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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark one)

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 0-06334

 

 

AssuranceAmerica Corporation

(Exact name of smaller reporting company as specified in its charter)

 

 

 

Nevada   87-0281240
(State of Incorporation)   (IRS Employer ID Number)
5500 Interstate North Parkway, Suite 600   30328
(Address of principal executive offices)   (Zip Code)

(770) 952-0200

(Issuer’s telephone number, including area code)

 

 

Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or 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  ¨

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  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  þ

There were 65,810,531 shares of the Registrant’s $.01 par value Common Stock outstanding as of November 9, 2011.

 

 

 


Table of Contents

ASSURANCEAMERICA CORPORATION

Index to Form 10-Q

 

         Page  
PART I — FINANCIAL INFORMATION   

Item 1

  Financial Statements   
 

Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010

     3   
 

Consolidated Statements of Operations For the Three Months and Nine Months Ended September  30, 2011 and September 30, 2010

     4   
 

Consolidated Statements of Comprehensive Income For the Three Months and Nine Months Ended September 30, 2011 and September 30, 2010

     5   
 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and September 30, 2010

     6   
 

Notes to Consolidated Financial Statements

     7   

Item 2

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      21   

Item 3

  Quantitative and Qualitative Disclosures about Market Risk      30   

Item 4

  Controls and Procedures      30   
PART II — OTHER INFORMATION   
Item 1A   Risk Factors      30   
Item 2   Unregistered Sales of Equity Securities and Use of Proceeds      30   
Item 3   Defaults Upon Senior Securities      30   
Item 4   Removed and Reserved      30   
Item 5   Other Information      30   
Item 6   Exhibits      31   

Signatures

     32   

 

2


Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     (Unaudited)
September 30,
2011
    December 31,
2010
 
ASSETS     

Cash and cash equivalents

   $ 4,639,419      $ 7,958,473   

Cash restricted

     504,069        1,802,990   

Short-term investments

     125,008        145,085   

Long-term investments, at fair value (amortized cost $5,679,805 and $8,561,245)

     5,753,687        8,630,776   

Marketable equity securities, at fair value (cost $1,821,545 and $1,978,166)

     1,776,076        2,243,235   

Other long-term investments

     658,543        727,288   

Investment income due and accrued

     85,042        180,487   

Receivable from insureds

     30,931,079        33,120,082   

Reinsurance recoverable (including $14,699,366 and $10,602,969 on paid losses)

     44,233,444        34,013,415   

Prepaid reinsurance premiums

     21,465,291        23,643,822   

Deferred acquisition costs

     2,176,746        2,286,118   

Property and equipment (net of accumulated depreciation of $3,779,833 and $3,260,449)

     1,937,535        1,838,203   

Other receivables

     1,041,750        384,057   

Prepaid expenses

     482,749        541,736   

Security deposits

     33,833        33,833   

Assets of discontinued operations

     799,570        8,290,462   

Prepaid income tax

     180,826        106,864   

Deferred tax assets

     3,537,208        1,837,551   
  

 

 

   

 

 

 

Total assets

   $ 120,361,875      $ 127,784,477   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Accounts payable and accrued expenses

   $ 5,980,068      $ 6,770,890   

Unearned premium

     31,302,797        34,217,108   

Unpaid losses and loss adjustment expenses

     43,460,427        33,311,067   

Reinsurance payable

     26,163,570        29,426,944   

Provisional commission reserve

     2,437,780        3,289,272   

Funds withheld from reinsurers

     575,000        1,875,000   

Liabilities of discontinued operations

     643,548        2,026,825   

Revolving line of credit

     0        1,500,000   

Notes and interest payable

     132,925        175,420   
  

 

 

   

 

 

 

Total liabilities

     110,696,115        112,592,526   
  

 

 

   

 

 

 

Commitments and Contingencies

    

Common stock, $.01 par value (authorized 120,000,000 and outstanding 65,810,531 and 65,494,357)

     658,105        654,943   

Surplus-paid in

     18,230,253        17,875,779   

Accumulated deficit

     (9,240,355     (3,547,896

Accumulated other comprehensive gains:

    

Net unrealized gains on investment securities, net of taxes

     17,757        209,125   
  

 

 

   

 

 

 

Total stockholders’ equity

     9,665,760        15,191,951   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 120,361,875      $ 127,784,477   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

ASSURANCEAMERICA CORPORATION

(Unaudited) CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
     2011     2010     2011     2010  

Revenue:

        

Gross premiums written

   $ 22,160,011      $ 24,908,126      $ 71,570,796      $ 78,946,512   

Gross premiums ceded

     (15,395,290     (16,636,790     (46,005,673     (53,257,566
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums written

     6,764,721        8,271,336        25,565,123        25,688,946   

(Increase) decrease in unearned premiums, net of prepaid reinsurance premiums

     1,210,593        25,191        724,112        (520,796
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

     7,975,314        8,296,527        26,289,235        25,168,150   

Commission income

     3,210,775        3,714,076        9,612,330        11,434,897   

Managing general agent fees

     2,535,896        2,693,884        8,162,882        8,332,545   

Net investment income

     81,831        165,427        186,178        501,917   

Net investment gains (losses) on securities

     (7,278     3,627        49,933        (2,075

Other income

     12,796        0        12,796        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     13,809,334        14,873,541        44,313,354        45,435,434   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Losses and loss adjustment expenses

     7,559,973        6,056,487        24,746,504        17,892,230   

Selling, general and administrative expenses

     8,038,430        7,964,288        23,823,895        24,048,423   

Stock option expense

     88,264        103,939        262,784        317,308   

Depreciation and amortization expense

     190,797        149,432        519,384        431,767   

Interest expense

     947        92,483        7,494        276,727   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     15,878,411        14,366,629        49,360,061        42,966,455   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (2,069,077     506,912        (5,046,707     2,468,979   

Income tax benefit (expense) on continuing operations

     757,799        (243,873     1,833,586        (1,074,181
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (1,311,278     263,039        (3,213,121     1,394,798   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations (including loss on disposal of $659,409 and $1,160,566 for the three and nine months ended 2011)

     (92,093     (369,456     (2,236,540     (1,096,085

Income tax benefit (expense) on discontinued operations

     (460,521     138,546        (242,795     411,032   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

     (552,614     (230,910     (2,479,335     (685,053
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (1,863,892   $ 32,129      $ (5,692,456   $ 709,745   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) Per Common Share

        

Basic-Income (loss) from continuing operations

   $ (0.020   $ 0.004      $ (0.049   $ 0.021   

Diluted-Income (loss) from continuing operations

   $ (0.020   $ 0.004      $ (0.049   $ 0.021   

Basic-Loss from discontinued operations

   $ (0.008   $ (0.004   $ (0.038   $ (0.010

Diluted-Loss from discontinued operations

   $ (0.008   $ (0.004   $ (0.038   $ (0.010

Basic-Net income (loss)

   $ (0.028   $ 0.000      $ (0.087   $ 0.011   

Diluted-Net income (loss)

   $ (0.028   $ 0.000      $ (0.087   $ 0.011   

Weighted average shares outstanding-basic

     65,797,593        65,494,357        65,717,987        65,458,460   

Weighted average shares outstanding-diluted

     65,797,593        66,139,978        65,717,987        65,957,494   

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES

(Unaudited) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
     2011     2010     2011     2010  

Net income (loss)

   $ (1,863,892   $ 32,129      $ (5,692,456   $ 709,745   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive gains (losses):

        

Change in unrealized gains (losses) of investments:

        

Unrealized gains (losses) arising during the year

     (461,879     305,600        (256,255     445,424   

Reclassification adjustment for realized (gains) and losses recognized during the year

     7,278        (3,627     (49,933     2,075   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized gains (losses)

     (454,601     301,973        (306,188     447,499   

Deferred income taxes on above changes

     170,475        (113,239     114,820        (167,812
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive gain (loss)

     (284,126     188,734        (191,368     279,687   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (2,148,018   $ 220,863      $ (5,883,824   $ 989,432   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES

(Unaudited) CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Nine Months Ended
September 30,
 
     2011     2010  

Cash flows from operating activities:

    

Income (loss) of continuing operations

   $ (3,213,121   $ 1,394,798   

Loss of discontinued operations

     (2,479,335     (685,053
  

 

 

   

 

 

 

Net income (loss)

     (5,692,456     709,745   

Adjustments to net income (loss) to net cash provided (used) by operating activities

    

Net investment (gains) losses on securities

     (49,933     2,075   

Depreciation and amortization

     775,815        945,472   

Loss on disposal of property and equipment

     3,084        0   

Loss on disposal of discontinued operations

     1,160,566        0   

Stock-based compensation

     262,784        317,308   

Deferred tax provision

     (1,584,837     395,389   

Changes in assets and liabilities:

    

Investment income due and accrued

     95,445        (12,522

Receivables

     1,956,312        (124,276

Prepaid expenses

     58,987        (528,580

Unearned premiums

     (2,914,311     1,351,655   

Unpaid loss and loss adjustment expenses

     10,149,360        (10,301,857

Ceded reinsurance payable

     (3,263,374     1,634,760   

Reinsurance recoverable

     (10,220,029     11,632,163   

Prepaid reinsurance premiums

     2,178,531        (830,861

Accounts payable and accrued expenses

     (790,824     (193,976

Prepaid income taxes

     (73,962     258,602   

Other operating activities

     295,396        0   

Funds withheld from reinsurers

     (1,300,000     0   

Deferred acquisition costs

     109,372        (150,368

Provisional commission reserve

     (851,492     (704,908
  

 

 

   

 

 

 

Net cash provided (used) by operating activities - continuing operations

     (9,695,566     4,399,821   

Net cash provided (used) by operating activities - discontinued operations

     (150,859     83,330   
  

 

 

   

 

 

 

Net cash provided (used) by operating activities

     (9,846,425     4,483,151   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (737,804     (392,746

Change in short-term investments

     20,077        4,769   

Proceeds from sales, call and maturities of investments

     4,659,652        1,357,895   

Purchases of investments

     (1,671,690     (2,871,746

Transfer of restricted cash to cash

     1,298,920        (2,337

Proceeds received on sale of agencies discontinued operations

     4,255,000        0   
  

 

 

   

 

 

 

Net cash provided (used) by investing activities - continuing operations

     7,824,155        (1,904,165

Net cash (used) by investing activities - discontinued operations

     (10,370     (274,213
  

 

 

   

 

 

 

Net cash provided (used) by investing activities

     7,813,785        (2,178,378
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repayment of line of credit

     (1,500,000     0   

Repayment of notes payable and related party debt

     (42,495     (517,083

Stock issued, net of expenses

     94,852        105,000   
  

 

 

   

 

 

 

Net cash (used) by financing activities – continuing operations

     (1,447,643     (412,083

Net cash (used) by financing activities – discontinued operations

     0        (57,600
  

 

 

   

 

 

 

Net cash (used) by financing activities

     (1,447,643     (469,683
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (3,480,283     1,835,090   

Cash and cash equivalents, beginning of period – continuing operations

     7,958,473        6,155,305   

Cash and cash equivalents, beginning of period – discontinued operations

     420,541        98,338   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

     4,898,731        8,088,733   

Less cash and cash equivalents, end of period of discontinued operations

     259,312        346,821   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period of continuing operations

   $ 4,639,419      $ 7,741,912   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2011 and 2010

(1) Description of Business

AssuranceAmerica Corporation, a Nevada corporation (the “Company”) is an insurance holding company whose business is comprised of AssuranceAmerica Insurance Company (“AAIC”), AssuranceAmerica Managing General Agency, LLC (“MGA”) and TrustWay Insurance Agencies, LLC (“TrustWay”), each wholly-owned. The Company solicits and underwrites non-standard private passenger automobile insurance. The Company is headquartered in Atlanta, Georgia.

(2) Summary of Significant Accounting Policies

Basis of Consolidation and Presentation

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. In our opinion, the financial statements reflect all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim period. For further information, please refer to our audited consolidated financial statements appearing in the Form 10-K for the year ended December 31, 2010.

Basis of Investments and Presentation

Valuation of available-for-sale investments. Our available for sale investment portfolio is recorded at fair value, which is typically based on publicly-available quoted prices. From time to time, the carrying value of our investments may be temporarily impaired because of the inherent volatility of publicly-traded investments.

We conduct regular reviews to assess whether our investments are impaired and if any impairment is other than temporary. Factors considered by us in assessing whether an impairment is other than temporary include the credit quality of the investment, the duration of the impairment, our ability and intent to hold the investment until recovery or maturity and overall economic conditions. If we determine that the value of any investment is other-than-temporarily impaired, we record a charge against earnings in the amount of the impairment. The credit loss component of an impairment charge is recognized in net earnings while the non-credit component is recognized in accumulated other comprehensive income.

Gains and losses realized on the disposition of available for sale investment securities are determined on the specific identification basis and credited or charged to income. Premiums and discounts on available for sale investment securities are amortized and accreted using the interest method and charged or credited to investment income.

Other long-term investments. Our other long-term investments consists of low income federal housing tax credits, which are being amortized over the life of the credits using the amortized cost method. The credits will be utilized over 10 years as required by the federal government and will be offset against the Company’s federal income tax expenses.

Estimates

A discussion of our significant accounting policies and the use of estimates is included in the notes to the consolidated financial statements included in the Company’s Financial Statements for the year ended December 31, 2010 as filed with the Securities and Exchange Commission in the 2010 Form 10-K.

Balance sheet reclassifications

Balance sheet reclassifications have been made in 2010 in order to conform to the discontinued operations presentation as discussed in Note 7 for 2011.

New Accounting Standards Adopted

In December 2010, the FASB issued Accounting Standards Update No. 2010-29 (“ASU 2010-29”), under Topic 805 Business Combinations; the objective of this update is to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. Paragraph 805-10-50-2(h) requires a public entity to disclose pro forma information for business combinations that occurred in the current reporting period. The disclosures include pro forma revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the

 

7


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comparable prior annual reporting period. The amendments in this update affect any public entity as defined by Topic 805 that enters into business combinations that are material on an individual or aggregate basis. The update also specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted the amendments and they did not have any impact to its financial statements and related disclosures.

In December 2010, the FASB issued Accounting Standards Update No. 2010-28 (“ASU 2010-28”), under Topic 350 on goodwill and other intangible assets. When a goodwill impairment test is performed (either on an annual or interim basis), an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). If it does, an entity must perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment (Step 2). The objective of this update is to address questions about entities with reporting units with zero or negative carrying amounts because some entities concluded that Step 1 of the test is passed in those circumstances because the fair value of their reporting unit will generally be greater than zero. As a result of that conclusion, some constituents raised concerns that Step 2 of the test is not performed despite factors indicating that goodwill may be impaired. The amendments in this update do not provide guidance on how to determine the carrying amount or measure the fair value of the reporting unit. The amendments in this update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative.

For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples in paragraph 350-20-35-30, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Upon adoption of the amendments, an entity with reporting units that have carrying amounts that are zero or negative is required to assess whether it is more likely than not that the reporting units’ goodwill is impaired. If the entity determines that it is more likely than not that the goodwill of one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill impairment test for those reporting unit(s). For public entities, the amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company adopted the amendments and they did not have any impact to its financial statements and related disclosures.

(3) Investments

All of the Company’s marketable equity and long-term investment securities have been classified as available-for-sale. The Company’s long-term securities are available to be sold in response to the Company’s liquidity needs, changes in market interest rates, asset-liability management strategies, and other economic factors. Investments available-for-sale are stated at fair value on the balance sheet. The other long-term investments consist of low income federal housing tax credits, which are being amortized over the life of the credits using the amortized cost method. Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive income within stockholders’ equity net of related deferred income taxes.

A decline in the fair value of an available-for-sale security below cost that is deemed other than temporary results in a charge to income, resulting in the establishment of a new cost basis for the security. Gross unrealized gains, net of unrealized losses as of September 30, 2011 and December 31, 2010 were $28,413 and $334,600, respectively.

Premiums and discounts are amortized or accreted, respectively, over the life of the related fixed maturity security as an adjustment to yield using a method that approximates the effective interest method. Dividends and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific-identification method for determining the cost of securities sold.

A summary of investments follows as of:

 

     September 30,
2011
     December 31,
2010
 

Short-term investments and bank certificates of deposit

   $ 125,008       $ 145,085   

U.S. government sponsored enterprises

     4,211,607         4,617,953   

Corporate debt securities

     1,542,080         4,012,823   

Marketable equity securities

     1,776,076         2,243,235   

Other long-term investments

     658,543         727,288   
  

 

 

    

 

 

 

Total

   $ 8,313,314       $ 11,746,384   
  

 

 

    

 

 

 

 

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Table of Contents

The amortized cost, fair value and gross unrealized gains or losses of U.S. sponsored enterprises and corporate debt securities available-for-sale at September 30, 2011 and December 31, 2010, by contractual maturity, is shown below:

 

Years to Maturity — September 30, 2011

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Within one year

   $ 1,090,633       $ 529       $ 13,831       $ 1,077,331   

One to five years

     3,128,552         174,971         0         3,303,523   

Five to ten years

     547,772         0         83,022         464,750   

Over ten years

     912,848         13,236         18,001         908,083   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,679,805       $ 188,736       $ 114,854       $ 5,753,687   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Years to Maturity — December 31, 2010

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Within one year

   $ 1,022,943       $ 0       $ 9,980       $ 1,012,963   

One to five years

     5,365,295         136,961         91,481         5,410,775   

Five to ten years

     1,005,508         20,740         5,106         1,021,142   

Over ten years

     1,167,499         18,477         80         1,185,896   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,561,245       $ 176,178       $ 106,647       $ 8,630,776   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost, fair value and gross unrealized gains or losses of securities available-for-sale at September 30, 2011 and December 31, 2010, by security type, is shown below:

 

Security Type — September 30, 2011

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

U.S. government sponsored enterprises

   $ 4,041,401       $ 188,207       $ 18,001       $ 4,211,607   

Corporate debt securities

     1,638,404         529         96,853         1,542,080   

Marketable equity securities

     1,821,545         123,140         168,609         1,776,076   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,501,350       $ 311,876       $ 283,463       $ 7,529,763   
  

 

 

    

 

 

    

 

 

    

 

 

 

Security Type — December 31, 2010

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

U.S. government sponsored enterprises

   $ 4,493,940       $ 129,199       $ 5,186       $ 4,617,953   

Corporate debt securities

     4,067,305         46,979         101,461         4,012,823   

Marketable equity securities

     1,978,166         350,552         85,483         2,243,235   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,539,411       $ 526,730       $ 192,130       $ 10,874,011   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 2011, the Company has determined that all of the unrealized losses in available-for-sale securities were temporary.

There were no fundamental issues with any of these securities and the Company has the ability and intent to hold the securities until there is a recovery in fair value. The carrying amounts of individual assets are reviewed at each balance sheet date to assess whether the fair values have declined below the carrying amounts. The Company considers internal and external information, such as credit ratings, in concluding that the impairments are not other than temporary. The decline in value of investments (bonds) is principally driven by rate.

 

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Table of Contents

The following table shows the gross unrealized losses and fair value of securities, aggregated by category and length of time that securities have been in a continuous unrealized loss position at September 30, 2011 and December 31, 2010.

 

     Less Than Twelve Months      Over Twelve Months  
     Gross
Unrealized
Losses
     Estimated
Market
Fair Value
     Gross
Unrealized
Losses
     Estimated
Market
Fair Value
 

September 30, 2011:

           

U.S. government sponsored enterprises

   $ 18,001       $ 644,433       $ 0       $ 0   

Corporate debt securities

     13,831         576,656         83,022         464,750   

Marketable equity securities

     95,031         616,312         73,578         169,399   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 126,863       $ 1,837,401       $ 156,600       $ 634,149   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010:

           

U.S. government sponsored enterprises

   $ 5,186       $ 1,165,156       $ 0       $ 0   

Corporate debt securities

     11,306         1,368,312         90,155         457,325   

Marketable equity securities

     12,570         154,679         72,913         368,369   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 29,062       $ 2,688,147       $ 163,068       $ 825,694   
  

 

 

    

 

 

    

 

 

    

 

 

 

The total proceeds received on sales, maturities and calls on investments amounted to $4,659,652 and $1,357,895 for the nine months ended September 30, 2011 and 2010, respectively. The Company had realized gains and losses of $115,183 and $65,250 during 2011, respectively, and $47,443 and $49,518 during 2010, respectively.

(4) Fair Value Disclosures

The fair value of our investments in fixed income and equity securities is based on observable market quotations, other market observable data, or is derived from such quotations and market observable data. The Company utilizes third party pricing servicers, brokers and internal valuation models to determine fair value. Management gains assurance of the overall reasonableness and consistent application of the assumptions and methodologies and compliance with accounting standards for fair value determination through our ongoing monitoring of the fair values received or derived internally.

Level 1 inputs are unadjusted, quoted prices in active markets for identical instruments at the measurement date (e.g., U.S. Treasury securities and active exchange-traded equity securities). Level 2 securities are comprised of securities whose fair value was determined by a nationally recognized pricing service using observable market inputs. Level 3 securities are comprised of (i) securities for which the pricing service is unable to provide a fair value, (ii) securities whose fair value is determined by the pricing service based on unobservable inputs and (iii) securities, other than securities backed by the U.S. Government, that are not rated by a nationally recognized statistical rating organization.

The following table illustrates the recurring fair value measurements as of September 30, 2011:

 

     Total      Quoted Prices
in
Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Other
Unobservable
Inputs
(Level 3)
 

Available-for-sale securities:

           

U.S. government sponsored enterprises

   $ 4,211,607       $ 4,211,607       $ 0       $ 0   

Corporate debt securities

     1,542,080         0         1,542,080         0   

Marketable equity securities

     1,776,076         1,776,076         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,529,763       $ 5,987,683       $ 1,542,080       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

The following table illustrates the recurring fair value measurements as of December 31, 2010:

 

     Total      Quoted Prices
in
Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Other
Unobservable
Inputs
(Level 3)
 

Available-for-sale securities:

           

U.S. government sponsored enterprises

   $ 4,617,953       $ 4,617,953       $ 0       $ 0   

Corporate debt securities

     4,012,823         0         4,012,823         0   

Marketable equity securities

     2,243,235         2,243,235         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,874,011       $ 6,861,188       $ 4,012,823       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table illustrates the nonrecurring fair value measurement for intangibles net of amortization as of September 30, 2011:

 

     Total     Quoted Prices
in
Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Other
Unobservable
Inputs
(Level 3)
 

Intangible Assets:

          

Beginning balance at December 31, 2010

   $ 5,969,215      $ 0       $ 0       $ 5,969,215   

Sale of TrustWay Agencies

     (5,776,702     0         0         (5,776,702

Amortization of intangibles

     (192,513     0         0         (192,513
  

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance September 30, 2011

   $ 0      $ 0       $ 0       $ 0   
  

 

 

   

 

 

    

 

 

    

 

 

 

The following table illustrates the nonrecurring fair value measurement for intangibles net of amortization as of December 31, 2010:

 

     Total     Quoted Prices
in
Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Other
Unobservable
Inputs
(Level 3)
 

Intangible Assets:

          

Beginning balance at December 31, 2009

   $ 7,509,934      $ 0       $ 0       $ 7,509,934   

Goodwill write down

     (1,519,200     0         0         (1,519,200

Additional intangibles related to acquisitions

     355,275        0         0         355,275   

Amortization of intangibles

     (376,794     0         0         (376,794
  

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance December 31, 2010

   $ 5,969,215      $ 0       $ 0       $ 5,969,215   
  

 

 

   

 

 

    

 

 

    

 

 

 

(5) Losses and Loss Adjustment Expenses

The estimated liabilities for losses and loss adjustment expenses include the accumulation of estimates for losses for claims reported prior to the balance sheet dates (“case reserves”), estimates (based upon actuarial analysis of historical data) of losses for claims incurred but not reported (“IBNR”) and for the development of case reserves to ultimate values, and estimates of expenses for investigating, adjusting and settling all incurred claims. Amounts reported are estimates of the ultimate costs of settlement, net of estimated salvage and subrogation. These estimated liabilities are subject to the outcome of future events, such as changes in medical and repair costs as well as economic and social conditions that impact the settlement of claims. Management believes that, given the inherent variability in any such estimates, the aggregate reserves are reasonably adequate. The methods of making such estimates and for establishing the resulting reserves are reviewed and updated quarterly and any resulting adjustments are reflected in current operations.

 

11


Table of Contents

A summary of unpaid losses and loss adjustment expenses, net of reinsurance ceded, is as follows:

 

     September 30,
2011
     December 31,
2010
 

Case basis

   $ 5,187,568       $ 5,180,252   

IBNR

     8,738,781         4,720,369   
  

 

 

    

 

 

 

Total

   $ 13,926,349       $ 9,900,621   
  

 

 

    

 

 

 

(6) Reinsurance

In the normal course of business, the Company seeks to reduce its overall risk levels by obtaining reinsurance from other insurance enterprises or reinsurers. Reinsurance premiums and reserves on reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts.

Effective May 15, 2011, the Company entered into a new catastrophe agreement with Shelter Mutual Insurance Company. The Reinsurer shall be liable for private passenger automobile physical damage coverage with respect to each loss occurrence, for the ultimate net loss over and above an initial ultimate net loss of $400,000 each loss occurrence, subject to a limit of liability to the reinsurer of $1,600,000 each loss occurrence, and further subject to a limit of liability to the reinsurer of $3,200,000 with respects to all loss occurrences commencing during the term of this contract.

Effective April 1, 2011, the Company entered into a new quota share agreement with Greenlight Reinsurance Ltd. for the 2011 treaty year business. The Company has agreed to cede 50% of the bodily injury liability, physical damage and other automobile liability coverages. This reinsurance contract will cover the state of Florida. The losses incurred are ceded on a similar basis.

The Company will receive a 19% ceding commission on ceded premiums earned if the loss and loss adjustment expense ratio as a percentage of earned premium is 75.5% or greater. If the loss ratio is less than 75.5%, but not less than 71.5% then the ceding commission shall be 19.0%, plus one half of the difference in percentage points between 75.5% and the actual loss ratio. If the loss ratio is 71.5% or less, then the ceding commission rate will be 21.0%. The Company receives a provisional commission rate of 20% in advance, which is subject to adjustment once the final loss ratio is known.

Effective January 1, 2011, the Company entered into a new quota share agreement with Swiss Reinsurance America Corporation for the 2011 treaty year business. The Company has agreed to cede 75.0% of the bodily injury liability coverage and 82.5% of physical damage and other automobile liability coverages. The reinsurance contract will cover all states except Florida. The losses incurred are ceded on a similar basis. The agreement includes a loss corridor of 75.0%-79.0%, whereby the Company shall retain the amount by which losses and LAE incurred exceed 75% of collected net premiums earned, subject to a maximum additional retention equal to 4% of collected net premiums earned. Further, the Company shall retain the amount by which losses and LAE incurred, after the application of the loss corridor, exceeds 120% of collected net premiums earned Loss Ratio Cap.

The Company will receive a 21% ceding commission on ceded premiums earned if the loss and loss adjustment expense ratio as a percentage of earned premium is 73.5% or greater. If the loss ratio is 73.5%, but not less than 71.5% then the ceding commission shall be 21.0%, plus the difference in percentage points between 73.5% and the actual loss ratio. If the loss ratio is 71.5% or less, then the ceding commission rate will be 23.0%. The Company receives a provisional commission rate of 23% in advance, which is subject to adjustment once the final loss ratio is known.

Reinsurance contracts do not relieve the Company from its obligations to policyholders. The Company periodically reviews the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies.

Reinsurance assets include balances due from other insurance companies under the terms of reinsurance agreements. Amounts applicable to ceded unearned premiums, ceded loss payments and ceded claims liabilities are reported as assets in the accompanying balance sheets. Under the reinsurance agreements the Company has four reinsurers that are required to collateralize the reinsurance recoverable. As of September 30, 2011 all four reinsurers have provided a letter of credit or secured trust accounts to provide security sufficient to satisfy AAIC’s obligations under the reinsurance agreement. The Company believes the fair value of its reinsurance recoverable approximates its carrying amounts.

 

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Table of Contents

The impact of reinsurance on the statements of operations for the period ended September 30, 2011 and 2010 was as follows:

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
     2011     2010     2011     2010  

Premiums written:

        

Direct

   $ 22,160,011      $ 24,908,886      $ 71,570,796      $ 78,947,429   

Assumed

     0        (760     0        (917

Ceded

     (15,395,290     (16,636,790     (46,005,673     (53,257,566
  

 

 

   

 

 

   

 

 

   

 

 

 

Net

   $ 6,764,721      $ 8,271,336      $ 25,565,123      $ 25,688,946   
  

 

 

   

 

 

   

 

 

   

 

 

 

Premiums earned:

        

Direct

   $ 23,085,387      $ 25,437,176      $ 74,485,634      $ 77,595,773   

Assumed

     0        (761     (529     (918

Ceded

     (15,110,073     (17,139,888     (48,195,870     (52,426,705
  

 

 

   

 

 

   

 

 

   

 

 

 

Net

   $ 7,975,314      $ 8,296,527      $ 26,289,235      $ 25,168,150   
  

 

 

   

 

 

   

 

 

   

 

 

 

Losses and loss adjustment expenses incurred:

        

Direct

   $ 23,638,301      $ 21,105,038      $ 76,366,694      $ 63,245,870   

Assumed

     14        5,949        187        41,914   

Ceded

     (16,078,342     (15,054,500     (51,620,377     (45,395,554
  

 

 

   

 

 

   

 

 

   

 

 

 

Net

   $ 7,559,973      $ 6,056,487      $ 24,746,504      $ 17,892,230   
  

 

 

   

 

 

   

 

 

   

 

 

 

The impact of reinsurance on the balance sheets as of the date indicated is as follows:

 

     September 30,
2011
    December 31,
2010
 

Unpaid losses and loss adjustment expense:

    

Direct

   $ 43,355,037      $ 33,188,235   

Assumed

     105,390        122,832   

Ceded

     (29,534,078     (23,410,446
  

 

 

   

 

 

 

Net

   $ 13,926,349      $ 9,900,621   
  

 

 

   

 

 

 

 

     September 30,
2011
    December 31,
2010
 

Unearned premiums:

    

Direct

   $ 31,302,268      $ 34,216,544   

Assumed

     529        564   

Ceded

     (21,453,623     (23,643,822
  

 

 

   

 

 

 

Net

   $ 9,849,174      $ 10,573,286   
  

 

 

   

 

 

 

The Company receives commissions on its reinsurance agreements for treaty year 2011 on the basis of ceded collected premium. The Company received commissions on its reinsurance agreements for treaty year 2010 and prior on the basis of ceded written premium. The Company pays the reinsurers premium on the basis of ceded collected premium for all of its reinsurance agreements.

As of September 30, 2011 the Company received $5,539,560 in commissions on ceded collected premiums and refunded $1,003,689 in commissions on returned ceded written premium, for net commissions of $4,535,871. Had all of the Company’s reinsurance agreements been cancelled at September 30, 2011, the Company would have returned $3,057,231 in reinsurance commissions to its reinsurers and its reinsurers would have returned $4,177,525 in collected premiums to the Company.

 

13


Table of Contents

(7) Assets and Liabilities of Discontinued Operations

Discontinued Operations

During the second quarter of 2011, the Company committed to sell the assets of the Trustway Insurance Agencies and the stock of TrustWay T.E.A.M, Inc and TrustWay T.E.A.M. Services, LLC. As of June 30, 2011, assets and liabilities of $4,682,030 and $1,294,263, respectively, were classified as held for sale. The Company recognized a $1,473,602 loss, net of tax, related to the classification of the assets held for sale.

On September 30, 2011, the Company sold its Florida insurance agencies and received a total of $2,850,000 in cash related to the sale of assets. The fair value of these assets was $3,489,717 and the Company recognized a pre-tax loss on disposal in the amount of $639,717. The pre-tax loss on discontinued operations for the Florida agencies amounted to $1,121,910. The purchase price related to this sale could increase as much as $250,000, subject to expense savings adjustments. The adjustment period will commence October 1, 2011 and end on January 31, 2012.

Effective July 31, 2011, the Company sold its Alabama insurance agencies. The Company received $75,000 in cash and issued a promissory note receivable in the amount of $225,000 related to the sale. The fair value of these assets was $560,485 and the Company recognized a pre-tax loss on disposal of $260,485. The pre-tax loss on the discontinued operations for the Alabama agencies amounted to $175,606. The principal amount payable is due in four consecutive installments of $45,000 on August 1, 2012 and 2013, with the remaining installments of $67,500 due on August 1, 2014 and 2015. The interest rate is 10% per annum and is payable on the unpaid balance on the last day of each quarter (April 30, July 31, October 31, and January 31,) commencing with the first date of the note until the maturity date.

Effective July 2, 2011, the Company sold the stock of TrustWay T.E.A.M, Inc and TrustWay T.E.A.M. Services, LLC. The Company received $280,000 in cash related to the sale. The fair value of these assets amounted to $83,208, resulting in a pre-tax gain on disposal of $196,792. The pre-tax income on the discontinued operations amounted to $122,942 for TrustWay T.E.A.M.

On June 30, 2011, the Company sold its Georgia insurance agencies. The Company received $750,000 in cash and received a promissory note receivable in the amount of $500,000 related to the sale and is due and payable by November 15, 2011 at an interest rate of 8% per annum. The fair value of these assets was $1,707,156 and the Company recognized a pre-tax loss on disposal of $457,157. The pre-tax income on the discontinued operations for the Georgia agencies amounted to $98,599.

The assets and liabilities of the aforementioned businesses are all classified as discontinued operations at September 30, 2011 and December 31, 2010 are summarized below. A reclassification was made in the prior year to be comparable to the 2011 presentation.

 

     September 30,
2010
     December 31,
2010
 

Assets

     

Cash and cash equivalents

   $ 259,312       $ 420,541   

Current receivables

     405,445         1,392,274   

Property and equipment, net of accumulated depreciation

     0         314,429   

Intangibles, net of accumulated amortization

     0         5,969,215   

Other

     134,813         194,003   
  

 

 

    

 

 

 

Assets of discontinued operations

   $ 799,570       $ 8,290,462   
  

 

 

    

 

 

 

Liabilities

     

Accounts payable and accrued expenses

   $ 643,548       $ 2,026,825   
  

 

 

    

 

 

 

Liabilities of discontinued operations

   $ 643,548       $ 2,026,825   
  

 

 

    

 

 

 

 

14


Table of Contents

Summarized financial information for revenues and losses on discontinued operations is shown below.

 

     Nine Months Ended September 30,  
     2011     2010  

Revenues

   $ 4,632,321      $ 6,377,704   
  

 

 

   

 

 

 

Operations

    

Loss from discontinued operations before income taxes

   $ (1,075,974   $ (1,096,085

Income tax benefit

     403,491        411,032   
  

 

 

   

 

 

 

loss from discontinued operations, net of taxes

   $ (672,483   $ (685,053
  

 

 

   

 

 

 

Disposal

    

Loss on disposal before income taxes

   $ (1,160,566   $ 0   

Income tax expense

     (646,286     0   
  

 

 

   

 

 

 

Loss on disposal, net of taxes

   $ (1,806,852   $ 0   
  

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

   $ (2,479,335   $ (685,053
  

 

 

   

 

 

 

(8) Borrowings

Revolving Line of Credit

On June 30, 2010, the Company entered into a First Amendment Agreement (the “First Amendment”) to the Loan Agreement between the Company and Wells Fargo Bank, N.A. (as successor in interest by merger to Wachovia Bank, N.A.) (The “Lender”). The First Amendment amends the Loan Agreement, dated July 17, 2009, between the Company and the Lender (the “Loan Agreement”).

The First Amendment extends the maturity date for the facility to July 16, 2011. However, the lender extended the agreement through September 30, 2011 and it will not be renewed and was paid off during 2011. The proceeds of the facility in the past was used for funding certain permitted acquisitions, funding short-term loans to the Company’s wholly owned subsidiary, AAIC, or for working capital or general corporate needs in the ordinary course of business. The credit facility was originally secured by a pledge of the Company’s ownership interests in two of the Company’s subsidiaries, TrustWay and MGA, and was guaranteed by the same entities.

The Loan Agreement and the First Amendment include customary covenants, including financial covenants regarding minimum fixed charge coverage ratio and minimum net worth. As of September 30, 2011, the Company expects to receive a waiver for the fixed charge and net worth covenants. The First Amendment provides that the facility shall be repaid in full and no loans under the facility may be outstanding for at least one period of 30 consecutive days during each 12-month period in which the Loan Agreement is in effect. In addition, the Company’s minimum fixed charge coverage ratio, which was 1.35 under the Loan Agreement, decreased to 1.10 for each of the fiscal quarters ended June 30, 2010 and September 30, 2010 and increased to 1.25 for each subsequent fiscal quarter. The interest rate is 3.00% plus 90-day LIBOR (3.374% at September 30, 2011) due and payable monthly. As of September 30, 2011 the Company did not have any borrowings outstanding and as of December 31, 2010, there was $1.5 million in borrowings outstanding under the credit agreement.

Notes Payable

The Company had two notes payable outstanding as of September 30, 2011. First, on January 14, 2008 the Company issued a note payable in the amount of $276,250 with Information Distribution & Marketing, Inc. for the purchase of a software package that grants the Company a perpetual license to the source code and the ability to develop derivatives and advance the product to meet business demands and react to changing market conditions. The note requires monthly principal and interest payments beginning in January 2008 and matures in November 2012 with an interest rate of 2.8871% per annum. The outstanding principal balance on the note at September 30, 2011 and December 31, 2010 was $72,984 and $115,480, respectively.

Second, as a result of the acquisition of First Choice Insurance Agency effective February 26, 2009 the Company issued an unsecured promissory note payable to the former owner in the amount of $115,200 which carries an interest rate of 5%, with four equal yearly installments of principal and interest payments beginning February 26, 2010. The outstanding balance on the note at September 30, 2011 and December 31, 2010 was $57,600. Further, the Company had accrued interest of $2,341 related to its line of credit as of September 30, 2011.

 

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Table of Contents

Scheduled Maturities of Long-term Debt

The aggregate annual maturities of payments due on long-term debt outstanding as of September 30, 2011 are as follows:

 

     Amount  

2011

   $ 16,730   

2012

     87,395   

2013

     28,800   
  

 

 

 

Total

   $ 132,925   
  

 

 

 

(9) Capital Stock

Common Stock

During the first nine months of 2011 and 2010, the Company issued 316,174 and 350,000 shares of common stock, $.01 par value to its board of directors, respectively.

Stock-Based Compensation

In April of 2010, the Company’s shareholders approved a new Stock Incentive Plan (the “2010 Plan”). The Company’s 2010 Plan provides for the granting of stock options to officers, key employees, directors, consultants, independent contractors and other agents at the discretion of the Board of Directors. The Company believes that such awards better align the interests of its associates with those of its shareholders. Options become exercisable at various dates, generally vesting over a five-year continuous period of service and have similar contractual terms. Certain employment agreements may provide for accelerated vesting if there is a change in control of the Company (as defined in the Plan). Generally, options are issued with exercise prices no less than the fair market value of the common stock at the time of the grant (or in the case of a ten-percent-or-greater stockholder, 110 percent of fair market value). The aggregate number of common shares authorized under the 2010 Plan is currently 2,000,000. The common stock is reserved and available for issuance pursuant to awards granted to participants under 2010 Plan. As of September 30, 2011, there were 1,402,000 shares of the Company’s common stock subject to outstanding awards under the 2010 Plan.

The Company’s Prior 2000 Incentive Plan (the “Prior Plan”) has an aggregate total of 8,500,000 authorized common shares, but no additional awards will be granted under this Plan, as it expired in June 2010. As of September 30, 2011, there were 4,418,600 shares of the Company’s common stock subject to outstanding awards under the Prior Plan.

The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option-pricing model using the assumptions noted in the following table. Expected volatilities are based on historical volatilities of the Company’s stock. The Company uses historical data to estimate expected term and option forfeitures within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company does not provide for any expected dividends or discount for post-vesting restrictions in the model.

The fair value of each option awarded during the nine-months ended September 30, 2011 and 2010 is estimated on the date of grant using the Black-Scholes-Merton option-pricing model using the assumptions noted in the following table.

 

     2011   2010

Weighted average grant date fair value

   $0.1950   $0.2425

Expected volatility

   160% - 163%   163% - 168%

Weighted average volatility

   162%   164%

Risk-free interest rate

   2.53 - 2.92%   1.91% - 2.59%

Expected term (in years)

   6.5   6.1

Expected forfeitures

   7.1   6.7

 

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A summary of all stock option activity during the six months ending September 30, 2011 and 2010, were as follows:

 

     September 30,
2011
     September 30,
2010
 

Options Outstanding

   Number of
Shares
    Weighted
Average
Exercise Price
     Number of
Shares
    Weighted
Average
Exercise Price
 

January 1

     7,598,555      $ 0.49         7,789,721      $ 0.53   

Add (deduct):

         

Granted

     870,000      $ 0.20         0        0.00   

Forfeited

     (637,240   $ 0.23         0        0.00   

Expired

     (236,460   $ 0.47         0        0.00   
  

 

 

      

 

 

   

March 31

     7,594,855      $ 0.50         7,789,721      $ 0.53   

Add (deduct):

         

Granted

     0      $ 0.00         407,000      $ 0.17   

Forfeited

     (362,400   $ 0.68         (282,590   $ 0.82   

Expired

     0      $ 0.00         (75,306   $ 0.61   
  

 

 

      

 

 

   

June 30

     7,232,455      $ 0.49         7,838,825      $ 0.51   

Add (deduct):

         

Granted

     0      $ 0.00         510,000      $ 0.27   

Forfeited

     (412,300   $ 0.28         (563,580   $ 0.30   

Expired

     (999,555    $ 1.07         (2,000   $ 0.35   
  

 

 

      

 

 

   

September 30

     5,820,600      $ 0.41         7,783,245      $ 0.51   
  

 

 

      

 

 

   

Exercisable, September 30

     3,024,046      $ 0.52         3,580,750      $ 0.63   
  

 

 

      

 

 

   

The weighted-average grant date fair value of options granted during the nine-months ended September 30, 2011 and 2010 was $0.1950 and $0.2425, respectively. There were no options exercised during the nine-months ended September 30, 2011 and 2010. The aggregate intrinsic value of options outstanding and of options exercisable at September 30, 2011 was $6,250 and $2,250 and in 2010 there was $618,000 and $172,000, respectively. These options have weighted-average contractual terms of 6.5 years and 6.1 years, respectively. As of September 30, 2011 there was $701,396 of unrecognized compensation cost related to non-vested stock options and this cost is expected to be recognized over a weighted-average period of 1.4 years.

Total compensation cost for share-based payment arrangements recognized for the three and nine-months ended September 30, 2011 and 2010 was $88,264 and $262,784 and $103,939 and $317,308, respectively.

(10) Commitments and Contingencies

Contingencies

In the normal course of business, the Company is named as a defendant in lawsuits related to claims and other insurance policy issues. Some of the actions seek extra-contractual and/or punitive damages. These actions are vigorously defended unless a reasonable settlement appears appropriate. In the opinion of management, the ultimate outcome of known litigation is not expected to be material to the Company’s financial condition, results of operations, or cash flows.

Contractual Commitments

AssuranceAmerica Corporation leases office space for its corporate headquarters located at RiverEdge One, Suite 600, 5500 Interstate North Parkway, Atlanta, Georgia 30328. Effective October 1, 2009 the Company signed an amendment to extend its lease until 2019 under more favorable lease terms. AssuranceAmerica Managing General Agency, LLC., leases a claims office in the state of Florida. During 2011 the Company sold its TrustWay retail operations and the leases associated with the sale are no longer commitments for the Company. However, the Company is still obligated for the lease commitment for three discontinued retail offices in Alabama and Georgia under short term commercial leases. The above mentioned companies lease office equipment for use in their various locations. The Company believes that its existing facilities in the various states are adequate for the Company’s current requirements and operations. Rent expense for long-term leases with predetermined minimum rental escalations is recognized on a straight-line basis, and the difference between the recognized rental expense and amounts payable under the leases, or deferred rent, is included in accrued expenses.

 

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Table of Contents

The Company has entered into leases primarily for office space and certain equipment, classified as operating leases. The future minimum rental payments required under long-term non-cancelable leases are summarized as follows:

 

Period ending December 31,

   Amount  

2011

   $ 455,663   

2012

     911,074   

2013

     623,121   

2014

     622,593   

2015

     588,489   

Thereafter

     2,366,785   
  

 

 

 
   $ 5,567,725   
  

 

 

 

Defined Contribution Plan

Effective January 1, 2011, associates will be automatically enrolled in the 401(k) defined contribution retirement plan at 3% of their salary. Associates have the option to opt-out of the plan. The Company contributed $131,544 and $90,867 to this plan during the nine-months ended September 30, 2011 and 2010, respectively. The plan currently matches 33.3% on the first 6% of employee earnings and the Company can elect to make discretionary contributions. The eligibility requirements are 21 years of age, 6 months of service and full time employment.

(11) Net Income (loss) Per Share

Basic and diluted income (loss) per common share is computed using the weighted average number of common shares outstanding during the period. Potential common shares not included in the calculations of net income (loss) per share for the three and nine months ended September 30, 2011 and 2010, because their inclusion would be anti-dilutive, are as follows:

 

     Three Months
Ended September 30,
     Nine Months
Ended September 30,
 
     2011      2010      2011      2010  

Stock options

     5,820,600         4,202,495         5,820,600         4,202,495   
  

 

 

    

 

 

    

 

 

    

 

 

 

The reconciliation of the amounts used in the computation of both basic earnings per share and diluted earnings per share for the periods ended September 30, 2011 and 2010 are as follows:

 

     Net
Income
(Loss)
    Average Shares
Outstanding
     Per Share
Amount
 

For the three months ended September 30, 2011:

       

Net income — basic

   $ (1,863,892     65,797,593       $ (0.028
       

 

 

 

Effect of dilutive stock warrants and options

     0       0      
  

 

 

   

 

 

    

Net income — diluted

   $ (1,863,892     65,797,593       $ (0.028
  

 

 

   

 

 

    

 

 

 

For the three months ended September 30, 2010:

       

Net income — basic

   $ 32,129        65,494,357       $ 0.000   
       

 

 

 

Effect of dilutive stock warrants and options

     0        645,621      
  

 

 

   

 

 

    

Net income — diluted

   $ 32,129        66,139,978       $ 0.000   
  

 

 

   

 

 

    

 

 

 

For the nine months ended September 30, 2011:

       

Net income — basic

   $ (5,692,456     65,717,987       $ (0.087
       

 

 

 

Effect of dilutive stock warrants and options

     0        0      
  

 

 

   

 

 

    

Net income — diluted

   $ (5,692,456     65,717,987       $ (0.087
  

 

 

   

 

 

    

 

 

 

For the nine months ended September 30, 2010:

       

Net income — basic

   $ 709,745        65,458,460       $ 0.011   
       

 

 

 

Effect of dilutive stock warrants and options

     0        499,034      
  

 

 

   

 

 

    

Net income — diluted

   $ 709,745        65,957,494       $ 0.011   
  

 

 

   

 

 

    

 

 

 

 

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(12) Supplemental Cash Flow Information

 

     2011     2010  

Cash paid during the nine-months ended September 30:

    

Interest

   $ 7,494      $ 280,644   

Income taxes

   $ 2,338      $ 3,455   

Non-cash investing activities:

    

Change in unrealized gains and losses on investment securities, net of taxes

   $ (191,368   $ 279,687   

Note receivable from sale of Trustway Agencies

   $ 425,000      $ 0   

(13) Segment Reporting

The Company’s subsidiaries are each unique operating entities performing a separate business function. AAIC, a property and casualty insurance company, focuses on writing nonstandard automobile business in the states of Alabama, Arizona, Florida, Georgia, Indiana, Louisiana, Mississippi, South Carolina, Texas and Virginia. MGA markets AAIC’s policies through more than 2700 independent agencies in these states. MGA provides all of the underwriting, accounting, product management, legal, policyholder administration and claims functions for AAIC and two unaffiliated carriers related to the non-standard automobile insurance policies produced in Florida and Texas. The Company also provides claims services for one unaffiliated MGA in Florida and receives a fronting fee on this business. MGA receives various fees related to insurance transactions that vary according to state insurance laws and regulations. The TrustWay agencies were sold during 2011 in order to focus on its core business and was comprised of 37 retail insurance agencies that focused on selling nonstandard automobile policies and related coverages in Alabama, Florida and Georgia. TrustWay received commissions and various fees associated with the sale of the products and services from its appointing insurance carriers.

The Company evaluates profitability based on pretax income (loss). Pretax income (loss) for each segment is defined as the revenues less the segment’s operating expenses including depreciation, amortization, and interest. During the second and third quarter of 2011, the Company had discontinued operations for the Trustway agencies as discussed in Note (7) of the Consolidated Financial Statements. Following are the operating results for the Company’s various segments and an overview of segment assets:

 

($ in thousands)

   MGA     TrustWay     AAIC     Company     Eliminations     Consolidated  

THIRD QUARTER 2011

            

Revenues

            

External customer

   $ 5,743      $ 0      $ 8,054      $ 12      $ 0      $ 13,809   

Intersegment

     696        0        747        584        (2,027     0   

Income

            

Segment pretax income (loss) Continuing operations

     (998     (42     (925     (104     0        (2,069

Discontinued operations

     0        (92     0        0        0        (92

Total pre-tax income (loss)

     (998     (134     (925     (104     0        (2,161

Assets

            

Segment assets

     6,571        838        116,093        17,676        (20,816     120,362   

 

($ in thousands)

   MGA      TrustWay     AAIC      Company      Eliminations     Consolidated  

THIRD QUARTER 2010

               

Revenues

               

External customer

   $ 6,399       $ 0      $ 8,475       $ 0       $ 0      $ 14,874   

Intersegment

     1,768         0        820         847         (3,435     0   

Income

               

Segment pretax income (loss) Continuing operations

     496         (205     202         13         0        506   

Discontinued operations

     0         (369     0         0         0        (369

Total pre-tax income (loss)

     496         (574     202         13         0        137   

Assets

               

Segment assets

     16,795         13,161        119,356         24,515         (36,497     137,330   

 

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Table of Contents

($ in thousands)

   MGA     TrustWay     AAIC     Company      Eliminations     Consolidated  

FIRST NINE MONTHS 2011

             

Revenues

             

External customer

   $ 17,748      $ 0      $ 26,553      $ 12       $ 0      $ 44,313   

Intersegment

     4,099        0        2,397        2,033         (8,529     0   

Income

             

Segment pretax income (loss) Continuing operations

     (1,135     (215     (3,714     17         0        (5,047

Discontinued operations

     0        (2,237     0        0         0        (2,237

Total pretax income (loss)

     (1,135     (2,452     (3,714     17         0        (7,284

Assets

             

Segment assets

     6,571        838        116,093        17,676         (20,816     120,362   

 

($ in thousands)

   MGA      TrustWay     AAIC      Company     Eliminations     Consolidated  

FIRST NINE MONTHS 2010

              

Revenues

              

External customer

   $ 19,625       $ 0      $ 25,810       $ 0      $ 0      $ 45,435   

Intersegment

     5,357         0        2,543         2,543        (10,443     0   

Income

              

Segment pretax income (loss) Continuing operations

     1,638         (415     1,295         (49     0        2,469   

Discontinued operations

     0         (1,096     0         0        0        (1,096

Total pretax income (loss)

     1,638         (1,511     1,295         (49     0        1,373   

Assets

              

Segment assets

     16,795         13,161        119,356         24,515        (36,497     137,330   

(14) Accounting Standards Updates

In September of 2011, the FASB issued Accounting Standards Update No. 2011-08 (“ASU”) 2011-08, under the Intangibles-Goodwill and Other (Topic 350). The objective of this update is to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.

Previous guidance under Topic 350 required an entity to test goodwill for impairment, on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one). If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of the impairment loss, if any. Under the amendments in this update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this update apply to all entities, both public and nonpublic, that have goodwill reported in their financial statements. The amendments do not change the current guidance for testing other indefinite-lived intangible assets for impairment. However, on September 7, 2011, the FASB chairman added a separate project to the Board’s short-term agenda to explore alternative approaches to the manner in which an entity tests other indefinite-lived intangible assets for impairment.

The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The Company currently does not expect any financial impact related to this update.

In June of 2011, the FASB issued Accounting Standards Update No. 2011-05 (“ASU”) 2011-05, under the presentation of Comprehensive Income (Topic 220). The objective of this update is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments in this update. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of

 

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Table of Contents

comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income.

The statement of other comprehensive income should immediately follow the statement of net income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments in this update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. The Company does not expect any financial impact related to this disclosure.

In May of 2011, the FASB issued Accounting Standards Update No. 2011-04 (ASU 2011-04) amendments to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs (Topic 820). The FASB and IFRS boards worked together to ensure that fair value has the same meaning in U.S. GAAP and in IFRSs and that their respective fair value measurement and disclosure requirements are the same (except for minor differences in wording and style). The boards concluded that the amendments in this update will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments in this update explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting.

The amendments in this update apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements. Some of the disclosures required by the amendments in this update are not required for nonpublic entities. Those disclosures include the following: (1) information about transfers between Level 1 and Level 2 of the fair value hierarchy, (2) information about the sensitivity of a fair value measurement categorized within Level 3 of the fair value hierarchy to changes in unobservable inputs and any interrelationships between those unobservable input, (3) the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position, but for which the fair value of such items is required to be disclosed.

The amendments in this update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company is currently assessing this requirement and does not expect any financial impact related to this disclosure.

(15) Subsequent Event

On November 4, 2011, the Company filed with the Securities and Exchange Commission (the “SEC”) under Section 13(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 13e-3 promulgated thereunder a Schedule 13E-3 Transaction Statement (the “Schedule 13E-3”), in connection with a proposed “going private” transaction. The primary purpose of the going private transaction is to reduce the number of record holders of the Company’s common stock, par value $0.01 per share (the “Common Stock”), to fewer than 300, thereby allowing the Company to terminate the registration of the Common Stock under Section 12(g) of the Exchange Act defined above and suspend its reporting obligations under Section 15(d) of the Exchange Act. The Company may not consummate the Reverse Stock Split until 20 days after the date on which it first mails the Disclosure Statement to its stockholders.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Continuing Operations

The Company reported a net after-tax loss on continuing operations of $1.3 million and $3.2 million for the three-months and nine-months ended September 30, 2011, compared to earnings of $0.3 million and $1.4 million for the three-months and nine-months ended September 30, 2010. The Company reported basic and fully diluted losses per common share on continuing operations of $0.020 and $0.049 for the three-months and nine-months ended September 30, 2011, compared to earnings of $0.004 and $0.021 for the same period in 2010. The pre-tax loss on continuing operations was $2.1 million and $5.0 million for the three-months and nine-month periods ended September 30, 2011 and pre-tax earnings of $0.5 million and $2.5 million for 2010, respectively.

The pre-tax loss on continuing operations for the three-months and nine-months ended September 30, 2011 as compared to the same period last year, relates to lower earnings in the wholesale operation (AAIC and MGA). Loss and loss adjustment expense increased by $1.5 million and $6.9 million for the three-months and nine-months periods, respectively. Ceding commission income declined by $0.5 million for the three-month period and $1.8 million for the nine-month period, resulting from lower ceded premium volume and a lower ceding commission rate. The premiums earned for the three-month period declined $0.3 million due to premium rate changes. However, the nine-month period reductions in earnings mentioned above were partially offset by higher premiums earned on the retained volume of $1.1 million.

Results of Discontinued Operations

The Company reported a net after-tax loss on discontinued operations of $0.6 million and $2.5 million for the three-months and nine-months ended September 30, 2011, as compared to $0.2 million and $0.7 million for the same periods last year. The Company reported basic and fully diluted losses per common share on discontinued operations of $0.008 and $0.038 for the three-months and nine-months ended September 30, 2011, compared to $0.004 and $0.010 in each of the same periods in 2010. The pre-tax loss on discontinued operations was $0.1 million and $2.2 million for the three-months and nine-months period ended September 30, 2011 and $0.4 and $1.1 million for both periods in 2010, respectively.

 

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The pre-tax loss on discontinued operations for the three-months and nine-months ended September 30, 2011 as compared to 2010 pre-tax losses reflects a loss of $1.2 million on the sale of retail agencies operations. The pre-tax loss on discontinued operations also includes $0.2 million and $1.1 million of discontinued operating losses for the three-months and nine-months ended September 30, 2011 as compared to $0.4 million and $1.1 million for the same periods last year. The Company sold its TrustWay agencies, which will enable the Company to focus on its core operations. See Note 7 within the Consolidated Financial Statements for further information. We reported the businesses described above as discontinued operations and the Company made a reclassification for all periods in order to comply with the required disclosures.

Revenues

Premiums

Gross premiums written for the three-months and nine-months ended September 30, 2011 were $22.2 million and $71.6 million, a decline of 11% and 9.3% when compared to the same periods in 2010. The decline in premium is driven by a reduction in new business policies as well as a mix shift from 12 month policies to more 6 month policies. The reduction in new business is due to the challenging competitive environment as well as actions taken by the Company to improve profitability in underperforming market segments. These actions include rate increases, implementation of tighter underwriting guidelines and restrictions on new business in high fraud areas in the state of Florida. Average premium per policy increased for new and renewal policies written in the third quarter by 3.5% and 2.3% respectively and as compared to the same period last year, reflecting the impact of the rate increases taken earlier in the year.

Policies in-force as of September 30, 2011 decreased 7.7%, when compared to the same period in 2010. This is due to a reduction in premium and the mix of volume by state, as the average premium per policy varies by state.

The Company ceded approximately 69% or $15.4 million of its direct premiums written to its reinsurers during the third quarter of 2011 as compared to 67% or $16.6 million in 2010, resulting from lower ceded premium for the state of Florida. The Company ceded approximately 64% or $46.0 million of its direct premiums written to its reinsurers during the year of 2011 as compared to 67% or $53.3 million in 2010 due to lower direct premium volume produced.

Premiums written refers to the total amount of premiums billed to the policyholder less the amount of premiums returned, generally as a result of cancellations, during a given period. Premiums written become premiums earned as the policy ages. Barring premium rate changes, if an insurance company writes the same mix of business each year, premiums written and premiums earned will be equal and the unearned premium reserve will remain constant. During periods of growth, the unearned premium reserve will increase, causing premiums earned to be less than premiums written. Conversely, during periods of decline, the unearned premium reserve will decrease, causing premiums earned to be greater than premiums written. The Company’s net premiums earned, after deducting reinsurance, was $8.0 million for the three-months ended September 30, 2011, compared to $8.3 million for the same period a year ago and $26.3 million and $25.2 million for the nine-months ended September 30, 2011 and 2010, respectively.

Commission and Fee Income

In our MGA operations, we receive managing general agent fees for agency, underwriting, policy administration, and claims adjusting services performed on behalf of insurers. Commission income for the three-months and nine-months ended September 30, 2011, was $3.2 million and $9.6 million compared to $3.7 million and $11.4 million for the same periods ended September 30, 2010. The decrease in commissions for the three-months and nine-months ended September 30, 2011 is driven by the reduction in premium volume and a lower ceding commission rate. Also, AAIC pays the MGA commission on premium, which AAIC retains and this amount is subsequently eliminated upon consolidation.

Managing general agent fees for the three-months and nine-months ended September 30, 2011 was $0.2 million lower than the same period last year, due to lower premiums.

Net Investment Income and Investment Gains (losses)

Our investment portfolio is generally highly liquid and consists substantially of readily marketable, investment-grade debt and equity securities. Net investment income is primarily comprised of interest and dividends earned on these securities and related investment expenses. Net investment income and gains were $75 thousand and $236 thousand for the three-months and nine-months ended September 30, 2011 and $169 thousand and $500 thousand for the same periods last year. The lower investment performance was mainly due to interest income received on the trust preferred debt in the prior year, which was extinguished in December of 2010.

 

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Expenses

Insurance Loss and Loss Adjustment Expenses

Insurance losses and loss adjustment expenses include payments made to settle claims, estimates for future claim payments and changes in those estimates for current and prior periods, as well as loss adjustment expenses incurred in connection with settling claims. Insurance losses and loss adjustment expenses are influenced by many factors, such as claims frequency and severity trends, the impact of changes in estimates for prior accident years, and increases in the cost of medical treatment and automobile repairs. The anticipated impact of inflation is considered when we establish our premium rates and set loss reserves. Our actuaries perform a rolling accident year actuarial analysis each quarter and establish or adjust (for prior accident quarters) reserves, based upon their estimate of the ultimate incurred losses and loss adjustment expenses to reflect loss development information and trends that have been updated for the most recent quarter’s activity. Each quarter their estimate of ultimate loss and loss adjustment expenses is evaluated by accident quarter, by major coverage group (e.g., bodily injury, physical damage) and changes in estimates are reflected in the period the additional information becomes known.

We have historically used reinsurance to manage our exposure to loss by ceding a portion of our gross losses and loss adjustment expenses to reinsurers. We remain obligated for amounts covered by reinsurance in the event that the reinsurers do not meet their obligations under the agreements due to, for example, disputes with the reinsurer or the reinsurer’s insolvency.

Effective May 15, 2011, the Company entered into a new catastrophe agreement with Shelter Mutual Insurance Company. The Reinsurer shall be liable for private passenger automobile physical damage coverage with respect to each loss occurrence, for the ultimate net loss over and above an initial ultimate net loss of $400,000 each loss occurrence, subject to a limit of liability to the reinsurer of $1,600,000 each loss occurrence, and further subject to a limit of liability to the reinsurer of $3,200,000 with respects to all loss occurrences commencing during the term of this contract.

Effective April 1, 2011, the Company entered into a new quota share agreement with Greenlight Reinsurance Ltd. for the 2011 treaty year business. The Company has agreed to cede 50% of the bodily injury liability, physical damage and other automobile liability coverages. The reinsurance contract will cover the state of Florida. The losses incurred are ceded on a similar basis.

The Company will receive a 19% ceding commission on ceded premiums earned if the loss and loss adjustment expense ratio as a percentage of earned premium is 75.5% or greater. If the loss ratio is less than 75.5%, but not less than 71.5% then the ceding commission shall be 19.0%, plus one half of the difference in percentage points between 75.5% and the actual loss ratio. If the loss ratio is 71.5% or less, then the ceding commission rate will be 21.0%. The Company receives a provisional commission rate of 20% in advance, which is subject to adjustment once the final loss ratio is known.

Effective January 1, 2011, the Company entered into a new quota share agreement with Swiss Reinsurance America Corporation for the 2011 treaty year business. The Company has agreed to cede 75.0% of the bodily injury liability coverage and 82.5% of physical damage and other automobile liability coverages. The reinsurance contract will cover all states except Florida. The losses incurred are ceded on a similar basis. The agreement includes a loss corridor of 75.0%-79.0%, whereby the Company shall retain the amount by which losses and LAE incurred exceed 75% of collected net premiums earned, subject to a maximum additional retention equal to 4% of collected net premiums earned. Further, the Company shall retain the amount by which losses and LAE incurred, after the application of the loss corridor, exceeds 120% of collected net premiums earned Loss Ratio Cap.

As a result of the reinsurance agreements, the Company is currently ceding approximately 68% in 2011 and 71% in 2010 of its direct loss and loss adjustment expenses incurred to its reinsurers and the amount ceded for the nine-months ended September 30, 2011 and 2010 was $51.6 million and $45.4 million, respectively.

After making deductions for the effect of reinsurance, losses and loss adjustment expenses were $7.6 million and $24.7 million for the three-months and nine-months ended September 30, 2011, compared to $6.1 million and $17.9 million for the same period in 2010. As a percentage of earned premiums, the loss ratio for the three-months and nine-months ended September 30, 2011 was 94.8% and 94.1% and 73.0% and 71.1%, for the same periods in 2010. The amount represents actual payments made and changes in estimated future payments to be made to or on behalf of AAIC’s policyholders, including the expenses associated with settling claims. The year-over-year increase was primarily driven by development on claims from prior accident years. Florida no-fault coverage (PIP) continued to develop unfavorably for 2009 and 2010, heavily influenced by the increase in fraud activity in the state. We also experienced some additional development on the bodily injury coverage for accident year 2010.

Operating Expenses

The selling, general and administrative expenses were $8.0 million and $23.8 million for the three-months and nine-months ended in September 30, 2011 and $8.0 million and $24.0 million, when compared to the same period of 2010. The operating expenses were essentially flat for the quarter. The decrease in expenses for the nine-months relates to lower selling expenses of $0.9 million, offset by an increase in personnel costs of $1.1 million in the wholesale division. The expenses as a percentage of revenue increased to 58.2% for the three-months ended September 30, 2011 compared to 53.5% for the same period of 2010 primarily relates to lower

 

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premiums earned and commission revenue. The year over year percentage increased to 53.8% from 52.9% for the nine-months ended September 30, 2011. The increase for the nine-months ended September 30, 2011 is mainly driven by lower commission revenue. Depreciation and amortization expenses increased slightly due to the development of a web rater within the wholesale division. Interest expense was lower during the quarter by $91 thousand and $269 thousand in 2011 as compared to the same periods in the prior year, resulting from the 2010 interest expense on related party notes payable and interest expense on the trust preferred, which was extinguished in late 2010.

Income Tax (Benefit) Expense

The income tax benefit for the three-months and nine-months ended September 30, 2011 from the continuing and discontinued operations was $0.3 million and $1.6 million compared to $0.1 million and $0.7 million tax expense for the same periods last year. The increase in the tax benefit during the quarter and the year primarily relates to the losses on continuing operations.

Financial Condition

As of September 30, 2011, the Company had investments and cash of $13.5 million, compared to $21.5 million as of December 31, 2010. The Company’s investment strategy is to be invested in highly liquid short-term investments and equity securities as well as investing in bonds with short durations in order to meet its insurance obligations. As of September 30, 2011, the Company had $5.1 million in cash and short-term investments, which included $0.5 million of cash restricted to provide security for certain reinsurance reserve obligations. The equity security portfolio amounted to $1.8 million and is diversified amongst various industries. The Company’s long term investments of $5.8 million are spread among direct obligations of the U.S. Treasury as well as those securities unconditionally guaranteed as to the payment of principal and interest by the United States government or any agency thereof and in corporate bonds. The other long term investments of $0.7 million represent low income housing tax credits, which will be used to offset the Company’s future tax liabilities.

The Company’s investment activities are made in accordance with the Company’s investment policy. The objectives of the investment policy are to obtain favorable after-tax returns on investments through a diversified portfolio of fixed income and equity. The Company’s investment criteria and practices reflect the short-term duration of its contractual obligations with policyholders and regulators. Tax considerations include federal and state income tax as well as premium tax abatement and credit opportunities offered to insurance companies in the states where AAIC writes policies.

Receivable from insureds as of September 30, 2011, decreased $2.2 million to $30.9 million compared to $33.1 million as of December 31, 2010. The balance represents amounts due from AAIC’s insured’s and the decrease is directly attributable to the decline in the AAIC’s premium writings during the first nine-months of 2011. The Company’s policy is to write off receivable balances immediately upon cancellation or expiration, and the Company does not consider an allowance for doubtful accounts to be necessary.

Reinsurance recoverables as of September 30, 2011, increased $10.2 million, to $44.2 million compared to $34.0 million as of December 31, 2010. The increase is directly related to an increase in ceded losses and the timing of settlements with the reinsurers for AAIC. AAIC maintains a quota-share reinsurance treaty with its reinsurers in which it ceded approximately 64% of premiums and 68% of losses through the nine-months of 2011. The $44.2 million represents the reinsurers’ portion of losses and loss adjustment expense, both paid and unpaid.

Prepaid reinsurance premiums as of September 30, 2011, decreased $2.1 million to $21.5 million compared to $23.6 million as of December 31, 2010. The decrease results from AAIC’s decline in premium during the nine months of 2011 and represents premiums ceded to its reinsurers which have not been fully earned.

Property and equipment, net of accumulated depreciation increased by $100 thousand to $1.9 million as of September 30, 2011, compared to the balance at December 31, 2010. Prepaid expenses as of September 30, 2011, decreased $59 thousand to $483 thousand as of September 30, 2011, compared to $542 thousand as of December 31, 2010. The decrease in prepaid was mainly due to a decline in prepaid rent and general and administrative expenses.

Other receivables as of September 30, 2011 increased $0.6 million to $1.0 million when compared to December 31, 2010. The increase mainly relates to $0.4 million issuance of a notes receivable to the purchaser of the TrustWay agencies and $0.2 million increase for balances related to the managing general agency agreements.

Assets of discontinued operations decreased $7.5 million to $0.8 million as of September 30, 2011 from the balance of $8.3 million as of December 31, 2010. This decrease is mainly related to the sale of the intangibles and assets disposed of during the quarter. See note 7 of the Consolidated Financial Statements for further information.

Prepaid income taxes increased $73 thousand as of September 30, 2011, when compared to the balance at December 31, 2010. Deferred tax assets increased $1.7 million as of September 30, 2011 compared to the balance as of December 31, 2010. This increase was mainly due to operating loss carryforwards on the losses from continuing operations.

 

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Accounts payable and accrued expenses as of September 30, 2011, decreased $0.8 million from December 31, 2010 to $6.0 million from $6.8 million. The decrease is primarily due to $0.6 million in lower premium tax accruals $0.4 million in general and administrative expense accruals and lower accrued expenses for personnel salary costs, offset by an increase in amounts due to agents of $0.2 million.

Unearned premium decreased $2.9 million to $31.3 million as of September 30, 2011 from $34.2 million as of December 31, 2010, and represents premiums written but not earned. This is directly attributable to a decrease in AAIC’s premium writings during the first nine-months of 2011.

Unpaid losses and loss adjustment expenses increased $10.1 million to $43.5 million as of September 30, 2011 from $33.3 million at December 31, 2010. This amount represents management’s estimates of future amounts needed to pay claims and related expenses. The increase is primarily related to reserve strengthening and increased loss frequency.

Reinsurance payable as of September 30, 2011 decreased $3.2 million to $26.2 million, compared to $29.4 million as of December 31, 2010. The amount represents premiums owed to the Company’s reinsurers. AAIC maintains nine quota-share reinsurance treaties with its reinsurers and is currently ceding approximately 64% of premiums for all of its states for 2011. The decrease is mainly due to the decrease in premiums during the year and the timing of settlements with reinsurers.

Provisional commission reserves represent the difference between our minimum ceding commission and the provisional amount paid by the reinsurers. These balances as of September 30, 2011 decreased $0.9 million to $2.4 million, compared to the balance at December 31, 2010 of $3.3 million. The decrease is related to the provisional payments made on prior treaty years during the second quarter of 2011.

The revolving line of credit of $1.5 million was paid off during the third quarter of 2011. The line was extended through September 30, 2011, but it will not be renewed.

Notes and interest payable as of September 30, 2011 decreased $42 thousand due to payment on note with a third party.

Liquidity and Capital Resources

Net cash used by operating activities for the nine-months ended September 30, 2011, was $9.9 million. The decrease in operating cash was primarily driven by lower premium volume and lower ceded claims for approximately $3.1 million, timing on settlement of ceding commission of $3.7 million, return of $1.3 million held as restricted on behalf of the reinsurer and payment of provisional commissions of $1.8 million.

Investing activities provided cash for the nine-months ended September 30, 2011 of $7.8 million as compared to a decrease of $2.2 used as of September 30, 2010. The increase primarily relates to a $1.3 million transfer of cash for restricted funds held for reinsurers, $4.3 million related to the sale of the TrustWay insurance agencies and $3.1 million net sale of bonds, offset by $0.7 million of purchases of property and equipment related to the wholesale division.

Financing activities for the nine-months ended September 30, 2011, used cash of $1.5 million compared to $0.5 million of cash used in 2010. The year-over-year increase relates to $1.5 million payment of the line of credit compared to $0.5 million payment of related party debt repaid in the previous year.

On June 30, 2010, the Company entered into a First Amendment Agreement (“First Amendment”) to the Loan Agreement between the Company and Wells Fargo Bank, N.A. (as successor in interest by merger to Wachovia Bank, N.A.) (“Lender”). The First Amendment amends the Loan Agreement, dated July 17, 2009, between the Company and the Lender (“Loan Agreement”).

The First Amendment extends the maturity date for the facility to July 16, 2011. However, the lender extended the agreement through September 30, 2011 and will not be renewed and was paid off during the year. The proceeds of the facility was used for funding certain permitted acquisitions, funding short-term loans to the Company’s wholly owned subsidiary, AAIC, or for working capital or general corporate needs in the ordinary course of business. The credit facility was secured by a pledge of the Company’s ownership interests in two of the Company’s subsidiaries, TrustWay and MGA, and was guaranteed by the same entities.

The Loan Agreement includes customary covenants, including financial covenants regarding minimum fixed charge coverage ratio and minimum net worth. As of September 30, 2011, the Company expects to receive a waiver for the fixed charge covenant and net worth covenants. The First Amendment provides that the facility shall be repaid in full and no loans under the facility may be outstanding for at least one period of 30 consecutive days during each 12-month period in which the Loan Agreement is in effect. In addition, the Company’s minimum fixed charge coverage ratio, which was 1.35 under the Loan Agreement, decreases to 1.10 for each of the fiscal quarters ended June 30, 2010, and September 30, 2010 and increases to 1.25 for each subsequent fiscal quarter. The interest rate is 3.00% plus 90-day LIBOR (3.374% September 30, 2011) due and payable monthly. As of September 30, 2011, the outstanding balance was zero. The Company’s, liquidity and capital needs will be met through premiums, commissions and fee income.

 

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To support Company growth, the Company maintains a highly liquid investment portfolio and closely manages capital requirements. AAIC is required by the state of South Carolina to maintain minimum Statutory Capital and Surplus of $3.0 million. As of September 30, 2011, AAIC’s statutory Capital and Surplus was $9.3 million.

Off-Balance Sheet Arrangements

The Company does have off balance sheet leasing arrangements. For further information, please refer to Note 10 in the financial statements.

Loss and LAE Reserves

The Company is required to make certain estimates and assumptions when preparing its financial statements and accompanying notes in accordance with GAAP. One area which requires estimations and assumptions is the establishment of loss and LAE reserves. Loss and LAE reserves are established to reflect the estimated costs of paying claims and claims expenses under insurance policies we have issued. These reserves are an approximation of amounts necessary to settle all outstanding claims, including claims of which we are aware and claims that have been incurred but not reported (“IBNR”) as of the financial statement date.

At September 30, 2011, and December 31, 2010, we had $13.9 million and $9.9 million of net loss and LAE reserves, respectively, which included $5.2 million case reserves and $8.7 million and $4.7 million of IBNR reserves. During 2011, the Company’s case reserves were flat and IBNR reserves increased $4.0 million. This increase in reserves is related to reserve strengthening and adjustments to the actuarial estimate for prior accident years related to the bodily injury and personal injury protection coverages.

GROSS RESERVES BY LINE OF BUSINESS

The following table presents the gross reserves by line of business as of September 30, 2011 and December 31, 2010:

 

     2011      2010  

Personal Auto Liability

   $ 40,724,179       $ 31,638,391   

Personal Auto Physical Damage

     2,736,248         1,672,676   
  

 

 

    

 

 

 

Total Gross Reserves-Unpaid Losses and LAE

   $ 43,460,427       $ 33,311,067   
  

 

 

    

 

 

 

The increase in gross reserves was $10.1 million representing a increase in the auto physical damage coverage of $1.0 million and $9.1 million increase in bodily injury and personal injury protection coverages.

Variability of Reserves for Loss and LAE

Management believes that there are no reasonably likely changes in the key factors and assumptions that materially affect the Company’s estimate of the reserve for loss and LAE that would materially impact the Company’s financial position, liquidity and results of operations. The Company’s low average policy limit and concentration on the nonstandard auto driver classification help stabilize fluctuations in frequency and severity, thereby limiting the potential variability the reserve level may have on reported results. For example, approximately 96% of policies included within the nonstandard book of business include only the state-mandated minimum policy limits for bodily injury and property damage, which mitigates the complexity of estimating average severity. These low limits tend to reduce the exposure of the loss reserves on this coverage to medical cost inflation on severe injuries since the minimum policy limits will limit the total payout.

The following table provides the estimated changes in the liability and related payments made for the nine-months ended September 30, 2011 and 2010:

 

     2011     2010  

Change in net loss and LAE reserves

   $ 4,025,728      $ (3,102,921

Paid losses and LAE

     20,720,776        20,995,151   
  

 

 

   

 

 

 

Total incurred losses and LAE

   $ 24,746,504      $ 17,892,230   
  

 

 

   

 

 

 

Loss and LAE ratio(1)

     94.1     71.1
  

 

 

   

 

 

 

 

(1)

The ratio was calculated by taking losses and LAE divided by the Net Premiums Earned.

 

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Losses and Loss Adjustment Expenses (LAE)

The Company’s claims costs represent payments made and estimated future payments to be made to or on behalf of our policyholders, including expenses needed to adjust or settle claims. These costs relate to current costs under our non-standard state-mandated automobile insurance programs. Claims costs are impacted by loss severity and frequency and are influenced by inflation and driving patterns, among other factors. Accordingly, anticipated changes in these factors are taken into account when we establish premium rates and loss reserves.

During the nine-months ended September 30, 2011, our loss and LAE ratio increased 23.0%, as compared to .3% increase in the same period a year ago, which reflects reserve strengthening for prior year loss development. We continuously monitor internal and industry-wide severity trends and adjust rates as appropriate to compensate for the higher loss costs.

The table below presents the development experienced in the following periods:

 

     2011     2010  

Prior year incurred losses

   $ 3,284,001      $ 919,003   

Current year incurred losses and LAE

     21,462,503        16,973,227   
  

 

 

   

 

 

 

Total incurred losses and LAE

   $ 24,746,504      $ 17,892,230   
  

 

 

   

 

 

 

Increase to the calendar year loss and LAE ratio

     23.0     0.3
  

 

 

   

 

 

 

 

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Ceded Reinsurance

The Company cedes a significant portion of its personal automobile premium to other reinsurers. The Company’s reinsurance strategy is to use quota share reinsurance to mitigate the financial impact of losses on its operations, while enabling premium growth within its capital base. Historically, the Company’s reinsurance contracts have been one or two years in duration, subject to renewal.

Effective May 15, 2011, the Company entered into a new catastrophe agreement with Shelter Mutual Insurance Company. The Reinsurer shall be liable private passenger automobile physical damage coverage with respect to each loss occurrence, for the ultimate net loss over and above an initial ultimate net loss of $400,000 each loss occurrence, subject to a limit of liability to the reinsurer of $1,600,000 each loss occurrence, and further subject to a limit of liability to the reinsurer of $3,200,000 with respects all loss occurrences commencing during the term of this contract.

Effective April 1, 2011, the Company entered into a new quota share agreement with Greenlight Reinsurance Ltd. for the 2011 treaty year business. The Company has agreed to cede 50% of the bodily injury liability, physical damage and other automobile liability coverages. The reinsurance contract will cover the state of Florida. The losses incurred are ceded on a similar basis.

The Company will receive a 19% ceding commission on ceded premiums earned if the loss and loss adjustment expense ratio as a percentage of earned premium is 75.5% or greater. If the loss ratio is less than 75.5%, but not less than 71.5% then the ceding commission shall be 19.0%, plus one half of the difference in percentage points between 75.5% and the actual loss ratio. If the loss ratio is 71.5% or less, then the ceding commission rate will be 21.0%. The Company receives a provisional commission rate of 20% in advance, which is subject to adjustment once the final loss ratio is known.

Effective January 1, 2011, the Company entered into a new quota share agreement with Swiss Reinsurance America Corporation for the 2011 treaty year business. The Company has agreed to cede 75.0% of the bodily injury liability coverage and 82.5% of physical damage and other automobile liability coverages. The agreement includes a loss corridor of 75.0%-79.0%, whereby the Company shall retain the amount by which losses and LAE incurred exceed 75% of collected net premiums earned, subject to a maximum additional retention equal to 4% of collected net premiums earned. The reinsurance contract will cover all states except Florida. Further, the Company shall retain the amount by which losses and LAE incurred, after the application of the loss corridor, exceeds 120% of collected net premiums earned Loss Ratio Cap.

The Company will receive a 21% ceding commission on ceded premiums earned if the loss and loss adjustment expense ratio is 73.5% or greater. If the loss ratio is 73.5%, but not less than 71.5% then the ceding commission shall be 21.0%, plus the difference in percentage points between 73.5% and the actual loss ratio. If the loss ratio is 71.5% or less then the ceding commission rate will be 23.0%.

Reinsurance contracts do not relieve the Company from its obligations to policyholders. The Company periodically reviews the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies. The Company has nine reinsurers, of which eight are A- rated or better based on the most recent A.M. Best ratings available. While the ninth reinsurer does not have a rating, the contract is in run-off. Further, the reinsurers cover up to $2,000,000 in aggregate claims for extra contractual obligations each policy year.

The impact of reinsurance on the income statement as of September 30 is as follows:

 

     2011      2010  

Premiums ceded written

   $ 46,005,673       $ 53,257,566   

Ceded commissions incurred

   $ 9,459,123       $ 12,037,522   

Ceded losses and loss adjustment expenses incurred

   $ 51,620,377       $ 45,395,554   

 

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The impact of reinsurance on the balance sheets as of September 30, 2011 and December 31, 2010 is as follows:

 

     2011      2010  

Reinsurance recoverable

   $ 44,233,444       $ 34,013,415   

Ceded unpaid losses and loss adjustment expense

   $ 29,534,078       $ 23,410,446   

Ceded prepaid premiums

   $ 21,465,291       $ 23,643,822   

Reinsurance payable

   $ 26,163,570       $ 29,426,944   

Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. The Company reports as assets (a) the estimated reinsurance recoverable on unpaid losses, including an estimate for losses incurred but not reported, and (b) amounts paid to reinsurers applicable to the policies-in-force. During 2011, the Company ceded approximately 64% of its premium and 68% of losses during the first nine-months of September 30, 2011 as compared to approximately 67% of its premium and 71% of losses were ceded to reinsurers for the prior year. The ceded premium and losses reflect the new contract terms entered into during 2011 as previously mentioned. The ceded premium under these reinsurance agreements for the nine-months ended September 30, 2011 and 2010 were $46.0 million and $53.3 million, respectively. The related ceding commission was approximately $9.5 million in 2011 and $12.0 million in 2010. The lower ceded premium and commission were mainly due to lower production and the reduced ceded premium related to the state of Florida, which is ceded at 50% effective April 1, 2011.

Ceded reinsurance for all programs reduced the Company’s incurred losses and LAE for the nine-months ended September 30, 2011 and 2010 by $51.6 million and $45.4 million, respectively.

Reinsurance assets include balances due from other contracted reinsurers under the terms of reinsurance agreements. Amounts applicable to ceded unearned premiums ceded loss payments and ceded claims liabilities are reported as assets in the accompanying balance sheets. Under the reinsurance agreements, the Company has four reinsurers that are required to collateralize the reinsurance recoverables. As of September 30, 2011, all reinsurers have provided a letter of credit or a secured trust account to provide security sufficient to satisfy the Company’s obligations under the reinsurance agreement. The Company believes the fair value of its reinsurance recoverables approximates their carrying amounts.

The Company’s reinsurance recoverable balances amounted to $44.2 million and $34.0 million as of September 30, 2011 and December 31, 2010, respectively. The recoverable includes ceded unpaid losses and loss adjustment expenses of $29.5 million and $23.4 million of the same periods, respectively. The ceded reserves from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies ceded. Reinsurance recoverable assets include paid loss balances due from other reinsurers under the terms of reinsurance agreements in the amount of $14.7 million and $10.6 million as of September 30, 2011 and December 31, 2010, respectively. The paid loss recoverables are in good standing as of September 30, 2011.

The Company’s ceded prepaid premium relates to policies in force and is earned ratably over the policy period. As of September 30, 2011 and December 31, 2010, the ceded prepaid premiums amounted to $21.5 million and $23.6 million, respectively. Reinsurance payable of $26.2 million and $29.4 million as of September 30, 2011 and December 31, 2010, respectively, and represents the amounts due to reinsurers for ceded premiums net of commissions. The Company pays its reinsurers on a collected premium basis. Effective for the 2011 treaty year, the Company will receive ceding commissions on a ceded earned basis, whereas for prior treaty years ceding commissions were based on ceded written premiums. The Company does not have any balances that are in dispute through September 30, 2011.

The Company’s quota share reinsurance facility has a significant impact on its cash flows. Since the Company cedes a significant amount of its premium and losses, the Company relies heavily on its reinsurers to settle outstanding reinsurance balances due for loss payments net of premiums collected. The Company paid ceded premiums net of commissions of $39.8 and $39.7 million for the nine-months ended September 30, 2011 and 2010, respectively and received reinsurance recoverables on paid loss and loss adjustment expenses of $41.4 million and $57.0 million during the same periods.

The Company’s reinsurance strategies have not changed from previous years and the Company’s limited loss exposure is based on the existing quota share agreement. While the Company monitors conditions within the reinsurance market, adverse conditions could have an impact on the Company’s ability to secure reinsurance capacity, thereby limiting its ability to cede future losses.

 

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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS

Not Applicable

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures in accordance with Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Management’s Annual Report on Changes in Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our 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.

Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2011. In making this assessment, management used the criteria described in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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 policies and procedures may deteriorate. Based on this evaluation, management determined that, as of September 30, 2011, we maintained effective internal control over financial reporting, and there were no changes in our internal control over financial reporting made during our most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1A. RISK FACTORS

Not Applicable

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

For 2011, each non-officer director may choose between (i) an amount in cash equal to $15,000 plus the number of shares equal to $15,000 divided by the share price on December 31, of the prior year or (ii) the number of shares equal to $30,000 divided by the share price on December 31, of the prior year. During the first nine-months of 2011, the Company issued 316,174 shares of common stock, $.01 par value, to members of its board of directors pursuant to this director compensation program. The Company issued 264,703 shares on March, 22, 2011 and 51,471 shares on May 27, 2011 to the directors, each an accredited investor, as a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended and Regulation D. The Company received no consideration for the common stock issued.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4. REMOVED AND RESERVED

Not Applicable

ITEM 5. OTHER INFORMATION

Not Applicable

 

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ITEM 6. EXHIBITS

 

(a)    Exhibits.
31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002.

101    XBRL Instance Document

 

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

ASSURANCEAMERICA CORPORATION
By:   /s/    GUY W. MILLNER        
  Guy Millner
  Chairman and CEO

Date: November 14, 2011

 

By:   /s/    SHEREE S. WILLIAMS        
  Sheree S. Williams
  Chief Financial Officer

Date: November 14, 2011

 

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