(606) |
|
2005 |
|
|
- |
|
|
|
(141) |
|
|
|
(242) |
|
|
|
(430) |
|
|
|
(87) |
|
|
|
(900) |
|
2006 |
|
|
- |
|
|
|
- |
|
|
|
(216) |
|
|
|
- |
|
|
|
(30) |
|
|
|
(246) |
|
2007 |
|
|
- |
|
|
|
- |
|
|
|
(297) |
|
|
|
(180) |
|
|
|
(417) |
|
|
|
(894) |
|
|
Total unrealized loss |
|
|
$ (296) |
|
|
|
$ (141) |
|
|
|
$ (757) |
|
|
|
$ (662) |
|
|
|
$ (1,068) |
|
|
|
$ (2,924) |
|
|
% of book value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12%) | |
|
Asset-backed Securities
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating |
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB or |
|
|
Fair |
|
Deal Origination Year |
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
Lower |
|
|
Value |
|
|
2003 |
|
|
$ 499 |
|
|
|
$ 242 |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ 741 |
|
2004 |
|
|
- |
|
|
|
- |
|
|
|
444 |
|
|
|
- |
|
|
|
1,509 |
|
|
|
1,953 |
|
2005 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
571 |
|
|
|
571 |
|
2006 |
|
|
16 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15 |
|
|
|
31 |
|
|
Total fair value |
|
|
$ 515 |
|
|
|
$ 242 |
|
|
|
$ 444 |
|
|
|
$ - |
|
|
|
$ 2,095 |
|
|
|
$ 3,296 |
|
|
% of fair value |
|
|
16% |
|
|
|
7% |
|
|
|
13% |
|
|
|
0% |
|
|
|
64% |
|
|
|
100% |
|
|
Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating |
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB or |
|
|
Unrealized |
|
Deal Origination Year |
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
Lower |
|
|
Loss |
|
|
2003 |
|
|
$ (2) |
|
|
|
$ (75) |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ (77) |
|
2004 |
|
|
- |
|
|
|
- |
|
|
|
(336) |
|
|
|
- |
|
|
|
(792) |
|
|
|
(1,128) |
|
2005 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0) |
|
|
|
(0) |
|
2006 |
|
|
(0) |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(17) |
|
|
|
(17) |
|
2007 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(98) |
|
|
|
(98) |
|
|
Total unrealized loss |
|
|
$ (2) |
|
|
|
$ (75) |
|
|
|
$ (336) |
|
|
|
$ - |
|
|
|
$ (907) |
|
|
|
$ (1,320) |
|
|
% of book value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29%) | |
|
For those fixed-maturity investments deemed not to be in an OTTI position, we believe that the
gross unrealized investment loss was primarily caused by a lack of liquidity in the capital
markets. We expect cash flows from operations to be sufficient to meet our liquidity requirements and, therefore, we do not intend
69
to sell these fixed maturity securities
and we do not believe that we will be required to sell these securities before recovering their
cost basis. For equity securities not considered OTTI, we believe we have the ability to hold these
investments until a recovery of fair value to our cost basis. A substantial portion of the
unrealized loss relating to the mortgage-backed securities is the result of a lack of liquidity in
the market that we believe to be temporary.
See Note 4 - Investments in the consolidated financial statement for further information about
impairment testing and other-than-temporary impairments.
Liquidity and Capital Resources
Sources and Uses of Funds
Tower is organized as a holding company with multiple intermediate holding companies, ten Insurance
Subsidiaries and several management companies. Towers principal liquidity needs include interest
on debt, income taxes and stockholder dividends. Our principal sources of liquidity include
dividends and other permitted payments from our subsidiaries, as well as financing through
borrowings and sales of securities.
Under New York law, TICNY is limited to paying dividends to Tower only from statutory earned
surplus. In addition, the New York Insurance Department must approve any dividend declared or paid
by TICNY that, together with all dividends declared or distributed by TICNY during the preceding
twelve months, exceeds the lesser of (1) 10% of TICNYs policyholders surplus as shown on its
latest statutory financial statement filed with the New York State Insurance Department or (2) 100%
of adjusted net investment income during the preceding twelve months. TICNY declared $2.0 million,
$5.2 million and $8.5 million in dividends to Tower in 2009, 2008 and 2007, respectively.
Bermuda legislation imposes limitations on the dividends that CastlePoint Re may pay. We are
subject to Bermuda regulatory constraints that affect our ability to pay dividends on our shares
and make other payments. Under the Companies Act 1981 of Bermuda, as amended (the Companies Act),
we may declare or pay a dividend out of distributable reserves only if we have reasonable grounds
for believing that we are, or would after the payment, be able to pay our liabilities as they
become due and if the realizable value of our assets would thereby not be less than the aggregate
of our liabilities and issued share capital and share premium accounts.
Under the Insurance Act of 1978, as amended (the Insurance Act), CastlePoint Re is required to
maintain a specified solvency margin and a minimum liquidity ratio and is prohibited from declaring
or paying any dividends if doing so would cause CastlePoint Re to fail to meet its solvency margin
and its minimum liquidity ratio. Under the Insurance Act, CastlePoint Re is prohibited from
declaring or paying dividends without the approval of the Bermuda Monetary Authority, if
CastlePoint Re failed to meet its solvency margin and minimum liquidity ratio on the last day of
the previous fiscal year. Under the Insurance Act, CastlePoint Re is prohibited, without the
approval of the BMA, from reducing by 15% or more its total statutory capital as set forth on its
audited statutory financial statements for the previous year.
The other Insurance Subsidiaries are subject to similar restrictions, usually related to
policyholders surplus, unassigned surplus or net income and notice requirements of their
domiciliary state. As of December 31, 2009, the amount of distributions that our Insurance
Subsidiaries could pay to Tower without approval of their domiciliary Insurance Departments was
$52.8 million.
TRM is not subject to any limitations on its dividends to Tower, other than the basic requirement
that dividends may be declared or paid if the net assets of TRM remaining after such declaration or
payment will at least equal the amount of TRMs stated capital. TRM declared dividends of $6.0
million, $7.2 million and $0 in 2009, 2008 and 2007, respectively.
Pursuant to a Tax Allocation Agreement, we compute and pay Federal income taxes on a consolidated
basis. At the end of each consolidated return year, each entity must compute and pay to Tower its
share of the Federal income tax liability primarily based on separate return calculations. The tax
allocation agreement allows Tower to make certain Code elections in the consolidated Federal tax
return. In the event such Code elections are made, any benefit or liability is accrued or paid by
each entity. If a unitary or combined state income tax return is filed, each entitys share of the
liability is based on the methodology required or established by state income tax law or, if none,
the percentage equal to each entitys separate income or tax divided by the total separate income
or tax reported on the return. During 2009, Tower received $55.9 million in tax payments from its
subsidiaries under this agreement.
70
Cash Flows from Follow-on Offering
On January 22, 2007, we sold 2,704,000 shares of common stock at a price of $31.25 per share, less
underwriting discounts, and granted to the underwriters an option to purchase up to 405,600
additional shares of common stock at the same price to cover over-allotments. On February 5, 2007,
the underwriters exercised their over-allotment option with respect to 340,600 shares of common
stock. We received aggregate net proceeds of approximately $89.4 million from the offering and
over-allotment option, after underwriting discounts and expenses.
Cash Flows from Issuance of Subordinated Debentures and Perpetual Preferred Stock
In January 2007 we issued $20 million of subordinated debentures.
On November 13, 2006, we entered into the Stock Purchase Agreement with a subsidiary of CastlePoint
pursuant to which we agreed to issue and sell 40,000 shares of perpetual preferred stock to the
subsidiary for aggregate consideration of $40 million. The transaction closed on December 4, 2006.
On January 26, 2007, we fully redeemed all 40,000 shares of the preferred stock for $40.0 million
using $20.0 million of the net proceeds from our trust preferred securities issued on January 25,
2007 and $20.0 million of the net proceeds from our common stock offering.
Surplus Levels
Our Insurance Subsidiaries are required by law to maintain a certain minimum level of
policyholders surplus on a statutory basis. Policyholders surplus is calculated by subtracting
total liabilities from total assets. The NAIC maintains risk-based capital (RBC) requirements for
property and casualty insurance companies. RBC is a formula that attempts to evaluate the adequacy
of statutory capital and surplus in relation to investments and insurance risks. The formula is
designed to allow the state Insurance Departments to identify potential weakly capitalized
companies. Under the formula, a company determines its risk-based capital by taking into account
certain risks related to the insurers assets (including risks related to its investment portfolio
and ceded reinsurance) and the insurers liabilities (including underwriting risks related to the
nature and experience of its insurance business). Applying the RBC requirements as of December 31,
2009, our Insurance Subsidiaries risk-based capital exceeded the minimum level that would trigger
regulatory attention.
Cash Flows
The primary sources of cash flow in our Insurance Subsidiaries are net premiums collected, ceding
commissions received from our quota share reinsurers, loss payments by our reinsurers, investment
income and proceeds from the sale or maturity of investments. The Insurance Subsidiaries use funds
for loss payments and loss adjustment expenses on our net business, commissions to producers,
salaries and other underwriting expenses as well as to purchase investments, fixed assets and to
pay dividends to Tower. Funds are also used by the Insurance Subsidiaries for ceded premium
payments to reinsurers, which are paid on a net basis after subtracting losses paid on reinsured
claims and reinsurance commissions. TRMs primary sources of cash are commission and fee income.
Our reconciliation of net income to cash provided from operations is generally influenced by the
collection of premiums in advance of paid losses, the timing of reinsurance, issuing company
settlements and loss payments.
Cash flow and liquidity are categorized into three sources: (1) operating activities; (2) investing
activities; and (3) financing activities, which are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Summary |
|
Year ended December 31, |
|
($ in millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
|
$ 214.7 |
|
|
|
$ 61.7 |
|
|
|
$ 75.9 |
|
Investing activities |
|
|
(175.2) |
|
|
|
1.6 |
|
|
|
(182.9) |
|
Financing activities |
|
|
(10.9) |
|
|
|
(4.7) |
|
|
|
67.5 |
|
|
Net increase in cash and cash equivalents |
|
|
28.6 |
|
|
|
58.6 |
|
|
|
(39.5) |
|
Cash and cash equivalents, beginning of year |
|
|
136.3 |
|
|
|
77.7 |
|
|
|
117.2 |
|
|
Cash and cash equivalents, end of period |
|
|
$ 164.9 |
|
|
|
$ 136.3 |
|
|
|
$ 77.7 |
|
|
71
Comparison of Years Ended December 31, 2009 and 2008
The increase in operating cash flow in 2009 was primarily a result of additional cash flows
provided through the acquisition of CastlePoint and Hermitage and in increase in premiums
collected, partially offset by increased claims and tax payments.
Net cash flows used in investing activities were $156.9 million in 2009 compared to net cash flow
provided in 2008 of $1.6 million. In 2009, net cash acquired from acquisitions of $254.5 million
was offset by the purchase of fixed assets of $26.3 million and the net increase in investments of
$385.1 million. In 2008, we purchased $17.2 million of fixed assets and had a net cash inflow of
$18.8 million from investments.
Net cash flows used in financing activities related primarily to the payment of dividends to
stockholders of $10.7 million in 2009, compared to $4.6 million in 2008.
Comparison of Years Ended December 31, 2008 and 2007
For 2008 and 2007, net cash provided by operating activities was $61.7 million and $75.9 million,
respectively. The decrease in cash flow for 2008 was due, in part, to faster payments to CPIC by
TRM in 2008 compared to 2007 as well as direct transaction costs for the CastlePoint acquisition.
The net cash flows provided by investing activities for 2008 was $1.6 million as compared to net
cash used by investing activities of $182.9 million for the same period in 2007. During 2008, we
capitalized $15.3 million for software, principally expenditures for operating systems and
hardware. These expenditures were offset by net sales of fixed maturity securities totaling
$19.9 million and net purchases of equities of $0.6 million.
The net cash flows used by financing activities for 2008 related primarily to the payment of
dividends.
Liquidity
Our Insurance Subsidiaries maintain sufficient liquidity to pay claims, operating expenses and meet
our other obligations. We held $164.9 million and $136.3 million of cash and cash equivalents at
December 31, 2009 and 2008, respectively. We monitor our expected claims payment needs and maintain
a sufficient portion of our invested assets in cash and cash equivalents to enable us to fund our
claims payments without having to sell longer-duration investments. As necessary, we adjust our
holdings of short-term investments and cash and cash equivalents to provide sufficient liquidity to
respond to changes in the anticipated pattern of claims payments. See BusinessInvestments.
In 2009 and 2008, we contributed $5.3 and $0.3 million to TICNY, respectively. We also contributed
$1.3 million to CPIC in 2009. In 2007, we contributed $3.2 million to TICNY, $2.5 million to PIC
and $2.5 million to NEIC.
Commitments
The following table summarizes information about contractual obligations and commercial
commitments. The minimum payments under these agreements as of December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
($ in millions) |
|
Total |
|
|
Less than 1 Year |
|
|
1-3 Years |
|
|
4-5 Years |
|
|
After 5 Years |
|
|
Subordinated Debentures |
|
|
$ 235.1 |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ 235.1 |
|
Interest on subordinated debentures |
|
|
463.0 |
|
|
|
17.3 |
|
|
|
34.7 |
|
|
|
34.7 |
|
|
|
376.3 |
|
Operating lease obligations |
|
|
60.5 |
|
|
|
8.6 |
|
|
|
13.6 |
|
|
|
10.7 |
|
|
|
27.6 |
|
Gross loss reserves |
|
|
1,132.0 |
|
|
|
347.6 |
|
|
|
429.9 |
|
|
|
210.2 |
|
|
|
144.3 |
|
|
Total contractual obligations |
|
|
$ 1,890.6 |
|
|
|
$ 373.5 |
|
|
|
$ 478.2 |
|
|
|
$ 255.6 |
|
|
|
$ 783.3 |
|
|
The gross loss reserve payments due by period in the table above are based upon the loss and
loss expense reserves estimates as of December 31, 2009 and actuarial estimates of expected payout
patterns by line of business. As a result, our calculation of loss reserve payments due by period
is subject to the same uncertainties associated with determining the level of reserves and to the
additional uncertainties arising from the difficulty of predicting when claims (including claims
that have not yet been reported to us) will be paid. The projected gross loss payments presented do
not include the estimated amounts recoverable from reinsurers that amounted to $199.7 million,
which are estimated to be recovered as follows: less than one year, $59.6million; one to three
72
years, $74.8 million; four to five years, $38 million; and after five years, $27.3 million. The
interest on the subordinated debentures is calculated using interest rates in effect at
December 31, 2009 for variable rate debentures.
For a discussion of our loss and LAE reserving process, see Critical Accounting PoliciesLoss and
LAE Reserves. Actual payments of losses and loss adjustment expenses by period will vary, perhaps
materially, from the above table to the extent that current estimates of loss reserves vary from
actual ultimate claims amounts and as a result of variations between expected and actual payout
patterns. See Risk Factors-Risks Related to Our Business. If our actual loss and loss adjustment
expenses exceed our loss reserves, our financial condition and results of operations could be
adversely affected, for a discussion of the uncertainties associated with estimating loss and LAE
expense reserves. The estimated ceded reserves recoverable referred to above also assumes timely
reimbursement from our reinsurers. If our reinsurers do not meet their contractual obligations on a
timely basis, the payment assumptions presented above could vary materially.
Capital Resources
At various times over the past five years we have issued trust preferred securities through
wholly-owned Delaware statutory business trusts. The trusts use the proceeds of the sale of the
trust preferred securities and common securities that we acquire from the trust to purchase junior
subordinated debentures from us with terms that match the terms of the trust preferred securities.
Interest on the junior subordinated debentures and the trust preferred securities is payable
quarterly. In some cases, the interest rate is fixed for an initial period of five years after
issuance and then floats with changes in the London Interbank Offered Rate (LIBOR). In other
cases the interest rate floats with LIBOR without any initial fixed-rate period. The principal
terms of the outstanding trust preferred securities are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
|
|
|
|
|
|
|
|
Amount of |
|
Amount of |
|
|
|
|
|
|
|
|
|
|
Investment in |
|
Junior |
|
|
|
|
|
|
|
|
|
|
Common |
|
Subordinated |
|
|
|
|
Maturity |
|
Early |
|
Interest |
|
Securities of |
|
Debenture |
Issue Date |
|
Issuer |
|
Date |
|
Redemption |
|
Rate |
|
Trust |
|
Issued to |
|
|
|
|
|
|
|
|
|
|
|
|
Trust |
|
May 2003
|
|
Tower Group
Statutory Trust I
|
|
May 2033
|
|
At our option at
par on or after
May
15, 2008
|
|
Three-month LIBOR
plus 410 basis
points
|
|
$0.3 million
|
|
$10.3 million |
|
September 2003
|
|
Tower Group
Statutory Trust II
|
|
September 2033
|
|
At our option at
par on or after
September 30, 2008
|
|
7.5% until September 30, 2008; three-month LIBOR plus 400 basis points thereafter
|
|
$0.3 million
|
|
$10.3 million |
|
May 2004
|
|
Preserver Capital
Trust I
|
|
May 2034
|
|
At our option at
par on or after May
24, 2009
|
|
Three-month LIBOR
plus 425 basis
points
|
|
$0.4 million
|
|
$12.4 million |
|
December 2004
|
|
Tower Group
Statutory Trust III
|
|
December 2034
|
|
At our option at
par on or after
December 15, 2009
|
|
7.4% until December
7, 2009;
three-month LIBOR
plus 340 basis
points thereafter
|
|
$0.4 million
|
|
$13.4 million |
|
December 2004
|
|
Tower Group
Statutory Trust IV
|
|
March 2035
|
|
At our option at
par on or after
December 21, 2009
|
|
Three-month LIBOR
plus 340 basis
points
|
|
$0.4 million
|
|
$13.4 million |
|
March 2006
|
|
Tower Group
Statutory Trust V
|
|
April 2036
|
|
At our option at
par on or after
April 7, 2011
|
|
8.5625% until March
31, 2011;
three-month LIBOR
plus 330 basis
points thereafter
|
|
$0.6 million
|
|
$20.6 million |
|
January 2007
|
|
Tower Group
Statutory Trust VI
|
|
March 2037
|
|
At our option at
par on or after
March 15, 2012
|
|
8.155% until
January 25, 2012;
three-month LIBOR
plus 300 basis
points thereafter
|
|
$0.6 million
|
|
$20.6 million |
|
December 2006
|
|
CastlePoint
Management
Statutory Trust II
|
|
December 2036
|
|
At our option at
par on or after
December 14, 2011
|
|
8.5551% until
December 14, 2011;
three-month LIBOR
plus 330 basis
points thereafter
|
|
$1.6 million
|
|
$51.6 million |
|
December 2006
|
|
CastlePoint
Management
Statutory Trust I
|
|
December 2036
|
|
At our option at
par on or after
December 1, 2011
|
|
8.66% until
December 1, 2011;
three-month LIBOR
plus 350 basis
points thereafter
|
|
$1.6 million
|
|
$51.6 million |
|
September 2007
|
|
CastlePoint Bermuda
Capital Trust I
|
|
December 2037
|
|
At our option at
par on or after
September 27, 2012
|
|
8.39% until
September 27, 2012;
three-month LIBOR
plus 350 basis
points thereafter
|
|
$0.9 million
|
|
$30.9 million |
|
73
We do not consolidate interest in our statutory business trusts for which we hold 100% of the
common trust securities because we are not the primary beneficiary of the trusts. Our investments
in common trust securities of the statutory business trusts are reported in investments as equity
securities. We report as a liability the outstanding subordinated debentures owed to the statutory
business trusts.
Under the terms for all of the trust preferred securities, an event of default may occur upon:
|
|
non-payment of interest on the trust preferred securities, unless such non-payment
is due to a valid extension of an interest payment period; |
|
|
|
non-payment of all or any part of the principal of the trust preferred securities; |
|
|
|
our failure to comply with the covenants or other provisions of the indentures or
the trust preferred securities; or |
|
|
|
bankruptcy or liquidation of us or the trusts. |
If an event of default occurs and is continuing, the entire principal and the interest accrued on
the affected trust preferred securities and junior subordinated debentures may be declared to be
due and payable immediately.
Pursuant to the terms of our subordinated debentures, we and our subsidiaries cannot declare or pay
any dividends if we are in default or have elected to defer payments of interest on the
subordinated debentures.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements at December 31, 2009.
Inflation
Property and casualty loss and loss adjustment expense reserves are established before we know the
amount of losses and loss adjustment expenses or the extent to which inflation may affect such
amounts. We attempt to anticipate the potential impact of inflation in establishing our loss and
LAE reserves. Inflation in excess of the levels we have assumed could cause loss and LAE expenses
to be higher than we anticipated.
Substantial future increases in inflation could also result in future increases in interest rates,
which in turn are likely to result in a decline in the market value of the investment portfolio and
cause unrealized losses or reductions in stockholders equity.
Adoption of New Accounting Pronouncements
For a discussion of accounting standards, see Note 1 of Notes to Consolidated Financial Statements.
Marketplace Conditions and Trends
The property and casualty insurance industry is affected by naturally occurring industry cycles
known as hard and soft markets. For the first ten years after our company began, we operated in
a soft market, generally considered an adverse industry condition in the property and casualty
insurance industry. A soft market is characterized by intense competition that results in
inadequate pricing, expanded coverage terms and increased commissions paid to distribution sources
in order to compete for business. A hard market, generally considered a beneficial industry trend, is characterized by
reduced competition that results in
74
higher pricing, reduced coverage terms and lower commissions
paid to acquire business.
In the last three decades, there have been three hard markets in which industry-wide
inflation-adjusted premiums grew. Each of these periods was followed by an increase in capacity,
price competition and the aggressive terms and conditions that are typical of a soft market.
According to A.M. Best a prolonged period of competitive conditions drove industry net premiums
written down by 4.2% to $426.8 billion in 2009 and, for the first time in A.M. Bests recorded
history, net premiums written have declined in three consecutive years.
Despite the decline in net premiums written, A.M. Best expects the industrys net income to
increase to $30.6 billion in 2009 from $3.8 billion in 2008 as underwriting results benefited from
lower catastrophe related losses, favorable development on prior accident years and an increase in
investment gains. According to A.M. Best, the substantial increase in earnings combined with the
$70 billion swing from unrealized losses in 2008 to unrealized gains in 2009 allowed policyholders
surplus, which rebounded by 9.4%, to be replenished to levels that offered comfort to the market
and prevented a turnaround in pricing. A.M. Best estimates that the industry combined ratio for
2009 will be 100.6%, a decrease of 4.5 percentage points from the 105.1% in 2008 of which 2.3
points is attributable to an improvement in the mortgage and financial guaranty results.
The outlook for 2010 suggests that the economy, although sluggish, is showing signs of recovery as
banks lessen restrictions on lending, the housing sector seems to be bottoming out and consumer and
business debt loads are shrinking. These factors suggest a modest organic premium growth from new
business and renewal retention. The degree of growth will be influenced by a slowly improving job
sector and general uncertainty of the direction of key economic indicators. Production pressures
in the P&C industry continue as evidenced by ongoing rate decreases, reductions in exposure units
such as payroll, sales, new housing starts and limited new business creation. A. M. Best projects a
1.6% decrease in net premiums written in 2010. With rates flat to slightly down, there are no signs
of a meaningful market hardening and, barring a major catastrophe, a turn in the cycle may be
delayed until 2011 at the earliest. Overall industry combined ratio estimates project the greatest
negative impact to be seen in Workers Compensation, Commercial Multi-Peril, Other Liability, Fire &
Allied Lines and Medical Professional Liability. These will be driven by accident year loss
development, escalating medical costs and an anticipated return to a normal weather-related
catastrophe results. The Private Passenger Auto line, with selected rate increases making an impact
coupled with a stable loss frequency, projects a combined ratio improvement for 2010. While overall
results of the industry are expected to continue to deteriorate until a general market improvement,
those companies that manage the cycle effectively will be well-positioned to take advantage of the
current adverse conditions and substantially outperform their peers.
Our product and geographic expansion initiatives, including the acquisition and consolidation of
existing profitable books of business completed in 2009, will be followed by the broadening of our
personal lines segment in 2010. This will feature a private passenger automobile capability and a
signature personal package policy resulting from the pending acquisition of the One Beacon personal
lines division. These significant efforts will provide ample growth for us in 2010. Furthermore,
our continued expansion into narrowly defined classes of specialty commercial business will
generate growth in the small and lower middle market commercial segments. We will continue to be
less interested in the higher premium per policy levels of the upper middle market, which are
challenged by severe competitive conditions. It is expected that the industrys loss of surplus in
2008 will be fully recovered in 2010. This will add to the excess underwriting capacity and, with
the treasury yield curve remaining at its depressed level reducing investment income, continued
pressure on top line growth will further extend the soft market conditions. In contrast to these
trends, we expect to maintain underwriting integrity and premium adequacy in low to moderate hazard
classes of business with a strong niche market focus providing solutions to our customers needs.
This market discipline will span each of the commercial and personal lines, as well as specialty
segments by demonstrating consistent risk selection and providing coverage terms and conditions at
adequate pricing. Our broad product line portfolio and diversified distribution platform will allow
us to manage our business mix by allocating capital in response to profit opportunities within the
current market environment.
Item 7A. Quantitative And Qualitative Disclosures About Market Risk
Market risk is the risk that we will incur losses in our investments due to adverse changes in
market rates and prices. Market risk is directly influenced by the volatility and liquidity in the
market in which the related underlying assets are invested. We believe that we are principally
exposed to three types of market risk:
|
|
changes in interest rates, |
|
|
|
changes in the credit quality of issuers of investment securities and reinsurers, and |
|
|
|
changes in equity prices. |
75
Interest Rate Risk
Interest rate risk is the risk that we may incur economic losses due to adverse changes in interest
rates. The primary market risk to the investment portfolio is interest rate risk associated with
investments in fixed maturity securities, although conditions affecting particular asset classes
(such as conditions in the housing market that affect residential mortgage-backed securities) can
also be a significant source of market risk. Fluctuations in interest rates have a direct impact on
the market valuation of these securities. Our fixed maturity portfolio is comprised of primarily
investment grade corporate securities, U.S. government and agency securities, municipal obligations
and mortgage-backed securities. Our fixed maturity securities are classified as available-for-sale
in accordance with GAAP and reported at fair value, with unrealized gains and losses excluded from
earnings except for the credit portion of losses considered to be other than temporarily impaired
and reported as a separate component of stockholders equity. The fair value of our fixed maturity
securities as of December 31, 2009 was $1.8 billion.
For fixed maturity securities, short-term liquidity needs and the potential liquidity needs for the
business are key factors in managing our portfolio. We use modified duration analysis to measure
the sensitivity of the fixed income portfolio to changes in interest rates. As of December 31,
2009, the average duration of the fixed maturity portfolio was 4.5 years.
As of December 31, 2009, we had a total of $59.7 million of outstanding floating rate debt, all of
which is outstanding subordinated debentures underlying our trust preferred securities issued by
our wholly owned statutory business trusts and carrying an interest rate that is determined by
reference to market interest rates. If interest rates increase, the amount of interest payable by
us would also increase.
Sensitivity Analysis
Sensitivity analysis is a measurement of potential loss in future earnings, fair values or cash
flows of market sensitive instruments resulting from one or more selected hypothetical changes in
interest rates and other market rates or prices over a selected time. In our sensitivity analysis
model, we select a hypothetical change in market rates that reflects what we believe are reasonably
possible near-term changes in those rates. The term near-term means a period of time going
forward up to one year from the date of the consolidated financial statements. Actual results may
differ from the hypothetical change in market rates assumed in this disclosure, especially since
this sensitivity analysis does not reflect the results of any action that we may take to mitigate
such hypothetical losses in fair value.
In this sensitivity analysis model, we use fair values to measure our potential loss. The
sensitivity analysis model includes fixed maturities and short-term investments.
For invested assets, we use modified duration modeling to calculate changes in fair values.
Durations on invested assets are adjusted for call, put and interest rate reset features. Durations
on tax-exempt securities are adjusted for the fact that the yield on such securities is less
sensitive to changes in interest rates compared to Treasury securities. Invested asset portfolio
durations are calculated on a market value weighted basis, including accrued investment income,
using holdings as of December 31, 2009.
The following table summarizes the estimated change in fair value on our fixed maturity portfolio
including short-term investments based on specific changes in interest rates as of December 31,
2009:
|
|
|
|
|
|
|
Estimated Increase |
|
Estimated Percentage |
|
|
(Decrease) in Fair Value |
|
Increase (Decrease) |
Change in interest rate |
|
($ in thousands) |
|
in Fair Value |
|
300 basis point rise |
|
$(255,967) |
|
-14.3% |
200 basis point rise |
|
(174,779) |
|
-9.7% |
100 basis point rise |
|
(88,647) |
|
-4.9% |
100 basis point decline |
|
91,545 |
|
5.1% |
The sensitivity analysis model used by us produces a predicted pre-tax loss in fair value of
market-sensitive instruments of $88.6 million or 4.9% based on a 100 basis point increase in
interest rates as of December 31, 2009. This loss amount only reflects the impact of an interest
rate increase on the fair value of our fixed maturities investments, which constituted
approximately 94.0% of our total invested assets excluding cash and cash equivalents as of December
31, 2009.
Interest expense would also be affected by a hypothetical change in interest rates. As of December
31, 2009 we had $36.0 million of floating rate debt obligations. Assuming this amount remains
constant, a hypothetical 100 basis point increase in interest rates would increase annual interest
expense by $360,000, a 200 basis point increase would increase interest expense by $720,000, and a
300 basis point increase would increase interest expense by $1,080,000.
76
With respect to investment income, the most significant assessment of the effects of hypothetical
changes in interest rates on investment income would be related to residential mortgage-backed
securities. The rates at which the residential mortgages underlying mortgage backed securities are
prepaid, and therefore the average life of residential mortgage-backed securities, can vary
depending on changes in interest rates (for example, mortgages are prepaid faster and the average
life of mortgage backed securities falls when interest rates decline). The adjustments for changes
in amortization, which are based on revised average life assumptions, would have an impact on
investment income if a significant portion of our residential mortgage backed securities holdings
had been purchased at significant discounts or premiums to par value. As of December 31, 2009, the
par value of our residential mortgage-backed securities holdings was $330.6 million and the
amortized cost of our residential mortgage-backed securities holdings was $311.0 million. This
equates to an average price of 94% of par. Historically, few of our mortgage backed securities were
purchased at more than three points (below 97% and above 103%) from par, thus an adjustment would
not have a significant effect on investment income. However, since many of our non investment grade
mortgage-backed securities have been impaired as a result of adverse cash flows, the required
adjustment to book yield can have a significant effect on our future investment income.
Furthermore, significant hypothetical changes in interest rates in either direction would likely
not have a significant effect on principal redemptions, and therefore investment income, because of
the prepayment protected mortgage securities in the portfolio. The residential mortgage-backed
securities portion of the portfolio totaled 17.7% as of December 31, 2009. Of this total, 91.3% was
in agency pass through securities, which have the highest amount of prepayment risk from declining
rates. The remainder of our mortgage-backed securities portfolio is invested in agency planned
amortization class collateralized mortgage obligations and non-agency residential non-accelerating
securities.
The planned amortization class collateralized mortgage obligation securities maintain their average
life over a wide range of prepayment assumptions, while the non-agency residential non-accelerating
securities have five years of principal lock-out protection and the commercial mortgage-backed
securities have very onerous prepayment and yield maintenance provisions that greatly reduce the
exposure of these securities to prepayments.
Credit Risk
Our credit risk is the potential loss in market value resulting from adverse change in the
borrowers ability to repay its obligations. Our investment objectives are to preserve capital,
generate investment income and maintain adequate liquidity for the payment of claims and debt
service. We seek to achieve these goals by investing in a diversified portfolio of securities. We
manage credit risk through regular review and analysis of the creditworthiness of all investments
and potential investments. Although we experienced increased credit risk during 2009 due to the
dislocation of the credit markets and a general economic deterioration in the housing markets
primarily throughout 2008 and continuing in 2009, our fixed maturity portfolio maintained an
average S&P rating of AA-.
We also bear credit risk on our reinsurance recoverables and premiums ceded to reinsurers. As of
December 31, 2009, we had unsecured reinsurance recoverables of $42.8 million owed by One Beacon
Insurance, $11 million owed by Endurance Reinsurance Corporation, $10.4 million owed by Lloyd
Syndicates, $10 million owed by Hanover Ruckversicherungs AG, $9.7 million owed by Axis Reinsurance
Company, $8.8 million owed by Platinum Underwriters Reinsurance Inc., $8.5 million owed by Munich
Reinsurance America Inc., $6.9 million owed by Westport Insurance Corp., $5.5 million owed by QBE
Reinsurance Corporation, and other reinsurers owing in total $25.5 million. If any of these
reinsurers fails to pay its obligations to us, or substantially delays making payments on the
reinsurance recoverables, our financial condition and results of operations could be impaired. To
mitigate the credit risk associated with reinsurance recoverables, we secure certain of our
reinsurance recoverables by withholding ceded premium and requiring funds to be placed in trust as
well as monitoring our reinsurers financial condition and rating agency ratings and outlook. See
BusinessReinsurance.
We also bear credit risk for premiums produced by TRM and a limited portion, generally a deposit
amount, of the direct premiums written by our Insurance Subsidiaries. Producers collect such
premiums and remit them to us within prescribed periods. After receiving a deposit, the Insurance
Subsidiaries premiums are directly billed to insureds. In New York State and other jurisdictions,
premiums paid to producers by an insured may be considered to have been paid under applicable
insurance laws and regulations and the insured will no longer be liable to us for those amounts,
whether or not we have actually received the premium payment from the producer. Consequently, we
assume a degree of credit risk associated with producers. Due to the unsettled and fact specific
nature of the law, we are unable to quantify our exposure to this risk.
Equity Risk
Equity risk is the risk that we may incur economic losses due to adverse changes in equity prices.
Our exposure to changes in equity prices primarily results from our holdings of preferred stocks,
and to a lesser extent, common stocks, mutual funds and other equities. Our equity securities are
classified as available for sale in accordance with GAAP and carried on the balance sheet at fair
value. Our outside investment managers are constantly reviewing the financial health of these
issuers. In addition, we perform periodic reviews of these issuers.
77
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
|
|
|
|
|
Page |
|
|
|
F-2 |
|
|
F-4 |
|
|
F-5 |
|
|
F-6 |
|
|
F-7 |
|
|
F-9 |
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Tower Group, Inc.
We have audited the accompanying consolidated balance sheets of Tower Group, Inc. (the Company)
as of December 31, 2009 and 2008, and the related consolidated statements of income and
comprehensive net income, changes in stockholders equity and cash flows for each of the years in
the three-year period ended December 31, 2009. Our audits also included the financial statement
schedules listed in Item 15. We also have audited the Companys internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Companys management is responsible for these financial statements and financial statement
schedules, for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Managements Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on these financial statements and the financial statement
schedules and an opinion on the Companys internal control over financial reporting based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate
As described in Managements Annual Report on Internal Control over Financial Reporting, the
Company has excluded Specialty Underwriters Alliance, Inc. from its assessment of internal control
over financial reporting as of December 31, 2009 as Specialty Underwriters Alliance, Inc. and its
subsidiary were acquired by the Company in a business combination during 2009. We have also
excluded Specialty Underwriters Alliance, Inc. from our audit of internal control over financial
reporting. The total assets and revenues of Specialty Underwriters Alliance, Inc. represent 15%
and 3%, respectively, of the related consolidated financial statement amounts as of and for the
year ended December 31, 2009.
F-2
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of
accounting for other-than-temporary impairments of debt securities as of January 1, 2009 due to the
adoption of new FASB guidance.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Tower Group, Inc. as of December 31, 2009 and 2008,
and the results of its consolidated operations and its cash flows for each of the years in the
three-year period ended December 31, 2009 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, such financial statement
schedules, when considered in relation to the basic financial statements as a whole, present
fairly, in all material respects, the information set forth therein. Also in our opinion, Tower
Group, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ Johnson Lambert & Co. LLP
Falls Church, Virginia
March 1, 2010
F-3
Tower Group, Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
| |
December 31, |
($ in thousands, except par value and share amounts) |
|
2009 |
|
|
2008 |
|
|
Assets |
|
|
|
|
|
|
|
|
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of
$1,729,117 and $581,470) |
|
|
$ 1,783,596 |
|
|
|
$ 530,159 |
|
Equity securities, available-for-sale, at fair value (cost of $78,051 and $12,726) |
|
|
76,733 |
|
|
|
10,814 |
|
Short-term investments, available-for sale, at fair value (cost of $36,500) |
|
|
36,500 |
|
|
|
- |
|
|
Total investments |
|
|
1,896,829 |
|
|
|
540,973 |
|
Cash and cash equivalents |
|
|
164,882 |
|
|
|
136,253 |
|
Investment income receivable |
|
|
20,240 |
|
|
|
6,972 |
|
Premiums receivable |
|
|
280,357 |
|
|
|
188,643 |
|
Reinsurance recoverable on paid losses |
|
|
14,819 |
|
|
|
50,377 |
|
Reinsurance recoverable on unpaid losses |
|
|
199,687 |
|
|
|
222,229 |
|
Prepaid reinsurance premiums |
|
|
94,818 |
|
|
|
153,650 |
|
Deferred acquisition costs, net of deferred ceding commission revenue |
|
|
170,652 |
|
|
|
53,080 |
|
Deferred income taxes |
|
|
41,757 |
|
|
|
36,207 |
|
Intangible assets |
|
|
53,350 |
|
|
|
20,464 |
|
Goodwill |
|
|
244,690 |
|
|
|
18,962 |
|
Fixed assets, net of accumulated depreciation |
|
|
66,429 |
|
|
|
39,038 |
|
Investment in unconsolidated affiliate |
|
|
- |
|
|
|
29,293 |
|
Other assets |
|
|
64,442 |
|
|
|
42,240 |
|
|
Total assets |
|
|
$ 3,312,952 |
|
|
|
$ 1,538,381 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses |
|
|
1,131,989 |
|
|
|
534,991 |
|
Unearned premium |
|
|
658,940 |
|
|
|
328,847 |
|
Reinsurance balances payable |
|
|
89,080 |
|
|
|
134,598 |
|
Funds held under reinsurance agreements |
|
|
13,737 |
|
|
|
20,474 |
|
Accounts payable, accrued liabilities and other liabilities |
|
|
133,647 |
|
|
|
83,231 |
|
Subordinated debentures |
|
|
235,058 |
|
|
|
101,036 |
|
|
Total liabilities |
|
|
2,262,451 |
|
|
|
1,203,177 |
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Common stock ($0.01 par value; 100,000,000 shares authorized, 45,092,321 and
and 23,408,145 shares issued, and 44,984,953 and 23,339,470 shares outstanding) |
|
|
451 |
|
|
|
234 |
|
Treasury stock (107,368 and 68,675 shares) |
|
|
(1,995 |
) |
|
|
(1,026 |
) |
Paid-in-capital |
|
|
751,878 |
|
|
|
208,094 |
|
Accumulated other comprehensive income (loss) |
|
|
34,554 |
|
|
|
(37,498 |
) |
Retained earnings |
|
|
265,613 |
|
|
|
165,400 |
|
|
Total stockholders equity |
|
|
1,050,501 |
|
|
|
335,204 |
|
|
Total liabilities and stockholders equity |
|
|
$ 3,312,952 |
|
|
|
$ 1,538,381 |
|
|
See accompanying notes to the consolidated financial statements.
F-4
Tower Group, Inc.
Consolidated Statements of Income and Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands, except |
Year Ended December 31, |
per share and share amounts) |
|
|
2009 |
|
|
|
2008 |
|
|
|
2007 |
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
|
$ 854,711 |
|
|
|
$ 314,551 |
|
|
|
$ 286,106 |
|
Ceding commission revenue |
|
|
43,937 |
|
|
|
79,162 |
|
|
|
71,010 |
|
Insurance services revenue |
|
|
5,123 |
|
|
|
68,156 |
|
|
|
33,300 |
|
Policy billing fees |
|
|
2,965 |
|
|
|
2,347 |
|
|
|
2,038 |
|
Net investment income |
|
|
74,866 |
|
|
|
34,568 |
|
|
|
36,699 |
|
Net realized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments |
|
|
(44,210 |
) |
|
|
(22,651 |
) |
|
|
(10,094 |
) |
Portion of loss recognized in other comprehensive
income (loss) |
|
|
20,722 |
|
|
|
- |
|
|
|
- |
|
Other net realized investment gains (losses) |
|
|
24,989 |
|
|
|
8,297 |
|
|
|
(7,417 |
) |
|
Total net realized investment gains (losses) |
|
|
1,501 |
|
|
|
(14,354 |
) |
|
|
(17,511 |
) |
|
Total revenues |
|
|
983,103 |
|
|
|
484,430 |
|
|
|
411,642 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses |
|
|
475,497 |
|
|
|
162,739 |
|
|
|
157,906 |
|
Direct and ceding commission expense |
|
|
204,565 |
|
|
|
132,445 |
|
|
|
101,030 |
|
Other operating expenses |
|
|
129,846 |
|
|
|
91,491 |
|
|
|
77,319 |
|
Acquisition-related transaction costs |
|
|
14,038 |
|
|
|
- |
|
|
|
- |
|
Interest expense |
|
|
18,122 |
|
|
|
8,449 |
|
|
|
9,290 |
|
|
Total expenses |
|
|
842,068 |
|
|
|
395,124 |
|
|
|
345,545 |
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Equity (loss) income in unconsolidated affiliate |
|
|
(777 |
) |
|
|
269 |
|
|
|
2,438 |
|
Gain on investment in acquired unconsolidated affiliate |
|
|
7,388 |
|
|
|
- |
|
|
|
- |
|
Gain from issuance of common stock by unconsolidated affiliate |
|
|
- |
|
|
|
- |
|
|
|
2,705 |
|
Gain on bargain purchase |
|
|
13,186 |
|
|
|
- |
|
|
|
- |
|
|
Income before income taxes |
|
|
160,832 |
|
|
|
89,575 |
|
|
|
71,240 |
|
Income tax expense |
|
|
51,502 |
|
|
|
32,102 |
|
|
|
26,158 |
|
|
Net income |
|
|
$ 109,330 |
|
|
|
$ 57,473 |
|
|
|
$ 45,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized investment holding gains (losses) arising during periods |
|
|
108,879 |
|
|
|
(56,098 |
) |
|
|
(29,424 |
) |
Cumulative effect adjustment resulting from adoption of new
accounting guidance |
|
|
(2,497 |
) |
|
|
- |
|
|
|
- |
|
Equity in net unrealized (losses) gains on investment in unconsolidated
affiliates investment portfolio |
|
|
3,124 |
|
|
|
(3,142 |
) |
|
|
(218 |
) |
Less: reclassification adjustment for (gains) losses included in net income |
|
|
(1,501 |
) |
|
|
14,354 |
|
|
|
17,511 |
|
Income tax benefit (expense) related to items of other comprehensive income |
|
|
(37,700 |
) |
|
|
15,710 |
|
|
|
4,246 |
|
|
Comprehensive net income |
|
|
$ 179,635 |
|
|
|
$ 28,297 |
|
|
|
$ 37,197 |
|
|
Basic and diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic-Common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Distributed |
|
|
$ 0.26 |
|
|
|
$ 0.20 |
|
|
|
$ 0.15 |
|
Undistributed |
|
|
2.52 |
|
|
|
2.27 |
|
|
|
1.79 |
|
|
Total |
|
|
$ 2.78 |
|
|
|
$ 2.47 |
|
|
|
$ 1.94 |
|
|
Diluted |
|
|
$ 2.76 |
|
|
|
$ 2.45 |
|
|
|
$ 1.92 |
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
39,363,324 |
|
|
|
23,290,506 |
|
|
|
22,927,087 |
|
|
Diluted |
|
|
39,580,654 |
|
|
|
23,484,614 |
|
|
|
23,128,052 |
|
|
Dividends declared and paid per common share |
|
|
$ 0.26 |
|
|
|
$ 0.20 |
|
|
|
$ 0.15 |
|
|
See accompanying notes to the consolidated financial statements.
F-5
Tower Group, Inc.
Consolidated Statements of Changes in Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Total |
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Treasury |
|
|
Paid-in |
|
|
Comprehensive |
|
|
Retained |
|
|
Stockholders |
|
(in thousands) |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Stock |
|
|
Capital |
|
|
Income |
|
|
Earnings |
|
|
Equity |
|
|
Balance at December 31, 2006 |
|
|
40 |
|
|
|
$ 39,600 |
|
|
|
20,006 |
|
|
|
$ 200 |
|
|
|
$ (207 |
) |
|
|
$ 113,168 |
|
|
|
$ (437 |
) |
|
|
$ 71,596 |
|
|
|
$ 223,920 |
|
Dividends declared |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,444 |
) |
|
|
(3,444 |
) |
Dividends declared on preferred stock |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(298 |
) |
|
|
(298 |
) |
Stock based compensation |
|
|
- |
|
|
|
- |
|
|
|
175 |
|
|
|
2 |
|
|
|
(341 |
) |
|
|
2,904 |
|
|
|
- |
|
|
|
- |
|
|
|
2,565 |
|
Redemption of preferred stock |
|
|
(40 |
) |
|
|
(39,600 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(400 |
) |
|
|
(40,000 |
) |
Equity offering and over-allotment, net of
issuance costs |
|
|
- |
|
|
|
- |
|
|
|
3,045 |
|
|
|
30 |
|
|
|
- |
|
|
|
89,334 |
|
|
|
- |
|
|
|
- |
|
|
|
89,364 |
|
Warrant exercise |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
55 |
|
|
|
29 |
|
|
|
- |
|
|
|
- |
|
|
|
84 |
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
45,082 |
|
|
|
45,082 |
|
Net unrealized depreciation on securities available
for sale, net of income tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(7,885 |
) |
|
|
- |
|
|
|
(7,885 |
) |
|
Balance at December 31, 2007 |
|
|
- |
|
|
|
$ - |
|
|
|
23,225 |
|
|
|
$ 232 |
|
|
|
$ (493 |
) |
|
|
$ 205,435 |
|
|
|
$ (8,322 |
) |
|
|
$ 112,535 |
|
|
|
$ 309,387 |
|
Dividends declared |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,608 |
) |
|
|
(4,608 |
) |
Stock based compensation |
|
|
- |
|
|
|
- |
|
|
|
183 |
|
|
|
2 |
|
|
|
(592 |
) |
|
|
2,634 |
|
|
|
- |
|
|
|
- |
|
|
|
2,044 |
|
Warrant exercise |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
59 |
|
|
|
25 |
|
|
|
- |
|
|
|
- |
|
|
|
84 |
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
57,473 |
|
|
|
57,473 |
|
Net unrealized depreciation on securities available
for sale, net of income tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(29,176 |
) |
|
|
- |
|
|
|
(29,176 |
) |
|
Balance at December 31, 2008 |
|
|
- |
|
|
|
- |
|
|
|
23,408 |
|
|
|
234 |
|
|
|
(1,026 |
) |
|
|
208,094 |
|
|
|
(37,498 |
) |
|
|
165,400 |
|
|
|
335,204 |
|
Cumulative effect of adjustment resulting from
adoption of new accounting guidance |
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,623 |
) |
|
|
1,623 |
|
|
|
- |
|
|
Adjusted balance at December 31, 2008 |
|
|
- |
|
|
|
- |
|
|
|
23,408 |
|
|
|
234 |
|
|
|
(1,026 |
) |
|
|
208,094 |
|
|
|
(39,121 |
) |
|
|
167,023 |
|
|
|
335,205 |
|
Dividends declared |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(10,740 |
) |
|
|
(10,740 |
) |
Stock based compensation |
|
|
- |
|
|
|
- |
|
|
|
346 |
|
|
|
3 |
|
|
|
(1,059 |
) |
|
|
6,664 |
|
|
|
- |
|
|
|
- |
|
|
|
5,608 |
|
Issuance of common stock |
|
|
- |
|
|
|
- |
|
|
|
21,338 |
|
|
|
214 |
|
|
|
- |
|
|
|
527,292 |
|
|
|
- |
|
|
|
- |
|
|
|
527,505 |
|
Fair value of outstanding CastlePoint
and SUA stock options |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,918 |
|
|
|
- |
|
|
|
- |
|
|
|
9,918 |
|
Warrant exercise |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
90 |
|
|
|
(90 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
109,330 |
|
|
|
109,330 |
|
Net unrealized appreciation on securities available
for sale, net of income tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
73,675 |
|
|
|
- |
|
|
|
73,675 |
|
|
Balance at December 31, 2009 |
|
|
- |
|
|
|
$ - |
|
|
|
45,092 |
|
|
|
$ 451 |
|
|
|
$ (1,995 |
) |
|
|
$ 751,878 |
|
|
|
$ 34,554 |
|
|
|
$ 265,613 |
|
|
|
$ 1,050,501 |
|
|
See accompanying notes to the consolidated financial statements
F-6
Tower Group, Inc.
Consolidated Statements of Cash Flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
($ in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Cash flows provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
$ 109,330 |
|
|
|
$ 57,473 |
|
|
|
$ 45,082 |
|
Adjustments to reconcile net income to net cash provided by (used in) operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain from IPO of common shares of unconsolidated affiliate |
|
|
- |
|
|
|
|
|
|
|
(2,705 |
) |
Gain on investment in acquired unconsolidated affiliate |
|
|
(7,388 |
) |
|
|
- |
|
|
|
- |
|
Gain on bargain purchase |
|
|
(13,186 |
) |
|
|
- |
|
|
|
- |
|
Acquisition-related transaction costs |
|
|
14,038 |
|
|
|
- |
|
|
|
- |
|
(Gain) loss on sale of investments |
|
|
(24,989 |
) |
|
|
(8,297 |
) |
|
|
7,417 |
|
Other-than-temporary-impairment loss on investments |
|
|
23,488 |
|
|
|
22,651 |
|
|
|
10,094 |
|
Depreciation and amortization |
|
|
19,344 |
|
|
|
11,718 |
|
|
|
8,725 |
|
Amortization of bond premium or discount |
|
|
100 |
|
|
|
1,067 |
|
|
|
591 |
|
Amortization of restricted stock |
|
|
5,608 |
|
|
|
2,480 |
|
|
|
1,919 |
|
Deferred income taxes |
|
|
5,089 |
|
|
|
(4,201 |
) |
|
|
(4,774 |
) |
Excess tax benefits from share-based payment arrangements |
|
|
(191 |
) |
|
|
(175 |
) |
|
|
(1,105 |
) |
(Increase) decrease in assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment income receivable |
|
|
(5,785 |
) |
|
|
(426 |
) |
|
|
(534 |
) |
Premiums receivable |
|
|
164,382 |
|
|
|
(64,043 |
) |
|
|
(27,237 |
) |
Reinsurance recoverable |
|
|
147,547 |
|
|
|
(64,778 |
) |
|
|
(49,915 |
) |
Prepaid reinsurance premiums |
|
|
89,571 |
|
|
|
(28,816 |
) |
|
|
(26,808 |
) |
Deferred acquisition costs, net |
|
|
(26,758 |
) |
|
|
(13,809 |
) |
|
|
10,494 |
|
Other assets |
|
|
6,922 |
|
|
|
(1,664 |
) |
|
|
(10,165 |
) |
Increase (decrease) in liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses |
|
|
(94,258 |
) |
|
|
33,808 |
|
|
|
81,383 |
|
Unearned premium |
|
|
(54,390 |
) |
|
|
56,073 |
|
|
|
3,033 |
|
Reinsurance balances payable |
|
|
(103,575 |
) |
|
|
75,859 |
|
|
|
15,378 |
|
Payable to issuing carriers |
|
|
(47,399 |
) |
|
|
4,446 |
|
|
|
42,193 |
|
Accounts payable and accrued expenses |
|
|
28,839 |
|
|
|
(8 |
) |
|
|
(9,044 |
) |
Funds held under reinsurance agreement |
|
|
(21,628 |
) |
|
|
(17,624 |
) |
|
|
(18,094 |
) |
|
Net cash flows provided by operations |
|
|
214,711 |
|
|
|
61,734 |
|
|
|
75,928 |
|
|
Cash flows provided by (used in) investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash acquired from acquisition of CastlePoint |
|
|
218,373 |
|
|
|
- |
|
|
|
- |
|
Acquisition of Hermitage, net of cash acquired |
|
|
(43,596 |
) |
|
|
- |
|
|
|
- |
|
Net cash acquired from acquisition of SUA |
|
|
51,952 |
|
|
|
- |
|
|
|
- |
|
Acquisition of Preserver Group Inc, net of cash acquired |
|
|
- |
|
|
|
- |
|
|
|
(70,737 |
) |
Purchase of fixed assets |
|
|
(26,299 |
) |
|
|
(17,210 |
) |
|
|
(13,993 |
) |
Purchase - fixed-maturity securities |
|
|
(1,244,713 |
) |
|
|
(336,465 |
) |
|
|
(306,638 |
) |
Purchase - equity securities |
|
|
(85,777 |
) |
|
|
(7,175 |
) |
|
|
(15,885 |
) |
Short-term investments-net |
|
|
(31,766 |
) |
|
|
- |
|
|
|
- |
|
Sale or maturity - fixed-maturity securities |
|
|
936,028 |
|
|
|
355,966 |
|
|
|
199,628 |
|
Sale - equity securities |
|
|
50,582 |
|
|
|
6,511 |
|
|
|
24,759 |
|
|
Net cash flows (used in) investing activities |
|
|
(175,216 |
) |
|
|
1,627 |
|
|
|
(182,866 |
) |
|
(Continued)
F-7
Tower Group, Inc.
Consolidated Statements of Cash Flow-(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
($ in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Cash flows provided by (used in) financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity offering and over allotment, net of issuance costs |
|
|
$ - |
|
|
|
$ - |
|
|
|
$ 89,366 |
|
Redemption of preferred stock |
|
|
- |
|
|
|
- |
|
|
|
(40,000 |
) |
Proceeds from issuance of subordinated debentures |
|
|
- |
|
|
|
- |
|
|
|
20,619 |
|
Purchase of common trust securities - statutory business trusts |
|
|
- |
|
|
|
- |
|
|
|
(619 |
) |
Exercise of stock options and warrants |
|
|
741 |
|
|
|
179 |
|
|
|
1,167 |
|
Excess tax benefits from share-based payment arrangements |
|
|
191 |
|
|
|
175 |
|
|
|
1,105 |
|
Treasury stock acquired-net employee share-based compensation |
|
|
(1,058 |
) |
|
|
(533 |
) |
|
|
(439 |
) |
Dividends paid |
|
|
(10,740 |
) |
|
|
(4,608 |
) |
|
|
(3,743 |
) |
|
Net cash flows (used in) provided by financing activities |
|
|
(10,866 |
) |
|
|
(4,787 |
) |
|
|
67,456 |
|
|
Increase (decrease) in cash and cash equivalents |
|
|
28,629 |
|
|
|
58,574 |
|
|
|
(39,482 |
) |
Cash and cash equivalents, beginning of period |
|
|
136,253 |
|
|
|
77,679 |
|
|
|
117,161 |
|
|
Cash and cash equivalents, end of period |
|
|
$ 164,882 |
|
|
|
$ 136,253 |
|
|
|
$ 77,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
|
$ 61,521 |
|
|
|
$ 27,110 |
|
|
|
$ 27,555 |
|
Cash paid for interest |
|
|
18,053 |
|
|
|
7,882 |
|
|
|
8,145 |
|
Schedule of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in acquisition of CastlePoint and SUA |
|
|
527,505 |
|
|
|
- |
|
|
|
- |
|
Value of CastlePoint and SUA stock options at date of acquisition |
|
|
9,918 |
|
|
|
- |
|
|
|
- |
|
|
See accompanying notes to the consolidated financial statements.
F-8
Tower Group, Inc.
Notes to Consolidated Financial Statements
Note 1Nature of Business
Tower Group, Inc. (the Company), through its subsidiaries, offers a broad range of commercial,
personal and specialty property and casualty insurance products and services to businesses in
various industries and to individuals. The Companys common stock is publicly traded on the NASDAQ
Global Select Market under the symbol TWGP.
The Company has changed the presentation of its business results, beginning January 1, 2009, by
allocating its previously reported insurance segment into brokerage insurance and specialty
business, based on the way management organizes the segments for making operating decisions and
assessing profitability. The prior period segment disclosures have been restated to conform to the
current presentation. We now report three operating segments as follows:
|
|
Brokerage Insurance (Brokerage) Segment offers a broad range of commercial lines
and personal lines property and casualty insurance products to small to mid-sized businesses
and individuals distributed through a network of retail and wholesale agents on both an
admitted and non-admitted basis; |
|
|
Specialty Business (Specialty) Segment provides specialty classes of business
through program underwriting agents. This segment also includes reinsurance solutions provided
primarily to small insurance companies; and |
|
|
Insurance Services (Services) Segment provides underwriting, claims and
reinsurance brokerage services to insurance companies. |
On February 5, 2009, the Company completed the acquisition of 100% of the issued and outstanding
common stock of CastlePoint Holdings, Ltd. (CastlePoint), a Bermuda exempted corporation.
CastlePoint was a Bermuda holding company organized to provide property and casualty insurance and
reinsurance business solutions, products and services primarily to small insurance companies and
program underwriting managers in the United States.
On February 27, 2009, the Company and its subsidiary, CastlePoint, completed the acquisition of
HIG, Inc. (Hermitage), a property and casualty insurance holding company. Hermitage offers both
admitted and excess and surplus lines (E&S) products. This transaction further expanded the
Companys wholesale distribution system nationally and established a network of retail agents in
the Southeast.
On October 14, 2009, the Company completed the acquisition of the renewal rights to the workers
compensation business of AequiCap Program Administrators, Inc. (AequiCap), an underwriting agency based
in Fort Lauderdale, Florida.
On November 13, 2009, the Company completed the acquisition of 100% of the issued and outstanding
common stock of Specialty Underwriters Alliance, Inc. (SUA). SUA offers specialty commercial
property and casualty insurance products through program underwriting managers that serve niche
groups of insureds.
Note 2Accounting Policies and Basis of Presentation
Basis of Presentation
The consolidated financial statements include the accounts of Tower Group, Inc. (Tower) and its
insurance subsidiaries, Tower Insurance Company of New York (TICNY), Tower National Insurance
Company (TNIC), Preserver Insurance Company (PIC), North East Insurance Company (NEIC),
Mountain Valley Indemnity Company (MVIC), CastlePoint Insurance Company (CPIC), CastlePoint
Reinsurance Company, Ltd. (CPRe), CastlePoint Florida Insurance Company (CPFL), Hermitage
Insurance Company (HIC), Kodiak Insurance Company (KIC), and SUA Insurance Company (SUA) (renamed CastlePoint National Insurance Company (CPNIC)) (collectively the Insurance
Subsidiaries), and its managing general agencies, Tower Risk Management Corp. (TRM), CastlePoint
Management Corp. (CPM) and AequiCap CP Services Group, Inc. (renamed CastlePoint Risk
Management of Florida, Inc. (CPRMFL)). The Company has four intermediate holding companies,
Preserver Group, Inc. (PGI), Ocean I Corporation, CastlePoint Bermuda Holdings, Ltd. (CBH), and
HIG, Inc. (Hermitage). The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP).
All significant inter-company accounts and transactions have been eliminated in consolidation.
F-9
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect reported assets, liabilities, revenues and expenses and the
related disclosures as of the date of the financial statements. As more information becomes
available, actual results could differ, perhaps substantially, from those estimates.
Reclassifications
Certain reclassifications have been made to prior year financial information to conform to the
current year presentation. None of these reclassifications had an effect on the Companys
consolidated net earnings, total stockholders equity or cash flows.
Net Premiums Earned
Insurance policies issued or reinsured by the Company are short-duration contracts. Accordingly,
premium revenue, including direct writings and reinsurance assumed, net of premiums ceded to
reinsurers, is recognized on a pro-rata basis over the terms of the underlying policies. Unearned
premiums represent premium applicable to the unexpired risk of in-force insurance contracts at
each balance sheet date. Prepaid reinsurance premiums represent the unexpired portion of
reinsurance premiums on risks ceded and are earned consistent with premiums.
Ceding Commission Revenue
Commissions on reinsurance premiums ceded are earned in a manner consistent with the recognition
of the costs to acquire the underlying policies, generally on a pro-rata basis over the terms of
the policies reinsured. Certain reinsurance agreements contain provisions whereby the ceding
commission rates vary based on the loss experience of the policies covered by the agreements. The
Company records ceding commission revenue based on its current estimate of losses on the reinsured
policies subject to variable commission rates. The Company records adjustments to the ceding
commission revenue in the period that changes in the estimated losses are determined.
Insurance Services Revenue
Direct commission revenue from the Companys managing general underwriting services is recognized
and earned as insurance policies are placed with the issuing companies of TRM, CPM, and CPRMFL.
Fees relating to the provision of reinsurance intermediary services are earned when the Companys
Insurance Subsidiaries or the issuing companies of TRM, CPM, and CPRMFL cede premiums to
reinsurers. Claims administration fees and other administration revenues are earned as services
are performed.
Policy Billing Fees
Policy billing fees are earned as they are collected. These fees include installment and other
fees related to billing and collections.
Loss and Loss Adjustment Expenses (LAE)
The liability for loss and LAE represents managements best estimate of the ultimate cost and
expense of all reported and unreported losses that are unpaid as of the balance sheet date and the
fair value adjustments related to the acquisitions of CastlePoint, Hermitage and SUA. The liability
for loss and LAE is generally estimated on an undiscounted basis, using individual case-basis
valuations, statistical analyses and various actuarial procedures. The Company recorded a tabular
reserve discount for workers compensation and excess workers compensation claims in the amount of
$4.5 million at December 31, 2009, primarily due to the acquisition of SUA The gross undiscounted
amount of these reserves was $166.8 million. The projection of future claims payments and reporting
is based on an analysis of the Companys historical experience, supplemented by analyses of
industry loss data. Management believes that the liability for loss and LAE is adequate to cover
the ultimate cost of losses and claims to date; however, because of the uncertainty from various
sources, including changes in reporting patterns, claims settlement patterns, judicial decisions,
legislation, and economic conditions, actual loss experience may not conform to the assumptions
used in determining the estimated amounts for such liability at the balance sheet date. As
adjustments to these estimates become necessary, such adjustments are reflected in expense for the
period in which the estimates are changed. Because of the nature of the business historically
written, the Companys management believes that the Company has limited exposure to environmental
claim liabilities.
Tower estimates reserves separately for losses, allocated loss adjustment expenses, and unallocated
loss adjustment expenses. Allocated loss adjustment expenses (ALAE) refers to costs of attorneys
as well as miscellaneous costs such as witness fees and court costs attributable to specific claims that
F-10
generally are in various stages of litigation.
Unallocated loss adjustment expenses (ULAE) refers to costs for administering claims that are
not related to attorney fees and miscellaneous costs associated with litigated claims. ULAE
includes overhead costs attributable to the claims function. Tower estimates the ALAE liability
separately for claims that are defended by in-house attorneys, claims that are handled by other
attorneys that are not employees, and miscellaneous ALAE costs such as witness fees and court
costs.
For ALAE stemming from defense by in-house attorneys the Company determines a fixed fee per
in-house litigated claim, and allocates to each of these litigated claims 50% of this fixed fee
when litigation on a particular claim begins and 50% of the fee when the litigation is closed. The
fee is determined actuarially based upon the projected number of litigated claims and expected
closing patterns at the beginning of each year as well as the projected budget for the Companys
in-house attorneys, and these amounts are subject to adjustment each quarter based upon actual
experience.
For ULAE the Company determines a standard cost per claim for each line of business that represents
the ultimate average cost to administer that claim. 50% of this standard cost is recorded as paid
ULAE when a claim is opened, and 50% of this standard cost is recorded as paid ULAE when a claim is
closed. The standard costs are determined actuarially and subject to adjustment each quarter such
that the total calendar period costs for the claims function is recorded as paid ULAE each quarter.
Reinsurance
The Company uses reinsurance to limit its exposure to certain risks. Management has evaluated its
reinsurance arrangements and determined that significant insurance risk is transferred to the
reinsurers. Reinsurance agreements have been determined to be short-duration prospective contracts
and, accordingly, the costs of the reinsurance are recognized over the life of the contracts in a
manner consistent with the earning of premiums on the underlying policies subject to the
reinsurance contract.
Reinsurance recoverable represents managements best estimate of paid and unpaid loss and LAE
recoverable from reinsurers. Ceded losses recoverable are estimated using techniques and
assumptions consistent with those used in estimating the liability for loss and LAE. These
techniques and assumptions are continually reviewed and updated with any resulting adjustments
recorded in current earnings. Loss and LAE incurred as presented in the consolidated statement of
income and comprehensive net income are net of reinsurance recoveries.
Management estimates uncollectible amounts receivable from reinsurers based on an assessment of a
number of factors. The Company recorded no allowance for uncollectible reinsurance at December 31,
2009 and 2008 and did not write-off any balances from reinsurers during the three year period
ended December 31, 2009.
Cash and Cash Equivalents
Cash consists of cash in banks, generally in operating accounts. The Company maintains its cash
balances at several financial institutions. Management monitors balances in excess of insured
limits and believes they do not represent a significant credit risk to the Company.
The Company considers all highly liquid investments with original maturities of three months or
less to be cash equivalents. Cash and cash equivalents are presented at cost, which approximates
fair value.
Investments
The Companys fixed-maturity and equity securities are classified as available-for-sale and
carried at fair value. The Company may sell its available-for-sale securities in response to
changes in interest rates, risk/reward characteristics, liquidity needs or other factors.
Fair value for fixed-maturity securities and equity securities is based on quoted market prices or
a recognized pricing service, with limited exceptions as discussed in Note 5 Fair Value
Measurements. Changes in unrealized gains and losses, net of tax effects, are reported as a
separate component of other comprehensive income while cumulative unrealized gains and losses are
reported in stockholders equity as a separate component. Realized gains and losses are determined
on the specific identification method. Investment income is recorded when earned and includes the
amortization of premium and discount on investments.
The Company regularly reviews its fixed-maturity and equity security portfolios to evaluate the
necessity of recording impairment losses for other-than-temporary declines in the fair value of
investments. In evaluating potential impairment, management considers, among other criteria: (i)
the overall financial condition of the issuer, (ii) the current fair value compared to amortized
cost or cost, as appropriate; (iii) the length of time the securitys fair value has been below
amortized cost or cost; (iv) specific credit issues related to the issuer such as changes in credit
rating, reduction or elimination of dividends or non-
F-11
payment of scheduled interest payments; (v) whether management intends to sell the security and, if
not, whether it is not more likely than not that the Company will be required to sell the security
before recovery of its cost or amortized cost basis; (vi) specific cash flow estimations for
certain mortgage-backed securities and (vii) current economic conditions. If an
other-than-temporary-impairment (OTTI) loss is determined for a fixed-maturity security, the
credit portion is recorded in the statement of income as net realized losses on investments and the
non-credit portion is recorded in accumulated other comprehensive income. The credit portion
results in a permanent reduction of the cost basis of the underlying investment.
Fair Value
GAAP establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used
to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in
active markets for identical assets or liabilities (Level 1) followed by similar but not identical
assets or liabilities (Level 2) and the lowest priority to unobservable inputs (Level 3). If the
inputs used to measure the assets or liabilities fall within different levels of the hierarchy,
the classification is based on the lowest level input that is significant to the fair value
measurement of the asset or liability. Classification of assets and liabilities within the
hierarchy considers the markets in which the assets and liabilities are traded, including during
periods of market disruption, and the reliability and transparency of the assumptions used to
determine fair value. The hierarchy requires the use of observable market data when available.
The Company uses outside pricing services and, to a lesser extent, brokers to assist in
determining fair values. For investments in active markets, the Company uses the quoted market
prices provided by the outside pricing services to determine fair value. The outside pricing
services used by the Company have indicated that they will only provide prices where observable
inputs are available. In circumstances where quoted market prices are unavailable, the Company
utilizes fair value estimates based upon other observable inputs including matrix pricing,
benchmark interest rates, market comparables and other relevant inputs.
The Companys process to validate the market prices obtained from the outside pricing sources
include, but are not limited to, periodic evaluation of model pricing methodologies and analytical
reviews of certain prices. The Company also periodically performs back-testing of selected sales
activity to determine whether there are any significant differences between the market price used
to value the security prior to sale and the actual sale price.
Premiums Receivable
Premiums receivable represent amounts due from insureds and reinsureds for insurance coverage and
are presented net of an allowance for doubtful accounts of $1.3 million and $0.6 million at
December 31, 2009 and 2008, respectively. The allowance for uncollectible amounts is based on an
analysis of amounts receivable giving consideration to historical loss experience and current
economic conditions and reflects an amount that, in managements judgment, is adequate.
Uncollectible agents premiums receivable of $0.9 million, $0.4 million, and $0.2 million were
written off in 2009, 2008 and 2007, respectively.
With respect to the business produced by TRM for other issuing carriers, agents collect premiums
from the policyholders and forward them to TRM. In certain jurisdictions, when the insured pays a
premium for these policies to agents for payment to TRM, the premiums are considered to have been
paid and the insured will no longer be liable to TRM for those amounts, whether or not TRM has
actually received the premiums from the agent. Consequently, TRM assumes a degree of credit risk
associated with agents and brokers. The Company recorded no losses in 2009, 2008 and 2007 for this
activity.
Deferred Acquisition Costs and Deferred Ceding Commission Revenue
Acquisition costs represent the costs of writing business that vary with, and are primarily
related to, the production of insurance business (principally commissions, premium taxes and
certain underwriting costs). Policy acquisition costs are deferred and recognized as expense as
related premiums are earned. Deferred acquisition costs (DAC) presented in the balance sheet are
net of deferred ceding commission revenue. The value of business acquired (VOBA) is an
intangible asset relating to the estimated fair value of the unexpired insurance policies acquired
in a business combination. VOBA is determined at the time of a business combination and is
reported on the consolidated balance sheet with DAC and is amortized in proportion to the timing
of the estimated underwriting profit associated with the in force policies acquired. The cash flow
or interest component of VOBA is amortized in proportion to the expected pattern of future cash
flows. The Company considers anticipated investment income in determining the recoverability of
these costs and believes they are fully recoverable.
Goodwill and Intangible Assets
In business combinations, including the acquisition of a group of assets, the Company allocates
the purchase price to the net tangible and intangible assets acquired based on their relative fair
values. Any portion of the purchase price in excess of this amount results in goodwill.
Identifiable intangible assets with a finite useful life are amortized over the period that the
asset is expected to contribute directly or indirectly to the future cash flows of the Company. Intangible
F-12
assets with an indefinite life and goodwill are not amortized and are subject to annual impairment
testing. The Company conducted the required annual goodwill and intangible asset impairment
testing as of September 30 for 2009 whereas it had performed this testing as of December 31 in
prior years. All identifiable intangible assets and goodwill are tested for recoverability
whenever events or changes in circumstances indicate that a carrying amount may not be
recoverable. No impairment losses were recognized in 2009, 2008 and 2007.
Fixed Assets
Furniture, leasehold improvements, computer equipment, and software are reported at cost less
accumulated depreciation and amortization. Depreciation and amortization is provided using the
straight-line method over the estimated useful lives of the assets. The Company estimates the
useful life for computer equipment to be three years, computer software, three to seven years,
furniture and other equipment seven years and leasehold improvements is the term of the lease.
Investment in Unconsolidated Affiliate
Although the Company owned less than 20% of the outstanding common stock of CastlePoint Holdings,
Ltd. (CastlePoint) at December 31, 2008, it recorded its investment in CastlePoint under the
equity method of accounting as it was able to significantly influence the operating and financial
policies and decisions of CastlePoint. The Company acquired 100% of the common stock of
CastlePoint on February 5, 2009, at which time it became a wholly-owned subsidiary.
Statutory Business Trusts
The Company does not consolidate its interest in the statutory business trusts for which the
Company holds 100% of the common trust securities because Tower is not the primary beneficiary of
the trusts. See Note 12 Debt for more details. The Companys investment in common trust
securities of the statutory business trust are reported in balance sheet at equity. The Company
reports as a liability the outstanding subordinated debentures owed to the statutory business
trusts.
Income Taxes
Pursuant to a Tax Sharing Agreement, each of the entities in the group is required to make
payments to Tower for federal income tax imposed on its taxable income in a manner consistent with
filing a separate federal income tax return (but subject to certain limitations that are applied
to the Tower consolidated group as a whole).
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax basis and for operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance
if it is more likely than not that all or some portion of the deferred tax asset will not be
realized.
Treasury Stock
The Company accounts for the treasury stock at the repurchase price as a reduction to
stockholders equity as it does not intend to retire the treasury stock held at December 31, 2009.
Stock-based Compensation
The Company accounts for restricted stock shares and options awarded at fair value at the date
awarded and compensation expense is recorded over the requisite service period that has not been
rendered. The Company amortizes awards with graded vesting on a straight-line basis over the
requisite service period.
Assessments
Insurance related assessments are accrued in the period in which they have been incurred. A
typical obligating event would be the issuance of an insurance policy or the payment of a claim.
The Company is subject to a variety of assessments. Among such assessments are state guaranty
funds as well as workers compensation second injury funds. State guaranty fund assessments are
used by state insurance oversight boards to cover losses of policyholders of insolvent insurance
companies and for the operating expenses of such agencies. The Company uses estimates derived from
state regulators and/or NAIC Tax and Assessments Guidelines.
F-13
Earnings per Share
The Company measures earnings per share at two levels: basic earnings per share and diluted
earnings per share. Basic earnings per share is calculated by dividing income (loss) allocable to
common stockholders by the weighted average number of common shares outstanding during the year.
This weighted average number of shares includes unvested share-based awards that contain
nonforfeitable rights to dividends or dividend equivalents whether paid or unpaid (participating
securities). Diluted earnings per share is calculated by dividing income (loss) allocable to
common stockholders by the weighted average number of common shares outstanding during the year,
as adjusted for the potentially dilutive effects of stock options, warrants, unvested restricted
stock and/or preferred stock that are not participating securities, unless common equivalent
shares are antidilutive.
Concentration and Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk are
primarily cash and cash equivalents, investments and accounts receivable. Investments are
diversified through many industries and geographic regions through the use of money managers who
employ different investment strategies. The Company limits the amount of credit exposure with any
one financial institution and believes that no significant concentration of credit risk exists
with respect to cash and investments. The premiums receivable balances are generally diversified
due to the number of entities comprising the Companys distribution force and its customer base,
which is largely concentrated in the Northeast (primarily New York), Florida, Texas and
California. To reduce credit risk, the Company performs ongoing evaluations of its distribution
forces and customers financial condition. The Company also has receivables from its reinsurers.
Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company. The Company
periodically evaluates the financial condition of its reinsurers and, in certain cases, requires
collateral from its reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. Managements policy is to review all outstanding receivables at period end as well
as the bad debt write-offs experienced in the past and establish an allowance for doubtful
accounts, if deemed necessary.
One agent accounted for approximately 4%, 7% and 12%, respectively, of the Insurance Subsidiaries
and TRMs premiums receivable balances at December 31, 2009, 2008 and 2007. The same agent
accounted for 10%, 10% and 11% of the Insurance Subsidiaries direct premiums written and TRMs
premiums produced in 2009, 2008 and 2007, respectively. In addition, SUA has one agent that
accounted for 12% of the Insurance Subsidiaries and TRMs premiums receivable balance at 2009.
The line of business that subjects the Company to concentration risk is primarily the commercial
multiple-peril line. For the years ended December 31, 2009, 2008 and 2007, 33%, 42% and 42%,
respectively, of gross premiums earned were for the commercial multiple-peril line.
Statutory Accounting Principles
The Companys Insurance Subsidiaries are required to prepare statutory basis financial statements
in accordance with practices prescribed or permitted by the state in which they are domiciled. See
Note 20 Statutory Financial Information and Accounting Policies for more details.
Accounting Pronouncements
Accounting guidance adopted in 2009
In December 2007, the Financial Accounting Standards Board (FASB) issued guidance on business
combinations, where an acquiring entity is required to recognize assets acquired and liabilities
assumed at fair value, with very few exceptions. In addition, transaction costs are no longer
included in the measurement of the cost of the business acquired, but are expensed as incurred. The
new guidance applies to all business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008. The Company
adopted the guidance on January 1, 2009. See Note 3 Acquisitions for additional information.
On January 1, 2009, guidance regarding fair value measurements for certain nonfinancial assets and
nonfinancial liabilities and associated required disclosures became effective and the Company
applied the guidance to the nonfinancial assets and nonfinancial liabilities measured at fair value
resulting from the business combinations during 2009.
F-14
In April 2008, the FASB issued new guidance in determining the useful life of a recognized
intangible asset. The purpose of this guidance is to improve consistency between the useful life
of an intangible asset and the period of expected cash flows used to measure the fair value of the
asset for purposes of determining possible impairments. This guidance requires an entity to
disclose information related to the extent the expected future cash flows associated with the asset
are affected by the entitys intent and/or ability to renew or extend the arrangement. This
guidance is required to be applied prospectively to all new intangible assets acquired after
January 1, 2009. The Company adopted the new guidance on January 1, 2009, with no material effects
on the financial statements.
In June 2008, the FASB issued new guidance related to earnings per share (EPS) calculations and
the participating securities in the basic earnings per share calculation under the two-class
method. This new guidance requires that unvested share-based awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities
and shall be included in the computation of EPS pursuant to the two-class method. This guidance is
effective for financial statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those years. All prior-period EPS data presented have been adjusted
retrospectively (including interim financial statements, summaries of earnings, and selected
financial data) to conform to the guidance. The Company adopted the guidance on January 1, 2009,
which did not have a material effect on the Companys earnings per share.
In April, 2009, the FASB issued new guidance to help an entity in determining whether a market
for an asset is not active and when a price for a transaction is not distressed. The guidance
includes the following two steps:
|
|
Determine whether there are factors present that indicate that the market for the asset is
not active at the measurement date; and |
|
|
|
Evaluate the quoted price (i.e., a recent transaction or broker price quotation) to determine
whether the quoted price is not associated with a distressed transaction. |
This guidance is effective for interim and annual periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. The Company adopted the new provisions
on January 1, 2009. The adoption did not have a material effect on the Companys consolidated
financial condition and results of operations.
In April 2009, the FASB issued new guidance for Other-Than-Temporary-Impairment (OTTI) of
fixed-maturity securities for which management asserts that it does not have the intent to sell the
security and it is more likely than not that it will not be required to sell the security before
recovery of cost or amortized cost. Subsequent to this guidance, companies are required to separate
OTTI into (a) the amount representing the credit loss, which continues to be recorded in earnings,
and (b) the amount related to all other factors, which is recorded in other comprehensive net
income/loss. The new guidance required a cumulative-effect adjustment for those securities that
were other-than-temporarily-impaired at the effective date. This cumulative-effect adjustment
reclassifies the noncredit portion of a previously other-than-temporarily-impaired instrument held
at the effective date, net of related tax effects, to accumulated other comprehensive net
income/loss from retained earnings. Early adoption was permitted for periods ending after March 15,
2009. The Company adopted the guidance on January 1, 2009, and was required to make a cumulative
effect adjustment to the opening balance of retained earnings for the non-credit portion of the
previously recorded other-than-temporarily securities in the amount of $1.6 million, net of tax.
As a result of adopting the guidance, the amounts of net investment income, net realized investment
losses from impairment charges and net income reported for the year ended December 31, 2009 were
different than the amounts that would have been reported under the previous accounting guidance.
The guidance resulted in less net realized investment losses from impairment in 2009, and
accordingly, an increase in net income of approximately $13.5 million ($20.7 million pretax) or
$0.34 per share, basic and diluted.
In April, 2009, the FASB issued new guidance regarding requirements for disclosures relating
to fair value of financial instruments. This guidance specifies that after reporting periods ended
June 15, 2009, all interim, as well as annual, financial statements must contain the additional
disclosures regarding fair value of financial instruments. Early adoption was permitted for periods
ending after March 15, 2009. The Company adopted this guidance on January 1, 2009. As this guidance
relates to disclosure rather than measurement of assets and liabilities, there will be no effect on
the financial results or position of the Company.
In May 2009, the FASB issued new guidance requiring entities to disclose the date through which
they have evaluated subsequent events and whether the date corresponds with the release of their
financial statements. The Company implemented this guidance as of April 1, 2009. As this guidance
relates to disclosure rather than measurement of assets and liabilities, there will be no effect on
the financial results or position of the Company.
F-15
In June 2009, the FASB issued guidance establishing a new hierarchy of generally accepted
accounting principles called FASB Accounting Standards Codification. The new hierarchy is the new
single source of authoritative nongovernmental U.S. generally accepted accounting principles. The
codification reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and
displays them using a consistent structure. Also included is relevant Securities and Exchange
Commission guidance organized using the same topical structure in separate sections. Effective for
interim and annual periods that end after September 15, 2009, the Company implemented this guidance
as of July 1, 2009 and has removed all references to prior authoritative literature.
In August 2009, the FASB issued new guidance concerning the fair value measurement of liabilities.
This new guidance provides clarification that in circumstances in which a quoted price in an active
market for the identical liability is not available, fair value can be measured using a valuation
technique that uses the quoted price of the identical liability when traded as an asset (Level 1)
or similar liability when traded as an asset (Level 2) or another valuation technique that is
consistent with the principals of fair value. Under this guidance, a company is not required to
make an adjustment to reflect the existence of a restriction that prevents the transfer of the
liability. This guidance is effective for the first reporting period, including interim periods,
beginning after issuance. The Company adopted this guidance on October 1, 2009, with no material
effect on the financial statements.
Accounting guidance not yet effective
In June 2009, the FASB issued new guidance which requires more information about transfers of
financial assets, including securitization transactions, and where entities have continuing
exposure to the risks related to transferred financial assets. This guidance eliminates the concept
of a qualifying special-purpose entity, changes the requirements for derecognizing financial
assets, and requires additional disclosures. The new guidance enhances information reported to
users of financial statements by providing greater transparency about transfers of financial assets
and an entitys continuing involvement in transferred financial assets. This guidance will be
effective for annual reporting periods beginning on or after January 1, 2010. Early application is
not permitted. The Company is currently analyzing the effect this guidance may have on its
financial statements.
In June 2009, the FASB issued new guidance which concerns the consolidation of variable interest
entities and changes how a reporting entity determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another entity is based on,
among other things, the other entitys purpose and design and the reporting entitys ability to
direct the activities of the other entity that most significantly affect the other entitys
economic performance. The new guidance will require a reporting entity to provide additional
disclosures about its involvement with variable interest entities and any significant changes in
risk exposure due to that involvement. A reporting entity will be required to disclose how its
involvement with a variable interest entity affects the reporting entitys financial statements.
This guidance will be effective for annual reporting periods beginning on or after January 1, 2010.
Early application is not permitted. The Company is currently analyzing the effect this guidance may
have on its financial statements.
In January 2010, the FASB issued new guidance that requires additional disclosure of the fair value
of assets and liabilities. This guidance calls for additional disclosures to be made about
significant transfers in and out of Levels 1 and 2 of the fair value hierarchy within GAAP. This
requirement will be effective for annual and interim periods beginning after December 15, 2009.
This guidance also calls for additional disclosure about the gross activity within Level 3 of the
fair value hierarchy within GAAP as opposed to the net disclosure currently required. This
disclosure will be effective for annual and interim periods beginning after December 15, 2010. As
this guidance relates to disclosure rather than measurement of assets and liabilities, there will
be no effect on the financial results or position of the Company. The Company will comply with the
disclosure requirements as they become effective.
Note 3Acquisitions
Acquisition of Specialty Underwriters Alliance, Inc.
On November 13, 2009, the Company completed the acquisition of 100% of the issued and outstanding
common stock of Specialty Underwriters Alliance, Inc. (SUA), a specialty property and casualty
insurance company for $106.7 million.
The acquisition was accounted for using the purchase method in accordance with GAAP guidance on
business combinations effective in 2009. The purchase consideration consists primarily of 4,460,092
shares of Tower common stock with an aggregate value of $105.9 million issued to SUA shareholders
at a ratio of 0.28 shares of Tower common stock for each share of SUA common stock. Additionally,
$0.7 million related to the replacement of SUA employee stock options with Tower common stock
options was included in the purchase consideration. The Company issued 201,058 employee stock
options to replace the SUA employee stock options as of the acquisition date and 92,276 shares for
deferred restricted stock awards.
F-16
The following table presents the fair value of assets acquired and liabilities assumed with the
acquisition of SUA and the fair value hierarchy level under GAAP as of November 13, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
$4,734 |
|
|
$ |
241,515 |
|
|
|
$- |
|
|
$ |
246,249 |
|
Cash and cash equivalents |
|
|
54,377 |
|
|
|
- |
|
|
|
- |
|
|
|
54,377 |
|
Receivables |
|
|
- |
|
|
|
- |
|
|
|
62,039 |
|
|
|
62,039 |
|
Prepaid reinsurance premiums |
|
|
- |
|
|
|
- |
|
|
|
1,930 |
|
|
|
1,930 |
|
Reinsurance recoverable |
|
|
- |
|
|
|
- |
|
|
|
73,888 |
|
|
|
73,888 |
|
Deferred acquisition costs/VOBA |
|
|
- |
|
|
|
- |
|
|
|
17,149 |
|
|
|
17,149 |
|
Deferred income taxes |
|
|
- |
|
|
|
- |
|
|
|
11,450 |
|
|
|
11,450 |
|
Intangibles |
|
|
- |
|
|
|
- |
|
|
|
11,930 |
|
|
|
11,930 |
|
Other assets |
|
|
- |
|
|
|
- |
|
|
|
21,133 |
|
|
|
21,133 |
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses |
|
|
- |
|
|
|
- |
|
|
|
(252,905 |
) |
|
|
(252,905 |
) |
Unearned premium |
|
|
- |
|
|
|
- |
|
|
|
(98,577 |
) |
|
|
(98,577 |
) |
Other liabilities |
|
|
- |
|
|
|
- |
|
|
|
(28,814 |
) |
|
|
(28,814 |
) |
|
Net assets acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,849 |
|
|
Total purchase consideration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,663 |
|
|
Gain on bargain purchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(13,186 |
) |
|
The Company began consolidating the financial results of SUA as of the date of acquisition. As
the fair value of net assets acquired was in excess of the total purchase consideration, the gain
on bargain purchase of $13.2 million shown in the schedule above has been recognized in other
income. The assets and liabilities were adjusted to fair value as of the acquisition date, and as a
part of these adjustments the nominal value of the loss and loss adjustment expense reserves was
increased by $25.7 million. The valuation model then used an estimate of net nominal future cash
flows related to the loss and loss adjustment expense reserves which were adjusted for the time
value of money at a risk free rate and a risk margin to compensate Tower for bearing the risk
associated with the liabilities. The adjustment for the time value of money and a risk margin
amounted to $1.9 million. The total fair value adjustment impacting loss and loss adjustment
expense reserves totaled $27.6 million. This adjustment is based upon our actuaries best estimate
of SUAs reserves using loss reserving techniques consistent with those utilized by Tower for
lines of business that have relatively long reporting and settlement claims patterns. The Company
incurred approximately $2.3 million of transaction costs, including legal, accounting, investment
advisory and other costs directly related to the acquisition which were expensed in 2009.
Acquisition of the Renewal Rights of AequiCap
On October 14, 2009, the Company completed the acquisition of the renewal rights to the workers
compensation business of AequiCap Program Administrators Inc. (AequiCap), an underwriting agency based
in Fort Lauderdale, Florida. The acquired business primarily consists of small, low to moderate
hazard workers compensation policies in Florida. Most of the employees of AequiCap involved in the
servicing of the workers compensation business became employees of the Company. The acquisition of
this business strengthens the Companys regional presence in the Southeast.
The acquisition was accounted for using the purchase method in accordance with recently issued GAAP
guidance on business combinations. Under the terms of the Agreement, the Company acquired AequiCap
for $5.5 million in cash. The distribution network was the only identifiable intangible asset
acquired. The fair value of this asset was $5.3 million and the fair value of miscellaneous assets
acquired was $0.1 million resulting in $0.1 million of goodwill.
Acquisition of CastlePoint Holdings, Ltd.
On February 5, 2009, the Company completed the acquisition of 100% of the issued and outstanding
common stock of CastlePoint, a Bermuda exempted corporation. The acquisition was accounted for
using the purchase method in accordance with GAAP guidance on business combinations effective in
2009. The Company acquired CastlePoint for $491.4 million consisting of 16,869,572 shares of Tower
common stock with an aggregate value of $421.7 million, $4.4 million related to the fair value of
unexercised warrants, and $65.3 million of cash. The Company issued 1,148,308 employee stock
options to replace the CastlePoint employee and director stock options as of the acquisition date.
The value of the Companys stock options attributed to the services rendered by the CastlePoint
employees as of the acquisition date totaled $9.1 million and is included in the purchase
consideration. Also, the fair value of the CastlePoint acquisition included the fair value of the
Companys previously held interest in CastlePoint and is presented as follows:
F-17
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
Purchase consideration |
|
$ |
491,366 |
|
Fair value of outstanding CastlePoint stock options |
|
|
9,138 |
|
|
Total purchase consideration |
|
|
500,504 |
|
Fair value of previously held investment in CastlePoint |
|
|
34,673 |
|
|
Fair value of CastlePoint at acquisition |
|
$ |
535,177 |
|
|
CastlePoint was a Bermuda holding company organized to provide property and casualty insurance
and reinsurance business solutions, products and services primarily to small insurance companies
and program underwriting managers in the United States. Program underwriting managers are insurance
intermediaries that aggregate insurance business from retail and wholesale agents and manage
business on behalf of insurance companies. Their functions may include some or all of risk
selection, underwriting, premium collection, policy form and design, and client service. As a
result of this transaction, the Company expects to expand and diversify its source of revenue by
accessing CastlePoints programs, risk sharing and reinsurance businesses.
The Company began consolidating CastlePoints financial statements as of the closing date. The
purchase consideration has been allocated to the assets acquired and liabilities assumed, including
separately identified intangible assets, based on their fair values as of the close of the
acquisition, with the amounts exceeding the fair value recorded as goodwill. The goodwill consists
largely of the synergies and economies of scale expected from combining the operations of the
Company and CastlePoint.
The following presents assets acquired and liabilities assumed with the acquisition of CastlePoint,
based on their fair values and the fair value hierarchy level under GAAP as of February 5, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
$868 |
|
|
$ |
484,937 |
|
|
|
$229 |
|
|
$ |
486,034 |
|
Cash and cash equivalents |
|
|
307,632 |
|
|
|
- |
|
|
|
- |
|
|
|
307,632 |
|
Receivables |
|
|
- |
|
|
|
- |
|
|
|
211,464 |
|
|
|
211,464 |
|
Prepaid reinsurance premiums |
|
|
- |
|
|
|
- |
|
|
|
23,424 |
|
|
|
23,424 |
|
Reinsurance recoverable |
|
|
- |
|
|
|
- |
|
|
|
8,249 |
|
|
|
8,249 |
|
Deferred acquisition costs / VOBA |
|
|
- |
|
|
|
- |
|
|
|
68,231 |
|
|
|
68,231 |
|
Deferred income taxes |
|
|
- |
|
|
|
- |
|
|
|
21,373 |
|
|
|
21,373 |
|
Intangibles |
|
|
- |
|
|
|
- |
|
|
|
9,100 |
|
|
|
9,100 |
|
Other assets |
|
|
- |
|
|
|
- |
|
|
|
7,448 |
|
|
|
7,448 |
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses |
|
|
- |
|
|
|
- |
|
|
|
(291,076 |
) |
|
|
(291,076 |
) |
Unearned premium |
|
|
- |
|
|
|
- |
|
|
|
(242,365 |
) |
|
|
(242,365 |
) |
Other liabilities |
|
|
- |
|
|
|
- |
|
|
|
(130,623 |
) |
|
|
(130,623 |
) |
Subordinated debt |
|
|
- |
|
|
|
- |
|
|
|
(134,022 |
) |
|
|
(134,022 |
) |
|
Net assets acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
344,869 |
|
|
Purchase consideration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
535,177 |
|
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
190,308 |
|
|
In connection with recording the acquisition, the Company revalued its previous investment in
CastlePoint at fair value on the acquisition date, resulting in a gain of $7.4 million, before
income taxes. This gain was included in the Consolidated Statements of Income in the first quarter
of 2009. The Company incurred approximately $11.4 million of transaction costs, including legal,
accounting, investment advisory and other costs directly related to the acquisition, which were
expensed in the first quarter of 2009.
Acquisition of Hermitage
On February 27, 2009, the Company completed the acquisition of Hermitage, a property and casualty
insurance holding company, from a subsidiary of Brookfield Asset Management Inc. for $130.1
million. Hermitage offers both admitted and Excess & Surplus (E&S) lines products. This
transaction further expanded the Companys wholesale distribution system nationally and establishes
a network of retail agents in the Southeast.
The Company began consolidating the Hermitage financial statements as of the closing date. The
purchase consideration has been allocated to the assets acquired and liabilities assumed, including
separately identified intangible assets, based on their fair values as of the close of the acquisition, with the amounts exceeding the fair value recorded as
goodwill. The goodwill consists largely of the synergies and economies of scale expected from
combining the operations of the Company and Hermitage.
F-18
The following table presents assets acquired and liabilities assumed with the acquisition of
Hermitage, based on their fair values and the fair value hierarchy level under GAAP as of February
27, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
$151 |
|
|
$ |
101,296 |
|
|
|
$- |
|
|
$ |
101,447 |
|
Cash and cash equivalents |
|
|
88,167 |
|
|
|
- |
|
|
|
- |
|
|
|
88,167 |
|
Receivables |
|
|
- |
|
|
|
- |
|
|
|
11,761 |
|
|
|
11,761 |
|
Prepaid reinsurance premiums |
|
|
- |
|
|
|
- |
|
|
|
7,329 |
|
|
|
7,329 |
|
Reinsurance recoverable |
|
|
- |
|
|
|
- |
|
|
|
15,390 |
|
|
|
15,390 |
|
Deferred acquisition costs/VOBA |
|
|
- |
|
|
|
- |
|
|
|
11,319 |
|
|
|
11,319 |
|
Deferred income taxes |
|
|
- |
|
|
|
- |
|
|
|
6,423 |
|
|
|
6,423 |
|
Intangible |
|
|
- |
|
|
|
- |
|
|
|
10,830 |
|
|
|
10,830 |
|
Other assets |
|
|
- |
|
|
|
- |
|
|
|
2,077 |
|
|
|
2,077 |
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses |
|
|
- |
|
|
|
- |
|
|
|
(101,297 |
) |
|
|
(101,297 |
) |
Unearned premium |
|
|
- |
|
|
|
- |
|
|
|
(45,485 |
) |
|
|
(45,485 |
) |
Other liabilities |
|
|
- |
|
|
|
- |
|
|
|
(13,166 |
) |
|
|
(13,166 |
) |
|
Net assets acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,795 |
|
|
Purchase consideration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,115 |
|
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,320 |
|
|
The Company recorded goodwill from the acquisitions of CastlePoint, Hermitage and AequiCap in
the amount of $184.3 million, $35.3 million and $0.1 million, respectively. The acquisition of SUA
resulted in negative goodwill which was recorded as a gain on bargain purchase in the income
statement in 2009. The Company estimated that $17.0 million of goodwill related to the Hermitage
acquisition is deductible for tax purposes. The Company has determined that none of the goodwill
related to the CastlePoint acquisition may be deductible for tax purposes. See Note 6 Goodwill
and Intangible Assets for the allocation of goodwill to segments as required by GAAP.
Acquired Companies Contribution to Revenue and Income
For the period covering their respective acquisition dates through year ended December 31, 2009,
the Company included total revenues and net income for the companies acquired in 2009 in its
Consolidated Statements of Income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
($ in thousands) |
|
CastlePoint |
|
Hermitage |
|
SUA |
|
Total Revenue |
|
$ |
410,631 |
|
|
$ |
68,629 |
|
|
$ |
30,275 |
|
Net Income |
|
|
52,409 |
|
|
|
10,346 |
|
|
|
1,606 |
|
The amounts in the table above include revenues and net income for CastlePoint, Hermitage and
SUA based on each companys net premiums earned prior to pooling. Revenues and net income for
CastlePoint Re include the assumed business, on a quota share basis, from the Tower insurance
subsidiaries. Net losses incurred and net underwriting expenses incurred are based on the related
net ratio of the pool. Net investment income represents actual net investment income earned.
F-19
Significant Factors Affecting Acquisition Date Fair Values
Value of Business Acquired (VOBA)
Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. The
valuation for the insurance policies that were in force on the acquisition dates was determined by
using a cash flow model rather than an observable market price as a liquid market for valuing the
in force business could not be determined. The valuation model used an estimate of the underwriting
profit and the net nominal future cash flows associated with the in force policies that a market
participant would expect as of the dates of the acquisitions. The estimated underwriting profit and
the future cash flows were adjusted for the time value of money at a risk free rate and a risk
margin to compensate an acquirer for bearing the risk associated with the in force business. An
estimate of the expected level of policy cancellations that would occur after the acquisition dates
was also included, where applicable.
The underwriting profit component of the VOBA will be amortized in proportion to the timing of the
estimated underwriting profit associated with the in force policies acquired. The cash flow or
interest component of the VOBA asset will be amortized in proportion to the expected pattern of the
future cash flows. The amortization will be reflected as a component of underwriting expenses in
both the brokerage insurance and specialty business segments. VOBA is determined at the time of a
business combination and is reported on the consolidated balance sheet with DAC.
At the acquisition dates of CastlePoint, Hermitage and SUA, VOBA was $96.7 million, and the Company
amortized $80.9 million for the year ended December 31, 2009 with the remainder to be amortized in
2010.
Intangibles
The fair value of intangible assets represents acquired customer relationships, insurance licenses
and trademarks. The fair value of customer relationships and trademarks was estimated based upon an
income approach methodology. The fair value of insurance licenses was based upon a market approach
methodology. Critical inputs into the valuation model for customer relationships included
estimations of expected premium and attrition rates, expected operating margins and capital
requirements.
Loss and Loss Adjustment Expense Reserves Acquired
The valuation of loss and loss adjustment expense reserves acquired was determined using a cash
flow model rather than an observable market price since a liquid market for such underwriting
liabilities could not be determined. The valuation model used an estimate of net nominal future
cash flows related to liabilities for losses and LAE that a market participant would expect as of
the date of the acquisitions. These future cash flows were adjusted for the time value of money at
a risk free rate and a risk margin to compensate an acquirer for bearing the risk associated with
the liabilities.
The fair value adjustment for loss and LAE of $19.1 million will be amortized over the expected
loss and LAE payout pattern and reflected as a component of loss and loss adjustment expenses. The
Company amortized $5.0 million for the year ended December 31, 2009 with the remainder to be
amortized over the next three to four years.
Non-financial Assets and Liabilities
Receivables, other assets and liabilities were valued at fair value which approximated carrying
value.
Pro Forma Results of Operations
Selected unaudited pro forma results of operations assuming the CastlePoint, Hermitage, AequiCap
and SUA acquisitions had occurred as of January 1, 2008, are set forth below:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(in thousands, except per share amounts) |
|
2009 |
|
2008 |
|
Total revenue |
|
$ |
1,164,716 |
|
|
$ |
1,056,654 |
|
Net income (1) |
|
|
93,501 |
|
|
|
74,348 |
|
Net income per share-basic |
|
|
$2.29 |
|
|
|
$1.85 |
|
Net income per share-diluted |
|
|
$2.27 |
|
|
|
$1.85 |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
Basic |
|
|
40,891 |
|
|
|
40,095 |
|
Diluted |
|
|
41,108 |
|
|
|
40,289 |
|
|
|
|
|
|
(1)
The Company excluded certain one-time charges from the pro forma results for the year ended
December 31, 2009 and 2008 including, (i) transaction costs of $14.1 million, and $9.4 million,
respectively related to the acquisitions of CastlePoint, Hermitage
and SUA, (ii) CastlePoints
severance expenses of $2.0 million for the year ended |
F-20
|
|
|
December 31, 2009, (iii) Towers gain of $7.4
million related to the acquisition of CastlePoint for the year ended December 31, 2009 and (iv)
Towers gain on bargain purchase of $13.2 million related to the acquisition of SUA for the year
ended December 31, 2009. |
Note 4 Investments
The cost or amortized cost and fair value of investments in fixed-maturity securities, equities and
short-term investments and gross unrealized gains, losses and other-than-temporary impairment
losses as of December 31, 2009 and 2008 are summarized as follows:
F-21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
Gross |
|
Gross Unrealized Losses |
|
|
|
|
|
Unrealized |
|
|
Amortized |
|
Unrealized |
|
Less than 12 |
|
More than 12 |
|
Fair |
|
OTTI |
($ in thousands) |
|
Cost |
|
Gains |
|
Months |
|
Months |
|
Value |
|
Losses (1) |
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
|
73,281 |
|
|
|
235 |
|
|
|
(225 |
) |
|
|
- |
|
|
|
73,291 |
|
|
|
- |
|
U.S. Agency securities |
|
|
40,063 |
|
|
|
134 |
|
|
|
(214 |
) |
|
|
- |
|
|
|
39,983 |
|
|
|
- |
|
Municipal bonds |
|
|
508,204 |
|
|
|
18,241 |
|
|
|
(587 |
) |
|
|
(143 |
) |
|
|
525,715 |
|
|
|
- |
|
Corporate and other bonds |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance |
|
|
174,971 |
|
|
|
11,150 |
|
|
|
(291 |
) |
|
|
(1,099 |
) |
|
|
184,731 |
|
|
|
- |
|
Industrial |
|
|
371,848 |
|
|
|
13,225 |
|
|
|
(726 |
) |
|
|
(608 |
) |
|
|
383,739 |
|
|
|
- |
|
Utilities |
|
|
43,154 |
|
|
|
3,559 |
|
|
|
(37 |
) |
|
|
(25 |
) |
|
|
46,651 |
|
|
|
- |
|
Commercial mortgage-backed
securities |
|
|
195,580 |
|
|
|
16,603 |
|
|
|
(598 |
) |
|
|
(8,138 |
) |
|
|
203,447 |
|
|
|
(7,713 |
) |
Residential mortgage-backed
securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed securities |
|
|
283,403 |
|
|
|
6,245 |
|
|
|
(963 |
) |
|
|
- |
|
|
|
288,685 |
|
|
|
- |
|
Non-agency backed securities |
|
|
27,597 |
|
|
|
2,772 |
|
|
|
(14 |
) |
|
|
(2,910 |
) |
|
|
27,445 |
|
|
|
(1,948 |
) |
Asset-backed securities |
|
|
11,016 |
|
|
|
214 |
|
|
|
(116 |
) |
|
|
(1,205 |
) |
|
|
9,909 |
|
|
|
(1,301 |
) |
|
Total fixed-maturity securities |
|
|
1,729,117 |
|
|
|
72,378 |
|
|
|
(3,771 |
) |
|
|
(14,128 |
) |
|
|
1,783,596 |
|
|
|
(10,962 |
) |
Preferred stocks, principally financial sector |
|
|
77,536 |
|
|
|
919 |
|
|
|
(1,441 |
) |
|
|
(724 |
) |
|
|
76,290 |
|
|
|
- |
|
Common stocks |
|
|
515 |
|
|
|
78 |
|
|
|
(150 |
) |
|
|
- |
|
|
|
443 |
|
|
|
- |
|
Short-term investments |
|
|
36,500 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
36,500 |
|
|
|
- |
|
|
Total |
|
$ |
1,843,668 |
|
|
$ |
73,375 |
|
|
$ |
(5,362 |
) |
|
$ |
(14,852 |
) |
|
$ |
1,896,829 |
|
|
$ |
(10,962 |
) |
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
|
26,482 |
|
|
|
524 |
|
|
|
- |
|
|
|
- |
|
|
|
27,006 |
|
|
|
|
|
U.S. Agency securities |
|
|
361 |
|
|
|
38 |
|
|
|
- |
|
|
|
- |
|
|
|
399 |
|
|
|
|
|
Municipal bonds |
|
|
179,734 |
|
|
|
2,865 |
|
|
|
(2,485 |
) |
|
|
(166 |
) |
|
|
179,948 |
|
|
|
|
|
Corporate and other bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance |
|
|
84,579 |
|
|
|
458 |
|
|
|
(6,003 |
) |
|
|
(4,173 |
) |
|
|
74,860 |
|
|
|
|
|
Industrial |
|
|
122,599 |
|
|
|
475 |
|
|
|
(7,740 |
) |
|
|
(5,639 |
) |
|
|
109,695 |
|
|
|
|
|
Utilities |
|
|
2,829 |
|
|
|
- |
|
|
|
(205 |
) |
|
|
(204 |
) |
|
|
2,420 |
|
|
|
|
|
Commercial mortgage-backed
securities |
|
|
52,558 |
|
|
|
3 |
|
|
|
(4,399 |
) |
|
|
(16,626 |
) |
|
|
31,535 |
|
|
|
|
|
Residential mortgage-backed
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed securities |
|
|
70,416 |
|
|
|
1,799 |
|
|
|
(16 |
) |
|
|
(20 |
) |
|
|
72,179 |
|
|
|
|
|
Non-agency backed securities |
|
|
31,441 |
|
|
|
4 |
|
|
|
(3,536 |
) |
|
|
(3,594 |
) |
|
|
24,315 |
|
|
|
|
|
Asset-backed securities |
|
|
10,471 |
|
|
|
32 |
|
|
|
(2,652 |
) |
|
|
(49 |
) |
|
|
7,802 |
|
|
|
|
|
|
|
|
|
|
Total fixed-maturity
securities |
|
|
581,470 |
|
|
|
6,198 |
|
|
|
(27,036 |
) |
|
|
(30,471 |
) |
|
|
530,159 |
|
|
|
|
|
Preferred stocks, principally financial sector |
|
|
5,551 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,857 |
) |
|
|
3,694 |
|
|
|
|
|
Common stocks |
|
|
7,175 |
|
|
|
5 |
|
|
|
(60 |
) |
|
|
- |
|
|
|
7,120 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
594,196 |
|
|
|
6,203 |
|
|
|
(27,096 |
) |
|
|
(32,328 |
) |
|
|
540,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the gross unrealized loss on other-than-temporarily impaired securities as of December 31, 2009 recognized in accumulated other
comprehensive income (loss). |
At December 31, 2009 and 2008, U.S. Treasury Notes and other securities with carrying values of
approximately $113.1 million and $21.7 million, respectively, were on deposit with various states
to comply with the insurance laws of the states in which the Company is licensed.
Major categories of the Companys net investment income are summarized as follows:
F-22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
($ in thousands) |
|
2009 |
|
2008 |
|
2007 |
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-maturity securities |
|
$ |
72,619 |
|
|
$ |
31,791 |
|
|
$ |
28,279 |
|
Equity securities |
|
|
3,600 |
|
|
|
730 |
|
|
|
4,332 |
|
Cash and cash equivalents |
|
|
1,103 |
|
|
|
2,897 |
|
|
|
4,974 |
|
Dividends on common trust securities |
|
|
559 |
|
|
|
244 |
|
|
|
215 |
|
|
Total |
|
|
77,881 |
|
|
|
35,662 |
|
|
|
37,800 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Investment expenses |
|
|
3,015 |
|
|
|
1,094 |
|
|
|
1,101 |
|
|
Net investment income |
|
$ |
74,866 |
|
|
$ |
34,568 |
|
|
$ |
36,699 |
|
|
Proceeds from the sale and maturity of fixed-maturity securities were $936.6 million, $356.0
million and $199.6 million in 2009, 2008 and 2007, respectively. Proceeds from the sale of equity
securities were $50.6 million, $6.5 million and $24.8 million in 2009, 2008 and 2007, respectively.
The Companys gross realized gains, losses and impairment write-downs on investments are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
($ in thousands) |
|
2009 |
|
2008 |
|
2007 |
|
Fixed-maturity securities |
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
$ |
25,131 |
|
|
$ |
7,322 |
|
|
$ |
3,189 |
|
Gross realized losses |
|
|
(574 |
) |
|
|
(918 |
) |
|
|
(599 |
) |
|
|
|
|
24,557 |
|
|
|
6,404 |
|
|
|
2,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
|
528 |
|
|
|
1,968 |
|
|
|
1,324 |
|
Gross realized losses |
|
|
(96 |
) |
|
|
(75 |
) |
|
|
(11,331 |
) |
|
|
|
|
432 |
|
|
|
1,893 |
|
|
|
(10,007 |
) |
|
Net realized gains (losses) on investments |
|
|
24,989 |
|
|
|
8,297 |
|
|
|
(7,417 |
) |
|
Other-than-temporary impairment losses recognized in earnings |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-maturity securities |
|
|
(23,488 |
) |
|
|
(20,215 |
) |
|
|
(4,879 |
) |
Equity securities |
|
|
- |
|
|
|
(2,436 |
) |
|
|
(5,215 |
) |
|
Total other-than-temporary impairment losses |
|
|
(23,488 |
) |
|
|
(22,651 |
) |
|
|
(10,094 |
) |
|
Total net realized gains (losses), including other-than
temporary impairment losses |
|
$ |
1,501 |
|
|
$ |
(14,354 |
) |
|
$ |
(17,511 |
) |
|
The Company may dispose of a particular security due to significant changes in economic facts
and circumstances related to an invested asset that have arisen since the Companys last analysis
of the facts supporting the Companys intent and ability to retain the investment in the security
for a period of time sufficient to recover the amortized cost or cost basis as of the prior
reporting period.
Impairment Review
The Company regularly reviews its fixed-maturity and equity security portfolios to evaluate the
necessity of recording impairment losses for other-than-temporary declines in the fair value of
investments. In evaluating potential impairment, management considers, among other criteria: (i)
the overall financial condition of the issuer, (ii) the current fair value compared to amortized
cost or cost, as appropriate; (iii) the length of time the securitys fair value has been below
amortized cost or cost; (iv) specific credit issues related to the issuer such as changes in credit
rating, reduction or elimination of dividends or non-payment of scheduled interest payments; (v)
whether management intends to sell the security and, if not, whether it is not more likely than not
that the Company will be required to sell the security before recovery of its amortized cost basis;
(vi) specific cash flow estimations for certain mortgage-backed and asset-backed securities and
(vii) current economic conditions. If an other-than-temporary impairment loss is determined for a
fixed-maturity security and management does not intend to sell and it is more likely than not that
it will not be required to sell the security before recovery of cost or amortized cost, the credit
portion is included in the statement of income in net realized investment gains (losses) and the
non-credit portion is included in comprehensive net income. The credit portion results in a
permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a
subjective process and different judgments and assumptions could affect the timing of loss
realization.
F-23
The Companys commercial mortgage-backed securities (CMBS), non-agency residential
mortgage-backed securities (RMBS) and corporate bonds represent our largest unrealized loss
positions as of December 31, 2009.
For certain non-highly rated structured fixed-maturity securities, the Company determines the
credit loss component by utilizing discounted cash flow modeling to determine the present value of
the security and comparing the present value with the amortized cost of the security. If the
amortized cost is greater than the present value of the expected cash flows, the difference is
considered a credit loss and included in net realized investment gains (losses). During the year
ended December 31, 2009 the Company recorded $23.5 million of credit related OTTI primarily related
to commercial and non-agency residential mortgage-backed securities.
For certain non-structured fixed-maturity securities (U.S. Treasury securities, obligations of U.S.
Government and government agencies and authorities, obligations of states, municipalities and
political subdivisions, debt securities issued by foreign governments, and certain corporate debt),
the estimate of expected cash flows is determined by projecting a recovery value and a recovery
time frame and assessing whether further principal and interest will be received. The
determination of recovery value incorporates an issuer valuation assumption utilizing one or a
combination of valuation methods as deemed appropriate by the Company. The present value of the
cash flows is determined by applying the effective yield of the security at the date of acquisition
(or the most recent implied rate used to accrete the security if the implied rate has changed as a
result of a previous impairment) and an estimated recovery time frame. Generally, that time frame
for securities for which the issuer is in bankruptcy is 12 months. For securities for which the
issuer is financially troubled but not in bankruptcy, that time frame is generally longer.
Included in the present value calculation are expected principal and interest payments; however,
for securities for which the issuer is classified as bankrupt or in default, the present value
calculation assumes no interest payments and a single recovery amount. In situations for which a
present value of cash flows cannot be estimated, a write down to fair value is recorded.
In estimating the recovery value, significant judgment is involved in the development of
assumptions relating to a myriad of factors related to the issuer including, but not limited to,
revenue, margin and earnings projections, the likely market or liquidation values of assets,
potential additional debt to be incurred pre- or post- bankruptcy/ restructuring, the ability to
shift existing or new debt to different priority layers, the amount of restructuring/bankruptcy
expenses, the size and priority of unfunded pension obligations, litigation or other contingent
claims, the treatment of intercompany claims and the likely outcome with respect to inter-creditor
conflicts.
The non-agency RMBS holdings include securities with underlying prime mortgages. Sub-prime and
Alt-A mortgages are included in Agency backed Securities. The Company analyzes certain of its RMBS
on a quarterly basis using default loss models based on the performance of the underlying loans.
Performance metrics include delinquencies, defaults, foreclosures, prepayment speeds and cumulative
losses incurred. The expected losses for a mortgage pool are compared to the break-even loss, which
represents the point at which the Companys tranche begins to experience losses. The timing of
projected cash flows on these securities has changed as economic conditions have prevented the
underlying borrowers from refinancing the mortgages underlying these securities, thereby reducing
the amount of projected prepayments. Additionally, for certain of the non-agency RMBS holdings, the
estimated cash flows have continued to decline throughout the year. This is primarily attributable
to the continued decline in home prices during the first half of the year, but which seems to have
stabilized during the second half of 2009. Additionally, unemployment has steadily risen
throughout 2009 from 7.4% at December 2008 to 10.0% at December 2009. These are critical factors
impacting future projected losses. As a result, the default and loss severity estimates have
increased based on these home price change estimates and the increase in unemployment. See the
table below for a summary of OTTI losses recorded in 2009. The OTTI charges are recognized and
recorded in the period when there are adverse changes in projected cash flows, which the Company
tests on a quarterly basis.
The Companys CMBS are also evaluated on a quarterly basis using analytical techniques and various
metrics including the level of subordination, debt-service-coverage ratios, loan-to-value ratios,
delinquencies, defaults and foreclosures. For certain of the CMBS holdings, the estimated cash
flows have continued to decline throughout the year, similar to RMBS. The primary driver of this
decline has been an increase of delinquencies from 1.5% at December 31, 2008 to 5.3% by the fourth
quarter of 2009. Additionally, the weak economy is causing higher vacancies, negatively impacting
income to support debt payments. Furthermore, a lack of financing in the CMBS market and a decline
in real estate values is resulting in higher longer term projected losses due to the increase in
refinancing risk of commercial loans upon the balloon dates. See the table below for a summary of
OTTI losses recorded in 2009. The OTTI charges are recognized and recorded in the period when there
are adverse changes in projected cash flows, which the Company tests on a quarterly basis.
The following table shows the number and amount of fixed-maturity and equity securities that the
Company determined were OTTI for the years ended December 31, 2009, 2008 and 2007. This resulted in
recording impairment write-downs included in net realized investment gains (losses), and reduced
the unrealized loss in other comprehensive net income:
F-24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
($ in thousands) |
|
No. |
|
|
Amount |
|
|
No. |
|
|
Amount |
|
|
No. |
|
|
Amount |
|
|
Corporate and other bonds |
|
|
14 |
|
|
$ |
(1,851 |
) |
|
|
3 |
|
|
$ |
(3,276 |
) |
|
|
2 |
|
|
$ |
(457 |
) |
Commercial mortgage-backed securities |
|
|
50 |
|
|
|
(25,229 |
) |
|
|
1 |
|
|
|
(338 |
) |
|
|
- |
|
|
|
- |
|
Residential mortgage-backed securities |
|
|
75 |
|
|
|
(12,479 |
) |
|
|
17 |
|
|
|
(14,107 |
) |
|
|
22 |
|
|
|
(4,422 |
) |
Asset-backed securities |
|
|
30 |
|
|
|
(4,651 |
) |
|
|
3 |
|
|
|
(2,494 |
) |
|
|
- |
|
|
|
- |
|
Equities |
|
|
- |
|
|
|
- |
|
|
|
7 |
|
|
|
(2,436 |
) |
|
|
7 |
|
|
|
(5,215 |
) |
|
|
|
|
169 |
|
|
|
(44,210 |
) |
|
|
31 |
|
|
|
(22,651 |
) |
|
|
31 |
|
|
|
(10,094 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of loss recognized in other comprehensive net
income, principally residential
mortgage-backed securities |
|
|
|
|
|
|
20,722 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
Impairment losses recognized in earnings |
|
|
|
|
|
$ |
(23,488 |
) |
|
|
|
|
|
$ |
(22,651 |
) |
|
|
|
|
|
$ |
(10,094 |
) |
|
The following table provides a rollforward of the cumulative pre-tax amount of OTTI showing the
amounts that have been included in earnings for securities still held for the year ended December
31, 2009:
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
Balance, January 1, 2009 |
|
$ |
24,638 |
|
Cumulative effect of adjustment upon adoption of 2009 GAAP guidance on OTTI |
|
|
(2,497 |
) |
No OTTI has been previously recognized |
|
|
16,076 |
|
OTTI has been previously recognized |
|
|
7,412 |
|
Securities sold during the period (realized) |
|
|
(4,895 |
) |
|
Balance, December 31, 2009 |
|
$ |
40,734 |
|
|
Unrealized Losses
There are 525 investment positions at December 31, 2009 that account for the gross unrealized loss,
none of which is deemed by the Company to be OTTI. Temporary losses on investments resulted
primarily from purchases made in a lower interest rate environment or lower yield spread
environment as opposed to market illiquidity and market dislocation that existed during 2008. There
have been some ratings downgrades within the corporate sector due to the weak, but improving,
economic environment. However, after analyzing the credit quality, balance sheet strength and
company outlook, management believes these securities will recover in value as liquidity and the
economy continue to improve. The structured securities that had significant unrealized losses
resulted from continuing declines in both residential and commercial real estate prices. However,
declines in home and commercial property prices have not adversely affected projected cash flows on
these securities. To the extent projected cash flows on structured securities change adversely,
they would be considered OTTI and an impairment loss would be recognized. The Company considered
all relevant factors, including expected recoverability of cash flows, in assessing whether the
loss was other than temporary. The Company does not intend to sell these fixed maturity securities
and it is not more likely than not that we will be required to sell these securities before
recovering their cost basis.
For all securities in an unrealized loss position at December 31, 2009, the Company has received
all contractual interest payments (and principal if applicable). Based on the continuing receipt of
cash flow and the foregoing analyses, the Company expects continued timely payments of principal
and interest and considers the losses to be temporary.
The following table presents information regarding the Companys invested assets that were in an
unrealized loss position at December 31, 2009 and December 31, 2008 by amount of time in a
continuous unrealized loss position:
F-25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
12 Months or Longer |
|
Total |
|
|
|
|
|
|
Fair |
|
Unrealized |
|
|
|
|
|
Fair |
|
Unrealized |
|
|
|
|
|
Aggregate |
|
Unrealized |
($ in thousands) |
|
No. |
|
Value |
|
Losses |
|
No. |
|
Value |
|
Losses |
|
No. |
|
Fair Value |
|
Losses |
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
|
24 |
|
|
$ |
43,421 |
|
|
$ |
(225 |
) |
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
24 |
|
|
$ |
43,421 |
|
|
$ |
(225 |
) |
U.S. Agency securities |
|
|
21 |
|
|
|
27,652 |
|
|
|
(214 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
21 |
|
|
|
27,652 |
|
|
|
(214 |
) |
Municipal bonds |
|
|
42 |
|
|
|
50,526 |
|
|
|
(587 |
) |
|
|
5 |
|
|
|
2,569 |
|
|
|
(143 |
) |
|
|
47 |
|
|
|
53,095 |
|
|
|
(730 |
) |
Corporate and other
bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance |
|
|
32 |
|
|
|
28,342 |
|
|
|
(291 |
) |
|
|
20 |
|
|
|
14,906 |
|
|
|
(1,099 |
) |
|
|
52 |
|
|
|
43,248 |
|
|
|
(1,390 |
) |
Industrial |
|
|
104 |
|
|
|
69,475 |
|
|
|
(726 |
) |
|
|
25 |
|
|
|
14,563 |
|
|
|
(608 |
) |
|
|
129 |
|
|
|
84,038 |
|
|
|
(1,334 |
) |
Utilities |
|
|
6 |
|
|
|
3,575 |
|
|
|
(37 |
) |
|
|
2 |
|
|
|
625 |
|
|
|
(25 |
) |
|
|
8 |
|
|
|
4,200 |
|
|
|
(62 |
) |
Commercial mortgage-backed securities |
|
|
20 |
|
|
|
25,810 |
|
|
|
(598 |
) |
|
|
27 |
|
|
|
22,904 |
|
|
|
(8,138 |
) |
|
|
47 |
|
|
|
48,714 |
|
|
|
(8,736 |
) |
Residential mortgage-
backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
43 |
|
|
|
79,005 |
|
|
|
(963 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
43 |
|
|
|
79,005 |
|
|
|
(963 |
) |
Non-agency backed |
|
|
4 |
|
|
|
1,081 |
|
|
|
(14 |
) |
|
|
37 |
|
|
|
19,672 |
|
|
|
(2,910 |
) |
|
|
41 |
|
|
|
20,753 |
|
|
|
(2,924 |
) |
Asset-backed securities |
|
|
5 |
|
|
|
334 |
|
|
|
(116 |
) |
|
|
11 |
|
|
|
2,962 |
|
|
|
(1,205 |
) |
|
|
16 |
|
|
|
3,296 |
|
|
|
(1,321 |
) |
|
Total fixed-maturity
securities |
|
|
301 |
|
|
|
329,221 |
|
|
|
(3,771 |
) |
|
|
127 |
|
|
|
78,201 |
|
|
|
(14,128 |
) |
|
|
428 |
|
|
|
407,422 |
|
|
|
(17,899 |
) |
Preferred stocks |
|
|
87 |
|
|
|
59,243 |
|
|
|
(1,441 |
) |
|
|
6 |
|
|
|
4,827 |
|
|
|
(724 |
) |
|
|
93 |
|
|
|
64,070 |
|
|
|
(2,165 |
) |
Common stocks |
|
|
4 |
|
|
|
31 |
|
|
|
(150 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
31 |
|
|
|
(150 |
) |
|
Total |
|
|
392 |
|
|
$ |
388,495 |
|
|
$ |
(5,362 |
) |
|
|
133 |
|
|
$ |
83,028 |
|
|
$ |
(14,852 |
) |
|
|
525 |
|
|
$ |
471,523 |
|
|
$ |
(20,214 |
) |
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds |
|
|
53 |
|
|
$ |
49,879 |
|
|
$ |
(2,485 |
) |
|
|
1 |
|
|
$ |
371 |
|
|
$ |
(166 |
) |
|
|
54 |
|
|
$ |
50,250 |
|
|
$ |
(2,651 |
) |
Corporate and other
bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance |
|
|
55 |
|
|
|
42,007 |
|
|
|
(6,003 |
) |
|
|
38 |
|
|
|
20,575 |
|
|
|
(4,173 |
) |
|
|
93 |
|
|
|
62,582 |
|
|
|
(10,176 |
) |
Industrial |
|
|
110 |
|
|
|
72,787 |
|
|
|
(7,740 |
) |
|
|
32 |
|
|
|
17,701 |
|
|
|
(5,639 |
) |
|
|
142 |
|
|
|
90,488 |
|
|
|
(13,379 |
) |
Utilities |
|
|
5 |
|
|
|
1,974 |
|
|
|
(205 |
) |
|
|
2 |
|
|
|
446 |
|
|
|
(204 |
) |
|
|
7 |
|
|
|
2,420 |
|
|
|
(409 |
) |
Commercial mortgage-backed securities |
|
|
15 |
|
|
|
13,997 |
|
|
|
(4,399 |
) |
|
|
22 |
|
|
|
16,430 |
|
|
|
(16,626 |
) |
|
|
37 |
|
|
|
30,427 |
|
|
|
(21,026 |
) |
Residential mortgage-
backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
6 |
|
|
|
3,408 |
|
|
|
(16 |
) |
|
|
1 |
|
|
|
582 |
|
|
|
(20 |
) |
|
|
7 |
|
|
|
3,990 |
|
|
|
(36 |
) |
Non-agency backed |
|
|
32 |
|
|
|
12,676 |
|
|
|
(3,536 |
) |
|
|
16 |
|
|
|
9,953 |
|
|
|
(3,594 |
) |
|
|
48 |
|
|
|
22,629 |
|
|
|
(7,130 |
) |
Asset-backed securities |
|
|
20 |
|
|
|
6,481 |
|
|
|
(2,652 |
) |
|
|
2 |
|
|
|
551 |
|
|
|
(49 |
) |
|
|
22 |
|
|
|
7,032 |
|
|
|
(2,701 |
) |
|
Total fixed-maturity
securities |
|
|
296 |
|
|
|
203,209 |
|
|
|
(27,036 |
) |
|
|
114 |
|
|
|
66,609 |
|
|
|
(30,471 |
) |
|
|
410 |
|
|
|
269,818 |
|
|
|
(57,508 |
) |
Preferred stocks |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6 |
|
|
|
3,694 |
|
|
|
(1,857 |
) |
|
|
6 |
|
|
|
3,694 |
|
|
|
(1,857 |
) |
Common stocks |
|
|
1 |
|
|
|
1,440 |
|
|
|
(60 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
1,440 |
|
|
|
(60 |
) |
|
Total |
|
|
297 |
|
|
$ |
204,649 |
|
|
$ |
(27,096 |
) |
|
|
120 |
|
|
$ |
70,303 |
|
|
$ |
(32,328 |
) |
|
|
417 |
|
|
$ |
274,952 |
|
|
$ |
(59,425 |
) |
|
The unrealized position associated with the fixed-maturity portfolio included $17.9 million in
unrealized losses, consisting primarily of asset-backed and mortgage-backed securities representing
69% and corporate bonds representing 14% of the unrealized loss. The fixed-maturity portfolio
unrealized losses included 428 securities which were, in aggregate, approximately 4.0% below
amortized cost. Of the 428 investments, 127 have been in an unrealized loss position for more than
12 months. The total unrealized loss on these investments at December 31, 2009 was $14.1 million.
The Company does not consider these investments to be other-than-temporarily impaired.
The unrealized losses on the Companys investments in preferred securities were primarily due to
purchases made during the third quarter of 2009 where pricing was adversely affected after the
ex-dividend date was declared. The Company evaluated preferred securities that were in an
unrealized loss position as of December 31, 2009. The evaluation consisted of a detailed review
including but not limited to some or all of the following factors for each security: the current
S&P rating, analysts reports, past earnings trends and analysts earnings expectations for the
next 12 months, liquidity, near term financing risk, and
F-26
whether the company was currently paying dividends on its equity securities. We believe the
decline in value to be temporary in nature and we do not consider these investments to be
other-than-temporarily impaired.
The following tables stratify, by securitized assets and all other assets, the gross unrealized
losses in the Companys portfolio at December 31, 2009, by duration in a loss position and
magnitude of the loss as a percentage of the cost of the security:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized Assets |
|
|
|
|
|
|
Total Gross |
|
Decline of Investment Value |
|
|
Fair |
|
Unrealized |
|
>15% |
|
>25% |
|
>50% |
($ in thousands) |
|
Value |
|
Losses |
|
No. |
|
Amount |
|
No. |
|
Amount |
|
No. |
|
Amount |
|
Unrealized loss for less than 6 months |
|
$ |
106,188 |
|
|
$ |
(1,511 |
) |
|
|
2 |
|
|
$ |
(42 |
) |
|
|
2 |
|
|
$ |
(106 |
) |
|
|
1 |
|
|
$ |
(150 |
) |
Unrealized loss for over 6 months |
|
|
6 |
|
|
|
(0 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Unrealized loss for over 12 months |
|
|
3,081 |
|
|
|
(446 |
) |
|
|
2 |
|
|
|
(138 |
) |
|
|
- |
|
|
|
- |
|
|
|
5 |
|
|
|
(179 |
) |
Unrealized loss for over 18 months |
|
|
15,933 |
|
|
|
(1,753 |
) |
|
|
4 |
|
|
|
(431 |
) |
|
|
2 |
|
|
|
(99 |
) |
|
|
2 |
|
|
|
(311 |
) |
Unrealized loss for over 2 years |
|
|
26,560 |
|
|
|
(10,234 |
) |
|
|
8 |
|
|
|
(1,204 |
) |
|
|
5 |
|
|
|
(2,811 |
) |
|
|
14 |
|
|
|
(5,432 |
) |
|
|
|
$ |
151,768 |
|
|
$ |
(13,944 |
) |
|
|
16 |
|
|
$ |
(1,815 |
) |
|
|
9 |
|
|
$ |
(3,016 |
) |
|
|
22 |
|
|
$ |
(6,072 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other Assets |
|
|
|
|
|
|
Total Gross |
|
Decline of Investment Value |
|
|
Fair |
|
Unrealized |
|
>15% |
|
>25% |
|
>50% |
($ in thousands) |
|
Value |
|
Losses |
|
No. |
|
Amount |
|
No. |
|
Amount |
|
No. |
|
Amount |
|
Unrealized loss for less than 6 months |
|
$ |
281,180 |
|
|
$ |
(3,642 |
) |
|
|
- |
|
|
$ |
- |
|
|
|
2 |
|
|
$ |
(21 |
) |
|
|
2 |
|
|
$ |
(3 |
) |
Unrealized loss for over 6 months |
|
|
2,759 |
|
|
|
(127 |
) |
|
|
1 |
|
|
|
(1 |
) |
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
(95 |
) |
Unrealized loss for over 12 months |
|
|
58 |
|
|
|
(172 |
) |
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
(38 |
) |
|
|
3 |
|
|
|
(135 |
) |
Unrealized loss for over 18 months |
|
|
10,972 |
|
|
|
(708 |
) |
|
|
1 |
|
|
|
(411 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Unrealized loss for over 2 years |
|
|
24,786 |
|
|
|
(1,622 |
) |
|
|
1 |
|
|
|
(7 |
) |
|
|
2 |
|
|
|
(239 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
$ |
319,755 |
|
|
$ |
(6,271 |
) |
|
|
3 |
|
|
$ |
(419 |
) |
|
|
5 |
|
|
$ |
(298 |
) |
|
|
8 |
|
|
$ |
(233 |
) |
|
The Company evaluated the severity of the impairment in relation to the carrying amount for the
securities referred to above and considered all relevant factors, in assessing whether the loss was
other-than-temporary. The Company does not intend to sell its fixed-maturity securities, and it is
not more likely than not that the Company will be required to sell these investments until there is
a recovery of fair value to the Companys original cost or amortized cost basis, which, for fixed
maturities, may be at maturity.
Fixed-Maturity InvestmentsTime to Maturity
The following table shows the composition of our fixed-maturity portfolio by remaining time to
maturity at December 31, 2009 and December 31, 2008. For securities that are redeemable at the
option of the issuer and have a market price that is greater than par value, the maturity used for
the table below is the earliest redemption date. For securities that are redeemable at the option
of the issuer and have a market price that is less than par value, the maturity used for the table
below is the final maturity date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
December 31, 2008 |
|
|
Amortized |
|
|
|
|
|
Amortized |
|
|
($ in thousands) |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
Remaining Time to Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year |
|
$ |
30,282 |
|
|
$ |
30,465 |
|
|
$ |
8,813 |
|
|
$ |
8,789 |
|
One to five years |
|
|
346,309 |
|
|
|
355,402 |
|
|
|
115,645 |
|
|
|
112,514 |
|
Five to ten years |
|
|
477,843 |
|
|
|
492,517 |
|
|
|
189,267 |
|
|
|
176,218 |
|
More than 10 years |
|
|
357,086 |
|
|
|
375,726 |
|
|
|
102,859 |
|
|
|
96,807 |
|
Mortgage and asset-backed securities |
|
|
517,597 |
|
|
|
529,486 |
|
|
|
164,886 |
|
|
|
135,831 |
|
|
Total |
|
$ |
1,729,117 |
|
|
$ |
1,783,596 |
|
|
$ |
581,470 |
|
|
$ |
530,159 |
|
|
Note 5Fair Value Measurements
GAAP establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used
to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in
active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the
F-27
inputs
used to measure the assets or
liabilities fall within different levels of the hierarchy, the classification is based on the
lowest level input that is significant to the fair value measurement of the asset or liability.
Classification of assets and liabilities within the hierarchy considers the markets in which the
assets and liabilities are traded, including during periods of market disruption, and the
reliability and transparency of the assumptions used to determine fair value. The hierarchy
requires the use of observable market data when available. The levels of the hierarchy and those
investments included in each are as follows:
Level 1 Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets
or liabilities traded in active markets. Included are those investments traded on an active
exchange, such as the NASDAQ Global Select Market.
Level 2 Inputs to the valuation methodology include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar assets or liabilities in
markets that are not active, inputs other than quoted prices that are observable for the asset or
liability and market-corroborated inputs. Included are investments in U.S. Treasury securities and
obligations of U.S. government agencies, together with municipal bonds, corporate debt securities,
commercial mortgage and asset-backed securities, certain residential mortgage-backed securities
that are generally investment grade and certain equity securities.
Level 3 Inputs to the valuation methodology are unobservable for the asset or liability and are
significant to the fair value measurement. Material assumptions and factors considered in pricing
investment securities may include projected cash flows, collateral performance including
delinquencies, defaults and recoveries, and any market clearing activity or liquidity circumstances
in the security or similar securities that may have occurred since the prior pricing period.
Generally included in this valuation methodology are investments in certain mortgage-backed and
asset-backed securities.
The availability of observable inputs varies and is affected by a wide variety of factors. When the
valuation is based on models or inputs that are less observable or unobservable in the market, the
determination of fair value requires significantly more judgment. The degree of judgment exercised
by management in determining fair value is greatest for investments categorized as Level 3. For
investments in this category, the Company considers prices and inputs that are current as of the
measurement date. In periods of market dislocation, as characterized by current market conditions,
the ability to observe stable prices and inputs may be reduced for many instruments. This condition
could cause a security to be reclassified between levels.
As at December 31, 2009 and 2008, the Companys fixed-maturities and equity investments are
allocated among levels as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-maturity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
- |
|
|
$ |
73,290 |
|
|
$ |
- |
|
|
$ |
73,290 |
|
U.S. Agency securities |
|
|
- |
|
|
|
39,983 |
|
|
|
- |
|
|
|
39,983 |
|
Municipal bonds |
|
|
- |
|
|
|
525,716 |
|
|
|
- |
|
|
|
525,716 |
|
Corporate and other bonds |
|
|
- |
|
|
|
615,122 |
|
|
|
- |
|
|
|
615,122 |
|
Commercial mortgage-backed securities |
|
|
- |
|
|
|
203,447 |
|
|
|
- |
|
|
|
203,447 |
|
Residential mortgage-backed securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Agency |
|
|
- |
|
|
|
288,686 |
|
|
|
- |
|
|
|
288,686 |
|
Non-agency |
|
|
- |
|
|
|
16,936 |
|
|
|
10,508 |
|
|
|
27,444 |
|
Asset-backed securities |
|
|
- |
|
|
|
6,821 |
|
|
|
3,087 |
|
|
|
9,908 |
|
|
Total fixed-maturities |
|
|
- |
|
|
|
1,770,001 |
|
|
|
13,595 |
|
|
|
1,783,596 |
|
Equity investments |
|
|
54,044 |
|
|
|
22,689 |
|
|
|
- |
|
|
|
76,733 |
|
Short-term investments |
|
|
36,500 |
|
|
|
- |
|
|
|
- |
|
|
|
36,500 |
|
|
Total |
|
$ |
90,544 |
|
|
$ |
1,792,690 |
|
|
$ |
13,595 |
|
|
$ |
1,896,829 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-maturity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
- |
|
|
$ |
27,006 |
|
|
$ |
- |
|
|
$ |
27,006 |
|
U.S. Agency securities |
|
|
- |
|
|
|
399 |
|
|
|
- |
|
|
|
399 |
|
Municipal bonds |
|
|
- |
|
|
|
179,948 |
|
|
|
- |
|
|
|
179,948 |
|
Corporate and other bonds |
|
|
- |
|
|
|
186,975 |
|
|
|
- |
|
|
|
186,975 |
|
Commercial mortgage-backed securities |
|
|
- |
|
|
|
25,940 |
|
|
|
5,595 |
|
|
|
31,535 |
|
Residential mortgage-backed securities
Agency |
|
|
- |
|
|
|
72,179 |
|
|
|
- |
|
|
|
72,179 |
|
Non-agency |
|
|
- |
|
|
|
15,720 |
|
|
|
8,595 |
|
|
|
24,315 |
|
Asset-backed securities |
|
|
- |
|
|
|
3,907 |
|
|
|
3,895 |
|
|
|
7,802 |
|
|
Total fixed-maturities |
|
|
- |
|
|
|
512,074 |
|
|
|
18,085 |
|
|
|
530,159 |
|
Equity investments |
|
|
5,134 |
|
|
|
5,680 |
|
|
|
- |
|
|
|
10,814 |
|
|
Total |
|
$ |
5,134 |
|
|
$ |
517,754 |
|
|
$ |
18,085 |
|
|
$ |
540,973 |
|
|
F-28
The fair values of the Companys fixed-maturity and equity investments are determined by
management after taking into consideration available sources of data. Management believes that
pricing sources, at times, use unrealistically low prices based on trades in inactive or distressed
markets. The Company considers various factors that may indicate an inactive market, including
levels of activity, source and timeliness of quotes, abnormal liquidity risk premiums, unusually
wide bid-ask spreads, and lack of correlation between fair value of assets and relevant indices. If
management believes that the price provided from the pricing source is distressed based on the
Companys evaluation of market activity, the Company will use a valuation method that reflects an
orderly transaction between market participants, generally a discounted cash flow method that
incorporates relevant interest rate, risk and liquidity factors.
77% of the portfolio valuations classified as Level 1 or Level 2 in the above table are priced by
utilizing the services of several independent pricing services that provide the Company with a
price quote for each security. The remaining 23% of the portfolio valuations represents non-binding
broker quotes. The Company has not made any adjustments to the prices obtained from the independent
pricing sources and dealers on securities classified as Level 1 or Level 2.
The Level 3 classified securities in the table above consist of securities that were either not
traded or very thinly traded due to concerns in the securities market. Management, in conjunction
with its outside portfolio manager, considered the various factors that may indicate an inactive
market and concluded that prices provided by the pricing sources represented an inactive or
distressed market. As a result, prices from independent third party pricing services, broker quotes
or other observable inputs were not always available, or were deemed unrealistically low, or, in
the case of certain broker quotes, were non-binding. Therefore, the fair values of these securities
were determined using a model to develop a security price using future cash flow expectations that
were developed based on collateral composition and performance and discounted at an estimated
market rate (including estimated risk and liquidity premiums) taking into account estimates of the
rate of future prepayments, current credit spreads, credit subordination protection, mortgage
origination year, default rates, benchmark yields and time to maturity. For certain securities,
non-binding broker quotes were available and these were also considered in determining the
appropriateness of the security price.
The Companys use of Level 3 (the unobservable inputs) included 66 and 60 securities and accounted
for approximately 0.7% and 3.3% of total investments at December 31, 2009 and 2008, respectively.
The Company has reviewed the pricing techniques and methodologies of the independent pricing
sources and believes that their policies adequately consider market activity, either based on
specific transactions for the issue valued or based on modeling of securities with similar credit
quality, duration, yield and structure that were recently traded. The Company monitors
security-specific valuation trends and discusses material changes or the absence of expected
changes with the pricing sources to understand the underlying factors and inputs and to validate
the reasonableness of pricing.
The following table summarizes changes in Level 3 assets measured at fair value at December 31,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
($ in thousands) |
|
2009 |
|
2008 |
|
Beginning balance, January 1 |
|
$ |
18,085 |
|
|
|
$- |
|
Total gains (losses)-realized / unrealized |
|
|
|
|
|
|
|
|
Included in net income |
|
|
(11,321 |
) |
|
|
(12,290 |
) |
Included in other comprehensive income (loss) |
|
|
1,818 |
|
|
|
2,945 |
|
Purchases, issuances and settlements |
|
|
3,513 |
|
|
|
(3,627 |
) |
Net transfers into (out of) Level 3 |
|
|
1,501 |
|
|
|
31,057 |
|
|
Ending balance, December 31 |
|
$ |
13,595 |
|
|
$ |
18,085 |
|
|
F-29
Note 6Goodwill and Intangible Assets
Goodwill
Goodwill is calculated as the excess of purchase price over the net fair value of assets acquired.
See Note 3 Acquisitions for information regarding the calculation of goodwill related to the
acquisitions of CastlePoint, Hermitage and AequiCap. The acquisition of SUA resulted in negative
goodwill which was recorded as a gain on bargain purchase in income in 2009. Under GAAP, the
Company is required to allocate goodwill to its reportable segments. The following is a summary of
goodwill by reporting units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage |
|
Specialty |
|
Insurance |
|
|
($ in thousands) |
|
Insurance |
|
Business |
|
Services |
|
Total |
|
Balance, January 1, 2009 |
|
$ |
18,962 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
18,962 |
|
Additions (a) |
|
|
193,661 |
|
|
|
32,067 |
|
|
|
- |
|
|
|
225,728 |
|
|
Total |
|
$ |
212,623 |
|
|
$ |
32,067 |
|
|
$ |
- |
|
|
$ |
244,690 |
|
|
|
|
|
(a) |
|
Primarily relates to the acquisitions of CastlePoint and Hermitage |
The Company performs an analysis annually to identify potential goodwill impairment and
measures the amount of any goodwill impairment loss that may need to be recognized. This test is
performed during the fourth quarter of each year or more frequently if events or circumstances
change in a way that requires the Company to perform the impairment analysis on an interim basis.
Goodwill impairment testing requires an evaluation of the estimated fair value of each reporting
unit to its carrying value, including the goodwill. An impairment charge is recorded if the
estimated fair value is less than the carrying amount of the reporting unit. No impairments have
been identified to date.
Intangibles
Intangible assets consist of finite and indefinite life assets. Finite life intangible assets
include customer relationships and trademarks. Insurance company licenses are considered indefinite
life intangible assets subject to annual impairment testing. The weighted average amortization
period of identified intangible assets with a finite life is 7.1 years as of December 31, 2009.
The components of intangible assets and their useful lives, accumulated amortization, and net
carrying value as of December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
December 31, 2008 |
|
|
Useful |
|
Gross |
|
|
|
|
|
Net |
|
Gross |
|
|
|
|
|
Net |
|
|
Life |
|
Carrying |
|
Accumulated |
|
Carrying |
|
Carrying |
|
Accumulated |
|
Carrying |
($ in thousands) |
|
(in-yrs) |
|
Amount |
|
Amortization |
|
Amount |
|
Amount |
|
Amortization |
|
Amount |
|
Insurance licenses |
|
|
- |
|
|
$ |
17,703 |
|
|
$ |
- |
|
|
$ |
17,703 |
|
|
$ |
6,503 |
|
|
$ |
- |
|
|
$ |
6,503 |
|
Customer relationships |
|
|
10-25 |
|
|
|
39,290 |
|
|
|
(5,858 |
) |
|
|
33,432 |
|
|
|
17,090 |
|
|
|
(3,129 |
) |
|
|
13,961 |
|
Trademarks |
|
|
5 |
|
|
|
2,690 |
|
|
|
(475 |
) |
|
|
2,215 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total |
|
|
|
|
|
$ |
59,683 |
|
|
$ |
(6,333 |
) |
|
$ |
53,350 |
|
|
$ |
23,593 |
|
|
$ |
(3,129 |
) |
|
$ |
20,464 |
|
|
The activity in the components of intangible assets for the year ended December 31, 2009 consisted of intangible assets acquired
from business combinations and amortization expense as shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
Customer |
|
|
|
|
($ in thousands) |
|
Licenses |
|
Relationships |
|
Trademarks |
|
Total |
|
Balance, January 1, 2009 |
|
$ |
6,503 |
|
|
$ |
13,961 |
|
|
$ |
- |
|
|
$ |
20,464 |
|
Additions (a) |
|
|
11,200 |
|
|
|
22,200 |
|
|
|
2,690 |
|
|
|
36,090 |
|
Deductions (b) |
|
|
- |
|
|
|
(2,729 |
) |
|
|
(475 |
) |
|
|
(3,204 |
) |
|
Balance, December 31, 2009 |
|
$ |
17,703 |
|
|
$ |
33,432 |
|
|
$ |
2,215 |
|
|
$ |
53,350 |
|
|
|
|
|
|
(a) |
|
Relates to the acquisition of CastlePoint, Hermitage, AequiCap and SUA |
F-30
(b) Amortization
The Company recorded amortization expense related to intangibles, of $3.2 million, $1.2 million
and $1.0 million in 2009, 2008, and 2007, respectively. The estimated amortization expense for
each of the next five years is:
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
2010 |
|
$ |
5,328 |
|
2011 |
|
|
4,175 |
|
2012 |
|
|
3,571 |
|
2013 |
|
|
2,846 |
|
2014 |
|
|
2,464 |
|
Note 7Investment in Unconsolidated AffiliateCastlePoint
The Company acquired CastlePoint on February 5, 2009, at which time it became a wholly-owned
subsidiary and the Company began consolidating its financial results. Changes in the carrying value
of the equity investment in CastlePoint are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
($ in millions) |
|
2009 |
|
|
2008 |
|
|
Investment in unconsolidated affiliate, beginning of year |
|
$ |
29.3 |
|
|
$ |
32.6 |
|
Equity in net income (loss) of CastlePoint |
|
|
(0.8 |
) |
|
|
0.3 |
|
Equity in net unrealized gain (loss) of the CastlePoint investment portfolio |
|
|
(0.8 |
) |
|
|
(3.2 |
) |
Dividends received from CastlePoint |
|
|
(0.1 |
) |
|
|
(0.4 |
) |
Acquisition of CastlePoint by Tower on February 5, 2009 |
|
|
(27.6 |
) |
|
|
- |
|
|
Investment in unconsolidated affiliate, end of year |
|
$ |
- |
|
|
$ |
29.3 |
|
|
The Company and/or its subsidiaries were parties to a master agreement, certain reinsurance
agreements, and other agreements, including program management agreements and service and expense
sharing agreements, with CastlePoint prior to its acquisition on February 5, 2009. The more
significant agreements were the Master Agreement and the Reinsurance Agreement with CastlePoint.
Master Agreement
In April 2006, the Company entered into a master agreement with CastlePoint ( Master Agreement).
The Master Agreement provided that, subject to the receipt of required regulatory approvals,
CastlePoint would manage the traditional program business and the specialty program business, and
the Company would manage the brokerage business. The program managers were required to purchase
property and casualty excess of loss reinsurance and property catastrophe excess of loss
reinsurance from third party reinsurers to protect the net exposure of the participants. In
purchasing the property catastrophe excess of loss reinsurance, the manager could retain risk
equating to no more than 10% of the combined surplus of the Company and CastlePoint Insurance
Company (referred to as the pooled catastrophe retention).
The parties to the Master Agreement agreed to exercise good faith, and to cause their respective
subsidiaries to exercise good faith, to carry out the intent of parties in the event the specific
agreements contemplated by the Master Agreement must be revised to comply with regulatory
requirements. The Master Agreement is no longer in force and effect as of the acquisition of
CastlePoint by the Company on February 5, 2009.
Reinsurance Agreements with CastlePoint
The Companys Insurance Subsidiaries were parties to three multi-year quota share reinsurance
agreements with CastlePoint Reinsurance Company, Ltd. (CastlePoint Reinsurance) covering
brokerage business, traditional program business and specialty program business. These agreements
were terminated on December 31, 2008 on a run-off basis.
The following table provides an analysis of the reinsurance activity between the Company and
CastlePoint Reinsurance for the years ended December 31, 2008 and 2007, respectively:
F-31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded |
|
|
Ceded |
|
|
Ceding |
|
|
Ceding |
|
|
|
Premiums |
|
|
Premiums |
|
|
Commissions |
|
|
Commission |
|
($ in thousands) |
|
Written |
|
|
Earned |
|
|
Revenue |
|
|
Percentage |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage business |
|
|
$ 112,710 |
|
|
|
$ 158,694 |
|
|
|
$ 56,896 |
|
|
|
35.9 |
% |
Traditional program business |
|
|
7,648 |
|
|
|
6,522 |
|
|
|
1,988 |
|
|
|
30.5 |
% |
Specialty program business and insurance risk-sharing
business |
|
|
64,355 |
|
|
|
36,696 |
|
|
|
12,307 |
|
|
|
33.5 |
% |
|
Total |
|
|
$ 184,713 |
|
|
|
$ 201,912 |
|
|
|
$ 71,191 |
|
|
|
35.3 |
% |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage business |
|
|
$ 209,576 |
|
|
|
$ 184,851 |
|
|
|
$ 64,199 |
|
|
|
34.7 |
% |
Traditional program business |
|
|
1,669 |
|
|
|
950 |
|
|
|
285 |
|
|
|
30.0 |
% |
Specialty program business and insurance risk-sharing
business |
|
|
9,824 |
|
|
|
4,030 |
|
|
|
1,209 |
|
|
|
30.0 |
% |
|
Total |
|
|
$ 221,069 |
|
|
|
$ 189,831 |
|
|
|
$ 65,693 |
|
|
|
34.6 |
% |
|
Effective April 1, 2007, under the brokerage business quota share reinsurance agreement,
CastlePoint agreed to pay 30% of the Companys property catastrophe reinsurance premiums relating
to the brokerage business pool managed by the Company and 30% of the Companys net retained
property catastrophe losses. CastlePoint and the Company participated proportionately in
catastrophe reinsurance on the underlying brokerage business pool. The premium payment was $7.3
million and $2.3 million in 2008 and 2007, respectively. CastlePoint Reinsurance also participated
as a reinsurer on the Companys overall property catastrophe reinsurance program from July 1, 2008
to the date the Company acquired it on February 5, 2009, and from July 1, 2006 to June 30, 2007,
and the Companys excess of loss reinsurance program, effective May 1, 2006 through December 31,
2008. Under the catastrophe and excess reinsurance programs, the Company ceded premiums of $4.5
million and $4.4 million to CastlePoint Reinsurance in 2008 and 2007, respectively.
In addition, the Company entered into two aggregate excess of loss reinsurance agreements for the
brokerage business with CastlePoint effective October 1, 2007. The purpose of the two aggregate
excess of loss reinsurance agreements was to equalize the loss ratios for the brokerage business
written by CastlePoint Insurance Company (CPIC) and the Company. Under the first agreement, TICNY
reinsured approximately 85% (which percentage to be adjusted to equal Towers actual percentage of
the total brokerage business written by the Company and CPIC) of CPICs brokerage business losses
above a loss ratio of 52.5%. Under the second agreement, CPIC reinsured approximately 15% (which
percentage to be adjusted to equal CastlePoints actual percentage of the total brokerage business
written by the Company and CPIC) of the Companys brokerage business losses above a loss ratio of
52.5%. For the years ended December 31, 2008 and 2007, the Company paid $3.0 million and $0.8
million to CPIC for reinsurance brokerage business written by the Company and received $3.0 million
and $0.8 million from CPIC for business assumed which was produced by TRM as part of the brokerage
business pool, respectively. The Company recorded $2.7 million and $0 million in net loss
recoveries from the aggregate stop loss agreements with CPIC for the years ended December 31, 2008
and 2007, respectively. The aggregate excess of loss agreements were terminated effective December
31, 2008.
At December 31, 2008, the Companys receivables and payables with CastlePoint arising in the normal
course of business were as follows:
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
December 31, 2008 |
|
|
|
|
Prepaid reinsurance premiums |
|
|
$ 95,701 |
|
Reinsurance recoverable |
|
|
182,634 |
|
Reinsurance balances payable |
|
|
(93,381 |
) |
Payable to issuing carriers |
|
|
(46,780 |
) |
|
Total |
|
|
$ 138,174 |
|
|
Note 8 Deferred Acquisition Costs and Deferred Ceding Commission Revenue
Acquisition costs incurred and policy-related ceding commission revenue are deferred and amortized
to income on property and casualty business as follows:
F-32
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Deferred acquisition costs net of ceding commission revenue, January 1 |
|
|
$ 53,080 |
|
|
|
$ 39,271 |
|
|
|
$ 35,811 |
|
Acquisition date balances of acquired companies (VOBA) |
|
|
96,700 |
|
|
|
- |
|
|
|
13,955 |
|
Cost incurred and deferred during years: |
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and brokerage |
|
|
212,478 |
|
|
|
124,670 |
|
|
|
88,284 |
|
Other underwriting and acquisition costs |
|
|
121,582 |
|
|
|
74,363 |
|
|
|
65,821 |
|
Ceding commission revenue |
|
|
(37,852 |
) |
|
|
(77,677 |
) |
|
|
(81,864 |
) |
|
Deferred acquisition costs net of ceding commission revenue |
|
|
296,208 |
|
|
|
121,356 |
|
|
|
72,241 |
|
Amortization |
|
|
(275,336 |
) |
|
|
(107,547 |
) |
|
|
(82,736 |
) |
|
Deferred acquisition costs, net of ceding commission revenue,
December 31, |
|
|
$ 170,652 |
|
|
|
$ 53,080 |
|
|
|
$ 39,271 |
|
|
Note 9Fixed Assets
The components of fixed assets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
($ in thousands) |
|
Cost |
|
|
Depreciation |
|
|
Net |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Furniture |
|
|
$ 3,395 |
|
|
|
$ (1,477 |
) |
|
|
$ 1,918 |
|
Leasehold improvements |
|
|
14,066 |
|
|
|
(3,527 |
) |
|
|
10,539 |
|
Computer equipment |
|
|
16,365 |
|
|
|
(10,990 |
) |
|
|
5,375 |
|
Software |
|
|
79,562 |
|
|
|
(30,965 |
) |
|
|
48,597 |
|
|
Total |
|
|
$ 113,388 |
|
|
|
$ (46,959 |
) |
|
|
$ 66,429 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Furniture |
|
|
$ 2,064 |
|
|
|
$ (747 |
) |
|
|
$ 1,317 |
|
Leasehold improvements |
|
|
13,863 |
|
|
|
(2,313 |
) |
|
|
11,550 |
|
Computer equipment |
|
|
11,383 |
|
|
|
(8,374 |
) |
|
|
3,009 |
|
Software |
|
|
43,029 |
|
|
|
(19,867 |
) |
|
|
23,162 |
|
|
Total |
|
|
$ 70,339 |
|
|
|
$ (31,301 |
) |
|
|
$ 39,038 |
|
|
Additions of $15.1 million were attributable to the fair value of fixed assets of acquired
companies in 2009.
Included in software are internally developed applications. The Company accounts for costs incurred
to develop computer software for internal use in accordance with applicable GAAP guidance. The
Company capitalizes the costs incurred during the application development stage, which include
costs to design the software configuration and interfaces, coding, installation, and testing. Costs
incurred during the preliminary project along with post-implementation stages of internal use
computer software are expensed as incurred. Capitalized development costs are amortized over
various periods up to three years. Costs incurred to maintain existing product offerings are
expensed as incurred. The capitalization and ongoing assessment of recoverability of development
costs requires considerable judgment by management with respect to certain external factors,
including, but not limited to, technological and economic feasibility, and estimated economic life.
For the years ended December 31, 2009 and 2008, the Company capitalized software development costs
of $13 million and $6.0 million, respectively. As of December 31, 2009 and 2008, net capitalized
software costs totaled $29.5 million and $7.8 million, respectively.
Depreciation expense for 2009, 2008 and 2007 was $13.3 million, $10.5 million and $7.7 million,
respectively.
Note 10 Reinsurance
The Company has automatic treaty capacity of $30.0 million for property risks, $1.0
million/ $2.0 million for liability coverages, $50.0 million for workers compensation,
$5.0 million for umbrella liability and $100.0 million for equipment breakdown. The
Company may offer higher limits through its use of facultative reinsurance. In addition,
the Company has clash coverage in effect for 2009 for a limit of $9.0 million in excess of
$1.0 million which applies to the aggregate liability losses from multiple insureds involved in the
same occurrence.
Through various quota share, excess of loss and catastrophe reinsurance agreements, as
described further below, the Company limits its exposure to a maximum loss on any one
risk:
F-33
|
|
|
|
|
|
|
Maximum Loss |
|
From / To |
|
Exposure |
|
|
January 1, 2009 - December 31, 2009 |
|
|
$ 1,500,000 |
|
October 1, 2008 - December 31, 2008 |
|
|
4,520,000 |
|
April 1, 2008 - September 30, 2008 |
|
|
4,750,000 |
|
January 1, 2008 - March 31, 2008 |
|
|
4,800,000 |
|
January 1, 2007 - December 31, 2007 |
|
|
4,500,000 |
|
Certain of the Companys reinsurance agreements contain provisions for loss ratio caps to
provide the reinsurers with some limit on the amount of potential loss being assumed, while
maintaining the transfer of significant insurance risk with the possibility of a significant loss
to the reinsurer. Loss ratio caps cut off the reinsurers liability for losses above a specified
loss ratio. The loss ratio caps in the 2005, 2004 and 2003 quota share agreements were 95.0%, 95.0%
and 92.0%, respectively. The loss ratio cap in the 2008 Swiss Re quota share agreement was 120%.
The loss ratio cap for the brokerage liability quota share agreements effective October 1, 2009
and January 1, 2010 is 110%. There was no loss ratio cap in 2007 and 2006.
The structure of the Companys reinsurance program enables the Company to reflect significant
reductions in premiums written and earned and also provides income as a result of ceding
commissions earned pursuant to reinsurance contracts. This structure has enabled the Company to
significantly grow its premium volume while maintaining regulatory capital and other financial
ratios within expected ranges used for regulatory oversight purposes. The Companys participation
in reinsurance arrangements does not relieve the Company from its obligations to policyholders.
Approximate reinsurance recoverables by reinsurer are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid |
|
|
Paid |
|
|
|
|
($ in thousands) |
|
Losses |
|
|
Losses |
|
|
Total |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Swiss Reinsurance America Corp. |
|
$ |
39,677 |
|
|
$ |
6,112 |
|
|
$ |
45,789 |
|
One Beacon Insurance |
|
|
42,755 |
|
|
|
- |
|
|
|
42,755 |
|
Max Bermuda Ltd. |
|
|
12,701 |
|
|
|
- |
|
|
|
12,701 |
|
Munich Reinsurance America Inc |
|
|
6,979 |
|
|
|
3,662 |
|
|
|
10,641 |
|
Tokio Millennium Re Ltd |
|
|
9,426 |
|
|
|
625 |
|
|
|
10,051 |
|
Lloyds Syndicates |
|
|
10,051 |
|
|
|
(6 |
) |
|
|
10,045 |
|
Axis Reinsurance Co. |
|
|
9,755 |
|
|
|
8 |
|
|
|
9,763 |
|
Endurance Reinsurance Corp of America |
|
|
8,908 |
|
|
|
19 |
|
|
|
8,927 |
|
Hannover Ruckversicherungs AG |
|
|
8,246 |
|
|
|
303 |
|
|
|
8,549 |
|
Platinum Underwriters Reinsurance Inc. |
|
|
7,334 |
|
|
|
222 |
|
|
|
7,556 |
|
Westport Insurance Corp. |
|
|
6,217 |
|
|
|
20 |
|
|
|
6,237 |
|
Hannover Re Ireland Ltd. |
|
|
5,224 |
|
|
|
454 |
|
|
|
5,678 |
|
Midwest Insurance Co. |
|
|
5,183 |
|
|
|
243 |
|
|
|
5,426 |
|
QBE Reinsurance Corporation |
|
|
4,791 |
|
|
|
212 |
|
|
|
5,003 |
|
Others |
|
|
22,440 |
|
|
|
2,945 |
|
|
|
25,385 |
|
|
Total |
|
$ |
199,687 |
|
|
$ |
14,819 |
|
|
$ |
214,506 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
CastlePoint Reinsurance Company, Ltd. |
|
$ |
135,437 |
|
|
$ |
39,022 |
|
|
$ |
174,459 |
|
Munich Reinsurance America Inc |
|
|
12,964 |
|
|
|
2,528 |
|
|
|
15,492 |
|
Tokio Millennium Re Ltd |
|
|
12,814 |
|
|
|
1,259 |
|
|
|
14,073 |
|
Westport Insurance Corp. |
|
|
7,459 |
|
|
|
3,644 |
|
|
|
11,103 |
|
Hannover Re Ireland Ltd. |
|
|
7,576 |
|
|
|
935 |
|
|
|
8,511 |
|
CastlePoint Insurance Company |
|
|
7,600 |
|
|
|
575 |
|
|
|
8,175 |
|
Endurance Reinsurance Corp of America |
|
|
6,839 |
|
|
|
(3 |
) |
|
|
6,836 |
|
Platinum Underwriters Reinsurance Inc. |
|
|
6,741 |
|
|
|
1 |
|
|
|
6,742 |
|
Hannover Ruckversicherungs AG |
|
|
6,052 |
|
|
|
7 |
|
|
|
6,059 |
|
Swiss Reinsurance America Corp. |
|
|
5,102 |
|
|
|
617 |
|
|
|
5,719 |
|
Others |
|
|
13,645 |
|
|
|
1,792 |
|
|
|
15,437 |
|
|
Total |
|
$ |
222,229 |
|
|
$ |
50,377 |
|
|
$ |
272,606 |
|
|
F-34
The Company recorded prepaid reinsurance premiums as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
($ in thousands) |
|
2009 |
|
|
2008 |
|
|
Swiss Rein America Corp. |
|
$ |
48,443 |
|
|
$ |
41,644 |
|
Allianz Risk Transfer AG (Bermuda) |
|
|
16,125 |
|
|
|
- |
|
Maiden Insurance Co. |
|
|
5,565 |
|
|
|
- |
|
Hannover Ruckversicherungs AG |
|
|
4,052 |
|
|
|
2,131 |
|
Platinum Underwriters Reinsurance Inc. |
|
|
3,602 |
|
|
|
1,010 |
|
CastlePoint Reinsurance Company, Ltd. |
|
|
- |
|
|
|
95,701 |
|
Others |
|
|
17,031 |
|
|
|
13,164 |
|
|
Total |
|
$ |
94,818 |
|
|
$ |
153,650 |
|
|
The following collateral is available to the Company for amounts recoverable from reinsurers as
of December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulation |
|
|
Letters of |
|
|
Funds |
|
|
|
|
($ in thousands) |
|
114 Trust |
|
|
Credit |
|
|
Held |
|
|
Total |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AequiCap Insurance Co. |
|
|
$ - |
|
|
|
$ - |
|
|
|
$ 350 |
|
|
|
$ 350 |
|
Allianz Risk Transfer AG |
|
|
- |
|
|
|
4,964 |
|
|
|
- |
|
|
|
4,964 |
|
Tokio Millennium Re Ltd. |
|
|
6,638 |
|
|
|
- |
|
|
|
8,437 |
|
|
|
15,075 |
|
Hannover Reinsurance (Ireland) Ltd. |
|
|
- |
|
|
|
4,964 |
|
|
|
4,938 |
|
|
|
9,902 |
|
Maiden Insurance Company |
|
|
5,260 |
|
|
|
- |
|
|
|
- |
|
|
|
5,260 |
|
Max Bermuda Ltd. |
|
|
12,412 |
|
|
|
- |
|
|
|
- |
|
|
|
12,412 |
|
Midwest Insurance Company |
|
|
6,292 |
|
|
|
- |
|
|
|
- |
|
|
|
6,292 |
|
Swiss Reinsurance America Corp. |
|
|
31,555 |
|
|
|
- |
|
|
|
- |
|
|
|
31,555 |
|
Others |
|
|
- |
|
|
|
1,081 |
|
|
|
12 |
|
|
|
1,093 |
|
|
Total |
|
|
$ 62,157 |
|
|
|
$ 11,009 |
|
|
|
$ 13,737 |
|
|
|
$ 86,903 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CastlePoint Reinsurance Company, Ltd. |
|
|
$ 225,839 |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ 225,839 |
|
Tokio Millennium Re Ltd. |
|
|
6,183 |
|
|
|
- |
|
|
|
12,905 |
|
|
|
19,088 |
|
Hannover Reinsurance (Ireland) Ltd. |
|
|
- |
|
|
|
4,964 |
|
|
|
7,556 |
|
|
|
12,520 |
|
Midwest Insurance Co. |
|
|
5,322 |
|
|
|
- |
|
|
|
- |
|
|
|
5,322 |
|
Others |
|
|
- |
|
|
|
796 |
|
|
|
13 |
|
|
|
809 |
|
|
Total |
|
|
$ 237,344 |
|
|
|
$ 5,760 |
|
|
|
$ 20,474 |
|
|
|
$ 263,578 |
|
|
The Company is obliged under the quota share reinsurance agreements, effective October 1, 2003,
January 1, 2004 and January 1, 2005, to credit reinsurers with an annual effective yield of 2.5%,
2.5% and 3.0%, respectively, on the monthly balance in the funds held under reinsurance agreements
liability accounts. The amounts credited for 2009, 2008 and 2007 were $0.7 million, $0.6 million
and $1.2 million, respectively, and have been recorded as interest expense.
Ceding Commissions
The Company earns ceding commissions under quota share reinsurance agreements for 2008, 2007, 2005
and 2004 based on a sliding scale of commission rates and ultimate treaty year loss ratios on the
policies reinsured under each of these agreements. The sliding scale includes minimum and maximum
commission rates in relation to specified ultimate loss ratios. The commission rate and ceding
commissions earned increase when the estimated ultimate loss ratio decreases, and conversely, the
commission rate and ceding commissions earned decrease when the estimated ultimate loss ratio
increases.
As of December 31, 2009, the Companys estimated ultimate loss ratios attributable to these
contracts are lower than the contractual ultimate loss ratios at which the minimum amount of ceding
commissions can be earned. Accordingly, the Company has recorded ceding commissions earned that are
greater than the minimum commissions. The relevant estimated ultimate loss ratios and commissions
as of December 31, 2009 are set forth below for treaties that remain in effect as of December 31,
2009 ($ in millions):
F-35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
at Which |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential |
|
|
|
|
|
|
|
Minimum |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction |
|
|
|
|
|
|
|
Ceding |
|
|
Estimated |
|
|
Ceding |
|
|
|
|
|
|
of Ceding |
|
|
|
Treaty |
|
|
Commission |
|
|
Ultimate |
|
|
Commissions |
|
|
Minimum |
|
|
Commission |
|
Treaty With |
|
Year |
|
|
Rate Applies |
|
|
Loss Ratio |
|
|
Earned |
|
|
Commission |
|
|
Earned |
|
|
Tokio Millenium |
|
|
2003 |
|
|
|
65.6 |
% |
|
|
64.6 |
% |
|
|
$ 21.2 |
|
|
|
$ 20.6 |
|
|
|
$ 0.6 |
|
Hannover Re Ireland |
|
|
2004 |
|
|
|
68.0 |
% |
|
|
52.8 |
% |
|
|
30.2 |
|
|
|
20.6 |
|
|
|
9.6 |
|
Hannover Re Ireland |
|
|
2005 |
|
|
|
68.0 |
% |
|
|
52.9 |
% |
|
|
30.5 |
|
|
|
20.8 |
|
|
|
9.7 |
|
Swiss Re |
|
|
2008 |
|
|
|
61.5 |
% |
|
|
56.0 |
% |
|
|
26.0 |
|
|
|
22.3 |
|
|
|
3.7 |
|
Swiss Re |
|
|
2009 |
|
|
|
75.0 |
% |
|
|
65.0 |
% |
|
|
6.3 |
|
|
|
5.5 |
|
|
|
0.8 |
|
Allianz |
|
|
2009 |
|
|
|
75.0 |
% |
|
|
65.0 |
% |
|
|
2.1 |
|
|
|
1.9 |
|
|
|
0.3 |
|
Based on the amount of ceded premiums earned, the maximum potential reduction to ceding
commissions earned related to an increase in the Companys estimated ultimate loss ratios is $33.5
million for all treaties for all five years. The ceded premiums for the 2004, 2005, 2006, 2007 and
2008 treaty years have been fully earned as of December 31, 2009. As of December 31, 2009, the
ceded premium earned and prepaid reinsurance premiums for the 2009 treaty year were $27.2 million
and $59.7 million, respectively.
The estimated ultimate loss ratios are the Companys best estimate based on facts and circumstances
known at the end of each period that losses are estimated. The estimation process is complex and
involves the use of informed estimates, judgments and actuarial methodologies relative to future
claims severity and frequency, the length of time for losses to develop to their ultimate level,
possible changes in law and other external factors. The same uncertainties associated with
estimating loss adjustment expense reserves affect the estimates of ceding commissions earned. The
Company monitors and adjusts the ultimate loss ratio on a quarterly basis to determine the effect
on the commission rate and ceding commissions earned. The increase (decrease) in estimated
ceding commission income relating to prior years recorded in 2009, 2008 and 2007 was ($2.2)
million, ($1.8) million and ($0.5) million, respectively.
Note 11Property and Casualty Insurance Activity
Premiums written ceded and earned are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed to |
|
($ in thousands) |
|
Direct |
|
|
Assumed |
|
|
Ceded |
|
|
Net |
|
|
Net |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written |
|
|
$ 989,771 |
|
|
|
$ 80,946 |
|
|
|
$ 184,528 |
|
|
|
$ 886,190 |
|
|
|
9.1 |
% |
Change in unearned premiums |
|
|
(52,554 |
) |
|
|
28,097 |
|
|
|
7,022 |
|
|
|
(31,479 |
) |
|
|
-89.3 |
% |
|
Premiums earned |
|
|
$ 937,217 |
|
|
|
$ 109,043 |
|
|
|
$ 191,550 |
|
|
|
$ 854,711 |
|
|
|
12.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written |
|
|
$ 627,319 |
|
|
|
$ 7,501 |
|
|
|
$ 290,777 |
|
|
|
$ 344,043 |
|
|
|
2.2 |
% |
Change in unearned premiums |
|
|
(56,105 |
) |
|
|
(370 |
) |
|
|
(26,983 |
) |
|
|
(29,492 |
) |
|
|
1.3 |
% |
|
Premiums earned |
|
|
$ 571,214 |
|
|
|
$ 7,131 |
|
|
|
$ 263,794 |
|
|
|
$ 314,551 |
|
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written |
|
|
$ 520,421 |
|
|
|
$ 3,593 |
|
|
|
$ 264,832 |
|
|
|
$ 259,182 |
|
|
|
1.4 |
% |
Change in unearned premiums |
|
|
(7,189 |
) |
|
|
5,109 |
|
|
|
(29,004 |
) |
|
|
26,924 |
|
|
|
19.0 |
% |
|
Premiums earned |
|
|
$ 513,232 |
|
|
|
$ 8,702 |
|
|
|
$ 235,828 |
|
|
|
$ 286,106 |
|
|
|
3.0 |
% |
|
The components of the liability for loss and LAE expenses (LAE) and related reinsurance
recoverables are as follows:
F-36
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Reinsurance |
|
($ in thousands) |
|
Liability |
|
|
Recoverable |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
Case-basis reserves |
|
|
$ 638,476 |
|
|
|
$ 98,212 |
|
IBNR reserves |
|
|
493,513 |
|
|
|
101,475 |
|
Recoverable on paid losses |
|
|
- |
|
|
|
14,819 |
|
|
Total |
|
|
$ 1,131,989 |
|
|
|
$ 214,506 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
Case-basis reserves |
|
|
$ 316,284 |
|
|
|
$ 126,064 |
|
IBNR reserves |
|
|
218,707 |
|
|
|
96,165 |
|
Recoverable on paid losses |
|
|
- |
|
|
|
50,377 |
|
|
Total |
|
|
$ 534,991 |
|
|
|
$ 272,606 |
|
|
The following table provides a reconciliation of the beginning and ending balances for unpaid
losses and LAE for
the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
($ in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Balance at January 1 |
|
$ |
534,991 |
|
|
$ |
501,183 |
|
|
$ |
302,541 |
|
Less reinsurance recoverables on unpaid losses |
|
|
(222,229 |
) |
|
|
(189,525 |
) |
|
|
(110,042 |
) |
|
|
|
|
312,762 |
|
|
|
311,658 |
|
|
|
192,499 |
|
Net reserves, at fair value, of acquired companies |
|
|
549,978 |
|
|
|
- |
|
|
|
85,055 |
|
Incurred related to: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
477,757 |
|
|
|
171,616 |
|
|
|
159,512 |
|
Prior years |
|
|
(2,260 |
) |
|
|
(8,877 |
) |
|
|
(1,606 |
) |
|
Total incurred |
|
|
475,497 |
|
|
|
162,739 |
|
|
|
157,906 |
|
Paid related to: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
154,207 |
|
|
|
59,205 |
|
|
|
55,308 |
|
Prior years |
|
|
251,728 |
|
|
|
102,430 |
|
|
|
68,494 |
|
|
Total paid |
|
|
405,935 |
|
|
|
161,635 |
|
|
|
123,802 |
|
|
Net balance at end of year |
|
|
932,302 |
|
|
|
312,762 |
|
|
|
311,658 |
|
Add reinsurance recoverables on unpaid losses |
|
|
199,687 |
|
|
|
222,229 |
|
|
|
189,525 |
|
|
Balance at December 31 |
|
$ |
1,131,989 |
|
|
$ |
534,991 |
|
|
$ |
501,183 |
|
|
Incurred losses and LAE of $483.8 million were reduced by $5.0 million pertaining to the
amortization of the reserve risk premium on loss reserves in accordance with GAAP for the business
combinations occurring during 2009.
Incurred losses and LAE are net of amounts ceded under reinsurance contracts of $91.3 million,
$125.6 million and $106.8 million in 2009, 2008 and 2007, respectively.
Incurred loss and LAE attributable to insured events of prior years decreased by $2.3 million, $8.9
million and $1.6 million in 2009, 2008 and 2007, respectively. Prior year development is based upon
numerous estimates by line of business and accident year. No additional premiums or return premiums
have been accrued as a result of the prior year effects; however, these changes in estimated losses
impact the Companys sliding scale commission income estimates. The Companys management
continually monitors claims activity to assess the appropriateness of carried case and IBNR
reserves, giving consideration to Company and industry trends.
Loss and loss adjustment expense reserves. The reserving process for loss and LAE reserves
provides for the Companys best estimate at a particular point in time of the ultimate unpaid cost
of all losses and LAE incurred, including settlement and administration of losses, and is based on
facts and circumstances then known and including losses that have been incurred but not yet been
reported. The liability for loss and LAE also includes the fair value adjustment related to the
acquisitions of CastlePoint, Hermitage and SUA The process includes using actuarial methodologies
to assist in establishing these estimates, judgments relative to estimates of future claims
severity and frequency, the length of time before losses will develop to their ultimate level and
the possible changes in the law and other external factors that are often beyond the Companys
control. The methods used to select the estimated loss reserves include the loss ratio projection,
loss development projection, and the Bornhuetter-Ferguson (B-F) method. The process produces
carried reserves set by management based upon the actuaries best estimate and is the result of
numerous best estimates made by line of business, accident year, and loss and LAE. The amount of
loss and LAE reserves for reported claims is based primarily upon a case-by-case evaluation of
coverage, liability, injury severity, and any other information considered pertinent to estimating
the exposure presented by the claim. The amounts of loss and LAE reserves for unreported claims are
determined using historical information by line of insurance as adjusted to current conditions.
Since our process produces loss and LAE reserves set by management based upon the actuaries best
estimate, there is no explicit or implicit risk premium provision for uncertainty in the carried
loss and LAE reserves, excluding the loss and LAE reserves assumed through business combinations
in 2009.
F-37
For each acquisition, the Company estimates and records the loss LAE reserves based upon its
independent analysis of those reserves. In the case of SUA, the loss and LAE reserves were
increased by $27.5 million above the amounts prior to the acquisition, which was comprised of an
additional $25.7 million in nominal statutory and GAAP basis reserves based upon the Companys
independent actuarial analysis plus an additional $1.8 million in GAAP basis loss and LAE reserves
pertaining to the reserves risk premium required under GAAP.
Included in the reserves for the loss and LAE reserve is $4.5 million of tabular reserve discount
for workers compensation and excess workers compensation claims acquired as part of the SUA
transaction.
As of December 31, 2009, the Company had recorded $14.1 million of reserve risk premium on loss
reserves in accordance with GAAP for the business combinations occurring during 2009.
The Company has implemented two changes in estimating LAE reserves. These two changes impacted
costs to handle litigation for claims handled by the Companys attorneys and costs to handle
litigation for claims handled by attorneys who are not employed by the Company.
Beginning in the fourth quarter of 2008, LAE stemming from defense by in-house attorneys is
attributed to claims based upon a determined fixed fee per in-house litigated claim. The Company
allocates to each of these litigated claims 50% of the fixed fee when litigation on a particular
claim begins and 50% of the fee when the litigation is closed. The fee is determined actuarially
based upon the projected number of litigated claims and expected closing patterns at the beginning
of each year, as well as the projected budget for the Companys in-house attorneys, and these
amounts are subject to adjustment each quarter based upon actual experience.
For LAE stemming from defense by other attorneys who are not employees, the Company implemented
automated legal fee auditing in the fourth quarter of 2008.
Due to the inherent uncertainty associated with the reserving process, the ultimate liability may
differ, perhaps substantially, from the original estimate. Such estimates are regularly reviewed
and updated and any resulting adjustments are included in the current years results. Reserves are
closely monitored and are recomputed periodically using the most recent information on reported
claims and a variety of statistical techniques. Specifically, on at least a quarterly basis, the
Company reviews, by line of business, existing reserves, new claims, changes to existing case
reserves and paid losses with respect to the current and prior years.
The Company segregates data for estimating loss reserves. Property lines include Fire, Homeowners,
CMP Property, Multi-Family Dwellings and Auto Physical Damage. Casualty lines include CMP
Liability, Other Liability, Workers Compensation, Commercial Auto Liability, and Personal Auto
Liability. The Company also analyzes and records reserves separately for Specialty Business
programs and treaties and for Brokerage Insurance.
Two key assumptions that materially impact the estimate of loss reserves are the loss ratio
estimate for the current accident year and the loss development factor selections for all accident
years. The loss ratio estimate for the current accident year is selected after reviewing historical
accident year loss ratios adjusted for rate changes, trend, and mix of business.
In most cases, the Companys data have sufficient credibility and historical experience to
base development factors on its own data. Where necessary, we supplement our own data with
historical experience for the business that is available from the previous insurance carrier, and
we may utilize industry loss development factors, where appropriate. There have only been minor
changes in selected loss development factors since 2003. The chart below shows the number of years
by product line when the Company expects 50%, 90% and 99% of losses to be reported for a given
accident year, although for some classes of business the development patterns may be significantly
longer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of years |
Segment |
|
50% |
|
90% |
|
99% |
|
Fire |
|
< 1 year |
|
< 1 year |
|
2 years |
Homeowners |
|
< 1 year |
|
< 2 years |
|
3 years |
Multi-Family Dwellings |
|
< 2 years |
|
< 2 years |
|
5 years |
CMP Property |
|
< 1 year |
|
1 year |
|
2 years |
CMP Liability |
|
< 2 years |
|
5 years |
|
9 years |
Workers compensation |
|
< 1 year |
|
2 years |
|
5 years |
Other liability |
|
3 years |
|
4 years |
|
9 years |
|
Commercial auto liability |
|
< 1 year |
|
3 years |
|
4 years |
Auto physical damage |
|
< 1 year |
|
< 1 year |
|
1 year |
Personal auto liability |
|
< 1 year |
|
< 2 years |
|
4 years |
F-38
Loss development methods, the Bornhuetter-Ferguson (B-F) method and variations of this method,
and loss ratio projections are the predominant methodologies the Companys actuaries use to project
losses and corresponding reserves. Based on these methods the Companys actuaries determine a best
estimate of the loss reserves. All of these methods are standard actuarial approaches in the
industry. Generally, the loss development methods are relied upon for older accident years, and the
loss ratio method is used for the most recent accident year when there is less reliability in the
loss development methods. The B-F method combines the loss ratio method and the loss development
methods to determine loss reserves by adding an expected development (loss ratio times premium
times percent unreported) to the case reserves, and this method may be utilized for the most recent
accident year or relatively immature accident years when the loss development methods are not fully
reliable.
The incurred method relies on historical development factors derived from changes in the Companys
incurred estimates of claims paid and case reserves over time. The paid method relies on the
Companys claim payment patterns and ultimate claim costs. The incurred method is sensitive to
changes in case reserving practices over time. Thus, if case reserving practices change over time,
the incurred method may produce significant variation in estimates of ultimate losses. The paid
method relies on actual claim payments and therefore is not sensitive to changes in case reserve
estimates.
The Company is not aware of any claims trends that have emerged or that would cause future adverse
development that have not already been considered in existing case reserves and in its current loss
development factors.
In New York State, lawsuits for negligence, subject to certain limitations, must be commenced
within three years from the date of the accident or are otherwise barred. Accordingly, the
Companys exposure to IBNR is relatively limited, although there remains a possibility of adverse
development on reported claims. This is reflected by the loss development for our Brokerage
Insurance segment for which New York State comprises a significant proportion of the business,
particularly for older accident years. However, there are no assurances that future loss
development and trends will be consistent with its past loss development history, and so adverse
loss reserves development remains a risk factor to the Companys business.
Note 12Debt
Subordinated Debentures
The Company and its wholly-owned subsidiaries have issued trust preferred securities through
wholly-owned Delaware statutory business trusts. The trusts use the proceeds of the sale of the
trust preferred securities and common securities that the Company acquired from the trusts to
purchase junior subordinated debentures from the Company with terms that match the terms of the
trust preferred securities. Interest on the junior subordinated debentures and the trust preferred
securities is payable quarterly. In some cases, the interest rate is fixed for an initial period of
five years after issuance, then floats with changes in the London Interbank Offered Rate (LIBOR)
and in other cases the interest rate floats with LIBOR without any initial fixed-rate period. The
principal terms of the outstanding trust preferred securities, including those which were assumed
by the Company through acquisitions, are summarized in the following table:
F-39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
|
|
|
|
|
|
|
|
Amount of |
|
Amount of |
|
|
|
|
|
|
|
|
|
|
Investment in |
|
Junior |
|
|
|
|
|
|
|
|
|
|
Common |
|
Subordinated |
|
|
|
|
Maturity |
|
Early |
|
Interest |
|
Securities of |
|
Debenture |
Issue Date |
|
Issuer |
|
Date |
|
Redemption |
|
Rate |
|
Trust |
|
Issued to Trust |
|
May 2003
|
|
Tower Group
Statutory Trust I
|
|
May 2033
|
|
At our option at
par on or after May
15, 2008
|
|
Three-month LIBOR
plus 410 basis
points
|
|
$0.3 million
|
|
$10.3 million |
|
September 2003
|
|
Tower Group
Statutory Trust II
|
|
September 2033
|
|
At our option at
par on or after
September 30, 2008
|
|
7.5% until
September 30, 2008;
three-month LIBOR
plus 400 basis
points thereafter
|
|
$0.3 million
|
|
$10.3 million |
|
May 2004
|
|
Preserver Capital
Trust I
|
|
May 2034
|
|
At our option at
par on or after May
24, 2009
|
|
Three-month LIBOR
plus 425 basis
points
|
|
$0.4 million
|
|
$12.4 million |
|
December 2004
|
|
Tower Group
Statutory Trust III
|
|
December 2034
|
|
At our option at
par on or after
December 15, 2009
|
|
7.4% until December
7, 2009;
three-month LIBOR
plus 340 basis
points thereafter
|
|
$0.4 million
|
|
$13.4 million |
|
December 2004
|
|
Tower Group
Statutory Trust IV
|
|
March 2035
|
|
At our option at
par on or after
December 21, 2009
|
|
Three-month LIBOR
plus 340 basis
points
|
|
$0.4 million
|
|
$13.4 million |
|
March 2006
|
|
Tower Group
Statutory Trust V
|
|
April 2036
|
|
At our option at
par on or after
April 7, 2011
|
|
8.5625% until March
31, 2011;
three-month LIBOR
plus 330 basis
points thereafter
|
|
$0.6 million
|
|
$20.6 million |
|
January 2007
|
|
Tower Group
Statutory Trust VI
|
|
March 2037
|
|
At our option at
par on or after
March 15, 2012
|
|
8.155% until
January 25, 2012;
three-month LIBOR
plus 300 basis
points thereafter
|
|
$0.6 million
|
|
$20.6 million |
|
December 2006
|
|
CastlePoint
Management
Statutory Trust II
|
|
December 2036
|
|
At our option at
par on or after
December 14, 2011
|
|
8.5551% until
December 14, 2011;
three-month LIBOR
plus 330 basis
points thereafter
|
|
$1.6 million
|
|
$51.6 million |
|
December 2006
|
|
CastlePoint
Management
Statutory Trust I
|
|
December 2036
|
|
At our option at
par on or after
December 1, 2011
|
|
8.66% until
December 1, 2011;
three-month LIBOR
plus 350 basis
points thereafter
|
|
$1.6 million
|
|
$51.6 million |
|
September 2007
|
|
CastlePoint Bermuda
Capital Trust I
|
|
December 2037
|
|
At our option at
par on or after
September 27, 2012
|
|
8.39% until
September 27, 2012;
three-month LIBOR
plus 350 basis
points thereafter
|
|
$0.9 million
|
|
$30.9 million |
|
The carrying amount reported for the subordinated debentures was $235.1 million and $101.0
million at December 31, 2009 and 2008, respectively. Based upon models using the spreads between
the interest rates on the subordinated debt and 30 year Treasury Notes, management has estimated
the fair value of the subordinated debt to be $248.4 million at December 31, 2009.
Total interest expense incurred for all subordinated debentures, including amortization of deferred
origination costs, was $17.4 million, $7.9 million and $8.2 million, respectively, for the three
years ended December 31, 2009, 2008 and 2007.
Aggregate scheduled maturities of the subordinated debentures at December 31, 2009 are:
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
2033 |
|
$ |
20,620 |
|
2034 |
|
|
25,775 |
|
2035 |
|
|
13,403 |
|
2036 |
|
|
123,713 |
|
2037 |
|
|
51,547 |
|
|
|
|
$ |
235,058 |
|
|
F-40
Note 13Stockholders Equity
Authorized Shares of Common Stock
On January 28, 2009, an amendment to increase the number of authorized shares of common stock, par
value $0.01 per share, from 40,000,000 shares to 100,000,000 shares was approved at a special
meeting of stockholders. The amendment was filed with the Secretary of the State of Delaware on
February 4, 2009.
Shares of Common Stock Issued
In connection with the acquisition of Specialty Underwriters Alliance (SUA) on November 13,
2009, the Company issued 4,460,092 shares to the shareholders of SUA increasing Common Stock by
$44,600 and Paid-in Capital by $105.8 million.
In connection with the acquisition of CastlePoint on February 5, 2009, the Company issued
16,869,572 shares to the shareholders of CastlePoint increasing Common Stock by $169,000 and
Paid-in Capital by $421.5 million.
In 2007, the Company issued 3,450,200 shares from which it raised $89.4 million, net of
underwriting discounts and expenses.
For the year ended December 31, 2009, the Company issued 52,310 new common shares as the result of
employee stock option exercises and issued 310,208 new common shares as the result of restricted
stock grants. For the year ended December 31, 2008, the Company issued 23,366 new common shares as
the result of employee stock option exercises and issued 159,740 new common shares as the result of
restricted stock grants. For the year ended December 31, 2007, the Company issued 81,100 new common
shares as the result of employee stock option exercises and issued 93,581 new common shares as the
result of restricted stock grants.
For the years ended December 31, 2009 and 2008, the Company purchased 43,820 and 24,615 shares,
respectively of its common stock from employees in connection with the vesting of restricted stock
issued in conjunction with its 2004 Long Term Equity Compensation Plan (the Plan). The shares
were withheld at the direction of employee as permitted under the Plan in order to pay the expected
amount of tax liability owed by the employees from the vesting of those shares. In addition, for
the year ended December 31, 2009 and 2008, 11,065 and 14,889 shares, respectively, of common stock
were surrendered to the Company as a result of restricted stock forfeitures.
Warrants
As part of the IPO in October 2004, the Company issued to Friedman, Billings, Ramsey & Co., Inc.
(FBR), the lead underwriter, warrants to purchase 189,000 shares of the Companys common stock at
an exercise price of $8.50 per share. The warrants were exercisable for a term of five years
beginning on October 20, 2004 and expired on October 20, 2009. During 2008, FBR assigned the then
outstanding warrants to six of its employees, two of whom exercised their warrants during 2008. In
2009, the Company issued 16,193 treasury shares to FBR employees in cashless exercises of their
warrants. As of December 31, 2009, there were no warrants outstanding.
Dividends Declared
The Company declared dividends on common stock of $10.7 million and $4.6 million year ended
December 31, 2009 and 2008, respectively.
Note 14Stock Based Compensation
2004 Long-Term Equity Compensation Plan
In 2004, the Companys Board of Directors adopted and its stockholders approved a long-term
incentive plan (the 2004 Long-Term Equity Compensation Plan).
The plan provides for the granting of non-qualified stock options, incentive stock options (within
the meaning of Section 422 of the Code), stock appreciation rights (SARs), restricted stock and
restricted stock unit awards, performance shares and other cash or share-based awards. The maximum
amount of share-based awards authorized is 2,325,446 of which 239,166 are available for future
grants as of December 31, 2009.
2001 Stock Award Plan
In December 2000, the Board of Directors adopted a long-term incentive plan (the 2001 Stock
Award Plan). The plan provided for a variety of awards, including incentive or non-qualified stock
options, performance shares, SARs or any combination of the foregoing.
As of December 31, 2009, there are 122,580 shares of common stock options outstanding that are
fully vested. With the adoption of the 2004 Long-Term Incentive Compensation Plan, no further
awards may be granted under the 2001 Stock Award Plan.
F-41
Restricted Stock Awards
During the three years ended December 31, 2009, 2008 and 2007, restricted stock shares were granted
to senior officers and key employees as shown in the table below. Included in the restricted stock
shares granted in 2009 were 83,228 restricted stock shares that were originally issued to employees
or directors of CastlePoint and were converted into restricted shares of the Companys common stock
upon the acquisition of CastlePoint. The fair value of all restricted stock awards on the date of
grant during 2009,
2008 and 2007 was $7.3 million, $3.9 million and $3.0 million, respectively. Compensation expense
recognized for the three years ended December 31, 2009, 2008 and 2007 was $2.6 million, $1.3
million and $1.0 million net of tax, respectively. The total intrinsic value of restricted stock
vesting was $1.8 million, $2.0 million and $2.1 million during 2009, 2008 and 2007, respectively.
The intrinsic value of the unvested restricted stock outstanding as of December 31, 2009 is $11.1
million.
Changes in restricted stock for the three years ended December 31, 2009, 2008 and 2007 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
Number of |
|
Grant Date |
|
|
Number of |
|
Grant Date |
|
|
Number of |
|
Grant Date |
|
|
|
Shares |
|
Fair Value |
|
|
Shares |
|
Fair Value |
|
|
Shares |
|
Fair Value |
|
|
Outstanding, January 1 |
|
|
258,645 |
|
|
$ |
26.05 |
|
|
|
195,468 |
|
|
$ |
24.69 |
|
|
|
180,766 |
|
|
$ |
17.35 |
|
Granted |
|
|
310,208 |
|
|
|
23.50 |
|
|
|
159,740 |
|
|
|
24.39 |
|
|
|
93,581 |
|
|
|
32.20 |
|
Vested |
|
|
(83,765 |
) |
|
|
24.58 |
|
|
|
(81,674 |
) |
|
|
19.41 |
|
|
|
(68,587 |
) |
|
|
15.92 |
|
Forfeitures |
|
|
(11,065 |
) |
|
|
26.04 |
|
|
|
(14,889 |
) |
|
|
26.88 |
|
|
|
(10,292 |
) |
|
|
22.59 |
|
|
Outstanding, December 31 |
|
|
474,023 |
|
|
$ |
24.64 |
|
|
|
258,645 |
|
|
$ |
26.05 |
|
|
|
195,468 |
|
|
$ |
24.69 |
|
|
SUA Restricted Deferred Stock Awards
A summary of the status of the SUA non-vested restricted stock awards, after conversion of the
awards to the Companys common stock on the date of acquisition on November 13, 2009, as of
December 31, 2009 and changes during the period from the acquisition to December 31, 2009 is
presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
Grant Date |
|
|
|
Shares |
|
Fair Value |
|
|
Outstanding, date of acquisition |
|
|
- |
|
|
|
$- |
|
Granted |
|
|
92,276 |
|
|
|
23.74 |
|
Vested |
|
|
(46,088 |
) |
|
|
23.74 |
|
Forfeitures |
|
|
- |
|
|
|
- |
|
|
Outstanding, December 31, 2009 |
|
|
46,188 |
|
|
$ |
23.74 |
|
|
Stock Options
The following table provides an analysis of stock option activity during the three years ended
December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Exercise |
|
|
Number of |
|
|
Exercise |
|
|
Number of |
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Outstanding, January 1 |
|
|
258,530 |
|
|
$ |
5.47 |
|
|
|
281,896 |
|
|
$ |
5.57 |
|
|
|
362,996 |
|
|
$ |
4.94 |
|
Granted at fair value |
|
|
1,349,361 |
|
|
|
22.51 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercised |
|
|
(52,310 |
) |
|
|
14.17 |
|
|
|
(23,366 |
) |
|
|
6.65 |
|
|
|
(81,100 |
) |
|
|
2.78 |
|
Forfeitures and expirations |
|
|
(168,562 |
) |
|
|
22.70 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Outstanding, December 31 |
|
|
1,387,019 |
|
|
$ |
19.62 |
|
|
|
258,530 |
|
|
$ |
5.47 |
|
|
|
281,896 |
|
|
$ |
5.57 |
|
|
Exercisable, December 31 |
|
|
1,197,459 |
|
|
$ |
19.34 |
|
|
|
234,230 |
|
|
$ |
5.15 |
|
|
|
233,296 |
|
|
$ |
4.95 |
|
|
Options outstanding and excercisable as of December 31, 2009 are shown on the following table:
F-42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
Average |
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Contractual |
Exercise |
|
|
Number of |
|
Exercise |
|
Range of Exercise Prices |
|
Shares |
|
|
Life (Years) |
Price |
|
|
Shares |
|
Price |
|
|
Under $5.00 |
|
|
244,080 |
|
|
|
2.9 |
|
|
$ |
5.63 |
|
|
|
244,080 |
|
|
$ |
5.63 |
|
$5.00 - $10.00 |
|
|
735,680 |
|
|
|
6.7 |
|
|
|
18.50 |
|
|
|
609,934 |
|
|
|
18.47 |
|
$10.01 - $20.00 |
|
|
230,006 |
|
|
|
7.9 |
|
|
|
26.94 |
|
|
|
166,192 |
|
|
|
27.02 |
|
$20.01 - $30.00 |
|
|
177,253 |
|
|
|
4.9 |
|
|
|
34.05 |
|
|
|
177,253 |
|
|
|
34.05 |
|
|
Total Options |
|
|
1,387,019 |
|
|
|
6.0 |
|
|
$ |
19.62 |
|
|
|
1,197,459 |
|
|
$ |
19.34 |
|
|
Included in options granted in 2009 were 1,148,308 stock options that were originally issued to
employees or directors of CastlePoint on four grant dates and were converted into options to
acquire shares of the Companys common stock upon the acquisition of CastlePoint. Also included in
options granted in 2009 were 201,058 stock options that were originally issued to employees of SUA
on two grant dates and were converted into options to acquire shares of the Companys common stock
upon the acquisition of SUA.
The fair value of the options granted to replace the CastlePoint options was estimated using the
Black-Scholes pricing model as of February 5, 2009, the date of conversion from CastlePoint stock
options to the Companys stock options, with the following weighted average assumptions: risk free
interest rate of 1.46% to 1.83%, dividend yield of 0.8%, volatility factors of the expected market
price of the Companys common stock of 43.8% to 45.3%, and a weighted-average expected life of the
options of 3.3 to 5.3 years.
The fair value of the options granted to replace the SUA options was estimated using the
Black-Scholes pricing model as of November 13, 2009, the date of conversion from SUA stock options
to the Companys stock options, with the following weighted average assumptions: risk free interest
rate of 1.66%, dividend yield of 1.2%, volatility factors of the expected market price of the
Companys common stock of 43.8%, and a weighted-average expected life of the options of 1.4 years.
The fair value measurement objective of the relevant GAAP guidance is achieved using the
Black-Scholes model as the model (a) is applied in a manner consistent with the fair value
measurement objective and other requirements of GAAP, (b) is based on established principles of
financial economic theory and generally applied in that field and (c) reflects all substantive
characteristics of the instrument.
Compensation expense (net of tax) related to stock options was $1.0 million and $49,900 for the
year ended December 31, 2009 and 2008, respectively. The intrinsic value of stock options
outstanding as of December 31, 2009 is $8.0 million, of which $7.4 million is related to vested
options.
Total Equity Compensation Not Yet Recognized
The total remaining compensation cost related to non-vested stock options and restricted stock
awards not yet recognized in the income statement was $8.9 million of which $0.6 million was for
stock options and $8.3 million was for restricted stock as of December 31, 2009. The weighted
average period over which this compensation cost is expected to be recognized is 3.3 years.
Note 15Income Taxes
The Company files a consolidated Federal income tax return. The provision for Federal, state and
local income taxes consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Current Federal income tax expense |
|
|
$ 54,082 |
|
|
|
$ 28,346 |
|
|
|
$ 27,417 |
|
Current state income tax expense |
|
|
2,458 |
|
|
|
5,432 |
|
|
|
3,545 |
|
Deferred Federal and State income tax (benefit) |
|
|
(5,038 |
) |
|
|
(1,676 |
) |
|
|
(4,804 |
) |
|
Provision for income taxes |
|
|
$ 51,502 |
|
|
|
$ 32,102 |
|
|
|
$ 26,158 |
|
|
Deferred tax assets and liabilities are determined using the enacted tax rates applicable to
the period the temporary differences are expected to be recovered. Accordingly, the current period
income tax provision can be affected by the enactment of new tax rates. The net deferred income
taxes on the balance sheet reflect temporary differences between the
carrying amounts of the assets and liabilities for financial reporting purposes and income tax purposes, tax effected
at a 35% rate. Significant components of the Companys deferred tax assets and liabilities are as
follows:
F-43
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
($ in thousands) |
|
2009 |
|
|
2008 |
|
|
Deferred tax asset: |
|
|
|
|
|
|
|
|
Claims reserve discount |
|
|
$ 32,477 |
|
|
|
$ 11,863 |
|
Unearned premium |
|
|
40,113 |
|
|
|
12,837 |
|
Equity compensation plans |
|
|
7,077 |
|
|
|
273 |
|
Investment impairments |
|
|
16,103 |
|
|
|
8,680 |
|
Net operating loss carryforwards |
|
|
18,839 |
|
|
|
13,632 |
|
Capital loss carryforwards |
|
|
- |
|
|
|
2,848 |
|
Other |
|
|
2,360 |
|
|
|
650 |
|
|
Total deferred tax assets |
|
|
116,969 |
|
|
|
50,783 |
|
Deferred tax liability: |
|
|
|
|
|
|
|
|
Deferred acquisition costs net of deferred ceding commission revenue |
|
|
40,673 |
|
|
|
18,578 |
|
Warrant received from unconsolidated affiliate |
|
|
- |
|
|
|
1,612 |
|
Gain from issuance of common stock by unconsolidated affiliate |
|
|
- |
|
|
|
3,706 |
|
Depreciation and amortization |
|
|
14,439 |
|
|
|
7,096 |
|
Net unrealized appreciation (depreciation) of securities |
|
|
18,730 |
|
|
|
(18,919 |
) |
Equity income in unconsolidated affiliate |
|
|
- |
|
|
|
1,111 |
|
Salvage and subrogation |
|
|
314 |
|
|
|
764 |
|
Accrual of bond discount |
|
|
986 |
|
|
|
628 |
|
Other |
|
|
70 |
|
|
|
- |
|
|
Total deferred tax liabilities |
|
|
75,212 |
|
|
|
14,576 |
|
|
Deferred income taxes |
|
|
$ 41,757 |
|
|
|
$ 36,207 |
|
|
In assessing the valuation of deferred tax assets, the Company considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Prior to
purchase, CPM established a valuation allowance of $1.9 million against its state NOL benefits. The
Company has reviewed the CPM valuation allowance and determined that it should be recorded by the
Company as of the acquisition date.
Preserver, which was acquired by the Company on April 10, 2007, CastlePoint, which was acquired by
the Company on February 5, 2009, and SUA, which was acquired by the Company on November 13, 2009,
have tax loss carryforwards and other tax assets that the Company believes will be used in the
future, subject to change of ownership limitations pursuant to Section 382 of the Internal Revenue
Code (IRC) and to the ability of the combined post-merger company to generate sufficient taxable
income to use the benefits before the expiration of the applicable carryforward periods.
Section 382 imposes limitations on a corporations ability to utilize its net operating loss carry
forwards (NOL) if it experiences an ownership change. As a result of the acquisitions,
Preserver, CastlePoint and SUA underwent ownership changes as defined in the IRC. Use of the NOL
from Preserver, CastlePoint and SUA of $36.2 million, $15.0 million and $2.7 million, respectively,
or $53.9 million in total, are subject to an annual limitation under Section 382 determined by
multiplying the purchase price of Preserver, CastlePoint and SUA by the applicable long-term tax
free rate resulting in an annual limitation amount of approximately $2.8 million, $11.1 million and
$4.6 million, respectively. Any unused annual limitation may be carried over to later years.
Preservers NOL balance has been adjusted to reflect the finalization of Preservers income tax
returns with the IRS. The $53.8 million of NOL will expire if unused in 2011-2027.
The Company made elections under IRC § 338(g) for CPBH and CPRe, both of which are Bermuda
entities. The effect of these elections is to treat CPBH and CPRe as new corporations, effective as
of the day of the closing, with a fair market value basis in their assets for US tax purposes and a
new taxable year beginning the day after the closing. The Company also made a check-the-box
election to treat CPBH as a disregarded entity for US tax purposes. Furthermore, the Company made
an IRC § 953(d) election with regards to CPRe for the taxable year beginning after the date of
acquisition. The 953(d) election will cause CPRe to be treated as a domestic corporation for US
income tax purposes.
The Company has also made elections under IRC §338(h) (10) with regards to its purchase of
Hermitage. The effect of these elections is to treat Hermitage as a new corporation, effective as
of the day of the closing, with a fair market value basis in their assets for US tax purposes and a
new taxable year beginning the day after the closing.
F-44
The Company adopted the relevant provisions of GAAP concerning uncertainties in income taxes on
January 1, 2007. At the adoption date and as of December 31, 2009, the Company had no material
unrecognized tax benefits and no adjustments to liabilities or operations were required.
The Company recognizes interest and penalties related to uncertain tax positions in income tax
expense which was zero for the years ended December 31, 2009, 2008 and 2007.
Tax years 2004 through 2008 are subject to examination by the Internal Revenue Service, which is
currently performing an audit of the 2006 tax year. In addition, the Internal Revenue Service is
auditing CPREs federal excise tax and protective income tax returns for the 2008 tax year and
SUAs federal income tax return for the 2007 tax year. There is currently a New York State
Department of Taxation and Finance audit under way for the tax years of 2003 through 2004. The
Company does not anticipate any material adjustments from these audits.
The provision for Federal income taxes incurred is different from that which would be obtained by
applying the Federal income tax rate to net income before taxes. The items causing this difference
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Federal income tax expense at |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. statutory rate (35%) |
|
|
$ 56,291 |
|
|
|
$ 31,353 |
|
|
|
$ 24,934 |
|
Tax exempt interest |
|
|
(4,159 |
) |
|
|
(1,953 |
) |
|
|
(1,466 |
) |
State income taxes net of Federal benefit |
|
|
1,597 |
|
|
|
3,531 |
|
|
|
2,303 |
|
Gain on bargain purchase |
|
|
(4,615 |
) |
|
|
- |
|
|
|
- |
|
Acquisition-related transaction costs |
|
|
2,342 |
|
|
|
- |
|
|
|
- |
|
Other |
|
|
46 |
|
|
|
(829 |
) |
|
|
387 |
|
|
Provision for income taxes |
|
|
$ 51,502 |
|
|
|
$ 32,102 |
|
|
|
$ 26,158 |
|
|
Note 16Employee Benefit Plans
The Company maintains a defined contribution Employee Pretax Savings Plan (401(k) Plan) for its
employees. The Company matches 50% of each participants contribution up to 8% of the participants
eligible contribution. The Company incurred approximately $1.4 million, $1.3 million and $1.0
million of expense in 2009, 2008 and 2007, respectively, related to the 401(k) Plan.
Supplemental Executive Retirement Plan (SERP)
The SERP is a non-qualified defined contribution plan effective as of January 1, 2009 that is
intended to enhance retirement benefits for the Companys most senior executives and certain other
key employees. Eligibility to participate in the SERP generally requires three years of prior
employment with the Company for Senior Vice Presidents and between five and 10 years of prior
employment with the Company for other key employees. In 2010, it is expected that all of the Named
Executive Officers and certain other key executives selected at the discretion of the Compensation
Committee will be eligible to participate in the SERP. The Company will make annual contributions
to the SERP on behalf of each participant. For Mr. Lee, the amount of the annual contribution is
equal to the product of 2.0% of his annual cash compensation multiplied by his number of years of
service with the Company, up to a maximum of 30 years. For other participants, the amount of the
annual contribution is equal to 5.0% of their annual cash compensation. Company contributions for
each participant remain unvested until such participant has completed 10 years of service with the
Company, and vest in full upon completion of 10 years of service. The Compensation Committee has
discretion to terminate the SERP or to adjust upward or downward the level of the Companys
contribution each year.
Note 17Commitments and Contingencies
Legal Proceedings
From time to time, the Company is involved in various legal proceedings in the ordinary course of
business. For example, to the extent a claim asserted by a third party in a law suit against one of
the Companys insureds covered by a particular policy, the Company may have a duty to defend the
insured party against the claim. These claims may relate to bodily injury, property damage or other
compensable injuries as set forth in the policy. Such proceedings are considered in estimating the
liability for loss and LAE expenses.
F-45
On May 28, 2009, Munich Reinsurance America, Inc. (Munich) commenced an action against Tower
Insurance Company of New York ( TICNY) in the United States District Court for the District of
New Jersey seeking, inter alia, to recover approximately $6.1 million under various retrocessional
contracts pursuant to which TICNY reinsures Munich. On June 22, 2009, TICNY filed its answer, in
which it, inter alia, asserted two separate counterclaims seeking to recover approximately $2.8
million under various reinsurance contracts pursuant to which Munich reinsures TICNY. On June 17,
2009, Munich commenced a separate action against TICNY in the United States District Court for the
District of New Jersey seeking a declaratory judgment that Munich is entitled to access to the
TICNYs books and records pertaining to various quota share agreements, to which the TICNY filed
its answer on July 7, 2009. Because the litigation is only in its preliminary stage, management is
unable to assess the likelihood of any particular outcome, including what amounts, if any, will be
recovered by the parties from each other under the reinsurance and retrocession contracts that are
at issue. Accordingly, an estimate of the possible range of loss, if any, cannot be made.
Leases
The Company has various lease agreements for office space, furniture and equipment. The terms of
the office space lease agreements provide for annual rental increases and certain lease incentives
including initial free rent periods and cash allowances for leasehold improvements. The Company
amortizes scheduled annual rental increases and lease incentives ratably over the term of the
lease. The Companys future minimum lease payments are as follows:
|
|
|
|
|
($ in thousands) |
|
Amount |
|
|
2010 |
|
$ |
8,571 |
|
2011 |
|
|
7,880 |
|
2012 |
|
|
5,763 |
|
2013 |
|
|
5,386 |
|
2014 |
|
|
5,347 |
|
Thereafter |
|
|
27,537 |
|
|
|
|
$ |
60,484 |
|
|
Total rental expense charged to operations was approximately $7.9 million, $3.8 million and
$4.3 million in 2009, 2008 and 2007, respectively.
Assessments
Towers Insurance Subsidiaries are also required to participate in various mandatory insurance
facilities or in funding mandatory pools, which are generally designed to provide insurance
coverage for consumers who are unable to obtain insurance in the voluntary insurance market. The
Insurance Subsidiaries are subject to assessments in New York, New Jersey and other states for
various purposes, including the provision of funds necessary to fund the operations of the New York
Insurance Department and the New York Property/Casualty Insurance Security Fund, which pays covered
claims under certain policies provided by impaired, insolvent or failed insurance companies and
various funds administered by the New York Workers Compensation Board, which pays covered claims
under certain policies provided by impaired, insolvent or failed insurance companies. The Company
was assessed $0 in 2009 and 2008 and $624,000 in 2007 for its proportional share of the total
assessment for the Property/Casualty Security Fund and approximately $4.0 million, $2.0 million and
$1.4 million in 2009, 2008 and 2007, respectively, for its proportional share of the operating
expenses of the New York Insurance Department. Property casualty insurance company insolvencies or
failures may result in additional security fund assessments to the Company at some future date. At
this time the Company is unable to estimate the possible amounts, if any, of such assessments.
Accordingly, the Company is unable to determine the impact, if any; such assessments may have on
financial position or results of operations of the Company. The Company is permitted to assess
premium surcharges on workers compensation policies that are based on statutorily enacted rates.
Actual assessments have resulted in differences to the original estimates based on permitted
surcharges of $2.2 million, $0 and ($2.2 million) in 2009, 2008 and 2007, respectively. The Company
estimates its liability for future assessments based on actual written premiums and historical
rates and available information. As of December 31, 2009 the liability for the various workers
compensation funds, which includes amounts assessed on workers compensation policies was $11.6
million. This amount is expected to be paid over an eighteen month period ending June 30, 2011. As
of December 31, 2008, the liability for the various workers compensation funds was $1.0 million.
F-46
Note 18 Statutory Financial Information and Accounting Policies
United States
For regulatory purposes, the Companys Insurance Subsidiaries prepare their statutory
basis financial statements in accordance with practices prescribed or permitted by the
state they are domiciled in (statutory basis or SAP). The more significant SAP
variances from GAAP are as follows:
|
|
Policy acquisition costs are charged to operations in the year such costs are incurred,
rather than being deferred and amortized as premiums are earned over the terms of the
policies. |
|
|
|
Ceding commission revenues are earned when ceded premiums are written except for ceding
commission revenues in excess of anticipated acquisition costs, which are deferred and
amortized as ceded premiums are earned. GAAP requires that all ceding commission revenues be
earned as the underlying ceded premiums are earned over the term of the reinsurance
agreements. |
|
|
|
Certain assets including certain receivables, a portion of the net deferred tax asset,
prepaid expenses and furniture and equipment are not admitted. |
|
|
|
Investments in fixed-maturity securities are valued at NAIC value for statutory financial
purposes, which is primarily amortized cost. GAAP requires certain investments in
fixed-maturity securities classified as available for sale, to be reported at fair value. |
|
|
|
Certain amounts related to ceded reinsurance are reported on a net basis within the
statutory basis financial statements. GAAP requires these amounts to be shown gross. |
|
|
|
For SAP purposes, changes in deferred income taxes relating to temporary differences
between net income for financial reporting purposes and taxable income are recognized as a
separate component of gains and losses in surplus rather than included in income tax expense
or benefit as required under GAAP. |
State insurance laws restrict the ability of our Insurance Subsidiaries to declare
dividends. State insurance regulators require insurance companies to maintain specified
levels of statutory capital and surplus. Generally, dividends may only be paid out of
earned surplus, and the amount of an insurers surplus following payment of any dividends
must be reasonable in relation to the insurers outstanding liabilities and adequate to
meet its financial needs. Further, prior approval of the insurance department of its state
of domicile is required before any of our Insurance Subsidiaries can declare and pay an
extraordinary dividend to the Company.
For the years ended December 31, 2009, 2008 and 2007, the Companys Insurance Subsidiaries
had SAP net income of $32.8 million, $30.2 million and $43.6 million, respectively. At
December 31, 2009 and 2008 the Companys Insurance Subsidiaries had reported SAP surplus
as regards policyholders of $593.9 million and $305.2 million, respectively, as filed with
the insurance regulators.
The Companys Insurance Subsidiaries paid approximately $15.0 million, $5.2 million and
$8.5 million in dividends and or return of capital to Tower in 2009, 2008 and 2007,
respectively. As of December 31, 2009, the maximum distribution that Towers Insurance
Subsidiaries could pay without prior regulatory approval was approximately $52.8 million.
Bermuda
CP Re is registered as a Class 3 reinsurer under The Insurance Act 1978 (Bermuda), amendments
thereto and related regulations (the Insurance Act). Under the Insurance Act, CP Re is required
to prepare Statutory Financial Statements and to file a Statutory Financial Return. The Insurance
Act also requires CP Re to maintain minimum share capital and surplus, and it has met these
requirements as of December 31, 2009.
For the year ended December 31, 2009, CP Re had statutory net income of $19.1 million and at
December 31, 2009, had statutory surplus of $255.0 million.
For Bermuda registered companies, there are some differences between financial statements prepared
in accordance with GAAP and those prepared on a statutory basis. Certain assets are non-admitted
under Bermuda regulations and deferred policy acquisition costs have been fully expenses to income
under Bermuda regulations and prepaid expenses and fixed asset have been removed from the statutory
balance sheet under Bermuda regulations.
F-47
Note 19Fair Value of Financial Instruments
GAAP guidance requires all entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized in the balance sheet, for which it is
practicable to estimate fair value. See Note 3Acquisitions for further information about the
fair value of assets and liabilities of CastlePoint, Hermitage and SUA acquired upon acquisition.
The Company uses the following methods and assumptions in estimating its fair value disclosures for
financial instruments:
Equity and fixed income investments: Fair value disclosures for investments are included in Note
4Investments.
Common trust securitiesstatutory business trusts: Common trust securities are investments in
related parties; as such it is not practical to estimate the fair value of these instruments.
Accordingly, these amounts are reported using the equity method.
Agents balances receivable, assumed premiums receivable, receivable-claims paid by agency: The
carrying values reported in the accompanying balance sheets for these financial instruments
approximate their fair values.
Reinsurance balances payable, payable to issuing carrier and funds held: The carrying value
reported in the balance sheet for these financial instruments approximates fair value.
Subordinated debentures: Fair value disclosures for the subordinated debt carried on the balance
sheet for these financial statements are included in
Note 12 Debt.
Note 20Earnings per Share
Effective January 1, 2009, the Company adopted relevant new GAAP guidance, which requires that
unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) be considered participating securities and included in the
computation of earnings per share pursuant to the two-class method. This guidance became effective
for financial statements issued for fiscal years beginning after December 15, 2008, and interim
periods within those years.
In accordance with the two-class method, the Company allocates its undistributed net earnings (net
income less dividends declared during the period) to both its common stock and unvested share-based
payment awards (unvested restricted stock). Because the common shareholders and share-based
payment award holders share in dividends on a 1:1 basis, the earnings per share on undistributed
earnings is equivalent. Undistributed earnings are allocated to all outstanding share-based payment
awards, including those for which the requisite service period is not expected to be rendered.
All prior-period earnings per share data have been adjusted retrospectively to conform to the
provisions of this new guidance. As a result, weighted average common shares outstanding for the
years ended December 31, 2008 and 2007 increased by 250,010 and 212,424 shares to 23,290,506 and
22,927,087 shares, respectively. Basic and diluted earnings per share for the years ended December
31, 2008 and 2007 decreased by $0.02 and $0.01, respectively.
The following table shows the computation of the Companys earnings per share pursuant to the
two-class method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
($ in thousands, except per share amounts) |
|
2009 |
|
2008 |
|
2007 |
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
109,330 |
|
|
$ |
57,473 |
|
|
$ |
45,082 |
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
39,363 |
|
|
|
23,291 |
|
|
|
22,927 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
205 |
|
|
|
135 |
|
|
|
172 |
|
Unvested restricted stock units |
|
|
9 |
|
|
|
36 |
|
|
|
- |
|
Warrants |
|
|
3 |
|
|
|
23 |
|
|
|
29 |
|
|
Weighted average common and potential dilutive shares outstanding |
|
|
39,580 |
|
|
|
23,485 |
|
|
|
23,128 |
|
|
Earnings per share - basic |
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings |
|
$ |
0.26 |
|
|
$ |
0.20 |
|
|
$ |
0.15 |
|
Undistributed earnings |
|
|
2.52 |
|
|
|
2.27 |
|
|
|
1.79 |
|
|
Total |
|
$ |
2.78 |
|
|
$ |
2.47 |
|
|
$ |
1.94 |
|
|
Earnings per share - diluted |
|
$ |
2.76 |
|
|
$ |
2.45 |
|
|
$ |
1.92 |
|
|
F-48
For the year ended December 31, 2009, 401,659 options to purchase Tower shares were not
included in the computation of diluted earnings per share because the exercise price of the options
was greater than the average market price.
Note 21Segment Information
The Company has changed the presentation of its business results by allocating its previously
reported insurance segment into brokerage insurance and specialty business, based on the way
management organizes the segments, for making operating decisions and assessing profitability. This
change results in reporting three segments: brokerage (commercial and personal lines underwriting),
specialty, which includes third party reinsurance assumed by CPRe, and insurance services
(underwriting, claims and reinsurance services). The prior period segment disclosures have been
restated to conform to the current presentation. The Company considers many factors in determining
reportable segments including economic characteristics, production sources, products or services
offered and the regulatory environment.
The Company evaluates segment performance based on segment profit, which excludes investment
income, realized gains and losses, interest expense, income taxes and incidental corporate
expenses. The Company does not allocate assets to segments because assets, which consist primarily
of investments and fixed assets, other than intangibles and goodwill, are considered in total by
management for decision-making purposes. Intangibles and goodwill are allocated for purposes of
impairment testing as more fully described in Note 6 Goodwill and Intangible Assets.
Business segments results are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
($ in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Brokerage Insurance Segment |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
|
$ 624,994 |
|
|
|
$ 296,719 |
|
|
|
$ 284,216 |
|
Ceding commission revenue |
|
|
34,231 |
|
|
|
61,051 |
|
|
|
66,531 |
|
Policy billing fees |
|
|
2,944 |
|
|
|
2,004 |
|
|
|
2,005 |
|
|
Total revenues |
|
|
662,169 |
|
|
|
359,774 |
|
|
|
352,752 |
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses |
|
|
340,035 |
|
|
|
152,546 |
|
|
|
156,790 |
|
Underwriting expenses |
|
|
246,556 |
|
|
|
153,495 |
|
|
|
149,565 |
|
|
Total expenses |
|
|
586,591 |
|
|
|
306,041 |
|
|
|
306,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
$ 75,578 |
|
|
|
$ 53,733 |
|
|
|
$ 46,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Business Segment |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
|
$ 229,717 |
|
|
|
$ 17,832 |
|
|
|
$ 1,890 |
|
Ceding commission revenue |
|
|
9,706 |
|
|
|
18,111 |
|
|
|
4,479 |
|
|
Total revenues |
|
|
239,423 |
|
|
|
35,943 |
|
|
|
6,369 |
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses |
|
|
135,462 |
|
|
|
10,193 |
|
|
|
1,116 |
|
Underwriting expenses |
|
|
79,771 |
|
|
|
24,280 |
|
|
|
5,041 |
|
|
Total expenses |
|
|
215,233 |
|
|
|
34,473 |
|
|
|
6,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
$ 24,190 |
|
|
|
$ 1,470 |
|
|
|
$ 212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Services Segment |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Direct commission revenue from managing general agency |
|
|
$ 1,583 |
|
|
|
$ 58,215 |
|
|
|
$ 28,795 |
|
Claims administration revenue |
|
|
1,482 |
|
|
|
5,392 |
|
|
|
2,314 |
|
Other administration revenue |
|
|
570 |
|
|
|
3,559 |
|
|
|
1,421 |
|
Reinsurance intermediary fees |
|
|
1,488 |
|
|
|
990 |
|
|
|
770 |
|
Policy billing fees |
|
|
21 |
|
|
|
343 |
|
|
|
33 |
|
|
Total revenues |
|
|
5,144 |
|
|
|
68,499 |
|
|
|
33,333 |
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Direct commission expense paid to producers |
|
|
1,707 |
|
|
|
26,798 |
|
|
|
14,055 |
|
Other insurance services expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting expenses reimbursed to TICNY |
|
|
1,446 |
|
|
|
12,346 |
|
|
|
5,793 |
|
Claims expense reimbursement to TICNY |
|
|
1,130 |
|
|
|
5,392 |
|
|
|
2,302 |
|
|
Total expenses |
|
|
4,283 |
|
|
|
44,536 |
|
|
|
22,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance services pretax income |
|
|
$ 861 |
|
|
|
$ 23,963 |
|
|
|
$ 11,183 |
|
|
F-49
The following table reconciles revenue by segment to consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
($ in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Brokerage insurance segment |
|
|
$ 662,169 |
|
|
|
$ 359,774 |
|
|
|
$ 352,752 |
|
Specialty business segment |
|
|
239,423 |
|
|
|
35,943 |
|
|
|
6,369 |
|
Insurance services segment |
|
|
5,144 |
|
|
|
68,499 |
|
|
|
33,333 |
|
|
Total segment revenues |
|
|
906,736 |
|
|
|
464,216 |
|
|
|
392,454 |
|
Net investment income |
|
|
74,866 |
|
|
|
34,568 |
|
|
|
36,699 |
|
Net realized gains (losses) on investments, including
other-than-temporary impairments |
|
|
1,501 |
|
|
|
(14,354 |
) |
|
|
(17,511 |
) |
|
Consolidated revenues |
|
|
$ 983,103 |
|
|
|
$ 484,430 |
|
|
|
$ 411,642 |
|
|
The following table reconciles the results of the Companys individual segments to consolidated income before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
($ in thousands) |
|
2009 |
|
2008 |
|
2007 |
|
Brokerage insurance segment underwriting profit |
|
$ |
75,578 |
|
|
$ |
53,733 |
|
|
$ |
46,397 |
|
Specialty business segment underwriting profit |
|
|
24,190 |
|
|
|
1,470 |
|
|
|
212 |
|
Insurance services segment pretax income |
|
|
861 |
|
|
|
23,963 |
|
|
|
11,183 |
|
Net investment income |
|
|
74,866 |
|
|
|
34,568 |
|
|
|
36,699 |
|
Net realized gains (losses) on investments, including
other-than-temporary impairments |
|
|
1,501 |
|
|
|
(14,354 |
) |
|
|
(17,511 |
) |
Corporate expenses |
|
|
(3,801 |
) |
|
|
(1,626 |
) |
|
|
(1,593 |
) |
Acquisition-related expenses |
|
|
(14,038 |
) |
|
|
- |
|
|
|
- |
|
Interest expense |
|
|
(18,122 |
) |
|
|
(8,449 |
) |
|
|
(9,290 |
) |
Other income (loss) |
|
|
19,797 |
|
|
|
270 |
|
|
|
5,143 |
|
|
Income before taxes |
|
$ |
160,832 |
|
|
$ |
89,575 |
|
|
$ |
71,240 |
|
|
Note 22Subsequent Events
Acquisition of the Personal Lines Division of OneBeacon Group Ltd
On February 2, 2010 the Company announced the signing of a definitive agreement to acquire the
Personal Lines Division of OneBeacon, subject to customary closing conditions and regulatory
approvals. For the purchase price of $32.5 million plus book value, Tower will acquire
Massachusetts Homeland Insurance Company, York Insurance Company of Maine and two management
companies. The management companies are the attorneys-in-fact for Adirondack Insurance Exchange, a
New York reciprocal insurer, and New Jersey Skylands Insurance Association, a New Jersey reciprocal
insurer, and its New Jersey domiciled stock insurance subsidiary, New Jersey Skylands Insurance
Company. Tower will also purchase the surplus notes issued by the two reciprocal insurers for an
amount equal to the statutory surplus in the exchanges (approximately $103 million at December 31,
2009). This transaction is subject to approvals by the appropriate regulatory agencies and is
expected to close at the end of the second quarter of 2010. Tower will write and manage the private
passenger automobile, homeowners and package policies through the companies currently issuing these
policies and combine its existing personal lines operations, which is currently reflected in our
Brokerage Insurance segment, with the business being acquired. Excluded from this transaction are
AutoOne, specialty collector car and boat businesses, and Houston General companies. The Personal
Lines Division writes business in the Northeastern United States with offices in: Canton,
Massachusetts; South Portland, Maine; and Williamsville, New York.
F-50
Share Repurchase Program
As part of the Companys capital management plan, the Board of Directors of Tower on February, 26,
2010, approved a $100 million share repurchase program. Purchases will be made from time to time in
the open market or in privately negotiated transactions in accordance with applicable laws and
regulations. The program has no expiration date. Based on the closing stock price of Tower common
stock on February 26, 2010, the authorized repurchase would represent approximately 9.5% of
outstanding shares.
Quarterly Dividend
Tower Group, Inc.s Board of Directors approved a quarterly dividend on February 5, 2010 of $0.07
per share payable March 26, 2010 to stockholders of record as of March 15, 2010.
Note 23 Unaudited Quarterly Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
($ in thousands, except per share amounts) |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
Total |
|
|
Revenues |
|
|
$ 200,322 |
|
|
|
$ 254,983 |
|
|
|
$ 256,340 |
|
|
|
$ 271,458 |
|
|
|
$ 983,103 |
|
Net Income |
|
|
17,976 |
|
|
|
30,627 |
|
|
|
29,978 |
|
|
|
30,749 |
|
|
|
109,330 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (1) |
|
|
$ 0.53 |
|
|
|
$ 0.76 |
|
|
|
$ 0.74 |
|
|
|
$ 0.72 |
|
|
|
$ 2.78 |
|
Diluted (1) |
|
|
$ 0.53 |
|
|
|
$ 0.75 |
|
|
|
$ 0.74 |
|
|
|
$ 0.72 |
|
|
|
$ 2.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
Total |
|
|
Revenues |
|
|
$ 110,492 |
|
|
|
$ 106,798 |
|
|
|
$ 130,747 |
|
|
|
$ 136,393 |
|
|
|
$ 484,430 |
|
Net Income |
|
|
14,853 |
|
|
|
10,169 |
|
|
|
16,716 |
|
|
|
15,735 |
|
|
|
57,473 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (1) (2) |
|
|
$ 0.64 |
|
|
|
$ 0.44 |
|
|
|
$ 0.72 |
|
|
|
$ 0.67 |
|
|
|
$ 2.47 |
|
Diluted (1) (2) |
|
|
$ 0.63 |
|
|
|
$ 0.44 |
|
|
|
$ 0.71 |
|
|
|
$ 0.67 |
|
|
|
$ 2.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
Total |
|
|
Revenues |
|
|
$ 84,317 |
|
|
|
$ 102,784 |
|
|
|
$ 112,014 |
|
|
|
$ 112,527 |
|
|
|
$ 411,642 |
|
Net Income |
|
|
11,628 |
|
|
|
12,379 |
|
|
|
14,384 |
|
|
|
6,691 |
|
|
|
45,082 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (1) (2) |
|
|
$ 0.49 |
|
|
|
$ 0.54 |
|
|
|
$ 0.62 |
|
|
|
$ 0.29 |
|
|
|
$ 1.94 |
|
Diluted (1) (2) |
|
|
$ 0.49 |
|
|
|
$ 0.53 |
|
|
|
$ 0.61 |
|
|
|
$ 0.29 |
|
|
|
$ 1.92 |
|
(1) |
|
Since the weighted-average shares for the quarters are calculated
independently of the weighted-average shares for the year, quarterly
earnings per share may not total to annual earnings per share. In
addition, preferred dividends are excluded from the quarterly
calculations of earnings per share in 2007 since they are
anti-dilutive, but are included in the year end calculations. |
|
(2) |
|
Prior year earnings per share have been restated for new GAAP guidance
adopted in 2009 which requires unvested share-based payment awards
that contain non-forfeitable rights to dividends or dividend
equivalents be considered participating securities and included in the
computation of earnings per share. Basic and diluted earnings per
share for the years ended December 31, 2008 and 2007 decreased by
$0.02 and $0.01, respectively. |
F-51
Item 9. Changes In And Disagreements With Accountants Or Accounting And Financial Disclosure
On November 30, 2009, the Audit Committee approved the engagement of PricewaterhouseCoopers LLP
(PWC) as the Companys independent registered public accounting firm for the Companys fiscal
year beginning January 1, 2010. During the two fiscal years ended December 31, 2009, and the
interim period through the filing of this Form 10-K on March 1, 2010, the Company did not consult
with PWC with respect to the application of accounting principles to any specific transaction or
the type of audit opinion that might be rendered on the Companys financial statements. Further,
PWC did not provide any written or oral advice that was an important factor considered by the
Company in reaching a decision as to any such accounting, auditing or financial reporting or any
matter being the subject of disagreement or reportable event or any other matter as defined in
Regulation S-K, Item 304 (a)(1)(iv) or (a)(1)(v).
On November 30, 2009, we informed Johnson Lambert & Co LLP (JLCO) that it would be dismissed as
the Companys independent registered public accounting firm effective following the completion by
JLCO of its report on the consolidated financial statements of the Company as of December 31, 2009
and for the fiscal year then ended, at which time the Company would amend its Form 8-K filed on
December 3, 2009 to reflect the actual dismissal date of JLCO. The Audit Committee approved the
dismissal of JLCO. The report by JLCO on the consolidated financial statements of the Company as
of December 31, 2009 and 2008 and for the fiscal years then ended did not contain an adverse
opinion or a disclaimer of opinion, nor was any such report qualified or modified as to
uncertainty, audit scope or accounting principles. During the fiscal years ended December 31, 2009
and 2008, and through the filing of this Form 10-K on March 1, 2010, there were no disagreements
with JLCO on any matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which, if not resolved to the satisfaction of JLCO, would have caused
JLCO to make reference to the subject matter of the disagreement(s) in its reports on the
financial statements for such years. During the fiscal years ended December 31, 2009 and 2008 and
through the filing of this Form 10-K on March 1, 2010, there were no reportable events with
respect to the Company as that term is defined in Item 304(a)(1)(iv) or (a)(1)(v) of Regulation
S-K.
Item 9A. Controls and Procedures
(a) Disclosure Controls and Procedures
The Companys principal executive officer and its principal financial officer, based on their
evaluation of the Companys disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)), have concluded that the Companys disclosure controls and procedures are effective for
the purposes set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of December 31,
2009.
(b) Managements Report on Internal Control over Financial Reporting
The management of Tower Group, Inc. and its subsidiaries is responsible for establishing and
maintaining adequate internal control over financial reporting for Tower as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934.
Our internal control over financial reporting is a process designed by or under the supervision of
our principal executive and principal financial officers to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our internal control over
financial reporting includes policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of
assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures are being made only in accordance with authorizations of
management and the directors of the Company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the Companys
assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree or compliance with the policies or procedures may deteriorate.
On November 3, 2009, we completed our acquisition of SUA. It operations have been excluded from
our review of the internal controls under Section 404 of the Sarbanes-Oxley Act of 2002. We are
integrating SUAs operations, including internal controls and processes, and extending our Section
404 compliance program to SUAs operations. SUA accounted for 14.7% of assets and 13.5% of net
income of the Company in 2009.
Management has assessed its internal controls over financial reporting as of December 31, 2009 in
relation to criteria for effective internal control over financial reporting described in Internal
ControlIntegrated Framework Issued by the Committee of Sponsoring Organizations of the Treadway
78
Commission (COSO). Based on this assessment under
those criteria, Towers management concluded that its internal control over financial reporting
was effective as of December 31, 2009.
(c) Attestation report of the Companys registered public accounting firm
Johnson Lambert & Co. LLP, an independent registered public accounting firm, which has audited and
reported on the consolidated financial statements contained in this Form 10-K, has issued its
written attestation report on the Companys internal control over financial reporting which
appears on page F-2 of this report.
(d) Changes in internal control over financial reporting
On November 13, 2009, we completed the acquisition of Security Underwriters Alliance, Inc (SUA).
SUA has an existing program of internal controls over financial reporting in compliance with the
Sarbanes Oxley Act of 2002, which is being integrated into our Sarbanes Oxley program for internal
controls over financial reporting.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors And Executive Officers Of The Registrant
The information called for by this Item and not provided herein will be contained in the Companys
Proxy Statement, which the Company intends to file within 120 days after the end of the companys
fiscal year ended December 31, 2009, and such information is incorporated herein by reference.
The Company has adopted a Code of Business Conduct and Ethics and posted it on its website
http://www.twrgrp.com/under Investor Information and then under Corporate Governance.
Item 11. Executive Compensation
The information called for by this item will be contained in the Companys Proxy Statement, which
the Company intends to file within 120 days after the end of the Companys fiscal year ended
December 31, 2009, and such information is incorporated herein by reference.
Item 12. Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters
The information called for by the Item and not provided herein will be contained in the Companys
Proxy Statement, which the Company intends to file within 120 days after the end of the Companys
fiscal year ended December 31, 2009, and such information is incorporated herein by reference.
Item 13. Certain Relationships And Related Transactions, And Director Independence
The information called for by the Item and not provided herein will be contained in the Companys
Proxy Statement, which the Company intends to file within 120 days after the end of the Companys
fiscal year ended December 31, 2009, and such information is incorporated herein by reference.
Item 14. Principal Accountant Fees And Services
The information called for by the Item and not provided herein will be contained in the Companys
Proxy Statement, which the Company intends to file within 120 days after the end of the Companys
fiscal year ended December 31, 2009, and such information is incorporated herein by reference.
79
PART IV
Item 15. Exhibits, Financial Statement Schedules
|
|
|
|
|
|
|
A.
|
|
(1 |
) |
|
|
The financial statements and notes to financial statements are filed as part of this
report in Item 8. Financial Statements and Supplementary Data. |
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
The financial statement schedules are listed in the Index to Consolidated Financial
Statement Schedules. |
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
The exhibits are listed in the Index to Exhibits |
The following entire exhibits are included:
|
|
|
|
|
|
|
Exhibit 21.1
|
|
Subsidiaries of Tower Group, Inc. |
|
|
|
|
|
|
|
Exhibit 23.1
|
|
Consent of Johnson Lambert & Co. LLP |
|
|
|
|
|
|
|
Exhibit 31.1
|
|
Certification of CEO to Section 302(a) |
|
|
|
|
|
|
|
Exhibit 31.2
|
|
Certification of CFO to Section 302(a) |
|
|
|
|
|
|
|
Exhibit 32
|
|
Certification of CEO and CFO to Section 906 |
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
|
Tower Group, Inc.
Registrant
|
|
|
|
|
|
|
|
Date: March 1, 2010
|
|
/s/ Michael H. Lee
Michael H. Lee
Chairman of the Board,
President and Chief Executive Officer
|
|
|
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the
following persons on behalf of the registrant and in the capacities indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ MICHAEL H. LEE
Michael H. Lee
|
|
Chairman of the
Board, President
and Chief Executive
Officer (Principal
Executive Officer)
|
|
March 1, 2010 |
|
|
|
|
|
/s/ FRANCIS M. COLALUCCI
Francis M. Colalucci
|
|
Senior Vice
President, Chief
Financial Officer
and Treasurer,
Director (Principal
Financial Officer,
Principal
Accounting Officer)
|
|
March 1, 2010 |
|
|
|
|
|
/s/ CHARLES A. BRYAN
Charles A. Bryan
|
|
Director
|
|
March 1, 2010 |
|
|
|
|
|
/s/ WILLIAM W. FOX, JR.
William W. Fox, Jr.
|
|
Director
|
|
March 1, 2010 |
|
|
|
|
|
/s/ WILLIAM A. ROBBIE
William A. Robbie
|
|
Director
|
|
March 1, 2010 |
|
|
|
|
|
/s/ STEVEN W. SCHUSTER
Steven W. Schuster
|
|
Director
|
|
March 1, 2010 |
|
|
|
|
|
/s/ ROBERT S. SMITH
Robert S. Smith
|
|
Director
|
|
March 1, 2010 |
|
|
|
|
|
/s/ JAN R. VAN GORDER
Jan R. Van Gorder
|
|
Director
|
|
March 1, 2010 |
|
|
|
|
|
/s/ AUSTIN P. YOUNG, III
Austin P. Young, III
|
|
Director
|
|
March 1, 2010 |
81
Tower Group, Inc.
Index to Financial Statement Schedules
|
|
|
|
|
Schedules |
|
|
|
Pages |
I
|
|
Summary of Investmentsother than investments in related parties
|
|
S-2 |
II
|
|
Condensed Financial Information of the Registrant as of and for the years ended December
31, 2009, 2008, and 2007
|
|
S-3 |
III
|
|
Supplementary Insurance Information for the years ended December 31, 2009, 2008, and 2007
|
|
S-6 |
IV
|
|
Reinsurance for the years ended December 31, 2009, 2008, and 2007
|
|
S-7 |
V
|
|
Valuation and Qualifying Accounts for the years ended December 31, 2009, 2008, and 2007
|
|
S-8 |
VI
|
|
Supplemental Information Concerning Insurance Operations for the years ended December
31, 2009, 2008, and 2007
|
|
S-9 |
S-1
Tower Group, Inc.
Schedule I - Summary of Investments - Other Than Investments in Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
|
|
|
|
|
Fair |
|
|
Reflected on |
|
($ in thousands) |
|
Cost |
|
|
Value |
|
|
Balance Sheet |
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
$ |
113,344 |
|
|
$ |
113,272 |
|
|
$ |
113,272 |
|
Corporate securities |
|
|
589,973 |
|
|
|
615,122 |
|
|
|
615,122 |
|
Mortgage-backed securities |
|
|
517,596 |
|
|
|
529,486 |
|
|
|
529,486 |
|
Municipal securities |
|
|
508,204 |
|
|
|
525,716 |
|
|
|
525,716 |
|
|
Total fixed maturities |
|
|
1,729,117 |
|
|
|
1,783,596 |
|
|
|
1,783,596 |
|
Preferred stocks |
|
|
77,536 |
|
|
|
76,290 |
|
|
|
76,290 |
|
Common stock |
|
|
515 |
|
|
|
443 |
|
|
|
443 |
|
|
Total equities |
|
|
78,051 |
|
|
|
76,733 |
|
|
|
76,733 |
|
Short-term investments |
|
|
36,500 |
|
|
|
36,500 |
|
|
|
36,500 |
|
|
Total investments |
|
$ |
1,843,668 |
|
|
$ |
1,896,829 |
|
|
$ |
1,896,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
|
|
|
|
|
Fair |
|
|
Reflected on |
|
($ in thousands) |
|
Cost |
|
|
Value |
|
|
Balance Sheet |
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
$ |
26,843 |
|
|
$ |
27,405 |
|
|
$ |
27,405 |
|
Corporate securities |
|
|
210,007 |
|
|
|
186,975 |
|
|
|
186,975 |
|
Mortgage-backed securities |
|
|
164,886 |
|
|
|
135,831 |
|
|
|
135,831 |
|
Municipal securities |
|
|
179,734 |
|
|
|
179,948 |
|
|
|
179,948 |
|
|
Total fixed maturities |
|
|
581,470 |
|
|
|
530,159 |
|
|
|
530,159 |
|
Preferred stocks |
|
|
5,551 |
|
|
|
3,694 |
|
|
|
3,694 |
|
Common stock |
|
|
7,175 |
|
|
|
7,120 |
|
|
|
7,120 |
|
|
Total equities |
|
|
12,726 |
|
|
|
10,814 |
|
|
|
10,814 |
|
|
Total investments |
|
$ |
594,196 |
|
|
$ |
540,973 |
|
|
$ |
540,973 |
|
|
S-2
Tower Group, Inc.
Schedule II - Condensed Financial Information of the Registrant
Condensed Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
($ in thousands) |
|
2009 |
|
|
2008 |
|
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
$ 18,619 |
|
|
|
$ 22,291 |
|
Investment in subsidiaries |
|
|
1,118,491 |
|
|
|
359,486 |
|
Federal and state taxes recoverable |
|
|
- |
|
|
|
1,960 |
|
Fixed assets, net of accumulated depreciation |
|
|
10,175 |
|
|
|
11,180 |
|
Investment in unconsolidated affiliate |
|
|
- |
|
|
|
29,293 |
|
Investment in statutory business trusts, equity method |
|
|
2,664 |
|
|
|
2,664 |
|
Due from affiliate |
|
|
784 |
|
|
|
673 |
|
Other assets |
|
|
2,141 |
|
|
|
9,699 |
|
|
|
Total assets |
|
|
$ 1,152,874 |
|
|
|
$ 437,246 |
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
3,314 |
|
|
|
$ 666 |
|
Deferred rent liability |
|
|
6,032 |
|
|
|
6,411 |
|
Federal and state income taxes payable |
|
|
2,714 |
|
|
|
- |
|
Deferred income taxes |
|
|
1,649 |
|
|
|
6,301 |
|
Subordinated debentures |
|
|
88,664 |
|
|
|
88,664 |
|
|
|
Total liabilities |
|
|
102,373 |
|
|
|
102,042 |
|
|
|
Stockholders equity |
|
|
1,050,501 |
|
|
|
335,204 |
|
|
|
Total liabilities and stockholders equity |
|
|
$ 1,152,874 |
|
|
|
$ 437,246 |
|
|
|
S-3
Tower Group, Inc.
Schedule II - Condensed Financial Information of the Registrant
Condensed Statements of Income and Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
($ in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
$ 3,216 |
|
|
|
$ 774 |
|
|
|
$ 1,893 |
|
Equity in net earnings of subsidiaries |
|
|
118,983 |
|
|
|
62,135 |
|
|
|
46,557 |
|
|
Total revenues |
|
|
122,199 |
|
|
|
62,909 |
|
|
|
48,450 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses |
|
|
2,302 |
|
|
|
1,626 |
|
|
|
1,594 |
|
Interest expense |
|
|
6,112 |
|
|
|
6,950 |
|
|
|
7,359 |
|
|
Total expenses |
|
|
8,414 |
|
|
|
8,576 |
|
|
|
8,953 |
|
Other Income |
|
|
|
|
|
|
|
|
|
|
|
|
Equity income in unconsolidated affiliate |
|
|
(777 |
) |
|
|
269 |
|
|
|
2,438 |
|
Gain from issuance of common stock by unconsolidated affiliate |
|
|
- |
|
|
|
- |
|
|
|
2,705 |
|
Gain on investment in acquired unconsolidated affilitate |
|
|
7,388 |
|
|
|
- |
|
|
|
- |
|
Acquisition related transaction costs |
|
|
(13,989 |
) |
|
|
- |
|
|
|
- |
|
|
Income before income taxes |
|
|
106,407 |
|
|
|
54,602 |
|
|
|
44,640 |
|
Provision/(benefit) for income taxes |
|
|
(2,923 |
) |
|
|
(2,871 |
) |
|
|
(442 |
) |
|
Net income |
|
|
$ 109,330 |
|
|
|
$ 57,473 |
|
|
|
$ 45,082 |
|
|
Gross unrealized investment holding gains (losses) arising during the period |
|
|
108,879 |
|
|
|
(56,098 |
) |
|
|
(29,424 |
) |
Cumulative effect of adjustment resulting from adoption of new accounting guidance |
|
|
(2,497 |
) |
|
|
- |
|
|
|
- |
|
Equity in net unrealized gains in investment in unconsolidated affiliates investment portfolio |
|
|
3,124 |
|
|
|
(3,142 |
) |
|
|
(218 |
) |
Less: reclassification adjustment for (gains) losses included in net income |
|
|
(1,501 |
) |
|
|
14,354 |
|
|
|
17,511 |
|
Income tax (expense) benefit related to items of other comprehensive income |
|
|
(37,700 |
) |
|
|
15,710 |
|
|
|
4,246 |
|
|
Comprehensive income |
|
|
$ 179,635 |
|
|
|
$ 28,297 |
|
|
|
$ 37,197 |
|
|
S-4
Tower Group, Inc.
Schedule II - Condensed Finanacial Information of the Registrant
Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
($ in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Cash flows provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
$ 109,330 |
|
|
|
$ 57,473 |
|
|
|
$ 45,082 |
Adjustments to reconcile net income to net cash provided by
(used) in operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on issuance of common shares of unconsolidated affiliate |
|
|
- |
|
|
|
- |
|
|
|
(2,705 |
) |
Dividends received from consolidated subsidiaries |
|
|
8,000 |
|
|
|
12,400 |
|
|
|
8,500 |
|
Equity in undistributed net income of subsidiaries |
|
|
(118,983 |
) |
|
|
(62,135 |
) |
|
|
(46,557 |
) |
Depreciation and amortization |
|
|
1,018 |
|
|
|
1,021 |
|
|
|
1,815 |
|
Amortization of restricted stock |
|
|
5,608 |
|
|
|
2,480 |
|
|
|
1,919 |
|
Deferred income tax |
|
|
(4,652 |
) |
|
|
564 |
|
|
|
1,517 |
|
(Increase) decrease in assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal and state income tax recoverable |
|
|
4,674 |
|
|
|
1,891 |
|
|
|
(1,556 |
) |
Equity loss (income) in unconsolidated affiliate |
|
|
777 |
|
|
|
(269 |
) |
|
|
(2,438 |
) |
Excess tax benefits from share-based payment arrangements |
|
|
(191 |
) |
|
|
(175 |
) |
|
|
(1,105 |
) |
Other assets |
|
|
(640 |
) |
|
|
(8,571 |
) |
|
|
2,582 |
|
(Increase) decrease in liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
2,644 |
|
|
|
(1,507 |
) |
|
|
3,583 |
|
Deferred rent |
|
|
(380 |
) |
|
|
(380 |
) |
|
|
832 |
|
Other-net |
|
|
- |
|
|
|
448 |
|
|
|
321 |
|
|
Net cash flows provided by operations |
|
|
7,204 |
|
|
|
3,240 |
|
|
|
11,789 |
|
Cash flows provided by (used in) investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Preserver Group, Inc. |
|
|
- |
|
|
|
- |
|
|
|
(48,286 |
) |
Preserver transaction costs |
|
|
- |
|
|
|
- |
|
|
|
(4,729 |
) |
Purchase of fixed assets |
|
|
(12 |
) |
|
|
(182 |
) |
|
|
(2,540 |
) |
Investment in subsidiary |
|
|
- |
|
|
|
- |
|
|
|
(4,759 |
) |
|
Net cash flows used in investing activities |
|
|
(12 |
) |
|
|
(182 |
) |
|
|
(60,314 |
) |
Cash flows provided by (used in) financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity offering and over allotment, net of issuance costs |
|
|
- |
|
|
|
- |
|
|
|
89,366 |
|
Repayment of redeemable preferred stock |
|
|
- |
|
|
|
- |
|
|
|
(40,000 |
) |
Proceeds from issuance of subordinated debentures |
|
|
- |
|
|
|
- |
|
|
|
20,619 |
|
Purchase of common trust securitiesstatutory business trusts |
|
|
- |
|
|
|
- |
|
|
|
(619 |
) |
Exercise of stock options and warrants |
|
|
741 |
|
|
|
179 |
|
|
|
1,166 |
|
Excess tax benefits from share-based payment arrangements |
|
|
191 |
|
|
|
175 |
|
|
|
1,105 |
|
Stock repurchase |
|
|
(1,058 |
) |
|
|
(533 |
) |
|
|
(439 |
) |
Dividends paid |
|
|
(10,739 |
) |
|
|
(4,608 |
) |
|
|
(3,743 |
) |
|
Net cash flows provided by (used in) financing activities |
|
|
(10,865 |
) |
|
|
(4,787 |
) |
|
|
67,455 |
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(3,672 |
) |
|
|
(1,729 |
) |
|
|
18,931 |
|
Cash and cash equivalents, beginning of year |
|
|
22,291 |
|
|
|
24,020 |
|
|
|
5,089 |
|
|
Cash and cash equivalents, end of year |
|
|
$ 18,619 |
|
|
|
$ 22,291 |
|
|
|
$ 24,020 |
|
S-5
Tower Group, Inc.
Schedule III - Supplementary Insurance Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost, Net of |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
Future Policy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceding |
|
|
Benefits, |
|
|
Gross |
|
|
|
|
|
|
Benefits, |
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
Commission |
|
|
Losses and |
|
|
Unearned |
|
|
Net Earned |
|
|
Losses and |
|
|
Amortization |
|
|
Operating |
|
|
Premiums |
|
($ in thousands) |
|
Revenue |
|
|
Loss Expenses |
|
|
Premiums |
|
|
Premiums |
|
|
Loss Expenses |
|
|
of DAC |
|
|
Expenses |
|
|
Written |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage Segment |
|
|
$ 121,629 |
|
|
|
$ 696,253 |
|
|
|
$ 445,403 |
|
|
|
$ 624,994 |
|
|
|
$ 340,035 |
|
|
$ |
(174,852 |
) |
|
|
$ 103,424 |
|
|
|
$ 656,882 |
Specialty Segment |
|
|
49,023 |
|
|
|
435,736 |
|
|
|
213,537 |
|
|
|
229,717 |
|
|
|
135,462 |
|
|
|
(100,484 |
) |
|
|
20,044 |
|
|
|
229,308 |
|
Total |
|
|
$ 170,652 |
|
|
|
$ 1,131,989 |
|
|
|
$ 658,940 |
|
|
|
$ 854,711 |
|
|
|
$ 475,497 |
|
|
$ |
(275,336 |
) |
|
|
$ 123,468 |
|
|
|
$ 886,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage Segment |
|
|
$ 33,694 |
|
|
|
$ 487,155 |
|
|
|
$ 267,525 |
|
|
|
$ 296,718 |
|
|
|
$ 152,546 |
|
|
$ |
(114,463 |
) |
|
|
$ 68,871 |
|
|
|
$ 315,655 |
Specialty Segment |
|
|
19,386 |
|
|
|
47,836 |
|
|
|
61,322 |
|
|
|
17,832 |
|
|
|
10,193 |
|
|
|
6,915 |
|
|
|
3,256 |
|
|
|
28,387 |
|
Total |
|
|
$ 53,080 |
|
|
|
$ 534,991 |
|
|
|
$ 328,847 |
|
|
|
$ 314,550 |
|
|
|
$ 162,739 |
|
|
$ |
(107,548 |
) |
|
|
$ 72,127 |
|
|
|
$ 344,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage Segment |
|
|
$ 35,200 |
|
|
|
$ 488,228 |
|
|
|
$ 258,255 |
|
|
|
$ 284,216 |
|
|
|
$ 156,790 |
|
|
$ |
(84,076 |
) |
|
|
$ 66,962 |
|
|
|
$ 254,891 |
Specialty Segment |
|
|
4,071 |
|
|
|
12,955 |
|
|
|
14,519 |
|
|
|
1,890 |
|
|
|
1,116 |
|
|
|
1,340 |
|
|
|
668 |
|
|
|
4,292 |
|
Total |
|
|
$ 39,271 |
|
|
|
$ 501,183 |
|
|
|
$ 272,774 |
|
|
|
$ 286,106 |
|
|
|
$ 157,906 |
|
|
$ |
(82,736 |
) |
|
|
$ 67,630 |
|
|
|
$ 259,183 |
|
S-6
Tower Group , Inc.
Schedule IV - Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
|
Ceded to |
|
|
Assumed from |
|
|
|
|
|
|
Amount |
|
|
|
Direct |
|
|
Other |
|
|
Other |
|
|
Net |
|
|
Assumed to |
|
($ in thousands) |
|
Amount |
|
|
Companies |
|
|
Companies |
|
|
Amount |
|
|
Net |
|
|
Year ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance |
|
|
$ 989,771 |
|
|
|
$ 184,528 |
|
|
|
$ 80,945 |
|
|
|
$ 886,190 |
|
|
|
9.1 |
% |
Accident and health insurance |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.0 |
% |
|
Total Premiums |
|
|
$ 989,771 |
|
|
|
$ 184,528 |
|
|
|
$ 80,945 |
|
|
|
$ 886,190 |
|
|
|
9.1 |
% |
|
Year ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance |
|
|
$ 627,319 |
|
|
|
$ 290,777 |
|
|
|
$ 7,501 |
|
|
|
$ 344,043 |
|
|
|
2.2 |
% |
Accident and health insurance |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.0 |
% |
|
Total Premiums |
|
|
$ 627,319 |
|
|
|
$ 290,777 |
|
|
|
$ 7,501 |
|
|
|
$ 344,043 |
|
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance |
|
|
$ 520,421 |
|
|
|
$ 264,832 |
|
|
|
$ 3,593 |
|
|
|
$ 259,182 |
|
|
|
1.4 |
% |
Accident and health insurance |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.0 |
% |
|
Total Premiums |
|
|
$ 520,421 |
|
|
|
$ 264,832 |
|
|
|
$ 3,593 |
|
|
|
$ 259,182 |
|
|
|
1.4 |
% |
|
S-7
Tower Group, Inc.
Schedule V - Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
($ in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Balance, January 1 |
|
$ |
550 |
|
|
$ |
204 |
|
|
$ |
248 |
|
Additions |
|
|
1,671 |
|
|
|
707 |
|
|
|
157 |
|
Deletions |
|
|
(949 |
) |
|
|
(361 |
) |
|
|
(201 |
) |
|
Balance, December 31 |
|
$ |
1,272 |
|
|
$ |
550 |
|
|
$ |
204 |
|
|
S-8
Tower Group, Inc.
Schedule VI - Supplemental Information Concerning Insurance Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and Claims |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Unpaid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred and Related to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Year* |
|
|
|
|
|
|
Paid Claims |
|
|
|
|
|
|
Deferred |
|
|
Claim |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Includes |
|
|
Amortization |
|
|
and Claim |
|
|
Net |
|
|
|
Acquisition |
|
|
Adjustment |
|
|
Discounted |
|
|
Unearned |
|
|
Earned |
|
|
Investment |
|
|
Current |
|
|
PXRE |
|
|
of |
|
|
Adjustment |
|
|
Premiums |
|
($ in thousands) |
|
Cost |
|
|
Expenses |
|
|
Reserves |
|
|
Premium |
|
|
Premium |
|
|
Income |
|
|
Year |
|
|
Commutation |
|
|
DAC |
|
|
Expenses |
|
|
Written |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Insurance Subsidiaries |
|
|
$ 170,652 |
|
|
|
$ 1,131,989 |
|
|
|
$ - |
|
|
|
$ 658,940 |
|
|
|
$ 854,711 |
|
|
|
$ 74,866 |
|
|
|
$ 477,757 |
|
|
$ |
(2,620 |
) |
|
$ |
(279,187 |
) |
|
|
$ 405,935 |
|
|
|
$ 886,189 |
|
Unconsolidated affiliate (1) (2) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,627 |
|
|
|
2,098 |
|
|
|
2,105 |
|
|
|
(20 |
) |
|
|
914 |
|
|
|
967 |
|
|
|
1,375 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Insurance Subsidiaries |
|
|
53,080 |
|
|
|
534,991 |
|
|
|
- |
|
|
|
328,847 |
|
|
|
314,551 |
|
|
|
34,568 |
|
|
|
171,616 |
|
|
|
(8,877 |
) |
|
|
(107,547 |
) |
|
|
161,635 |
|
|
|
344,043 |
|
Unconsolidated affiliate (1) |
|
|
5,452 |
|
|
|
18,232 |
|
|
|
- |
|
|
|
17,541 |
|
|
|
29,663 |
|
|
|
1,968 |
|
|
|
17,376 |
|
|
|
86 |
|
|
|
(12,214 |
) |
|
|
8,365 |
|
|
|
31,242 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Insurance Subsidiaries |
|
|
39,271 |
|
|
|
501,183 |
|
|
|
- |
|
|
|
272,774 |
|
|
|
286,106 |
|
|
|
36,699 |
|
|
|
159,512 |
|
|
|
(1,606 |
) |
|
|
(82,736 |
) |
|
|
123,804 |
|
|
|
259,183 |
|
Unconsolidated affiliate (1) |
|
|
5,204 |
|
|
|
8,647 |
|
|
|
- |
|
|
|
15,490 |
|
|
|
17,687 |
|
|
|
2,101 |
|
|
|
9,442 |
|
|
|
(89 |
) |
|
|
(6,523 |
) |
|
|
3,141 |
|
|
|
26,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Information relates to CastlePoint Holdings, Ltd.
(CP) |
(2) The Company acquired CP on February 5, 2009. These are amounts for the period ended February 5, 2009 or for the period from January 1, 2009 February 5, 2009. Subsequent to February 5, 2009, CP amounts are
included with
consolidated insurance subsidiaries. |
S-9
The exhibits listed below are incorporated by reference to the documents following the
descriptions of the exhibits.
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibits |
2.1
|
|
Agreement and Plan of Merger, dated as of August 4, 2008, by and among Tower Group, Inc.,
Ocean I Corporation and CastlePoint Holdings, Ltd., incorporated by reference to Exhibit 2.1
to the Companys Current Report on Form 8-K/A filed on August 6, 2008 |
2.2
|
|
Agreement and Plan of Merger, dated as of June 21, 2009, by and among Tower Group, Inc., Tower
S.F. Merger Corporation and Specialty Underwriters Alliance, Inc., incorporated by reference
to Exhibit 2.1 to the Companys Current Report on Form 8 filed on June 22, 2009 |
2.3
|
|
Amended and Restated Agreement and Plan of Merger, dated as of June 21, 2009, by and among
Tower Group, Inc., Tower S.F. Merger Corporation and Specialty Underwriters Alliance, Inc.,
incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K/A filed
on July 23, 2009 |
2.4
|
|
Purchase Agreement, dated as of February 2, 2010, by and among Tower Group, Inc., OneBeacon
Insurance Group, Ltd., OneBeacon Insurance Group LLC, OneBeacon America Insurance Company, The
Employers Fire Insurance Company, The Camden Fire Insurance Association, Homeland Insurance
Company of New York, OneBeacon Insurance Company, OneBeacon Midwest Insurance Company,
Pennsylvania General Insurance Company and The Northern Assurance Company of America,
incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K filed on
February 3, 2010 |
3.1
|
|
Amended and Restated Certificate of Incorporation of Tower Group, Inc., incorporated by
reference to Exhibit 3.1 to the Companys Registration Statement on Form S-1 (Amendment No. 2)
(No. 333-115310) filed on July 23, 2004 |
3.2
|
|
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Tower Group,
Inc., incorporated by reference to Exhibit 3.1 to the Companys Registration Statement on Form
S-8 (No. 333-115310) filed on February 5, 2009 |
3.3
|
|
Certificate of Designations of Preferred Stock, incorporated by reference to the Companys
Current Report on Form 8-K filed on December 8, 2006 |
3.4
|
|
Certificate of Designations of Series A-1 Preferred Stock of Tower Group, Inc. incorporated by
reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed on January 12, 2007 |
3.5
|
|
Amended and Restated By-laws of Tower Group, Inc. as amended October 24, 2007, incorporated by
reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed on October 26, 2007 |
4.1
|
|
Specimen Common Stock Certificate, incorporated by reference to Exhibit 4.1 to the Companys
Registration Statement on Form S-1 (Amendment No. 6) (No. 333-115310) filed on September 30,
2004 |
4.2
|
|
Warrant issued to Friedman, Billings, Ramsey & Co., Inc., incorporated by reference to Exhibit
4.3 to the Companys Registration Statement on Form S-1 (Amendment No. 3) (No. 333-115310)
filed on August 25, 2004 |
9.1
|
|
Voting Agreement, dated August 4, 2008, between Tower Group, Inc. and Michael H. Lee,
incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on
August 5, 2008 |
10.1
|
|
Employment Agreement, dated as of August 1, 2004, by and between Tower Group, Inc. and Michael
H. Lee, incorporated by reference to Exhibit 10.1 to the Companys Registration Statement on
Form S-1 (Amendment No. 3) (No. 333-115310) filed on August 25, 2004 |
10.2
|
|
Employment Agreement, dated as of August 1, 2004, by and between Tower Group, Inc. and Francis
M. Colalucci, incorporated by reference to Exhibit 10.3 to the Companys Registration
Statement on Form S-1 (Amendment No. 3) (No. 333-115310) filed on August 25, 2004 |
10.3
|
|
Employment Agreement, dated as of March 23, 2009, by and between Tower Group, Inc. and Richard
Barrow, incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form
10-Q filed on May 11, 2009 |
10.4
|
|
Employment Agreement, dated as of November 19, 2009, by and between Tower Group, Inc. and
William E. Hitselberger, incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on November 19, 2009 |
10.4
|
|
2004 Long-Term Equity Compensation Plan, as amended and restated effective May 15, 2008,
incorporated by reference to Exhibit 99.1 to the Companys Registration Statement on Form S-8
(No. 333-115310) filed on June 20, 2008 |
10.5
|
|
2001 Stock Award Plan, incorporated by reference to Exhibit 10.8 to the Companys Registration
Statement on Form S-1 (No. 333-115310) filed on May 7, 2004 |
10.6
|
|
2000 Deferred Compensation Plan, incorporated by reference to Exhibit 10.9 to the Companys
Registration Statement on Form S-1 (Amendment No. 6) (No. 333-115310) filed on September 30,
2004 |
10.7
|
|
Amended & Restated Declaration of Trust, dated as of May 15, 2003, by and between Tower Group,
Inc., Tower Statutory Trust I and U.S. Bank National Association, incorporated by reference to
Exhibit 10.10 to the Companys Registration Statement on Form S-1 (No. 333-115310) filed on
May 7, 2004 |
10.8
|
|
Indenture, dated as of May 15, 2003, by and between Tower Group, Inc. and U.S. Bank National
Association, incorporated by reference to Exhibit 10.11 to the Companys Registration
Statement on Form S-1 (No. 333-115310) filed on May 7, 2004 |
10.9
|
|
Guarantee Agreement, dated as of May 15, 2003, by and between Tower Group, Inc. and U.S. Bank
National Association, incorporated by reference to Exhibit 10.12 to the Companys Registration
Statement on Form S-1 (No. 333-115310) filed on May 7, 2004 |
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibits |
10.10
|
|
Amended and Restated Trust Agreement, dated as of September 30, 2003, by and between Tower
Group, Inc., JPMorgan Chase Bank, Chase Manhattan Bank USA, National Association and Michael
H. Lee, Steven G. Fauth and Francis M. Colalucci as Administrative Trustees of Tower Group
Statutory Trust II, incorporated by reference to Exhibit 10.13 to the Companys Registration
Statement on Form S-1 (No. 333-115310) filed on May 7, 2004 |
10.11
|
|
Junior Subordinated Indenture, dated as of September 30, 2003, by and between Tower Group,
Inc. and JPMorgan Chase Bank, incorporated by reference to Exhibit 10.14 to the Companys
Registration Statement on Form S-1 (No. 333-115310) filed on May 7, 2004 |
10.12
|
|
Guarantee Agreement, dated as of September 30, 2003, by and between Tower Group, Inc. and
JPMorgan Chase Bank, incorporated by reference to Exhibit 10.15 to the Companys Registration
Statement on Form S-1 (No. 333-115310) filed on May 7, 2004 |
10.13
|
|
Service and Expense Sharing Agreement, dated as of December 28, 1995, by and between Tower
Insurance Company of New York and Tower Risk Management Corp., incorporated by reference to
Exhibit 10.16 to the Companys Registration Statement on Form S-1 (No. 333-115310) filed on
May 7, 2004 |
10.14
|
|
Real Estate Lease and amendments thereto, by and between Broadpine Realty Holding Company,
Inc. and Tower Insurance Company of New York, incorporated by reference to Exhibit 10.17 to
the Companys Registration Statement on Form S-1 (Amendment No. 1) (No. 333-115310) filed on
June 24, 2004 |
10.15
|
|
Third Amendment to Lease between Tower Insurance Company of New York and 120 Broadway
Holdings, LLC executed September 1, 2005, incorporated by reference to Exhibit 10.01 to the
Companys Current Report on Form 8-K filed on August 26, 2005 |
10.16
|
|
License and Services Agreement, dated as of June 11, 2002, by and between AgencyPort Insurance
Services, Inc. and Tower Insurance Company of New York, incorporated by reference to Exhibit
10.18 to the Companys Registration Statement on Form S-1 (Amendment No. 3) (No. 333-115310)
filed on August 25, 2004 |
10.17
|
|
Agreement, dated as of April 17, 1996, between Morstan General Agency, Inc. and Tower Risk
Management Corp., incorporated by reference to Exhibit 10.19 to the Companys Registration
Statement on Form S-1 (No. 333-115310) filed on May 7, 2004 |
10.18
|
|
Amended and Restated Declaration of Trust, dated December 15, 2004, by and among Wilmington
Trust Company, as Institutional Trustee; Wilmington Trust Company, as Delaware Trustee; Tower
Group, Inc., as Sponsor; and the Trust Administrators Michael H. Lee, Francis M. Colalucci and
Steve G. Fauth, incorporated by reference to Exhibit 10.04 to the Companys Current Report on
Form 8-K filed on December 20, 2004 |
10.19
|
|
Indenture between Tower Group, Inc. and Wilmington Trust Company, as Trustee, dated December
15, 2004, incorporated by reference to Exhibit 10.03 to the Companys Current Report on Form
8-K filed on December 20, 2004 |
10.20
|
|
Guarantee Agreement dated December 15, 2004, by and between Tower Group, Inc. and Wilmington
Trust Company, incorporated by reference to Exhibit 10.02 to the Companys Current Report on
Form 8-K filed on December 20, 2004 |
10.21
|
|
Amended and Restated Declaration of Trust, dated December 21, 2004, by and among JPMorgan
Chase Bank, National Association, as Institutional Trustee, Chase Manhattan Bank USA, National
Association, as Delaware Trustee; Tower Group, Inc., as Sponsor; and the Trust Administrators
Michael H. Lee, Francis M. Colalucci and Steve G. Fauth, incorporated by reference to Exhibit
10.04 to the Companys Current Report on Form 8-K filed on December 23, 2004 |
10.22
|
|
Indenture between Tower Group, Inc. and JPMorgan Chase Bank, National Association, as Trustee,
dated December 21, 2004, incorporated by reference to Exhibit 10.03 to the Companys Current
Report on Form 8-K filed on December 23, 2004 |
10.23
|
|
Guarantee Agreement dated December 21, 2004, by and between Tower Group, Inc. and JPMorgan
Chase Bank, National Association, incorporated by reference to Exhibit 10.02 to the Companys
Current Report on Form 8-K filed on December 23, 2004 |
10.24
|
|
Amended and Restated Declaration of Trust, dated March 31, 2006, by and among Wells Fargo
Bank, National Association, as Institutional Trustee; Wells Fargo Delaware Trust Company, as
Delaware Trustee; Tower Group, Inc., as Sponsor; and the Trust Administrators Francis M.
Colalucci and Steve G. Fauth, incorporated by reference to Exhibit 10.04 to the Companys
Current Report on Form 8-K filed on April 6, 2006 |
10.25
|
|
Indenture between Tower Group, Inc. and Wells Fargo Bank, National Association, as Trustee,
dated March 31, 2006, incorporated by reference to Exhibit 10.03 to the Companys Current
Report on Form 8-K filed on April 6, 2006 |
10.26
|
|
Guarantee Agreement dated March 31, 2006, by and between Tower Group, Inc. and Wells Fargo
Delaware Trust Company, incorporated by reference to Exhibit 10.02 to the Companys Current
Report on Form 8-K filed on April 6, 2006 |
10.27
|
|
Stock Purchase Agreement by and among Tower Group, Inc. and Preserver Group, Inc. dated
November 13, 2006, incorporated by reference to Exhibit 10.1 to the Companys Current Report
on Form 8-K filed on November 17, 2006 |
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibits |
10.28
|
|
Exchange Agreement by and among Tower Group, Inc. and CastlePoint Management Corp. dated
January 11, 2007 incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed on January 12, 2007 |
10.29
|
|
Master Agreement dated April 4, 2006 by and among Tower Group, Inc., Tower Insurance Company
of New York, Tower National Insurance Company, CastlePoint Holdings, Ltd. and CastlePoint
Management Corp. incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed on January 22, 2007 |
10.30
|
|
Addendum No. 1 to the Master Agreement by and among Tower Group, Inc. and CastlePoint
Holdings, Ltd. incorporated by reference to Exhibit 10.2 to the Companys Current Report on
Form 8-K filed on January 22, 2007 |
10.31
|
|
Amended and Restated Declaration of Trust, dated January 25, 2007, by and among Wilmington
Trust, as Institutional Trustee and as Delaware Trustee; Tower Group, Inc., as Sponsor; and
the Trust Administrators Michael H. Lee, Francis M. Colalucci and Stephen L. Kibblehouse,
incorporated by reference to Exhibit 10.02 to the Companys Current Report on Form 8-K filed
on January 26, 2007 |
10.32
|
|
Indenture between Tower Group, Inc. and Wilmington Trust Company, as Trustee, dated January
25, 2007, incorporated by reference to Exhibit 4.01 to the Companys Current Report on Form
8-K filed on January 26, 2007 |
10.33
|
|
Guarantee Agreement dated January 25, 2007, by and between Tower Group, Inc. and Wilmington
Trust Company, incorporated by reference to Exhibit 10.01 to the Companys Current Report on
Form 8-K filed on January 26, 2007 |
10.34
|
|
Management Agreement, dated July 1, 2007, by and between CastlePoint Insurance Company and
Tower Risk Management Corp., incorporated by reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q filed on November 9, 2007 |
10.35
|
|
Employment Agreement, dated as of July 23, 2007, by and between Tower Group Inc. and Gary S.
Maier, incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form
10-Q filed on November 9, 2007 |
10.36
|
|
Fourth Amendment to Lease between Tower Insurance Company of New York and 120 Broadway
Holdings, LLC dated July 25, 2006, incorporated by reference to Exhibit 10.49 to the Companys
Annual Report on Form 10-K filed on March 14, 2008 |
10.37
|
|
Fifth Amendment to Lease between Tower Insurance Company of New York and 120 Broadway
Holdings, LLC dated December 20, 2006, incorporated by reference to Exhibit 10.50 to the
Companys Annual Report on Form 10-K filed on March 14, 2008 |
10.38
|
|
Employment Agreement, dated as of November 12, 2006, by and between Tower Group Inc. and
Patrick J. Haveron, incorporated by reference to Exhibit 10.1 to the Companys Current Report
on Form 8-K filed on April 12, 2007 |
10.39
|
|
Service Agreement dated May 1, 2007 by and among Tower Risk Management Corp. and CastlePoint
Management Corp. , incorporated by reference to Exhibit 10.59 to the Companys Annual Report
on Form 10-K filed on March 14, 2008 |
10.40
|
|
Form of Tower Group, Inc. 2004 Long Term Equity Compensation Plan Restricted Stock Award
Agreement, incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed on March 18, 2008 |
10.41
|
|
Form of Tower Group, Inc. 2004 Long Term Equity Compensation Plan Performance Shares Award
Agreement, incorporated by reference to Exhibit 10.50 to the Companys Annual Report on Form
10-K filed on March 16, 2009 |
10.42
|
|
Form of Tower Group, Inc. 2004 Long Term Equity Compensation Plan, as amended and restated
effective May 15, 2008, Restricted Stock Units Award Agreement, incorporated by reference to
Exhibit 10.63 to the Companys Annual Report on Form 10-K filed on March 14, 2008 |
10.43
|
|
Stock Purchase Agreement dated August 27, 2008 between CastlePoint Reinsurance Company, Ltd.,
HIG, Inc. and Brookfield US Corporation, incorporated by reference to Exhibit 2.1 to
CastlePoint Holdings, Ltd.s Current Report on Form 8-K filed on September 2, 2008 |
10.44
|
|
Asset Purchase Agreement, dated as of August 26, 2008, by and among CastlePoint Reinsurance
Company, Ltd., Tower Insurance Company of New York, Tower National Insurance Company,
Preserver Insurance Company, Mountain Valley Insurance Company, North East Insurance Company
and Tower Risk Management Corp., incorporated by reference to Exhibit 2.1 to the Companys
Current Report on Form 8-K filed August 27, 2008 |
10.45
|
|
Limited Waiver Agreement, dated as of August 26, 2008, by and among Tower Group, Inc., Ocean I
Corporation and CastlePoint Holdings, Ltd., incorporated by reference to Exhibit 2.2 to the
Companys Current Report on Form 8-K filed August 27, 2008 |
10.46
|
|
Parent Guarantee Agreement, dated as of December 1, 2006, between CastlePoint Holdings, Ltd.
and Wilmington Trust Company, incorporated by reference to Exhibit 10.32 to CastlePoint
Holdings Ltd.s Registration Statement on Form S-1 (No. 333-139939) filed on January 11, 2007 |
10.47
|
|
Guarantee Agreement, dated as of December 1, 2006, between CastlePoint Management Corp. and
Wilmington Trust Company, incorporated by reference to Exhibit 10.33 to CastlePoint Holdings
Ltd.s Registration Statement on Form S-1 (No. 333-139939) filed on January 11, 2007 |
10.48
|
|
Indenture, dated as of December 1, 2006, between CastlePoint Management Corp. and Wilmington
Trust Company, incorporated by reference to Exhibit 10.34 to CastlePoint Holdings Ltd.s
Registration Statement on Form S-1 (No. 333-139939) filed on January 11, 2007 |
10.49
|
|
Amended and Restated Declaration of Trust, dated as of December 1, 2006, among Wilmington
Trust Company as |
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibits |
|
|
Institutional Trustee, Wilmington Trust Company, as Delaware Trustee,
CastlePoint Management Corp., as Sponsor, and Joel Weiner, James Dulligan and Roger Brown, as
Administrators, incorporated by reference to Exhibit 10.35 to CastlePoint Holdings Ltd.s
Registration Statement on Form S-1 (No. 333-139939) filed on January 11, 2007 |
10.50
|
|
Parent Guarantee Agreement, dated as of December 14, 2006, between CastlePoint Holdings, Ltd.
and Wilmington Trust Company, incorporated by reference to Exhibit 10.36 to CastlePoint
Holdings Ltd.s Registration Statement on Form S-1 (No. 333-139939) filed on January 11, 2007 |
10.51
|
|
Guarantee Agreement of CastlePoint Management Corp., dated as of December 14, 2006, between
CastlePoint Management Corp. and Wilmington Trust Company, incorporated by reference to
Exhibit 10.37 to CastlePoint Holdings Ltd.s Registration Statement on Form S-1 (No.
333-139939) filed on January 11, 2007 |
10.52
|
|
Indenture, dated as of December 14, 2006, between CastlePoint Management Corp. and Wilmington
Trust Company, incorporated by reference to Exhibit 10.38 to CastlePoint Holdings Ltd.s
Registration Statement on Form S-1 (No. 333-139939) filed on January 11, 2007 |
10.53
|
|
Amended and Restated Declaration of Trust, dated as of December 14, 2006, among Wilmington
Trust Company as Institutional Trustee, Wilmington Trust Company, as Delaware Trustee,
CastlePoint Management Corp., as Sponsor, and Joel Weiner, James Dulligan and Roger Brown, as
Administrators, incorporated by reference to Exhibit 10.39 to CastlePoint Holdings Ltd.s
Registration Statement on Form S-1 (No. 333-139939) filed on January 11, 2007 |
10.54
|
|
CastlePoint Holdings, Ltd. 2006 Long-Term Equity Compensation Plan, incorporated by reference
to Exhibit 10.4 to CastlePoint Holdings Ltd.s Registration Statement on Form S-1 (File No.
333-134628) filed on June 1, 2006 |
10.55
|
|
Amendment No. 1 to CastlePoint Holdings, Ltd. 2006 Long-Term Equity Compensation Plan,
incorporated by reference to Exhibit 4.5 to CastlePoint Holdings Ltd.s Registration Statement
on Form S-8 (File No. 333-134628) filed on December 5, 2007 |
10.56
|
|
Form of Stock Option Agreement for Executive Employee Recipients of Options under 2006
Long-Term Equity Compensation Plan, incorporated by reference to Exhibit 10.5 to CastlePoint
Holdings Ltd.s Registration Statement on Form S-1 (File No. 333-134628) filed on June 1, 2006 |
10.57
|
|
Form of Stock Option Agreement for Non-Employee Director Recipients of Options under 2006
Long-Term Equity Compensation Plan, incorporated by reference to Exhibit 10.6 to CastlePoint
Holdings Ltd.s Registration Statement on Form S-1 (File No. 333-134628) filed on June 1, 2006 |
10.58
|
|
Indenture between CastlePoint Bermuda Holdings, Ltd. and Wilmington Trust Company, as Trustee,
dated September 27, 2007, incorporated by reference to Exhibit 4.1 to CastlePoint Holdings
Ltd.s Current Report on Form 8-K filed on October 1, 2007 |
10.59
|
|
Guarantee Agreement dated September 27, 2007 by and between CastlePoint Bermuda Holdings, Ltd.
and Wilmington Trust Company, incorporated by reference to Exhibit 4.2 to CastlePoint Holdings
Ltd.s Current Report on Form 8-K filed on October 1, 2007 |
10.60
|
|
Amended and Restated Declaration of Trust, dated September 27, 2007, by Wilmington Trust, as
Institutional Trustee and as Delaware Trustee; CastlePoint Bermuda Holdings, Ltd. as Sponsor,
and Trust Administrators Roger A. Brown, Joel S. Weiner and James Dulligan, incorporated by
reference to Exhibit 4.3 to CastlePoint Holdings Ltd.s Current Report on Form 8-K filed on
October 1, 2007 |
10.61
|
|
Fixed/Floating Rate Junior Subordinated Deferrable Interest Debenture, dated September 27,
2007 by CastlePoint Bermuda Holdings, Ltd. in favor of Wilmington Trust Company as
institutional trustee, incorporated by reference to Exhibit 4.4 to CastlePoint Holdings Ltd.s
Current Report on Form 8-K filed on October 1, 2007 |
10.62
|
|
Supplemental Guarantee, dated as of February 5, 2009, by and among Ocean I Corporation,
CastlePoint Holdings, Ltd. and Wilmington Trust Company (related to that certain Parent
Guarantee Agreement, dated as of December 1, 2006, between CastlePoint Holdings, Ltd. and
Wilmington Trust Company), incorporated by reference to Exhibit 10.71 to the Companys Annual
Report on Form 10-K filed on March 16, 2009 |
10.63
|
|
Supplemental Guarantee, dated as of February 5, 2009, by and among Ocean I Corporation,
CastlePoint Holdings, Ltd. and Wilmington Trust Company (related to that certain Parent
Guarantee Agreement, dated as of December 14, 2006, between CastlePoint Holdings, Ltd. and
Wilmington Trust Company), incorporated by reference to Exhibit 10.72 to the Companys Annual
Report on Form 10-K filed on March 16, 2009 |
10.64
|
|
Supplemental Guarantee, dated as of February 5, 2009, by and among Ocean I Corporation,
CastlePoint Holdings, Ltd. and Wilmington Trust Company (related to that certain Parent
Guarantee Agreement, dated as of November 8, 2007, between CastlePoint Holdings, Ltd. and
Wilmington Trust Company), incorporated by reference to Exhibit 10.73 to the Companys Annual
Report on Form 10-K filed on March 16, 2009 |
10.65
|
|
Separation Agreement, dated as of February 27, 2009, by and between Tower Group, Inc. and
Patrick J. Haveron, incorporated by reference to Exhibit 10.75 to the Companys Annual Report
on Form 10-K filed on March 16, 2009 |
10.66
|
|
Consulting Agreement, dated as of February 27, 2009, by and between Tower Group, Inc. and
Patrick J. Haveron, incorporated by reference to Exhibit 10.76 to the Companys Annual Report
on Form 10-K filed on March 16, 2009 |
10.67
|
|
Letter of Amendment dated February 23, 2009 to Stock Purchase Agreement dated August 27, 2008
between CastlePoint Reinsurance Company, Ltd., HIG, Inc. and Brookfield US Corporation,
incorporated by reference to Exhibit 10.77 to the Companys Annual Report on Form 10-K filed
on March 16, 2009 |
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibits |
21.1
|
|
Subsidiaries of the registrant |
23.1
|
|
Consent of Johnson Lambert & Co. |
31.1
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Michael H. Lee |
31.2
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Francis M. Colalucci |
32
|
|
Certification of Chief Executive Officer and Chief Financial Officer, Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |