UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended December 31,
2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to to .
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Commission File Number
001-34204
SeaBright Insurance Holdings,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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56-2393241
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(State or other jurisdiction
of
incorporation or organization)
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(IRS Employer
Identification No.)
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1501
4th
Avenue, Suite 2600
Seattle, Washington
(Address of principal
executive offices)
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98101
(Zip
code)
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(206) 269-8500
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which registered
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Common stock, par value $0.01 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark whether the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act: Yes o No þ
Indicate by check mark whether the registrant is not required to
file reports pursuant to Section 13 or 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 Web site, 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 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act): Yes o No þ
The aggregate market value of the common stock held by
non-affiliates of the registrant, based on the closing price of
the common stock on June 30, 2009 as reported by the New
York Stock Exchange, was $208,894,165.
The number of shares of the registrants common stock
outstanding as of March 12, 2010 was 21,722,481.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the SeaBright Insurance Holdings, Inc. definitive
Proxy Statement for its 2010 annual meeting of stockholders to
be filed with the Commission pursuant to Regulation 14A not
later than 120 days after December 31, 2009 are
incorporated by reference in Part III of this
Form 10-K.
SEABRIGHT
INSURANCE HOLDINGS, INC.
INDEX TO
FORM 10-K
PART I
In this annual report:
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references to the Acquisition refer to the series
of transactions that occurred on September 30, 2003
described under the heading Our History in
Item 1 of this Part I;
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references to our predecessor, for periods prior
to the date of the Acquisition, refer collectively to PointSure
Insurance Services, Inc., Eagle Pacific Insurance Company and
Pacific Eagle Insurance Company;
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references to the Company, we,
us or our refer to SeaBright Insurance
Holdings, Inc. and its subsidiaries, SeaBright Insurance Company
and PointSure Insurance Services, Inc., and prior to the date of
the Acquisition, include references to our predecessor;
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the term our business refers to the business
conducted by the Company since October 1, 2003 and with
respect to periods prior to October 1, 2003, to the
business conducted by our predecessor; and
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references to SeaBright refer solely to SeaBright
Insurance Holdings, Inc., unless the context suggests
otherwise.
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Overview
We are a specialty provider of multi-jurisdictional
workers compensation insurance and, on a limited basis,
general liability insurance. We are domiciled in Illinois,
commercially domiciled in California and headquartered in
Seattle, Washington. We are licensed in 49 states and the
District of Columbia to write workers compensation and
other lines of insurance. Traditional providers of workers
compensation insurance provide coverage to employers under one
or more state workers compensation laws, which prescribe
benefits that employers are obligated to provide to their
employees who are injured arising out of or in the course of
employment. We focus on employers with complex workers
compensation exposures, and provide coverage under multiple
state and federal acts, applicable common law or negotiated
agreements. We also provide traditional state act coverage in
markets we believe are underserved. In 2008, we began providing
general liability insurance on a limited basis and only in
conjunction with workers compensation insurance we provide
for major construction projects written under a controlled
insurance program (commonly known as
wrap-up
programs). At December 31, 2009, we had three general
liability insurance policies in force with estimated annual
premium of $1.2 million. Since our general liability
insurance business is small, the majority of discussion in this
annual report on
Form 10-K
focuses on our workers compensation line of business.
Our workers compensation policies are issued to employers
who also pay the premiums. The policies provide payments to
covered, injured employees of the policyholder for, among other
things, temporary or permanent disability benefits, death
benefits and medical and hospital expenses. The benefits payable
and the duration of such benefits are set by statute and vary by
jurisdiction and with the nature and severity of the injury or
disease and the wages, occupation and age of the employee.
SeaBright Insurance Holdings, Inc. was formed in 2003 by members
of our current management and entities affiliated with Summit
Partners, a leading private equity and venture capital firm, for
the purpose of acquiring from Lumbermens Mutual Casualty Company
(LMC) and certain of its affiliates the renewal
rights and substantially all of the operating assets and
employees of Eagle Pacific Insurance Company and Pacific Eagle
Insurance Company, which we collectively refer to as Eagle or
the Eagle Entities (the Acquisition). Eagle began
writing specialty workers compensation insurance in the
mid-1980s. The Acquisition gave us renewal rights to an
existing portfolio of business, representing a valuable asset
given the customer renewal rates of our business, and a fully
operational infrastructure that would have taken many years to
develop. These renewal rights gave us access to Eagles
customer lists and the right to seek to renew Eagles
continuing in-force insurance contracts. These renewal rights
were valued at the date of the Acquisition.
1
Introduction
to Insurance Terms
Throughout this annual report, we refer to certain terms that
are commonly used in the insurance industry. The following terms
when used herein have the following meanings:
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Accident year or accident year losses
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The year in which an accident or loss occurred, regardless of
when the accident was reported or when the related loss amount
was recognized in our financial statements. Losses grouped by
accident year are referred to as accident year losses.
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Assume
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To receive from a ceding company all or a portion of a risk in
consideration of receipt of a premium.
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Assumed premiums written
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Premiums that we have received from an authorized state-mandated
pool in connection with our involuntary assumption of a portion
of the insurance written by the pool.
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Cede
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To transfer to an assuming company, or reinsurer, all or a
portion of a risk in consideration of payment of a premium.
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Ceded premiums written
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The portion of our gross premiums written that is ceded to
reinsurers in return for the portion of our risk that they
reinsure. Also included in ceded premiums written are premiums
related to policies that we write on behalf of the Washington
State USL&H Compensation Act Assigned Risk Plan (the
Washington USL&H Plan). We immediately cede
100% of direct premiums written related to this business, net of
our expenses, and 100% of the associated losses back to the
Washington USL&H Plan.
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Commutation
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The termination of obligation between the parties to an
agreement.
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Development
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The amount by which estimated losses, measured subsequently by
reference to payments and additional estimates, differ from
those originally reported for a period. Development is favorable
when losses ultimately settle for less than the amount reserved
or subsequent estimates indicate a basis for reducing loss
reserves on open claims. Development is unfavorable when losses
ultimately settle for more than the levels at which they were
reserved or subsequent estimates indicate a basis for reserve
increases on open claims. Favorable or unfavorable development
of loss reserves is reflected in our Consolidated Statement of
Operations in the period in which the change is made.
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Direct loss reserves
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Loss reserves related to business written directly by us, as
opposed to loss reserves related to business that is assumed or
ceded by us.
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Direct premiums written
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All premiums, billed and unbilled, written by us during a
specified policy period. Premiums are earned over the terms of
the related policies. At the end of each accounting period, the
portions of premiums that are not yet earned are included in
unearned premiums and are realized as revenue in subsequent
periods over the remaining terms of the policies.
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Excess of loss reinsurance
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A form of reinsurance in which the reinsurer pays all or a
specified percentage of a loss caused by a particular occurrence
or event in excess of a fixed amount and up to a stipulated
limit.
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Gross premiums written
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The sum of direct premiums written and assumed premiums written
during a specified period.
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Incurred but not reported claims
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Claims relating to insured events that have occurred but have
not yet been reported to us.
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In-force premiums
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The current annual gross premiums written on all active or
unexpired policies, excluding premiums received from the
Washington USL&H Plan.
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Loss adjustment expenses
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The expenses of investigating, administering and settling
claims, including legal expenses.
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Loss reserves
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The liability representing estimates of amounts needed to pay
reported and unreported claims and related loss adjustment
expenses.
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Net combined ratio
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The sum of the net loss ratio and the net underwriting expense
ratio.
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Net loss ratio
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A key financial measure that we use in monitoring our
profitability. Calculated by dividing loss and loss adjustment
expenses for the period less claims service income by premiums
earned for the period.
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Net premiums written
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Equal to gross premiums written minus ceded premiums written.
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Net underwriting expense ratio
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A key profitability measure. Calculated by dividing
underwriting, acquisition and insurance expenses for the period
less other service income by premiums earned for the period.
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Reinsurance
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A contract by which one insurer transfers all or part of a risk
to another insurer in exchange for all or part of the premium
paid by the insured.
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Retention
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The amount of losses from a single occurrence or event which is
paid by the company prior to the attachment of excess of loss
reinsurance.
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Retrospectively-rated policy
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A policy containing a provision for determining the insurance
premium for a specified policy period on the basis of the loss
experience for the same period.
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Treaty
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A reinsurance contract.
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Industry
Background
Workers compensation is a statutory system under which an
employer is required to pay for its employees medical,
disability, vocational rehabilitation and death benefits costs
for work-related injuries or illnesses. Most employers comply
with this requirement by purchasing workers compensation
insurance. The principal concept underlying workers
compensation laws is that an employee injured in the course of
his or her employment has only the legal remedies available
under workers compensation law and does not have any other
recourse against his or her employer. Generally, workers are
covered for injuries that occur in the course and within the
scope of their employment. An employers obligation to pay
workers compensation does not depend on any negligence or
wrongdoing on the part of the employer and exists even for
injuries that result from the negligence or wrongdoings of
another person, including the employee.
Workers compensation insurance policies generally provide
that the carrier will pay all benefits that the insured employer
may become obligated to pay under applicable workers
compensation laws. Each state has a
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regulatory and adjudicatory system that quantifies the level of
wage replacement to be paid, determines the level of medical
care required to be provided and the cost of permanent
impairment and specifies the options in selecting healthcare
providers available to the injured employee or the employer.
Coverage under the United States Longshore and Harbor
Workers Compensation Act (USL&H or the
USL&H Act) is similar to the state statutory
system, but is administered on a federal level by the
U.S. Department of Labor. This coverage is required for
maritime employers with employees working on or near the
waterfront in coastal areas of the United States and its inland
waterways. As benefits under the USL&H Act are generally
more generous than in the individual state systems, the rates
charged for this coverage are higher than those charged for
comparable land-based employment. These state and federal laws
generally require two types of benefits for injured employees:
(1) medical benefits, which include expenses related to
diagnosis and treatment of the injury, as well as any required
rehabilitation and (2) indemnity payments, which consist of
temporary wage replacement, permanent disability payments and
death benefits to surviving family members. To fulfill these
mandated financial obligations, virtually all employers are
required to purchase workers compensation insurance or, if
permitted by state law or approved by the U.S. Department
of Labor, to self-insure. In most states, employers may purchase
workers compensation insurance from a private insurance
carrier, a state-sanctioned assigned risk pool or a
self-insurance fund (an entity that allows employers to obtain
workers compensation coverage on a pooled basis, typically
subjecting each employer to joint and several liability for the
entire fund). Some states, including North Dakota, Ohio,
Washington, and Wyoming, are known as monopolistic
states, meaning that employers in those states are generally
required to buy workers compensation insurance from the
state or, in some cases, may be allowed to self-insure.
Our
History
On July 14, 2003, SeaBright entered into a purchase
agreement with Kemper Employers Group, Inc. (KEG),
LMC and the Eagle Entities. Pursuant to the purchase agreement,
we acquired 100% of the issued and outstanding capital stock of
Kemper Employers Insurance Company (KEIC) and
PointSure Insurance Services, Inc. (PointSure), a
wholesale insurance broker and third party claims administrator,
and acquired tangible assets, specified contracts, renewal
rights and intellectual property rights from LMC and the Eagle
Entities. We acquired KEIC, a shell company with no in-force
policies or employees, solely for the purpose of acquiring its
workers compensation licenses in 43 states and the
District of Columbia and for its certification with the United
States Department of Labor. SeaBright paid approximately
$6.5 million for KEICs insurance licenses,
Eagles renewal rights, internally developed software and
other assets and PointSure and approximately $9.2 million
for KEICs statutory surplus and capital, for a total
purchase price of $15.7 million. In September 2004 we paid
to LMC a purchase price adjustment in the amount of $771,116
based on the terms of the purchase agreement.
The Acquisition was completed on September 30, 2003, at
which time entities affiliated with Summit Partners, certain
co-investors and members of our management team invested
approximately $45.0 million in SeaBright and received
convertible preferred stock in return. See Certain
Relationships and Related Transactions, and Director
Independence in Part III, Item 13 of this annual
report. These proceeds were used to pay for the assets under the
purchase agreement and to contribute additional capital to KEIC,
which was renamed SeaBright Insurance Company.
SeaBright Insurance Company received an A−
(Excellent) rating from A.M. Best Company
(A.M. Best) following the completion of the
Acquisition. See the discussion under the heading
Ratings in this Item 1.
On January 26, 2005, we closed the initial public offering
of 8,625,000 shares of our common stock at a price of
$10.50 per share for net proceeds of approximately
$80.8 million, after deducting underwriters fees,
commissions and offering costs totaling approximately
$9.8 million. Approximately $74.8 million of the net
proceeds were contributed to SeaBright Insurance Company. In
connection with our initial public offering, all 508,365.25
outstanding shares of our Series A preferred stock were
converted into 7,777,808 shares of common stock.
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On February 1, 2006, we closed a follow-on public offering
of 3,910,000 shares of common stock at a price of $15.75
per share for net proceeds of approximately $57.7 million,
after deducting underwriters fees, commissions and
offering costs totaling approximately $3.9 million.
Following the closing of this offering, we contributed
$50.0 million of the net proceeds to SeaBright Insurance
Company, which used the capital to expand its business in its
core markets and to new territories.
On December 17, 2007, we completed the acquisition of Total
HealthCare Management, Inc. (THM), a privately held
California provider of medical bill review, utilization review,
nurse case management and related services. The total purchase
price was $1.5 million, of which $1.2 million was paid
at closing. The remaining $0.3 million was scheduled to be
paid in three equal installments on the first three
anniversaries of the closing date, provided that THM achieves
certain revenue objectives in 2008, 2009 and 2010. Based on
THMs performance in 2008 and 2009, the first two
installments have not been paid at this time. However, such
amount may be paid later if warranted by THMs future
performance. Goodwill recognized in connection with this
acquisition totaled approximately $1.4 million. Following
the acquisition, THM became a wholly owned subsidiary of
SeaBright.
In July 2008, PointSure acquired 100% of the outstanding common
stock of Black/White and Associates, Inc., Black/White and
Associates of Nevada and Black/White Rockridge Insurance
Services, Inc. (referred to collectively as BWNV), a
privately held managing general agent and wholesale insurance
broker. Also included in the transaction was a covenant not to
compete from key principals of BWNV and other intangible assets.
The preliminary purchase price paid at closing was
$1.7 million, of which $0.5 million was allocated to
the purchase of BWNV capital stock. The Company recorded
goodwill of approximately $0.5 million in connection with
this acquisition. Following the acquisition, BWNV became a
wholly owned subsidiary of PointSure. The stock purchase
agreement provided for a contingent purchase price to be paid by
(or refunded to) the Company approximately 13 months
following the closing date, depending on whether BWNV revenue in
the 12 months following closing exceeded (or was less than)
the base revenue assumed at the time of the closing. The Company
paid approximately $159,000 as additional purchase consideration
upon completion of the contingency period in 2009.
Corporate
Structure
Our corporate structure was as follows at December 31, 2009:
SeaBright Insurance Company is our insurance company subsidiary
and a specialty provider of multi-jurisdictional workers
compensation insurance. PointSure acts primarily as an in-house
wholesale broker and third party administrator for SeaBright
Insurance Company. Total HealthCare Management, Inc. is a
provider of medical bill review, utilization review, nurse case
management and related services. Black/White and Associates,
Inc. is a managing general agent and wholesale insurance broker.
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Services
Arrangements
In connection with the Acquisition, we entered into services
agreements with LMC and certain of its affiliates that require
us to provide certain service functions to the Eagle Entities in
exchange for fee income. The services that we are required to
provide to the Eagle Entities under these agreements include
administrative services, such as underwriting services, billing
and collections services, safety services and accounting
services, and claims services, including claims administration,
claims investigation and loss adjustment and settlement
services. For the years ended December 31, 2009, 2008 and
2007, we received approximately $0.3 million,
$0.3 million, and $0.9 million, respectively, in
service fee income from LMC and its affiliates under these
services arrangements.
At the time of the Acquisition, we entered into a service
agreement with Broadspire Services, Inc.
(Broadspire), a third-party claims administrator and
former subsidiary of LMC, pursuant to which Broadspire provided
us with claims services for the claims that we acquired from
KEIC in connection with the Acquisition. In 2008, we terminated
our arrangement with Broadspire and assumed responsibility for
administering these claims.
Issues
Relating to a Potential LMC Receivership
LMC and its affiliates had traditionally offered a wide array of
personal, risk management and commercial property and casualty
insurance products. However, due to the distressed financial
situation of LMC and its affiliates, LMC is no longer writing
new business and is now operating under a voluntary run-off plan
which has been approved by the Illinois Department of Insurance.
Run-off is the professional management of an
insurance companys discontinued, distressed or non-renewed
lines of insurance and associated liabilities outside of a
judicial proceeding. Under the run-off plan, LMC has instituted
aggressive expense control measures in order to reduce its
future loss exposure and allow it to meet its obligations to
current policyholders.
In the event that LMC is placed into receivership, a receiver
may seek to recover certain payments made by LMC to us in
connection with the Acquisition under applicable voidable
preference and fraudulent transfer laws. However, we believe
that there are factors that would mitigate the risk to us
resulting from a potential voidable preference or fraudulent
conveyance action brought by a receiver of LMC, including the
fact that we believe LMC and KEIC were solvent at the time of
the Acquisition and that the Acquisition was negotiated at arms
length and for fair value, the fact that the Director of the
Illinois Department of Insurance approved the Acquisition
notwithstanding LMCs financial condition and the fact that
a substantial period of time has elapsed since the date of the
Acquisition.
In addition, if LMC is placed into receivership, various
arrangements that we established with LMC in connection with the
Acquisition, including the servicing arrangements, the
commutation agreement, the adverse development cover, and the
collateralized reinsurance trust could be adversely affected.
For a discussion of the risks relating to a potential LMC
receivership, see the risks described under Risks Related
to Our Business In the event LMC is placed into
receivership, we could lose our rights to fee income and
protective arrangements that were established in connection with
the Acquisition, our reputation and credibility could be
adversely affected and we could be subject to claims under
applicable voidable preference and fraudulent transfer
laws in Part I, Item 1A of this annual report.
Competitive
Strengths
We believe we enjoy the following competitive strengths:
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Niche Product Offering. Our specialized
workers compensation insurance products in maritime,
alternative dispute resolution (ADR) and selected
state act markets enable us to address the needs of underserved
markets. Our management team and staff have extensive experience
serving the specific and complex needs of these customers.
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Specialized Underwriting Expertise. We
identify individual risks with complex workers
compensation needs, such as multi-jurisdictional coverage, and
negotiate customized coverage plans to meet those needs. Our
underwriting professionals average approximately 22 years
of insurance industry experience.
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Focus on Larger Accounts. We target a
relatively small number of larger, more safety-conscious
employers (businesses with 50 to 400 employees) within our
niche markets. We had over 1,500 customers, with an average
estimated annual premium size of approximately $198,000 at
December 31, 2009 compared to approximately $248,000 at
December 31, 2008, a reflection of our continued geographic
diversification , lower premium rates in many jurisdictions and
the introduction of our Alternative Markets and Small Maritime
Program products. We believe this focus, together with our
specialized underwriting expertise, increases the profitability
of our book of business primarily because the more extensive
loss history of larger customers enables us to better predict
future losses, allowing us to price our policies more
accurately. Our focus on larger accounts also enables us to
provide individualized attention to our customers, which we
believe leads to higher satisfaction and long-term loyalty.
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Proactive Loss Control and Claims
Management. We consult with employers on
workplace safety, accident and illness prevention and safety
awareness training. We also offer employers medical and
disability management tools that help injured employees return
to work more quickly. These tools include access to a national
network of physicians, case management nurses and a national
discount pharmacy benefit program. Our strong focus on proven
claims management practices helps minimize attorney involvement
and to expedite the settlement of valid claims. In addition, our
branch office network affords us extensive local knowledge of
claims and legal environments, further enhancing our ability to
achieve favorable results on claims. As of December 31,
2009, approximately 98% of our total time loss claims were
handled in-house as opposed to being handled by third-party
administrators. Our claims managers and claims examiners are
highly experienced, with an average of over 18 years in the
workers compensation insurance industry.
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Experienced Management Team. The members of
our senior management team, consisting of John G. Pasqualetto,
Richard J. Gergasko, Scott H. Maw, Richard W. Seelinger, Marc B.
Miller, M.D., D. Drue Wax Esq., and Jeffrey C. Wanamaker,
average over 22 years of insurance industry experience, and
over 19 years of workers compensation insurance
experience.
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Strong Distribution Network. We market our
products through independent brokers and through PointSure. This
two-tiered distribution system provides us with flexibility in
originating premiums and managing our commission expense.
PointSure, including BWNV, produced approximately 17.2% of our
direct premiums written and 17.6% of our customers in the year
ended December 31, 2009. We are highly selective in
establishing relationships with independent brokers. As of
December 31, 2009, we had appointed 234 independent brokers
to represent our products. In addition, we negotiate commissions
for the placement of all risks that we underwrite, either
through independent brokers or through PointSure. For the year
ended December 31, 2009, our ratio of net commission
expense to net premiums earned was 8.3% including business
assumed from the National Council on Compensation Insurance,
Inc., or NCCI, residual market pool.
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Strategy
We pursue profitable growth and favorable returns on equity
through the following strategies:
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Geographic Location. We believe our experience
with maritime coverage issues in the states in which we operate
can be readily applied to other areas of the country that we do
not currently serve. Nine states have enabling legislation for
collectively bargained ADR that is similar to the ADR
legislation in California. In 2008, we expanded our business by
writing policies in several more of the approved states in which
we are licensed to do business.
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Expand Business in Target Markets. We wrote
approximately 43.3% of our direct premiums in California, 9.1%
in Louisiana and 8.0% in Illinois for the year ended
December 31, 2009. Alaska and
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Texas accounted for 6.2% and 5.6%, respectively, of our direct
premiums written in 2009. Proceeds from our initial public
offering in January 2005, the follow-on offering in February
2006 and cash provided by operations have provided us with the
necessary capital to enable us to increase the amount of
insurance business that we are able to write in these and other
markets. We believe that our product offerings, combined with
our specialized underwriting expertise and niche market focus,
have positioned us to increase our market share in our target
markets.
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We have also formed several operating divisions to focus on the
development and expansion of business in several key niches. In
2007, we formed the Construction Division, headquartered in
Needham, Massachusetts, to focus on providing construction
project coverage on a per-project basis (commonly known as
wrap-ups).
In the first quarter of 2008, we formed a dedicated Energy
Division, headquartered in Houston, Texas, to increase our
presence in the national energy sector. In the second quarter of
2008, we formed the Alternative Markets Division, headquartered
in Needham, Massachusetts, to seek opportunities to partner with
select managing general agents who write program
business, or large numbers of similar risks in a given
industry group.
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Increase Distribution and Leverage Key
Relationships. We are focusing our marketing
efforts on developing relationships with brokers that have
expertise in our product offerings. We also seek strategic
partnerships with unions and union employers to increase
acceptance of our ADR product in new markets.
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Effectively Manage Overall Medical Claims
Cost. With the help of our chief medical officer,
we are working within medical provider networks to expand our
own network of physicians that we believe will consistently
produce the best outcome for injured workers and permit them to
return to work more quickly. We believe this strategy enhances
our profitability over time by reducing our overall claims cost.
|
|
|
|
Focus on Profitability. We continue our focus
on underwriting discipline and profitability by selecting risks
prudently, by pricing our products appropriately and by focusing
on larger accounts in our target markets.
|
|
|
|
Continue to Develop Scalable Technology. Our
in-house technology department has developed effective and
customized analytical tools that we believe significantly
enhance our ability to write profitable business and administer
claims in a cost-effective manner. In addition, these tools
allow for seamless connectivity with our branch offices. We
intend to continue making investments in advanced and reliable
technological infrastructure.
|
Customers
We currently provide workers compensation insurance to the
following types of customers:
|
|
|
|
|
Maritime employers with complex coverage needs over land, shore
and navigable waters. This involves underwriting liability
exposures subject to various state and federal statutes and
applicable maritime common law. Our customers in this market are
engaged primarily in ship building and repair, pier and marine
construction, stevedoring, offshore oil and gas development and
exploration.
|
|
|
|
Employers, particularly in the construction industry in
California, who are party to collectively bargained
workers compensation agreements that provide for
settlement of claims out of court in a negotiated process.
|
|
|
|
Employers who are obligated to pay insurance benefits
specifically under state workers compensation laws. We
primarily target employers in states that we believe are
underserved, such as the construction market in California,
Illinois and Louisiana, and the states of Texas, Alaska, Florida
and Hawaii.
|
State
Act Customers
We provide workers compensation insurance to employers who
are obligated to pay benefits to employees under state
workers compensation laws. Approximately 73.2% of our
state act business is written
8
in Alaska, California, Illinois, Louisiana, and Texas. We
provide coverage under state statutes that prescribe the
benefits that employers are required to provide to their
employees who may be injured in the course of their employment.
Our policies are issued to employers. The policies provide
payments to covered, injured employees of the policyholder for,
among other things, temporary or permanent disability benefits,
death benefits, medical benefits and hospital expenses. The
benefits payable and the duration of these benefits are set by
statute and vary by state and with the nature and severity of
the injury or disease and the wages, occupation and age of the
employee. We are one of a few insurance carriers that have a
local claim office in Alaska and Hawaii and, as such, we do not
need to rely on third party administrators in these two markets.
For the year ended December 31, 2009, we received
approximately $178.6 million, or 62.4%, of our direct
premiums written from state act customers. We define a state act
customer as a customer whose state act exposure arises only
under state workers compensation laws and is not a
maritime customer or an ADR customer.
Maritime
Customers
Providing workers compensation insurance to maritime
customers with multi-jurisdictional liability exposures was the
core of the business of Eagle Pacific Insurance Company, which
began writing specialty workers compensation insurance
over 24 years ago, and remains a key component of our
business today. We are authorized by the U.S. Department of
Labor to write maritime coverage under the USL&H Act in all
federal districts, and believe, based primarily on the
experience of our management team, that we are highly qualified
underwriters in this niche in the United States. The USL&H
Act is a federal law that provides benefits to any person
engaged in maritime employment, including longshoreman or others
engaged in long shoring operations and any harbor workers
including shipbuilders, ship repairers and ship breakers. The
employees injury or death must occur upon navigable waters
of the United States, including any adjoining pier, wharf, dry
dock, terminal, building way, marine railway or other adjoining
area customarily used by an employer in loading, unloading,
repairing, dismantling or building a vessel.
One of the coverage extensions that we provide under the
USL&H Act is for exposures under the Outer Continental
Shelf Lands Act (OCSLA). OCSLA is a federal
workers compensation act that provides access to federal
benefits to those offshore workers whose duties include
research, exploration, development and extraction of natural
resources from fixed platforms attached to the seabed of the
Outer Continental Shelf.
In conjunction with our USL&H Act writings, we also
underwrite Maritime Employers Liability coverage which
falls under the Merchant Marine Act of 1920, more commonly known
as The Jones Act. This tort liability coverage provides remedies
to injured offshore workers, or qualified Jones Act seamen, and
satisfies the maritime employers obligation to those
employees. These remedies include an action against their
employer for injuries arising from negligent acts of the
employer or co-workers during the course of employment on a ship
or vessel.
The availability of maritime coverage has declined in recent
years due to several factors, including market tightening and
insolvency of insurers providing this type of insurance.
Offshore mutual organizations have increasingly become the
default mechanism for insuring exposures for maritime employers
due to the withdrawal of several traditional insurance carriers
from this market segment. Maritime employers that obtain
coverage through offshore mutual organizations are not able to
rely on the financial security of a rated domestic insurance
carrier. Accordingly, these employers are exposed to
joint-and-several
liability along with other members of the mutual organization.
We offer maritime employers cost-competitive insurance coverage
(usually under one policy) for liabilities under various state
and federal statutes and applicable maritime common law without
the uncertain financial exposure associated with
joint-and-several
liability. We believe we have very few competitors who focus on
maritime employers with multi-jurisdictional liability exposures.
For the year ended December 31, 2009, we received
approximately $65.6 million, or 22.9%, of our direct
premiums written from our maritime customers. We define a
maritime customer as a customer whose total workers
compensation exposure consists of at least 10% of maritime
exposure. When we use the term maritime exposure in this annual
report, we refer to exposure under the USL&H Act and its
extensions, including the OCSLA; the Jones Act; or both. Not all
of the gross premiums written from our maritime
9
customers are for maritime exposures. For the year ended
December 31, 2009, approximately 14.7% of our direct
premiums written for maritime customers were for maritime
exposures. Our experience writing maritime coverage attracts
maritime customers for whom we can also write state act and ADR
coverage.
Employers
Party to Collectively Bargained Workers Compensation
Agreements
We also provide workers compensation coverage for
employers, particularly in the construction industry in
California, that are party to collectively bargained
workers compensation agreements with trade unions, also
known as ADR programs. These programs use informal arbitration
instead of litigation to resolve disputes out of court in a
negotiated process. ADR insurance programs in California were
made possible by legislation passed in 1993 and expanded by
legislation passed in 2003. In 2003, these ADR programs became
available to all unionized employees in California, where
previously they were available only to unionized employees in
the construction industry. We are recognized by 18
labor/management programs as authorized to provide coverage for
employers that are party to collectively bargained workers
compensation agreements with trade unions. We are aware of
11 states, including California, Florida and Hawaii, that
have enabling legislation allowing for the creation of ADR
collectively bargained workers compensation insurance
programs. Last year, SeaBright played an active role in gaining
enabling legislation in the state of Nevada.
The primary objectives of an ADR program are to reduce
litigation costs, improve the quality of medical care, improve
the delivery of benefits, promote safety and increase the
productivity of union workers by reducing workers
compensation costs. The ADR process is generally handled by an
ombudsman, who is typically experienced in the workers
compensation system. The ombudsman gathers the facts and
evidence in a dispute and attempts to use his or her experience
to resolve the dispute among the employer, employee and
insurance carrier. If the ombudsman is unable to resolve the
dispute, the case goes to mediation or arbitration.
ADR programs have had many positive effects on the California
workers compensation process. For example, a 2009 study
conducted by the California Workers Compensation Institute
revealed that attorney involvement decreased by 35% for claims
handled under ADR programs as opposed to claims handled under
Californias statutory workers compensation system.
We are one of the few insurance companies that offer this
product in the markets that we serve.
For the year ended December 31, 2009, we received
approximately $40.6 million, or 14.2%, of our direct
premiums written from customers who participate in ADR programs.
We define an ADR customer as any customer who pays us a premium
for providing the customer with insurance coverage in connection
with an ADR program. Not all of the gross premiums written from
our ADR customers are for ADR exposures. Our experience writing
ADR coverage attracts ADR customers for whom we can also write
state act and maritime coverage. For the year ended
December 31, 2009, approximately 9.5% of our direct
premiums written for ADR customers were for ADR exposures. We
believe we are a leading provider of the ADR product. As
awareness of this product by unions and employers increases over
time, we expect to have substantial opportunities for growth in
states that have passed enabling legislation.
Customer
Concentration
As of December 31, 2009, our largest customer had annual
gross premiums written of approximately $4.3 million, or
1.4% of our total in-force premiums as of December 31,
2009. We are not dependent on any single customer, the loss of
whom would have a material adverse effect on our business. As of
December 31, 2009, we had in-force premiums of
$304.5 million. In-force premiums refers to our current
annual gross premiums written for all customers that have active
or unexpired policies, excluding premiums received from the
Washington State USL&H Compensation Act Assigned Risk Plan
(the Washington USL&H Plan), and represents
premiums from our total customer base. Our three largest
customers have combined annual gross premiums written of
$10.6 million, or 3.5% of our total in-force premiums as of
December 31, 2009. We do not expect the size of our largest
customers to increase significantly over time. Accordingly, as
we grow in the future, we believe our largest customers will
account for a decreasing percentage of our total gross premiums
written.
10
Distribution
We distribute our products primarily through independent brokers
we have identified as having well-established maritime or
construction expertise. As of December 31, 2009, we had a
network of approximately 234 appointed insurance brokers. For
the year ended December 31, 2009, no broker, excluding
PointSure, accounted for more than 6.8% of our direct premiums
written. We do not employ sales representatives and make limited
use of third-party managing general agents in marketing our
coverage to alternative markets customers (employers
within homogenous classes, such as agriculture and health care).
Our managing general agents do not have authority to underwrite
or bind coverage.
The licensed insurance brokers with whom we contract are
compensated by a commission set as a percentage of premiums. Our
standard broker agreement does not contain a commission schedule
because all commissions are specifically negotiated as part of
our underwriting process. Our ratio of net commissions to net
premiums earned for the year ended December 31, 2009 was
8.3%. For the year ended December 31, 2009, the accounts
for 135 of our customers, constituting 9.1% of our direct
premiums written for that period, were written with no
commissions paid by us. Brokers do not have authority to
underwrite or bind coverage on our behalf, and they are
contractually bound by our broker agreement.
We also distribute our products through PointSure, our licensed
in-house wholesale insurance broker and third-party
administrator. PointSure is a wholly-owned subsidiary of
SeaBright. PointSure had approximately 2,702
sub-producer
agreements as of December 31, 2009 compared to 2,108 as of
December 31, 2008, representing an increase of 28.2%.
PointSure is authorized to act as an insurance broker under
corporate licenses or licenses held by one of its officers in
50 states and the District of Columbia. In addition to
enhancing distribution for SeaBright Insurance Company,
PointSure provides SeaBright Insurance Company with a
cost-effective source of business. It provides the flexibility
needed to avoid the costly and time consuming process of
appointing brokers directly in both existing and new
territories. For the year ended December 31, 2009,
excluding premiums for the Washington USL&H Plan,
PointSures direct premiums written with SeaBright
Insurance Company were $49.3 million compared to
$42.5 million in 2008 and $43.5 million in 2007.
PointSure acts in a variety of capacities for SeaBright
Insurance Company and for third parties. PointSure provides
SeaBright Insurance Company with marketing, sales, distribution,
and some policyholder services for its brokers that are not
directly appointed with SeaBright Insurance Company. PointSure
also performs services for third parties unaffiliated with
SeaBright. For example, PointSure acts as a third party
administrator for self-insured employers and as a wholesale
insurance broker for non-affiliated insurance companies. For
these services, PointSure receives commissions from insurance
carriers
and/or
brokerage fees on policies placed through PointSure. Incentive
commissions may also be received from non-affiliated carriers
based on the achievement of certain premium growth, retention
and profitability objectives.
11
The following table provides the geographic distribution of our
risks insured as represented by direct premiums written by
product for the year ended December 31, 2009, excluding
premiums written under the Washington USL&H Plan which are
ceded 100% back to the plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Premiums Written In Year Ended December 31,
2009
|
|
|
|
|
|
|
Alternative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dispute
|
|
|
|
|
|
General
|
|
|
|
|
|
Percent of
|
|
State
|
|
Maritime
|
|
|
Resolution
|
|
|
State Act
|
|
|
Liability
|
|
|
Total
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Alabama
|
|
$
|
479
|
|
|
$
|
|
|
|
$
|
2,307
|
|
|
$
|
|
|
|
$
|
2,786
|
|
|
|
|
*
|
Alaska
|
|
|
2,964
|
|
|
|
9
|
|
|
|
14,737
|
|
|
|
|
|
|
|
17,710
|
|
|
|
6.3
|
%
|
Arizona
|
|
|
(7
|
)
|
|
|
559
|
|
|
|
7,791
|
|
|
|
|
|
|
|
8,343
|
|
|
|
3.0
|
%
|
Arkansas
|
|
|
18
|
|
|
|
17
|
|
|
|
429
|
|
|
|
|
|
|
|
464
|
|
|
|
|
*
|
California
|
|
|
9,341
|
|
|
|
33,953
|
|
|
|
80,562
|
|
|
|
|
|
|
|
123,856
|
|
|
|
43.9
|
%
|
Colorado
|
|
|
37
|
|
|
|
(90
|
)
|
|
|
862
|
|
|
|
|
|
|
|
809
|
|
|
|
|
*
|
Connecticut
|
|
|
109
|
|
|
|
(47
|
)
|
|
|
1,110
|
|
|
|
|
|
|
|
1,172
|
|
|
|
|
*
|
Delaware
|
|
|
44
|
|
|
|
|
|
|
|
1,091
|
|
|
|
|
|
|
|
1,135
|
|
|
|
|
*
|
District of Columbia
|
|
|
|
|
|
|
117
|
|
|
|
213
|
|
|
|
|
|
|
|
330
|
|
|
|
|
*
|
Florida
|
|
|
5,882
|
|
|
|
2,881
|
|
|
|
3,124
|
|
|
|
|
|
|
|
11,887
|
|
|
|
4.2
|
%
|
Georgia
|
|
|
620
|
|
|
|
19
|
|
|
|
922
|
|
|
|
|
|
|
|
1,561
|
|
|
|
|
*
|
Hawaii
|
|
|
1,255
|
|
|
|
1,154
|
|
|
|
4,558
|
|
|
|
|
|
|
|
6,967
|
|
|
|
2.5
|
%
|
Idaho
|
|
|
85
|
|
|
|
(4
|
)
|
|
|
24
|
|
|
|
|
|
|
|
105
|
|
|
|
|
*
|
Illinois
|
|
|
180
|
|
|
|
239
|
|
|
|
22,592
|
|
|
|
|
|
|
|
23,011
|
|
|
|
8.1
|
%
|
Indiana
|
|
|
(44
|
)
|
|
|
|
|
|
|
184
|
|
|
|
|
|
|
|
140
|
|
|
|
|
*
|
Iowa
|
|
|
35
|
|
|
|
1
|
|
|
|
302
|
|
|
|
|
|
|
|
338
|
|
|
|
|
*
|
Kansas
|
|
|
1
|
|
|
|
(19
|
)
|
|
|
518
|
|
|
|
|
|
|
|
500
|
|
|
|
|
*
|
Kentucky
|
|
|
170
|
|
|
|
|
|
|
|
127
|
|
|
|
|
|
|
|
297
|
|
|
|
|
*
|
Louisiana
|
|
|
20,835
|
|
|
|
36
|
|
|
|
5,272
|
|
|
|
|
|
|
|
26,143
|
|
|
|
9.3
|
%
|
Maine
|
|
|
12
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
18
|
|
|
|
|
*
|
Maryland
|
|
|
125
|
|
|
|
83
|
|
|
|
984
|
|
|
|
|
|
|
|
1,192
|
|
|
|
|
*
|
Massachusetts
|
|
|
34
|
|
|
|
(6
|
)
|
|
|
624
|
|
|
|
|
|
|
|
652
|
|
|
|
|
*
|
Michigan
|
|
|
174
|
|
|
|
54
|
|
|
|
28
|
|
|
|
|
|
|
|
256
|
|
|
|
|
*
|
Minnesota
|
|
|
77
|
|
|
|
569
|
|
|
|
113
|
|
|
|
|
|
|
|
759
|
|
|
|
|
*
|
Mississippi
|
|
|
1,375
|
|
|
|
10
|
|
|
|
471
|
|
|
|
|
|
|
|
1,856
|
|
|
|
|
*
|
Missouri
|
|
|
464
|
|
|
|
(37
|
)
|
|
|
449
|
|
|
|
|
|
|
|
876
|
|
|
|
|
*
|
Montana
|
|
|
197
|
|
|
|
(123
|
)
|
|
|
199
|
|
|
|
|
|
|
|
273
|
|
|
|
|
*
|
Nebraska
|
|
|
|
|
|
|
6
|
|
|
|
94
|
|
|
|
|
|
|
|
100
|
|
|
|
|
*
|
Nevada
|
|
|
11
|
|
|
|
327
|
|
|
|
2,285
|
|
|
|
|
|
|
|
2,623
|
|
|
|
|
*
|
New Hampshire
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
38
|
|
|
|
|
*
|
New Jersey
|
|
|
1,107
|
|
|
|
(22
|
)
|
|
|
4,029
|
|
|
|
|
|
|
|
5,114
|
|
|
|
1.8
|
%
|
New Mexico
|
|
|
14
|
|
|
|
(51
|
)
|
|
|
2,080
|
|
|
|
|
|
|
|
2,043
|
|
|
|
|
*
|
New York
|
|
|
131
|
|
|
|
|
|
|
|
807
|
|
|
|
|
|
|
|
938
|
|
|
|
|
*
|
North Carolina
|
|
|
198
|
|
|
|
282
|
|
|
|
1,877
|
|
|
|
|
|
|
|
2,357
|
|
|
|
|
*
|
Ohio
|
|
|
13
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
17
|
|
|
|
|
*
|
Oklahoma
|
|
|
62
|
|
|
|
4
|
|
|
|
687
|
|
|
|
|
|
|
|
753
|
|
|
|
|
*
|
Oregon
|
|
|
798
|
|
|
|
(26
|
)
|
|
|
323
|
|
|
|
|
|
|
|
1,095
|
|
|
|
|
*
|
Pennsylvania
|
|
|
510
|
|
|
|
|
|
|
|
5,913
|
|
|
|
586
|
|
|
|
7,009
|
|
|
|
2.5
|
%
|
Rhode Island
|
|
|
13
|
|
|
|
(7
|
)
|
|
|
101
|
|
|
|
|
|
|
|
107
|
|
|
|
|
*
|
South Carolina
|
|
|
693
|
|
|
|
|
|
|
|
838
|
|
|
|
|
|
|
|
1,531
|
|
|
|
|
*
|
South Dakota
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
7
|
|
|
|
|
*
|
Tennessee
|
|
|
172
|
|
|
|
11
|
|
|
|
1,214
|
|
|
|
|
|
|
|
1,397
|
|
|
|
|
*
|
Texas
|
|
|
7,702
|
|
|
|
132
|
|
|
|
7,546
|
|
|
|
652
|
|
|
|
16,032
|
|
|
|
5.7
|
%
|
Utah
|
|
|
28
|
|
|
|
506
|
|
|
|
110
|
|
|
|
|
|
|
|
644
|
|
|
|
|
*
|
Vermont
|
|
|
14
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
15
|
|
|
|
|
*
|
Virginia
|
|
|
390
|
|
|
|
15
|
|
|
|
835
|
|
|
|
|
|
|
|
1,240
|
|
|
|
|
*
|
Washington
|
|
|
5,704
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
5,702
|
|
|
|
2.0
|
%
|
West Virginia
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
30
|
|
|
|
|
*
|
Wisconsin
|
|
|
|
|
|
|
7
|
|
|
|
186
|
|
|
|
|
|
|
|
193
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
62,022
|
|
|
$
|
40,559
|
|
|
$
|
178,602
|
|
|
$
|
1,238
|
|
|
$
|
282,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total
|
|
|
22.0
|
%
|
|
|
14.4
|
%
|
|
|
63.2
|
%
|
|
|
0.4
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
* |
|
Represents less than 1% of total |
12
Underwriting
We underwrite business on a guaranteed-cost basis. We also
underwrite dividend and loss sensitive plans that make use of
retrospective-rating plans and deductible plans. Guaranteed cost
plans allow for fixed premium rates for the term of the
insurance policy. Although the premium rates are fixed, the
final premium on a guaranteed cost plan will vary based on the
difference between the estimated term payroll at the time the
policy is issued and the final audited payroll of the customer
after the policy expires. Dividend plans allow a policyholder to
earn a cash dividend if its individual loss experience is lower
than predetermined levels established at the inception of the
policy. Policyholder dividends are payable only if declared by
the Board of Directors of SeaBright Insurance Company. Loss
sensitive plans, on the other hand, provide for a variable
premium rate for the policy term. The variable premium is based
on the customers actual loss experience for claims
occurring during the policy period, subject to a minimum and
maximum premium. The final premium for the policy may not be
known for five to seven years or longer after the expiration of
the policy because the premium is recalculated at
12-month
intervals beginning six months following expiration of the
policy to reflect development on reported claims. Our loss
sensitive plans allow our customers to choose to actively manage
their insurance premium costs by sharing risk with us. For the
year ended December 31, 2009 approximately 83.4% of our
direct premiums written came from customers on guaranteed cost
plans, 1.8% from customers on dividend plans and the remaining
14.8% from customers on loss sensitive plans.
As opposed to using a class underwriting approach, which targets
specific classes of business or industries and where the
acceptability of a risk is determined by the entire class or
industry, our underwriting strategy is to identify and target
individual risks with specialized workers compensation
needs. We negotiate individual coverage plans to meet those
needs with competitive pricing and supportive underwriting, risk
management and service. Our underwriting is tailored to each
individual risk, and involves a financial evaluation, loss
exposure analysis and review of management control and
involvement. Each account that we underwrite is evaluated for
its acceptability, coverage, pricing and program design. We make
use of risk sharing (or loss sensitive) plans to align our
interests with those of the insured. Our underwriting department
monitors the performance of each account throughout the coverage
period, and upon renewal, the profitability of each account is
reviewed and integrated into the terms and conditions of
coverage going forward.
The underwriting of each piece of business begins with the
selection process. All of our underwriting submissions are
initially sent to the local underwriting office based on the
location of the producer. A submission is an application for
insurance coverage by a broker on behalf of a prospective
policyholder. Our underwriting professionals screen each
submission to ensure that the potential customer is a maritime
employer, an employer involved in an ADR program, or an employer
governed by a state workers compensation act with a record
of successfully controlling high hazard workers
compensation exposures. The submission generally must meet a
minimum premium size of $75,000, higher for some classes of
business, and must not involve prohibited operations. For
example, we deem diving, ship breaking, employee leasing and
asbestos and lead abatement to be prohibited operations that we
generally do not insure. Once a submission passes the initial
clearance hurdle, members of our loss control and underwriting
departments jointly determine whether to accept the account. If
our underwriting department preliminarily decides to accept the
account, our loss control department conducts a prospect survey.
We require a positive loss control survey before any piece of
new business is bound, unless otherwise approved by our
underwriting department management. Our loss control consultants
independently verify the information contained in the submission
and communicate with our underwriters to confirm the decision to
accept the account.
We use a customized loss-rating model to determine the premium
on a particular account. We compare the loss history of each
customer to the expected losses underlying the rates in each
state and jurisdiction. Our loss projections are based on
comparing actual losses to expected losses. We estimate the
annual premium by adding our expenses and profit to the loss
projection selected by our underwriters. This process helps to
ensure that the premiums we charge are adequate for the risk
insured.
Our underwriting department is managed by experienced
underwriters who specialize in maritime and construction
exposures. We have underwriting offices in Seattle, Washington;
Orange, California; Anchorage, Alaska; Houston, Texas; Concord,
California; Phoenix, Arizona; Lake Mary, Florida; Radnor,
Pennsylvania;
13
Chicago, Illinois; Needham, Massachusetts; and Baton Rouge,
Louisiana. As of December 31, 2009, we had a total of
89 employees in our underwriting department, consisting of
32 underwriting professionals and 57 support-level staff
members. Our underwriting professionals average approximately
22 years of insurance industry experience. We use audits
and authority letters to help ensure the quality of
our underwriting decisions. Our authority letters set forth the
underwriting authority for each individual underwriting staff
member based on their level of experience and demonstrated
knowledge of the product and market. We also maintain a table of
underwriting authority controls in our custom-built quote and
issue system that is designed to alert underwriters of pricing
and coverage conflicts that are outside their granted
underwriting authority. These controls compare the
underwriters authority for premium size, commission level,
pricing deviation, plan design and coverage jurisdiction to the
terms that are being proposed for the specific policyholder.
Proposals that are outside an underwriters authority
require appropriate review and approval from our senior
underwriting personnel, allowing our senior underwriting
personnel to mentor and manage the individual performance of our
underwriters and to monitor the selection of new accounts.
Loss
Control
We place a strong emphasis on our loss control function as an
integral part of the underwriting process as well as a
competitive differentiator. Our loss control department delivers
risk level evaluations to our underwriters with respect to the
degree of an employers management commitment to safety and
acts as a resource for our customers to effectively promote a
safe workplace. Our loss control staff has extensive experience
developed from years of servicing the maritime and construction
industries. Our loss control staff consists of 27 employees
as of December 31, 2009, averaging 22 years of
experience in the industry. We believe that this experience
benefits us by allowing us to serve our customers more
efficiently and effectively. Specifically, our loss control
staff grades each prospective customers safety program
elements and key loss control measures, supported with
explanations in an internal report to the appropriate
underwriter. Our loss control staff prepares risk improvement
recommendations as applicable and provides a loss control
opinion of risk with supporting comments. Our loss control staff
also prepares a customized loss control service plan for each
policyholder based upon identified servicing needs.
Our loss control staff works closely with Marc B.
Miller, M.D., our chief medical officer, to assist our
customers in developing tailored medical cost management
strategies. We believe that by analyzing our loss data, our
medical management needs and the current legal and regulatory
environment, our chief medical officer helps us reduce our
payments for medical costs and improve the delivery of medical
care to our policyholders employees.
Our loss control staff conducts large loss investigation visits
on site for traumatic or fatal incidents whenever possible. Our
loss control staff also conducts a comprehensive re-evaluation
visit prior to the expiration of a policy term to assist the
underwriter in making decisions on coverage renewal.
We have loss control staff located within, or in close proximity
to, our offices in Anchorage, Alaska; Baton Rouge, Louisiana;
Chicago, Illinois; Honolulu, Hawaii; Houston, Texas; Orange,
California; Lake Mary, Florida; Radnor, Pennsylvania; Phoenix,
Arizona; Concord, California; and Seattle, Washington. The
majority of our loss control staff work from resident offices. A
network of well-vetted independent consultants provides
supplemental loss control service support throughout the country.
Pricing
Our underwriting department determines expected ultimate losses
for each of our prospective accounts and renewals using a
customized loss-rating model developed by staff actuaries. This
loss-rating model projects expected losses for future policy
periods by weighing expected losses underlying specific
workers compensation class codes against our
customers historical payroll and loss information. Our
underwriting department uses these projections to produce an
expected loss amount for each account. This loss amount provides
the foundation for developing overall pricing terms for the
account. After the ultimate expected losses are calculated, our
underwriting department determines the appropriate premium for
the risk after adding
14
specific expense elements to the expected loss amount, including
loss control expenses, commissions, reinsurance cost, taxes and
underwriting margins.
We also own a customized pricing model developed completely
in-house that we use to calculate insurance terms for our loss
sensitive plans. This program uses industry-published excess
loss factors and tables of insurance charges, as well as
company-specific expenses, to calculate the appropriate pricing
terms. As discussed above under the heading
Underwriting, our loss sensitive plans align our
interests with our customers interests by providing our
customers with the opportunity to pay a premium that would
otherwise be higher than under a guaranteed cost plan if they
are able to keep their losses below an expected level. The
premiums for our retrospectively rated loss sensitive plans are
reflective of the customers loss experience because,
beginning six months after the expiration of the relevant
insurance policy, and annually thereafter, we recalculate the
premium payable during the policy term based on the current
value of the known losses that occurred during the policy term.
Because of the long duration of our loss sensitive plans, there
is a risk that the customer will fail to pay the additional
premium. Accordingly, we obtain collateral in the form of
letters of credit to mitigate credit risk associated with our
loss sensitive plans.
We monitor the overall price adequacy of all new and renewal
policies using a weekly price monitoring report. Our rates upon
renewal were steady in 2009, up approximately 0.02%, while down
9.4% in 2008 and 16.8% in 2007. The reductions in 2008 and prior
were driven primarily by our California business, where rates
have declined since 2004 as a result of reform legislation
enacted primarily in 2003 and 2004. Following eight straight
reductions, totaling 65.1%, in the advisory pure premium rates
approved by the California Insurance Commissioner, in 2008, the
California Insurance Commissioner approved a 5.0% rate increase
effective January 1, 2009, which we adopted. The pure
premium rates approved by the California Insurance Commissioner
effective January 1, 2009 were 63.4% lower than the pure
premium rates in effect as of July 1, 2003. More recent
data has indicated the need for an increase in rates in
California. The Workers Compensation Insurance Rating
Bureau of California (the WCIRB) filed for rate
changes on both July 1, 2009 and January 1, 2010 that
were rejected by the California Insurance Commissioner.
SeaBright filed for a 10.6% rate increase effective
August 1, 2009 which was approved by the California
Department of Insurance.
Claims
We believe we are particularly well qualified to handle
multi-jurisdictional workers compensation claims. Our
claims operation is organized around our unique product mix and
customer needs. We believe that we can achieve quality claims
outcomes because of our niche market focus, our local market
knowledge and our superior claims handling practices. We have
claims staff located in Seattle, Washington; Orange and Concord,
California; Anchorage, Alaska; Phoenix, Arizona; Honolulu,
Hawaii; Houston, Texas; Lake Mary, Florida; Chicago, Illinois;
and Radnor, Pennsylvania. We also maintain resident claim
examiners in San Diego, California, and Western Washington
to better serve our client base.
Our maritime claims are handled by our Seattle, Washington and
Houston, Texas offices. Upon completion of a thorough
investigation, our maritime claims staff is able to promptly
determine the appropriate jurisdiction for the claim and
initiate benefit payments to the injured worker. We believe our
ability to handle both USL&H Act and Jones Act claims in
one integrated process results in reduced legal costs for our
customers and improved benefit delivery to injured workers.
Claims for our California ADR product are handled by our Orange,
California office. Claims for our Hawaii ADR product are handled
by our Honolulu, Hawaii office and claims for our Florida ADR
product are handled in our Lake Mary, Florida office. By
centralizing these claims in key regional locations, we have
developed tailored claims handling processes, systems and
procedures. We believe this claims centralization also results
in enhanced focus and improved claims execution.
Claims for our state act products are handled by our regional
claims offices located in Anchorage, Alaska; Phoenix, Arizona;
Honolulu, Hawaii; Orange and Concord, California; Houston,
Texas; Chicago, Illinois; Lake Mary, Florida; and Radnor,
Pennsylvania. We believe in maintaining a local market presence
for our claims handling process. Our regional claims staff has
developed a thorough knowledge of the local medical and legal
community, enabling them to make more informed claims handling
decisions.
15
We seek to maintain an effective claims management strategy
through the application of sound claims handling practices. We
are devoted to maintaining a quality, professional staff with a
high level of technical proficiency. We practice a team approach
to claims management, seeking to distribute each claim to the
most appropriate level of technical expertise in order to obtain
the best possible outcome. Our claims examiners are supported by
claims assistants, at a ratio of approximately one claims
assistant for every two claims examiners. Claims assistants
perform a variety of routine tasks to assist our claims
examiners. This support enables our claims examiners to focus on
the more complex tasks associated with our unique products,
including analyzing jurisdictional issues; investigating,
negotiating and settling claims; considering causal connection
issues; and managing the medical, disability, litigation and
benefit delivery aspects of the claims process. We believe that
it is critical for our claims professionals to have regular
customer contact, to develop relationships with owners and risk
management personnel of the employer and to be familiar with the
activities of the employer.
Having a highly-experienced claims staff with manageable work
loads is integral to our business model. Our claims staff is
experienced in the markets in which we compete. As of
December 31, 2009, we had a total of 72 employees in
our claims department, including 50 claim management and
technical staff and 22 support-level staff members. Our claims
managers and examiners average 19 years of experience in
the insurance industry and over 18 years of experience with
workers compensation coverage. In addition, our in-house
claims examiners maintain manageable work loads so they can more
fully investigate individual claims, with each claims examiner
handling, on average, 116 time loss cases concurrently as of
December 31, 2009. Our target time loss case load per
claims examiner is 125; consequently, we currently have capacity
to handle additional claim volume without making additions to
our claims staff.
Our claims examiners are focused on early return to work, timely
and effective medical treatment and prompt claim resolution.
Newly-hired examiners are assigned to experienced supervisors
who monitor all activity and decision making to verify skill
levels. Like our underwriting department, we use audits and
authority letters in our claims department to help
ensure the quality of our claims decisions. The authority
letters set forth the claims handling authority for each
individual claims professional based on their level of
experience and demonstrated knowledge of the product and market.
We believe that our audits are a valuable tool in measuring
execution against performance standards and the resulting impact
on our business. Our home office audit function conducts an
annual review of each claims office for compliance with our best
claims handling practices, policies and procedures.
Our claims staff also works closely with Marc B.
Miller, M.D., our chief medical officer, to better manage
medical costs. Our chief medical officer performs a variety of
functions for us, including providing counsel and direction on
cases involving complex medical issues and assisting with the
development and implementation of innovative medical cost
management strategies tailored to the unique challenges of our
market niches.
We have an electronic claims management system that we believe
enables us to provide prompt, responsive service to our
customers. We offer a variety of claim reporting options,
including telephone, facsimile,
e-mail and
online reporting from our website. This information flows into
Compass, our automated claims management system.
In those states where we do not have claims staff, we have made
arrangements with local third party administrators to handle
state act claims only. As of December 31, 2009,
approximately 98% of our time loss claims were being handled
in-house as opposed to being handled by third-party
administrators. To help ensure the appropriate level of claims
expertise, we allow only our own claims personnel to handle
maritime claims, regardless of where the claim occurs.
Until July 2008, Broadspire Services, a third-party claims
administrator, handled losses associated with a small run-off
book of business acquired in the Acquisition.
Run-off is the professional management of an
insurance companys discontinued, distressed or non-renewed
lines of insurance and associated liabilities outside of a
judicial proceeding. In July 2008, we assumed the responsibility
for servicing all remaining open claims. As of December 31,
2009, there were 49 open claims in the book of claims we
acquired in the Acquisition, compared to 65 open claims at
December 31, 2008. Outstanding loss reserves related to
claims
16
we assumed in the Acquisition totaled $2.8 million (gross)
and $1.8 million (net of reinsurance) at December 31,
2009.
Loss
Reserves
We maintain amounts for the payment of claims and expenses
related to adjusting those claims. Unpaid losses are estimates
at a given point in time of amounts that an insurer expects to
pay for claims which have been reported and for claims which
have occurred but are unreported. We take into consideration the
facts and circumstances for each claim file as then known by our
claims department, as well as actuarial estimates of aggregate
unpaid losses and loss expenses.
Our unpaid losses consist of case amounts, which are for
reported claims, and amounts for claims that have been incurred
but have not yet been reported (sometimes referred to as
IBNR) as well as adjustments to case amounts for
ultimate expected losses. The amount of unpaid loss for reported
claims is based primarily upon a
claim-by-claim
evaluation of coverage, liability or injury severity, and any
other information considered pertinent to estimating the
exposure presented by the claim. The amounts for unreported
claims and unpaid loss adjustment expenses are determined using
historical information, adjusted to current conditions using
actuarial judgment. Unpaid loss adjustment expense is intended
to cover the ultimate cost of settling claims, including
investigation and defense of lawsuits resulting from such
claims. The amount of loss reserves is determined by us on the
basis of industry information, historical loss information and
anticipated future conditions. A loss reserve committee,
comprised of senior executives from our Executive, Actuarial,
Underwriting, Claims and Finance departments, meets quarterly to
review our loss reserves and to make necessary recommendations
regarding such amounts. Although we review our loss reserve
estimates on a quarterly basis and believe that our estimates at
any point in time are reasonable and appropriate, loss reserves
are estimates and are inherently uncertain; they do not and
cannot represent an exact measure of liability.
We consider the following factors to be especially important at
this time because they increase the variability risk factors in
our current loss reserves:
|
|
|
|
|
We wrote our first policy on October 1, 2003 and, as a
result, our total reserve portfolio is relatively immature when
compared to other industry data.
|
|
|
|
At December 31, 2009, approximately $135.8 million, or
44.9%, of our direct loss reserves were related to business
written in California. The California workers compensation
benefit system experienced significant reform activity in 2002
through 2004 which has resulted in uncertainty regarding the
impact of the reforms on loss reserves. In addition, several of
the reforms face ongoing challenges in the California court
system.
|
We review the following significant components of loss reserves
on a quarterly basis:
|
|
|
|
|
IBNR reserves for pure losses, which includes amounts for the
medical and indemnity components of the workers
compensation claim payments, net of subrogation recoveries and
deductibles;
|
|
|
|
IBNR reserves for defense and cost containment expenses
(DCC), also referred to as allocated loss adjustment
expenses (ALAE), net of subrogation recoveries and
deductibles;
|
|
|
|
reserve for adjusting and other expenses, also known as
unallocated loss adjustment expense (ULAE); and
|
|
|
|
reserve for loss based assessments, also referred to as the
8F reserve in reference to Section 8,
Compensation for Disability, subsection (f), Injury increasing
disability, of the USL&H Act.
|
The reserves for loss and DCC are also reviewed gross and net of
reinsurance (referred to as net). For gross losses,
the claims for the Washington USL&H Plan, the KEIC claims
assumed in the Acquisition and claims assumed from the NCCI
residual market pools are excluded from this discussion.
IBNR reserves include a provision for future development on
known claims, a reopened claims reserve, a provision for claims
incurred but not reported and a provision for claims in transit
(incurred and reported but not recorded).
In light of our short operating history and uncertainties
concerning the effects of recent legislative reforms,
specifically as they relate to our California workers
compensation experience, actuarial techniques
17
are applied that use historical experience of our predecessor as
well as industry information in the analysis of loss reserves.
It should be noted that a continuity of management and adjusting
staff exists between us and our predecessor. These techniques
recognize, among other factors:
|
|
|
|
|
our claims experience and that of our predecessor;
|
|
|
|
the industrys claim experience;
|
|
|
|
historical trends in reserving patterns and loss payments;
|
|
|
|
the impact of claim inflation
and/or
deflation;
|
|
|
|
the pending level of unpaid claims;
|
|
|
|
the cost of claim settlements;
|
|
|
|
legislative reforms affecting workers compensation,
including pricing levels;
|
|
|
|
the overall environment in which insurance companies
operate; and
|
|
|
|
trends in claim frequency and severity.
|
Our actuarial analysis is done separately for the indemnity,
medical and DCC components of the total loss reserves within
each accident year. Prior to the December 31, 2009 report,
the analysis evaluated three separate categories: State Act,
California; State Act, excluding California; and USL&H
claims. This structure was consistent with business
concentration in our earlier history, namely USL&H and
State Act in western states. This also recognized additional
variation in California results due to extensive reform activity.
However, as we continue to grow and diversify geographically, it
is important to reflect the continuing change in the business
distribution for the purpose of evaluating loss reserves. Since
much of workers compensation insurance is governed by
state laws, each with its own set of benefit structures, the
claim cost profile may vary significantly from state to state.
Consequently, internal analysis has identified additional
categories in which emerging company data shows distinctly
different patterns.
Beginning December 31, 2009, the analysis is completed
separately for the following five categories: State Act,
California (California); State Act, Alaska and Hawaii
(Alaska & Hawaii); State Act, Illinois (Illinois);
State Act, all other states (All Other); and USL&H. The
business is divided into these five categories for the
determination of ultimate losses due to differences in the laws
of these jurisdictions.
The Companys analysis is done separately for the
indemnity, medical and DCC components of the total loss reserves
by accident year (AYR) within each of the categories described
above. There are currently seven AYRs included in the analysis
valued at the following ages as of December 31, 2009:
|
|
|
|
|
AYR 2003 Valued at age 84 months
|
|
|
|
AYR 2004 Valued at age 72 months
|
|
|
|
AYR 2005 Valued at age 60 months
|
|
|
|
AYR 2006 Valued at age 48 months
|
|
|
|
AYR 2007 Valued at age 36 months
|
|
|
|
AYR 2008 Valued at age 24 months
|
|
|
|
AYR 2009 Valued at age 12 months
|
Gross ultimate loss (indemnity, medical and ALAE separately) for
each category is estimated using the following actuarial methods:
|
|
|
|
|
paid loss (or ALAE) development;
|
|
|
|
incurred loss (or ALAE) development;
|
|
|
|
Bornhuetter-Ferguson method (Bornhuetter-Ferguson),
a standard actuarial reserving methodology further described
below, using ultimate premiums and paid loss (or ALAE); and
|
|
|
|
Bornhuetter-Ferguson using ultimate premiums and incurred loss
(or ALAE).
|
18
The Bornheutter-Ferguson method blends the loss development and
expected loss ratio methods by assigning partial weight to the
initial expected losses, calculated from the expected loss ratio
method, with the remaining weight applied to the actual losses,
either paid or incurred. The weights assigned to the initial
expected losses decrease as the accident year matures.
A gross ultimate value is selected by reviewing the various
ultimate estimates and applying actuarial judgment to achieve a
reasonable point estimate of the ultimate liability. The gross
IBNR reserve equals the selected gross ultimate loss minus the
gross paid losses and gross case reserves as of the valuation
date. The selected gross ultimate loss and ALAE are currently
reviewed and updated on a quarterly basis.
Excess loss and ALAE is used to determine the estimated ultimate
ceded losses. Excess loss and ALAE is estimated based on excess
loss factors and development factors derived from our experience
and that of our predecessor. Net losses equal gross losses minus
ceded losses.
ULAE reserves are estimated using a standard paid ULAE to paid
loss approach applied to gross loss and ALAE reserves. At
December 31, 2009, the selected paid ULAE to paid loss
ratio was based on experience from calendar years 2006 through
2009.
We participate in a special fund administered by the
U.S. Department of Labor related to workers
compensation benefits under the USL&H Act. Annual
assessments levied by the special fund are treated as claim
payments by us and in our financial statements as loss and ALAE.
Our actuarial analysis of loss and ALAE reserves excludes these
payments. We separately review our liability for future
assessments related to claims incurred through the valuation
date of the study.
Reconciliation
of Loss Reserves
The table below shows the reconciliation of our loss reserves on
a gross and net basis for the periods indicated, reflecting
changes in losses incurred and paid losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Beginning balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid loss and loss adjustment expense
|
|
$
|
292,027
|
|
|
$
|
250,085
|
|
|
$
|
198,356
|
|
Reinsurance recoverables
|
|
|
(18,231
|
)
|
|
|
(14,034
|
)
|
|
|
(13,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, beginning of year
|
|
|
273,796
|
|
|
|
236,051
|
|
|
|
184,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
172,411
|
|
|
|
168,559
|
|
|
|
162,017
|
|
Prior years
|
|
|
(1,411
|
)
|
|
|
(24,978
|
)
|
|
|
(34,080
|
)
|
Receivable under adverse development cover
|
|
|
1,169
|
|
|
|
(1,646
|
)
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
172,169
|
|
|
|
141,935
|
|
|
|
128,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
(43,570
|
)
|
|
|
(42,253
|
)
|
|
|
(35,480
|
)
|
Prior years
|
|
|
(83,810
|
)
|
|
|
(63,583
|
)
|
|
|
(41,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
(127,380
|
)
|
|
|
(105,836
|
)
|
|
|
(76,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable under adverse development cover
|
|
|
(1,169
|
)
|
|
|
1,646
|
|
|
|
(248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, end of year
|
|
|
317,416
|
|
|
|
273,796
|
|
|
|
236,051
|
|
Reinsurance recoverables
|
|
|
34,080
|
|
|
|
18,231
|
|
|
|
14,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid loss and loss adjustment expense
|
|
$
|
351,496
|
|
|
$
|
292,027
|
|
|
$
|
250,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our practices for determining loss reserves are designed to set
amounts that in the aggregate are adequate to pay all claims at
their ultimate settlement value. Our loss reserves are not
discounted for interest or other factors. For a discussion of
the development of our loss reserves, see the discussion under
Note 9, Unpaid Loss and Loss Adjustment Expenses in
Part II, Item 8 of this annual report.
19
The figures in the above table include the development of the
KEIC loss reserves. See the discussion under the heading
Our History in this Item 1. Prior to the
Acquisition, KEIC had a limited operating history writing small
business workers compensation policies in California and
had established loss reserves in the amount of approximately
$16.0 million for these policies at September 30,
2003. In an effort to minimize our exposure to this past
business underwritten by KEIC and any adverse developments to
KEICs loss reserves as they existed at the date of the
Acquisition, we entered into various protective arrangements in
connection with the Acquisition, including the adverse
development cover and the collateralized reinsurance trust. For
a discussion of the development of KEICs loss reserves and
related matters, see the discussion under the heading Loss
Reserves KEIC Loss Reserves in this
Item 1.
SeaBright
Insurance Company Loss Reserves
SeaBright Insurance Company began writing insurance policies on
October 1, 2003. Shown below is the loss development
related to policies written from 2003 through 2009. The first
line of the table shows, for the years indicated, the gross
liability including the incurred but not reported losses as
originally estimated. For example, as of December 31, 2004
it was estimated that $46.0 million would be sufficient to
settle all claims not already settled that had occurred through
that date, whether reported or unreported. The next section of
the table shows, by year, the cumulative amounts of loss
reserves paid as of the end of each succeeding year. For
example, with respect to the gross loss reserves of
$46.0 million as of December 31, 2004, by
December 31, 2009 (five years later) $29.0 million had
actually been paid in settlement of the claims which pertain to
the liabilities as of December 31, 2004. The next section
of the table sets forth the re-estimates in later years of
incurred losses, including payments, for the years indicated.
For example, with respect to the gross loss reserves of
$46.0 million as of December 31, 2004,
$40.2 million is the re-estimated gross loss reserve,
including payments, as of December 31, 2009.
The cumulative redundancy/(deficiency) represents,
as of December 31, 2009, the difference between the latest
re-estimated liability and the amounts 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, with respect
to the gross loss reserves of $46.0 million as of
December 31, 2004, $5.7 million is the cumulative
redundancy as of December 31, 2009.
Analysis
of SeaBright Loss Reserve Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Gross liability as originally estimated:
|
|
$
|
2,054
|
|
|
$
|
45,981
|
|
|
$
|
122,625
|
|
|
$
|
180,929
|
|
|
$
|
232,538
|
|
|
$
|
275,942
|
|
|
$
|
335,172
|
|
Gross cumulative payments as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
609
|
|
|
|
11,693
|
|
|
|
25,691
|
|
|
|
39,744
|
|
|
|
62,308
|
|
|
|
82,925
|
|
|
|
|
|
Two years later
|
|
|
1,087
|
|
|
|
18,814
|
|
|
|
39,916
|
|
|
|
62,963
|
|
|
|
100,601
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
1,574
|
|
|
|
23,329
|
|
|
|
49,616
|
|
|
|
79,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
1,685
|
|
|
|
26,987
|
|
|
|
56,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
1,803
|
|
|
|
29,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
1,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
2,819
|
|
|
|
42,499
|
|
|
|
99,740
|
|
|
|
146,686
|
|
|
|
213,277
|
|
|
|
280,480
|
|
|
|
|
|
Two years later
|
|
|
3,453
|
|
|
|
36,428
|
|
|
|
85,850
|
|
|
|
140,161
|
|
|
|
209,395
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
3,314
|
|
|
|
37,957
|
|
|
|
83,396
|
|
|
|
134,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
3,354
|
|
|
|
41,030
|
|
|
|
83,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
3,408
|
|
|
|
40,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
3,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative redundancy/(deficiency):
|
|
|
(1,279
|
)
|
|
|
5,736
|
|
|
|
39,226
|
|
|
|
46,866
|
|
|
|
23,143
|
|
|
|
(4,538
|
)
|
|
|
|
|
20
The $1.3 million of adverse development on 2003 reserves is
due to the small base of claims and losses from the NCCI pool.
The $4.5 million adverse development on 2008 reserves is
primarily driven by a recognition of increased in severity in
California and emerging loss data in Illinois, with some
additional effect due to the increased severity in the
USL&H losses. Aside from 2003 and 2008, we have experienced
significant redundancies in our year-end reserves as a result of
the uncertainty around claim cost reductions resulting from
significant legislative reforms enacted in California, primarily
in 2003 and 2004, and, to a lesser extent, in other states. In
2006, we reduced our direct loss reserves by $20.4 million,
of which approximately $14.6 million related to accident
year 2005 and approximately $5.8 million related to
accident year 2004. In 2007, we reduced our direct loss reserves
by $27.7 million, of which approximately $17.3 million
related to accident year 2006 and approximately
$11.6 million related to accident year 2005. In 2008, we
reduced our direct loss reserves by $19.7 million, of which
approximately $11.6 million related to accident year 2007,
approximately $5.1 million related to accident year 2006,
and approximately $3.0 million related to accident years
2005 and prior. In 2009, we increased our direct loss reserves
by $14.4 million, of which approximately $8.8 million
related to accident year 2008, approximately $5.0 million
related to accident year 2007 and approximately
$0.6 million related to accident years 2006 and prior. As
noted above, the adverse development is primarily driven by a
recognition of increased severity in our reserving segments. The
$8.8 million increase in accident year 2008 was offset by
redundancies recognized in our ULAE, loss based assessment and
NCCI pool reserves, resulting in a smaller $4.5 million net
reserve adverse development in the table above. For further
discussion of the considerations and methodology relating to the
estimation of our unpaid loss and loss adjustment expenses, see
the related discussion under the heading Critical
Accounting Policies, Estimates and Judgments Unpaid
Loss and Loss Adjustment Expenses in Part II,
Item 7 of this annual report.
KEIC
Loss Reserves
Shown below is the loss development from 2000 through 2009
related to KEIC policies written from 2000 through 2002. The
last direct policy written by KEIC was effective in May 2002 and
expired in May 2003. KEIC has claim activity in accident years
2000, 2001, 2002 and 2003. The first line of the table shows,
for the years indicated, the gross liability including the
incurred but not reported losses as originally estimated. For
example, as of December 31, 2001, it was estimated that
$14.5 million would be sufficient to settle all claims not
already settled that had occurred prior to December 31,
2001, whether reported or unreported. The next section of the
table shows, by year, the cumulative amounts of loss reserves
paid as of the end of each succeeding year. For example, with
respect to the gross loss reserves of $14.5 million as of
December 31, 2001, by December 31, 2009 (eight years
later) $13.8 million had actually been paid in settlement
of the claims which pertain to the liabilities as of
December 31, 2001. The next section of the table sets forth
the re-estimates in later years of incurred losses, including
payments, for the years indicated. For example, with respect to
the gross loss reserves of $14.5 million as of
December 31, 2001, $17.8 million is the re-estimated
gross loss reserve, including payments, as of December 31,
2009.
The cumulative redundancy/(deficiency) represents,
as of December 31, 2009, the difference between the latest
re-estimated liability and the amounts 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, with respect
to the gross loss reserves of $14.5 million as of
December 31, 2001, $3.4 million is the cumulative
deficiency as of December 31, 2009.
21
Analysis
of KEIC Loss Reserve Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability as originally estimated:
|
|
$
|
3,258
|
|
|
$
|
14,458
|
|
|
$
|
30,748
|
|
|
$
|
27,677
|
|
|
$
|
22,248
|
|
|
$
|
17,497
|
|
|
$
|
14,126
|
|
|
$
|
13,261
|
|
|
$
|
10,508
|
|
|
$
|
7,818
|
|
Gross cumulative payments as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
723
|
|
|
|
7,525
|
|
|
|
(4,130
|
)
|
|
|
6,815
|
|
|
|
4,822
|
|
|
|
2,998
|
|
|
|
2,184
|
|
|
|
1,843
|
|
|
|
900
|
|
|
|
|
|
Two years later
|
|
|
2,070
|
|
|
|
4,443
|
|
|
|
2,283
|
|
|
|
11,637
|
|
|
|
7,820
|
|
|
|
5,182
|
|
|
|
4,027
|
|
|
|
2,743
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
1,438
|
|
|
|
8,107
|
|
|
|
6,884
|
|
|
|
14,635
|
|
|
|
10,004
|
|
|
|
7,025
|
|
|
|
4,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
1,792
|
|
|
|
10,312
|
|
|
|
9,651
|
|
|
|
16,819
|
|
|
|
11,847
|
|
|
|
7,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
2,304
|
|
|
|
11,701
|
|
|
|
11,552
|
|
|
|
18,662
|
|
|
|
12,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
2,584
|
|
|
|
12,646
|
|
|
|
13,314
|
|
|
|
19,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
2,712
|
|
|
|
13,408
|
|
|
|
14,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
2,858
|
|
|
|
13,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
2,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
3,013
|
|
|
|
19,562
|
|
|
|
23,374
|
|
|
|
29,063
|
|
|
|
23,319
|
|
|
|
17,124
|
|
|
|
15,445
|
|
|
|
12,351
|
|
|
|
8,718
|
|
|
|
|
|
Two years later
|
|
|
3,426
|
|
|
|
17,523
|
|
|
|
23,321
|
|
|
|
29,134
|
|
|
|
21,946
|
|
|
|
18,444
|
|
|
|
14,535
|
|
|
|
10,561
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
3,329
|
|
|
|
18,138
|
|
|
|
23,739
|
|
|
|
28,761
|
|
|
|
23,266
|
|
|
|
17,533
|
|
|
|
12,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
3,235
|
|
|
|
19,068
|
|
|
|
23,136
|
|
|
|
30,081
|
|
|
|
22,355
|
|
|
|
15,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
3,394
|
|
|
|
18,465
|
|
|
|
24,237
|
|
|
|
29,170
|
|
|
|
20,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
3,391
|
|
|
|
18,666
|
|
|
|
22,878
|
|
|
|
27,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
3,798
|
|
|
|
18,757
|
|
|
|
21,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
4,004
|
|
|
|
17,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
3,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative redundancy/ (deficiency):
|
|
|
(240
|
)
|
|
|
(3,358
|
)
|
|
|
9,370
|
|
|
|
297
|
|
|
|
1,683
|
|
|
|
1,754
|
|
|
|
1,381
|
|
|
|
2,700
|
|
|
|
1,790
|
|
|
|
|
|
The acquired book of business related to KEIC had gross reserves
of $7.8 million as of December 31, 2009. These
reserves represent a potential liability to us if the protective
arrangements that we have established prove to be inadequate.
Our initial source of protection is our external reinsurance,
which is described under the heading Reinsurance in
this Item 1. The total reserves net of external reinsurance
at December 31, 2009 were $4.1 million. The ceded
reserves of $3.7 million as of December 31, 2009 are
subject to collection from our external reinsurers. To the
extent we are not able to collect on our reinsurance
recoverables, these liabilities become our responsibility. See
the discussion under the heading Risks Related to Our
Business Our loss reserves are based on estimates
and may be inadequate to cover our actual losses in
Part I, Item 1A of this annual report.
The net reserves as of December 31, 2009 of
$4.1 million are subject to the various protective
arrangements that we entered into in connection with the
Acquisition. Prior to the Acquisition, KEIC had a limited
operating history in California writing small business
workers compensation policies with an average annual
premium size of approximately $4,100 per customer. KEIC had
established loss reserves in the amount of approximately
$16.0 million for these policies at September 30,
2003. In light of the deteriorating financial condition of LMC
and its affiliates, we entered into a number of protective
arrangements in connection with the Acquisition for the purpose
of minimizing our exposure to this past business underwritten by
KEIC and any adverse developments to KEICs loss reserves
as they existed at the date of the Acquisition. One of our
primary objectives in establishing these arrangements was to
create security at the time of the Acquisition with respect to
LMCs potential obligations to us as opposed to having a
mere future contractual right against LMC with respect to these
obligations. The protective arrangements we established included
a commutation agreement, an adverse development cover and a
collateralized reinsurance trust.
Commutation Agreement. Prior to the
Acquisition, LMC and KEIC had entered into a reinsurance
agreement requiring LMC to reinsure 80% of certain risks insured
by KEIC in exchange for a premium paid to LMC. To help insulate
us from the effects of a potential insolvency of LMC and the
possibility that LMC
22
may not continue to have the ability to make reinsurance
payments to KEIC in the future, in connection with the
Acquisition, KEIC entered into a commutation agreement with LMC
to terminate the previously established reinsurance agreement.
Under the commutation agreement, LMC paid us approximately
$13.0 million in cash in exchange for being released from
its obligations under the reinsurance agreement, and KEIC
reassumed all of the risks previously reinsured by LMC.
Adverse Development Cover. At the time of the
Acquisition and after the commutation agreement, KEIC had loss
reserves in the amount of approximately $16.0 million. In
connection with the Acquisition, we entered into an agreement
with LMC under which we both agreed to indemnify each other with
respect to developments in these loss reserves over a period of
approximately eight years. December 31, 2011 is the date to
which the parties will look to determine whether the loss
reserves with respect to KEICs insurance policies in
effect at the date of the Acquisition have increased or
decreased from the $16.0 million amount existing at the
date of the Acquisition. If the loss reserves have increased,
LMC must indemnify us in the amount of the increase. If they
have decreased, we must indemnify LMC in the amount of the
decrease.
Collateralized Reinsurance Trust. Because of
the poor financial condition of LMC and its affiliates, we
required LMC to fund a trust account in connection with the
Acquisition. The funds in the trust account serve as current
security for potential future obligations of LMC under the
adverse development cover. The minimum amount that must be
maintained in the trust account is equal to the greater of
(a) $1.6 million or (b) 102% of the then-existing
quarterly estimate of LMCs total obligations under the
adverse development cover, requiring LMC to fund additional
amounts into the trust account on a quarterly basis, if
necessary, based on a quarterly review of LMCs
obligations. We are entitled to access the funds in the trust
account from time to time to satisfy LMCs obligations
under the adverse development cover in the event that LMC fails
to satisfy its obligations.
As of December 31, 2009, we had recorded a receivable of
approximately $3.0 million for adverse loss development
under the adverse development cover since the date of the
Acquisition. The balance in the trust account, including
accumulated interest, totaled approximately $3.8 million at
December 31, 2009. We continue to assess the reasonableness
of reserves related to this business and believe that the trust
balance at December 31, 2009 is adequate to cover
LMCs present liability to us for adverse development.
Due to the distressed financial condition of LMC and its
affiliates, LMC is no longer writing new business and is now
operating under a voluntary run-off plan which has been approved
by the Illinois Department of Insurance. If LMC is placed into
receivership, various of the protective arrangements, including
the adverse development cover, the collateralized reinsurance
trust and the commutation agreement, could be adversely
affected. If LMC is placed into receivership and the amount held
in the collateralized reinsurance trust is inadequate to satisfy
the obligations of LMC to us under the adverse development
cover, it is unlikely that we would recover any future amounts
owed by LMC to us under the adverse development cover in excess
of the amounts currently held in trust because the director of
the Illinois Department of Insurance would have control of the
assets of LMC. In addition, it is possible that a receiver or
creditor could assert a claim seeking to unwind or recover the
$13.0 million payment made by LMC to us under the
commutation agreement or the funds deposited by LMC into the
collateralized reinsurance trust under applicable voidable
preference or fraudulent transfer laws. See Risks Related
to Our Business In the event LMC is placed into
receivership, we could lose our rights to fee income and
protective arrangements that were established in connection with
the Acquisition, our reputation and credibility could be
adversely affected and we could be subject to claims under
applicable voidable preference and fraudulent transfer
laws in Part I, Item 1A of this annual report.
If LMC is placed into receivership in the near future, we will
be responsible for the amount of any adverse development of
KEICs loss reserves in excess of the collateral that is
then currently available to us, including the $3.8 million
on deposit as of December 31, 2009 and any future amounts
deposited in the collateralized reinsurance trust. For example,
if LMC is placed into receivership at a time when the amount on
deposit in the collateralized reinsurance trust is deficient by
$1.0 million, we would have to absorb that amount. Because
the $13.0 million that we received under the commutation
agreement was not discounted for present value at the time of
payment, the earnings on these funds, if any, will help us to
absorb any adverse development on KEICs loss reserves in
excess of amounts on deposit under the collateralized
reinsurance
23
trust. We believe that there are several factors that would
mitigate the risk to us resulting from a potential voidable
preference or fraudulent conveyance action brought by a
receiver, but if a receiver is successful under applicable
voidable preference and fraudulent transfer laws in recovering
from us the collateral that we received in connection with the
Acquisition, those funds would not be available to us to offset
any adverse development in KEICs loss reserves. See
Our History Issues Relating to a Potential LMC
Receivership in this Item 1.
Investments
We derive investment income from our invested assets. We invest
our statutory surplus and funds to support our loss reserves and
our unearned premiums. As of December 31, 2009, the
amortized cost of our investment portfolio was
$608.2 million and the fair value of the portfolio was
$626.6 million.
The following table shows the fair values of various categories
of invested assets, the percentage of the total fair value of
our invested assets represented by each category and the tax
equivalent book yield based on the fair value of each category
of invested assets as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
Category
|
|
Fair Value
|
|
|
Total
|
|
|
Yield
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
19,392
|
|
|
|
3.1
|
%
|
|
|
3.20
|
%
|
Government sponsored agency securities
|
|
|
29,622
|
|
|
|
4.8
|
|
|
|
4.18
|
|
Corporate securities
|
|
|
99,757
|
|
|
|
15.9
|
|
|
|
4.52
|
|
Tax-exempt municipal securities
|
|
|
341,635
|
|
|
|
54.5
|
|
|
|
5.57
|
|
Mortgage pass-through securities
|
|
|
78,294
|
|
|
|
12.5
|
|
|
|
5.29
|
|
Collateralized mortgage obligations
|
|
|
15,222
|
|
|
|
2.4
|
|
|
|
2.90
|
|
Asset-backed securities
|
|
|
42,686
|
|
|
|
6.8
|
|
|
|
4.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
$
|
626,608
|
|
|
|
100.0
|
%
|
|
|
5.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The average credit rating for our fixed maturity portfolio at
December 31, 2009, using ratings assigned by Standard and
Poors, was AA. The following table shows the ratings
distribution of our fixed income portfolio as of
December 31, 2009, as a percentage of total fair value.
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Total Fair
|
|
Rating
|
|
Value
|
|
|
AAA
|
|
|
37.0
|
%
|
AA
|
|
|
37.3
|
|
A
|
|
|
22.0
|
|
BBB
|
|
|
3.1
|
|
Below BBB
|
|
|
0.6
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
|
|
|
The following table shows the composition of our fixed income
securities by remaining time to maturity at December 31,
2009. 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.
For mortgage-backed securities, mortgage
24
prepayment assumptions are utilized to project the expected
principal redemptions for each security, and the maturity used
in the table below is the average life based on those projected
redemptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
Total
|
|
Remaining Time to Maturity
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
Due in one year or less
|
|
$
|
26,421
|
|
|
|
4.2
|
%
|
Due after one year through five years
|
|
|
191,065
|
|
|
|
30.5
|
|
Due after five years through ten years
|
|
|
247,224
|
|
|
|
39.5
|
|
Due after ten years
|
|
|
25,696
|
|
|
|
4.1
|
|
Securities not due at a single maturity date
|
|
|
136,202
|
|
|
|
21.7
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
available-for-sale
|
|
$
|
626,608
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Our investment strategy is to conservatively manage our
investment portfolio by investing primarily in readily
marketable, investment grade fixed income securities. Our
investment portfolio is managed by a registered investment
advisory firm. We pay a variable fee based on assets under
management. Our Board of Directors has established investment
guidelines and periodically reviews portfolio performance for
compliance with our guidelines. Our investment policy currently
allows for investment of at least 90% of the portfolio in core
investment grade fixed income securities, up to 7.5% in common
stocks (up to 6% domestic and 1.5% international) and up to 5%
in convertible securities. Our investment policy contains
additional limitations and guidelines relating to, for example,
sector diversification, duration and credit rating.
We regularly review our investment portfolio to evaluate the
necessity of recording impairment losses for
other-than-temporary
declines in the fair value of investments. A number of criteria
are considered during this process, including but not limited to
the following: whether we intend to sell the security; the
current fair value as compared to amortized cost or cost, as
appropriate, of the security; the length of time the
securitys fair value has been below amortized cost; the
likelihood that we will be required to sell the security before
recovery of its cost basis; specific credit issues related to
the issuer; and current economic conditions, including interest
rates.
In general, we review all securities that are impaired by 5% or
more at the end of the period. We focus our review of securities
with no stated maturity date on securities that were impaired by
20% or more at the end of the period or have been impaired 10%
or more continuously for six months or longer as of the end of
the period. We also analyze the entire portfolio for other
factors that might indicate a risk of impairment, including
credit ratings, liquidity of the issuer and interest rates. If a
decline in value is deemed temporary, we record the decline as
an unrealized loss in other comprehensive income (loss) on our
consolidated statements of changes in stockholders equity
and comprehensive income and in accumulated other comprehensive
income (loss) on our consolidated balance sheets. If declines in
fair value are deemed other than temporary, we write
down the carrying value of the investment and record a realized
loss in our consolidated statements of operations for the credit
loss component and record the amount due to all other factors in
other comprehensive income. Significant changes in the factors
considered when evaluating investments for impairment losses,
such as those described above, could result in a significant
change in impairment losses reported in the financial statements.
In 2009, we recognized
other-than-temporary
impairment charges of approximately $0.3 million related to
our investment in preferred stock issued by Fannie Mae and
Freddie Mac. As of December 31, 2009, we had one security
with fair value less than 80% of its amortized cost or cost. The
unrealized loss related to this security totaled approximately
$61,000 and was determined to be a temporary impairment. As of
December 31, 2009, the net unrealized gain on our
investment portfolio totaled $18.4 million compared to net
unrealized losses of $4.6 million as of December 31,
2008. In 2008, we recognized
other-than-temporary
impairment charges of approximately $10.2 million on our
investments in preferred stocks (nearly all of which were
government-sponsored agency fixed and variable preferred stocks)
and approximately $3.2 million on our investment in equity
indexed securities exchange-traded funds. No
other-than-temporary
declines in the fair value of our securities were recorded in
2007.
25
The fair value of our investment portfolio increased
significantly in 2009 from the balance at December 31,
2008, which was negatively impacted by unprecedented events in
the capital and credit markets that resulted in extreme
volatility and disruption of the worlds financial markets.
Several factors contributed to the decrease in fair values of
our investment portfolio in 2008 including the
tightening/freezing of credit markets, significant failures of
large financial institutions, uncertainty regarding the
effectiveness of governmental solutions, as well as the current
recession. Despite the significant improvement in the value of
the our investment portfolio in 2009, it is possible that we
could recognize future impairment losses on some securities we
owned at December 31, 2009 if future events, information
and the passage of time result in a determination that a decline
in value is
other-than-temporary.
We had no direct exposure to
sub-prime
mortgage exposure in our investment portfolio as of
December 31, 2009 and $5.4 million of indirect
exposure to
sub-prime
mortgages. As of December 31, 2009, our portfolio included
$212.3 million of insured municipal bonds and
$132.3 million of uninsured municipal bonds. For further
information about our investment portfolio, please see the
related discussion under the heading Liquidity and Capital
Resources in Part II, Item 7 of this annual
report.
Reinsurance
We purchase reinsurance to reduce our net liability on
individual risks and to protect against possible catastrophes.
Reinsurance involves an insurance company transferring, or
ceding, a portion of its exposure on a risk to
another insurer, the reinsurer. The reinsurer assumes the
exposure in return for a portion of the premium. The cost and
limits of reinsurance we purchase can vary from year to year
based upon the availability of quality reinsurance at an
acceptable price and our desired level of retention, or the
amount of risk that we retain for our own account. In excess of
loss reinsurance, losses in excess of the retention level up to
the upper limit of the program, if any, are paid by the
reinsurer.
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 reduce our risk of the possibility of a
reinsurer becoming unable to fulfill its obligations under the
reinsurance contracts, we select financially strong reinsurers
with an A.M. Best 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. All of the
reinsurers included in our current
excess-of-loss
reinsurance program at December 31, 2009 had A.M. Best
ratings of A− or higher.
Our
Excess of Loss Reinsurance Treaty Program
Excess of loss reinsurance is reinsurance that indemnifies the
reinsured against all or a specified portion of losses on
underlying insurance policies in excess of a specified amount,
which is called an attachment level or
retention. Excess of loss reinsurance may be written
in layers, in which a reinsurer or group of reinsurers accepts a
band of coverage up to a specified amount. Any liability
exceeding the upper limit of the program reverts to the ceding
company, or the company seeking reinsurance. The ceding company
also bears the credit risk of a reinsurers insolvency. In
the ordinary course of our business, we renewed our
workers compensation and employers liability excess
of loss reinsurance treaty program effective October 1,
2009, whereby our reinsurers are liable for the ultimate net
losses in excess of $0.75 million for the business we
write, up to an $85.0 million limit and subject to
additional exclusions and limits, including those described
below. We have reviewed the terms of our excess of loss
reinsurance treaties and have concluded that they provide
sufficient transfer of risk and meet other requirements
necessary to qualify them for reinsurance accounting under the
Insurance Activities Topic of the FASB Accounting Standards
Codification. The agreements for the current reinsurance program
expire on October 1, 2010. The program provides coverage in
seven layers and applies to losses occurring between
October 1, 2009 and October 1, 2010 for business
written by us and classified as workers compensation,
employers liability and maritime employers
liability, except in the case of the fourth through seventh
layers, when classified by us as ocean marine. The second, third
and fourth layers also include general liability coverage. All
layers exclude our NCCI residual market assumed
26
business. In order for coverage to attach, we must report all
losses to our reinsurers before October 1, 2017 or, in the
case of general liability losses, by October 1, 2020.
The first reinsurance layer, of which we decided to place only
50%, affords coverage up to $0.5 million for each loss
occurrence in excess of $0.5 million for each loss
occurrence. The aggregate limit for all claims under the first
layer is $17.0 million. In addition, under the first layer
of reinsurance, there is a
sub-limit of
$1.5 million for losses caused by foreign acts of
terrorism, as defined in the Terrorism Risk Insurance Act of
2002, as extended and amended by the Terrorism Risk Insurance
Extension Act of 2005 and the Terrorism Risk Insurance Program
Reauthorization Act of 2007 (collectively referred to in this
annual report as the Terrorism Risk Act); and
maximum employers liability policy limits of
$1.0 million ($2.0 million in Hawaii), or
$5.0 million where case law provides for unlimited coverage.
The second layer affords coverage up to $1.0 million for
each loss occurrence in excess of $1.0 million for each
loss occurrence. The aggregate limit for all claims under the
second layer is $10.0 million. In addition, under the
second layer of reinsurance, there is a
sub-limit of
$2.0 million for losses caused by foreign acts of
terrorism, as defined in the Terrorism Risk Act; a
sub-limit of
$1.0 million for losses caused by occupational disease or
other disease or cumulative trauma; maximum employers
liability policy limits of $1.0 million ($2.0 million
in Hawaii), or $5.0 million where case law provides for
unlimited coverage; and a
sub-limit of
$1.0 million per policy, per occurrence for general
liability losses.
The third layer affords coverage up to $3.0 million for
each loss occurrence in excess of $2.0 million for each
loss occurrence. The aggregate limit for all claims under the
third layer is $12.0 million. In addition, the third layer
has a
sub-limit of
$6.0 million for losses caused by foreign acts of
terrorism, as defined in the Terrorism Risk Act; a
sub-limit of
$3.0 million for losses caused by occupational disease or
other disease or cumulative trauma; maximum employers
liability policy limits of $1.0 million ($2.0 million
in Hawaii), or $5.0 million where case law provides for
unlimited coverage; and a
sub-limit of
$2.0 million per policy, per occurrence for general
liability losses.
The fourth layer affords coverage up to $5.0 million for
each loss occurrence in excess of $5.0 million for each
loss occurrence. The aggregate limit for all claims under the
fourth layer is $15.0 million. In addition, the fourth
layer has a
sub-limit of
$5.0 million for losses caused by foreign acts of
terrorism, as defined in the Terrorism Risk Act; a
sub-limit of
$2.0 million per policy, per occurrence for general
liability losses.
The fifth, sixth and seventh layers in our excess of loss
reinsurance treaty program afford coverage up to
$75.0 million for each loss occurrence in excess of
$10.0 million. The fifth layer affords coverage up to
$10.0 million for each loss occurrence in excess of
$10.0 million for each loss occurrence, subject to an
aggregate limit of $20.0 million. The fifth layer has a
sub-limit of
$10.0 million for losses caused by foreign acts of
terrorism, as defined in the Terrorism Risk Act. The sixth layer
affords coverage up to $30.0 million for each loss
occurrence in excess of $20.0 million for each loss
occurrence, subject to an aggregate limit of $60.0 million.
The sixth layer has a
sub-limit of
$30.0 million for losses caused by foreign acts of
terrorism, as defined in the Terrorism Risk Act. The seventh
layer affords coverage up to $35.0 million for each loss
occurrence in excess of $50.0 million for each loss
occurrence, subject to an aggregate limit of $70.0 million.
The seventh layer has a
sub-limit of
$35.0 million for losses caused by foreign acts of
terrorism, as defined in the Terrorism Risk Act. Under the
fifth, sixth and seventh layers, the maximum amount applicable
to the ultimate net loss for any one loss suffered by any one
employee is $7.5 million.
Under the reinsurance treaty program, we are required to pay our
reinsurers an aggregate deposit premium of approximately
$14.0 million for the term of the agreements. The
agreements for the first, second, third and fourth layers in our
excess of loss reinsurance treaty program have profit-sharing
provisions allowing us to commute the treaties, solely at our
discretion and within 24 months following expiration, in
return for payment by the reinsurers of a portion of the
reinsurers profit on the treaty, calculated according to
the terms of the contract. For example, in 2008, we commuted the
three lower layer treaties (covering losses from
$0.5 million to $10.0 million) in our
2005-2006
reinsurance program in return for a profit commission of
approximately $2.3 million from the reinsurers. As part of
the commutation, we assume all losses occurring in that treaty
year up to an incurred amount of $10.0 million. In 2009, we
commuted the treaty covering losses from $5.0 million to
$10.0 million in our
2006-2007
reinsurance program in return for a profit commission of
27
approximately $0.7 million. In addition, under each layer
of our reinsurance treaty program, we are required to pay to our
reinsurers the pro rata share of the amount, if any, by which
any financial assistance paid to us under the Terrorism Risk Act
for acts of terrorism occurring during any one program year,
combined with our total private-sector reinsurance recoveries
for those acts of terrorism, exceeds the amount of insured
losses paid by us for those acts of terrorism.
Under each layer of our reinsurance treaty program, we may
terminate any reinsurers share under the applicable
agreement at any time by giving written notice to the reinsurer
under certain circumstances, including if the reinsurers
A.M. Best rating is downgraded below A−
and/or its
Standard & Poors rating is downgraded below
BBB+. As of December 31, 2009, there had been
no such downgrades of reinsurers in our current reinsurance
treaty program. Each layer of our reinsurance treaty program
includes various exclusions in addition to the specific
exclusions, including an exclusion for war in specified
circumstances, an exclusion for reinsurance assumed and
exclusions for losses with respect to biological, chemical,
radioactive or nuclear explosion, pollution, contamination or
fire.
Please refer to Note 8 of the consolidated financial
statements in Part II, Item 8 of this annual report
for a listing of participants in our current excess of loss
reinsurance treaty program and a listing of our top ten
reinsurers, based on net amount recoverable, as of
December 31, 2009.
Reinsurance
Arrangements Established in Connection with Past
Transactions
In addition to the reinsurance program described above, we have
existing reinsurance arrangements which were established in
connection with past transactions into which we have entered. In
March 2002, KEIC sold the assets and business of its commercial
compensation specialty operation to Argonaut Insurance Company.
In connection with the sale, KEIC entered into a reinsurance
agreement effective March 31, 2002 with Argonaut pursuant
to which KEIC ceded and Argonaut assumed a 100% quota share
participation in the transferred insurance policies. Certain
reinsurance-type arrangements, including the commutation
agreement and the adverse development cover, were also
established with LMC in connection with the Acquisition. See
Loss Reserves KEIC Loss Reserves in this
Item 1.
Terrorism
Reinsurance
As extended and amended, the Terrorism Risk Act is effective
through December 31, 2014. The Terrorism Risk Act may
provide us with reinsurance protection under certain
circumstances and subject to certain limitations. The Secretary
of the Treasury must declare the act to be a certified act
of terrorism for it to be covered under this federal
program. As amended in 2007, the definition of terrorism for
purposes of the Terrorism Risk Act includes acts of terror
perpetrated by domestic, as well as foreign, persons or
interests. No federal compensation will be paid under the
Terrorism Risk Act unless aggregate insured losses from the act
for the entire insurance industry exceed certain threshold
amounts ($100.0 million for terrorism losses occurring in
2007 and for the remainder of the program). Each insurance
company is responsible for a deductible based on a percentage of
the direct earned premiums of its affiliated group in the
previous calendar year for commercial lines policies (except for
certain excluded lines such as commercial auto) covering risks
in the United States. This deductible amount is 20.0% of such
premiums for losses occurring in 2007 and subsequent years. For
losses in excess of the deductible, the federal government will
reimburse 85% of the insurers loss occurring in 2007 and
subsequent years. As stated above, all layers of our reinsurance
program contain sublimits for losses caused by an act of
terrorism, as defined in the Terrorism Risk Act, subject to
certain absolute exclusions.
Competition
The insurance industry in general is highly competitive and
there is significant competition in the national workers
compensation industry. Competition in the insurance business is
based on many factors, including premiums charged, services
provided, financial strength ratings assigned by independent
rating agencies, speed of claims payments, reputation, perceived
financial strength and general experience. Many of the insurers
with whom we compete have significantly greater financial,
marketing and management resources and experience
28
than we do. In addition, our competitive advantage may be
limited due to the small number of insurance products that we
offer. Some of our competitors have additional competitive
leverage because of the wide array of insurance products they
offer. For example, it may be more convenient for a potential
customer to purchase numerous types of insurance products from
one insurance carrier. We do not offer a wide array of insurance
products due to our targeted market niches, and we may lose
potential customers to our larger, more diverse competitors as a
result. We may also compete with new market entrants in the
future.
We operate in niche markets where we believe we have fewer
competitors with a similar focus. While more than 400 insurance
companies participate in the national workers compensation
market, our competitors are relatively few in number because we
operate in niche markets. We compete with regional and national
insurance companies and state-sponsored insurance funds, as well
as individual and group self-insurance programs. Our primary
competitors vary slightly based on the type of product and by
region and some competitors limit their writings on a geographic
basis. For our maritime product, our primary competitors are
Chartis Inc, (formerly American International Group
(AIG)), American Longshore Mutual Association Ltd.
and Signal Mutual Indemnity Association Ltd. Additional
competitors by region are Alaska National Insurance Company and
Liberty Northwest in our Western Region; Louisiana Workers
Compensation Company (LWCC) and Texas Mutual in our
Gulf Region; Travelers and Zurich in the Southeast; Travelers
and Great American in the Midwest; and Liberty Mutual in our
Northeastern Region. For our state act construction product, our
primary competitors are Chartis Inc, Liberty Mutual, Old
Republic and Zurich in all of our regions. Additional
competitors by region are Amerisure, Alaska National and
Travelers in our Western Region; LWCC and Texas Mutual in our
Gulf Region; Amerisure, Acuity Group, Companion and Westfield in
our Midwestern Region; Hartford and PMA in our Northeastern
Region; and Builders Insurance, FCCI, Key Risk and Summit in our
Southeastern Region . For our ADR product, our primary
competitors are Chartis Inc., Zurich and SCIF. In Hawaii, our
primary competition is DTRIC, Hawaii Employers Mutual Insurance
Company and Island Insurance Company.
We believe our competitive advantages are our strong reputation
in our niche markets, our local knowledge in the markets where
we operate, our specialized underwriting expertise, our
client-driven claims and loss control service capabilities, our
innovative medical cost management strategies, our focus on
niche markets, our loyal brokerage distribution, and our
customized computer systems. In addition to these competitive
advantages, we offer our maritime customers regulated insurance
coverage without the
joint-and-several
liability associated with coverage provided by offshore mutual
organizations.
Ratings
Many insurance buyers, agents and brokers use the ratings
assigned by A.M. Best and other rating agencies to assist
them in assessing the financial strength and overall quality of
the companies from which they are considering purchasing
insurance. We have been rated A− (Excellent)
by A.M. Best since the completion of the Acquisition. This
rating was most recently affirmed in January 2010. An
A− rating is the fourth highest of 15 rating
categories used by A.M. Best. In evaluating a
companys financial and operating performance,
A.M. Best reviews a companys profitability,
indebtedness and liquidity, as well as its book of business, the
adequacy and soundness of its reinsurance, the quality and
estimated fair value of its assets, the adequacy of its loss
reserves, the adequacy of its surplus, its capital structure,
the experience and competence of its management and its market
presence. This rating is intended to provide an independent
opinion of an insurers ability to meet its obligations to
policyholders and is not an evaluation directed at investors.
Regulation
Holding
Company Regulation
As a member of an insurance holding company, SeaBright Insurance
Company, our insurance company subsidiary, is subject to
regulation by the states in which it is domiciled or transacts
business. SeaBright Insurance Company is domiciled in Illinois
and is considered to be commercially domiciled in California. An
insurer is deemed commercially domiciled in
California if, during the three preceding fiscal years, or a
lesser period of time if the insurer has not been licensed in
California for three years, the insurer has written
29
an average of more gross premiums in California than it has
written in its state of domicile, and such gross premiums
written constitute 33% or more of its total gross premiums
written in the United States for such period. Pursuant to the
insurance holding company laws of Illinois and California,
SeaBright Insurance Company is required to register with the
Illinois Department of Insurance and the California Department
of Insurance. In addition, SeaBright Insurance Company is
required to periodically report certain financial, operational
and management data to the Illinois Department of Insurance and
the California Department of Insurance. All transactions within
a holding company system affecting an insurer must have fair and
reasonable terms, charges or fees for services performed must be
reasonable, and the insurers policyholder surplus
following any transaction must be both reasonable in relation to
its outstanding liabilities and adequate for its needs. Notice
to, and in some cases approval from, insurance regulators in
Illinois and California is required prior to the consummation of
certain affiliated and other transactions involving SeaBright
Insurance Company.
Changes
of Control
In addition, the insurance holding company laws of Illinois and
California require advance approval by the Illinois Department
of Insurance and the California Department of Insurance of any
change in control of SeaBright Insurance Company.
Control is generally presumed to exist through the
direct or indirect ownership of 10% or more of the voting
securities of a domestic insurance company or of any entity that
controls a domestic insurance company. In addition, insurance
laws in many states contain provisions that require
prenotification to the insurance commissioners of a change in
control of a non-domestic insurance company licensed in those
states. Any future transactions that would constitute a change
in control of SeaBright Insurance Company, including a change of
control of us, would generally require the party acquiring
control to obtain the prior approval of the Illinois Department
of Insurance and the California Department of Insurance and may
require pre-acquisition notification in applicable states that
have adopted pre-acquisition notification provisions. Obtaining
these approvals may result in a material delay of, or deter, any
such transaction.
These laws may discourage potential acquisition proposals and
may delay, deter or prevent a change of control of SeaBright,
including through transactions, and in particular unsolicited
transactions, that some or all of the stockholders of SeaBright
might consider to be desirable.
State
Insurance Regulation
Insurance companies are subject to regulation and supervision by
the department of insurance in the state in which they are
domiciled and, to a lesser extent, other states in which they
conduct business. SeaBright Insurance Company is primarily
subject to regulation and supervision by the Illinois Department
of Insurance and the California Department of Insurance. These
state agencies have broad regulatory, supervisory and
administrative powers, including, among other things, the power
to: grant and revoke licenses to transact business; license
agents; set the standards of solvency to be met and maintained;
determine the nature of, and limitations on, investments and
dividends; approve policy forms and rates in some states;
periodically examine an insurance companys financial
condition; determine the form and content of required financial
statements; and periodically examine market conduct.
Detailed annual and quarterly financial statements and other
reports are required to be filed with the departments of
insurance of the states in which we are licensed to transact
business. The financial statements and condition of SeaBright
Insurance Company are subject to periodic examination by the
Illinois Department of Insurance and the California Department
of Insurance. In 2007, the Illinois Department of Insurance
completed a routine comprehensive examination of our 2005
statutory annual statement. On June 21, 2007, the
Department officially adopted, without fines or penalties
assessed, its Report of Examination as of December 31, 2005.
In addition, many states have laws and regulations that limit an
insurers ability to withdraw from a particular market. For
example, states may limit an insurers ability to cancel or
not renew policies. Furthermore, certain states prohibit an
insurer from withdrawing one or more lines of business from the
state,
30
except pursuant to a plan that is approved by the state
insurance department. The state insurance department may
disapprove a plan that may lead to market disruption. Laws and
regulations that limit cancellation and non-renewal and that
subject program withdrawals to prior approval requirements may
restrict our ability to exit unprofitable markets.
Federal
Laws and Regulations
As a provider of maritime workers compensation insurance,
we are subject to the USL&H Act, which generally covers
exposures on the navigable waters of the United States and in
adjoining waterfront areas, including exposures resulting from
loading and unloading vessels, and the Jones Act, which covers
exposures at sea. We are also subject to regulations related to
the USL&H Act and the Jones Act.
The USL&H Act, which is administered by the
U.S. Department of Labor, provides medical benefits,
compensation for lost wages and rehabilitation services to
longshoremen, harbor workers and other maritime workers who are
injured during the course of employment or suffer from diseases
caused or worsened by conditions of employment. The Department
of Labor has the authority to require us to make deposits to
serve as collateral for losses incurred under the USL&H
Act. Several other statutes extend the provisions of the
USL&H Act to cover other classes of private-industry
workers. These include workers engaged in the extraction of
natural resources from the outer continental shelf, employees on
American defense bases, and those working under contracts with
the U.S. government for defense or public-works projects,
outside of the continental United States. Our authorizations to
issue workers compensation insurance from the various
state departments of insurance regulating SeaBright Insurance
Company are augmented by our U.S. Department of Labor
certificates of authority to ensure payment of compensation
under the USL&H Act and extensions of the USL&H Act,
including the OCSLA and the Nonappropriated
Fund Instrumentalities Act. This coverage, which we write
as an endorsement to workers compensation and employers
liability insurance policies, provides employment-injury and
occupational disease protection to workers who are injured or
contract occupational diseases while working on the navigable
waters of the United States, or in adjoining areas, and for
certain other classes of workers covered by the extensions of
the USL&H Act.
The Jones Act is a federal law, the maritime employer provisions
of which provide injured offshore workers, or seamen, with the
right to seek compensation for injuries resulting from the
negligence of their employers or co-workers during the course of
their employment on a ship or vessel. In addition, an injured
offshore worker may make a claim against a vessel owner on the
basis that the vessel was not seaworthy. Our authorizations to
issue workers compensation insurance from the various
state departments of insurance regulating SeaBright Insurance
Company allow us to write Jones Act coverage for our maritime
customers. We are not required to have a certificate from the
U.S. Department of Labor to write Jones Act coverage.
We also offer extensions of coverage under the OCSLA, a federal
workers compensation act that provides workers
compensation coverage for the death or disability of an employee
resulting from any injury occurring as a result of working on an
off-shore drilling platform on the Outer Continental Shelf,
where required by a prospective policyholder.
As a condition of authorization effective August 25, 2005,
the U.S. Department of Labor implemented new regulations
requiring insurance carriers authorized to write insurance under
the USL&H Act or any of its extensions to deposit security
to secure compensation payment obligations. The Department of
Labor determines the amount of this deposit annually by
calculating the carriers USL&H and extension Act
obligation by state and by the percentage of those obligations
deemed unsecured by those states guaranty funds.
Privacy
Regulations
In 1999, the United States Congress enacted the
Gramm-Leach-Bliley Act, which, among other things, protects
consumers from the unauthorized dissemination of certain
personal information. Subsequently, a majority of states have
implemented additional regulations to address privacy issues.
These laws and regulations apply to all financial institutions,
including insurance and finance companies, and require us to
maintain appropriate procedures for managing and protecting
certain personal information of our customers
31
and to fully disclose our privacy practices to our customers. We
may also be exposed to future privacy laws and regulations,
which could impose additional costs and impact our financial
condition or results of operations. For example, a National
Association of Insurance Commissioners, or NAIC, initiative that
impacted the insurance industry in 2001 was the adoption in 2000
of the Privacy of Consumer Financial and Health Information
Model Regulation, which assisted states in promulgating
regulations consistent with the Gramm-Leach-Bliley Act. In 2002,
to further facilitate the implementation of the
Gramm-Leach-Bliley Act, the NAIC adopted the Standards for
Safeguarding Customer Information Model Regulation. Several
states have now adopted similar provisions regarding the
safeguarding of customer information. Our insurance subsidiary
has established procedures to comply with Gramm-Leach-Bliley
privacy requirements.
Federal
and State Legislative and Regulatory 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 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.
On November 26, 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 of 2002 was enacted.
In 2005, this law was extended and amended. The Terrorism Risk
Act is designed to ensure the availability of insurance coverage
for losses resulting from certain acts of terror in the United
States of America. As extended in 2005, the law established a
federal assistance program through the end of 2007 to help the
property and casualty insurance industry cover claims related to
future terrorism-related losses and required such companies to
offer coverage for certain acts of terrorism. On
December 26, 2007, President George W. Bush signed an
Extension Bill which extended the Terrorism Risk Act to
December 31, 2014. The terms and conditions applying during
each of the extension years are essentially the same as those
applied during 2007, except that acts of terror perpetrated on
behalf of domestic, as well as foreign, persons or interests are
now subject to the Terrorism Risk Act. By law, SeaBright
Insurance Company may not exclude coverage for terrorism losses
from its workers compensation policies. Although SeaBright
Insurance Company is protected by federally funded terrorism
reinsurance to the extent provided for in the Terrorism Risk
Act, there are limitations and restrictions on this protection,
including a substantial deductible that must be met, which could
have an adverse effect on our financial condition or results of
operations. Potential future changes to the Terrorism Risk Act
could also adversely affect us by causing our reinsurers to
increase prices or withdraw from certain markets where terrorism
coverage is required.
Collectively bargained workers compensation insurance
programs in California were enabled by S.B. 983, the
workers compensation reform bill passed in 1993, and
greatly expanded by the passage of S.B. 228 in 2003. Among other
things, this legislation amended the California Labor Code to
include the specific requirements for the creation of an ADR
program for the delivery of workers compensation benefits.
The passage of S.B. 228 made these programs available to all
unionized employees, where previously they were available only
to unionized employees in the construction industry.
Our workers compensation operations are subject to
legislative and regulatory actions. In California, where we have
our largest concentration of business, significant workers
compensation legislation was enacted twice in recent years.
Effective January 1, 2003, legislation became effective
which provides for increases in indemnity benefits to injured
workers. In September 2003 and April 2004, workers
compensation legislation was enacted in California with the
principal objectives of reducing medical costs and implementing
a more predictable and equitable permanent partial disability
rating schedule.
The principal changes in the legislation that impact medical
costs are as follows: 1) a reduction in the reimbursable
amount for certain physician fees, outpatient surgeries,
pharmaceutical products and certain
32
durable medical equipment; 2) a limitation on the number of
chiropractor or physical therapy office visits; 3) the
introduction of medical utilization guidelines; 4) a
requirement for second opinions on certain spinal surgeries; and
5) a repeal of the presumption of correctness afforded to
the treating physician, except where the employee has
pre-designated a treating physician. Since the passage of the
2003 and 2004 reforms, bills have been introduced to roll back
many areas of significant reform. Some compromise measures have
succeeded. For example, on October 13, 2007, new
legislation became effective that removed caps on physical
therapy but only when the administrative director adopts new
guidelines for occupational therapy and chiropractic care for
post-surgical care.
On September 30, 2008 the Governor of California vetoed a
Workers Compensation bill that would have substantially
increased the permanent disability indemnity benefits to
qualified injured workers by increasing the number of weeks such
benefits are paid. The Governor also vetoed bills that would
have: removed the December 31, 2009 sunset date
permitting employees to pre-designate their personal physician
for on the job injuries; required physicians performing
utilization review to be licensed in California; and prohibited
race, religious creed, color, national origin or various other
factors from being considered in the apportionment of permanent
disability.
Also in 2008, the California Division of Workers
Compensation recommended changes to the formula used to
determine permanent disability compensation awards for dates of
injury on or after January 1, 2009. Although a series of
public hearings were held to solicit public feedback on the
proposed changes, the Division chose not to update the permanent
disability rating schedule by January 1, 2010, as required
by SB899, citing concerns about the potential impact of a change
on the California economy.
In February of 2009, the California Workers Compensation
Appeals Board ( the Appeals Board) rendered an en
banc decision on a series of cases, commonly referred to as
Almarez, Guzman and Ogilvie, that could have a material impact
on the value of permanent disability awards. The en banc
decision led to considerable comment and debate in the
Workers Compensation community. Given this, the Appeals
Board subsequently granted a petition for reconsideration of the
subject cases, allowing interested parties until May 1,
2009 to provide input via an amicus curiae brief. In September
of 2009, the Appeals Board reaffirmed most aspects of its prior
work, with some clarifications to its February decisions. While
its decision is considered final, several aspects are likely to
still be determined by case law and through appeal. However, it
could take two to three years before review by higher courts is
complete.
We experienced significant reductions in our California premium
rates from 2003 to 2008. In 2007, in response to continued
reductions in California workers compensation claim costs,
we reduced our rates by an average of 14.2% for new and renewal
insurance policies written in California on or after
July 1, 2007. This action was the eighth California rate
reduction we had filed since October 1, 2003, resulting in
a net cumulative reduction of our California rates of
approximately 54.8%. On August 15, 2008, the Workers
Compensation Insurance Rating Bureau of California (the
WCIRB) submitted a filing with the California
Insurance Commissioner recommending a 16.0% increase in advisory
pure premium rates on new and renewal policies effective on or
after January 1, 2009. The filing was based on a review of
loss and loss adjustment experience through March 31, 2008.
In response to this recommendation, on October 24, 2008,
the California Insurance Commissioner approved a 5.0% increase
in advisory pure premium rates effective January 1, 2009.
With the California Department of Insurances approval, we
adopted this 5.0% increase effective January 1, 2009.
On March 27, 2009, the WCIRB submitted a filing with the
California Insurance Commissioner recommending a 24.4% increase
in advisory pure premium rates on new and renewal policies
effective on or after July 1, 2009. On April 23, 2009,
the WCIRB amended its filing to reduce the proposed rate
increase to 23.7%. A public hearing on the proposed rate
increase was held on April 28, 2009. Following the hearing,
the California Insurance Commissioner issued a press release in
which he urged the WCIRB to withdraw the portion of its
requested rate increase related to recent decisions by the
Workers Compensation Appeals Board (estimated to be
approximately 6%) until the judicial process related to these
decisions has concluded. A second hearing on medical treatment
costs was held on June 8, 2009. On July 8, 2009, the
California Insurance Commissioner announced his rejection of any
increase in advisory pure premium rates. Rating
33
decisions made by the California Insurance Commissioner are
advisory only and insurance companies may choose whether or not
to adopt approved or disapproved rates. After completing an
internal study of our California loss costs, on June 23,
2009, we filed with the California Department of Insurance
revised rates for new and renewal workers compensation
insurance policies written in the state of California on or
after August 1, 2009. The new rates reflected an average
increase of 10.6% from prior rates and were in response to
increased projected medical costs and recent decisions by the
Workers Compensation Appeals Board. On July 7, 2009,
the California Department of Insurance approved our filing for
the rate increase. If other insurers do not adopt similar rate
increases, this rate increase may have a negative effect on our
ability to compete in California. On August 18, 2009, the
WCIRB submitted a filing with the California Insurance
Commissioner recommending a 22.8% increase in advisory pure
premium rates on new and renewal policies effective on or after
January 1, 2010. A public hearing on the proposed rate
increase was held on October 6, 2009. On November 9,
2009, the California Insurance Commissioner announced his
decision to approve no change in advisory pure premium rates.
Rate reductions have also been adopted in other states in which
we operate. For example, in Alaska we adopted rate decreases of
10.3% and 7.6% effective January 1, 2010 and 2009,
respectively. In Louisiana, we adopted commissioner-approved
rate decreases of 17.4% and 8.6% effective May 1, 2009 and
2008, respectively. In Hawaii, we adopted rate decreases of
13.7% and 5.8% effective January 1, 2010 and
February 1, 2009, respectively. In Texas, we adopted rate
decreases of 10.0% and 7.7% effective May 1, 2009 and
January 1, 2008, respectively. In Florida, we adopted rate
decreases of 6.8% and 18.6% effective January 1, 2010 and
2009, respectively. We adopted a rate decrease of 0.1% effective
January 1, 2010 and rate increases of 2.5% and 3.5% in
Illinois effective April 1, 2009 and January 1, 2009,
respectively. In Arizona we adopted a rate decrease of 5.1%
effective January 1, 2010 and a rate increase of 7.9%
effective October 1, 2008. In Washington USL&H, we
adopted a rate increase of 21% effective December 1, 2009.
The
National Association of Insurance Commissioners
The NAIC is a group formed by state insurance commissioners to
discuss issues and formulate policy with respect to the
regulation, reporting and accounting of insurance companies.
Although the NAIC has no legislative authority and insurance
companies are at all times subject to the laws of their
respective domiciliary states and, to a lesser extent, other
states in which they conduct business, the NAIC is influential
in determining the form in which such laws are enacted. Model
Insurance Laws, Regulations and Guidelines (the Model
Laws) have been promulgated by the NAIC as a minimum
standard by which state regulatory systems and regulations are
measured. Adoption of state laws which provide for substantially
similar regulations to those described in certain of the Model
Laws is a requirement for accreditation by the NAIC. The NAIC
provides authoritative guidance to insurance regulators on
current statutory accounting issues by promulgating and updating
a codified set of statutory accounting practices in its
Accounting Practices and Procedures Manual. The Illinois
Department of Insurance and the California Department of
Insurance have adopted these codified statutory accounting
practices.
Illinois and California have also adopted laws substantially
similar to the NAICs risk based capital
(RBC) laws, which require insurers to maintain
minimum levels of capital based on their investments and
operations. These RBC requirements provide a standard by which
regulators can assess the adequacy of an insurance
companys capital and surplus relative to its operations.
Among other requirements, an insurance company must maintain
capital and surplus of at least 200% of the RBC computed by the
NAICs RBC model (known as the Authorized Control
Level of RBC). At December 31, 2009, the capital and
surplus of SeaBright Insurance Company exceeded 200% of the RBC
requirements.
The NAICs Insurance Regulatory Information System
(IRIS) key financial ratios, developed to assist
insurance departments in overseeing the financial condition of
insurance companies, are reviewed by experienced financial
examiners of the NAIC and state insurance departments to select
those companies that merit highest priority in the allocation of
the regulators resources. IRIS identifies twelve 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.
34
The 2009 IRIS results for SeaBright Insurance Company showed no
results outside the usual range for such ratios, as
such ranges are determined by the NAIC.
Dividend
Limitations
SeaBright Insurance Companys ability to pay dividends is
subject to restrictions contained in the insurance laws and
related regulations of Illinois and California. The insurance
holding company laws in these states require that ordinary
dividends be reported to the Illinois Department of Insurance
and the California Department of Insurance prior to payment of
the dividend and that extraordinary dividends be submitted for
prior approval. An extraordinary dividend is generally defined
as a dividend that, together with all other dividends made
within the past 12 months, exceeds the greater of 10% of
its statutory policyholders surplus as of the preceding
year end or the net income of the company for the preceding
year. Statutory policyholders surplus, as determined under
statutory accounting principles is the amount remaining after
all liabilities, including loss and loss adjustment expenses,
are subtracted from all admitted assets. Admitted assets are
assets of an insurer prescribed or permitted by a state
insurance regulator to be recognized on the statutory balance
sheet. Insurance regulators have broad powers to prevent the
reduction of statutory surplus to inadequate levels, and there
is no assurance that extraordinary dividend payments will be
permitted.
Statutory
Accounting Practices
Statutory accounting practices (SAP) are a basis of
accounting developed to assist insurance regulators in
monitoring and regulating the solvency of insurance companies.
SAP is primarily concerned with measuring an insurers
surplus available for 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.
U.S. generally accepted accounting principles
(GAAP) are concerned with a companys solvency,
but such principles are 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 Illinois and California regulators,
determine, among other things, the amount of statutory surplus
and statutory net income or loss of SeaBright Insurance Company
and thus determine, in part, the amount of funds it has
available to pay dividends to us.
Guaranty
Fund Assessments
In Illinois, California and in most of the states where
SeaBright Insurance Company is licensed to transact business,
there is a requirement that property and casualty insurers doing
business within each such state participate in a guaranty
association, which is 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 or policy surcharges.
Property and casualty insurance company insolvencies or failures
may result in additional security fund assessments to SeaBright
Insurance Company at some future date. At this time we are
unable to determine the impact, if any, such assessments may
have on the financial position or results of operations of
SeaBright Insurance Company. We have established liabilities for
guaranty fund assessments with respect to insurers that are
currently subject to insolvency proceedings.
35
PointSure
The brokerage and third party administrator activities of
PointSure are subject to licensing requirements and regulation
under the laws of each of the jurisdictions in which it
operates. PointSure is authorized to act as an insurance broker
under firm or officer licenses in 50 states and the
District of Columbia. PointSures business depends on the
validity of, and continued good standing under, the licenses and
approvals pursuant to which it operates, as well as compliance
with pertinent regulations. PointSure therefore devotes
significant effort toward maintaining its licenses to ensure
compliance with a diverse and complex regulatory structure.
Licensing laws and regulations vary from state to state. In all
states, 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,
PointSure follows practices based on interpretations of laws and
regulations generally followed by the industry, which may prove
to be different from the interpretations of regulatory
authorities.
Employees
As of December 31, 2009, we had 311 full-time
equivalent employees. We have employment agreements with some of
our executive officers, which are described in our proxy
statement for the 2010 annual meeting of stockholders and
incorporated by reference into Part III, Item 11 of
this annual report. We believe that our employee relations are
good.
Corporate
Website
Through our Internet website at www.sbic.com, we provide free
access to our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission (the
SEC). The following corporate governance materials
are also available on our website:
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Audit Committee, Compensation Committee, and Nominating and
Corporate Governance Committee charters;
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Code of Ethics for Senior Financial Employees;
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Conflict of Interest & Code of Conduct Policy; and
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Insider Trading Policy.
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If we waive or substantially change any material provision of
our Code of Ethics for Senior Financial Employees, we will
disclose that fact on our website within four business days of
the waiver or change. Information on our website is not part of
this annual report or any other report filed with the SEC.
Note on
Forward-Looking Statements
Some of the statements in Part I, Item 1 of this
annual report, some of the statements in this Item 1A, some
of the statements under the heading Managements
Discussion and Analysis of Financial Condition and Results of
Operation in Part II, Item 7 of this annual
report and statements elsewhere in this annual report, 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 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.
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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 the following:
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greater frequency or severity of claims and loss activity,
including as a result of catastrophic events, than our
underwriting, reserving or investment practices anticipate based
on historical experience or industry data;
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our dependency on a concentrated geographic market;
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changes in the availability, cost or quality of reinsurance and
failure of our reinsurers to pay claims timely or at all;
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changes in regulations or laws applicable to us, our
subsidiaries, brokers or customers;
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potential downgrades in our rating or changes in rating agency
policies or practices;
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ineffectiveness or obsolescence of our business strategy due to
changes in current or future market conditions;
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unexpected issues relating to claims or coverage and changes in
legal theories of liability under our insurance policies;
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increased competition on the basis of pricing, capacity,
coverage terms or other factors;
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developments in financial and capital markets that adversely
affect the performance of our investments;
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loss of the services of any of our executive officers or other
key personnel;
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our inability to raise capital in the future;
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our status as an insurance holding company with no direct
operations;
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our reliance on independent insurance brokers;
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increased assessments or other surcharges by states in which we
write policies;
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our potential exposure to losses if LMC were to be placed into
receivership;
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the effects of acquisitions that we may undertake;
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failure of our customers to pay additional premium under our
retrospectively rated policies;
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the effects of acts of terrorism or war;
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cyclical changes in the insurance industry;
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changes in accounting policies or practices; and
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changes in general economic conditions, including inflation and
other factors.
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The foregoing factors should not be construed as exhaustive and
should be read in conjunction with the other cautionary
statements that are included in this annual report. 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 annual
report reflect our views as of the date of this annual report
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. Before
making an investment decision, you should carefully consider all
of the factors identified in this annual report that could cause
actual results to differ.
37
You should carefully consider the risks described below,
together with all of the other information included in this
annual report. The risks and uncertainties described below are
not the only ones facing our company. If any of the following
risks actually occurs, our business, financial condition or
operating results could be harmed. 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. The risks
discussed below also include forward-looking statements and our
actual results may differ substantially from those discussed in
those forward-looking statements. Please refer to the discussion
under the heading Note on Forward-Looking Statements
in Part I, Item 1 of this annual report.
Risks
Related to Our Business
Our
loss reserves are based on estimates and may be inadequate to
cover our actual losses.
If we fail to accurately assess the risks associated with the
businesses we insure, our loss reserves may be inadequate to
cover our actual losses and we may fail to establish appropriate
premium rates. We establish loss reserves in our financial
statements that represent an estimate of amounts needed to pay
and administer claims with respect to insured events that have
occurred, including events that have not yet been reported to
us. Loss reserves are estimates and are inherently uncertain;
they do not and cannot represent an exact measure of liability.
Accordingly, our loss reserves may prove to be inadequate to
cover our actual losses. Any changes in these estimates are
reflected in our results of operations during the period in
which the changes are made, with increases in our loss reserves
resulting in a charge to our earnings and a reduction of our
statutory surplus. For example, in 2009, we increased loss
reserves for prior accident years by approximately
$14.4 million. See the discussion under the heading
Loss Reserves in this Item 1.
Our loss reserve estimates are based on estimates of the
ultimate cost of individual claims and on actuarial estimation
techniques. Several factors contribute to the uncertainty in
establishing these estimates. Judgment is required in actuarial
estimation to ascertain the relevance of historical payment and
claim settlement patterns under current facts and circumstances.
Key assumptions in the estimation process are the average cost
of claims over time, which we refer to as severity trends,
including the increasing level of medical, legal and
rehabilitation costs, and costs associated with fraud or other
abuses of the medical claim process; frequency of claims; the
length of time to achieve ultimate resolution; judicial theories
of liabilities; and other third-party factors beyond our
control. If there are unfavorable changes in severity trends, we
may need to increase our loss reserves, as described above.
Our
operations could be significantly affected by the severe
downturn in the U.S. economy.
Our operations and financial performance may be impacted by
changes in the U.S. economy. The significant downturn in
the U.S. economy during the fourth quarter of 2008 led to
lower reported payrolls, which has had a negative impact on our
gross premiums written. If our customers reduce their workforce
levels, the level of workers compensation insurance
coverage they require and, as a result the premiums that we
charge, would be reduced, and if our customers cease operations,
they will not renew their policies. It is uncertain if economic
conditions will deteriorate further, or when economic conditions
will improve. If the recession continues, it could further
reduce payrolls, which could have a significant negative impact
on our business, financial condition or results of operations.
Our
geographic concentration ties our performance to the business,
economic and regulatory conditions in California, Illinois and
Louisiana. Any single catastrophe or other condition affecting
losses in these states could adversely affect our results of
operations.
Our business is concentrated in California (approximately 43.9%
of direct premiums written for the year ended December 31,
2009), Louisiana (approximately 9.3% of direct premiums written
for the same period) and Illinois (approximately 8.1% of direct
premiums written for the same period). Accordingly, unfavorable
business, economic or regulatory conditions in those states
could negatively impact our business. For example,
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California, Louisiana and Illinois are states that are
susceptible to severe natural perils, such as tsunamis,
earthquakes, tornados and hurricanes, along with the possibility
of terrorist acts. Accordingly, we could suffer losses as a
result of catastrophic events in those states. Although
geographic concentration has not adversely affected our business
in the past, we may in the future be exposed to economic and
regulatory risks or risks from natural perils that are greater
than the risks faced by insurance companies that conduct
business over a greater geographic area. This concentration of
our business could have a material adverse effect on our
financial condition or results of operations.
If we
are unable to obtain or collect on our reinsurance protection,
our business, financial condition and results of operations
could be materially adversely affected.
We buy reinsurance coverage to protect us from the impact of
large losses. Reinsurance is an arrangement in which an
insurance company, called the ceding company, transfers
insurance risk by sharing premiums with another insurance
company, called the reinsurer. Conversely, the reinsurer
receives or assumes reinsurance from the ceding company. In the
ordinary course of our business we participate in a
workers compensation and employers liability excess
of loss reinsurance treaty program covering all of the business
that we write or renew pursuant to which our reinsurers are
liable for varying percentages of the ultimate net losses in
excess of $0.75 million for the business we write, up to a
limit of $85.0 million, subject to certain exclusions and
limitations. The treaty program provides coverage in several
layers. See the discussion under the heading
Reinsurance in Part I, Item 1 of this
annual report. The availability, amount and cost of reinsurance
depend on market conditions and may vary significantly. As a
result of catastrophic events, such as the events of
September 11, 2001, we may incur significantly higher
reinsurance costs, more restrictive terms and conditions, and
decreased availability. For example, each layer of our
reinsurance treaty program contains an aggregate limit for all
claims under that layer over which our reinsurers will not be
liable (e.g., $17.0 million under the first layer,
$10.0 million under the second layer and $12.0 million
under the third layer). In addition, each layer of our
reinsurance treaty program covers acts of terrorism only up to a
modest limit (e.g., $1.5 million per occurrence
under the first layer, $2.0 million per occurrence under
the second layer and $6.0 million under the third layer).
Because of these
sub-limits
and terrorism exclusions included in our treaties, which are
common in the wake of the events of September 11, 2001, we
have significantly greater exposure to losses resulting from
acts of terrorism. The incurrence of higher reinsurance costs
and more restrictive terms could materially adversely affect our
business, financial condition and results of operations.
The agreements for our current workers compensation excess
of loss reinsurance treaty program expire on October 1,
2010. Any decrease in the amount of our reinsurance at the time
of renewal, whether caused by the existence of more restrictive
terms and conditions or decreased availability, will also
increase our risk of loss and, as a result, could materially
adversely affect our business, financial condition and results
of operations. We have not experienced difficulty in qualifying
for or obtaining sufficient reinsurance to appropriately cover
our risks in the past. We currently have 10 reinsurers
participating in our excess of loss reinsurance treaty program,
and believe that this is a sufficient number of reinsurers to
provide us with reinsurance in the volume that we require.
However, it is possible that one or more of our current
reinsurers could cancel participation, or we could find it
necessary to cancel the participation of one of our reinsurers,
in our excess of loss reinsurance treaty program. In either of
those events, if our reinsurance broker is unable to spread the
cancelled or terminated reinsurance among the remaining
reinsurers in the program, we estimate that it could take
approximately one to three weeks or longer to identify and
negotiate appropriate documentation with a replacement
reinsurer. During this time, we could be exposed to an increased
risk of loss, the extent of which would depend on the volume of
cancelled reinsurance.
In addition, we are subject to credit risk with respect to our
reinsurers. Reinsurance protection that we receive does not
discharge our direct obligations under the policies we write. We
remain liable to our policyholders, even if we are unable to
make recoveries to which we believe we are entitled under our
reinsurance contracts. Losses may not be recovered from our
reinsurers until claims are paid, and, in the case of long-term
workers compensation cases, the creditworthiness of our
reinsurers may change before we can recover amounts to which we
are entitled. Although we have not experienced problems in the
past resulting from the failure of a reinsurer to pay our claims
in a timely manner, if we experience this problem in the
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future, our costs would increase and our revenues would decline.
As of December 31, 2009, we had $34.3 million of
amounts recoverable from our reinsurers, excluding the
receivable on our adverse development cover, that we would be
obligated to pay if our reinsurers failed to pay us.
The
insurance business is subject to extensive regulation and
legislative changes, which impact the manner in which we operate
our business.
Our insurance business is subject to extensive regulation by the
applicable state agencies in the jurisdictions in which we
operate, perhaps most significantly by the Illinois Department
of Insurance and the California Department of Insurance. These
state agencies have broad regulatory powers designed to protect
policyholders, not stockholders or other investors. These powers
include, among other things, the ability to:
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place limitations on our ability to transact business with our
affiliates;
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regulate mergers, acquisitions and divestitures involving our
insurance company subsidiary;
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require SeaBright Insurance Company, PointSure, THM and BWNV to
comply with various licensing requirements and approvals that
affect our ability to do business;
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approve or reject our policy coverage and endorsements;
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place limitations on our investments and dividends;
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set standards of solvency to be met and maintained;
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regulate rates pertaining to our business;
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require assessments for the provision of funds necessary for the
settlement of covered claims under certain policies provided by
impaired, insolvent or failed insurance companies;
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require us to comply with medical privacy laws; and
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prescribe the form and content of, and examine, our statutory
financial statements.
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Our ability to transact business with our affiliates and to
enter into mergers, acquisitions and divestitures involving our
insurance company subsidiary is limited by the requirements of
the insurance holding company laws of Illinois and California.
To comply with these laws, we are required to file notices with
the Illinois Department of Insurance and the California
Department of Insurance to seek their respective approvals at
least 30 days before engaging in any intercompany
transactions, such as sales, purchases, exchanges of assets,
loans, extensions of credit, cost sharing arrangements and
extraordinary dividends or other distributions to stockholders.
Under these holding company laws, any change of control
transaction also requires prior notification and approval.
Because these governmental agencies may not take action or give
approval within the 30 day period, these notification and
approval requirements may subject us to business delays and
additional business expense. If we fail to give these
notifications, we may be subject to significant fines and
penalties and damaged working relations with these governmental
agencies.
In addition, workers compensation insurance is statutorily
provided for in all of the states in which we do business. State
laws and regulations provide for the form and content of policy
coverage and the rights and benefits that are available to
injured workers, their representatives and medical providers.
For example, in California, on January 1, 2003,
workers compensation legislation became effective that
provided for increases in the benefits payable to injured
workers. Also, in California, workers compensation
legislation intended to reduce certain costs was enacted in
September 2003 and April 2004. Among other things, this
legislation established an independent medical review process
for resolving medical disputes, tightened standards for
determining impairment ratings by applying specific medical
treatment guidelines, capped temporary total disability payments
to 104 weeks from first payment and enabled injured workers
to access immediate medical care up to $10,000 but required them
to get medical care through a network of doctors chosen by the
employer. The implementation of these reforms affects the manner
in which we coordinate medical care costs with employers and the
manner in which we oversee treatment plans. However, the reforms
are subject to continuing opposition in the California
legislature, in the courts and by ballot initiatives, any of
which could
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overturn or substantially amend the reforms and regulatory rules
applicable to the legislation. Since the passage of the 2003 and
2004 reforms, bills have been introduced to roll back many areas
of significant reform. Some compromise measures have succeeded.
For example, on October 13, 2007, new legislation became
effective that removed caps on physical therapy but only when
the administrative director adopts new guidelines for
occupational therapy and chiropractic care for post-surgical
care. We cannot predict the ultimate impact of the reforms or of
any amendments to them.
Our business is also affected by federal laws, including the
USL&H Act, which is administered by the Department of
Labor, and the Merchant Marine Act of 1920, or Jones Act. The
USL&H Act contains various provisions affecting our
business, including the nature of the liability of employers of
longshoremen, the rate of compensation to an injured
longshoreman, the selection of physicians, compensation for
disability and death and the filing of claims.
In addition, we are impacted by the Terrorism Risk Act and by
the Gramm-Leach-Bliley Act of 2002 related to disclosure of
personal information. The Gramm-Leach-Bliley Act, which, among
other things, protects consumers from the unauthorized
dissemination of certain personal information, and various state
laws and regulations addressing privacy issues, require us to
maintain appropriate procedures for managing and protecting
certain personal information of our customers and to fully
disclose our privacy practices to our customers. The Terrorism
Risk Act requires that commercial property and casualty
insurance companies offer coverage for certain acts of terrorism
and has established a federal assistance program through the end
of 2014 to help insurers cover claims arising out of such acts.
The Terrorism Risk Act only covers certified acts of terrorism,
and the U.S. Secretary of the Treasury must declare the act
to be a certified act of terrorism for it to be
covered under this federal program. In addition, no federal
compensation will be paid under the Terrorism Risk Act unless
aggregate insured losses from the act for the entire insurance
industry exceed certain threshold amounts ($100.0 million
for terrorism losses occurring in 2007 and for the remainder of
the program). Under this program, the federal government covers
85% of the losses from covered certified acts of terrorism
occurring in 2007 and for the remainder of the program on
commercial risks in the United States only, in excess of the
applicable deductible amount. This deductible is calculated
based on a percentage of an affiliated insurance groups
prior year direct earned premiums on commercial lines policies
(except for certain excluded lines such as commercial auto)
covering risks in the United States. This deductible amount is
20.0% of such premiums for losses occurring in 2007 and
subsequent years.
Recently, the financial markets have experienced a period of
extreme turmoil, including the bankruptcy, restructuring or sale
of certain financial institutions, which resulted in
unprecedented intervention by the U.S. federal government,
including unprecedented levels of direct investment by the
federal government in certain financial and insurance
institutions. While the ultimate outcome of governmental
initiatives intended to alleviate the recent financial crisis
cannot be predicted, it is likely that governmental authorities
may seek to exercise their supervisory or enforcement power in
new or more robust ways, which could affect our business and the
way we manage our capital, and may require us to satisfy
increased capital requirements or impose additional restrictions
on us.
This extensive regulation of our business may affect the cost or
demand for our products and may limit our ability to obtain rate
increases or to take other actions that we might desire to
increase our profitability. In addition, we may be unable to
maintain all required approvals or comply fully with the wide
variety of applicable laws and regulations, which are
continually undergoing revision, or the relevant
authoritys interpretation of such laws and regulations.
A
downgrade in the A.M. Best rating of our insurance
subsidiary could reduce the amount of business we are able to
write.
Rating agencies rate insurance companies based on each
companys ability to pay claims. Our insurance company
subsidiary currently has a rating of A−
(Excellent) from A.M. Best, which is the rating agency that
we believe has the most influence on our business. The ratings
of A.M. Best are subject to periodic review using, among
other things, proprietary capital adequacy models, and are
subject to revision or withdrawal at any time. Insurance ratings
are directed toward the concerns of policyholders and insurance
agents and are not
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intended for the protection of investors or as a recommendation
to buy, hold or sell any of our securities. Our competitive
position relative to other companies is determined in part by
our A.M. Best rating. We believe that our business is
particularly sensitive to our A.M. Best rating because we
focus on larger customers which tend to give substantial weight
to the A.M. Best rating of their insurers. We expect that
any reduction in our A.M. Best rating below
A− would cause a reduction in the number of
policies we write and could have a material adverse effect on
our results of operations and our financial position.
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
contracts that are affected by the changes. As a result, the
full extent of liability under our insurance contracts may not
be known for many years after a contract is issued. For example,
the number or nature of existing occupational diseases may
expand beyond our expectation. In addition, medical claims costs
associated with permanent and partial disabilities may inflate
more rapidly or higher than we currently expect. Expansions of
this nature may expose us to more claims than we anticipated
when we wrote the underlying policy.
Intense
competition could adversely affect our ability to sell policies
at rates we deem adequate.
In most of the states in which we operate, we face significant
competition which, at times, is intense. If we are unable to
compete effectively, our business and financial condition could
be materially adversely affected. Competition in our businesses
is based on many factors, including premiums charged, services
provided, financial strength ratings assigned by independent
rating agencies, speed of claims payments, reputation, perceived
financial strength and general experience. We compete with
regional and national insurance companies and state-sponsored
insurance funds, as well as potential insureds that have decided
to self-insure. Our principal competitors include Chartis Inc.,
Liberty Mutual, Zurich, Signal Mutual Indemnity Association
Ltd., and American Longshore Mutual Association Ltd. Many of our
competitors have substantially greater financial and marketing
resources than we do, and some of our competitors, including the
State Compensation Insurance Fund of California, benefit
financially by not being subject to federal income tax.
In addition, our competitive advantage may be limited due to the
small number of insurance products we offer. Some of our
competitors, such as Chartis Inc. or Zurich, have additional
competitive leverage because of the wide array of insurance
products they offer. For example, a potential customer may
consider it more convenient to purchase multiple types of
insurance products from one insurance carrier. We do not offer a
wide array of insurance products due to our targeted market
niches, and we may lose potential customers to our larger, more
diverse competitors as a result.
We experienced significant reductions in our California premium
rates from 2003 to 2008. In 2007, in response to continued
reductions in California workers compensation claim costs,
we reduced our rates by an average of 14.2% for new and renewal
insurance policies written in California on or after
July 1, 2007. This action was the eighth California rate
reduction we had filed since October 1, 2003, resulting in
a net cumulative reduction of our California rates of
approximately 54.8%. On August 15, 2008, the Workers
Compensation Insurance Rating Bureau of California (the
WCIRB) submitted a filing with the California
Insurance Commissioner recommending a 16.0% increase in advisory
pure premium rates on new and renewal policies effective on or
after January 1, 2009. The filing was based on a review of
loss and loss adjustment experience through March 31, 2008.
In response to this recommendation, on October 24, 2008,
the California Insurance Commissioner approved a 5.0% increase
in advisory pure premium rates effective January 1, 2009.
With the California Department of Insurances approval, we
adopted this 5.0% increase effective January 1, 2009.
After completing an internal study of our California loss costs,
on June 23, 2009, we filed with the California Department
of Insurance revised rates for new and renewal workers
compensation insurance
42
policies written in the state of California on or after
August 1, 2009. The new rates reflected an average increase
of 10.6% from prior rates and were in response to increased
projected medical costs and recent decisions by the
Workers Compensation Appeals Board. On July 7, 2009,
the California Department of Insurance approved our filing for
the rate increase. We are unable to predict the impact that the
rate increase adopted by us in California might have on our
future financial position and results of operations. If other
insurers do not adopt similar rate increases, this rate increase
may have a negative effect on our ability to compete in
California.
Rate reductions have also been adopted in other states in which
we operate. For example, in Alaska we adopted rate decreases of
10.3% and 7.6% effective January 1, 2010 and 2009,
respectively. In Louisiana, we adopted commissioner-approved
rate decreases of 17.4% and 8.6% effective May 1, 2009 and
2008, respectively. In Hawaii, we adopted rate decreases of
13.7% and 5.8% effective January 1, 2010 and
February 1, 2009, respectively. In Texas, we adopted rate
decreases of 10.0% and 7.7% effective May 1, 2009 and
January 1, 2008, respectively. In Florida, we adopted rate
decreases of 6.8% and 18.6% effective January 1, 2010 and
2009, respectively. We adopted a rate decrease of 0.1% effective
January 1, 2010 in Illinois. In Arizona we adopted a rate
decrease of 5.1% effective January 1, 2010 and a rate
increase of 7.9% effective October 1, 2008. If any of our
competitors adopt premium rate reductions that are greater than
ours, we may be unable to compete effectively and our business,
financial condition and results of operations could be
materially adversely affected.
If we
are unable to realize our investment objectives, our financial
condition may be adversely affected.
Investment income is an important component of our revenues and
net income. The ability to achieve our investment objectives is
affected by factors that are beyond our control. For example,
the significant downturn in the United States economy generally
could cause our investment income to decrease. Interest rates
are highly sensitive to many factors, including governmental
monetary policies and domestic and international economic and
political conditions. The United States participation in
hostilities with other countries, acts of terrorism or
large-scale natural disasters or catastrophic events may further
adversely affect the economy generally. These and other factors
also affect the capital markets, and, consequently, the value of
the securities we own. The outlook for our investment income is
dependent on the future direction of interest rates and the
amount of cash flows from operations that are available for
investment. The fair values of fixed maturity investments that
are
available-for-sale
fluctuate with changes in interest rates and cause fluctuations
in our stockholders equity. Any significant decline in our
investment income as a result of rising interest rates or
general market conditions would have an adverse effect on our
net income and, as a result, on our stockholders equity
and our policyholders surplus. See Liquidity and
Capital Resources in Part II, Item 7 of this
annual report for a discussion of the limited exposure in our
investment portfolio at December 31, 2009 to
sub-prime
mortgages.
In 2008 and 2009, the capital markets in the United States and
elsewhere have experienced extreme volatility and disruption. We
are exposed to significant capital markets risk, including
changes in interest rates, credit spreads, equity prices and
foreign exchange rates. Our investment portfolio has been
affected by these changes in the capital markets. For example,
for the year ended December 31, 2008, we recorded an
impairment charge of $13.4 million for
other-than-temporary
losses related principally to our preferred stock investments
and holdings of equity indexed securities exchange-traded funds.
In addition, changes in interest rates and credit quality may
result in fluctuations in the income derived from, or the
valuation of, our fixed income securities. Our investment
portfolio is also subject to credit and cash flow risk,
including risks associated with our investment in asset-backed
and mortgage-backed securities, and the risk that issuers in our
portfolio may cease operations or other events may cause our
investments to become illiquid. Further adverse changes in the
capital markets could result in
other-than-temporary
impairments in the future, which may affect our financial
condition, or could reduce our investment income, which would
adversely affect our results of operations.
43
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 senior management team and key employees,
consisting of John G. Pasqualetto, Chairman, President and Chief
Executive Officer; Richard J. Gergasko, Executive Vice President
and Chief Operating Officer; D. Drue Wax Senior Vice
President, General Counsel and Corporate Secretary; Richard W.
Seelinger, Senior Vice President Policyholder
Services; Marc B. Miller, M.D., Senior Vice President and
Chief Medical Officer; Jeffrey C. Wanamaker, Senior Vice
President Underwriting; Christopher Desautel, Vice
President and Chief Information Officer; Scott H. Maw, Senior
Vice President, Chief Financial Officer, and Assistant
Secretary; M. Philip Romney, Vice President Finance,
Principal Accounting Officer and Assistant Secretary, and Craig
A. Pankow, President PointSure. Although we are not
aware of any planned departures or retirements, if we were to
lose the services of members of our management team, our
business could be adversely affected. Many of our principal
employees possess skills and extensive experience relating to
our market niches. Were we to lose any of these employees, it
may be challenging for us to attract a replacement employee with
comparable skills and experience in our market niches. We have
employment agreements with some of our executive officers, which
are described in our proxy statement for the 2010 annual meeting
of stockholders and incorporated by reference into
Part III, Item 11 of this annual report. We do not
currently maintain key man life insurance policies with respect
to any member of our senior management team or other employees.
We may
require additional capital in the future, which may not be
available or only 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 loss reserves at levels sufficient
to cover losses. We believe that cash provided by operations
will satisfy our capital requirements for the foreseeable
future. However, because the timing and amount of our future
needs for capital will depend on our growth and profitability,
we cannot provide any assurance in this regard. 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 the shares currently outstanding. If we cannot obtain
adequate capital on favorable terms or at all, we may be unable
to support future growth or operating requirements and,
accordingly, our business, financial condition or results of
operations could be materially adversely affected.
Our
status as an insurance holding company with no direct operations
could adversely affect our ability to pay dividends in the
future.
We are a holding company that transacts our business through our
operating subsidiaries, SeaBright Insurance Company, PointSure,
THM and BWNV. Our primary assets are the stock of these
operating subsidiaries. Our ability to pay expenses and
dividends depends, in the long run, upon the surplus and
earnings of our subsidiaries and the ability of our subsidiaries
to pay dividends to us. Payment of dividends by SeaBright
Insurance Company is restricted by state insurance laws,
including laws establishing minimum solvency and liquidity
thresholds, and could be subject to contractual restrictions in
the future, including those imposed by indebtedness we may incur
in the future. SeaBright Insurance Company is required to report
any ordinary dividends to the Illinois Department of Insurance
and the California Department of Insurance prior to the payment
of the dividend. In addition, SeaBright Insurance Company is not
authorized to pay any extraordinary dividends to us under
Illinois or California insurance laws without prior regulatory
approval from the Illinois Department of Insurance or the
California Department of Insurance. See the discussion under the
heading Regulation Dividend Limitations
in Part I, Item 1 of this annual report. As a result,
at times, we may not be able to receive dividends from SeaBright
Insurance Company and we may not receive dividends in amounts
necessary to pay dividends on our capital stock. In addition,
the payment of dividends
44
by us is within the discretion of our Board of Directors and
will depend on numerous factors, including our financial
condition, our capital requirements and other factors that our
Board of Directors considers relevant. On March 2, 2010,
our Board of Directors authorized a quarterly dividend of $0.05
per common share commencing in the first quarter 2010 and
payable on April 9, 2010 to shareholders of record on
March 23, 2010.
We
rely on independent insurance brokers to distribute our
products.
Our business depends in part on the efforts of independent
insurance brokers to market our insurance programs successfully
and produce business for us, as well as our ability to offer
insurance programs and services that meet the requirements of
the clients and customers of these brokers. The majority of the
business in our workers compensation operations is
produced by a group of licensed insurance brokers that totaled
approximately 234 at December 31, 2009. Brokers are not
obligated to promote our insurance programs and may sell
competitors insurance programs. Several of our
competitors, including Chartis Inc. and Zurich, offer a broader
array of insurance programs than we do. Accordingly, our brokers
may find it easier to promote the broader range of programs of
our competitors than to promote our niche selection of insurance
products. If our brokers fail or choose not to market our
insurance programs successfully or to produce business for us,
our growth may be limited and our financial condition and
results of operations may be negatively affected.
Assessments
and other surcharges for guaranty funds and second injury funds
and other mandatory pooling arrangements may reduce our
profitability.
Virtually all states require insurers licensed to do business in
their state to bear a portion of the unfunded obligations of
impaired or insolvent insurance companies. These obligations are
funded by assessments that are expected to continue in the
future as a result of insolvencies. Assessments are levied by
guaranty associations within the state, up to prescribed limits,
on all member insurers in the 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. See the discussion under the heading
Regulation in Part I, Item 1 of this
annual report. Accordingly, the assessments levied on us may
increase as we increase our premiums written. Further,
Washington state legislation enacted on April 20, 2005
created a separate account within the Guaranty Fund for
USL&H Act claims and authorized prefunding of potential
insolvencies in order to establish a cash balance. Many states
also have laws that established second injury funds to provide
compensation to injured employees for aggravation of a prior
condition or injury, which are funded by either assessments
based on paid losses or premium surcharge mechanisms. For
example, Alaska requires insurers to contribute to its second
injury fund annually an amount equal to the compensation the
injured employee is owed multiplied by a contribution rate based
on the funds reserve rate. In addition, as a condition of
the ability to conduct business in some states, including
California, insurance companies are required to participate in
mandatory workers compensation shared market mechanisms or
pooling arrangements, which provide workers compensation
insurance coverage from private insurers. Although we price our
products to account for the obligations that we may have under
these pooling arrangements, we may not be successful in
estimating our liability for these obligations. Accordingly, our
prices may not fully account for our liabilities under pooling
arrangements, which may cause a decrease in our profits. As we
write policies in new states that have pooling arrangements, we
will be required to participate in additional pooling
arrangements. Further, the insolvency of other insurers in these
pooling arrangements would likely increase the liability for
other members remaining in the pool. The effect of these
assessments and mandatory shared market mechanisms or changes in
them could reduce our profitability in any given period or limit
our ability to grow our business.
In the
event LMC is placed into receivership, we could lose our rights
to fee income and protective arrangements that were established
in connection with the Acquisition, our reputation and
credibility could be adversely affected and we could be subject
to claims under applicable voidable preference and fraudulent
transfer laws.
The assets that SeaBright acquired in the Acquisition were
acquired from LMC and certain of its affiliates. LMC and its
insurance company affiliates are currently operating under a
voluntary run-off plan
45
approved by the Illinois Department of Insurance. Under the
run-off plan, LMC has instituted aggressive expense control
measures to reduce its future loss exposure and allow it to meet
its obligations to current policyholders. According to
LMCs statutory financial statements, as of and for the
year ended December 31, 2009, LMC had a statutory surplus
of $8.1 million (unaudited), a decrease of approximately
$105.1 million from its surplus of $113.2 million
(audited) as of December 31, 2008. In connection with the
Acquisition, we established various arrangements with LMC and
certain of its affiliates, including (1) servicing
arrangements entitling us to fee income for providing claims
administration services for Eagle and (2) other protective
arrangements designed to minimize our exposure to any past
business underwritten by KEIC, the shell entity that we acquired
from LMC for its insurance licenses, and any adverse
developments in KEICs loss reserves as they existed at the
date of the Acquisition. See the discussion under the heading
Loss Reserves KEIC Loss Reserves in
Part I, Item 1 of this annual report. In the event LMC
is placed into receivership, our business could be adversely
affected in the following ways:
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A receiver could seek to reject or terminate one or more of the
services agreements that were established in connection with the
Acquisition between us and LMC or its affiliates, including
Eagle. In that event, we could lose the revenue we currently
receive under these services agreements.
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As discussed under Loss Reserves KEIC Loss
Reserves in Part I, Item 1 of this annual
report, to minimize our exposure to any past business
underwritten by KEIC, we entered into an arrangement with LMC at
the time of the Acquisition requiring LMC to indemnify us in the
event of adverse development of the loss reserves in KEICs
balance sheet as they existed on the date of closing of the
Acquisition. We refer to this arrangement as the adverse
development cover. To support LMCs obligations under the
adverse development cover, LMC funded a trust account at the
time of the Acquisition. The minimum amount that must be
maintained in the trust account is equal to the greater of
(a) $1.6 million or (b) 102% of the then existing
quarterly estimate of LMCs total obligations under the
adverse development cover. We refer to this trust account as the
collateralized reinsurance trust because the funds on deposit in
the trust account serve as collateral for LMCs potential
future obligations to us under the adverse development cover. At
December 31, 2009, the liability of LMC under the adverse
development cover was approximately $3.0 million compared
to approximately $4.2 million at December 31, 2008.
The development in 2008 was due primarily to a reduction in the
actuarial estimate for ceded IBNR as a result of changes in
selected loss development factors. The balance of the trust
account, including accumulated interest, at December 31,
2009 was $3.8 million. If LMC is placed into receivership
and the amount held in the collateralized reinsurance trust is
inadequate to satisfy the obligations of LMC to us under the
adverse development cover, it is unlikely that we would recover
any future amounts owed by LMC to us under the adverse
development cover in excess of the amounts currently held in
trust because the director of the Illinois Department of
Insurance would have control of the assets of LMC.
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Some of our customers are insured under Eagle insurance policies
that we service pursuant to the claims administration servicing
agreement described above. Although SeaBright is a separate
legal entity from LMC and its affiliates, including Eagle,
Eagles policyholders may not readily distinguish SeaBright
from Eagle and LMC if those policies are not honored in the
event LMC is found to be insolvent and placed into court-ordered
liquidation. If that were to occur, our market reputation,
credibility and ability to renew the underlying policies could
be adversely affected.
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In connection with the Acquisition, LMC and its affiliates made
various transfers and payments to SeaBright, including
approximately $13.0 million under the commutation agreement
and an initial amount of approximately $1.6 million to fund
the collateralized reinsurance trust. In the event that LMC is
placed into receivership, it is possible that a receiver or
creditor could assert a claim seeking to unwind or recover these
payments under applicable voidable preference and fraudulent
transfer laws.
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We may
pursue strategic acquisitions, which could have an adverse
impact on our business.
In December 2007, we acquired THM, a provider of medical bill
review, utilization review, nurse case management and other
related services, and in July 2008 we acquired BWNV, a privately
held managing
46
general agent and wholesale insurance broker. We may, from time
to time, consider acquiring additional complementary companies
or businesses. To do so, we would need to identify suitable
acquisition candidates and negotiate acceptable acquisition
terms. Pursuit of an acquisition may divert managements
attention and resources, and completion of an acquisition will
require use of our capital and may require additional financing.
If we complete additional acquisitions, we may have difficulty
integrating acquired businesses into our existing businesses,
which could adversely affect our operations, particularly in the
fiscal quarters immediately following the acquisition as they
are integrated into our operations.
If we
are unable to collect future retrospective premium adjustments
under our retrospectively rated policies, our financial position
and results of operations may be adversely
affected.
Retrospectively rated policies accounted for approximately 7.2%
and 10.7% of direct premiums written in the years ended
December 31, 2009 and 2008, respectively. Beginning six
months after the expiration of the relevant insurance policy,
and annually thereafter, we recalculate the premium payable
during the policy term based on the current value of the known
losses that occurred during the policy term. While the typical
retrospectively rated policy has around five annual adjustment
or measurement periods, premium adjustments continue until
mutual agreement to cease future adjustments is reached with the
policyholder. We bear credit risk with respect to
retrospectively rated policies. Because of the long duration of
our loss sensitive plans, there is a risk that the customer will
fail to pay the additional premium. Accordingly, we obtain
collateral in the form of letters of credit or deposits to
mitigate credit risk associated with our loss sensitive plans.
If we are unable to collect future retrospective premium
adjustments from an insured, we would be required to write off
the related amounts, which could impact our financial position
and results of operations.
Risks
Related to Our Industry
We may
face substantial exposure to losses from terrorism for which we
are required by law to provide coverage.
Under our workers compensation policies, we are required
to provide workers compensation benefits for losses
arising from acts of terrorism. The impact of any terrorist act
is unpredictable, and the ultimate impact on us would depend
upon the nature, extent, location and timing of such an act.
Notwithstanding the protection provided by the reinsurance we
have purchased and any protection provided by the Terrorism Risk
Act, the risk of severe losses to us from acts of terrorism has
not been eliminated because, as discussed above, our excess of
loss reinsurance treaty program contains various
sub-limits
and exclusions limiting our reinsurers obligation to cover
losses caused by acts of terrorism. Accordingly, events may not
be covered by, or may exceed the capacity of, our reinsurance
protection and any protection offered by the Terrorism Risk Act
or any successor legislation. Thus, any acts of terrorism could
materially adversely affect our business and financial condition.
The
threat of terrorism and military and other actions may result in
decreases in our net income, revenue and assets under management
and may adversely affect our investment portfolio.
The 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 and abroad, as well as loss of life, property
damage, additional disruptions to commerce and reduced economic
activity. Actual terrorist attacks could cause a decrease in our
stockholders equity, net income
and/or
revenue. The effects of these changes may result in a decrease
in our stock price. In addition, some of the assets in our
investment portfolio may be adversely affected by declines in
the bond markets and declines in economic activity caused by the
continued threat of terrorism, ongoing military and other
actions and heightened security measures.
We cannot predict at this time whether and the extent to which
industry sectors in which we maintain investments may suffer
losses as a result of potential decreased commercial and
economic activity, or how any such decrease might impact the
ability of companies within the affected industry sectors to pay
interest or principal on their securities, or how the value of
any underlying collateral might be affected.
47
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 our common stock to be
volatile.
The results of operations of companies in the insurance industry
historically have been subject to significant fluctuations and
uncertainties. Our profitability can be affected significantly
by:
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competition;
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decreased demand for our products;
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rising levels of loss costs that we cannot anticipate at the
time we price our products;
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volatile and unpredictable developments, including man-made,
weather-related and other natural catastrophes or terrorist
attacks;
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changes in the level of reinsurance capacity and capital
capacity;
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changes in the amount of loss reserves resulting from new types
of claims and new or changing judicial interpretations relating
to the scope of insurers liabilities; and
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fluctuations in interest rates, inflationary pressures and other
changes in the investment environment, which affect returns on
invested assets and may impact the ultimate payout of losses.
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The availability 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 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 as well as
periods when shortages of capacity permitted favorable premium
levels. During 1998, 1999 and 2000, the workers
compensation insurance industry experienced substantial pricing
competition, and this pricing competition greatly affected the
ability of our predecessor to increase premiums. Beginning in
2001, our predecessor witnessed a decrease in pricing
competition in the industry, which enabled them to raise their
rates. Although rates for many products increased from 2000 to
2003, legislative reforms caused premium rates in certain
states, including California, to decrease in 2004 through 2008,
and rates may decrease again or may decrease in other states. In
addition, the availability of insurance has and may continue to
increase, either by capital provided by new entrants or by the
commitment of additional capital by existing insurers, which may
perpetuate rate decreases. Any of these factors 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 may cause the price of our securities to be volatile.
Risks
Related to Our Common Stock
The
price of our common stock may decrease.
The trading price of shares of our common stock may decline for
many reasons, some of which are beyond our control, including,
among others:
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quarterly variations in our results of operations;
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changes in expectations as to our future results of operations,
including financial estimates by securities analysts and
investors;
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announcements of claims against us by third parties;
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changes in law and regulation;
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48
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results of operations that vary from those expected by
securities analysts and investors; and
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future sales of shares of our common stock.
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In addition, the stock market has recently experienced
substantial price and volume fluctuations that sometimes have
been unrelated or disproportionate to the operating performance
of companies whose shares are traded. The trading price of
shares of our common stock may decrease if our future operating
results fail to meet or exceed the expectations of market
analysts and investors or current economic or market conditions
persist or worsen.
Applicable
insurance laws may make it difficult to effect a change of
control of our company.
Our insurance company subsidiary is domiciled in the state of
Illinois and commercially domiciled in the state of California.
The insurance holding company laws of Illinois and California
require advance approval by the Illinois Department of Insurance
and the California Department of Insurance of any change in
control of SeaBright Insurance Company. Control is
generally presumed to exist through the direct or indirect
ownership of 10% or more of the voting securities of a domestic
insurance company or of any entity that controls a domestic
insurance company. In addition, insurance laws in many states
contain provisions that require prenotification to the insurance
commissioners of a change in control of a non-domestic insurance
company licensed in those states. Any future transactions that
would constitute a change in control of SeaBright Insurance
Company, including a change of control of us, would generally
require the party acquiring control to obtain the prior approval
of the Illinois Department of Insurance and the California
Department of Insurance and may require pre-acquisition
notification in applicable states that have adopted
pre-acquisition notification provisions. Obtaining these
approvals may result in a material delay of, or deter, any such
transaction. See the discussion under the heading
Regulation in Part I, Item 1 of this
annual report.
These laws may discourage potential acquisition proposals and
may delay, deter or prevent a change of control of us, including
through transactions, and in particular unsolicited
transactions, that some or all of our stockholders might
consider to be desirable.
Anti-takeover
provisions in our amended and restated certificate of
incorporation and by-laws and under the laws of the State of
Delaware could impede an attempt to replace or remove our
directors or otherwise effect a change of control of our
company, which could diminish the value of our common
stock.
Our amended and restated certificate of incorporation and
by-laws contain provisions that may make it more difficult for
stockholders to replace directors even if the stockholders
consider it beneficial to do so. In addition, these provisions
could delay or prevent a change of control that a stockholder
might consider favorable. For example, these provisions may
prevent a stockholder from receiving the benefit from any
premium over the market price of our common stock offered by a
bidder in a potential takeover. Even in the absence of an
attempt to effect a change in management or a takeover attempt,
these provisions may adversely affect the prevailing market
price of our common stock if they are viewed as discouraging
takeover attempts in the future. In addition, Section 203
of the Delaware General Corporation Law may limit the ability of
an interested stockholder to engage in business
combinations with us. An interested stockholder is defined to
include persons owning 15% or more of any class of our
outstanding voting stock.
Our amended and restated certificate of incorporation and
by-laws contain the following provisions that could have an
anti-takeover effect:
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stockholders have limited ability to call stockholder meetings
and to bring business before a meeting of stockholders;
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stockholders may not act by written consent; and
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our Board of Directors may authorize the issuance of preferred
stock with such rights, powers and privileges as the board deems
appropriate.
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49
These provisions may make it difficult for stockholders to
replace management and could have the effect of discouraging a
future takeover attempt which is not approved by our Board of
Directors but which individual stockholders might consider
favorable.
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Item 1B.
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Unresolved
Staff Comments.
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None.
Our principal executive offices are located in approximately
36,000 square feet of leased office space in Seattle,
Washington. We also lease office space consisting of
approximately 2,500 square feet in Anchorage, Alaska;
2,600 square feet in Baton Rouge, Louisiana;
5,650 square feet in Chicago, Illinois; 6,100 square
feet in Concord, California; 5,700 square feet in
Henderson, Nevada; 2,650 square feet in Honolulu, Hawaii;
3,300 square feet in Houston, Texas; 3,400 square feet
in Lake Mary, Florida; 3,700 square feet in Needham,
Massachusetts; 8,300 square feet in Orange, California;
6,260 square feet in Phoenix, Arizona; 3,900 square
feet in Radnor, Pennsylvania; 8,800 square feet in Santa
Ana, California; and executive suites in New Orleans, Louisiana;
and Yucca Valley, California. We conduct claims and underwriting
operations in our branch offices, with the exception of our
Honolulu office, where we conduct only claims and loss control
operations. We do not own any real property. We consider our
leased facilities to be adequate for our current operations.
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Item 3.
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Legal
Proceedings.
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We are, from time to time, involved in various legal proceedings
in the ordinary course of business. We believe we have
sufficient loss reserves and reinsurance to cover claims under
policies issued by us. Accordingly, 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, financial condition or results of
operations.
50
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
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Our common stock has been quoted on the New York Stock Exchange
under the symbol SBX since November 6, 2008
and, prior to that, was traded on the NASDAQ Global Select
Market under the symbol SEAB since our initial
public offering on January 21, 2005. Prior to that time,
there was no public market for our common stock. The following
table sets forth, for the periods indicated, the high and low
sales prices for our common stock as quoted on the New York
Stock Exchange and NASDAQ Global Select Market.
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High
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Low
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2009:
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First quarter
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$
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12.81
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$
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7.70
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Second quarter
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11.73
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7.91
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Third quarter
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11.70
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9.23
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Fourth quarter
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12.10
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10.36
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2008:
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First quarter
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$
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15.39
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$
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13.06
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Second quarter
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16.03
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13.64
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Third quarter
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16.03
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10.20
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Fourth quarter
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13.49
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7.64
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As of March 12, 2010, there were 74 holders of record of
our common stock.
Dividend
Policy
On March 2, 2010, our Board of Directors authorized a
quarterly dividend of $0.05 per common share commencing in the
first quarter 2010 and payable on April 9, 2010 to
shareholders of record on March 23, 2010. Any future
determination to pay cash dividends on our common stock will be
at the discretion of our Board of Directors and will be
dependent on our earnings, financial condition, operating
results, capital requirements, any contractual restrictions,
regulatory and other restrictions on the payment of dividends by
our subsidiaries to us, and other factors that our Board of
Directors deems relevant.
We are a holding company and have no direct operations. Our
ability to pay dividends in the future depends on the ability of
our operating subsidiaries to pay dividends to us. Our
subsidiary, SeaBright Insurance Company, is a regulated
insurance company and therefore is subject to significant
regulatory restrictions limiting its ability to declare and pay
dividends.
SeaBright Insurance Companys ability to pay dividends is
subject to restrictions contained in the insurance laws and
related regulations of Illinois and California. The insurance
holding company laws in these states require that ordinary
dividends be reported to the Illinois Department of Insurance
and the California Department of Insurance prior to payment of
the dividend and that extraordinary dividends be submitted for
prior approval. See Regulation in Part I,
Item 1 of this annual report.
For information regarding restrictions on the payment of
dividends by us and SeaBright Insurance Company, see the
discussion under the heading Liquidity and Capital
Resources in Part II, Item 7 and the discussion
under the heading Business
Regulation Dividend Limitations in
Part I, Item 1 of this annual report.
Purchases
of Equity Securities by the Issuer
We did not purchase any of our equity securities during 2009.
51
Performance
Graph
The following graph and table compare the total return on $100
invested in SeaBright common stock for the period commencing on
January 21, 2005 (the date of our initial public offering)
and ending on December 31, 2009 with the total return on
$100 invested in each of the New York Stock Exchange Composite
Index, the Dow Jones Wilshire Property and Casualty Insurance
Index, the Nasdaq Stock Market (U.S.) Index, and the Nasdaq
Insurance Index. On November 6, 2008, we transferred the
listing of our common stock from the NASDAQ Global Select Market
to the New York Stock Exchange. We previously compared our total
cumulative return to the Nasdaq Stock Market (U.S.) Index and
the Nasdaq Insurance Index. Beginning with the fiscal year ended
December 31, 2008, we compared our cumulative total return
to the New York Stock Exchange Composite Index and the Dow Jones
Wilshire Property and Casualty Insurance Index because we
believe these indexes provide a more meaningful comparison for
our stock price performance. The closing market price for
SeaBright common stock at the end of fiscal year 2009 was $11.49.
Comparison
of 59 Month Cumulative Total Return*
Among SeaBright Insurance Holdings, Inc., the New York Stock
Exchange Composite Index,
and the Dow Jones U.S. Property and Casualty Insurance TSM
Index
|
|
|
* |
|
Based on $100 invested on January 21, 2005, the first day
our common stock was publicly traded and, for purposes of the
indexes, assumes the reinvestment of dividends. |
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Total Return
|
|
|
|
SeaBright
|
|
|
NYSE
|
|
|
Dow Jones
|
|
|
|
Insurance
|
|
|
Composite
|
|
|
U.S. Property & Casualty
|
|
|
|
Holdings, Inc.
|
|
|
Index
|
|
|
Insurance TSM Index
|
|
|
1/21/05
|
|
$
|
100.00
|
|
|
$
|
100.00
|
|
|
$
|
100.00
|
|
3/31/05
|
|
|
85.81
|
|
|
|
99.37
|
|
|
|
99.96
|
|
6/30/05
|
|
|
94.85
|
|
|
|
100.79
|
|
|
|
106.48
|
|
9/30/05
|
|
|
107.39
|
|
|
|
107.10
|
|
|
|
111.38
|
|
12/31/05
|
|
|
138.01
|
|
|
|
109.36
|
|
|
|
115.80
|
|
3/31/06
|
|
|
144.56
|
|
|
|
116.71
|
|
|
|
115.41
|
|
6/30/06
|
|
|
133.69
|
|
|
|
116.62
|
|
|
|
116.60
|
|
9/30/06
|
|
|
115.93
|
|
|
|
121.50
|
|
|
|
123.71
|
|
12/31/06
|
|
|
149.46
|
|
|
|
131.74
|
|
|
|
132.39
|
|
3/31/07
|
|
|
152.70
|
|
|
|
134.15
|
|
|
|
129.19
|
|
6/30/07
|
|
|
145.06
|
|
|
|
143.99
|
|
|
|
136.32
|
|
9/30/07
|
|
|
141.66
|
|
|
|
147.09
|
|
|
|
128.06
|
|
12/31/07
|
|
|
125.15
|
|
|
|
143.42
|
|
|
|
119.90
|
|
3/31/08
|
|
|
122.24
|
|
|
|
130.33
|
|
|
|
104.53
|
|
6/30/08
|
|
|
120.17
|
|
|
|
129.24
|
|
|
|
100.40
|
|
9/30/08
|
|
|
107.88
|
|
|
|
113.10
|
|
|
|
104.34
|
|
12/31/08
|
|
|
97.43
|
|
|
|
87.12
|
|
|
|
89.73
|
|
3/31/09
|
|
|
86.80
|
|
|
|
75.94
|
|
|
|
73.30
|
|
6/30/09
|
|
|
84.07
|
|
|
|
90.84
|
|
|
|
79.88
|
|
9/30/09
|
|
|
94.77
|
|
|
|
106.92
|
|
|
|
97.18
|
|
12/31/09
|
|
|
95.35
|
|
|
|
111.76
|
|
|
|
98.22
|
|
The information in the graph and table above is not
soliciting material, is not deemed filed
with the SEC and is not to be incorporated by reference in any
of our filings under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended (the
Exchange Act), whether made before or after the date
of this annual report and irrespective of any general
incorporation language in any such filing, except to the extent
that we specifically incorporate such information by reference.
53
|
|
Item 6.
|
Selected
Financial Data.
|
The following table sets forth our selected historical financial
information for the periods ended and as of the dates indicated.
This information comes from our consolidated financial
statements. You should read the following selected financial
information along with the information contained in this annual
report, including Part II, Item 7 of this annual
report entitled Managements Discussion and Analysis
of Financial Condition and Results of Operations and the
combined and consolidated financial statements and related notes
and the reports of the independent registered public accounting
firm included in Part II, Item 8 and elsewhere in this
annual report. These historical results are not necessarily
indicative of results to be expected from any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands, except share and per share data)
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
290,002
|
|
|
$
|
270,344
|
|
|
$
|
282,658
|
|
|
$
|
230,253
|
|
|
$
|
204,742
|
|
Ceded premiums written
|
|
|
(27,234
|
)
|
|
|
(14,520
|
)
|
|
|
(15,300
|
)
|
|
|
(15,490
|
)
|
|
|
(19,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
262,768
|
|
|
$
|
255,824
|
|
|
$
|
267,358
|
|
|
$
|
214,763
|
|
|
$
|
185,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
244,427
|
|
|
$
|
248,644
|
|
|
$
|
227,995
|
|
|
$
|
185,591
|
|
|
$
|
158,850
|
|
Claims service income
|
|
|
1,011
|
|
|
|
959
|
|
|
|
1,711
|
|
|
|
2,026
|
|
|
|
2,322
|
|
Other service income
|
|
|
207
|
|
|
|
246
|
|
|
|
148
|
|
|
|
104
|
|
|
|
175
|
|
Net investment income
|
|
|
23,132
|
|
|
|
22,605
|
|
|
|
20,307
|
|
|
|
15,245
|
|
|
|
7,832
|
|
Other-than-temporary
impairment losses
|
|
|
(258
|
)
|
|
|
(13,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other net realized losses
|
|
|
(171
|
)
|
|
|
(476
|
)
|
|
|
(105
|
)
|
|
|
(410
|
)
|
|
|
(226
|
)
|
Other income
|
|
|
8,132
|
|
|
|
8,689
|
|
|
|
4,369
|
|
|
|
3,371
|
|
|
|
3,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
276,480
|
|
|
|
267,262
|
|
|
|
254,425
|
|
|
|
205,927
|
|
|
|
172,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses
|
|
|
172,169
|
|
|
|
141,935
|
|
|
|
128,185
|
|
|
|
107,884
|
|
|
|
105,783
|
|
Underwriting, acquisition, and insurance expenses(1)
|
|
|
73,044
|
|
|
|
71,169
|
|
|
|
58,932
|
|
|
|
42,306
|
|
|
|
33,839
|
|
Interest expense
|
|
|
599
|
|
|
|
867
|
|
|
|
1,139
|
|
|
|
1,101
|
|
|
|
888
|
|
Other expenses
|
|
|
14,082
|
|
|
|
11,150
|
|
|
|
7,773
|
|
|
|
6,248
|
|
|
|
4,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
259,894
|
|
|
|
225,121
|
|
|
|
196,029
|
|
|
|
157,539
|
|
|
|
145,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
16,586
|
|
|
|
42,141
|
|
|
|
58,396
|
|
|
|
48,388
|
|
|
|
26,743
|
|
Income tax expense
|
|
|
3,051
|
|
|
|
12,863
|
|
|
|
18,484
|
|
|
|
15,159
|
|
|
|
8,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,535
|
|
|
$
|
29,278
|
|
|
$
|
39,912
|
|
|
$
|
33,229
|
|
|
$
|
18,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.65
|
|
|
$
|
1.43
|
|
|
$
|
1.96
|
|
|
$
|
1.66
|
|
|
$
|
1.18
|
|
Diluted earnings per share
|
|
$
|
0.63
|
|
|
$
|
1.38
|
|
|
$
|
1.90
|
|
|
$
|
1.63
|
|
|
$
|
1.13
|
|
Weighted average basic shares outstanding
|
|
|
20,702,572
|
|
|
|
20,498,305
|
|
|
|
20,341,931
|
|
|
|
19,986,244
|
|
|
|
15,509,547
|
|
Weighted average diluted shares outstanding
|
|
|
21,515,153
|
|
|
|
21,232,762
|
|
|
|
20,976,525
|
|
|
|
20,403,089
|
|
|
|
16,195,855
|
|
Selected Insurance Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year loss ratio(2)
|
|
|
64.2
|
%
|
|
|
64.6
|
%
|
|
|
67.6
|
%
|
|
|
69.0
|
%
|
|
|
66.8
|
%
|
Prior years loss ratio(3)
|
|
|
5.8
|
%
|
|
|
(7.9
|
)%
|
|
|
(12.1
|
)%
|
|
|
(12.0
|
)%
|
|
|
(1.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio
|
|
|
70.0
|
%
|
|
|
56.7
|
%
|
|
|
55.5
|
%
|
|
|
57.0
|
%
|
|
|
65.1
|
%
|
Net underwriting expense ratio(4)
|
|
|
29.8
|
%
|
|
|
28.5
|
%
|
|
|
25.8
|
%
|
|
|
22.7
|
%
|
|
|
21.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net combined ratio(5)
|
|
|
99.8
|
%
|
|
|
85.2
|
%
|
|
|
81.3
|
%
|
|
|
79.7
|
%
|
|
|
86.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Selected Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for sale, at
fair value
|
|
$
|
626,608
|
|
|
$
|
531,505
|
|
|
$
|
494,437
|
|
|
$
|
399,932
|
|
|
$
|
261,103
|
|
Cash and cash equivalents
|
|
|
12,896
|
|
|
|
22,872
|
|
|
|
20,292
|
|
|
|
20,412
|
|
|
|
12,135
|
|
Reinsurance recoverables
|
|
|
34,339
|
|
|
|
18,544
|
|
|
|
14,210
|
|
|
|
13,675
|
|
|
|
14,375
|
|
Deferred policy acquisition costs, net
|
|
|
25,537
|
|
|
|
23,175
|
|
|
|
19,832
|
|
|
|
15,433
|
|
|
|
10,299
|
|
Total assets
|
|
|
964,861
|
|
|
|
842,687
|
|
|
|
755,569
|
|
|
|
614,275
|
|
|
|
427,275
|
|
Unpaid loss and loss adjustment expense
|
|
|
351,496
|
|
|
|
292,027
|
|
|
|
250,085
|
|
|
|
198,356
|
|
|
|
142,211
|
|
Unearned premiums
|
|
|
175,766
|
|
|
|
155,931
|
|
|
|
147,033
|
|
|
|
114,312
|
|
|
|
86,863
|
|
Total stockholders equity
|
|
|
359,473
|
|
|
|
324,813
|
|
|
|
294,306
|
|
|
|
249,126
|
|
|
|
155,678
|
|
|
|
|
(1) |
|
Includes acquisition expenses such as commissions, premium taxes
and other general administrative expenses related to
underwriting operations in our insurance subsidiary and are
included in the amortization of deferred policy acquisition
costs. |
|
(2) |
|
The current year loss ratio is calculated by dividing loss and
loss adjustment expenses for the current year less claims
service income by the current years net premiums earned. |
|
(3) |
|
The prior years loss ratio is calculated by dividing the
change in the loss and loss adjustment expenses for the prior
years by the current years net premiums earned. |
|
(4) |
|
The underwriting expense ratio is calculated by dividing net
underwriting expenses less other service income by the current
years net premiums earned. |
|
(5) |
|
The net combined ratio is the sum of the net loss ratio and the
net underwriting expense ratio. |
55
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The following discussion of our financial condition and
results of operations should be read in conjunction with our
financial statements and the notes to those statements included
elsewhere in this annual report. The discussion and analysis
below includes forward-looking statements that are subject to
risks, uncertainties and other factors described in Part I,
Item 1A of this annual report that could cause our actual
results of operations, performance and business prospects and
opportunities in 2010 and beyond to differ materially from those
expressed in, or implied by those forward-looking statements.
See Note on Forward-Looking Statements in
Part I, Item 1 of this annual report.
Overview
We provide workers compensation insurance coverage for
prescribed benefits that employers are required to provide to
their employees who may be injured in the course of their
employment. We currently provide workers compensation
insurance to customers in the maritime, ADR and state act
markets.
Principal
Revenue and Expense Items
We derive our revenue from premiums earned, service fee income,
net investment income and net realized gains and losses from
investments. Our primary expense items are loss and loss
adjustment expenses, underwriting, acquisition and insurance
expenses, and interest expense.
Premiums
Earned
Direct premiums written include all premiums charged for
policies we issue during a fiscal period. Assumed premiums are
premiums that we receive from an authorized state mandated pool.
Gross premiums written is the sum of direct and assumed premiums
written. Net premiums written represent gross premiums written
less premiums ceded or paid to reinsurers (ceded premiums
written).
Net premiums earned is the earned portion of our net premiums
written. Premiums are earned over the terms of the related
policies in proportion to the risks underwritten. Our policies
typically have terms of 12 months. Thus, for example, for a
policy that is written on July 1, 2009, one-half of the
premiums would be earned in 2009 and the other half would be
earned in 2010. At the end of each accounting period, the
portion of the premiums that are not yet earned is included in
unearned premiums and is realized as revenue in the subsequent
periods over the remaining term of the policies.
We earn our direct premiums written from our maritime, ADR and
state act customers. We also earn a small portion of our direct
premiums written from employers who participate in the
Washington USL&H Plan. We immediately cede 100% of those
premiums, net of our expenses, and 100% of the losses in
connection with that business to the plan.
Net
Investment Income and Realized Gains and Losses on
Investments
We invest our statutory surplus and the funds supporting our
insurance liabilities (including unearned premiums and unpaid
loss and loss adjustment expenses) in cash, cash equivalents and
fixed income 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 recognize realized losses
when investment securities are written down as a result of an
other-than-temporary
impairment or sold for an amount less than their carrying value.
Claims
Service Income
We receive claims service income in return for providing claims
administration services for other companies. The claims service
income we receive for providing these services approximates our
costs. For the years ended December 31, 2009, 2008, and
2007, approximately 32.3%, 46.3%, and 52.6%, respectively, of
our claims service income was generated by contracts we have
with LMC to provide claims handling services
56
for the policies written by the Eagle Entities prior to the
Acquisition. We expect income from these contracts to continue
to decrease substantially over the next several years as
transactions related to the Eagle Entities diminish. The next
largest claims administration services customer represented
approximately 20.5%, 17.9%, and 10.1% of claims service income
for the years ended December 31, 2009, 2008 and 2007,
respectively.
Other
Service Income
We receive handling fees associated with certain
large-deductible policies. These fees cover the cost of settling
losses and offset expenses associated with the USL&H second
injury fund and are recorded as other service income.
Also included in other service income are amounts received from
LMC. Following the Acquisition, we entered into servicing
arrangements with LMC to provide policy administration and
accounting services for the policies written by the Eagle
Entities prior to the Acquisition. The fee income we receive for
providing these services approximates our costs and will
decrease substantially over the next several years as
transactions related to the Eagle Entities diminish.
Loss
and Loss Adjustment Expenses
Loss and loss adjustment expenses represent our largest expense
item and include (1) claim payments made,
(2) estimates for future claim payments and changes in
those estimates for current and prior periods and (3) costs
associated with investigating, defending and adjusting claims.
For further information regarding our loss and loss adjustment
expenses, including amounts paid and unpaid, see the discussion
under the heading Critical Accounting Policies, Estimates
and Judgments Unpaid Loss and Loss Adjustment
Expenses in Part II, Item 7 of this annual
report.
Underwriting,
Acquisition and Insurance Expenses
In our insurance subsidiary, we refer to the expenses that we
incur to underwrite risks as underwriting, acquisition and
insurance expenses. Underwriting expenses consist of commission
expenses, premium taxes and fees and other underwriting expenses
incurred in writing and maintaining our business. We pay
commission expense in our insurance subsidiary to our brokers
for the premiums that they produce for us. We pay state and
local taxes based on premiums; licenses and fees; assessments;
and contributions to workers compensation security funds.
Other underwriting expenses consist of general administrative
expenses such as salaries and employee benefits, rent and all
other operating expenses not otherwise classified separately,
and boards, bureaus and assessments of statistical agencies for
policy service and administration items such as rating manuals,
rating plans and experience data. Certain of these costs that
vary with and are primarily related to the acquisition of
insurance contracts (deferred acquisition costs) are
initially deferred and amortized over the typical policy term of
12 months. Therefore, with respect to deferred acquisition
costs, there are timing differences between when the costs are
incurred or paid and when the related expense is recognized in
our statements of operations.
Interest
Expense
Included in other expense is interest expense we incur on
$12.0 million in surplus notes that our insurance
subsidiary issued in May 2004. The interest expense is paid
quarterly in arrears. The interest expense for each interest
payment period is based on the three-month LIBOR two London
banking days prior to the interest payment period plus
400 basis points. The interest rates for the years ended
December 31, 2009 and 2008 ranged from 4.26% to 6.15% and
6.15% to 9.03%, respectively.
57
Results
of Operations
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Gross Premiums Written. Gross premiums written
consists of direct premiums written and premiums assumed from
the NCCI residual markets. The number of customers we service,
in-force payrolls and in-force premiums represent some of the
factors we consider when analyzing gross premiums written.
Gross premiums written totaled $290.0 million in 2009
compared to $270.3 million in 2008, representing an
increase of $19.7 million, or 7.3%. Much of the increase in
gross premiums written resulted from premium growth primarily
related to new business growth in our program book
of business. Program business, which includes alternative
markets and small maritime programs, increased
$32.2 million in 2009 compared to 2008. The increase in
program business was offset by a $10.0 million decrease in
our core product lines, which includes energy,
maritime and construction business. The decrease was primarily
driven by our construction business as a result of the
continuing impact of the current economic downturn. Excluding
work we perform as the servicing carrier for the Washington
USL&H Assigned Risk Plan and excluding business assumed
from the NCCI residual market pool, the total number of
customers we serviced increased from more than 1,120 at
December 31, 2008 to approximately 1,530 at
December 31, 2009. Approximately 14.1% of the 410 customer
increase related to our core book of business and 85.9% of the
increase related to our program business. By design, our program
business will have a larger number of customers with a smaller
average premium size than our core book of business. Total
in-force payrolls, one of the factors used to determine premium
charges, increased 12.5% from $6.4 billion at
December 31, 2008 to $7.2 billion at year-end 2009.
California continues to be our largest market, accounting for
approximately $132.5 million, or 43.1% of our in-force
premiums at December 31, 2009. This represents an increase
of $22.0 million, or 19.9%, from approximately
$110.5 million, or 39.6%, of in-force premiums in
California at December 31, 2008.
The following is a summary of our top five markets based on
direct premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Direct
|
|
|
|
|
|
Direct
|
|
|
|
|
|
|
Premiums
|
|
|
|
|
|
Premiums
|
|
|
|
|
|
|
Written
|
|
|
%
|
|
|
Written
|
|
|
%
|
|
|
|
(in thousands)
|
|
|
California
|
|
$
|
123,856
|
|
|
|
43.3
|
%
|
|
$
|
102,392
|
|
|
|
38.8
|
%
|
Louisiana
|
|
|
26,143
|
|
|
|
9.1
|
%
|
|
|
24,043
|
|
|
|
9.1
|
%
|
Illinois
|
|
|
23,011
|
|
|
|
8.0
|
%
|
|
|
22,103
|
|
|
|
8.4
|
%
|
Alaska
|
|
|
17,710
|
|
|
|
6.2
|
%
|
|
|
17,242
|
|
|
|
6.5
|
%
|
Texas
|
|
|
16,032
|
|
|
|
5.6
|
%
|
|
|
17,789
|
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
206,752
|
|
|
|
72.2
|
%
|
|
$
|
183,569
|
|
|
|
69.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums assumed from the NCCI residual markets in the twelve
months ended December 31, 2009 totaled $4.0 million
compared to $6.6 million for the same period in 2008,
representing a decrease of $2.6 million, or 39.3%. The
decrease was primarily attributable to actuarial revised
estimates related to the year 2007 and 2008.
We experienced significant reductions in our California premium
rates from 2003 to 2008. On August 15, 2008, the
Workers Compensation Insurance Rating Bureau of California
(the WCIRB) submitted a filing with the California
Insurance Commissioner recommending a 16.0% increase in advisory
pure premium rates on new and renewal policies effective on or
after January 1, 2009. The filing was based on a review of
loss and loss adjustment experience through March 31, 2008.
In response to this recommendation, on October 24, 2008,
the California Insurance Commissioner approved a 5.0% increase
in advisory pure premium rates, effective January 1, 2009.
With the California Department of Insurance approval, we adopted
this 5.0% increase effective January 1, 2009.
On March 27, 2009, the WCIRB submitted a filing with the
California Insurance Commissioner recommending a 24.4% increase
in advisory pure premium rates on new and renewal policies
effective on or
58
after July 1, 2009. On April 23, 2009, the WCIRB
amended its filing to reduce the proposed rate increase to
23.7%. A public hearing on the proposed rate increase was held
on April 28, 2009. Following the hearing, the California
Insurance Commissioner issued a press release in which he urged
the WCIRB to withdraw the portion of its requested rate increase
related to recent decisions by the Workers Compensation
Appeals Board (estimated to be approximately 6%) until the
judicial process related to these decisions has concluded. A
second hearing on medical treatment costs was held on
June 8, 2009. On July 8, 2009, the California
Insurance Commissioner announced his rejection of any increase
in advisory pure premium rates. Rating decisions made by the
California Insurance Commissioner are advisory only and
insurance companies may choose whether or not to adopt, approve
or disapprove rates. After completing an internal study of our
California loss costs, on June 23, 2009, we filed with the
California Department of Insurance revised rates for new and
renewal workers compensation insurance policies written in
the state of California on or after August 1, 2009. The new
rates reflected an average increase of 10.6% from prior rates
and were in response to increased projected medical costs and
recent decisions by the Workers Compensation Appeals
Board. On July 7, 2009, the California Department of
Insurance approved our filing for the rate increase. We are
unable to predict the impact that the rate increase adopted by
us in California might have on our future financial position and
results of operations. If other insurers do not adopt similar
rate increases, this rate increase may have a negative effect on
our ability to compete in California. On August 18, 2009,
the WCIRB submitted a filing with the California Insurance
Commissioner recommending a 22.8% increase in advisory pure
premium rates on new and renewal policies effective on or after
January 1, 2010. A public hearing on the proposed rate
increase was held on October 6, 2009. On November 9,
2009, the California Insurance Commissioner announced his
decision to approve no change in advisory pure premium rates.
Rate reductions have also been adopted in other states in which
we operate. For example, in Alaska we adopted rate decreases of
10.3% and 7.6% effective January 1, 2010 and 2009,
respectively. In Louisiana, we adopted commissioner-approved
rate decreases of 17.4% and 8.6% effective May 1, 2009 and
2008, respectively. In Hawaii, we adopted rate decreases of
13.7% and 5.8% effective January 1, 2010 and
February 1, 2009, respectively. In Texas, we adopted rate
decreases of 10.0% and 7.7% effective May 1, 2009 and
January 1, 2008, respectively. In Florida, we adopted rate
decreases of 6.8% and 18.6% effective January 1, 2010 and
2009, respectively. We adopted a rate decrease of 0.1% effective
January 1, 2010 and rate increases of 2.5% and 3.5% in
Illinois effective April 1, 2009 and January 1, 2009,
respectively. In Arizona we adopted a rate decrease of 5.1%
effective January 1, 2010 and a rate increase of 7.9%
effective October 1, 2008. In Washington USL&H, we
adopted a rate increase of 21% effective December 1, 2009.
Net Premiums Written. Net premiums written
totaled $262.8 million in 2009 compared to
$255.8 million in 2008, representing an increase of
$7.0 million, or 2.7%. The increase was primarily
attributable to the increase in gross written premiums, offset
in part by a $12.7 million increase in premiums ceded
related to the increased ceding rate of the 2008 reinsurance
contracts due primarily to an increase in limits at the lower
and upper ends of the program, as well as the addition of a new
reinsurance treaty related to the residual market business.
Included in gross premiums written in 2009 is a decrease in the
amount of premiums we involuntarily assume on residual market
business from the NCCI, which operates residual market programs
on behalf of many states.
Premiums Earned. Net premiums earned totaled
$244.4 million in 2009 compared to $248.6 million in
2008, representing a decrease of $4.2 million, or 1.7%. We
record the entire annual policy premium as unearned premium at
inception and earn the premium over the life of the policy,
which is generally twelve months. Consequently, the amount of
premiums earned in any given year depends on when the underlying
policies were written. Our direct premiums earned increased
$7.6 million, or 3.0%, to $263.5 million in 2009 from
$255.9 million in 2008. Net premiums earned in 2009 were
reduced by net adjustments of $3.8 million on
retrospectively rated policies due to favorable loss results on
those policies.
Net premiums earned are also affected by premiums ceded under
reinsurance treaties. Ceded earned premiums in 2009 totaled
$22.7 million compared to $14.5 million in 2008,
representing an increase of $8.2 million, or 56.6%. An
increase in ceded earned premiums is a decrease to our overall
net premiums earned Effective January 2009, we ceded 100% of
NCCI assumed business for policy year 2009, which totaled
$3.6 million for the year ended December 31, 2009.
59
Net Investment Income. Net investment income
was $23.1 million in 2009 compared to $22.6 million in
2008, representing an increase of $0.5 million, or 2.3%.
Average invested assets increased $62.4 million, or 11.7%,
from $534.6 million in 2008 to $597.0 million in 2009.
This increase in our investment portfolio is due primarily to
cash flow from operations of $68.3 million for the year
ended December 31, 2009, which was invested primarily in
fixed income securities. Net investment income as a percentage
of average invested assets decreased slightly to 3.9% in 2009
from 4.2% in 2008 due to the effects of the global financial
crisis discussed previously.
Claims and Other Service Income. Claims and
Other Service income totaled $1.2 million in 2009 and 2008.
Our service income resulted primarily from service arrangements
we have with customers for claims processing services, policy
administration and administrative services that we perform for
them.
Other-Than-Temporary
Impairment
Losses. Other-than-temporary
impairment losses totaled $0.3 million for the year ended
December 31, 2009, compared to $13.4 million, in 2008.
In 2008, we recorded $13.4 million of
other-than-temporary-impairment
(OTTI) charges in connection with investments in
government-sponsored agency and corporate preferred stock
($10.2 million charge) and equity indexed securities
exchange-traded funds ($3.2 million charge). The
$0.3 million OTTI charge in 2009 also related to our
investment in government-sponsored agency preferred stock. The
OTTI charges were the result of thorough reviews of the
investment portfolio and a determination by management that
these investments met the criteria for OTTI charges primarily
due to the extent and duration of the impairments and the
inability to forecast a complete recovery of their book values
within a reasonable period of time or, in the case of the
government-sponsored entity preferred stocks, a significant
decline in the underlying credit fundamentals of the securities.
Other Income. Other income totaled
$8.1 million for the twelve months ended December 31,
2009 compared to $8.7 million for the same period in 2008,
representing a decrease of $0.6 million, or 6.4%. Other
income is derived primarily from the operations of PointSure
(including BWNV), our wholesale broker and third party
administrator, and THM, our provider of medical bill review,
utilization review, nurse care management and related services.
Loss and Loss Adjustment Expenses. Loss and
loss adjustment expenses totaled $172.2 million in 2009
compared to $141.9 million in 2008, representing an
increase of $30.3 million, or 21.3%. Our net loss ratio,
which is calculated by dividing loss and loss adjustment
expenses less claims service income by premiums earned, was
70.0% in 2009 compared to 56.7% in 2008. The higher loss ratio
in 2009 was attributable primarily to unfavorable development of
prior accident year loss reserves of $14.4 million in 2009
compared to favorable development of $19.7 million in 2008,
an increase in the current accident year loss ratio from 57.5%
at December 31, 2008 to 60.0% at December 31, 2009, an increase
of approximately $6.4 million in the earned premium against
which the current accident year ELR is applied and a reduction
of approximately $1.6 million in contingent profit commissions
related to the commutation of reinsurance treaties. Offsetting
these increases were a decrease in assumed losses of $4.0
million, an increase of approximately $4.0 million in assumed
losses ceded to reinsurers and a decrease of approximately $5.8
million relating primarily to ULAE reserves and loss based
assessments. Our direct net loss reserves are net of reinsurance
and exclude reserves associated with KEIC and the business that
we involuntarily assume from the NCCI.
For accident year 2009, an expected loss ratio was established
for each jurisdiction and type of loss (indemnity, medical,
allocated loss adjustment expense (ALAE)). The
expected loss ratio was multiplied by the booked accident year
earned premium to produce the ultimate loss to date. The
expected loss ratio selections are reviewed quarterly with each
internal IBNR study. Given the short experience period for the
current accident year, the expected loss ratios are usually
maintained at least through the first 12 months of the
accident year and revised as the underlying data matures.
However, after reviewing the
year-to-date
results for the 2009 accident year, we increased the expected
loss ratio for this year from 56.7% to 60.0% in the fourth
quarter, resulting in $8.3 million of additional loss and
allocated loss adjustment expenses in the quarter.
For accident year 2008, the ultimate loss estimates at
December 31, 2009 were higher when compared to
December 31, 2008 and resulted in a net increase of our
loss reserves of $8.8 million. The increase was primarily
due to an increase in ultimate loss estimates due to higher
severity development in our indemnity
60
and medical reserves. This adverse development was offset by
favorable development of $3.1 million related to ULAE and $1.3
million related to loss based assessments and NCCI.
For accident year 2007, the ultimate loss estimates at
December 31, 2009 were higher when compared to
December 31, 2008 and resulted in a net increase of our
loss reserves of $5.0 million. The development in the
ultimate loss selections can be attributed to indemnity and
medical loss development results in certain states, both in our
State Act and Longshore & Maritime business. With each
quarterly IBNR study, we monitor actual versus expected loss
development closely, along with claim severity and frequency
changes. The combination of these results warranted increases
totaling $2.1 million to our indemnity and medical ultimate
loss estimates in the fourth quarter. This adverse development
was offset by favorable development of $2.1 million related to
ULAE and $1.6 million related to loss based assessments and NCCI.
For accident years 2006 and prior, the ultimate loss estimates
at December 31, 2009 were slightly higher when compared to
December 31, 2008 and resulted in a net increase of our
loss reserves of $0.6 million. This small movement resulted
from the recognition of the results from the standard actuarial
methodologies in our December 31, 2009 IBNR study. This
adverse development was offset by favorable development of $2.4
million related to ULAE and $3.5 million related to loss based
assessments and NCCI. Due to the longer tail nature of
workers compensation, small movement in an accident
years ultimate loss estimate can be reasonably expected.
There is uncertainty about whether recent lower paid loss
trends, which result primarily from California legislative
reforms enacted in 2003 and 2004, will be sustained,
particularly in light of current efforts to change or repeal
portions of the reforms. We will not know the full impact of
these reforms with a high degree of confidence for several
years. We have recently observed an increase in severity
estimates for accident years 2007 and 2008 in California
following several years of decreasing trends. We have
established loss reserves at December 31, 2009 that are
based upon our current best estimate of ultimate loss costs,
taking into consideration the recent paid loss claim data,
incurred loss trends and uncertainty regarding the permanence of
recent legislative reforms. We continue to monitor the impact of
reforms and potential challenges to reforms in our loss data.
See the discussion under the headings Loss Reserves
in Part I, Item 1 and Critical Accounting
Policies, Estimates and Judgments Unpaid Loss and
Loss Adjustment Expenses in this Item 7 for a further
discussion of our loss reserving process.
Provisions in the three lower layer treaties (covering losses
from $1.0 million to $10.0 million) in our
2006-2007
reinsurance program allow us the ability, at our sole
discretion, to commute the contracts within 24 months of
expiration in return for a contingent profit commission
calculated in accordance with terms specified in the contracts.
In accordance with these provisions, we commuted the
$5.0 million excess $5.0 million layer of this treaty
in 2009 in return for a contingent profit commission of
approximately $0.7 million. The two lower layers (from
$1.0 million to $5.0 Million) were not commuted. As of
December 31, 2009, there were no ceded losses associated
with the $5.0 million excess $5.0 million layer and it
is not expected that developed losses that would otherwise be
covered by reinsurance will exceed the contingent profit
commission. The contingent profit commission was recorded as a
reduction of loss and loss adjustment expenses.
As of December 31, 2009, we had recorded a receivable of
approximately $3.0 million for adverse loss development
under the adverse development cover since the date of the
Acquisition. We do not expect this receivable to have any
material effect on our future cash flows if LMC fails to perform
its obligations under the adverse development cover. At
December 31, 2009, we had access to approximately
$3.8 million under the collateralized reinsurance trust in
the event that LMC fails to satisfy its obligations under the
adverse development cover. See the discussion under the heading
Loss Reserves KEIC Loss Reserves in
Part I, Item 1 of this annual report.
Underwriting, Acquisition and Insurance
Expenses. Underwriting expenses totaled
$73.0 million in 2009 compared to $71.2 million in
2008, representing an increase of $1.8 million, or 2.6%.
Our net underwriting expense ratio, which is calculated by
dividing underwriting, acquisition and insurance expenses less
other service income by premiums earned, was 29.8% in 2009
compared to 28.5% in 2008. The increase in the expense ratio was
driven primarily by increased staffing costs and other premium
production related
61
expenses as we invest in the geographic expansion and
development of our business, higher broker commissions, Florida
policyholder dividend expense, and
lower-than-expected
earned premiums when compared to the increase in gross premiums
written, primarily as a result of the impact of the continuing
economic recession on covered payrolls, and adjustments related
to retrospectively rated policies.
Interest Expense. Interest expense related to
the surplus notes issued by our insurance subsidiary in May 2004
totaled $0.6 million in 2009 and $0.9 million in 2008.
The surplus notes interest rate, which is calculated at the
beginning of each interest payment period using the
3-month
LIBOR plus 400 basis points, ranged between 4.26% and 6.15%
in 2009 down from 6.15% to 9.03% in 2008.
Other Expenses. Other expenses totaled
$14.1 million in 2009, an increase of $2.9 million, or
26.3%, from $11.2 million in 2008. Other expenses result
primarily from the operations of PointSure (including BWNV),
which continued to experience direct costs associated with the
expansion of insurance products they offer, and THM. PointSure
and THM each accounted for roughly half of the $2.9 million
increase in other expenses.
Income Tax Expense. The effective tax rate for
the year ended December 31, 2009 was 18.4% compared to
30.5% for the same period in 2008. The effective tax rate for
2009 was lower than the statutory tax rate of 35.0% primarily as
a result of tax exempt interest income, which accounted for
approximately 20.8 percentage points of the reduction from
the statutory rate. This decrease was partially offset by
approximately $0.7 million, or 4.2 percentage points,
due to state income taxes and other expenses. The effective rate
for December 31, 2008 was lower than the statutory rate of
35.0% primarily as a result of tax exempt interest income, which
accounted for approximately 7.5 points of the reduction from the
statutory rate. This decrease in the statutory rate was
partially offset by approximately $1.0 million, or 2.3
points, due to a valuation allowance established against our
deferred tax assets as of December 31, 2008.
Net Income. Net income totaled
$13.5 million in 2009 compared to $29.3 million in
2008, representing a decrease of $15.8 million, or 53.8%.
The 2009 decrease in net income resulted primarily from a
reduction in earned premiums, primarily resulting from the
effects of the current economic downturn, and increases in loss
and loss adjustment expense, underwriting, acquisition, and
insurance expenses, and other expenses, offset by
$13.4 million of OTTI losses in 2008.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Gross Premiums Written. Gross premiums written
totaled $270.3 million in 2008 compared to
$282.7 million in 2007, representing a decrease of
$12.4 million, or 4.4%. Premiums assumed from the NCCI
residual markets in the twelve months ended December 31,
2008 totaled $6.6 million compared to $9.7 million for
the same period in 2007, representing a decrease of
$3.1 million, or 32.0%. The decline in gross premiums
written for the twelve months ended December 31, 2008
resulted primarily from the continuing soft market, competitor
pricing pressure, and deteriorating economic conditions leading
to lower reported payrolls year over year. We continued to
experience rate reductions in California, our largest market, as
well as in other states. The average renewal rates for 2008
declined by 9.6% for California State Act, 10.3% for State Act,
excluding California, and 7.0% for maritime. Excluding work we
perform as the servicing carrier for the Washington USL&H
Plan, the number of customers we serviced at December 31,
2008 increased 17.9% to approximately 1,120 from approximately
950 at December 31, 2007. Year-end in-force payrolls, one
of the factors used to determine premium charges, increased
14.9% from $5.6 billion at December 31, 2007 to
$6.4 billion at year-end 2008. California in-force payrolls
increased 7.7% between December 31, 2007 and
62
December 31, 2008 and non-California in-force payrolls
increased 21.4% over the same period. The following is a summary
of our top five markets based on direct premiums written in 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Direct
|
|
|
|
|
|
Direct
|
|
|
|
|
|
|
Premiums
|
|
|
|
|
|
Premiums
|
|
|
|
|
|
|
Written
|
|
|
%
|
|
|
Written
|
|
|
%
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
California
|
|
$
|
102,392
|
|
|
|
38.8
|
%
|
|
$
|
107,989
|
|
|
|
39.6
|
%
|
Louisiana
|
|
|
24,043
|
|
|
|
9.1
|
%
|
|
|
23,732
|
|
|
|
8.7
|
%
|
Illinois
|
|
|
22,103
|
|
|
|
8.4
|
%
|
|
|
24,959
|
|
|
|
9.1
|
%
|
Texas
|
|
|
17,789
|
|
|
|
6.8
|
%
|
|
|
13,749
|
|
|
|
5.1
|
%
|
Alaska
|
|
|
17,242
|
|
|
|
6.5
|
%
|
|
|
19,480
|
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
183,569
|
|
|
|
69.6
|
%
|
|
$
|
189,909
|
|
|
|
69.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have experienced significant reductions in our California
premium rates from 2003 to 2008. In 2008, in response to
continued reductions in California workers compensation
claim costs, we reduced our rates by an average 14.2% for new
and renewal insurance policies written in California on or after
July 1, 2007. This action was the eighth California rate
reduction we had filed since October 1, 2003, resulting in
a net cumulative reduction of our California rates of
approximately 54.8%. On August 15, 2008, the WCIRB
submitted a filing with the California Insurance Commissioner
recommending a 16.0% increase in advisory pure premium rates on
new and renewal policies effective on or after January 1,
2009. The filing was based on a review of loss and loss
adjustment experience through March 31, 2008. In response
to this recommendation, on October 24, 2008, the California
Insurance Commissioner approved a 5.0% increase in advisory pure
premium rates, effective January 1, 2009. With the
California Department of Insurance approval, we adopted this
5.0% increase effective January 1, 2009.
In addition to the significant rate reductions in California
over the last five years, rate reductions have also been adopted
in other states in which we operate. For example, in Alaska we
adopted rate decreases of 4.8% and 10.9% effective
January 1, 2009 and 2008, respectively. Effective
July 1, 2007, we adopted the Louisiana Insurance
Commissioners recommendation of a 15.8% reduction in
Louisiana, which was 2.0% more than the 13.8% decrease
recommended by the NCCI. On March 7, 2008, we adopted a
further 8.6% rate reduction approved by the Louisiana Insurance
Commissioner for new and renewal workers compensation
insurance policies written in Louisiana on or after May 1,
2008. In Florida, we adopted rated decreases of 18.6% and 18.4%
effective January 1, 2009 and 2008, respectively. We have
also adopted rate increases of 3.5% and 4.0% in Illinois
effective January 1, 2009 and 2008, respectively.
Net Premiums Written. Net premiums written
totaled $255.8 million in 2008 compared to
$267.4 million in 2007, representing a decrease of
$11.6 million, or 4.3%. As discussed above, the decline in
net premiums written for the twelve months ended
December 31, 2008 was primarily attributable to the soft
market and deteriorating general economic conditions leading to
lower reported payrolls. Contributing to the decrease in net
premiums written for the year ended December 31, 2008 was a
$3.1 million decrease in premiums assumed from the NCCI
residual markets.
Net Premiums Earned. Net premiums earned
totaled $248.6 million in 2008 compared to
$228.0 million in 2007, representing an increase of
$20.6 million, or 9.0%. We record the entire annual policy
premium as unearned premium at inception and earn the premium
over the life of the policy, which is generally twelve months.
Consequently, the amount of premiums earned in any given year
depends on when the underlying policies were written. Our direct
premiums earned increased $21.4 million, or 9.1%, to
$255.9 million in 2008 from $234.5 million in 2007. Of
the increase, approximately $13.6 million is directly
related to the earn-out of basic policy premium and
approximately $7.8 million is associated with
retrospectively rated policies reflecting higher than expected
loss ratios, resulting in lower premium adjustments. As we fully
earn the premiums related to policies written in 2008, we expect
the 2008 decrease in gross and net premiums written to have a
similar impact on our 2009 net premiums earned.
63
Net premiums earned are also affected by premiums ceded under
reinsurance treaties. Ceded premiums earned in 2008 totaled
$14.5 million compared to $15.0 million in 2007,
representing a decrease of $0.5 million, or 3.3%. A
decrease in ceded premiums earned is an increase to our overall
net premiums earned. Offsetting the increase in net premiums
earned was a decrease in the amount of premiums we involuntarily
assume on residual market business from the NCCI, which operates
residual market programs on behalf of many states. Assumed
premiums earned decreased $1.4 million from
$8.6 million in 2007 to $7.2 million in 2008.
Service Income. Service income totaled
$1.2 million in 2008 compared to $1.9 million in 2007,
representing a decrease of $0.7 million, or 36.8%. Our
service income resulted primarily from service arrangements we
have with LMC for claims processing services, policy
administration and administrative services we performed for the
Eagle Entities insurance policies and from claims
processing services we perform for other unrelated companies.
During 2008, we discovered that claim data used to determine
billing amounts for claims administration services provided by
us had, since August 2006, been incorrectly reported to us by a
customer, resulting in an overstatement of claims service income
in 2007 and 2006 by approximately $0.3 million. As a
result, the financial position and results of operations for the
year ended December 31, 2008 reflect a $0.3 million
reduction in service income receivable and claims service
income, and a related decrease of $0.1 million in federal
income tax payable and income tax expense, to reflect the
correction of this error. Average monthly fees received from LMC
declined as the volume of work required for policy
administration decreased as a result of the run-off of our
predecessors business. Service income related to our
arrangements with LMC decreased $0.6 million, or 66.7%,
from $0.9 million in 2007 to $0.3 million in 2008.
Net Investment Income. Net investment income
was $22.6 million in 2008 compared to $20.3 million in
2007, representing an increase of $2.3 million, or 11.3%.
Average invested assets increased $67.1 million, or 14.4%,
from $467.5 million in 2007 to $534.6 million in 2008.
This increase in our investment portfolio is due primarily to
cash flow from operations of $66.9 million for the year
ended December 31, 2008, which was invested primarily in
fixed income securities. Net investment income as a percentage
of average invested assets decreased slightly to 4.2% in 2008
from 4.3% in 2007 due to the effects of the global financial
crisis discussed previously.
Other-Than-Temporary
Impairment
Losses. Other-than-temporary-impairments
(OTTI) charges in 2008 were recorded in connection
with investments in government-sponsored agency and corporate
preferred stock ($10.2 million charge) and equity indexed
securities exchange-traded funds ($3.2 million charge).
Approximately $1.9 million of the total charge was recorded
in the second quarter with the remaining $11.5 million
recorded in the third quarter. The OTTI charges were the result
of thorough reviews of the investment portfolio and a
determination by management that these investments met the
criteria for OTTI charges primarily due to the extent and
duration of the impairments and the inability to forecast a
complete recovery of their book values within a reasonable
period of time or, in the case of the government-sponsored
entity preferred stocks, a significant decline in the underlying
credit fundamentals of the securities.
Other Income. Other income totaled
$8.7 million for the twelve months ended December 31,
2008 compared to $4.4 million for the same period in 2007,
representing an increase of $4.3 million, or 97.7%. The
increase in other income relates primarily to the acquisition of
THM and BWNV, which contributed approximately $3.8 million
in other income for the year ended December 31, 2008.
Additionally, PointSure has, as a result of the expansion of its
portfolio of insurance products, been able to increase the
amount of income from external sources.
Loss and Loss Adjustment Expenses. Loss and
loss adjustment expenses totaled $141.9 million in 2008
compared to $128.2 million in 2007, representing an
increase of $13.7 million, or 10.7%. The higher loss and
loss adjustment expenses in 2008 were attributable to the
increase in premiums earned for the period as well as lower
favorable development of $8.0 million in 2008 compared to
2007. These increases were off set by a $2.3 million
commutation gain associated with the
2005-2006
reinsurance treaty year and a $0.9 million decrease in
assumed NCCI losses. The total reserve reduction of
approximately $19.7 million of previously recorded direct
net loss reserves in 2008, compared to approximately
$27.7 million in 2007, reflects an overall
64
continuation of deflation trends in the paid loss data for
recent accident years. Our direct net loss reserves are net of
reinsurance and exclude reserves associated with KEIC and the
business that we involuntarily assume from the NCCI.
Approximately $11.6 million of the 2008 reserve adjustments
related to accident year 2007, approximately $5.1 million
related to accident year 2006, and approximately
$3.0 million of the reserve adjustment related to accident
year 2005 and prior. As a result of these reserve changes, our
net loss ratio increased from 55.5% in 2007 to 56.7% in 2008.
As discussed under the heading Critical Accounting
Policies, Estimates and Judgments Unpaid Loss and
Loss Adjustment Expenses Actuarial Loss Reserve
Estimation Methods in Part II, Item 7 of this
annual report, we use an expected loss ratio (ELR)
method to establish the loss reserves for the current accident
year. Once the accident year is complete and begins to age, the
ELR method is blended with the actual paid and incurred losses
to determine the revised estimated ultimate losses for the
accident year. For accident year 2007, this resulted in lower
ultimate loss estimates at December 31, 2008 when compared
to December 31, 2007. The positive development in accident
year 2007 can be attributed to the actual indemnity and medical
losses being lower than the losses produced by the ELR used to
book the initial ultimate losses for the accident year. These
lower-than-expected
actual losses were a function of both claim frequency and claim
severity trending below the amounts considered in the ELR. The
positive development for indemnity and medical was offset by
negative development for allocated loss adjustment expense
(ALAE) as the actual ALAE costs were greater than
the expected ALAE produced by the ELR method, resulting in an
increase in the reserve. For accident year 2006, the positive
development can be attributed to
better-than-expected
loss severity for indemnity and medical, resulting in a reserve
reduction. While the estimated ultimate losses for accident year
2006 were reduced below the ELR level at December 31, 2007
(age 24 months), the actual loss development during
2008 warranted further reduction in the estimated ultimate
losses for indemnity and medical as of December 31, 2008
(age 36 months). For accident year 2006, there was
minimal change in the estimated ultimate ALAE amount at
December 31, 2008 when compared to December 31, 2007.
As discussed under the heading Critical Accounting
Policies, Estimates and Judgments Unpaid Loss and
Loss Adjustment Expenses Variation in Ultimate Loss
Estimates in Part II, Item 7 of this annual
report, there are a number of factors that could lead to the
actual losses trending below the expected amounts. We closely
watch the medical and indemnity trends, loss development and
claim settlement patterns in our data and believe our reserving
methodology is consistent with our analysis.
The positive development for accident years 2005 and prior is
largely attributed to accident year 2005. For accident year
2005, the actual paid and incurred loss severity developed
better than expected based on the underlying development
patterns, resulting in decreases in the estimated ultimate
losses for indemnity and medical. The ALAE for accident year
2005 developed slightly worse than expected, resulting in an
increase in the estimated ultimate ALAE. There was limited
movement in the estimated ultimate losses for accident years
2004 and 2003. As discussed under the heading Critical
Accounting Policies, Estimates and Judgments Unpaid
Loss and Loss Adjustment Expenses Impact of Changes
in Key Assumptions on Reserve Volatility in Part II,
Item 7 of this annual report, our loss reserve estimates
rely heavily on historical reserving and loss payment patterns
referred to as loss development. To the extent that the actual
paid and incurred losses vary from the historical loss
development patterns underlying the ultimate loss estimates, we
will experience changes in reserves, either upward or downward,
in future periods. The loss reserve estimates for prior years
are changed when the available information indicates a
reasonable likelihood that the ultimate losses will vary from
the prior estimates.
There is uncertainty about whether recent lower paid loss
trends, which result primarily from California legislative
reforms enacted in 2003 and 2004, will be sustained,
particularly in light of current efforts to change or repeal
portions of the reforms. We will not know the full impact of
these reforms with a high degree of confidence for several
years. We had established loss reserves at December 31,
2008 that were based upon our current best estimate of ultimate
loss costs, taking into consideration the recent lower paid loss
claim data, incurred loss trends and uncertainty regarding the
permanence of recent legislative reforms. See the discussion
under the headings Loss Reserves in Part I,
Item 1 and Critical Accounting Policies, Estimates
and Judgments Unpaid Loss and Loss Adjustment
Expenses in this Item 7 for a further discussion of
our loss reserving process.
65
Provisions of the three lower layer treaties (covering losses
from $0.5 million to $10.0 million) in our
2005-2006
reinsurance program give SeaBright the right, at its sole
discretion, to commute the contracts within 24 months of
expiration in return for a contingent profit commission
calculated in accordance with terms specified in the contracts.
In accordance with these provisions, we commuted these treaties
in 2008 in return for a contingent profit commission of
approximately $2.3 million. The amount related to each
treaty was as follows: $596,000 for the $500,000 excess $500,000
layer; $989,000 for the $4.0 million excess
$1.0 million layer; and $666,000 for the $5.0 million
excess $5.0 million layer. The contingent profit commission
was recorded as a reduction of loss and loss adjustment
expenses. There are currently no ceded losses associated with
these layers and it is not expected that developed losses that
would otherwise have been covered by reinsurance will exceed the
contingent profit commission.
As of December 31, 2008, we had recorded a receivable of
approximately $4.2 million for adverse loss development
under the adverse development cover since the date of the
Acquisition. We do not expect this receivable to have any
material effect on our future cash flows if LMC fails to perform
its obligations under the adverse development cover. At
December 31, 2008, we had access to approximately
$2.8 million under the collateralized reinsurance trust in
the event that LMC fails to satisfy its obligations under the
adverse development cover. In March 2009, we submitted a request
to LMC to increase the balance in the trust to 102% of its
obligations under the adverse development cover. LMC
subsequently increased the balance in the trust to the required
level. See the discussion under the heading Loss
Reserves KEIC Loss Reserves in Part I,
Item 1 of this annual report.
Underwriting, Acquisition and Insurance
Expenses. Underwriting expenses totaled
$71.2 million in 2008 compared to $58.9 million in
2007, representing an increase of $12.3 million, or 20.9%.
Our net underwriting expense ratio was 28.5% in 2008 compared to
25.8% in 2007. The increase in the expense ratio was driven
primarily by $6.7 million in increased staffing costs and
other premium production related expenses as we invest in the
geographic expansion and development of our business. Increases
of approximately $1.2 million in commission costs, driven
in part by the increase in earned premium, and $2.2 million
in equity compensation costs related to stock options and
restricted stock also contributed to the increase in our
underwriting expenses.
Interest Expense. Interest expense related to
the surplus notes issued by our insurance subsidiary in May 2004
totaled $0.9 million in 2008 and $1.1 million in 2007.
The surplus notes interest rate, which is calculated at the
beginning of each interest payment period using the
3-month
LIBOR rate plus 400 basis points, ranged between 6.15% and
9.03% in 2008.
Other Expenses. Other expenses totaled
$11.2 million, an increase of $3.4 million, or 43.6%,
from $7.8 million in 2007. Other expenses result primarily
from the operations of PointSure (including BWNV), which
continued to experience direct costs associated with the
expansion of insurance products they offer, and THM, which
accounted for approximately $3.4 million of expense in the
year ended December 31, 2008, due mainly to the fact that
the acquisition occurred in December 2007.
Income Tax Expense. The effective tax rate for
the year ended December 31, 2008 was 30.5% compared to
31.7% for the same period in 2007. The effective rate for
December 31, 2008 was lower than the statutory rate of
35.0% primarily as a result of tax exempt interest income, which
accounted for approximately 7.5 percentage points of the
reduction from the statutory rate. This decrease in the
statutory rate was partially offset by $1.0 million, or
2.3 percentage points, due to a valuation allowance
established against our deferred tax assets as of
December 31, 2008. The valuation allowance was necessary
primarily as a result of the OTTI charges we incurred in the
second and third quarters of 2008 and, to a lesser degree, our
capital loss carry forwards.
Net Income. Net income totaled
$29.3 million in 2008 compared to $39.9 million in
2007, representing a decrease of $10.6 million, or 26.6%.
The 2008 decrease in net income resulted primarily from the
increase in premiums earned and investment income for the
period, offset by related increases in loss and loss adjustment
expenses, underwriting acquisition and insurance expenses, net
realized losses (including OTTI charges) and net other
income/other expense.
66
Liquidity
and Capital Resources
Our principal sources of funds are underwriting operations,
investment income and proceeds from sales and maturities of
investments. Our primary use of funds is to pay claims and
operating expenses and to purchase investments.
Our investment portfolio is structured so that investments
mature periodically over time in reasonable relation to current
expectations of future claim payments. Since we have limited
claims history, we have derived our expected future claim
payments from industry and predecessor trends and included a
provision for uncertainties. Our investment portfolio as of
December 31, 2009 has an effective duration of
4.98 years with individual maturities extending to
30 years. Currently, we make claim payments from positive
cash flows from operations and invest excess cash in securities
with appropriate maturity dates to balance against anticipated
future claim payments. As these securities mature, we intend to
invest any excess funds with appropriate durations to match
against expected future claim payments.
At December 31, 2009, of our investment portfolio consisted
of investment-grade fixed income securities with fair values
subject to fluctuations in interest rates, as well as other
factors such as credit. In July 2009, our investment policy was
revised to allow for investment in domestic and international
equities up to 6% and 1.5%, respectively, of our statutory
consolidated capital and surplus. All of the securities in our
investment portfolio are accounted for as available for
sale securities. While we have structured our investment
portfolio to provide an appropriate matching of maturities with
anticipated claim payments, if we decide or are required in the
future to sell securities in a rising interest rate environment,
we would expect to incur losses from such sales.
We had no direct
sub-prime
mortgage exposure in our investment portfolio as of
December 31, 2009 and $5.4 million of indirect
exposure to
sub-prime
mortgages. As of December 31, 2009, our portfolio included
$212.3 million of insured municipal bonds and
$132.3 million of uninsured municipal bonds.
The following table provides a breakdown of ratings on the bonds
in our municipal portfolio as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured Bonds
|
|
|
|
|
|
Total Municipal Portfolio Based On
|
|
|
|
Insured
|
|
|
Underlying
|
|
|
Uninsured Bonds
|
|
|
Overall
|
|
|
Underlying
|
|
Rating
|
|
Ratings
|
|
|
Ratings
|
|
|
Ratings
|
|
|
Ratings(1)
|
|
|
Ratings
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
AAA
|
|
$
|
11,320
|
|
|
$
|
11,320
|
|
|
$
|
16,846
|
|
|
$
|
28,166
|
|
|
$
|
28,166
|
|
AA+
|
|
|
22,712
|
|
|
|
15,327
|
|
|
|
34,946
|
|
|
|
57,658
|
|
|
|
50,273
|
|
AA
|
|
|
39,746
|
|
|
|
19,263
|
|
|
|
33,042
|
|
|
|
72,788
|
|
|
|
52,305
|
|
AA-
|
|
|
58,193
|
|
|
|
45,126
|
|
|
|
15,215
|
|
|
|
73,408
|
|
|
|
60,341
|
|
A+
|
|
|
33,837
|
|
|
|
44,656
|
|
|
|
10,001
|
|
|
|
43,838
|
|
|
|
54,657
|
|
A
|
|
|
13,142
|
|
|
|
32,651
|
|
|
|
4,255
|
|
|
|
17,397
|
|
|
|
36,906
|
|
A−
|
|
|
7,373
|
|
|
|
16,818
|
|
|
|
524
|
|
|
|
7,897
|
|
|
|
17,342
|
|
BBB+
|
|
|
|
|
|
|
1,162
|
|
|
|
5,411
|
|
|
|
5,411
|
|
|
|
6,573
|
|
BB-
|
|
|
|
|
|
|
|
|
|
|
1,339
|
|
|
|
1,339
|
|
|
|
1,339
|
|
Pre-refunded(2)
|
|
|
24,656
|
|
|
|
24,656
|
|
|
|
10,736
|
|
|
|
35,392
|
|
|
|
35,392
|
|
Not rated
|
|
|
1,330
|
|
|
|
1,330
|
|
|
|
|
|
|
|
1,330
|
|
|
|
1,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
212,309
|
|
|
$
|
212,309
|
|
|
$
|
132,315
|
|
|
$
|
344,624
|
|
|
$
|
344,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents insured ratings on insured bonds and ratings on
uninsured bonds. |
|
(2) |
|
These bonds have been refunded by depositing highly rated
government-issued securities into irrevocable trust funds
established for payment of principal and interest. |
67
As of December 31, 2009, we had no direct investments in
any bond insurer, and the following three bond insurers insured
more than 10% of the municipal bond investments in our portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Insurer Ratings
|
|
|
Underlying Bond
|
|
Bond Insurer
|
|
Fair Value
|
|
|
S&P
|
|
|
Moodys
|
|
|
Rating
|
|
|
|
(Millions)
|
|
|
|
|
|
|
|
|
|
|
|
National Public Finance Guarantee Corporation
|
|
$
|
96.2
|
|
|
|
A
|
|
|
|
Baa1
|
|
|
|
AA−/A+
|
|
Financial Security Assurance Inc.
|
|
|
45.7
|
|
|
|
AAA
|
|
|
|
Aa3
|
|
|
|
A+
|
|
Ambac Assurance Corp.
|
|
|
42.1
|
|
|
|
CC
|
|
|
|
Caa2
|
|
|
|
AA−/A+
|
|
We do not expect a material impact to our investment portfolio
or financial position as a result of the problems currently
facing monoline bond insurers.
Our ability to adequately provide funds to pay claims comes from
our disciplined underwriting and pricing standards and the
purchase of reinsurance to protect us against severe claims and
catastrophic events. Effective October 1, 2008 and as
renewed on October 1, 2009, our reinsurance program
provides us with reinsurance protection for each loss occurrence
in excess of $0.75 million, up to $85.0 million,
subject to various deductibles and exclusions. Our reinsurance
program that was effective October 1, 2007 to
October 1, 2008, provides us with reinsurance protection
for each loss occurrence in excess of $1.0 million, up to
$75.0 million, subject to various deductibles and
exclusions. See the discussion under the heading
Reinsurance in Part I, Item 1 of this
annual report. Given industry and predecessor trends, we believe
we are sufficiently capitalized to cover our retained losses.
Our insurance subsidiary is required by law to maintain a
certain minimum level of surplus on a statutory basis. Surplus
is calculated by subtracting total liabilities from total
admitted assets. The NAIC has a risk-based capital standard
designed to identify property and casualty insurers that may be
inadequately capitalized based on inherent risks of each
insurers assets and liabilities and its mix of net
premiums written. Insurers falling below a calculated threshold
may be subject to varying degrees of regulatory action. As of
December 31, 2009, the statutory surplus of our insurance
subsidiary was in excess of the prescribed risk-based capital
requirements that correspond to any level of regulatory action.
SeaBright is a holding company with minimal unconsolidated
revenue and expenses. As SeaBright pays dividends and has other
capital needs in the future, we anticipate that it will be
necessary for our insurance subsidiary to pay dividends to
SeaBright. The payment of such dividends will be regulated as
previously described.
Net cash provided by operating activities in 2009 totaled
$68.3 million, an increase of $1.4 million, or 2.1%,
from $66.9 million in 2008, which decreased
$27.7 million, or 29.3%, from $94.6 million in 2007.
The increase in 2009 was primarily attributable to an increase
in premiums collected of approximately $5.5 million and a
decrease in federal income taxes paid of approximately
$14.8 million, offset by an increase in loss and loss
adjustment expenses paid (net of reinsurance collected) of
approximately $16.9 million. The decrease in 2008 is mainly
attributable to increases in paid loss and loss adjustment
expenses of approximately $25.8 million, paid federal and
state taxes of $2.3 million and other expenses of
$7.6 million. The increase in cash paid in 2008 was
partially offset by an $8.0 million increase in premium
collections.
We used net cash of $77.8 million for investing activities
in 2009 compared to $65.6 million in 2008 and
$95.1 million in 2007. The increase in 2009 from 2008 was
driven by higher net investment purchase activity (purchases,
net of sales and maturities) partially offset by a reduction in
purchases of property and equipment. The reduction in 2008 from
2007 was primarily attributable to a reduction in funds
generated by operations and made available for investing.
Net cash provided by (used in) financing activities totaled
$(0.4) million in 2009, an increase of $1.6 million
from $1.2 million in 2008, which increased
$0.8 million from $0.4 million in 2007.
68
Contractual
Obligations and Commitments
The following table identifies our contractual obligations by
payment due period as of December 31, 2009:
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|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
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|
|
|
|
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|
Less than
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|
|
|
|
|
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More than
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|
|
|
Total
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|
|
1 Year
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|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
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|
|
Long term debt obligations:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Surplus notes
|
|
$
|
12,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,000
|
|
Loss and loss adjustment expenses
|
|
|
351,496
|
|
|
|
112,127
|
|
|
|
141,653
|
|
|
|
30,580
|
|
|
|
67,136
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|
Operating lease obligations
|
|
|
17,325
|
|
|
|
2,904
|
|
|
|
6,132
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|
|
|
4,848
|
|
|
|
3,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
|
|
$
|
380,821
|
|
|
$
|
115,031
|
|
|
$
|
147,785
|
|
|
$
|
35,428
|
|
|
$
|
82,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The loss and loss adjustment expense payments due by period in
the table above are based upon the loss and loss adjustment
expense estimates as of December 31, 2009 and actuarial
estimates of expected payout patterns and are not contractual
liabilities as to time certain. Our contractual liability is to
provide benefits under the policies we write. As a result, our
calculation of loss and loss adjustment expense payments due by
period is subject to the same uncertainties associated with
determining the level of unpaid loss and loss adjustment
expenses generally 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. For a
discussion of our unpaid loss and loss adjustment expense
process, see the heading Loss Reserves in
Part I, Item 1 of this annual report and
Critical Accounting Policies, Estimates and
Judgments Unpaid Loss and Loss Adjustment
Expenses in Part II, Item 7 of this annual
report. Actual payments of loss and loss adjustment expenses by
period will vary, perhaps materially, from the above table to
the extent that current estimates of loss and loss adjustment
expenses vary from actual ultimate claims amounts and as a
result of variations between expected and actual payout
patterns. See the discussion under the heading Risks
Related to our Business Our loss reserves are based
on estimates and may be inadequate to cover our actual
losses in Part I, Item 1A of this annual report
for a discussion of the uncertainties associated with estimating
unpaid loss and loss adjustment expenses.
Off-Balance
Sheet Arrangements
As of December 31, 2009, we had no off-balance sheet
arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Critical
Accounting Policies, Estimates and Judgments
It is important to understand our accounting policies in order
to understand our financial statements. Management considers
some of these policies to be critical to the presentation of our
financial results, since they require management to make
estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures at the financial reporting date
and throughout the period being reported upon. Some of the
estimates result from judgments that can be subjective and
complex, and consequently, actual results reflected in future
periods might differ from these estimates.
The most critical accounting policies involve the reporting of
unpaid loss and loss adjustment expenses including losses that
have occurred but were not reported to us by the financial
reporting date, the amount and recoverability of reinsurance
recoverable balances, deferred policy acquisition costs, income
taxes, the impairment of investment securities, earned but
unbilled premiums and retrospective premiums. The following
should be read in conjunction with the notes to our consolidated
financial statements.
69
Unpaid
Loss and Loss Adjustment Expenses
Unpaid loss and loss adjustment expense represents our estimate
of the expected cost of the ultimate settlement and
administration of losses, based on known facts and
circumstances. Our policy is to record the liability for unpaid
claims and claim adjustment expense equal to the point estimate
we determine. Included in unpaid loss and loss adjustment
expense are amounts for case-based reserves, including estimates
of future developments on those claims, and claims incurred but
not yet reported to us, second injury fund expenses, and
allocated and unallocated claim adjustment expenses. Due to the
inherent uncertainty associated with the cost of unsettled and
unreported claims, the ultimate liability may differ, perhaps
materially, from the original estimate. These estimates are
regularly reviewed and updated and any resulting adjustments are
included in the current periods operating results.
Following is a summary of the gross loss and loss adjustment
expense reserves by line of business as of December 31,
2009 and 2008. The workers compensation line of business
comprises over 98% of our total loss reserves as of both dates.
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
As of December 31, 2008
|
|
Line of Business
|
|
Case
|
|
|
IBNR
|
|
|
Total
|
|
|
Case
|
|
|
IBNR
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Workers Compensation
|
|
$
|
168,491
|
|
|
$
|
176,807
|
|
|
$
|
345,298
|
|
|
$
|
131,814
|
|
|
$
|
155,909
|
|
|
$
|
287,723
|
|
Ocean Marine
|
|
|
1,046
|
|
|
|
4,771
|
|
|
|
5,817
|
|
|
|
1,041
|
|
|
|
3,251
|
|
|
|
4,292
|
|
General Liability
|
|
|
|
|
|
|
381
|
|
|
|
381
|
|
|
|
|
|
|
|
12
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
169,537
|
|
|
$
|
181,959
|
|
|
$
|
351,496
|
|
|
$
|
132,855
|
|
|
$
|
159,172
|
|
|
$
|
292,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial
Loss Reserve Estimation Methods
We use a variety of actuarial methodologies to assist us in
establishing the reserve for unpaid loss and loss adjustment
expense. We also make judgments relative to estimates of future
claims severity and frequency, length of time to achieve
ultimate resolution, judicial theories of liability and other
third-party factors that are often beyond our control.
For the current accident year, we establish the initial reserve
for claims incurred-but-not-reported (IBNR) using an
expected loss ratio (ELR) method. The ELR method is
based on an analysis of historical loss ratios adjusted for
current pricing levels, exposure growth, anticipated trends in
claim frequency and severity, the impact of reform activity and
any other factors that may have an impact on the loss ratio. The
actual paid and incurred loss data for the accident year is
reviewed each quarter and changes to the ELR may be made based
on the emerging data, although changes are typically not made
until the end of the accident year when the loss data can be
analyzed as a complete accident year. In the December 31,
2009 internal IBNR analysis, the ELR for accident year 2009 was
increased from 56.7% on a net and gross basis to 60.0% on a net
and gross basis. This was the first time the ELR was changed
prior to the accident year being complete. The change was made
to recognize the emerging loss experience primarily in the
Illinois state act segment. The ELR is multiplied by the
year-to-date
earned premium to determine the ultimate losses for the current
accident year. The actual paid and case outstanding losses are
subtracted from the ultimate losses to determine the IBNR for
the accident year. As the accident year matures, we incorporate
a standard actuarial reserving methodology referred to as the
Bornhuetter-Ferguson method. This method blends the loss
development and expected loss ratio methods by assigning partial
weight to the initial expected losses, calculated from the
expected loss ratio method, with the remaining weight applied to
the actual losses, either paid or incurred. The weights assigned
to the initial expected losses decrease as the accident year
matures. A reserve estimate implies a pattern of expected loss
emergence. If this emergence does not occur as expected, it may
cause us to revisit our previous assumptions. We may adjust loss
development patterns, the various method weights or the expected
loss ratios used in our analysis. Management employs judgment in
each reserve valuation as to how to make these adjustments to
reflect current information.
70
For all other accident years, the estimated ultimate losses are
developed using a variety of actuarial techniques as described
below. In reviewing this information, we consider the following
factors to be especially important at this time because they
increase the variability risk factors in our loss reserve
estimates:
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|
|
We wrote our first policy on October 1, 2003 and, as a
result, our total reserve portfolio is relatively immature when
compared to other industry data.
|
|
|
|
We have been growing consistently since we began operations and
have entered into several new states that are not included in
our predecessors historical data.
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|
|
|
At December 31, 2009, approximately $135.8 million, or
44.9%, of our direct loss reserves were related to business
written in California. Over the last several years, four
significant comprehensive legislative reforms were enacted in
California: AB 749 was enacted in February 2002; AB 227 and SB
228 were enacted in September 2003; and SB 899 was enacted in
April 2004. This reform activity has resulted in uncertainty
regarding the impact of the reforms on loss payments, loss
development and, ultimately, loss reserves, making historical
data less reliable as an indicator of future loss. All four
bills enacted structural changes to the benefit delivery system
in California, in addition to changes in the indemnity and
medical benefits afforded injured workers. In response to the
reform legislation and a continuing drop in the frequency of
workers compensation claims, the pure premium rates
approved by the California Insurance Commissioner effective
January 1, 2009 were 63.4% lower than the pure premium
rates in effect as of July 1, 2003. More recent data has
indicated the need for an increase in rates in California. On
June 23, 2009, we filed for a 10.6% rate increase to be
effective August 1, 2009, which was approved by the
California Insurance Department. With the California Department
of Insurances approval, we adopted a 5.0% increase in
advisory pure premium rates effective January 1, 2009.
|
Key elements of the reforms as they relate to indemnity and
medical benefits were as follows:
Indemnity
Benefits
AB 749 significantly increased most classes of workers
compensation indemnity benefits over a four-year period
beginning in 2003.
AB 227 and SB 228 repealed the mandatory vocational
rehabilitation benefits and replaced them with a system of
non-transferable education vouchers.
SB 899 required the Division of Workers Compensation
(DWC) Administrative Director to adopt, on or before
January 1, 2005, a new permanent disability rating schedule
(PDRS) based in part on American Medical Association
guidelines. Also, temporary disability was limited to a duration
of two years. SB 899 also provided that, effective
April 19, 2004, apportionment of disability for purposes of
permanent disability determination must be based on causation.
Medical
Benefits
AB 749 repealed the presumption given to the primary treating
physician (except when the worker has pre-designated a personal
physician), effective for injuries occurring on or after
January 1, 2003. (SB 228 and SB 899 later extended this to
all future medical treatment on earlier injuries.)
SB 228 required the DWC Administrative Director to establish, by
December 1, 2004, an Official Medical Treatment Utilization
Schedule meeting specific criteria. SB 228 also provided that
beginning three months after the publication date of the updated
American College of Occupational and Environmental Medical
(ACOEM) Practice Guidelines and continuing until
such time as the DWC Administrative Director establishes an
Official Medical Treatment Utilization Schedule, the ACOEM
standards will be presumed to be correct regarding the extent
and scope of all medical treatment. The DWC Administrative
Director has subsequently adopted the ACOEM Guidelines as the
Official Medical Treatment Utilization Schedule.
SB 228 limited the number of chiropractic visits and the number
of physical therapy visits to 24 each per claim.
71
SB 228 established a prescription medication fee schedule set at
100% of Medi-Cal Schedule amounts.
SB 228 provided that the maximum facility fee for services
performed in an ambulatory surgical center may not exceed 120%
of the Medicare fees for the same service performed in a
hospital outpatient facility.
SB 899 provided that after January 1, 2005, an employer or
insurer may establish medical provider networks meeting certain
conditions and, with limited exceptions, medical treatment can
be provided within those networks.
These reforms are a source of variability in the reserve
estimates as legislative changes affecting benefit levels not
only impact the cost of benefits but also the rate at which
accident year benefits or losses develop over time. Ongoing
efforts by some system stakeholders to challenge the reforms,
either through legislative, administrative or judicial means,
further adds to the variability.
In the last three years there have been ongoing challenges to
the PDRS, one of the most significant reforms to emerge from the
2004-2005
legislation. The PDRS was revised effective January 1,
2005. The revised schedule has resulted in significantly reduced
permanent disability awards, leading to concerns that injured
workers may not be adequately compensated for their work related
permanent injuries.
In February of 2009 the California Workers Compensation
Appeals Board ( the Appeals Board) rendered an en
banc decision on a series of cases, commonly referred to as
Almarez, Guzman and Ogilvie, that could have a material impact
on the value of permanent disability awards. The en banc
decision led to considerable comment and debate in the
Workers Compensation community. Given this, the Appeals
Board subsequently granted a petition for reconsideration on the
subject cases, allowing interested parties until May 1,
2009 to provide input via an amicus curiae brief. In September
of 2009, the Appeals Board reaffirmed most aspects of its prior
work, with some clarifications to its February decisions. While
its decision is considered final, several aspects are likely to
still be determined by case law and through appeal. However, it
could take two to three years before review by higher courts is
complete.
Workers compensation is considered a long-tail line of
business, as it takes a relatively long period of time to
finalize claims from a given accident year. Management believes
that it generally takes workers compensation losses
approximately 48 to 60 months after the start of an
accident year until the data is viewed as fully credible for
paid and incurred reserve evaluation methods. Workers
compensation losses can continue to develop beyond
60 months and in some cases claims can remain open more
than 20 years. As indicated above, we wrote our first
policy on October 1, 2003 so our first complete accident
year is 2004. As of December 31, 2009, accident year 2004
was 72 months developed, accident year 2005 was
60 months developed, accident year 2006 was 48 months
developed, accident year 2007 was 36 months developed,
accident year 2008 was 24 months developed and accident
year 2009 was 12 months developed. Our loss reserve
estimates are subject to considerable variation due to the
relative immaturity of the accident years from a development
standpoint.
We review the following significant components of loss reserves
on a quarterly basis:
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|
|
|
|
IBNR reserves for losses This includes amounts for
the medical and indemnity components of the workers
compensation claim payments, net of subrogation recoveries and
deductibles;
|
|
|
|
IBNR reserves for defense and cost containment expenses
(DCC, also referred to as allocated loss adjustment
expenses (ALAE)), net of subrogation recoveries and
deductibles;
|
|
|
|
reserve for adjusting and other expenses, also known as
unallocated loss adjustment expenses (ULAE); and
|
|
|
|
reserve for loss based assessments, also referred to as the
8F reserve in reference to Section 8,
Compensation for Disability, subsection (f), Injury increasing
disability, of the United States Longshore and Harbor
Workers Compensation Act (USL&H) Act.
|
The reserves for losses and DCC are also reviewed gross and net
of reinsurance (referred to as net). For gross
losses, the claims for the Washington USL&H Plan, the KEIC
claims assumed in the Acquisition and claims assumed from the
NCCI residual market pools are excluded from this discussion.
72
IBNR reserves include a provision for future development on
known claims, a reopened claims reserve, a provision for claims
incurred but not reported and a provision for claims in transit
(incurred and reported but not recorded).
Our analysis is done separately for the indemnity, medical and
DCC components of the total loss reserves within each accident
year. In addition, the analysis is completed separately for the
following five categories: State Act, California (California);
State Act, Alaska and Hawaii (Alaska&Hawaii); State Act,
Illinois (Illinois); State Act, all other states (All Other);
and USL&H claims. The business is divided into these three
categories for the determination of ultimate losses due to
differences in the laws that cover each of these categories.
Workers compensation insurance is statutorily provided for
in all of the states in which we do business. State laws and
regulations provide for the form and content of policy coverage
and the rights and benefits that are available to injured
workers, their representatives and medical providers. Because
the benefits are established by state statute, there can be
significant variation in these benefits by state. We refer to
this coverage as State Act.
Our business is also affected by federal laws including the
USL&H Act, which is administered by the Department of
Labor, and the Merchant Marine Act of 1920, or Jones Act. The
USL&H Act contains various provisions affecting our
business, including the nature of the liability of employers of
longshoremen, the rate of compensation to an injured
longshoreman, the selection of physicians, compensation for
disability and death and the filing of claims. We refer to the
business covered under the USL&H Act and the Jones Act as
USL&H.
Because there are different laws and benefit levels that affect
the State Act versus USL&H business, there is a strong
likelihood that these categories will exhibit different loss
development characteristics which will influence the ultimate
loss calculations. Separating the data into the State Act and
USL&H categories allows us to use actuarial methods that
contemplate these differences.
Development factors, expected loss rates and expected loss
ratios are derived from the combined experience of us and our
predecessor.
Gross ultimate loss (indemnity, medical and ALAE separately) for
each category is estimated using the following actuarial methods:
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|
|
paid loss (or ALAE) development;
|
|
|
|
incurred loss (or ALAE) development;
|
|
|
|
Bornhuetter-Ferguson using ultimate premiums and paid loss (or
ALAE); and
|
|
|
|
Bornhuetter-Ferguson using ultimate premiums and incurred loss
(or ALAE).
|
A gross ultimate value is selected by reviewing the various
ultimate estimates and applying actuarial judgment to achieve a
reasonable point estimate of the ultimate liability. The gross
IBNR reserve equals the selected gross ultimate loss minus the
gross paid losses and gross case reserves as of the valuation
date. The selected gross ultimate loss and ALAE are reviewed and
updated on a quarterly basis.
Variation
in Ultimate Loss Estimates
In light of our short operating history and uncertainties
concerning the effects of recent legislative reforms,
specifically as they relate to our California workers
compensation experience, the actuarial techniques discussed
above use the historical experience of our predecessor as well
as industry information in the analysis of loss reserves. We are
able to effectively draw on the historical experience of our
predecessor because most of the current members of our
management and adjusting staff also served as the management and
adjusting staff of our predecessor. Over time, we expect to
place more reliance on our own developed loss experience and
less on our predecessors and industry experience.
These techniques recognize, among other factors:
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|
|
our claims experience and that of our predecessor;
|
73
|
|
|
|
|
the industrys claim experience;
|
|
|
|
historical trends in reserving patterns and loss payments;
|
|
|
|
the impact of claim inflation
and/or
deflation;
|
|
|
|
the pending level of unpaid claims;
|
|
|
|
the cost of claim settlements;
|
|
|
|
legislative reforms affecting workers compensation,
including pricing;
|
|
|
|
the overall environment in which insurance companies
operate; and
|
|
|
|
trends in claim frequency and severity.
|
In addition, there are loss and loss adjustment expense risk
factors that affect workers compensation claims that can
change over time and also cause our loss reserves to fluctuate.
Some examples of these risk factors include, but are not limited
to, the following:
|
|
|
|
|
recovery time from the injury;
|
|
|
|
degree of patient responsiveness to treatment;
|
|
|
|
use of pharmaceutical drugs;
|
|
|
|
type and effectiveness of medical treatments;
|
|
|
|
frequency of visits to healthcare providers;
|
|
|
|
changes in costs of medical treatments;
|
|
|
|
availability of new medical treatments and equipment;
|
|
|
|
types of healthcare providers used;
|
|
|
|
availability of light duty for early return to work;
|
|
|
|
attorney involvement;
|
|
|
|
wage inflation in states that index benefits; and
|
|
|
|
changes in administrative policies of second injury funds.
|
Variation can also occur in the loss reserves due to factors
that affect our book of business in general. Some examples of
these risk factors include, but are not limited to, the
following:
|
|
|
|
|
injury type mix;
|
|
|
|
change in mix of business by state;
|
|
|
|
change in mix of business by employer type;
|
|
|
|
small volume of internal data; and
|
|
|
|
significant exposure growth over recent data periods.
|
Impact
of Changes in Key Assumptions on Reserve
Volatility
The most significant factor currently impacting our loss reserve
estimates is the reliance on historical reserving patterns and
loss payments from our predecessor and the industry, also
referred to as loss development. This is due to our limited
operating history as discussed above. The actuarial methods that
we use depend at varying levels on loss development patterns
based on past information. Development is defined as the
difference, on successive valuation dates, between observed
values of certain fundamental quantities that may be used in the
loss reserve estimation process. For example, the data may be
paid losses, case incurred losses and the change in case
reserves or claim counts, including reported claims, closed
claims or reopened
74
claims. Development can be expected, meaning it is consistent
with prior results; favorable (better than expected); or
unfavorable (worse than expected). In all cases, we are
comparing the actual development of the data in the current
valuation with what was expected based on the historical
patterns in the underlying data. Favorable development indicates
a basis for reducing the estimated ultimate loss amounts while
unfavorable development indicates a basis for increasing the
estimated ultimate loss amounts. We reflect the favorable or
unfavorable development in loss reserves in the results of
operations in the period in which the ultimate loss estimates
are changed.
Estimating loss reserves is an uncertain and complex process
which involves actuarial techniques and management judgment.
Actuarial analysis generally assumes that past patterns
demonstrated in the data will repeat themselves and that the
data provides a basis for estimating future loss reserves.
However, since conditions and trends that have affected losses
in the past may not occur in the future in the same manner, if
at all, future results may not be reliably predicted by the
prior data. Due to the relative immaturity of our book of
business, the challenge has been to give the right weight in the
ultimate loss estimation process to the new data as it becomes
available. As discussed above, management believes that it
generally takes workers compensation losses approximately
48 to 60 months after the start of an accident year until
the data is viewed as fully credible for paid and incurred
reserve evaluation methods. Due to our limited operating
history, we have five complete accident years that were
developed 72 months, 60 months, 48 months,
36 months, 24 months and 12 months (2004, 2005,
2006, 2007, 2008 and 2009, respectively) at December 31,
2009. At December 31, 2009, the analysis for accident years
2003 through 2008 utilizes a Bornhuetter-Ferguson approach,
which blends the loss development and expected loss ratio
methods, in addition to the paid and incurred loss development
methods. For accident years 2003 through 2008, the actuarial
analysis did show some movement, both upward and downward, when
compared to the prior actuarial estimates at December 31,
2008. For accident years 2003 through 2006, the movement was
minimal and resulted in a net increase of our net ultimate loss
estimates of $0.6 million for the year ended
December 31, 2009.
For accident year 2007, there was unfavorable development in the
gross losses for California State Act which resulted in an
increase of our net ultimate loss estimates of
$3.3 million. For non-California State Act, there was
unfavorable development in the gross losses for accident year
2007 which resulted in an increase of our net ultimate loss
estimates of $0.9 million. For USL&H, there was
unfavorable development in the gross losses for accident year
2007 which resulted in an increase of our ultimate loss
estimates of $0.7 million. For California State Act and
USL&H, we placed more reliance on the most recent data
points in our loss development selections than in the prior
year. As with the prior year, we did not completely rely on the
most recent data points in our loss development selections. We
believe that our loss development factor selections are
appropriate given the maturity level of our data. Over time, as
the data for these accident years mature and uncertainty
surrounding the ultimate outcome of the claim costs diminish,
the full impact of the actual loss development will be factored
into our assumptions and selections.
For accident year 2008, there was unfavorable development in the
gross losses for California State Act which resulted in an
increase of our net ultimate loss estimates of
$6.2 million. For non-California State Act, there was
unfavorable development in the gross losses for accident year
2008 which resulted in an increase of our net ultimate loss
estimates of $1.5 million. For USL&H, there was
unfavorable development in the gross losses for accident year
2008 which resulted in an increase of our ultimate loss
estimates of $1.1 million.
For accident year 2009, the ultimate losses were set by
multiplying the selected ELR to the booking earned premium. For
more information on the ELR method and selection see the related
discussion under the heading Actuarial Loss Reserve
Estimation Methods in Part II, Item 7 of this
annual report.
Reserve
Sensitivities
Although many factors influence the actual cost of claims and
the corresponding unpaid loss and loss adjustment expense
estimates, we do not measure and estimate values for all of
these variables individually. This is due to the fact that many
of the factors that are known to impact the cost of claims
cannot be measured directly. This is the case for the impact of
economic inflation on claim costs, coverage interpretations and
jury determinations. In most instances, we rely on historical
experience or industry information to estimate values
75
for the variables that are explicitly used in the unpaid loss
and loss adjustment expense analysis. We assume that the
historical effect of these unmeasured factors, which is embedded
in our experience or industry experience, is representative of
future effects of these factors. It is important to note that
actual claims costs will vary from our estimate of ultimate
claim costs, perhaps by substantial amounts, due to the inherent
variability of the business written, the potentially significant
claim settlement lags and the fact that not all events affecting
future claim costs can be estimated.
As discussed in the previous section, there are a number of
variables that can impact, individually or in combination, the
adequacy of our loss and loss adjustment expense liabilities.
While the actuarial methods employed factor in amounts for these
circumstances, the loss reserves may prove to be inadequate
despite the actuarial methods used. Several examples are
provided below to highlight the potential variability present in
our loss reserves. Each of these examples represents scenarios
that are reasonably likely to occur over time. For example,
there may be a number of claims where the unpaid loss and loss
adjustment expense associated with future medical treatment
proves to be inadequate because the injured workers do not
respond to medical treatment as expected by the claims examiner.
If we assume this affects 10% of the open claims and, on
average, the unpaid loss and loss adjustment expenses on these
claims are 20% inadequate, this would result in our unpaid loss
and loss adjustment expense liability being inadequate by
approximately $7.0 million, or 2%, as of December 31,
2009. Another example is claim inflation. Claim inflation can
result from medical cost inflation or wage inflation. As
discussed above, the actuarial methods employed include an
amount for claim inflation based on historical experience. We
assume that the historical effect of this factor, which is
embedded in our experience and industry experience, is
representative of future effects for claim inflation. To the
extent that the historical factors, and the actuarial methods
utilized, are inadequate to recognize future inflationary
trends, our unpaid loss and loss adjustment expense liabilities
may be inadequate. If our estimate of future medical trend is
two percentage points inadequate (e.g., if we estimate a 9%
annual trend and the actual trend is 11%), our unpaid loss and
loss adjustment expense liability could be inadequate. The
amount of the inadequacy would depend on the mix of medical and
indemnity payments and the length of time until the claims are
paid. For example, if we assume that 50% of the unpaid loss and
loss adjustment expense is associated with medical payments and
an average payout period of 5 years, our unpaid loss and
loss adjustment expense liabilities would be inadequate by
approximately $17.6 million on a pre-tax basis, or 5%, as
of December 31, 2009. Under these assumptions, the
inadequacy of approximately $17.6 million represents
approximately 4.9% of total stockholders equity at
December 31, 2009. The impact of any reserve deficiencies,
or redundancies, on our reported results and future earnings is
discussed below.
In the event that our estimates of ultimate unpaid loss and loss
adjustment expense liabilities prove to be greater or less than
the ultimate liability, our future earnings and financial
position could be positively or negatively impacted. Future
earnings would be reduced by the amount of any deficiencies in
the year(s) in which the claims are paid or the unpaid loss and
loss adjustment expense liabilities are increased. For example,
if we determined our unpaid loss and loss adjustment expense
liability of $351.5 million as of December 31, 2009 to
be 5% inadequate, we would experience a pre-tax reduction in
future earnings of approximately $17.6 million. This
reduction could be realized in one year or multiple years,
depending on when the deficiency is identified. The deficiency
would also impact our financial position because most of our
statutory surplus would be reduced by an amount equivalent to
the reduction in net income. Any deficiency is typically
recognized in the unpaid loss and loss adjustment expense
liability and, accordingly, it typically does not have a
material effect on our liquidity because the claims have not
been paid. Since the claims will typically be paid out over a
multi-year period, we have generally been able to adjust our
investments to match the anticipated future claim payments.
Conversely, if our estimates of ultimate unpaid loss and loss
adjustment expense liabilities prove to be redundant, our future
earnings and financial position would be improved.
Reinsurance
Recoverables
Reinsurance recoverables on paid and unpaid losses represent the
portion of the loss and loss adjustment expenses that is assumed
by reinsurers. These recoverables are reported on our balance
sheet separately as assets, as 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
76
agreement. Reinsurance recoverables are determined based in part
on the terms and conditions of reinsurance contracts, which
could be subject to interpretations that differ from ours based
on judicial theories of liability. We calculate amounts
recoverable from reinsurers based on our estimates of the
underlying loss and loss adjustment expenses, which themselves
are subject to significant judgments and uncertainties described
above under the heading Unpaid Loss and Loss Adjustment
Expenses. Changes in the estimates and assumptions
underlying the calculation of our loss reserves may have an
impact on the balance of our reinsurance recoverables. In
general, one would expect an increase in our underlying loss
reserves on claims subject to reinsurance to have an upward
impact on our reinsurance recoverables. The amount of the impact
on reinsurance recoverables would depend on a number of
considerations including, but not limited to, the terms and
attachment points of our reinsurance contracts and the incurred
amount on various claims subject to reinsurance. We also bear
credit risk with respect to our reinsurers, which can be
significant considering that some claims may remain open for an
extended period of time.
We periodically evaluate our reinsurance recoverables, including
the financial ratings of our reinsurers, and revise our
estimates of such amounts as conditions and circumstances
change. Changes in reinsurance recoverables are recorded in the
period in which the estimate is revised. We assessed the
collectibility of our year-end receivables and believe that all
amounts are collectible based on currently available
information. Therefore, as of December 31, 2009 and 2008,
we had no reserve for uncollectible reinsurance recoverables. As
of December 31, 2009, the top ten companies from which we
had reinsurance amounts recoverable had A.M. Best ratings
of A− or higher.
Deferred
Policy Acquisition Costs
We defer commissions, premium taxes and certain other costs that
vary with and are primarily related to the acquisition of
insurance contracts. These costs are capitalized and charged to
expense in proportion to the recognition of premiums earned. The
method followed in computing deferred policy acquisition costs
limits the amount of these deferred costs to their estimated
realizable value, which gives effect to the premium to be
earned, related estimated investment income, anticipated losses
and settlement expenses and certain other costs we expect to
incur as the premium is earned. Judgments regarding the ultimate
recoverability of these deferred costs are highly dependent upon
the estimated future costs associated with our unearned
premiums. If our expected claims and expenses, after considering
investment income, exceed our unearned premiums, we would be
required to write-off all or a portion of deferred policy
acquisition costs. To date, we have not needed to write-off any
portion of our deferred acquisition costs. If our estimate of
anticipated losses and related costs was 10% inadequate, our
deferred acquisition costs as of December 31, 2009 would
still be fully recoverable and no write-off would be necessary.
We will continue to monitor the balance of deferred acquisition
costs for recoverability.
Income
Taxes
We use the asset and liability method of accounting for income
taxes. Under this method, 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 bases
and operating loss and tax credit carry-forwards. Deferred tax
assets and liabilities are measured using 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 the income statement in the period that
includes the enactment date.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will 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. This analysis requires management to make various
estimates and assumptions, including the scheduled reversal of
deferred tax liabilities, the consideration of operating versus
capital items, projected future taxable income and the effect of
tax planning strategies. If actual results differ from
managements estimates and assumptions, we may be required
to establish a valuation allowance to reduce the deferred tax
assets to the amounts more likely than not to be realized. The
establishment of a
77
valuation allowance could have a significant impact on our
financial position and results of operations in the period in
which it is deemed necessary. As of December 31, 2009, no
valuation allowance was recorded. We established a valuation
allowance of approximately $2.0 million at
December 31, 2008 (of which $976,000 was recorded in tax
expense and $1.0 million was recorded in accumulated other
comprehensive income) and reversed the $2.0 million
allowance through accumulated other comprehensive income in 2009.
We apply a recognition threshold and measurement process for
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return, and also
provides guidance on the derecognition of previously recorded
benefits and their classification, as well as the proper
recording of interest and penalties, accounting in interim
periods, disclosures and transition. As of December 31,
2009 and December 31, 2008, we had no unrecognized tax
benefits. We do not anticipate that the amount of unrecognized
tax benefits will significantly increase in the next
12 months. Our policy is to recognize interest and
penalties on unrecognized tax benefits as an element of income
tax expense (benefit) in our consolidated statements of
operations. We file consolidated U.S. federal and state
income tax returns. The tax years which remain subject to
examination by the taxing authorities are the years ended
December 31, 2006, 2007, 2008 and 2009.
Impairment
of Investment Securities
We regularly review our investment portfolio to evaluate the
necessity of recording impairment losses for
other-than-temporary
declines in the fair value of investments. A number of criteria
are considered during this process, including but not limited to
the following: whether we intend to sell the security; the
current fair value as compared to amortized cost or cost, as
appropriate, of the security; the length of time the
securitys fair value has been below amortized cost;
objective information supporting recovery in a reasonable period
of time; the likelihood that we will be required to sell the
security before recovery of its cost basis; specific credit
issues related to the issuer; and current economic conditions,
including interest rates.
For debt securities that are considered OTTI and that we do not
intend to sell and more likely than not would not be required to
sell prior to recovery of the amortized cost basis, we recognize
OTTI losses in accordance with the provisions of the
Codification. The amount of the OTTI loss is separated into the
amount that is credit related (credit loss component) and the
amount due to all other factors. The credit loss component is
recognized in earnings and is the difference between a
securitys amortized cost basis and the present value of
expected future cash flows discounted at the securitys
effective interest rate. The amount due to all other factors is
recognized in other comprehensive income. For the year ended
December 31, 2009, we recognized no OTTI losses related to
debt securities.
We regularly review our investment portfolio for declines in
value. In general, we review all securities that are impaired by
5% or more at the end of the period. We focus our review of
securities with no stated maturity date on securities that were
impaired by 20% or more at the end of the period or have been
impaired 10% or more continuously for six months or longer as of
the end of the period. We also analyze the entire portfolio for
other factors that might indicate a risk of impairment,
including credit ratings and interest rates. It is possible that
we could recognize future impairment losses on some securities
we owned at December 31, 2009 if future events, information
and the passage of time result in a determination that a decline
in value is
other-than-temporary.
In 2009, we recognized
other-than-temporary
impairment charges of $0.3 million related to our
investments in preferred stocks issued by Fannie Mae and Freddie
Mac that were sold in 2009. In 2008, we recognized
other-than-temporary
impairment charges of approximately $10.2 million on our
investments in preferred stocks (nearly all of which were
government-sponsored agency fixed and variable preferred stocks)
and approximately $3.2 million on our investment in equity
indexed securities exchange-traded funds. No
other-than-temporary
declines in the fair value of our securities were recorded in
2007. Please refer to the tables in Note 3 of the
consolidated financial statements in Part II, Item 8
of this annual report for additional information on unrealized
losses on our investment securities. Please refer to
Part II, Item 7A of this annual report for tables
showing the sensitivity of the fair value of our fixed-income
investments to selected hypothetical changes in interest rates.
See Liquidity and Capital Resources in Part II,
Item 7 of this annual
78
report for a discussion of the limited exposure in our
investment portfolio at December 31, 2009 to
sub-prime
mortgages.
Earned
But Unbilled Premiums
Shortly following the expiration of an insurance policy, we
perform a final payroll audit of each insured to determine the
final premium to be billed and earned. These final audits
generally result in an audit adjustment, either increasing or
decreasing the estimated premium earned and billed to date. We
estimate the amount of premiums that have been earned but are
unbilled at the end of a reporting period by analyzing
historical earned premium adjustments made at final audit for
the preceding 12 months and applying the average adjustment
percentage against our in-force earned premium for the period.
These estimates are subject to changes in policyholders
payrolls due to growth, economic conditions, seasonality and
other factors, as well as fluctuations in our in-force premium.
For example, the amount of our accrual for premiums earned but
unbilled fluctuated between ($497,000) and $19,000 in 2009 and
between ($611,000) and $182,000 in 2008. The balance of our
accrual for premiums earned but unbilled totaled approximately
($132,000) and ($611,000) at December 31, 2009 and 2008,
respectively. Although considerable variability is inherent in
such estimates, management believes that the accrual for earned
but unbilled premiums is reasonable. The estimates are reviewed
quarterly and adjusted as necessary as experience develops or
new information becomes known. Any such adjustments are included
in current operations.
Retrospective
Premiums
The premiums for our retrospectively rated loss sensitive plans
are reflective of the customers loss experience because,
beginning six months after the expiration of the relevant
insurance policy, and annually thereafter, we recalculate the
premium payable during the policy term based on the current
value of the known losses that occurred during the policy term.
While the typical retrospectively rated policy has around five
annual adjustment or measurement periods, premium adjustments
continue until mutual agreement to cease future adjustments is
reached with the policyholder. Retrospective premiums for
primary and reinsured risks are included in income as earned on
a pro rata basis over the effective period of the respective
policies. Earned premiums on retrospectively rated policies are
based on our estimate of loss experience as of the measurement
date. Unearned premiums are deferred and include that portion of
premiums written that is applicable to the unexpired period of
the policies in force and estimated adjustments of premiums on
policies that have retrospective rating endorsements.
We bear credit risk with respect to retrospectively rated
policies. Because of the long duration of our loss sensitive
plans, there is a risk that the customer will fail to pay the
additional premium. Accordingly, we obtain collateral in the
form of letters of credit or deposits to mitigate credit risk
associated with our loss sensitive plans. If we are unable to
collect future retrospective premium adjustments from an
insured, we would be required to write-off the related amounts,
which could impact our financial position and results of
operations. To date, there have been no such write-offs.
Retrospectively rated policies accounted for approximately 7.2%
of direct premiums written in 2009 and approximately 10.7% of
direct premiums written in 2008.
Recent
Accounting Pronouncements
In January 2009, the FASB issued FSP
EITF 99-20-1,
Amendments to the Impairment Guidance of EITF Issue
No. 99-20,
(FSP
EITF 99-20-1)
which amends FASB Emerging Issues Task Force (EITF)
No. 99-20,
Recognition of Interest Income and Impairment on Purchased
Beneficial Interest and Beneficial Interests That Continue to Be
Held by a Transferor or in Securitized Financial Assets,
(EITF 99-20)
to align the impairment guidance in
EITF 99-20
with the impairment guidance and related implementation guidance
in SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. The provisions of FSP
EITF 99-20-1
are effective for reporting periods ending after
December 15, 2008. We adopted FSP
EITF 99-20-1
as of December 31, 2008, which did not have a material
effect on our consolidated financial condition and results of
operations.
79
In April 2009, the FASB issued FSP
FAS 115-2
and
FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary
Impairments (FSP
FAS 115-2/124-2).
FSP
FAS 115-2/124-2
requires entities to separate an
other-than-temporary
impairment of a debt security into two components when there are
credit related losses associated with the impaired debt security
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 its cost
basis. The amount of the
other-than-temporary
impairment related to a credit loss is recognized in earnings,
and the amount of the
other-than-temporary
impairment related to other factors is recorded in other
comprehensive loss. FSP
FAS 115-2/124-2
is effective for periods ending after June 15, 2009. We
adopted the provisions of FSP
FAS 115-2/124-2
in the quarter ended June 30, 2009. There were no
impairments previously recognized on debt securities we owned at
December 31, 2008 and therefore, there was no cumulative
effect adjustment to retained earnings and other comprehensive
income (loss) as a result of adopting this standard. There were
no impairments recognized on debt securities in the year ended
December 31, 2009 and therefore, the adoption of FSP
FAS 115-2/124-2
had no effect on our consolidated financial condition or results
of operations.
In April 2009, the FASB issued FSP
FAS 157-4,
Determining Fair Value When Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions that are Not Orderly
(FSP
FAS 157-4).
Under FSP
FAS 157-4,
if an entity determines that there has been a significant
decrease in the volume and level of activity for the asset or
the liability in relation to the normal market activity for the
asset or liability (or similar assets or liabilities), then
transactions or quoted prices may not accurately reflect fair
value. In addition, if there is evidence that the transaction
for the asset or liability is not orderly, the entity shall
place little, if any, weight on that transaction price as an
indicator of fair value. FSP
FAS 157-4
is effective for periods ending after June 15, 2009. We
adopted FSP
FAS 157-4
in the quarter ended June 30, 2009, which did not have a
material effect on our consolidated financial condition and
results of operations.
In April 2009, the FASB issued FSP
FAS 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial
Instruments (FSP
FAS 107-1
and APB
28-1).
FSP
FAS 107-1
and APB 28-1
requires disclosures about the fair value of financial
instruments in interim and annual financial statements. FSP
FAS 107-1
and APB 28-1
is effective for periods ending after June 15, 2009. We
adopted FSP
FAS 107-1
and APB 28-1
in the quarter ended June 30, 2009. Because FSP
FAS 107-1
and APB 28-1
amends only the disclosure requirements related to the fair
value of financial instruments, adoption of
FSP 107-1
and APB 28-1
did not have a material effect on our consolidated financial
condition and results of operations.
In May 2009, the FASB issued FAS No. 165,
Subsequent Events (FAS 165).
FAS 165 establishes general standards of accounting for and
disclosures of events that occur after the balance sheet date
but before financial statements are issued or available to be
issued. FAS 165 is effective for periods ending after
June 15, 2009. We adopted FAS 165 in the quarter ended
June 30, 2009, which did not have a material effect on our
consolidated financial condition and results of operations.
In June 2009, the Financial Accounting Standards Board
(FASB) issued FASB Statement of Financial Accounting
Standards (SFAS) No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles (SFAS 168).
SFAS 168 identifies the sources of accounting principles
and the framework for selecting the principles used in preparing
the financial statements of nongovernmental entities that are
presented in conformity with U.S. generally accepted
accounting principles (GAAP). SFAS 168 further
identifies the FASB Accounting Standards Codification (the
Codification) as the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental
entities. The Codification does not change existing
U.S. GAAP authoritative literature in place as of
July 1, 2009. SFAS 168 is effective for financial
statements issued for interim and annual periods ending after
September 15, 2009. We adopted SFAS 168 as of
September 30, 2009 which did not have a material effect on
our consolidated financial condition or results of operations.
80
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
In 2008 and 2009, a series of crises occurred in the
U.S. financial and capital markets, as well as in housing
and global credit markets. These conditions accelerated into a
global economic recession, as evidenced by declining consumer
confidence, lower consumer spending, bankruptcies and
significant job losses. The declining economic conditions
worsened over the last half of 2008 and continued into the first
half of 2009. During this period, equity and debt markets
experienced major declines in market prices on a worldwide
basis. As a result, we recorded $13.4 million of OTTI
losses in the year ended December 31, 2008. However, the
equity and debt markets began to show improvement in mid-2009.
For example, the net unrealized gain on our investment portfolio
increased from $1.4 million at March 31, 2009 to
$18.4 million at December 31, 2009. The disruptions in
the financial markets in 2008 and 2009 have resulted in a lack
of liquidity within the credit markets, which has increased
credit risk in the financial markets and resulted in the
widening of credit spreads.
81
Our consolidated balance sheets include a substantial amount of
assets and liabilities whose fair values are subject to market
risks, including credit and interest rate risks. Market risk is
the potential economic loss principally arising from adverse
changes in the fair value of financial instruments. In 2008 and
2009, conditions in the public debt and equity markets declined
significantly, resulting in exceptional volatility in debt and
equity prices. In 2008, we recognized, on a pre-tax basis,
approximately $13.4 million of
other-than-temporary
impairment charges related primarily to our investments in
exchange-traded funds and government-sponsored-entity preferred
stock. In 2009, we recognized, on a pre-tax basis, approximately
$0.3 million of
other-than-temporary
impairment charges related to our investments in
government-sponsored-entity preferred stock. The impact of
actions taken by governmental bodies in response to the current
economic crisis is difficult to predict, particularly over the
short term, and we cannot predict the timing or magnitude of a
recovery. The fair value of our investment portfolio remains
subject to considerable volatility, particularly over the short
term. The following sections address the significant market
risks associated with our business activities.
Credit
Risk
Credit Risk is the potential economic loss principally arising
from adverse changes in the financial condition of a specific
debt issuer. We address this risk by investing generally in
fixed-income securities which are rated A or higher
by Standard & Poors or another major rating
agency. We also independently, and through our outside
investment managers, monitor the financial condition of all of
the issuers of fixed-income securities in the portfolio. To
limit our exposure to risk, we employ stringent diversification
rules that limit the credit exposure to any single issuer or
business sector. See Investments in Part I,
Item 1 of this annual report for a discussion of the
limited exposure in our investment portfolio at
December 31, 2009 to
sub-prime
mortgages.
Interest
Rate Risk
We had fixed-income investments with a fair value of
$626.6 million at December 31, 2009 that are subject
to interest rate risk compared with $522.3 million at
December 31, 2008. We manage the exposure to interest rate
risk through a disciplined asset/liability matching and capital
management process. In the management of this risk, the
characteristics of duration, credit and variability of cash
flows are critical elements. These risks are assessed regularly
and balanced within the context of the liability and capital
position.
The table below summarizes our interest rate risk as of
December 31, 2009 and December 31, 2008. It
illustrates the sensitivity of the fair value of fixed-income
investments to selected hypothetical changes in interest rates
as of December 31, 2009 and December 31, 2008. The
selected scenarios are not predictions of future events, but
rather illustrate the effect that such events may have on the
fair value of our fixed-income portfolio and stockholders
equity.
Interest Rate Risk as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
Estimated
|
|
|
|
|
|
(Decrease) in
|
|
|
|
Change in
|
|
|
|
|
|
Portfolio
|
|
Hypothetical Change in Interest Rates
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Value
|
|
|
|
($ in thousands)
|
|
|
($ in thousands)
|
|
|
|
|
|
200 basis point increase
|
|
$
|
(55,839
|
)
|
|
$
|
570,769
|
|
|
|
(8.9
|
)%
|
100 basis point increase
|
|
|
(27,561
|
)
|
|
|
599,047
|
|
|
|
(4.4
|
)%
|
No change
|
|
|
|
|
|
|
626,608
|
|
|
|
|
|
100 basis point decrease
|
|
|
26,843
|
|
|
|
653,451
|
|
|
|
4.3
|
%
|
200 basis point decrease
|
|
|
52,970
|
|
|
|
679,578
|
|
|
|
8.5
|
%
|
82
Interest Rate Risk as of December 31, 2008:
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|
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|
|
|
|
|
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|
|
|
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|
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Hypothetical
|
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|
|
|
|
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|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
Estimated
|
|
|
|
|
|
(Decrease) in
|
|
|
|
Change in
|
|
|
|
|
|
Portfolio
|
|
Hypothetical Change in Interest Rates
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Value
|
|
|
|
($ in thousands)
|
|
|
($ in thousands)
|
|
|
|
|
|
200 basis point increase
|
|
$
|
(39,352
|
)
|
|
$
|
482,937
|
|
|
|
(7.5
|
)%
|
100 basis point increase
|
|
|
(19,662
|
)
|
|
|
502,627
|
|
|
|
(3.8
|
)%
|
No change
|
|
|
|
|
|
|
522,289
|
|
|
|
|
|
100 basis point decrease
|
|
|
19,635
|
|
|
|
541,924
|
|
|
|
3.8
|
%
|
200 basis point decrease
|
|
|
39,243
|
|
|
|
561,532
|
|
|
|
7.5
|
%
|
83
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
Index to
Financial Statements
|
|
|
|
|
|
|
Page
|
|
SeaBright Insurance Holdings, Inc. and Subsidiaries
Consolidated Financial Statements
|
|
|
|
|
|
|
|
85
|
|
|
|
|
86
|
|
|
|
|
87
|
|
|
|
|
88
|
|
|
|
|
89
|
|
|
|
|
90
|
|
84
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
SeaBright Insurance Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of
SeaBright Insurance Holdings, Inc. and subsidiaries (the
Company) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, changes in
stockholders equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
December 31, 2009. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of SeaBright Insurance Holdings, Inc. and subsidiaries
as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
SeaBright Insurance Holdings, Inc. and subsidiaries
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), and our report dated March 16, 2010
expressed an unqualified opinion on the effectiveness of
SeaBright Insurance Holdings, Inc and subsidiaries
internal control over financial reporting.
Seattle, Washington
March 16, 2010
85
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share and per share information)
|
|
|
ASSETS
|
Fixed income securities
available-for-sale,
at fair value (amortized cost $608,222 in 2009 and $523,892 in
2008)
|
|
$
|
626,608
|
|
|
$
|
522,289
|
|
Equity securities
available-for-sale,
at fair value (cost $11,333 in 2008)
|
|
|
|
|
|
|
8,856
|
|
Preferred stock available for sale, at fair value (cost $851 in
2008)
|
|
|
|
|
|
|
360
|
|
Cash and cash equivalents
|
|
|
12,896
|
|
|
|
22,872
|
|
Accrued investment income
|
|
|
6,734
|
|
|
|
6,054
|
|
Premiums receivable, net of allowance
|
|
|
14,477
|
|
|
|
16,374
|
|
Deferred premiums
|
|
|
182,239
|
|
|
|
163,322
|
|
Service income receivable
|
|
|
317
|
|
|
|
322
|
|
Reinsurance recoverables
|
|
|
34,339
|
|
|
|
18,544
|
|
Due from reinsurer
|
|
|
6,707
|
|
|
|
9,125
|
|
Receivable under adverse development cover
|
|
|
3,010
|
|
|
|
4,179
|
|
Prepaid reinsurance
|
|
|
6,760
|
|
|
|
1,619
|
|
Property and equipment, net
|
|
|
5,356
|
|
|
|
5,190
|
|
Federal income tax recoverable
|
|
|
4,774
|
|
|
|
1,671
|
|
Deferred income taxes, net
|
|
|
21,861
|
|
|
|
25,144
|
|
Deferred policy acquisition costs, net
|
|
|
25,537
|
|
|
|
23,175
|
|
Intangible assets, net
|
|
|
1,431
|
|
|
|
1,225
|
|
Goodwill
|
|
|
4,321
|
|
|
|
4,212
|
|
Other assets
|
|
|
7,494
|
|
|
|
8,154
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
964,861
|
|
|
$
|
842,687
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Unpaid loss and loss adjustment expense
|
|
$
|
351,496
|
|
|
$
|
292,027
|
|
Unearned premiums
|
|
|
175,766
|
|
|
|
155,931
|
|
Reinsurance funds withheld and balances payable
|
|
|
7,312
|
|
|
|
1,615
|
|
Premiums payable
|
|
|
4,786
|
|
|
|
6,783
|
|
Accrued expenses and other liabilities
|
|
|
54,028
|
|
|
|
49,518
|
|
Surplus notes
|
|
|
12,000
|
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
605,388
|
|
|
|
517,874
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Series A preferred stock, $0.01 par value;
750,000 shares authorized; no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Undesignated preferred stock, $0.01 par value;
10,000,000 shares authorized; no shares issued and
outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 75,000,000 shares
authorized; issued and outstanding
21,675,786 shares at December 31, 2009 and
21,392,854 shares at December 31, 2008
|
|
|
217
|
|
|
|
214
|
|
Paid-in capital
|
|
|
205,079
|
|
|
|
200,893
|
|
Accumulated other comprehensive income (loss)
|
|
|
12,927
|
|
|
|
(4,009
|
)
|
Retained earnings
|
|
|
141,250
|
|
|
|
127,715
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
359,473
|
|
|
|
324,813
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
964,861
|
|
|
$
|
842,687
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
86
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share and earnings per share
information)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
244,427
|
|
|
$
|
248,644
|
|
|
$
|
227,995
|
|
Claims service income
|
|
|
1,011
|
|
|
|
959
|
|
|
|
1,711
|
|
Other service income
|
|
|
207
|
|
|
|
246
|
|
|
|
148
|
|
Net investment income
|
|
|
23,132
|
|
|
|
22,605
|
|
|
|
20,307
|
|
Other-than-temporary
impairment losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses
|
|
|
(258
|
)
|
|
|
(13,405
|
)
|
|
|
|
|
Less portion of losses recognized in accumulated other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(258
|
)
|
|
|
(13,405
|
)
|
|
|
|
|
Other net realized losses recognized in earnings
|
|
|
(171
|
)
|
|
|
(476
|
)
|
|
|
(105
|
)
|
Other income
|
|
|
8,132
|
|
|
|
8,689
|
|
|
|
4,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
276,480
|
|
|
|
267,262
|
|
|
|
254,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses
|
|
|
172,169
|
|
|
|
141,935
|
|
|
|
128,185
|
|
Underwriting, acquisition and insurance expenses
|
|
|
73,044
|
|
|
|
71,169
|
|
|
|
58,932
|
|
Interest expense
|
|
|
599
|
|
|
|
867
|
|
|
|
1,139
|
|
Other expenses
|
|
|
14,082
|
|
|
|
11,150
|
|
|
|
7,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
259,894
|
|
|
|
225,121
|
|
|
|
196,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
16,586
|
|
|
|
42,141
|
|
|
|
58,396
|
|
Income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
5,805
|
|
|
|
20,031
|
|
|
|
23,762
|
|
Deferred
|
|
|
(2,754
|
)
|
|
|
(7,168
|
)
|
|
|
(5,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,051
|
|
|
|
12,863
|
|
|
|
18,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,535
|
|
|
$
|
29,278
|
|
|
$
|
39,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.65
|
|
|
$
|
1.43
|
|
|
$
|
1.96
|
|
Diluted earnings per share
|
|
$
|
0.63
|
|
|
$
|
1.38
|
|
|
$
|
1.90
|
|
Weighted average basic shares outstanding
|
|
|
20,702,572
|
|
|
|
20,498,305
|
|
|
|
20,341,931
|
|
Weighted average diluted shares outstanding
|
|
|
21,515,153
|
|
|
|
21,232,762
|
|
|
|
20,976,525
|
|
See accompanying notes to consolidated financial statements.
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid-in
|
|
|
Income
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
(Loss)
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2006
|
|
|
20,553
|
|
|
$
|
205
|
|
|
$
|
190,593
|
|
|
$
|
(197
|
)
|
|
$
|
58,525
|
|
|
$
|
249,126
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,912
|
|
|
|
39,912
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized losses recorded into
income, net of tax of $36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
69
|
|
Decrease in unrealized loss on investment securities
available-for-sale,
net of tax of $951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,766
|
|
|
|
|
|
|
|
1,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,747
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
3,010
|
|
|
|
|
|
|
|
|
|
|
|
3,010
|
|
Restricted stock grants
|
|
|
240
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Exercise of stock options, including tax benefit of $110
|
|
|
38
|
|
|
|
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
20,831
|
|
|
|
208
|
|
|
|
194,023
|
|
|
|
1,638
|
|
|
|
98,437
|
|
|
|
294,306
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,278
|
|
|
|
29,278
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized losses recorded into
income, net of tax of $4,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,089
|
|
|
|
|
|
|
|
9,089
|
|
Increase in unrealized loss on investment securities
available-for-sale,
net of tax benefit of $6,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,736
|
)
|
|
|
|
|
|
|
(14,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,631
|
|
Stock based compensation, net of taxes of $78
|
|
|
|
|
|
|
|
|
|
|
5,630
|
|
|
|
|
|
|
|
|
|
|
|
5,630
|
|
Restricted stock grants
|
|
|
428
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Exercise of stock options, including tax benefit of $148
|
|
|
134
|
|
|
|
2
|
|
|
|
1,240
|
|
|
|
|
|
|
|
|
|
|
|
1,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
21,393
|
|
|
|
214
|
|
|
|
200,893
|
|
|
|
(4,009
|
)
|
|
|
127,715
|
|
|
|
324,813
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,535
|
|
|
|
13,535
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized losses recorded into
income, net of tax of $150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
279
|
|
|
|
|
|
|
|
279
|
|
Increase in unrealized gain on investment securities
available-for-sale,
net of tax of $7,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,642
|
|
|
|
|
|
|
|
14,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,456
|
|
Stock based compensation, net of taxes of $192
|
|
|
|
|
|
|
|
|
|
|
4,611
|
|
|
|
|
|
|
|
|
|
|
|
4,611
|
|
Restricted stock grants
|
|
|
320
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Exercise of stock options, including tax benefit of $0
|
|
|
7
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
Tax effect of change in deferred tax asset valuation allowance
recorded in comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,015
|
|
|
|
|
|
|
|
2,015
|
|
Surrender of stock in connection with restricted stock vesting
|
|
|
(44
|
)
|
|
|
(1
|
)
|
|
|
(472
|
)
|
|
|
|
|
|
|
|
|
|
|
(473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
21,676
|
|
|
$
|
217
|
|
|
$
|
205,079
|
|
|
$
|
12,927
|
|
|
$
|
141,250
|
|
|
$
|
359,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
88
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,535
|
|
|
$
|
29,278
|
|
|
$
|
39,912
|
|
Adjustments to reconcile net income to cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs
|
|
|
44,653
|
|
|
|
43,631
|
|
|
|
36,481
|
|
Policy acquisition costs deferred
|
|
|
(47,015
|
)
|
|
|
(46,974
|
)
|
|
|
(40,880
|
)
|
Provision for depreciation and amortization
|
|
|
5,277
|
|
|
|
4,057
|
|
|
|
2,934
|
|
Compensation cost on restricted shares of common stock
|
|
|
4,117
|
|
|
|
4,720
|
|
|
|
2,312
|
|
Compensation cost on stock options
|
|
|
686
|
|
|
|
988
|
|
|
|
698
|
|
Net realized loss on investments
|
|
|
429
|
|
|
|
13,881
|
|
|
|
105
|
|
Benefit for deferred income taxes
|
|
|
(2,736
|
)
|
|
|
(7,168
|
)
|
|
|
(5,278
|
)
|
Changes in certain assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid loss and loss adjustment expense
|
|
|
59,469
|
|
|
|
41,943
|
|
|
|
51,729
|
|
Other assets and other liabilities
|
|
|
2,624
|
|
|
|
(1,156
|
)
|
|
|
194
|
|
Reinsurance recoverables, net of reinsurance withheld
|
|
|
(11,652
|
)
|
|
|
(1,383
|
)
|
|
|
2,465
|
|
Income taxes payable (recoverable)
|
|
|
(3,273
|
)
|
|
|
(2,375
|
)
|
|
|
3,636
|
|
Accrued investment income
|
|
|
(680
|
)
|
|
|
(999
|
)
|
|
|
(847
|
)
|
Unearned premiums, net of deferred premiums and premiums
receivable
|
|
|
2,816
|
|
|
|
(11,509
|
)
|
|
|
1,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
68,250
|
|
|
|
66,934
|
|
|
|
94,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities, net of effects of
acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(182,483
|
)
|
|
|
(144,538
|
)
|
|
|
(163,780
|
)
|
Sales of investments
|
|
|
54,934
|
|
|
|
19,373
|
|
|
|
24,160
|
|
Maturities and redemptions of investments
|
|
|
51,828
|
|
|
|
64,636
|
|
|
|
45,948
|
|
Payment for purchases of subsidiary net of cash acquired
|
|
|
|
|
|
|
(159
|
)
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,083
|
)
|
|
|
(4,911
|
)
|
|
|
(1,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(77,804
|
)
|
|
|
(65,599
|
)
|
|
|
(95,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
47
|
|
|
|
1,093
|
|
|
|
310
|
|
Excess tax benefit from disqualifying dispositions
|
|
|
|
|
|
|
148
|
|
|
|
110
|
|
Surrender of stock in connection with restricted stock vesting
|
|
|
(473
|
)
|
|
|
|
|
|
|
|
|
Proceeds from grants of restricted shares of common stock
|
|
|
4
|
|
|
|
4
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(422
|
)
|
|
|
1,245
|
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(9,976
|
)
|
|
|
2,580
|
|
|
|
(120
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
22,872
|
|
|
|
20,292
|
|
|
|
20,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
12,896
|
|
|
$
|
22,872
|
|
|
$
|
20,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income taxes paid
|
|
$
|
8,500
|
|
|
$
|
23,345
|
|
|
$
|
19,350
|
|
Interest paid on surplus notes
|
|
|
623
|
|
|
|
897
|
|
|
|
1,150
|
|
The Company purchased all of the capital stock of BWNV for $484
in 2008 and THM for $1,200 in 2007. In connection with the
acquisition, the following were assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
|
|
|
$
|
1,079
|
|
|
$
|
1,637
|
|
Cash paid for capital stock
|
|
|
|
|
|
|
(484
|
)
|
|
|
(1,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liabilities assumed
|
|
$
|
|
|
|
$
|
595
|
|
|
$
|
437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
89
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SeaBright Insurance Holdings, Inc. (SeaBright), a
Delaware corporation, was formed in June 2003. On July 14,
2003, SeaBright entered into a purchase agreement, effective
September 30, 2003, with Kemper Employers Group, Inc.
(KEG), Eagle Insurance Companies
(Eagle), and Lumbermens Mutual Casualty Company
(LMC), the ultimate owner of KEG and Eagle (the
Acquisition). Under this agreement, SeaBright
acquired Kemper Employers Insurance Company (KEIC),
PointSure Insurance Services, Inc. (PointSure), and
certain assets of Eagle, primarily renewal rights.
At the time of the Acquisition, KEIC was licensed to write
workers compensation insurance in 43 states and the
District of Columbia. Domiciled in the State of Illinois and
commercially domiciled in the State of California, it wrote both
state act workers compensation insurance and United States
Longshore and Harborworkers Compensation insurance
(USL&H). Prior to the Acquisition, beginning in
2000, KEIC wrote business only in California. In May 2002, KEIC
ceased writing business and by December 31, 2003, all
premiums related to business prior to the Acquisition were 100%
earned. As further discussed in Note 8.a., in connection
with the Acquisition, KEIC and LMC entered into an agreement
whereby LMC agreed to indemnify KEIC in the event of adverse
development of the reserves stated on KEICs balance sheet
at the Acquisition date, for a period of approximately eight
years. In addition, KEIC agreed to share with LMC any positive
development of those reserves. December 31, 2011 is the
date to which the parties will look to determine whether the
loss and loss adjustment expenses with respect to KEICs
insurance policies in effect at the date of the Acquisition have
increased or decreased from the amount existing at the date of
the Acquisition.
KEIC resumed writing business effective October 1, 2003,
primarily targeting policy renewals for former Eagle business in
the States of California, Hawaii and Alaska. In November 2003,
permission was granted by the Illinois Department of Insurance
for KEIC to change its name to SeaBright Insurance Company
(SBIC).
PointSure is engaged primarily in administrative and brokerage
activities. Eagle consists of Eagle Pacific Insurance Company,
Inc. and Pacific Eagle Insurance Company, Inc., both writers of
state act workers compensation insurance and USL&H
that are in run-off as of December 31, 2009.
On December 17, 2007, we completed the acquisition of Total
HealthCare Management, Inc. (THM), a privately held
California provider of medical bill review, utilization review,
nurse case management and related services. The total purchase
price was $1.5 million, of which $1.2 million was paid
at closing. The remaining $0.3 million was scheduled to be
paid in three equal installments on the first three
anniversaries of the closing date, provided that THM achieves
certain revenue objectives in 2008, 2009 and 2010. Based on
THMs performance in 2008 and 2009, the first two
installments have not been paid at this time. However, such
amount may be paid later if warranted by THMs future
performance. Goodwill recognized in connection with this
acquisition totaled approximately $1.4 million. Following
the acquisition, THM became a wholly owned subsidiary of
SeaBright.
In July 2008, PointSure acquired 100% of the outstanding common
stock of Black/White and Associates, Inc., Black/White and
Associates of Nevada and Black/White Rockridge Insurance
Services, Inc. (referred to collectively as BWNV), a
privately held managing general agent and wholesale insurance
broker. Also included in the transaction were a covenant not to
compete from key principals of BWNV and other intangible assets.
The preliminary purchase price paid at closing was
$1.7 million, of which $0.5 million was allocated to
the purchase of BWNV capital stock. The stock purchase agreement
provided for a contingent purchase price to be paid by (or
refunded to) the Company approximately 13 months following
the closing date, depending on whether BWNV revenue in the
12 months following closing exceeds (or is less than) the
base revenue assumed at the time of the closing. The Company
paid approximately $159,000 as additional purchase consideration
upon resolution of the contingency period in 2009. The Company
has recorded goodwill of approximately $0.5 million in
connection with this acquisition as of December 31, 2009.
90
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Summary
of Significant Accounting Policies
|
The accompanying consolidated financial statements include the
accounts of SeaBright and its wholly owned subsidiaries, SBIC,
PointSure, THM and BWNV (collectively, the Company).
All significant intercompany transactions among these affiliated
entities have been eliminated in consolidation.
The consolidated financial statements of the Company have been
prepared in accordance with U.S. generally accepted
accounting principles (GAAP) and include amounts
based on the best estimates and judgments of management. Such
estimates and judgments could change in the future, as more
information becomes known which could impact the amounts
reported and disclosed herein.
In accordance with ASC Topic 280, Segment Reporting
(formerly known as FAS 131, Disclosures about
Segments of an Enterprise and Related Information),
the Company considers an operating segment to be any component
of its business whose operating results are regularly reviewed
by the Companys chief operating decision maker to make
decisions about resources to be allocated to the segment and
assess its performance. Currently, the Company has one operating
segment, workers compensation insurance and related
services.
Certain reclassifications have been made to the prior year
financial statements to conform to classifications used in the
current year.
Investment securities are classified as
available-for-sale
and are carried at fair value. The estimated fair value of
investments in
available-for-sale
securities is generally based on quoted market prices for
securities traded in the public marketplace. If a quoted market
price is not available, fair value is generally estimated using
quoted market prices for similar securities.
The Company regularly reviews its investment portfolio to
evaluate the necessity of recording impairment losses for
other-than-temporary
declines in the fair value of its investments. A number of
criteria are considered during this process including, but not
limited to: whether the Company intends to sell the security;
the current fair value as compared to amortized cost or cost, as
appropriate, of the security; the length of time the
securitys fair value has been below amortized cost or
cost; the likelihood that the Company will be required to sell
the security before recovery of its cost basis; objective
information supporting recovery in a reasonable period of time;
specific credit issues related to the issuer; and current
economic conditions.
For debt securities that are considered OTTI and that the
Company does not intend to sell and more likely than not would
not be required to sell prior to recovery of the amortized cost
basis, the Company recognizes OTTI losses in accordance with the
provisions of the Codification. The amount of the OTTI loss is
separated into the amount that is credit related (credit loss
component) and the amount due to all other factors. The credit
loss component is recognized in earnings and is the difference
between a securitys amortized cost basis and the present
value of expected future cash flows discounted at the
securitys effective interest rate. The amount due to all
other factors is recognized in other comprehensive income. For
the year ended December 31, 2009, the Company recognized no
OTTI losses related to debt securities.
In general, the Company reviews all securities that are impaired
by 5% or more at the end of the period. For securities with no
stated maturity date, the review focuses on securities that were
impaired by 20% or more at the end of the period or had been
impaired 10% or more continuously for six months or longer as of
the end of the period. The Company also analyzes the entire
portfolio for other factors that might indicate a risk of
impairment, including credit ratings, liquidity of the issuer
and interest rates.
Other-than-temporary
impairment losses result in a permanent reduction of the
carrying amount of the underlying investment. Significant
changes in the factors considered when evaluating investments
for impairment losses could result in a significant change in
impairment losses reported in the consolidated financial
statements.
91
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Mortgage-backed securities represent participating interests in
pools of first mortgage loans originated and serviced by the
issuers of securities. These securities are carried at fair
value. Premiums and discounts are amortized using a method that
approximates the level yield method over the remaining period to
contractual maturity, adjusted for anticipated prepayments. To
the extent that the estimated lives of such securities change as
a result of changes in prepayment rates, the adjustment is also
included in net investment income. Prepayment assumptions used
for mortgage-backed and asset-backed securities were obtained
from an external securities information service and are
consistent with the current interest rate and economic
environment.
The fair value of the Companys investment portfolio
increased significantly in 2009 from the balance at
December 31, 2008, which was negatively impacted by
unprecedented events in the capital and credit markets that
resulted in extreme volatility and disruption of the
worlds financial markets. Several factors contributed to
the decrease in fair values of the Companys investment
portfolio in 2008 including the tightening/freezing of credit
markets, significant failures of large financial institutions,
uncertainty regarding the effectiveness of governmental
solutions, as well as the current recession. Despite the
significant improvement in the value of the Companys
investment portfolio in 2009, it is possible that the Company
could recognize future impairment losses on some securities it
owned at December 31, 2009 if future events, information
and the passage of time result in a determination that a decline
in value is
other-than-temporary.
Investment income is recorded when earned. For the purpose of
determining realized gains and losses, which arise principally
from the sale of investments, the cost of securities sold is
based on specific-identification as of the trade date.
|
|
c.
|
Cash
and Cash Equivalents
|
Cash and cash equivalents, which consist primarily of amounts
deposited in banks and financial institutions, and all highly
liquid investments with maturities of 90 days or less when
purchased, are stated at cost. Cash in excess of daily
requirements is invested in money market funds and repurchase
agreements with maturities of 90 days or less. Such
investments are deemed to be cash equivalents for purposes of
the consolidated balance sheets and statements of cash flows.
The Company had $12.9 million and $22.9 million of
cash and cash equivalents at December 31, 2009 and 2008,
respectively.
The preparation of the consolidated financial statements in
conformity with GAAP requires management of the Company to make
a number of estimates and assumptions relating to the reported
amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the period. Actual results could
differ from those estimates. The Company has used significant
estimates in determining unpaid loss and loss adjustment
expenses, including losses that have occurred but were not
reported to us by the financial reporting date; the amount and
recoverability of reinsurance recoverable balances; goodwill and
other intangibles; retrospective premiums; earned but unbilled
premiums; deferred policy acquisition costs; income taxes; and
the valuation and
other-than-temporary
impairments of investment securities.
Premiums receivable are recorded at the invoiced amount as they
are earned over the life of the contract in proportion to the
amount of insurance protection provided. The allowance for
doubtful accounts, which represents the Companys best
estimate of the amount of uncollectible premium in the
Companys existing premiums receivable balance, is based on
historical account write-offs and takes into consideration the
current economic environment. Account balances are charged off
against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote.
92
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
f.
|
Deferred
Policy Acquisition Costs
|
Acquisition costs related to premiums written are deferred and
amortized over the periods in which the premiums are earned.
Such acquisition costs vary with and are primarily related to
the acquisition of insurance contracts and include commissions,
premium taxes, and certain underwriting and policy issuance
costs. Deferred policy acquisition costs are limited to amounts
recoverable from unearned premiums and anticipated investment
income.
|
|
g.
|
Property
and Equipment
|
Furniture and equipment are recorded at cost and depreciated
using the straight-line method over their estimated useful
lives, which range from three to five years. Leasehold
improvements are depreciated on a straight-line basis over
periods ranging from approximately two to seven years, which is
the shorter of their estimated useful lives or the remaining
term of the respective lease. Depreciation expense totaled
$1.9 million, $1.4 million and $1.0 million for
the years ended December 31, 2009, 2008, and 2007,
respectively.
|
|
h.
|
Goodwill
and Other Intangible Assets
|
Goodwill balances are reviewed for impairment at least annually
or more frequently if events occur or circumstances change that
would more likely than not reduce the fair value of the
reporting unit below its carrying value. A reporting unit is
defined as an operating segment or one level below an operating
segment.
The goodwill impairment test follows a two step process. In the
first step, the fair value of a reporting unit is compared to
its carrying value. If the carrying value of a reporting unit
exceeds its fair value, the second step of the impairment test
is performed for purposes of measuring the impairment. In the
second step, the fair value of the reporting unit is allocated
to all of the assets and liabilities of the reporting unit to
determine an implied goodwill value. If the carrying amount of
the reporting unit goodwill exceeds the implied goodwill value,
an impairment loss would be recognized in an amount equal to
that excess, and the charge could have a material adverse effect
on the Companys results of operations and financial
position.
Managements determination of the fair value of each
reporting unit incorporates multiple inputs including discounted
cash flow calculations, the level of the Companys own
share price and assumptions that market participants would make
in valuing the reporting unit. Other assumptions include levels
of economic capital, future business growth, earnings
projections, assets under management for reporting units and the
discount rate utilized.
Premiums for primary and reinsured risks are included in revenue
over the life of the contract in proportion to the amount of
insurance protection provided (i.e., ratably over the policy
period). The portion of the premium that is applicable to the
unexpired period of a policy in-force is not included in revenue
but is deferred and recorded as unearned premium in the
liability section of the balance sheet. Deferred premiums
represent the unbilled portion of annual premiums.
Earned premiums on retrospectively rated policies are based on
the Companys estimate of loss experience as of the
measurement date. Loss experience includes known losses
specifically identifiable to a retrospective policy as well as
provisions for future development on known losses and for losses
incurred but not yet reported using actuarial loss development
factors and is consistent with how the Company projects losses
in general. For retrospectively rated policies, the governing
contractual minimum and maximum rates are established at policy
inception and are made a part of the insurance contract. While
the typical retrospectively rated policy has five annual
adjustment or measurement periods, premium adjustments continue
until mutual agreement to cease future adjustments is reached
with the policyholder. For the years ended
93
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2009, 2008 and 2007, approximately 7.2%, 10.7%
and 11.9%, respectively, of direct premiums written related to
retrospectively rated policies.
The Company estimates the amount of premiums that have been
earned but are unbilled at the end of the period by analyzing
historical earned premium adjustments made at final audit and
applying an adjustment percentage against premiums earned for
the period. Final audit adjustments may result in increasing or
decreasing the estimated premium earned and billed to date.
Included in deferred premiums at December 31, 2009, 2008
and 2007 and premiums earned for the years then ended were
accruals for earned but unbilled premiums of ($132,000),
($611,000) and $44,000, respectively.
Service income generated from various underwriting and claims
service agreements with third parties is recognized as income in
the period in which services are performed.
|
|
j.
|
Unpaid
Loss and Loss Adjustment Expense
|
Unpaid loss and loss adjustment expense represents an estimate
of the ultimate net cost of all unpaid losses incurred through
the specified period. Loss adjustment expenses are estimates of
unpaid expenses to be incurred in settlement of the claims
included in the liability for unpaid losses. These liabilities,
which anticipate salvage and subrogation recoveries and are
presented gross of amounts recoverable from reinsurers, include
estimates of future trends in claim severity and frequency and
other factors that could vary as the losses are ultimately
settled. Liabilities for unpaid loss and loss adjustment
expenses are not discounted to account for the time value of
money.
In light of the Companys short operating history, and
uncertainties concerning the effects of legislative reform
specifically as it relates to the Companys California
workers compensation class of business, actuarial techniques are
applied that use the historical experience of the Companys
predecessor as well as industry information in the analysis of
unpaid loss and loss adjustment expense. These techniques
recognize, among other factors:
|
|
|
|
|
the Companys claims experience and that of its predecessor;
|
|
|
|
the industrys claims experience;
|
|
|
|
historical trends in reserving patterns and loss payments;
|
|
|
|
the impact of claim inflation
and/or
deflation;
|
|
|
|
the pending level of unpaid claims;
|
|
|
|
the cost of claim settlements;
|
|
|
|
legislative reforms affecting workers compensation,
including pricing levels;
|
|
|
|
the environment in which insurance companies operate; and
|
|
|
|
trends in claim frequency and severity.
|
Although it is not possible to measure the degree of variability
inherent in such estimates, management believes that the
liability for unpaid loss and loss adjustment expense is
reasonable. The estimates are reviewed periodically and any
necessary adjustments are included in the results of operations
of the period in which the adjustment is determined.
The Company protects itself from excessive losses by reinsuring
certain levels of risk in various areas of exposure with
nonaffiliated reinsurers. Regardless of type, reinsurance does
not legally discharge the ceding insurer from primary liability
for the full amount due under the reinsured policies.
Reinsurance premiums,
94
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
commissions, expense reimbursements and reserves related to
ceded business are accounted for on a basis consistent with the
accounting for the original policies issued and the terms of
reinsurance contracts. The unpaid loss and loss adjustment
expense subject to the adverse development cover with LMC is
calculated on a quarterly basis using generally accepted
actuarial methodologies for estimating unpaid loss and loss
adjustment expense liabilities, including incurred loss and paid
loss development methods. The minimum amount that must be
maintained in the trust account is equal to the greater of
(a) $1.6 million or (b) 102% of the then existing
quarterly estimate of LMCs total obligations under the
adverse development cover. At December 31, 2009, the
liability of LMC under the adverse development cover was
approximately $3.0 million. The balance of the trust
account, including accumulated interest, at December 31,
2009 was $3.8 million. Amounts recoverable in excess of
acquired reserves at September 30, 2003 are recorded gross
in unpaid loss and loss adjustment expense in accordance with
ASC Topic 805, Business Combinations (formerly known as
FAS 141(R), Business Combinations), with
a corresponding amount receivable from the seller. Amounts are
shown net in the statements of operations. Premiums ceded to
other companies are reported as a reduction of premiums written
and earned. Reinsurance recoverables are determined based on the
terms and conditions of the reinsurance contracts.
Balances due from reinsurers on unpaid loss and loss adjustment
expenses, including an estimate of such recoverables related to
reserves for IBNR losses, are reported as assets and are
included in reinsurance recoverables even though amounts due on
unpaid loss and loss adjustment expenses are not recoverable
from the reinsurer until such losses are paid. The Company
monitors the financial condition of its reinsurers and does not
believe that it is currently exposed to any material credit risk
through its reinsurance treaties because most of its reinsurance
is recoverable from large, well-capitalized reinsurance
companies. Historically, no amounts from reinsurers have been
written-off as uncollectible.
The Company uses the asset and liability method of accounting
for income taxes. Under this method, 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 bases and operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities are measured
using 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 the income
statement in the period that includes the enactment date.
In assessing the realizability 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. This
analysis requires the Company to make various estimates and
assumptions, including the scheduled reversal of deferred tax
liabilities, the consideration of operating versus capital
items, projected future taxable income and the effect of tax
planning strategies. Based on this analysis, the Company may be
required to establish a valuation allowance to reduce the
deferred tax assets to the amounts more likely than not to be
realized.
As of December 31, 2009 and 2008, the Company had no
unrecognized tax benefits. The Companys policy is to
recognize interest and penalties on unrecognized tax benefits as
an element of income tax expense (benefit) in the consolidated
statements of operations. The Company files consolidated
U.S. federal and state income tax returns. The tax years
which remain subject to examination by the taxing authorities
are the years ended December 31, 2006, 2007, 2008 and 2009.
95
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides the reconciliation of weighted
average common share equivalents outstanding used in calculating
earnings per share for the years ended December 31, 2009,
2008, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Basic weighted average shares outstanding
|
|
|
20,702,572
|
|
|
|
20,498,305
|
|
|
|
20,341,931
|
|
Weighted average shares issuable upon exercise of outstanding
stock options and vesting of nonvested restricted stock
|
|
|
812,581
|
|
|
|
734,457
|
|
|
|
634,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
21,515,153
|
|
|
|
21,232,762
|
|
|
|
20,976,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n.
|
Recent
Accounting Pronouncements
|
In January 2009, the FASB issued FSP
EITF 99-20-1,
Amendments to the Impairment Guidance of EITF Issue
No. 99-20,
(FSP
EITF 99-20-1)
which amends FASB Emerging Issues Task Force (EITF)
No. 99-20,
Recognition of Interest Income and Impairment on Purchased
Beneficial Interest and Beneficial Interests That Continue to Be
Held by a Transferor or in Securitized Financial Assets,
(EITF 99-20)
to align the impairment guidance in
EITF 99-20
with the impairment guidance and related implementation guidance
in SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. The provisions of FSP
EITF 99-20-1
are effective for reporting periods ending after
December 15, 2008. The adoption of FSP
EITF 99-20-1
did not have a material impact on our results of operations or
financial position.
In April 2009, the FASB issued FSP
FAS 115-2
and
FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary
Impairments (FSP
FAS 115-2/124-2).
FSP
FAS 115-2/124-2
requires entities to separate an
other-than-temporary
impairment of a debt security into two components when there are
credit related losses associated with the impaired debt security
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 its cost
basis. The amount of the
other-than-temporary
impairment related to a credit loss is recognized in earnings,
and the amount of the
other-than-temporary
impairment related to other factors is recorded in other
comprehensive loss. FSP
FAS 115-2/124-2
is effective for periods ending after June 15, 2009. The
Company adopted the provisions of FSP
FAS 115-2/124-2
in the quarter ended June 30, 2009. There were no
impairments previously recognized on debt securities we owned at
December 31, 2008 and therefore, there was no cumulative
effect adjustment to retained earnings and other comprehensive
income (loss) as a result of adopting this standard. There were
no impairments recognized on debt securities in the year ended
December 31, 2009 and therefore, the adoption of FSP
FAS 115-2/124-2
had no effect on the Companys consolidated financial
condition or results of operations.
In April 2009, the FASB issued FSP
FAS 157-4,
Determining Fair Value When Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions that are Not Orderly
(FSP
FAS 157-4).
Under FSP
FAS 157-4,
if an entity determines that there has been a significant
decrease in the volume and level of activity for an asset or
liability in relation to the normal market activity for the
asset or liability (or similar assets or liabilities), then
transactions or quoted prices may not accurately reflect fair
value. In addition, if there is evidence that the transaction
for the asset or liability is not orderly, the entity shall
place little, if any, weight on that transaction price as an
indicator of fair value. FSP
FAS 157-4
is effective for periods ending after June 15, 2009. The
Company adopted FSP
FAS 157-4
in the quarter ended June 30, 2009, which did not have a
material effect on the Companys consolidated financial
condition and results of operations.
In April 2009, the FASB issued FSP
FAS 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial
Instruments (FSP
FAS 107-1
and APB
28-1).
FSP
FAS 107-1
and APB 28-1
requires disclosures
96
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
about the fair value of financial instruments in interim and
annual financial statements. FSP
FAS 107-1
and APB 28-1
is effective for periods ending after June 15, 2009. The
Company adopted FSP
FAS 107-1
and APB 28-1
in the quarter ended June 30, 2009. Because FSP
FAS 107-1
and APB 28-1
amends only the disclosure requirements related to the fair
value of financial instruments, adoption of
FSP 107-1
and APB 28-1
did not affect the Companys consolidated financial
condition and results of operations.
In May 2009, the FASB issued FAS No. 165,
Subsequent Events (FAS 165).
FAS 165 establishes general standards of accounting for and
disclosures of events that occur after the balance sheet date
but before financial statements are issued or available to be
issued. FAS 165 is effective for periods ending after
June 15, 2009. The Company adopted FAS 165 in the
quarter ended June 30, 2009, which did not have a material
effect on the Companys consolidated financial condition
and results of operations.
In June 2009, the Financial Accounting Standards Board
(FASB) issued FASB Statement of Financial Accounting
Standards (SFAS) No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles (SFAS 168).
SFAS 168 identifies the sources of accounting principles
and the framework for selecting the principles used in preparing
the financial statements of nongovernmental entities that are
presented in conformity with U.S. GAAP. SFAS 168
further identifies the FASB Accounting Standards Codification
(the Codification) as the source of authoritative
GAAP recognized by the FASB to be applied by nongovernmental
entities. The Codification does not change existing
U.S. GAAP authoritative literature in place as of
July 1, 2009. SFAS 168 is effective for financial
statements issued for interim and annual periods ending after
September 15, 2009. The Company adopted SFAS 168 as of
September 30, 2009, which did not have a material effect on
the Companys consolidated financial condition or results
of operations.
97
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The consolidated cost or amortized cost, gross unrealized gains
and losses, estimated fair value and carrying value of
investment securities
available-for-sale
at December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Carrying
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
19,212
|
|
|
$
|
433
|
|
|
$
|
(253
|
)
|
|
$
|
19,392
|
|
|
$
|
19,392
|
|
Government sponsored agency securities
|
|
|
28,720
|
|
|
|
1,047
|
|
|
|
(145
|
)
|
|
|
29,622
|
|
|
|
29,622
|
|
Corporate securities
|
|
|
97,135
|
|
|
|
3,117
|
|
|
|
(495
|
)
|
|
|
99,757
|
|
|
|
99,757
|
|
Tax-exempt municipal securities
|
|
|
330,855
|
|
|
|
11,595
|
|
|
|
(815
|
)
|
|
|
341,635
|
|
|
|
341,635
|
|
Mortgage pass-through securities
|
|
|
74,678
|
|
|
|
3,688
|
|
|
|
(72
|
)
|
|
|
78,294
|
|
|
|
78,294
|
|
Collateralized mortgage obligations
|
|
|
15,260
|
|
|
|
104
|
|
|
|
(142
|
)
|
|
|
15,222
|
|
|
|
15,222
|
|
Asset-backed securities
|
|
|
42,362
|
|
|
|
616
|
|
|
|
(292
|
)
|
|
|
42,686
|
|
|
|
42,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
$
|
608,222
|
|
|
$
|
20,600
|
|
|
$
|
(2,214
|
)
|
|
$
|
626,608
|
|
|
$
|
626,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
10,817
|
|
|
$
|
978
|
|
|
$
|
|
|
|
$
|
11,795
|
|
|
$
|
11,795
|
|
Government sponsored agency securities
|
|
|
23,361
|
|
|
|
1,597
|
|
|
|
(2
|
)
|
|
|
24,956
|
|
|
|
24,956
|
|
Corporate securities
|
|
|
56,951
|
|
|
|
1,024
|
|
|
|
(1,482
|
)
|
|
|
56,493
|
|
|
|
56,493
|
|
Tax-exempt municipal securities
|
|
|
289,989
|
|
|
|
5,008
|
|
|
|
(5,883
|
)
|
|
|
289,114
|
|
|
|
289,114
|
|
Mortgage pass-through securities
|
|
|
88,587
|
|
|
|
3,179
|
|
|
|
(1
|
)
|
|
|
91,765
|
|
|
|
91,765
|
|
Collateralized mortgage obligations
|
|
|
3,585
|
|
|
|
41
|
|
|
|
(201
|
)
|
|
|
3,425
|
|
|
|
3,425
|
|
Asset-backed securities
|
|
|
50,602
|
|
|
|
|
|
|
|
(5,861
|
)
|
|
|
44,741
|
|
|
|
44,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
523,892
|
|
|
|
11,827
|
|
|
|
(13,430
|
)
|
|
|
522,289
|
|
|
|
522,289
|
|
Equity securities
|
|
|
11,333
|
|
|
|
|
|
|
|
(2,477
|
)
|
|
|
8,856
|
|
|
|
8,856
|
|
Preferred stocks
|
|
|
851
|
|
|
|
|
|
|
|
(491
|
)
|
|
|
360
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
$
|
536,076
|
|
|
$
|
11,827
|
|
|
$
|
(16,398
|
)
|
|
$
|
531,505
|
|
|
$
|
531,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Equity securities at December 31, 2008 consisted of
investments in exchange traded funds designed to correspond to
the performance of certain indexes based on domestic or
international stocks. The following tables present information
about investment securities with unrealized losses at
December 31, 2009 and 2008.
Unrealized losses at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Aggregate
|
|
|
|
Aggregate
|
|
|
Unrealized
|
|
|
Aggregate
|
|
|
Unrealized
|
|
|
Aggregate
|
|
|
Unrealized
|
|
Investment Category
|
|
Fair Value
|
|
|
Loss
|
|
|
Fair Value
|
|
|
Loss
|
|
|
Fair Value
|
|
|
Loss
|
|
|
|
(In thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasuries Securities
|
|
$
|
7,737
|
|
|
$
|
(253
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,737
|
|
|
$
|
(253
|
)
|
Government sponsored agency securities(1)
|
|
|
8,584
|
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
8,584
|
|
|
|
(145
|
)
|
Corporate securities
|
|
|
27,001
|
|
|
|
(495
|
)
|
|
|
|
|
|
|
|
|
|
|
27,001
|
|
|
|
(495
|
)
|
Tax-exempt municipal securities
|
|
|
39,249
|
|
|
|
(416
|
)
|
|
|
9,459
|
|
|
|
(399
|
)
|
|
|
48,708
|
|
|
|
(815
|
)
|
Mortgage pass-through securities
|
|
|
5,890
|
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
5,890
|
|
|
|
(72
|
)
|
Collateralized mortgage obligations
|
|
|
2,960
|
|
|
|
(43
|
)
|
|
|
624
|
|
|
|
(99
|
)
|
|
|
3,584
|
|
|
|
(142
|
)
|
Asset-backed securities
|
|
|
11,253
|
|
|
|
(131
|
)
|
|
|
3,847
|
|
|
|
(161
|
)
|
|
|
15,100
|
|
|
|
(292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
102,674
|
|
|
$
|
(1,555
|
)
|
|
$
|
13,930
|
|
|
$
|
(659
|
)
|
|
$
|
116,604
|
|
|
$
|
(2,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Government sponsored agency securities are not backed by the
full faith and credit of the U.S. Government. |
Unrealized losses at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Aggregate
|
|
|
|
Aggregate
|
|
|
Unrealized
|
|
|
Aggregate
|
|
|
Unrealized
|
|
|
Aggregate
|
|
|
Unrealized
|
|
Investment Category
|
|
Fair Value
|
|
|
Loss
|
|
|
Fair Value
|
|
|
Loss
|
|
|
Fair Value
|
|
|
Loss
|
|
|
|
(In thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agency securities(1)
|
|
$
|
258
|
|
|
$
|
(2
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
258
|
|
|
$
|
(2
|
)
|
Corporate securities
|
|
|
23,275
|
|
|
|
(1,249
|
)
|
|
|
4,105
|
|
|
|
(233
|
)
|
|
|
27,380
|
|
|
|
(1,482
|
)
|
Tax-exempt municipal securities
|
|
|
59,907
|
|
|
|
(2,578
|
)
|
|
|
46,961
|
|
|
|
(3,305
|
)
|
|
|
106,868
|
|
|
|
(5,883
|
)
|
Mortgage pass-through securities
|
|
|
325
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
325
|
|
|
|
(1
|
)
|
Collateralized mortgage obligations
|
|
|
1,561
|
|
|
|
(67
|
)
|
|
|
116
|
|
|
|
(134
|
)
|
|
|
1,677
|
|
|
|
(201
|
)
|
Asset-backed securities
|
|
|
29,351
|
|
|
|
(2,652
|
)
|
|
|
15,391
|
|
|
|
(3,209
|
)
|
|
|
44,742
|
|
|
|
(5,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
114,677
|
|
|
|
(6,549
|
)
|
|
|
66,573
|
|
|
|
(6,881
|
)
|
|
|
181,250
|
|
|
|
(13,430
|
)
|
Equity securities
|
|
|
8,856
|
|
|
|
(2,477
|
)
|
|
|
|
|
|
|
|
|
|
|
8,856
|
|
|
|
(2,477
|
)
|
Preferred stock
|
|
|
360
|
|
|
|
(491
|
)
|
|
|
|
|
|
|
|
|
|
|
360
|
|
|
|
(491
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
123,893
|
|
|
$
|
(9,517
|
)
|
|
$
|
66,573
|
|
|
$
|
(6,881
|
)
|
|
$
|
190,466
|
|
|
$
|
(16,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Of the $13.9 million of securities with unrealized losses
of 12 months or longer at December 31, 2009 in the
above table, two securities with a combined fair value of
$1.5 million had fair values that were less than 90% of the
securities amortized cost. The combined unrealized loss on
those securities is $0.3 million.
For debt securities that are considered
other-than-temporarily
impaired (OTTI) and that the Company does not intend
to sell and more likely than not would not be required to sell
prior to recovery of the amortized cost basis, the Company
recognizes OTTI losses in accordance with the provisions of the
Codification. The amount of the OTTI loss is separated into the
amount that is credit related (credit loss component) and the
amount due to all other factors. The credit loss component is
recognized in earnings and is the difference between a
securitys amortized cost basis and the present value of
expected future cash flows discounted at the securitys
effective interest rate. The amount due to all other factors is
recognized in other comprehensive income. Approximately
$0.7 million of the total unrealized losses at
December 31, 2009 were from debt securities that had been
impaired for one year or longer. Included in these securities
was one security which had an unrealized loss that exceeded 20%
of the related securitys book value at December 31,
2009. As of December 31, 2009, all payments were current on
these debt securities and the Company expects to fully recover
its investment in these securities no later than their scheduled
maturities. The Company has no current intent to sell these
securities nor is it more likely than not that the Company would
be required to sell these securities. Therefore, based on
managements review of the financial strength of these debt
securities and the Companys expectation regarding future
receipt of principal and interest, management concluded these
debt securities were temporarily impaired as of
December 31, 2009. For the year ended December 31,
2009, the Company recognized no OTTI losses related to debt
securities.
For the year ended December 31, 2009, the Company
recognized OTTI losses of $0.3 million related to its
investment in preferred stock issued by Fannie Mae and Freddie
Mac. In 2008, the Company recognized OTTI losses of
approximately $10.2 million on its investments in preferred
stocks (nearly all of which were government-sponsored agency
fixed and variable preferred stocks) and approximately
$3.2 million on its investment in equity indexed securities
exchange-traded funds. No
other-than-temporary
declines in the fair value of the Companys securities were
recorded in 2007.
Significant changes in the factors considered when evaluating
investments for impairment losses could result in a significant
change in impairment losses reported in the financial
statements. At December 31, 2009 and 2008, the Company
evaluated investment securities with fair values less than
amortized cost and determined that the declines in value were
temporary and were related primarily to the change in market
rates since purchase or to other market anomalies that are
expected to correct themselves. Furthermore, the Company has the
ability and intent to hold the impaired investments to maturity
or for a period of time sufficient for recovery of their
carrying amount.
The Company had no direct
sub-prime
mortgage exposure in its investment portfolio as of
December 31, 2009 and less than $5.4 million of
indirect exposure to
sub-prime
mortgages. The following table provides a
100
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
breakdown of fair value by ratings on the bonds in the
Companys municipal portfolio as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uninsured
|
|
|
Total Municipal
|
|
|
|
Insured Bonds
|
|
|
Bonds
|
|
|
Portfolio Based on
|
|
|
|
Insured
|
|
|
Underlying
|
|
|
|
|
|
Overall
|
|
|
Underlying
|
|
Rating
|
|
Ratings
|
|
|
Ratings
|
|
|
Ratings
|
|
|
Ratings(1)
|
|
|
Ratings
|
|
|
|
(In thousands)
|
|
|
AAA
|
|
$
|
11,320
|
|
|
$
|
11,320
|
|
|
$
|
16,846
|
|
|
$
|
28,166
|
|
|
$
|
28,166
|
|
AA+
|
|
|
22,712
|
|
|
|
15,327
|
|
|
|
34,946
|
|
|
|
57,658
|
|
|
|
50,273
|
|
AA
|
|
|
39,746
|
|
|
|
19,263
|
|
|
|
33,042
|
|
|
|
72,788
|
|
|
|
52,305
|
|
AA−
|
|
|
58,193
|
|
|
|
45,126
|
|
|
|
15,215
|
|
|
|
73,408
|
|
|
|
60,341
|
|
A+
|
|
|
33,837
|
|
|
|
44,656
|
|
|
|
10,001
|
|
|
|
43,838
|
|
|
|
54,657
|
|
A
|
|
|
13,142
|
|
|
|
32,651
|
|
|
|
4,255
|
|
|
|
17,397
|
|
|
|
36,906
|
|
A−
|
|
|
7,373
|
|
|
|
16,818
|
|
|
|
524
|
|
|
|
7,897
|
|
|
|
17,342
|
|
BBB+
|
|
|
|
|
|
|
1,162
|
|
|
|
5,411
|
|
|
|
5,411
|
|
|
|
6,573
|
|
BB−
|
|
|
|
|
|
|
|
|
|
|
1,339
|
|
|
|
1,339
|
|
|
|
1,339
|
|
Pre-refunded(2)
|
|
|
24,656
|
|
|
|
24,656
|
|
|
|
10,736
|
|
|
|
35,392
|
|
|
|
35,392
|
|
Not rated
|
|
|
1,330
|
|
|
|
1,330
|
|
|
|
|
|
|
|
1,330
|
|
|
|
1,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
212,309
|
|
|
$
|
212,309
|
|
|
$
|
132,315
|
|
|
$
|
344,624
|
|
|
$
|
344,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents insured ratings on insured bonds and ratings on
uninsured bonds. |
|
(2) |
|
These bonds have been pre-refunded by depositing highly rated
government-issued securities into irrevocable trust funds
established for payment of principal and interest. |
As of December 31, 2009, we had no direct investments in
any bond insurer, and the following three bond insurers insured
more than 10% of the municipal bond investments in our portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Insurer Ratings
|
|
|
Underlying
|
|
Bond Insurer
|
|
Fair Value
|
|
|
S&P
|
|
|
Moodys
|
|
|
Bond Rating
|
|
|
|
(Millions)
|
|
|
|
|
|
|
|
|
|
|
|
National Public Finance Guarantee Corporation
|
|
$
|
96.2
|
|
|
|
A
|
|
|
|
Baa1
|
|
|
|
AA−/A+
|
|
Financial Security Assurance Inc.
|
|
|
45.7
|
|
|
|
AAA
|
|
|
|
Aa3
|
|
|
|
A+
|
|
Ambac Assurance Corp.
|
|
|
42.1
|
|
|
|
CC
|
|
|
|
Caa2
|
|
|
|
AA−/A+
|
|
We do not expect a material impact to our investment portfolio
or financial position as a result of the problems currently
facing monoline bond insurers.
101
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amortized cost and estimated fair value of fixed income
securities
available-for-sale
at December 31, 2009, by contractual maturity, are set
forth below. Actual maturities may differ from contractual
maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Estimated
|
|
Maturity
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Due in one year or less
|
|
$
|
26,086
|
|
|
$
|
26,421
|
|
Due after one year through five years
|
|
|
182,947
|
|
|
|
191,065
|
|
Due after five years through ten years
|
|
|
241,747
|
|
|
|
247,224
|
|
Due after ten years
|
|
|
25,142
|
|
|
|
25,696
|
|
Securities not due at a single maturity date
|
|
|
132,300
|
|
|
|
136,202
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
$
|
608,222
|
|
|
$
|
626,608
|
|
|
|
|
|
|
|
|
|
|
The consolidated amortized cost of fixed income securities
available-for-sale
deposited with various regulatory authorities was
$205.8 million and $203.6 million at December 31,
2009 and 2008, respectively.
Major categories of consolidated net investment income are
summarized as follows for the years ended December 31,
2009, 2008, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Fixed income securities
|
|
$
|
23,696
|
|
|
$
|
21,921
|
|
|
$
|
19,307
|
|
Equity securities
|
|
|
161
|
|
|
|
384
|
|
|
|
65
|
|
Preferred stock
|
|
|
|
|
|
|
423
|
|
|
|
210
|
|
Cash and short-term investments
|
|
|
157
|
|
|
|
644
|
|
|
|
1,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross investment income
|
|
|
24,014
|
|
|
|
23,372
|
|
|
|
20,985
|
|
Less investment expenses
|
|
|
(882
|
)
|
|
|
(767
|
)
|
|
|
(678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
23,132
|
|
|
$
|
22,605
|
|
|
$
|
20,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sales of fixed income and equity securities,
related realized gains and losses and changes in unrealized
gains (losses), excluding
other-than-temporary
impairments, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
Realized
|
|
|
Realized
|
|
|
Unrealized
|
|
|
|
Proceeds
|
|
|
Gains
|
|
|
Losses
|
|
|
Gains (Losses)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities and preferred stock
|
|
$
|
95,976
|
|
|
$
|
737
|
|
|
$
|
(361
|
)
|
|
$
|
20,480
|
|
Equity securities
|
|
|
10,786
|
|
|
|
|
|
|
|
(547
|
)
|
|
|
2,477
|
|
Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities and preferred stock
|
|
$
|
84,009
|
|
|
$
|
59
|
|
|
$
|
(535
|
)
|
|
$
|
(4,722
|
)
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,369
|
)
|
Year Ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities and preferred stock
|
|
$
|
70,108
|
|
|
$
|
30
|
|
|
$
|
(135
|
)
|
|
$
|
2,941
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(119
|
)
|
102
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Fair
Value of Financial Instruments
|
Estimated fair value amounts, defined as the exit price of
willing market participants, have been determined using
available market information and other appropriate valuation
methodologies. However, considerable judgment is required in
developing the estimates of fair value. Accordingly, these
estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange. The use of
different market assumptions or estimating methodologies may
have an effect on the estimated fair value amounts.
The following methods and assumptions were used by the Company
in estimating the fair value disclosures for financial
instruments in the accompanying consolidated financial
statements and notes:
|
|
|
|
|
Cash and cash equivalents, premiums receivable, accrued
expenses, other liabilities and surplus notes: The carrying
amounts for these financial instruments as reported in the
accompanying consolidated balance sheets approximate their fair
values.
|
|
|
|
Investment securities: The Company measures
and reports its financial assets and liabilities, including
investment securities, in accordance with the Fair Value
Measurement and Disclosure Topic of the Codification. The
estimated fair values for
available-for-sale
securities are generally based on quoted market value prices for
securities traded in the public marketplace. The Company also
considers the impact of a significant decrease in volume and
level of activity for an asset or liability when compared with
normal activity. Additional information with respect to fair
values of the Companys investment securities is disclosed
in Note 3.
|
Other financial instruments qualify as insurance-related
products and are specifically exempted from fair value
disclosure requirements.
The Company groups its financial assets and financial
liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the
reliability of the assumptions used to determine fair value.
These levels are:
|
|
|
|
|
Level 1 Valuations for assets and liabilities
traded in active exchange markets, such as the New York Stock
Exchange. Level 1 includes U.S. Treasury securities
that are traded by dealers or brokers in active markets.
Valuations are obtained from readily available pricing sources
for market transactions involving identical assets or
liabilities.
|
|
|
|
Level 2 Valuations for assets and liabilities
traded in less active dealer or broker markets. Level 2
valuations are based upon quoted prices for similar instruments
in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based
valuation techniques for which all significant assumptions are
observable in the market. Level 2 includes government
sponsored agency securities, corporate fixed-income securities,
municipal bonds, mortgage pass-through securities,
collateralized mortgage obligations and asset-backed securities.
|
|
|
|
Level 3 Valuations for assets and liabilities
that are derived from other valuation methodologies, including
discounted cash flow models and similar techniques, and not
based on market exchange, dealer, or broker traded transactions.
Level 3 valuations incorporate certain assumptions and
projections in determining the fair value assigned to such
assets or liabilities. As of December 31, 2009, the Company
had no Level 3 financial assets or liabilities.
|
103
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The table below presents the December 31, 2009 balances of
assets and liabilities measured at fair value on a recurring
basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
19,392
|
|
|
$
|
19,392
|
|
|
$
|
|
|
|
$
|
|
|
Government sponsored agency securities
|
|
|
29,622
|
|
|
|
|
|
|
|
29,622
|
|
|
|
|
|
Corporate securities
|
|
|
99,757
|
|
|
|
|
|
|
|
99,757
|
|
|
|
|
|
Tax-exempt municipal securities
|
|
|
341,635
|
|
|
|
|
|
|
|
341,635
|
|
|
|
|
|
Mortgage pass-through securities
|
|
|
78,294
|
|
|
|
|
|
|
|
78,294
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
|
15,222
|
|
|
|
|
|
|
|
15,222
|
|
|
|
|
|
Asset-backed securities
|
|
|
42,686
|
|
|
|
|
|
|
|
42,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
626,608
|
|
|
$
|
19,392
|
|
|
$
|
607,216
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active markets are those in which transactions occur with
sufficient frequency and volume to provide reliable pricing
information on an ongoing basis. Inactive markets are those in
which there are few transactions for the asset, prices are not
current, or price quotations vary substantially either over time
or among market makers, or in which little information is
released publicly. When the market for an investment is judged
to be inactive, appropriate adjustments must be made to
observable inputs to account for such inactivity. As of
December 31, 2009, the Companys investment portfolio
consisted of securities that it considered to be traded in
active markets. Therefore, no adjustment for market inactivity
or illiquidity was necessary.
The Company obtains fair value inputs for securities in its
investment portfolio from independent, nationally recognized
pricing services. The Company obtains one price per instrument
from these pricing services. The pricing services utilize
multidimensional pricing models that vary by asset class and
incorporate relevant inputs such as available trade, bid and
quote market data for identical or similar instruments,
model-based valuation techniques for which significant
assumptions were observable and other market information to
arrive at a fair value price for each security. This process
takes into consideration the relevance of observable inputs
based on factors such as the level of trading activity and the
volume and currency of available prices and includes appropriate
adjustments for nonperformance and liquidity risks. The Company
did not obtain any broker quotes as part of the portfolio
valuation process at December 31, 2009. When broker quotes
are obtained, they are usually non-binding.
The Company also seeks input from independent portfolio managers
and financial advisors engaged by the Company to assist in the
management and oversight of its investment portfolio. The
Company and an independent portfolio manager engaged by the
Company review such amounts for reasonableness in relation to
the following considerations, among others: recent trades of a
particular security; the Companys independent observations
of recent developments affecting the economy in general and
certain issuers in particular; and fair values from other
sources, such as statements from the Companys custodial
banks. When other evidence indicates a fair value that is
significantly different from that provided by an independent
pricing service, the Company may challenge the fair value and
request further validation and support from the independent
pricing service, which may result in a revised fair value from
the independent pricing service. If the Company has independent
evidence indicating that a securitys fair value is
significantly different from the final value provided by an
independent pricing service, it may adjust the fair value
accordingly. The Company did not adjust any of the
December 31, 2009 values it obtained from independent
pricing services and used those values in developing the fair
value measurements in the Companys consolidated financial
statements as of December 31, 2009.
The Company may be required, from time to time, to measure
certain other financial assets, such as goodwill, fixed assets
and other long-lived assets, at fair value on a non-recurring
basis in accordance with
104
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GAAP. These adjustments to fair value usually result from
write-downs of individual assets. None of these assets were
measured to fair value during the year ended December 31,
2009.
Direct premiums written totaled $286.0 million,
$263.8 million, and $273.0 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Premiums receivable consisted of the following at
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Premiums receivable
|
|
$
|
15,057
|
|
|
$
|
16,864
|
|
Allowance for doubtful accounts
|
|
|
(580
|
)
|
|
|
(490
|
)
|
|
|
|
|
|
|
|
|
|
Premiums receivable, net of allowance
|
|
$
|
14,477
|
|
|
$
|
16,374
|
|
|
|
|
|
|
|
|
|
|
The activity in the allowance for doubtful accounts for the
years ended December 31, 2009, 2008, and 2007 is as follows
(in thousands):
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
(1,109
|
)
|
Additions charged to bad debt expense
|
|
|
(512
|
)
|
Write offs charged against allowance
|
|
|
205
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
(1,416
|
)
|
Reductions credited to bad debt expense
|
|
|
905
|
|
Write offs charged against allowance
|
|
|
21
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
(490
|
)
|
Additions charged to bad debt expense
|
|
|
(91
|
)
|
Write offs charged against allowance
|
|
|
1
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
(580
|
)
|
|
|
|
|
|
|
|
6.
|
Property
and Equipment
|
Property and equipment consisted of the following at
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Computer equipment and software
|
|
$
|
4,456
|
|
|
$
|
3,732
|
|
Furniture and equipment
|
|
|
2,977
|
|
|
|
2,418
|
|
Leasehold improvements
|
|
|
3,190
|
|
|
|
2,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,623
|
|
|
|
8,539
|
|
Less accumulated depreciation and amortization
|
|
|
(5,267
|
)
|
|
|
(3,349
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
5,356
|
|
|
$
|
5,190
|
|
|
|
|
|
|
|
|
|
|
105
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Deferred
Policy Acquisition costs
|
The following reflects the amounts of policy acquisition costs
deferred and amortized for the years ended December 31,
2009, 2008, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
23,175
|
|
|
$
|
19,832
|
|
|
$
|
15,433
|
|
Policy acquisition costs deferred
|
|
|
47,015
|
|
|
|
46,974
|
|
|
|
40,880
|
|
Amortization of deferred policy acquisition costs
|
|
|
(44,653
|
)
|
|
|
(43,631
|
)
|
|
|
(36,481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
25,537
|
|
|
$
|
23,175
|
|
|
$
|
19,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under reinsurance treaties, the Company cedes various amounts of
risk to nonaffiliated insurance companies for the purpose of
limiting the maximum potential loss arising from the underlying
insurance risks. These reinsurance treaties do not relieve the
Company from its obligations to policyholders.
On October 1, 2009, the Company renewed its reinsurance
treaties with nonaffiliated reinsurers wherein it retains the
first $500,000 of each loss occurrence. The next $500,000 of
losses per occurrence (excess of the first $500,000 of losses
per occurrence retained by the Company) are 50% reinsured. The
new reinsurance program, which is effective through
September 30, 2010 and similar to the program that expired
September 30, 2009, provides coverage up to
$85.0 million per loss occurrence as follows:
|
|
|
Layer
|
|
General Description
|
|
$500,000 for each loss occurrence in excess of $500,000 for each
loss occurrence
|
|
50% reinsured, subject to an aggregate annual limit of $17.0
million.
|
$1.0 million for each loss occurrence in excess of
$1.0 million for each loss occurrence
|
|
Fully reinsured, subject to an aggregate annual limit of $10.0
million. Includes general liability coverage.
|
$3.0 million for each loss occurrence in excess of
$2.0 million for each loss occurrence
|
|
Fully reinsured, subject to an aggregate annual limit of $12.0
million. Includes general liability coverage.
|
$5.0 million for each loss occurrence in excess of
$5.0 million for each loss occurrence
|
|
Fully reinsured, subject to an aggregate annual limit of $15.0
million. Includes general liability coverage.
|
$10.0 million for each loss occurrence in excess of
$10.0 million for each loss occurrence
|
|
Fully reinsured, subject to an aggregate annual limit of $20.0
million and a limit of $7.5 million maximum for any one life.
|
$30.0 million for each loss occurrence in excess of
$20.0 million for each loss occurrence
|
|
Fully reinsured, subject to an annual aggregate limit of $60.0
million and a limit of $7.5 million maximum for any one life.
|
$35.0 million for each loss occurrence in excess of
$50.0 million for each loss occurrence
|
|
Fully reinsured, subject to an annual aggregate limit of $70.0
million and a limit of $7.5 million maximum for any one life.
|
106
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2009, the Companys current excess
of loss reinsurance treaties were placed with the following
reinsurers:
|
|
|
Reinsurer
|
|
A.M. Best Rating
|
|
Allied World Assurance Company Ltd.
|
|
A (Excellent)
|
Aspen Insurance UK Limited
|
|
A (Excellent)
|
Catlin Underwriting (US) o/b/o Lloyds Syndicate 2003 (SJC)
|
|
A (Excellent)
|
Hannover Rueckversicherung AG
|
|
A (Excellent)
|
Hannover Re (Bermuda) Limited
|
|
A (Excellent)
|
Lloyds of London (Various syndicates)
|
|
A (Excellent)
|
MAX Bermuda
|
|
A− (Excellent)
|
Paris Re S.A.
|
|
A− (Excellent)
|
Partner Reinsurance Company of the U.S.
|
|
A+ (Excellent)
|
Tokio Millennium Reinsurance Limited
|
|
A+ (Excellent)
|
Effective January 1, 2010, the Company renewed its
quota-share reinsurance agreement with a nonaffiliated reinsurer
wherein it cedes 100% of its residual market business assumed
from the National Council on Compensation Insurance (the
NCCI) for policy years 2009 and 2010.
For the periods from October 1, 2006 through
October 1, 2007 and from October 1, 2007 through
October 1, 2008, the Company entered into reinsurance
treaties with nonaffiliated reinsurers wherein it retains the
first $1.0 million of each loss occurrence. Losses in
excess of $1.0 million up to $75.0 million are
reinsured as follows:
|
|
|
Layer
|
|
General Description
|
|
$1.0 million excess of $1.0 million each loss
occurrence
|
|
Fully reinsured, subject to an aggregate annual limit of $8.0
million.
|
$3.0 million excess of $2.0 million each loss
occurrence
|
|
Fully reinsured, subject to an aggregate annual limit of $12.0
million.
|
$5.0 million excess of $5.0 million each loss
occurrence
|
|
Fully reinsured, subject to an aggregate annual limit of $15.0
million.
|
$10.0 million excess of $10.0 million each loss
occurrence
|
|
Fully reinsured, subject to a limit of $7.5 million maximum for
any one life and an aggregate limit of $20.0 million.
|
$30.0 million excess of $20.0 million each loss
occurrence
|
|
Fully reinsured, subject to an aggregate annual limit of $60.0
million and a limit of $5.0 million maximum for any one life.
|
$25.0 million excess of $50.0 million each loss
occurrence
|
|
Fully reinsured, subject to an annual aggregate limit of $50.0
million and a limit of $5.0 million maximum for any one life.
|
As part of the Acquisition, SeaBright and LMC entered into an
adverse development excess of loss reinsurance agreement (the
Agreement). The Agreement, after taking into account
any recoveries from third party reinsurers, calls for LMC to
reimburse SBIC 100% of the excess of the actual loss at
December 31, 2011 over the initial loss reserves at
September 30, 2003. The Agreement also calls for SBIC to
reimburse LMC 100% of the excess of the initial loss reserves at
September 30, 2003 over the actual loss results at
December 31, 2011. The amount of adverse loss development
under the Agreement was $3.0 million at December 31,
2009 and $4.2 million at December 31, 2008. The
decrease in the amount receivable from LMC is netted against
loss and loss adjustment expense in the accompanying
consolidated statements of operations.
107
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As part of the Agreement, LMC placed into trust (the
Trust) $1.6 million, equal to 10% of the
balance sheet reserves of SBIC at the date of the Acquisition.
Thereafter, the Trust shall be adjusted each quarter, if
warranted, to an amount equal to the greater of
(a) $1.6 million or (b) 102% of LMCs
obligations under the Agreement. The balance of the Trust,
including accumulated interest, was $3.8 million at
December 31, 2009 and $2.8 million at
December 31, 2008.
The Company involuntarily assumes residual market business
either directly from various states that operate their own
residual market programs or indirectly from the National Council
for Compensation Insurance, which operates residual market
programs on behalf of some states. The states in which the
Company assumed residual market business in 2009 and 2008
include the following: Alabama, Alaska, Arizona, Arkansas,
Connecticut, Delaware, the District of Columbia, Georgia, Idaho,
Illinois, Iowa, Kansas, Massachusetts, Michigan, Nevada, New
Jersey, New Mexico, North Carolina, Oregon, South Carolina,
South Dakota, and Virginia.
|
|
c.
|
Reinsurance
Recoverables and Income Statement Effects
|
Balances affected by reinsurance transactions are reported gross
of reinsurance in the balance sheets. Reinsurance recoverables
are comprised of the following amounts at December 31, 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Reinsurance recoverables on unpaid loss and loss adjustment
expenses
|
|
$
|
34,080
|
|
|
$
|
18,231
|
|
Reinsurance recoverables on paid losses
|
|
|
259
|
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
Total reinsurance recoverables
|
|
$
|
34,339
|
|
|
$
|
18,544
|
|
|
|
|
|
|
|
|
|
|
The Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk arising from
activities or economic characteristics of the reinsurers to
minimize its exposure to losses from reinsurer insolvencies. In
the event a reinsurer is unable to meet its obligations, the
Company would be liable for the losses under the agreement.
The following table summarizes the Companys top ten
reinsurers, based on net amount recoverable, as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Net Amount
|
|
|
|
|
|
Recoverable as of
|
|
|
|
A.M. Best
|
|
December 31,
|
|
Reinsurer
|
|
Rating
|
|
2009
|
|
|
|
|
|
(In thousands)
|
|
|
Hannover Rucversicherungs Aktiengesellschaft*
|
|
A
|
|
$
|
14,517
|
|
MAX RE Limited*
|
|
A−
|
|
|
7,162
|
|
Swiss Reinsurance America Corp.
|
|
A
|
|
|
3,996
|
|
Argonaut Insurance Company
|
|
A
|
|
|
1,475
|
|
Catlin UW/Lloyds Syndicate 2003 (SJC)*
|
|
A
|
|
|
1,182
|
|
Platinum Underwriters Reinsurance
|
|
A
|
|
|
978
|
|
Partner Reinsurance Company of the US*
|
|
A+
|
|
|
587
|
|
Allied World Reinsurance Company
|
|
A
|
|
|
587
|
|
Lloyds UW Syndicate 2987 BRT*
|
|
A
|
|
|
393
|
|
Paris Re S.A.*
|
|
A−
|
|
|
235
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
31,112
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Participant in current excess of loss reinsurance treaty program
or individual risk reinsurance placements. |
108
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company recorded no write-offs of uncollectible reinsurance
recoverables in the years ended December 31, 2009, 2008,
and 2007.
The effects of reinsurance are as follows for the years ended
December 31, 2009, 2008, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Reinsurance assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Written premiums
|
|
$
|
3,978
|
|
|
$
|
6,559
|
|
|
$
|
9,668
|
|
Earned premiums
|
|
|
3,625
|
|
|
|
7,169
|
|
|
|
8,576
|
|
Losses and loss adjustment expenses incurred
|
|
|
693
|
|
|
|
4,673
|
|
|
|
5,607
|
|
Commission expenses incurred
|
|
|
1,475
|
|
|
|
3,523
|
|
|
|
2,959
|
|
Reinsurance ceded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Written premiums
|
|
$
|
27,234
|
|
|
$
|
14,520
|
|
|
$
|
15,300
|
|
Earned premiums
|
|
|
22,685
|
|
|
|
14,447
|
|
|
|
14,979
|
|
Losses and loss adjustment expenses incurred
|
|
|
17,981
|
|
|
|
6,321
|
|
|
|
2,121
|
|
Commissions earned
|
|
|
2,589
|
|
|
|
1,591
|
|
|
|
1,121
|
|
Provisions in the three lower layer treaties (covering losses
from $0.5 million to $10.0 million) in the
Companys
2005-2006
reinsurance program allow the Company the ability, at its sole
discretion, to commute the contracts within 24 months of
expiration in return for a contingent profit commission
calculated in accordance with terms specified in the contracts.
In accordance with these provisions, the Company commuted these
treaties in 2008 in return for a contingent profit commission of
approximately $2.3 million. As of December 31, 2009,
there were no ceded losses associated with these layers and it
is not expected that developed losses that would otherwise be
covered by reinsurance will exceed the contingent profit
commission. The contingent profit commission was recorded as a
reduction of loss and loss adjustment expenses.
Provisions in the three lower layer treaties (covering losses
from $1.0 million to $10.0 million) in the
Companys
2006-2007
reinsurance program allow the Company the ability, at its sole
discretion, to commute the contracts within 24 months of
expiration in return for a contingent profit commission
calculated in accordance with terms specified in the contracts.
In accordance with these provisions, the Company commuted the
$5.0 million excess $5.0 million layer of this treaty
in 2009 in return for a contingent profit commission of
approximately $0.7 million. The two lower layers (from
$1.0 million to $5.0 Million) were not commuted. As of
December 31, 2009, there were no ceded losses associated
with the $5.0 million excess $5.0 million layer and it
is not expected that developed losses that would otherwise be
covered by reinsurance will exceed the contingent profit
commission. The contingent profit commission was recorded as a
reduction of loss and loss adjustment expenses.
109
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
Unpaid
Loss and Loss Adjustment Expenses
|
The following table summarizes the activity in unpaid loss and
loss adjustment expense for the years ended December 31,
2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Beginning balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid loss and loss adjustment expense
|
|
$
|
292,027
|
|
|
$
|
250,085
|
|
|
$
|
198,356
|
|
Reinsurance recoverables
|
|
|
(18,231
|
)
|
|
|
(14,034
|
)
|
|
|
(13,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, beginning of year
|
|
|
273,796
|
|
|
|
236,051
|
|
|
|
184,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
172,411
|
|
|
|
168,559
|
|
|
|
162,018
|
|
Prior years
|
|
|
(1,411
|
)
|
|
|
(24,978
|
)
|
|
|
(34,081
|
)
|
Receivable under adverse development cover
|
|
|
1,169
|
|
|
|
(1,646
|
)
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
172,169
|
|
|
|
141,935
|
|
|
|
128,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
(43,570
|
)
|
|
|
(42,253
|
)
|
|
|
(35,480
|
)
|
Prior years
|
|
|
(83,810
|
)
|
|
|
(63,583
|
)
|
|
|
(41,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
(127,380
|
)
|
|
|
(105,836
|
)
|
|
|
(76,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable under adverse development cover
|
|
|
(1,169
|
)
|
|
|
1,646
|
|
|
|
(248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, end of year
|
|
|
317,416
|
|
|
|
273,796
|
|
|
|
236,051
|
|
Reinsurance recoverables
|
|
|
34,080
|
|
|
|
18,231
|
|
|
|
14,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid loss and loss adjustment expense
|
|
$
|
351,496
|
|
|
$
|
292,027
|
|
|
$
|
250,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of changes in estimates of insured events in prior
periods, unpaid loss and loss adjustment expenses decreased by a
net amount of $1.4 million in 2009. Net adverse development
of prior year loss reserves totaled $14.4 million and
related to the following accident years: $8.8 million in
2008, $5.0 million in 2007, and $0.9 million in 2006.
This adverse development was offset by $0.3 million of net
favorable development of loss reserves related to accident years
2005 and prior. The net adverse development on loss reserves was
offset by $15.8 million of net favorable development of
other amounts such as ULAE, loss based assessments and losses
assumed from the NCCI pools. The $15.8 million related to
the following accident years: $4.3 million in 2008,
$4.2 million in 2007, $3.5 million in 2006, and
$3.8 million in 2005 and prior.
In 2008, unpaid loss and loss adjustment expense related to
prior years decreased by a net amount of $25.0 million.
Favorable development of prior year loss reserves totaled
$19.7 million and related to the following accident years:
$11.6 million in 2007, $5.1 million in 2006,
$2.4 million in 2005, and $0.6 million in 2005 and
prior. Additionally, there was $5.3 million of net
favorable development of other amounts such as ULAE, loss based
assessments and losses assumed from the NCCI pools. The
$5.3 million related to the following accident years:
$3.5 million in 2007, $2.3 million in 2006 and
$1.1 million in 2005, offset by $1.6 million of
adverse development in 2004 and prior.
In 2007, unpaid loss and loss adjustment expense related to
prior years decreased by a net amount of $34.1 million. Net
favorable development of prior year loss reserves totaled
$27.7 million and related to the following accident years:
$17.3 million in 2006 and $11.7 million in 2005,
offset by $1.3 million of adverse development in 2004 and
prior. Additionally, there was $6.4 million of net
favorable development of other
110
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amounts such as ULAE, loss based assessments and losses assumed
from the NCCI pools. The $6.4 million related to the
following accident years: $2.2 million in 2006,
$3.5 million in 2005 and $0.7 million in 2004 and
prior.
At December 31, 2009 and 2008, the Company reduced unpaid
loss and loss adjustment expense by $8.9 million and
$5.6 million, respectively, for anticipated salvage and
subrogation recoveries.
On May 26, 2004, SBIC issued in a private placement
$12.0 million in subordinated floating rate Surplus Notes
due in 2034. The note holder is ICONS, Ltd. and Wilmington
Trust Company acts as Trustee. Interest, paid quarterly in
arrears, is calculated at the beginning of the interest payment
period using the
3-month
LIBOR plus 400 basis points. The quarterly interest rate
cannot exceed the initial interest rate by more than 10% per
year, cannot exceed the corporate base (prime) rate by more than
2% and cannot exceed the highest rate permitted by New York law.
The rate or amount of interest required to be paid in any
quarter is also subject to limitations imposed by the Illinois
Insurance Code. Interest amounts not paid as a result of these
limitations become Excess Interest, which the
Company may be required to pay in the future, subject to the
same limitations and all other provisions of the Surplus Notes
Indenture. To date, there has been no Excess Interest. The
interest rate at December 31, 2009 was 4.3%. Interest and
principal may be paid only upon the prior approval of the
Illinois Department of Insurance. In the event of default, as
defined, or failure to pay interest due to lack of Illinois
Department of Insurance approval, the Company cannot pay
dividends on its capital stock, is limited in its ability to
redeem, purchase or acquire any of its capital stock and cannot
make payments of interest or principal on any debt issued by the
Company which ranks equal with or junior to the Surplus Notes.
If an event of default occurs and is continuing, the principal
and accrued interest can become immediately due and payable.
Interest expense for the years ended December 31, 2009,
2008, and 2007 was $0.6 million, $0.9 million, and
$1.1 million, respectively.
The notes are redeemable prior to 2034 by the Company, in whole
or in part, from time to time, on or after May 24, 2009 on
an interest payment date.
Issuance costs of $591,000 incurred in connection with the
Surplus Notes are being amortized over the life of the notes
using the effective interest method. Amortization expense for
the years ended December 31, 2009, 2008, and 2007 was
$29,000, $43,000 and $56,000, respectively.
The operations of SeaBright and its subsidiaries are included in
a consolidated federal income tax return.
The following is a reconciliation of the difference between the
expected income tax computed by applying the federal
statutory income tax rate of 35% to income before income taxes
and the total income taxes reflected on the books for the years
ended December 31, 2009, 2008, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Expected income tax expense at statutory rates
|
|
$
|
5,805
|
|
|
$
|
14,749
|
|
|
$
|
20,439
|
|
State income tax expense, net of federal benefit
|
|
|
134
|
|
|
|
240
|
|
|
|
374
|
|
Tax exempt bond interest income
|
|
|
(3,446
|
)
|
|
|
(3,153
|
)
|
|
|
(2,562
|
)
|
Valuation allowance on capital losses
|
|
|
|
|
|
|
957
|
|
|
|
|
|
Other
|
|
|
558
|
|
|
|
70
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
3,051
|
|
|
$
|
12,863
|
|
|
$
|
18,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred federal income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and those amounts
used for federal income tax reporting purposes. The significant
components of the deferred tax assets and liabilities at
December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Unpaid loss and loss adjustment expenses
|
|
$
|
17,141
|
|
|
$
|
14,558
|
|
Unearned premium
|
|
|
11,184
|
|
|
|
10,253
|
|
Unrealized net loss on investment securities
|
|
|
|
|
|
|
1,600
|
|
Bad debt reserves
|
|
|
202
|
|
|
|
171
|
|
Restricted stock grants
|
|
|
2,559
|
|
|
|
2,244
|
|
Amortizable assets
|
|
|
168
|
|
|
|
448
|
|
Accrued vacation and bonus
|
|
|
532
|
|
|
|
408
|
|
Guaranty fund payable
|
|
|
337
|
|
|
|
262
|
|
Net capital loss carryover
|
|
|
5,356
|
|
|
|
405
|
|
Other than temporary impairments
|
|
|
|
|
|
|
4,690
|
|
Other
|
|
|
799
|
|
|
|
1,549
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
38,278
|
|
|
|
36,588
|
|
Valuation allowance
|
|
|
|
|
|
|
(1,995
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net of valuation allowance
|
|
|
38,278
|
|
|
|
34,593
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(299
|
)
|
|
|
(323
|
)
|
Unrealized net gain on investment securities
|
|
|
(6,435
|
)
|
|
|
|
|
State insurance licenses
|
|
|
(420
|
)
|
|
|
(420
|
)
|
Deferred acquisition costs
|
|
|
(8,938
|
)
|
|
|
(8,111
|
)
|
Other
|
|
|
(325
|
)
|
|
|
(595
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(16,417
|
)
|
|
|
(9,449
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
21,861
|
|
|
$
|
25,144
|
|
|
|
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will 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. Management considers the taxes paid in prior years,
the scheduled reversal of deferred tax liabilities, projected
future taxable income and tax planning strategies in making this
assessment.
As of December 31, 2009, no valuation allowance was
recorded. As of December 31, 2008, management established a
valuation allowance of approximately $2.0 million (of which
$976,000 was recorded in tax expense and $1.0 million was
recorded in accumulated other comprehensive income), which was
reversed through accumulated other comprehensive income in 2009.
As of December 31, 2009, the Company had capital loss carry
forwards of approximately $15.3 million. Approximately
$146,000 expires in 2010, $431,000 expires in 2011, $106,000
expires in 2012, $475,000 expires in 2013 and $14.1 million
expires in 2014.
112
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
12.
|
Statutory
Net Income and Stockholders Equity
|
SBIC is required to file annually with state regulatory
insurance authorities financial statements prepared on an
accounting basis as prescribed or permitted by such authorities
(statutory basis accounting or SAP). Statutory net
income and capital and surplus (stockholders equity)
differ from amounts reported in accordance with GAAP, primarily
because of the following accounting treatments prescribed by
SAP: policy acquisition costs are expensed when incurred;
certain assets designated as nonadmitted for
statutory purposes are charged to surplus; fixed-income
securities are reported primarily at amortized cost or fair
value based on their rating by the National Association of
Insurance Commissioners (NAIC); policyholders
dividends are expensed as declared rather than accrued as
incurred; deferred income taxes are charged or credited directly
to unassigned surplus; and any change in the admitted net
deferred tax asset is offset to equity. Following is a summary
of SBICs statutory net gain for the years ended
December 31, 2009, 2008, and 2007 and statutory capital and
surplus as of December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Statutory net gain
|
|
$
|
12,565
|
|
|
$
|
24,398
|
|
|
$
|
33,693
|
|
Statutory capital and surplus
|
|
|
306,911
|
|
|
|
275,702
|
|
|
|
256,322
|
|
The maximum amount of dividends that can be paid to stockholders
by insurance companies domiciled in the State of Illinois
without prior approval of regulatory authorities is restricted
if such dividend, together with other distributions during the
12 preceding months, would exceed the greater of 10% of the
insurers statutory surplus as of the preceding December 31
or the statutorily adjusted net income for the preceding
calendar year. If the limitation is exceeded, then such proposed
dividend must be reported to the Director of Insurance at least
30 days prior to the proposed payment date and may be paid
only if not disapproved. The Illinois insurance laws also permit
payment of dividends only out of earned surplus, exclusive of
most unrealized gains. At December 31, 2009, SBIC had
statutory earned surplus of $112.7 million. Consequently,
SBIC would be able to pay up to $30.7 million of
stockholder dividends in 2010 without the prior approval of the
regulators.
In June 2007, the Illinois Department of Insurance completed a
comprehensive financial examination of SBICs 2005
statutory annual statement. The examination report contained
three findings, none of which resulted in any fines, penalties
or adjustments to SBICs financial statements. Prior to
this examination, KEIC was last examined by the Illinois
Department of Insurance as of December 31, 2000.
The State of Illinois imposes minimum risk-based capital
requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various
weighting factors that are applied to financial balances or
various levels of activity based on the perceived degree of
risk. Regulatory compliance is determined by a ratio of the
enterprises regulatory total adjusted capital to certain
minimum capital amounts as defined by the NAIC. Enterprises
below specified trigger points or ratios are classified within
certain levels, each of which requires specified corrective
action. SBIC exceeded the minimum risk-based capital
requirements at December 31, 2009 and 2008.
The Company leases certain office space for its headquarters and
regional offices under agreements that are accounted for as
operating leases. Lease expense totaled $3.4 million,
$2.9 million and $1.3 million for the years ended
December 31, 2009, 2008, and 2007, respectively. Total
rent, including the effect of rent increases and concessions, is
expensed on a straight-line basis over the respective lease
terms.
113
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future minimum payments required under the agreements are as
follows:
|
|
|
|
|
|
|
Operating
|
|
|
|
leases
|
|
|
|
(In thousands)
|
|
|
2010
|
|
$
|
2,904
|
|
2011
|
|
|
3,122
|
|
2012
|
|
|
3,010
|
|
2013
|
|
|
2,608
|
|
2014
|
|
|
2,240
|
|
Thereafter
|
|
|
3,441
|
|
|
|
|
|
|
|
|
$
|
17,325
|
|
|
|
|
|
|
The Company maintains a defined contribution 401(k) retirement
savings plan covering substantially all of its employees. In
2009, 2008 and 2007, the Company matched 100% of the first five
percent of eligible compensation contributed to the plan on a
pre-tax basis. For the year ended December 31, 2007, the
Company made additional contributions equal to one percent of
compensation for all persons who were employed at the end of the
year. Employees are 100% vested in all matching contributions
when they are made. Contribution expense for the years ended
December 31, 2009, 2008, and 2007 was $1.1 million,
$1.2 million and $0.8 million, respectively.
a. SBIC is subject to guaranty fund and other
assessments by the states in which it writes business. Guaranty
fund assessments are accrued at the time premiums are written.
Other assessments are accrued either at the time of assessment
or in the case of premium-based assessments, at the time the
premiums are written, or in the case of loss-based assessments,
at the time the losses are incurred. SBIC has accrued a
liability for guaranty fund and other assessments of
$7.9 million at December 31, 2009 and has recorded a
related asset for premium tax offset and policy surcharges of
$3.5 million at that date. This amount represents
managements best estimate based on information received
from the states in which it writes business and may change due
to many factors including the Companys share of the
ultimate cost of current insolvencies. Most assessments are paid
out in the year following the year in which the premium is
written or the losses are paid. Guaranty fund receivables and
other surcharge items are generally realized by a charge to new
and renewing policyholders in the year following the year in
which the related assessments were paid.
b. The Company is involved in various claims and
lawsuits arising in the ordinary course of business. Management
believes the outcome of these matters will not have a material
adverse effect on the Companys financial position.
|
|
16.
|
Retrospectively
Rated Contracts
|
On October 1, 2003, the Company began selling workers
compensation insurance policies for which the premiums vary
based on loss experience. Accrued retrospective premiums are
determined based upon the loss experience of business subject to
such experience rating adjustment. Accrued retrospectively rated
premiums are determined by and allocated to individual
policyholder accounts. Accrued retrospective premiums and return
retrospective premiums are recorded as additions to and
reductions from written premium, respectively. Approximately
7.2%, 10.7% and 11.9% of the Companys direct premiums
written for the years ended December 31, 2009, 2008 and
2007, respectively, related to retrospectively rated contracts.
The Company accrued $11.8 million for retrospective
premiums receivable and $21.5 million for return
retrospective
114
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
premiums at December 31, 2009 and $12.3 million for
retrospective premiums receivable and $18.5 million for
return retrospective premiums at December 31, 2008.
|
|
17.
|
Intangible
Assets and Goodwill
|
Intangible assets, other than goodwill, consist of the following
at December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
|
|
|
|
|
|
|
Amortization
|
|
|
Amount
|
|
|
Accumulated Amortization
|
|
|
|
Period (years)
|
|
|
at December 31
|
|
|
at December 31
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State insurance licenses
|
|
|
|
|
|
$
|
1,200
|
|
|
$
|
1,200
|
|
|
$
|
|
|
|
$
|
|
|
State business licenses
|
|
|
|
|
|
|
25
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
Renewal rights
|
|
|
2
|
|
|
|
783
|
|
|
|
783
|
|
|
|
783
|
|
|
|
783
|
|
Internally developed software
|
|
|
3
|
|
|
|
944
|
|
|
|
944
|
|
|
|
944
|
|
|
|
944
|
|
Trademark
|
|
|
5
|
|
|
|
50
|
|
|
|
50
|
|
|
|
50
|
|
|
|
50
|
|
Customer relations
|
|
|
2
|
|
|
|
30
|
|
|
|
30
|
|
|
|
30
|
|
|
|
30
|
|
Black/White Nevada Non-Compete Agreement
|
|
|
3
|
|
|
|
390
|
|
|
|
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,422
|
|
|
$
|
3,032
|
|
|
$
|
1,991
|
|
|
$
|
1,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company completed its annual goodwill assessment for the
individual reporting units as of December 31, 2009. The
conclusion reached as a result of the annual goodwill impairment
testing was that the fair value of each reporting unit to which
goodwill had been allocated was in excess of the respective
reporting units carrying value; therefore, no impairment
was necessary.
As part of the Companys goodwill analysis, the Company
compared the fair value of the aggregated reporting units to the
market capitalization of the Company using the December 31,
2009 common stock price. The difference between the aggregated
fair value of the reporting units and the market capitalization
of the Company was attributed to transaction premium. The amount
of the transaction premium was determined to be reasonable based
on recent insurance transactions and specific facts and
circumstances related to the Company.
If current market conditions persist during 2010, in particular
if the Companys share price remains meaningfully below
book value per share, or if the Companys actions to limit
risk associated with its products or investments causes a
significant change in any one reporting units fair value,
subsequent reviews of goodwill could result in an impairment of
goodwill during 2010 or later.
The weighted average amortization period for all intangible
assets subject to amortization is 2.7 years. Aggregate
amortization expense was $184,000, $7,500 and $10,000 for the
years ended December 31, 2009, 2008, and 2007, respectively.
The changes in the carrying amount of goodwill for the year
ended December 31, 2009, were as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance as of January 1, 2009
|
|
$
|
4,212
|
|
Contingent purchase consideration
|
|
|
159
|
|
Acquisition purchase adjustment
|
|
|
(50
|
)
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
4,321
|
|
|
|
|
|
|
115
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
18.
|
Share-Based
Payment Arrangements
|
At December 31, 2009, the Company had outstanding stock
options and nonvested stock granted according to the terms of
two equity incentive plans. The stockholders and Board of
Directors approved the 2003 Stock Option Plan (the 2003
Plan) in September 2003, and amended and restated the 2003
Plan in February 2004, and approved the 2005 Long-Term Equity
Incentive Plan (the 2005 Plan and, together with the
2003 Plan, the Stock Option Plans) in December 2004.
In April 2007, the Board of Directors further amended the 2003
Plan and amended the 2005 Plan.
The Board of Directors reserved an initial total of
776,458 shares of common stock under the 2003 Plan and
1,047,755 shares of common stock under the 2005 Plan, plus
an automatic annual increase on the first day of each fiscal
year beginning in 2006 and ending in 2015 equal to the lesser
of: (i) 2% of the shares of common stock outstanding on the
last day of the immediately preceding fiscal year or
(ii) such lesser number of shares as determined by the
Board of Directors. At December 31, 2009, the Company
reserved 776,458 shares of common stock for issuance under
the 2003 Plan, of which options to purchase 481,946 shares
had been granted, and 2,631,525 shares for issuance under
the 2005 Plan, of which 2,106,692 shares had been granted.
In January 2006, the Compensation Committee of the Board of
Directors terminated the ability to grant future stock options
awards under the 2003 Plan. Therefore, the Company anticipates
that all future awards will be made under the 2005 Plan.
The 2005 Plan provides for the grant of incentive or
non-qualified stock options, restricted stock, restricted stock
units, deferred stock units, performance awards, or any
combination of the foregoing. The Board of Directors has the
authority to determine all matters relating to awards granted
under the Stock Option Plans, including designation as incentive
or nonqualified stock options, the selection of individuals to
be granted options, the number of shares subject to each grant,
the exercise price, the term and the vesting period, if any.
Options to purchase the Companys common stock are granted
at prices at or above the fair value of the common stock on the
date of grant, generally vest 25% per year on each of the first
four anniversaries of the vesting start date, and expire
10 years from the date of grant. Options granted to
non-employee directors generally vest one-third on the first
anniversary of the grant date and the remaining two-thirds in
equal monthly installments over the following 24 months.
Nonvested stock issued to employees and directors generally
vests on the third anniversary of the grant date, assuming the
holder is still employed by or providing service to the Company
and satisfies all other conditions of the grant. Generally,
stock options granted to employees are incentive stock options,
while options granted to non-employee directors are
non-qualified stock options.
The Company has only issued new shares of common stock upon
exercise of stock options or award of nonvested shares.
Total stock-based compensation expense recognized in the
consolidated statements of operations for the years ended
December 31, 2009, 2008 and 2007 is shown in the following
table. No compensation cost was capitalized during years ended
December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Stock-based compensation expense related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested restricted stock
|
|
$
|
4,117
|
|
|
$
|
4,720
|
|
|
$
|
2,312
|
|
Stock options
|
|
|
686
|
|
|
|
988
|
|
|
|
698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,803
|
|
|
$
|
5,708
|
|
|
$
|
3,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total related tax benefit
|
|
$
|
377
|
|
|
$
|
1,122
|
|
|
$
|
839
|
|
116
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair values of stock options granted during the years ended
December 31, 2009, 2008 and 2007 were determined on the
dates of grant using the Black-Scholes-Merton option valuation
model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Expected term (years)
|
|
|
6.3
|
|
|
|
6.3
|
|
|
|
6.3
|
|
Expected stock price volatility
|
|
|
34.0
|
%
|
|
|
29.5
|
%
|
|
|
26.3
|
%
|
Risk-free interest rate
|
|
|
2.31
|
%
|
|
|
3.02
|
%
|
|
|
4.58
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value per option
|
|
$
|
3.73
|
|
|
$
|
5.15
|
|
|
$
|
6.75
|
|
The expected term of options was determined using the
simplified method, which averages an awards
weighted average vesting period. For 2007, the expected stock
price volatility was based on a weighted average of the
Companys historical stock price volatility since the
initial public offering of its common stock in January 2005 and
the historical volatility of a peer companys stock for a
period of time equal to the expected term of the option. In 2008
and 2009, expected stock price volatility was based on the
Companys historical stock price volatility since the
public offering of its common stock in January 2005. The change
in determining volatility was made in 2008 because the Company
had developed credible historical data based solely on the
Companys stock volatility. The risk-free interest rate is
based on the yield of U.S. Treasury securities with an
equivalent remaining term. The Company did not pay stockholder
dividends in 2009 or in prior years.
The assumptions used to calculate the fair value of options
granted are evaluated and revised, as necessary, to reflect
market conditions and the Companys historical experience
and future expectations. The calculated fair value is recognized
as compensation cost in the Companys financial statements
over the requisite service period of the entire award.
Compensation cost is recognized only for those options expected
to vest, with forfeitures estimated at the date of grant and
evaluated and adjusted periodically to reflect the
Companys historical experience and future expectations.
Any change in the forfeiture assumption is accounted for as a
change in estimate, with the cumulative effect of the change on
periods previously reported being reflected in the financial
statements of the period in which the change is made.
117
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes stock option activity for the
years ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Shares
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Subject to
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
per Share
|
|
|
(years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Outstanding at December 31, 2007
|
|
|
1,015,321
|
|
|
$
|
10.70
|
|
|
|
7.0
|
|
|
$
|
4,450
|
|
Granted
|
|
|
205,202
|
|
|
|
14.44
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(134,346
|
)
|
|
|
8.29
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(32,300
|
)
|
|
|
16.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
1,053,877
|
|
|
|
11.55
|
|
|
|
7.1
|
|
|
|
204
|
|
Granted
|
|
|
216,202
|
|
|
|
9.86
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(28,043
|
)
|
|
|
13.86
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(7,250
|
)
|
|
|
6.54
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(9,126
|
)
|
|
|
16.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
1,225,660
|
|
|
|
11.19
|
|
|
|
6.2
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December, 2009
|
|
|
804,325
|
|
|
|
10.30
|
|
|
|
5.0
|
|
|
|
960
|
|
Exercisable at December, 2008
|
|
|
654,090
|
|
|
|
9.33
|
|
|
|
6.1
|
|
|
|
1,573
|
|
The aggregate intrinsic values in the table above are before
applicable income taxes and are based on the Companys
closing stock price of $11.49 and $11.74 at December 31,
2009 and 2008, respectively. As of December 31, 2009, total
unrecognized stock-based compensation cost related to nonvested
stock options was approximately $1.4 million, which is
expected to be recognized over a weighted average period of
approximately 29.1 months. Proceeds from the exercise of
stock options totaled approximately $47,000 in 2009 and
approximately $1.1 million in 2008. The total intrinsic
value of stock options exercised was approximately $27,580 in
2009 and approximately $758,700 in 2008.
As of December 31, 2009, there were 524,833 shares of
common stock available for issuance of future share-based
awards. In accordance with the provisions of the 2005 Plan, the
number of shares authorized for issuance under the 2005 Plan was
automatically increased by 433,516 shares on
January 1, 2010, resulting in 958,349 shares available
for issuance as of that date. The following table presents
additional information regarding options outstanding as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Life (years)
|
|
|
Exercise Price
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
$6.54 - 9.90
|
|
|
497,300
|
|
|
|
5.3
|
|
|
$
|
7.27
|
|
|
|
369,468
|
|
|
$
|
6.54
|
|
10.11-12.54
|
|
|
323,394
|
|
|
|
6.2
|
|
|
|
10.63
|
|
|
|
239,807
|
|
|
|
10.63
|
|
13.93-15.96
|
|
|
191,766
|
|
|
|
8.1
|
|
|
|
14.65
|
|
|
|
61,345
|
|
|
|
14.80
|
|
17.16-18.68
|
|
|
213,200
|
|
|
|
6.9
|
|
|
|
18.08
|
|
|
|
133,705
|
|
|
|
18.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,225,660
|
|
|
|
6.2
|
|
|
|
11.19
|
|
|
|
804,325
|
|
|
|
10.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes restricted stock activity for the
years ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Outstanding at December 31, 2007
|
|
|
473,880
|
|
|
$
|
17.80
|
|
Granted
|
|
|
428,742
|
|
|
|
14.32
|
|
Vested
|
|
|
(102,900
|
)
|
|
|
16.47
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
799,722
|
|
|
|
16.11
|
|
Granted
|
|
|
372,315
|
|
|
|
10.30
|
|
Vested
|
|
|
(183,625
|
)
|
|
|
17.53
|
|
Forfeited
|
|
|
(52,392
|
)
|
|
|
11.41
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
936,020
|
|
|
|
13.78
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, there was $5.2 million of
total unrecognized compensation cost related to restricted stock
granted under the 2005 Plan. That cost is expected to be
recognized over a weighted-average period of 20.7 months.
|
|
19.
|
Quarterly
Financial Information (unaudited)
|
The following table summarizes selected unaudited quarterly
financial data for each quarter of the years ended
December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In thousands, except earnings per share)
|
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
58,004
|
|
|
$
|
60,029
|
|
|
$
|
64,427
|
|
|
$
|
61,967
|
|
Loss and loss adjustment expenses
|
|
|
38,564
|
|
|
|
41,212
|
|
|
|
42,216
|
|
|
|
50,177
|
|
Underwriting, acquisition and insurance expenses
|
|
|
19,794
|
|
|
|
16,090
|
|
|
|
18,155
|
|
|
|
19,005
|
|
Net income (loss)
|
|
|
3,988
|
|
|
|
4,302
|
|
|
|
6,665
|
|
|
|
(1,420
|
)
|
Diluted earnings (loss) per share
|
|
$
|
0.19
|
|
|
$
|
0.20
|
|
|
$
|
0.31
|
|
|
$
|
(0.07
|
)
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
56,722
|
|
|
$
|
55,685
|
|
|
$
|
68,687
|
|
|
$
|
67,550
|
|
Loss and loss adjustment expenses
|
|
|
30,409
|
|
|
|
32,156
|
|
|
|
39,154
|
|
|
|
40,216
|
|
Underwriting, acquisition and insurance expenses
|
|
|
15,646
|
|
|
|
17,678
|
|
|
|
17,350
|
|
|
|
20,495
|
|
Net income
|
|
|
10,852
|
|
|
|
6,432
|
|
|
|
1,781
|
|
|
|
10,213
|
|
Diluted earnings per share
|
|
$
|
0.52
|
|
|
$
|
0.30
|
|
|
$
|
0.08
|
|
|
$
|
0.48
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
48,631
|
|
|
$
|
54,757
|
|
|
$
|
59,721
|
|
|
$
|
64,886
|
|
Loss and loss adjustment expenses
|
|
|
25,918
|
|
|
|
29,012
|
|
|
|
34,921
|
|
|
|
38,334
|
|
Underwriting, acquisition and insurance expenses
|
|
|
12,631
|
|
|
|
14,692
|
|
|
|
15,172
|
|
|
|
16,437
|
|
Net income
|
|
|
10,073
|
|
|
|
10,203
|
|
|
|
9,650
|
|
|
|
9,986
|
|
Diluted earnings per share
|
|
$
|
0.48
|
|
|
$
|
0.49
|
|
|
$
|
0.46
|
|
|
$
|
0.48
|
|
119
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Management has evaluated subsequent events from
December 31, 2009. On March 2, 2010, our Board of
Directors authorized a quarterly dividend of $0.05 per common
share commencing in the first quarter 2010 and payable on
April 9, 2010 to shareholders of record on March 23,
2010.
120
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
Item 9A.
|
Controls
and Procedures.
|
Disclosure
Controls and Procedures
Under the supervision and with the participation of management,
including our Chief Executive Officer and our Chief Financial
Officer, who joined our company on February 3, 2010, we
have carried out an evaluation of our disclosure controls and
procedures (as defined in
Rule 13a-15(e)
under the Exchange Act). Based on that evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that
our disclosure controls and procedures were effective as of the
end of the period covered by this annual report to ensure that
information we are required to disclose in reports that are
filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the rules and forms specified by the SEC and is
accumulated and communicated to our management, including our
Chief Executive Officer and our Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.
Managements
Report on Internal Control Over Financial
Reporting
The management of SeaBright Insurance Holdings, Inc. is
responsible for establishing and maintaining adequate internal
control over financial reporting as required by the
Sarbanes-Oxley Act of 2002 and as defined in Exchange Act
Rule 13a-15(f).
Our system of internal control over financial reporting is
designed to provide reasonable assurance to our management and
Board of Directors regarding the preparation and fair
presentation of published financial statements. A system of
internal control can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Our
management, including our Chief Executive Officer and Chief
Financial Officer, conducted an assessment of the design and
operating effectiveness of our internal control over financial
reporting based on the framework in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, our management has
concluded that, as of December 31, 2009, our internal
control over financial reporting was effective.
KPMG LLP, an independent registered public accounting firm, has
issued their report regarding the audit of the effectiveness of
our internal control over financial reporting as of
December 31, 2009, which is included in this Item 9A.
Changes
in Internal Controls
There have not been any changes in our internal controls over
financial reporting during our fourth fiscal quarter of 2009
that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial
reporting.
121
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
SeaBright Insurance Holdings, Inc.:
We have audited SeaBright Insurance Holdings, Inc and
subsidiaries (the Company) 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 maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, SeaBright Insurance Holdings, Inc. and
subsidiaries 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.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of SeaBright Insurance Holdings,
Inc. and subsidiaries as of December 31, 2009 and 2008, and
the related consolidated statements of operations, changes in
stockholders equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
December 31, 2009, and our report dated March 16, 2010
expressed an unqualified opinion on those consolidated financial
statements.
Seattle, Washington
March 16, 2010
122
|
|
Item 9B.
|
Other
Information.
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
The information required by this item is incorporated by
reference from the sections captioned Board of Directors
and Corporate Governance and Common Stock
Ownership contained in our proxy statement for the 2010
annual meeting of stockholders, to be filed with the Commission
pursuant to Regulation 14A not later than 120 days
after December 31, 2009.
|
|
Item 11.
|
Executive
Compensation.
|
The information required by this item is incorporated by
reference from the sections captioned Executive
Compensation and Director Compensation
contained in our proxy statement for the 2010 annual meeting of
stockholders, to be filed with the Commission pursuant to
Regulation 14A not later than 120 days after
December 31, 2009.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this item is incorporated by
reference from the sections captioned Common Stock
Ownership and Executive Compensation contained
in our proxy statement for the 2010 annual meeting of
stockholders, to be filed with the Commission pursuant to
Regulation 14A not later than 120 days after
December 31, 2009.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by this item is incorporated by
reference from the section captioned Certain Relationships
and Related Transactions contained in our proxy statement
for the 2010 annual meeting of stockholders, to be filed with
the Commission pursuant to Regulation 14A not later than
120 days after December 31, 2009.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
The information required by this item is incorporated by
reference from the sections captioned Principal Accounting
Fees and Services contained in our proxy statement for the
2010 annual meeting of stockholders, to be filed with the
Commission pursuant to Regulation 14A not later than
120 days after December 31, 2009.
123
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules.
|
The following documents are being filed as part of this annual
report.
(a) (1) Financial Statements. The following
financial statements and notes are filed under Part II,
Item 8 of this annual report.
|
|
|
|
|
|
|
Page
|
|
SeaBright Insurance Holdings, Inc.
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
85
|
|
Consolidated Balance Sheets
|
|
|
86
|
|
Consolidated Statements of Operations
|
|
|
87
|
|
Consolidated Statements of Changes in Stockholders Equity
and Comprehensive Income
|
|
|
88
|
|
Consolidated Statements of Cash Flows
|
|
|
89
|
|
Notes to Consolidated Financial Statements
|
|
|
90
|
|
(2) Financial Statement Schedules.
SeaBright Insurance Holdings, Inc.
Schedule II Condensed Financial Information of
Registrant
Schedule IV Reinsurance
Schedule VI Supplemental Information Concerning
Insurance Operations
All other schedules for which provision is made in the
applicable accounting requirements of the Securities and
Exchange Commission are not required or the required information
has been included within the financial statements or the notes
thereto.
(3) Exhibits. The list of exhibits in the
Exhibit Index to this annual report is incorporated herein
by reference.
124
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.
SEABRIGHT INSURANCE HOLDINGS, INC.
|
|
|
|
By:
|
/s/ John
G. Pasqualetto
|
John G. Pasqualetto,
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities indicated below on
March 16, 2010.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ John
G. Pasqualetto
John
G. Pasqualetto
|
|
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
/s/ Scott
H. Maw
Scott
H. Maw
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
/s/ M.
Philip Romney
M.
Philip Romney
|
|
Vice President Finance, Principal
Accounting Officer
(Principal Accounting Officer)
|
|
|
|
/s/ Peter
Y. Chung
Peter
Y. Chung
|
|
Director
|
|
|
|
/s/ Joseph
A. Edwards
Joseph
A. Edwards
|
|
Director
|
|
|
|
/s/ William
M. Feldman
William
M. Feldman
|
|
Director
|
|
|
|
/s/ Mural
R. Josephson
Mural
R. Josephson
|
|
Director
|
|
|
|
/s/ George
M. Morvis
George
M. Morvis
|
|
Director
|
|
|
|
/s/ Michael
D. Rice
Michael
D. Rice
|
|
Director
|
125
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
SeaBright Insurance Holdings, Inc.:
Under date of March 16, 2010, we reported on the
consolidated balance sheets of SeaBright Insurance Holdings,
Inc. and subsidiaries (the Company) as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, changes in stockholders equity
and comprehensive income, and cash flows for each of the years
in the three-year period ended December 31, 2009, which
report is included in this annual report on
Form 10-K.
In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated
financial statement schedules in this annual report on
Form 10-K.
These financial statement schedules are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these financial statement schedules based on our
audits.
In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
Seattle, Washington
March 16, 2010
126
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SEABRIGHT
INSURANCE HOLDINGS, INC.
CONDENSED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share and per share information)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
9,116
|
|
|
$
|
10,133
|
|
Federal income tax recoverable
|
|
|
4,441
|
|
|
|
1,671
|
|
Other assets
|
|
|
7,137
|
|
|
|
7,435
|
|
Investment in subsidiaries
|
|
|
338,813
|
|
|
|
305,627
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
359,507
|
|
|
$
|
324,866
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
$
|
34
|
|
|
$
|
53
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
34
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Series A preferred stock, $0.01 par value;
750,000 shares authorized; no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Undesignated preferred stock, $0.01 par value;
10,000,000 shares authorized; no shares issued and
outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 75,000,000 authorized;
issued and outstanding 21,675,786 shares at
December 31, 2009 and 21,392,854 at December 31, 2008
|
|
|
217
|
|
|
|
214
|
|
Paid-in capital
|
|
|
205,079
|
|
|
|
200,893
|
|
Accumulated other comprehensive income (loss)
|
|
|
12,927
|
|
|
|
(4,009
|
)
|
Retained earnings
|
|
|
141,250
|
|
|
|
127,715
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
359,473
|
|
|
|
324,813
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
359,507
|
|
|
$
|
324,866
|
|
|
|
|
|
|
|
|
|
|
See report of independent registered public accounting firm.
127
SEABRIGHT
INSURANCE HOLDINGS, INC.
CONDENSED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share and earnings per share
information)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from subsidiaries
|
|
$
|
17,451
|
|
|
$
|
33,341
|
|
|
$
|
42,418
|
|
Net investment income
|
|
|
205
|
|
|
|
330
|
|
|
|
734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,656
|
|
|
|
33,671
|
|
|
|
43,152
|
|
Losses and expenses
|
|
|
5,594
|
|
|
|
6,329
|
|
|
|
4,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
12,062
|
|
|
|
27,342
|
|
|
|
38,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(1,173
|
)
|
|
|
(887
|
)
|
|
|
(303
|
)
|
Deferred
|
|
|
(300
|
)
|
|
|
(1,049
|
)
|
|
|
(832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,473
|
)
|
|
|
(1,936
|
)
|
|
|
(1,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,535
|
|
|
$
|
29,278
|
|
|
$
|
39,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.65
|
|
|
$
|
1.43
|
|
|
$
|
1.96
|
|
Diluted earnings per share
|
|
$
|
0.63
|
|
|
$
|
1.38
|
|
|
$
|
1.90
|
|
Weighted average basic shares outstanding
|
|
|
20,702,572
|
|
|
|
20,498,305
|
|
|
|
20,341,931
|
|
Weighted average diluted shares outstanding
|
|
|
21,515,153
|
|
|
|
21,232,762
|
|
|
|
20,976,525
|
|
See report of independent registered public accounting firm.
128
SEABRIGHT
INSURANCE HOLDINGS, INC.
CONDENSED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
AND
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-in
|
|
|
Income
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
(Loss)
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2006
|
|
|
20,553
|
|
|
$
|
|
|
|
$
|
205
|
|
|
$
|
190,593
|
|
|
$
|
(197
|
)
|
|
$
|
58,525
|
|
|
$
|
249,126
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,912
|
|
|
|
39,912
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized losses recorded into
income, net of tax of $36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
69
|
|
Decrease in unrealized loss on investment securities available
for sale, net of tax of $951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,766
|
|
|
|
|
|
|
|
1,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,747
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,010
|
|
|
|
|
|
|
|
|
|
|
|
3,010
|
|
Restricted stock grants
|
|
|
240
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Exercise of stock options, including tax benefit of $110
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
20,831
|
|
|
|
|
|
|
|
208
|
|
|
|
194,023
|
|
|
|
1,638
|
|
|
|
98,437
|
|
|
|
294,306
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,278
|
|
|
|
29,278
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized losses recorded into
income, net of tax of $4,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,089
|
|
|
|
|
|
|
|
9,089
|
|
Increase in unrealized loss on investment securities available
for sale, net of tax benefit of $6,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,736
|
)
|
|
|
|
|
|
|
(14,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,631
|
|
Stock based compensation, net of taxes of $78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,630
|
|
|
|
|
|
|
|
|
|
|
|
5,630
|
|
Restricted stock grants
|
|
|
428
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Exercise of stock options, including tax benefit of $148
|
|
|
134
|
|
|
|
|
|
|
|
2
|
|
|
|
1,240
|
|
|
|
|
|
|
|
|
|
|
|
1,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
21,393
|
|
|
|
|
|
|
|
214
|
|
|
|
200,893
|
|
|
|
(4,009
|
)
|
|
|
127,715
|
|
|
|
324,813
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,535
|
|
|
|
13,535
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized losses recorded into
income, net of tax of $150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
279
|
|
|
|
|
|
|
|
279
|
|
Increase in unrealized loss on investment securities available
for sale, net of tax benefit of $7,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,642
|
|
|
|
|
|
|
|
14,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,456
|
|
Stock based compensation, net of taxes $192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,611
|
|
|
|
|
|
|
|
|
|
|
|
4,611
|
|
Restricted stock grants
|
|
|
320
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Exercise of stock options, including tax benefit of $0
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
Tax effect of change in deferred tax asset valuation allowance
recorded in comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,015
|
|
|
|
|
|
|
|
2,015
|
|
Surrender of stock in connection with restricted stock vesting
|
|
|
(44
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
(472
|
)
|
|
|
|
|
|
|
|
|
|
|
(473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
21,676
|
|
|
$
|
|
|
|
$
|
217
|
|
|
$
|
205,079
|
|
|
$
|
12,927
|
|
|
$
|
141,250
|
|
|
$
|
359,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See report of independent registered public accounting firm.
129
SEABRIGHT
INSURANCE HOLDINGS, INC.
CONDENSED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,535
|
|
|
$
|
29,278
|
|
|
$
|
39,912
|
|
Adjustment to reconcile net income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries
|
|
|
(17,451
|
)
|
|
|
(33,341
|
)
|
|
|
(42,418
|
)
|
Benefit for deferred income taxes
|
|
|
(300
|
)
|
|
|
(1,049
|
)
|
|
|
(832
|
)
|
Amortization of intangible assets
|
|
|
|
|
|
|
10
|
|
|
|
(10
|
)
|
Compensation cost on stock options
|
|
|
686
|
|
|
|
988
|
|
|
|
698
|
|
Grant of restricted shares of common stock
|
|
|
4,117
|
|
|
|
4,720
|
|
|
|
2,311
|
|
Changes in certain assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable from subsidiaries
|
|
|
1,790
|
|
|
|
2,285
|
|
|
|
(4,026
|
)
|
Federal income taxes payable (recoverable)
|
|
|
(2,962
|
)
|
|
|
(4,122
|
)
|
|
|
3,606
|
|
Other assets
|
|
|
8
|
|
|
|
53
|
|
|
|
(68
|
)
|
Accrued expenses and other liabilities
|
|
|
(18
|
)
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(595
|
)
|
|
|
(1,178
|
)
|
|
|
(842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities, net of effects of
acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisition, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(1,178
|
)
|
Issuance of intercompany promissory note
|
|
|
|
|
|
|
(1,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
|
(1,700
|
)
|
|
|
(1,178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
47
|
|
|
|
1,094
|
|
|
|
313
|
|
Deferred tax benefit from disqualifying dispositions
|
|
|
|
|
|
|
148
|
|
|
|
|
|
Surrender of stock in connection with restricted stock vesting
|
|
|
(473
|
)
|
|
|
|
|
|
|
|
|
Grant of restricted stock
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(422
|
)
|
|
|
1,246
|
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(1,017
|
)
|
|
|
(1,632
|
)
|
|
|
(1,707
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
10,133
|
|
|
|
11,765
|
|
|
|
13,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
9,116
|
|
|
$
|
10,133
|
|
|
$
|
11,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See report of independent registered public accounting firm.
130
SCHEDULE IV
REINSURANCE
SEABRIGHT
INSURANCE HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
Ceded to
|
|
|
Assumed
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
Other
|
|
|
from Other
|
|
|
|
|
|
Assumed
|
|
|
|
Direct
|
|
|
Companies
|
|
|
Companies
|
|
|
Net
|
|
|
to Net
|
|
|
|
(In thousands)
|
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Earned
|
|
$
|
263,486
|
|
|
$
|
22,685
|
|
|
$
|
3,625
|
|
|
$
|
244,427
|
|
|
|
1.5
|
%
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Earned
|
|
|
255,949
|
|
|
|
14,447
|
|
|
|
7,169
|
|
|
|
248,644
|
|
|
|
2.9
|
%
|
Year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Earned
|
|
|
234,398
|
|
|
|
14,979
|
|
|
|
8,576
|
|
|
|
227,995
|
|
|
|
3.8
|
%
|
See report of independent registered public accounting firm.
131
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING INSURANCE OPERATIONS
SEABRIGHT
INSURANCE HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
|
|
|
Loss and Loss
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Loss and
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment Expenses Incurred
|
|
|
of Deferred
|
|
|
Paid Loss
|
|
|
|
|
|
|
Policy
|
|
|
Loss
|
|
|
Net
|
|
|
Net
|
|
|
Net
|
|
|
Related to
|
|
|
Policy
|
|
|
and Loss
|
|
|
Gross
|
|
|
|
Acquisition
|
|
|
Adjustment
|
|
|
Unearned
|
|
|
Earned
|
|
|
Investment
|
|
|
Current
|
|
|
Prior
|
|
|
Acquisition
|
|
|
Adjustment
|
|
|
Premiums
|
|
|
|
Costs, Net
|
|
|
Expense
|
|
|
Premium(1)
|
|
|
Premium
|
|
|
Income
|
|
|
Year
|
|
|
Years
|
|
|
Costs
|
|
|
Expenses
|
|
|
Written
|
|
|
|
(In thousands)
|
|
|
Year ended December 31, 2009
|
|
$
|
25,537
|
|
|
$
|
351,496
|
|
|
$
|
169,006
|
|
|
$
|
244,427
|
|
|
$
|
23,132
|
|
|
$
|
172,411
|
|
|
$
|
(242
|
)
|
|
$
|
44,653
|
|
|
$
|
127,380
|
|
|
$
|
290,002
|
|
Year ended December 31, 2008
|
|
|
23,175
|
|
|
|
292,027
|
|
|
|
154,312
|
|
|
|
248,644
|
|
|
|
22,605
|
|
|
|
168,559
|
|
|
|
(26,624
|
)
|
|
|
43,631
|
|
|
|
105,836
|
|
|
|
270,344
|
|
Year ended December 31, 2007
|
|
|
19,832
|
|
|
|
250,085
|
|
|
|
145,213
|
|
|
|
227,995
|
|
|
|
20,307
|
|
|
|
162,018
|
|
|
|
(33,833
|
)
|
|
|
36,481
|
|
|
|
76,738
|
|
|
|
282,658
|
|
|
|
|
(1) |
|
Net unearned premium represents unearned premiums minus prepaid
reinsurance. |
See report of independent registered public accounting firm.
132
EXHIBIT INDEX
The list of exhibits in the Exhibit Index to this annual
report is incorporated herein by reference.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of SeaBright
Insurance Holdings, Inc. (incorporated by reference to the
Companys
Form S-8
Registration Statement (File
No. 333-123319),
filed March 15, 2005)
|
|
3
|
.2
|
|
Amended and Restated By-laws of SeaBright Insurance Holdings,
Inc. (incorporated by reference to the Companys
Form S-8
Registration Statement (File
No. 333-123319),
filed March 15, 2005)
|
|
4
|
.1
|
|
Specimen Common Stock Certificate (incorporated by reference to
Amendment No. 2 to the Companys Registration
Statement on
Form S-1
(File
No. 333-119111),
filed November 22, 2004)
|
|
4
|
.2
|
|
Indenture dated as of May 26, 2004 by and between SeaBright
Insurance Company and Wilmington Trust Company
(incorporated by reference to the Companys Registration
Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.1
|
|
Employment Agreement, dated as of September 30, 2003, by
and between SeaBright Insurance Company and John G. Pasqualetto
(incorporated by reference to Amendment No. 1 to the
Companys Registration Statement on
Form S-1
(File
No. 333-119111),
filed November 1, 2004)
|
|
10
|
.2
|
|
Employment Agreement, dated as of September 30, 2003, by
and between SeaBright Insurance Company and Richard J. Gergasko
(incorporated by reference to the Companys Registration
Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.3
|
|
Employment Agreement, dated as of September 30, 2003, by
and between SeaBright Insurance Company and Joseph S. De Vita
(incorporated by reference to the Companys Registration
Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.4
|
|
Employment Agreement, dated as of September 30, 2003, by
and between SeaBright Insurance Company and Richard W. Seelinger
(incorporated by reference to the Companys Registration
Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.5
|
|
Employment Agreement, dated as of September 30, 2003, by
and between SeaBright Insurance Company and Jeffrey C. Wanamaker
(incorporated by reference to the Companys Registration
Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.6
|
|
Employment Agreement, dated as of March 31, 2005, by and
between SeaBright Insurance Company and Debra Drue Wax
(incorporated by reference to the Companys Current Report
on
Form 8-K,
filed April 5, 2005)
|
|
10
|
.7
|
|
Purchase Agreement, dated as of July 14, 2003, by and among
Insurance Holdings, Inc., Kemper Employers Group, Inc.,
Lumbermens Mutual Casualty Company and Pacific Eagle Insurance
Company (incorporated by reference to the Companys
Registration Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.8
|
|
Amendment Letter to Purchase Agreement, dated as of
July 30, 2003, by and among Insurance Holdings, Inc.,
Kemper Employers Group, Inc., Lumbermens Mutual Casualty
Company, Eagle Pacific Insurance Company and Pacific Eagle
Insurance Company (incorporated by reference to the
Companys Registration Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.9
|
|
Amendment Letter to Purchase Agreement, dated as of
September 15, 2003, by and among SeaBright Insurance
Holdings, Inc., Kemper Employers Group, Inc., Lumbermens Mutual
Casualty Company, Eagle Pacific Insurance Company and Pacific
Eagle Insurance Company (incorporated by reference to the
Companys Registration Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.10
|
|
Escrow Agreement, dated as of September 30, 2003, by and
among Wells Fargo Bank Minnesota, National Association,
SeaBright Insurance Holdings, Inc. and Kemper Employers Group,
Inc. (incorporated by reference to the Companys
Registration Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
133
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.11
|
|
Adverse Development Excess of Loss Reinsurance Agreement, dated
as of September 30, 2004, between Lumbermens Mutual
Casualty Company and Kemper Employers Insurance Company
(incorporated by reference to the Companys Registration
Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.12
|
|
Amended and Restated Reinsurance Trust Agreement, dated as
of February 29, 2004, by and among Lumbermens Mutual
Casualty Company and SeaBright Insurance Company (incorporated
by reference to Amendment No. 1 to the Companys
Registration Statement on
Form S-1
(File
No. 333-119111),
filed November 1, 2004)
|
|
10
|
.13
|
|
Commutation Agreement, dated as of September 30, 2003, by
and between Kemper Employers Insurance Company and Lumbermens
Mutual Casualty Company (incorporated by reference to the
Companys Registration Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.14
|
|
Administrative Services Agreement, dated as of
September 30, 2003, by and among Kemper Employers Insurance
Company, Eagle Pacific Insurance Company and Pacific Eagle
Insurance Company (incorporated by reference to the
Companys Registration Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.15
|
|
Administrative Services Agreement, dated as of
September 30, 2003, by and among Kemper Employers Insurance
Company and Lumbermens Mutual Casualty Company (incorporated by
reference to the Companys Registration Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.16
|
|
Claims Administration Services Agreement, dated as of
September 30, 2003, by and among Kemper Employers Insurance
Company, Eagle Pacific Insurance Company and Pacific Eagle
Insurance Company (incorporated by reference to the
Companys Registration Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.17
|
|
Side Letter, dated as of September 29, 2003, by and among
SeaBright Insurance Holdings, Inc., Kemper Employers Group,
Inc., Lumbermens Mutual Casualty Company, Eagle Pacific
Insurance Company and Pacific Eagle Insurance Company
(incorporated by reference to the Companys Registration
Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.18
|
|
Amendment to Employment Agreement by and between SeaBright
Insurance Company and John G. Pasqualetto (incorporated by
reference to Amendment No. 2 to the Companys
Registration Statement on
Form S-1
(File
No. 333-119111),
filed November 22, 2004)
|
|
10
|
.19
|
|
Executive Stock Agreement, dated as of September 30, 2003,
by and between SeaBright Insurance Holdings, Inc. and John
Pasqualetto (incorporated by reference to the Companys
Registration Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.20
|
|
Executive Stock Agreement, dated as of September 30, 2003,
by and between SeaBright Insurance Holdings, Inc. and Richard J.
Gergasko (incorporated by reference to the Companys
Registration Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.21
|
|
Executive Stock Agreement, dated as of September 30, 2003,
by and between SeaBright Insurance Holdings, Inc. and Joseph De
Vita (incorporated by reference to the Companys
Registration Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.22
|
|
Executive Stock Agreement, dated as of September 30, 2003,
by and between SeaBright Insurance Holdings, Inc. and Richard
Seelinger (incorporated by reference to the Companys
Registration Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.23
|
|
Executive Stock Agreement, dated as of September 30, 2003,
by and between SeaBright Insurance Holdings, Inc. and Jeffrey C.
Wanamaker (incorporated by reference to the Companys
Registration Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.24
|
|
Executive Stock Agreement, dated as of June 30, 2004, by
and between SeaBright Insurance Holdings, Inc. and Chris
Engstrom (incorporated by reference to the Companys
Registration Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
134
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.25
|
|
Executive Stock Agreement, dated as of June 30, 2004, by
and between SeaBright Insurance Holdings, Inc. and James Louden
Borland III (incorporated by reference to the
Companys Registration Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.26
|
|
Stock Purchase Agreement, dated as of June 30, 2004, by and
between SeaBright Insurance Holdings, Inc. and each of the
purchasers named therein (incorporated by reference to the
Companys Registration Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.27
|
|
Form of Incentive Stock Option Agreement (incorporated by
reference to the Companys Registration Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.28
|
|
Tax and Expense Sharing Agreement, dated as of March 12,
2004, by and among SeaBright Insurance Holdings, Inc., SeaBright
Insurance Company and PointSure Insurance Services, Inc.
(incorporated by reference to Amendment No. 1 to the
Companys Registration Statement on
Form S-1
(File
No. 333-119111),
filed November 1, 2004)
|
|
10
|
.29
|
|
Agency Services Agreement, effective as of October 1, 2003,
by and between SeaBright Insurance Company and PointSure
Insurance Services, Inc. (incorporated by reference to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
(File
No. 333-119111),
filed November 1, 2004)
|
|
10
|
.30
|
|
Floating Rate Surplus Note, dated May 26, 2004, from
SeaBright Insurance Company to Wilmington Trust Company, as
trustee, for $12,000,000 (incorporated by reference to the
Companys Registration Statement on
Form S-1
(File
No. 333-119111),
filed September 17, 2004)
|
|
10
|
.31
|
|
Side Letter, dated as of September 28, 2004, by and among
SeaBright Insurance Holdings, Inc., SeaBright Insurance Company
and Lumbermens Mutual Casualty Company (incorporated by
reference to Amendment No. 1 to the Companys
Registration Statement on
Form S-1
(File
No. 333-119111),
filed November 1, 2004)
|
|
10
|
.32
|
|
Form of Stock Option Award Agreement for awards granted under
2005 Long-Term Equity Incentive Plan (incorporated by reference
to Amendment No. 4 to the Companys Registration
Statement on
Form S-1
(File
No. 333-119111),
filed January 3, 2005)
|
|
10
|
.33
|
|
Form of Restricted Stock Grant Agreement for grants to directors
under the 2005 Long-Term Equity Incentive Plan (incorporated by
reference to the Companys Annual Report on
Form 10-K,
filed March 28, 2005)
|
|
10
|
.34
|
|
SeaBright Insurance Holdings, Inc. Bonus Plan 2007 (incorporated
by reference to the Companys Annual Report on
Form 10-K
(File
No. 000-51124),
filed March 17, 2008)
|
|
10
|
.35
|
|
Form of Restricted Stock Grant Agreement for grants to officers
under the 2005 Long-Term Equity Incentive Plan (incorporated by
reference to the Companys Annual Report on
Form 10-K
(File
No. 000-51124),
filed March 29, 2006)
|
|
10
|
.36
|
|
Employment Agreement, dated as of August 15, 2006, by and
between SeaBright Insurance Company and Marc B.
Miller, M.D. (incorporated by reference to the
Companys Current Report on
Form 8-K
(File
No. 000-51124),
filed August 17, 2006)
|
|
10
|
.37
|
|
Second Amended and Restated 2003 Stock Option Plan (incorporated
by reference to the Companys Current Report on
Form 8-K
(File
No. 000-51124),
filed April 3, 2007)
|
|
10
|
.38
|
|
Amended and Restated 2005 Long-Term Equity Incentive Plan
(incorporated by reference to the Companys Current Report
on
Form 8-K
(File
No. 000-51124),
filed April 3, 2007)
|
|
10
|
.39
|
|
SeaBright Insurance Holdings, Inc. Bonus Plan 2008 (incorporated
by reference to the Companys Current Report on
Form 8-K
(File
No. 000-51124),
filed February 26, 2008)
|
|
10
|
.40
|
|
Form of Bonus Exhibit under SeaBright Insurance Holdings, Inc.
Bonus Plan 2008 (incorporated by reference to the Companys
Current Report on
Form 8-K
(File
No. 000-51124),
filed April 2, 2008)
|
|
10
|
.41
|
|
Employment Offer Letter to Mr. Robert P. Cuthbert, dated
August 13, 2008 (incorporated by reference to the
Companys Current Report on
Form 8-K
(File
No. 000-51124),
filed October 17, 2008)
|
|
10
|
.42
|
|
SeaBright Insurance Holdings, Inc. 2009 Bonus Plan (incorporated
by reference to the Companys Current Report on
Form 8-K
(File
No. 001-34204),
filed April 2, 2009)
|
135
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.43
|
|
Release and Settlement Agreement (incorporated by reference to
the Companys Current Report on
Form 8-K
(File
No. 001-34204),
filed June 30, 2009)
|
|
10
|
.44
|
|
Employment Agreement with M. Philip Romney, dated
November 3, 2009 (incorporated by reference to
Exhibit 10.1 of the Companys Current Report on
Form 8-K
(File
No. 001-34204),
filed November 6, 2009)
|
|
10
|
.45
|
|
Revised Offer Letter to Mr. Scott H. Maw (incorporated by
reference to Exhibit 10.1 of the Companys Current
Report on
Form 8-K
(File
No. 001-34204),
filed February 9, 2010)
|
|
21
|
.1*
|
|
Subsidiaries of the registrant
|
|
23
|
.1*
|
|
Consent of KPMG LLP
|
|
31
|
.1*
|
|
Rule 13a-14(a)/15d-14(a)
Certification (Chief Executive Officer)
|
|
31
|
.2*
|
|
Rule 13a-14(a)/15d-14(a)
Certification (Chief Financial Officer)
|
|
32
|
.1*
|
|
Section 1350 Certification (Chief Executive Officer)
|
|
32
|
.2*
|
|
Section 1350 Certification (Chief Financial Officer)
|
|
|
|
* |
|
Filed herewith. |
|
|
|
Indicates a management contract, compensatory plan, contract or
arrangement required to be filed pursuant to Item 601 of
Regulation S-K. |
136