ProCentury Corporation Form 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2005 |
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or |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission File Number 0-6612
ProCentury Corporation
(Exact name of registrant as specified in its charter)
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Ohio
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31-1718622 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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465 Cleveland Ave. Westerville, Ohio
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43082 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code
(614) 895-2000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class |
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Name of Each Exchange on Which Registered |
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Common Shares, without par value
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NASDAQ |
Securities registered pursuant to Section 12(g) of the
Act:
NONE
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of June 30, 2005, based
upon the closing sale price of the Common Shares on
June 30, 2005 as reported on the NASDAQ National Market,
was $134,752,394.
The number of shares outstanding of the Registrants Common
Shares, without par value, on March 15, 2006 was 13,211,019.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrants definitive Proxy Statement for
the 2006 annual meeting of shareholders to be held May 15,
2006, are incorporated herein by reference into Part III of
this document.
TABLE OF CONTENTS
2
PART I
General
ProCentury Corporation (ProCentury,) is a specialty
property and casualty insurance holding company. We market and
underwrite general liability, commercial property, multi-peril
insurance and garage liability for small and mid-sized
businesses primarily through Century Surety Company
(Century), our primary operating insurance
subsidiary. References to Company, we,
us, and our refer to ProCentury and its
subsidiaries, unless the context requires otherwise. We are
either authorized as an admitted insurer or approved as an
excess and surplus lines insurer by the state insurance
regulators in 48 states plus the District of Columbia. We
primarily write specialty excess and surplus lines insurance
through a select group of general agents. The excess and surplus
lines market provides an alternative market for customers with
hard-to-place risks
that insurance companies licensed by the state in which the
insurance policy is sold, which are also referred to as
admitted insurers, typically do not cover. Our goal
is to be selective in the classes of business and the coverages
we write within the excess and surplus lines market. The
insurance needs of this market are serviced by retail insurance
brokers who maintain relationships with the general agents with
whom we do business.
As a niche company, we offer specialty insurance
products designed to meet specific insurance needs of targeted
insured groups. These targeted insured markets are often not
served or are underserved by standard companies. We focus on
serving the insurance needs of small and mid-sized businesses,
including habitational risks, hospitality businesses, artisan
contractors, daycare facilities, retail and wholesale stores,
fitness centers and special event providers. Typically, the
development of these specialty insurance products is generated
through proposals brought to us by an agent or broker seeking
coverage for a specific group of clients. We have disciplined
underwriting that considers all of our applicants for insurance
coverages on an individual basis. For each class we insure, we
employ a number of customized endorsements, rating tools and
decreased limits to align our product offerings to the risk
profile of the class and the specific insured being underwritten.
We now seek to achieve a balance between our property and
casualty premiums. Property business has an inherently shorter
tail than casualty business, and we emphasize short tail classes
of casualty business in order to reduce pricing and reserving
risk. For example, our primary casualty business is dominated by
premises liability risks known in the industry as Owners,
Landlords & Tenants (OL&T) risks, which
present a much shorter tail than a traditional excess and
surplus lines book of business, which is predominated by
Manufacturers & Contractors (M&C)
risks. Short tail risks are generally known to occur at a
definite point in time, and while the extent of the injury and
associated costs may be unknown for some period of time, the
actual occurrence is usually reported fairly quickly. In
contrast, with longer tail risk the injury occurs away from the
premises owned by the insured, may not be known for some period
of time and may result in cumulative or progressive damage.
We avoid high-hazard, long tail lines of business such as
product liability, occurrence coverage for general contractor
liability and construction contractor liability business and
medical malpractice. Due to the extreme lag in the reporting
time from the date of the occurrence of property damage to the
date a claim is reported in many states, the history of adverse
court precedent spreading to other jurisdictions, and
contractors having a relatively low barrier to operating across
state lines, we believe that construction trades may no longer
be predictably underwritten on an occurrence general liability
form. Therefore, as a prudent underwriter, beginning
January 1, 2005, we only offer a claims made and reported
commercial general liability form of coverage on any
construction risk regardless of the jurisdiction the contractors
operate in, the type of projects they work on, or trade they
perform.
As of December 31, 2005, we had consolidated assets of
$474.1 million and consolidated shareholders equity
of $121.2 million. For the year ended December 31,
2005, we produced gross written premiums of $216.2 million,
and we had net income of $10.2 million.
3
Our principal executive offices are located at 465 Cleveland
Ave., Westerville, Ohio 43082, and the telephone number at that
address is (614) 895-2000. The Company files annual,
quarterly, special reports and proxy statements with the SEC.
These filings are available to the public over the Internet on
the SECs Web site at http://www.sec.gov and at our
Web site at http://www.procentury.com.
Pursuant to
Rule 12b-23 under
the Securities and Exchange Act of 1934, as amended, the
industry segment information included in Item 8,
note 14 of Notes to Consolidated Financial Statements, is
incorporated by reference in partial response to this
Item 1.
Company History
Century was formed in 1978 as a specialty insurance carrier for
inland marine, surety and fidelity coverages for the surface
mining industry. In 1984, Century expanded its original focus
and initiated a business strategy centered on hard to place
property/casualty risks. In 1992, Century acquired Continental
Heritage Insurance Company (Continental), which
wrote specialty surety and bail bond business. In 1993, Century
acquired Evergreen National Indemnity Company
(Evergreen), which wrote landfill and specialty
surety business. These combined entities constituted the Century
Insurance
Group®.
In 1996, Century was acquired by Century Business Services, Inc.
(NASDAQ: CBIZ). In 1997, Century acquired the assets of the
managed care workers compensation business of the Anthem
Casualty Insurance Group.
ProCentury was formed as an Ohio corporation in July 2000 by
certain of our shareholders and members of management. Pursuant
to our management-led buyout in October 2000, ProCentury
acquired Century and its subsidiaries, including Evergreen and
Continental, from Century Business Services, Inc.
Following this transaction, the strategic direction of
ProCentury focused primarily on the excess and surplus lines and
involved exiting certain unprofitable businesses such as
commercial automobile beginning in May 2000 and workers
compensation in January 2002. As a result of this change in
strategy, we sought to take advantage of the increase in volume
and rates in the excess and surplus lines market, which began in
2001.
On April 26, 2004, we issued 8,000,000 common shares at
$10.50 per share in an initial public offering
(IPO) and received net proceeds (before expenses) of
$77.9 million. Immediately prior to the IPO, Evergreen and
Continental, were spun-off to ProCenturys existing
Class A shareholders. The operations of Evergreen and
Continental consisted of ProCenturys historical surety and
assumed excess workers compensation lines of insurance,
which were re-classified (net of minority interest and income
taxes) as discontinued operations in the accompanying financial
information for all periods presented.
On June 1, 2005, Century acquired 100% of the outstanding
shares of the Firemans Fund of Texas (FFTX) for
$5.9 million. FFTX is a Texas domiciled property and
casualty company licensed in Texas, Oklahoma and California. The
acquisition is part of our long-term plan to develop business
that requires admitted status, as well as its continued focus on
growing its excess and surplus lines business. On
August 16, 2005, FFTX was renamed ProCentury Insurance
Company (PIC).
Industry Overview
The excess and surplus lines insurance market differs
significantly from the standard market. In the standard market,
insurance products and coverages are largely uniform with broad
coverage grants due to highly regulated rates and forms.
Standard market companies tend to compete for customers
primarily on the basis of rate, retain close relationships with
retail insurance agents and make accommodations to the insureds
to maintain the marketability of their product for their
contracted direct agent.
In contrast, the excess and surplus lines market provides
coverage for risks that either do not fit the underwriting
criteria of standard carriers with which the retail agent has a
direct relationship, or they are of a class or risk that the
standard market generally avoids since the regulated nature of
that market does not allow for customized terms or rates.
Non-standard risks can be underwritten profitably, however, by
the excess and surplus market, by using highly specific coverage
forms with terms based on individual risk assessment, rather
4
than the risk profile of the most desirable members of the
class. When a certain risk has been excluded from the standard
market, the retail agents need quick placement with the excess
and surplus lines market in order to maintain coverage for the
insured. As a result, the primary basis for competition within
the excess and surplus lines industry can be focused more on
service and availability than rate.
The insurance industry has historically been cyclical. From 1987
to 2001, the industry generally experienced intensified
competition for standard and excess and surplus lines insurers,
resulting in rate decreases in many lines. In early 2001, a
return to risk-based underwriting disciplines in the standard
market caused a noticeable increase in submissions to the excess
and surplus lines market of risks that no longer qualified for
coverage from the standard carriers and higher premium rates.
Since 2001, we have benefited from this increase in rates and
volume, as well as reduced capacity in the excess and surplus
lines market, insurance industry consolidation, corporate
downsizing and the increased use of communications technology
and personal computers, which, among other factors, have
contributed to the high growth in the number of small
businesses. In addition, low interest rates have resulted in
increased rates and more conservative coverage terms because, as
investment returns have moderated over the past few years,
property and casualty carriers have been forced to adopt more
profitable underwriting practices. For property business, this
pattern continued until the second half of 2003, when rates
first plateaued, and then slowly began to decline. This moderate
decline continued throughout much of 2004, with some
stabilization seen after the 2005 hurricane season. For casualty
business, rates remained firm throughout 2003 and stabilized in
2004 with only slight declines beginning at the end of 2004 and
into 2005.
We expect that rate adequacy for our specialty and excess and
surplus lines products will continue, as a result of the
following factors:
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our commitment to underwriting profitability; |
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our re-underwriting of our binding policies; |
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continued low interest rates; |
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close monitoring or downgrading of many insurers and reinsurers
by rating agencies; |
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new corporate governance requirements; and |
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industry focus on rate adequacy and the negative effects of
under-priced business on the industry as a whole. |
Lines of Business
The following table sets forth an analysis of gross and net
written premiums by segment and major product groupings during
the periods indicated:
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Years Ended December 31, | |
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2005 | |
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2004 | |
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2003 | |
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(In thousands) | |
Gross written premiums:
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Property/ casualty
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$ |
212,127 |
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190,591 |
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150,900 |
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Other (including exited lines)
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4,037 |
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814 |
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(1,192 |
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Total gross written premiums
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216,164 |
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191,405 |
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149,708 |
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Ceded written premiums
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26,645 |
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25,381 |
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17,869 |
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Net written premiums
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$ |
189,519 |
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166,024 |
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131,839 |
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Net premiums earned
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$ |
177,630 |
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148,702 |
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108,294 |
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Net written premiums to gross written premiums
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87.7 |
% |
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86.7 |
% |
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88.1 |
% |
Net premiums earned to net written premiums
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93.7 |
% |
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89.6 |
% |
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82.1 |
% |
Net writings ratio, including discontinued operations(1)
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1.6 |
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1.4 |
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1.7 |
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5
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(1) |
The ratio of net written premiums to our insurance
subsidiaries combined statutory surplus. This ratio is not
restated to exclude discontinued operations as the insurance
subsidiaries combined statutory surplus is not allocated
by line of business. Therefore, in computing the ratio of net
written premiums to our insurance subsidiaries combined
statutory surplus we do not restate the net written premium for
discontinued operations to be consistent with that of the
subsidiaries combined statutory surplus. Management
believes this measure is useful in gauging our exposure to
pricing errors in the current book of business. It may not be
comparable to the definition of net writings ratio used by other
companies. |
Casualty Business. We target shorter tail classes of
casualty business focusing on what are commonly referred to as
OL&T (owners, landlords and tenants) classes of
business and have de-emphasized what are commonly referred to as
M&C (manufacturers and contractors) classes of
business. We believe these shorter tail OL&T classes of
business present less rating and reserving risk to us compared
to longer tail casualty lines. At the time of our management-led
buyout in October 2000, 46.5% of our property/casualty gross
written premiums comprised OL&T or shorter tail classes. For
the year ended December 31, 2005, 51.0% of our
property/casualty gross written premiums comprised OL&T or
shorter tail classes. With respect to the M&C classes of
business we continue to write, we focus on controlling the
reserving and pricing risk through the use of claims made and
reported forms, and in the case of manufacturing risks, staying
with consumable products with low risk of mass tort claims.
Our insurance policies provide coverage limits generally ranging
from $25,000 to $1.0 million per occurrence, with the
majority of our policies having limits between $500,000 and
$1.0 million. Generally, through reinsurance, we are
subject to the first $500,000 of an individual loss for the
current accident year. Our general liability policies usually
provide coverage for defense and related expenses in addition to
per occurrence and aggregate policy limits. For certain
products, defense expenses are included in the policy limits.
However, excess liability coverage does decrease in the event of
the carriers reinsurance insolvency.
Other Casualty Business. We also offer garage liability,
professional liability, automobile physical damage, commercial
excess and umbrella policies to supplement our commercial
multi-peril and commercial general liability writings. On garage
and professional liability we write up to a maximum of
$1.0 million per occurrence or accident. On the automobile
physical damage coverage, the maximum limit we will write is
$150,000 per vehicle. Commercial excess policies provide
excess liability coverage above the limits of standard liability
policies and may also provide coverage for risks not covered
under standard liability policies. Our limited umbrella form
policy may also provide coverage for risks not covered under
standard liability policies after the insured satisfies a
self-insured retention. We write commercial umbrella and excess
insurance for limits up to a total aggregate of
$5.0 million above the minimum underlying limits of
$1.0 million per occurrence and $2.0 million in the
aggregate. Although most of our umbrella and excess business is
written to support our primary policies, we will accept other
carriers as primary, provided they are rated A-V or
better by A.M. Best.
We also have a program division that writes specialty programs,
as well as alternative risk transfer programs, which require the
insured to fund all or part of the insurance risk with cash or a
letter of credit.
In our program division, we seek to write the better risks in a
class with strict information gathering, loss control and
underwriting guidelines and rules. In our specialty program
unit, we typically require more underwriting information on each
account than is required in our usual surplus lines business in
order to help us determine which individual risks in the group
that we wish to write. In addition, beginning in 2005, we
established a segregated cell captive in which our agents can
use their own funds to establish a cell. This allows the agent
to assume part of the risk in the business that they write by
acting as a quota share reinsurer of Century. In combination
with our increased class and individual risk underwriting
guidelines, this business is expected to produce more profitable
long term results versus business written on the same class but
with less intensive underwriting and submission requirements.
Examples of programs we write in this unit are general liability
for oil and gas service contractors, low limit automobile
liability for taxi cabs in California, laundromats, and mid to
low priced franchised hotels.
6
The fully or partially funded alternative risk business we write
in our program unit is generally for insureds with risks for
which traditional insurance is not cost effective for the first
$1.0 to $5.0 million of coverage. In these situations, the
insured pays as premium, an amount calculated to
include the limit of insurance that is exposed and an overhead
and profit calculation.
Property Business. For the year ended December 31,
2005, 32.2% of our total property/casualty gross written
premiums comprised property business. Consistent with our focus
on shorter tail casualty lines, we believe that the inherent
short tail property business presents less rating and reserving
risk to us. Our property business represents classes of business
that were chronically under-priced by the standard market
admitted insurers in the late 1990s and have since been pushed
to the excess and surplus lines market. These classes include
apartments, commercial buildings and low value dwellings.
Our commercial property lines provide coverage limits of up to
$25.0 million, but the majority of our written premiums in
2005 were written at limits of less than $2.0 million.
Through the use of treaty, automatic facultative and certificate
facultative reinsurance, we retain the first $500,000 of each
individual loss for the current accident year.
Package Business. We write commercial multi-peril
policies that provide our insureds with commercial property and
general liability coverages bundled together as a
package. The targeted classes, limits and pricing on
these policies are the same as if written separately.
Other (Including Exited Lines). We write a limited amount
of landfill and specialty surety bond business on a direct and
assumed basis. We continue to write surety business in order to
maintain our U.S. Treasury Listing. We do not expect our
surety segment to exceed 5% of our total gross written premium.
In connection with our management-led buyout in October 2000, we
changed our strategic direction to focus primarily on the excess
and surplus lines and the exiting of certain unprofitable
business. As a result, we exited the commercial
automobile/trucking line in May 2000 and the workers
compensation line effective as of January 1, 2002.
The following table sets forth the geographic distribution of
our gross written premiums for the periods indicated:
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Years Ended December 31, | |
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2005 | |
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2004 | |
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2003 | |
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(In thousands) | |
Midwest
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$ |
36,826 |
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17.0 |
% |
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38,458 |
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20.1 |
% |
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32,285 |
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21.6 |
% |
Southeast
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56,348 |
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26.1 |
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51,841 |
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27.1 |
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42,805 |
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28.6 |
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Southwest
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34,650 |
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16.0 |
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34,916 |
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18.2 |
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30,850 |
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20.6 |
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West
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76,196 |
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35.2 |
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61,062 |
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31.9 |
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42,458 |
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28.4 |
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Northeast
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8,933 |
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4.1 |
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5,128 |
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2.7 |
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2,286 |
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1.5 |
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Assumed Reinsurance
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3,211 |
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1.6 |
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(976 |
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(0.7 |
) |
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Total
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$ |
216,164 |
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100.0 |
% |
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191,405 |
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100.0 |
% |
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|
149,708 |
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100.0 |
% |
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We attempt to minimize catastrophic risk by diversifying in
different geographical regions. Our primary catastrophic risk is
structural property exposures as a result of hurricanes,
tornados, hail storms, winter storms and freezing. We maintain
property catastrophe coverage by evaluating the probable maximum
loss using a catastrophe exposure model developed by independent
experts. We do not write wind coverage on non-mobile properties
in Florida or within two counties of the Gulf of Mexico and the
eastern seaboard states.
7
Underwriting and Pricing
We underwrite our commercial property/casualty business on a
binding authority and a brokerage basis.
Binding Authority. Binding authority business represents
risks that may be quoted and bound with a policy subsequently
issued on our behalf by our general agents. This business is
produced in accordance with specific and detailed rules set
forth in our Electronic Underwriting Manual (EUM)
that is provided to our general agents. There are limited
classes and no premium credits available to the general agency
underwriter. We monitor the classes of business subject to
agents binding authority, considering market conditions,
competition, underwriting results and other factors and we
frequently change these guidelines by amending our EUM.
Our EUM provides that some prospective insureds must be
submitted to our underwriters for specific approval prior to the
agent quoting or binding the risk. The most frequent reason for
this specific approval requirement is the size of the risk
involved. Any prospective property risk with a total insured
value (TIV) over $1.0 million is automatically
required to be submitted for prior approval. Similarly, any
prospective casualty risk with a premium of $25,000 or greater
is required to be submitted for prior approval.
The economics of the binding business are generally different
than those of the brokerage business. The binding business is
characterized by small independently owned single location
businesses that have been denied coverage by the standard
market. Due to their size, the retail agent finds it difficult
to get a standard carrier to accept the account on an exception
basis often times nearly running out of time to provide the
insured with coverage before the current policy expires. For
this reason, it is important to provide binding authority, for
the less difficult classes of business, in order to take full
advantage in terms of rate and form that also allows fast and
reliable service that the insured demands. Further, because the
binding business is less likely than the brokerage business to
be shopped at renewal, it is more persistent from
year to year, therefore, being somewhat resistant to a softening
market.
Binding authority business accounted for 57.0% of our total core
property/casualty gross written premiums for the year ended
December 31, 2005. Our EUM outlines our risk eligibility,
pricing, underwriting guidelines and policy issuance
instructions. We monitor the underwriting quality of our
business by re-underwriting each piece of business produced by
our general agents in accordance with their underwriting
authority.
Brokerage Business. Brokerage business represents risks
that exceed the limits of underwriting authority that we are
willing to grant to our general agents. Many of our brokerage
accounts are classes of insurance that are not permitted to be
written at all by our general agents pursuant to their binding
authority. However, most of our brokerage business is produced
on risks that produce individual TIV or premium above levels we
believe prudent to allow for agency binding and issuance
authority. For property business, any risk with a TIV over
$1,500,000 is automatically classified as a brokerage account.
For casualty business, the threshold is $35,000 in premium. If
there is a package policy where either the property or casualty
portion is indicated as a brokerage account, the entire account
is classified as brokerage business. Commissions on brokerage
policies are generally 3.5% lower than on binding contracts.
Brokerage business accounted for approximately 43.0% of our
total core property/casualty gross written premiums for the year
ended December 31, 2005.
Pricing. In the commercial property and casualty market,
the rates and terms of coverage provided by property and
casualty insurance carriers are frequently based on benchmarks
and forms promulgated by the Insurance Services Office, also
known as ISO. ISO makes available to its members advisory
rating, statistical and actuarial services, policy language and
other related services. ISO currently provides these services to
more than 1,500 property and casualty insurance companies in the
United States. One of the services that ISO provides is an
actuarial-based estimate of the expected loss cost for risks in
each of approximately 1,000 risk classifications. These
benchmark loss costs reflect an analysis of the loss and
allocated loss adjustment expenses on claims reported to ISO.
ISO statistics, however, include only claims and policy
information reported to ISO, and therefore do not reflect all of
the loss experience for each class.
We primarily use ISO loss costs as the foundation for
establishing our rates for all casualty lines of business. We
then develop loss cost multipliers, or LCMs, which
are designed to support our operating
8
expenses, acquisition expenses and targeted return on equity. On
our property business, we employ a proprietary class rating
matrix that employs a series of ISO commercial fire rating
schedule-based charges determined by construction, occupancy,
protection and geographical concerns. We multiply our LCMs by
ISO loss cost to produce our final rates. We also employ minimum
premiums based on the limit and coverage provided that can only
increase the effective rate. Our final rates are regionalized to
incorporate variables such as historic loss experience, the
types and lines of business written, competition and state
regulatory considerations. For business that we write on an
admitted, or licensed, basis, we must obtain advance regulatory
approval of rates in a number of states. All agency underwritten
business is re-underwritten by our binding unit to check for
mistakes or other results that may be inconsistent with the
rules set forth in our EUM.
Marketing and Distribution
As of December 31, 2005, we marketed our products through
119 agents, including 97 agents with binding authority. These
agents maintain 193 offices in 47 states. This wholesale
general agency force makes our products available to licensed
retail agencies throughout the United States. We believe that
our distribution network enables us to efficiently access at a
relatively low fixed cost the numerous small markets our product
offerings target. These general agents and their retail
insurance agents and brokers have local market knowledge and
expertise that enable us to more effectively access these
markets. We generally confine our general agents marketing
territory to three or fewer states.
We strive to preserve each general agents franchise value
with us in that general agents marketing territory. We
seek to increase our written premiums with these general agents
and to develop long-term, profitable relationships by providing
a high level of service and support. For example, we try to
respond to our general agents requests for quotes on their
proposals within 48 hours. We believe that the performance
of the business that we ultimately write is measurably improved
when produced by general agents who have increased familiarity
and experience with our underwriting requirements.
Claims Management and Administration
Our approach to claims management is to:
|
|
|
|
|
control loss and expenses through prompt investigation, accurate
coverage determination, early evaluation, close supervision of
outside service providers and early resolution of all reported
claims; |
|
|
|
provide a high level of service and support to agents and
insureds throughout the claims process; and |
|
|
|
provide information and intelligence to our underwriters and
actuaries about changes in individual risk exposures and trends
in claims and the law that affect our overall risk exposure. |
Our general agents have no authority to settle claims or
otherwise exercise control over the claims process. Our claims
management staff supervises and processes all claims. Claims
adjusters have reserving authority based upon their skill levels
and experience. We have a formal claims review process, and
changes in loss and loss expense reserves on all claims valued
greater than $25,000 are reviewed on a weekly basis by senior
claims and underwriting management and the President of Century.
Loss and Loss Expense Reserves
We are liable for covered losses and incurred loss adjustment
expenses under the terms of the insurance policies that we
write. In many cases, several years may lapse between the
occurrence of an insured loss, the reporting of the loss to us
and our settlement of that loss. We reflect our liability for
the ultimate payment of all incurred losses and loss expenses by
establishing loss and loss expense reserves as balance sheet
liabilities for both reported and unreported claims. We do not
use discounting (recognition of the time value of money) in
reporting our estimated reserves for losses and loss expenses.
When a claim is reported, our claim department establishes a
case reserve for the estimated probable ultimate cost to resolve
a claim as soon as sufficient information is available to
evaluate a claim. We open
9
most claim files with a formula reserve (a nominal
fixed amount) for the type of claim involved. We adjust the
formula reserve to the probable ultimate cost for that claim as
soon as possible. It is our goal to reserve each claim at its
probable ultimate cost no later than 30 days on property
claims or 90 days on casualty claims following receipt of
the claim. We adjust reserves as soon as possible when new
information is received that materially changes our evaluation
of what we believe we will ultimately pay to reserve the claim.
We reserve for the payments we expect to make on the loss and
for the allocated loss adjustment expenses we expect to incur.
In addition to case reserves, we establish reserves on an
aggregate basis to provide for losses and loss expenses that
have been incurred but not reported, commonly referred to as
IBNR. Case reserves and IBNR comprise the total loss
and loss expense reserves.
Our internal actuaries apply multiple traditional actuarial
techniques to compute loss and loss expense reserve estimates
for claim liabilities other than construction defect. Each
individual technique produces a unique loss and loss expense
reserve estimate for the line being analyzed. The set of
techniques applied together produces a range of loss and loss
expense reserve estimates. From these estimates, the actuaries
form a best estimate which considers the assumptions and factors
discussed below that influence ultimate claim costs. For
construction defect claim liabilities, our internal actuaries
apply one actuarial technique, under various sets of
assumptions, which considers the factors that influence ultimate
claim costs as discussed below. The actuarial technique for
construction defect claims includes several variables relating
to the number of IBNR claims and the average cost per IBNR
claim. In addition to computing best estimate parameter values
for the actuarial projection, the actuaries also consider the
impact on resulting IBNR related to reasonably foreseeable
fluctuations in these variables.
The actuarial techniques for computing loss and loss expense
reserve estimates use the following factors, among others:
|
|
|
|
|
our experience and the industrys experience; |
|
|
|
historical trends in reserving patterns and loss payments; |
|
|
|
the impact of claim inflation; |
|
|
|
the pending level of unpaid claims; |
|
|
|
the cost of claim settlements; |
|
|
|
the line of business mix; and |
|
|
|
the environment in which property and casualty insurance
companies operate. |
Although many factors influence the actual cost of claims and
our corresponding reserve estimates, we do not measure and
estimate values for all of these variables individually. This is
due to the fact that many of the factors that are known to
impact the cost of claims cannot be measured directly, such as
the impact on claim costs due to economic inflation, coverage
interpretations and jury determinations. In most instances, we
rely on our historical experience or industry information to
estimate values for the variables that are explicitly used in
our reserve analyses. We assume that the historical effect of
these unmeasured factors, which is embedded in our experience or
industry experience, is representative of future effects of
these factors. Where we have reason to expect a change in the
effect of one of these factors, we perform analysis to quantify
the necessary adjustments.
We periodically review these estimates and, based on new
developments and information, we include adjustments of the
probable ultimate liability in operating results for the periods
in which the adjustments are made. In general, our initial
reserves are based upon the actuarial and underwriting data
utilized to set pricing levels and are reviewed as additional
information, including claims experience, becomes available. The
establishment of loss and loss expense reserves makes no
provision for the broadening of coverage by legislative action
or judicial interpretation or for the extraordinary future
emergence of new types of losses not sufficiently represented in
our historical experience or which cannot yet be quantified. We
regularly analyze our reserves and review our pricing and
reserving methodologies so that future adjustments to prior year
10
reserves can be minimized. However, given the complexity of this
process, reserves will require continual updates and the
ultimate liability may be higher or lower than previously
indicated.
Our Actuarial Unit has three actuaries, each of whom is a Fellow
of the Casualty Actuarial Society and Member of the American
Academy of Actuaries. The duties of the Actuarial Unit include:
|
|
|
|
|
performing an actuarial analysis of loss and loss expense
reserves on a quarterly basis; |
|
|
|
assisting our Underwriting Department in evaluating pricing
adequacy; |
|
|
|
assisting our Loss Reserve Committee, which includes our Senior
Vice President and Chief Actuary, President and Chief Executive
Officer of ProCentury, Senior Claims Officer, Senior
Underwriting Officer, Chief Financial Officer and Treasurer, and
President of Century, in establishing managements best
estimate of loss and loss expense reserves; and |
|
|
|
working with our independent external actuary in the year-end
loss and loss expense reserves statement of actuarial opinion
process. |
Due to the inherent uncertainty in estimating reserves for
losses and loss expenses, there can be no assurance that the
ultimate liability will not exceed amounts reserved, with a
resulting adverse effect on our results of operations and
financial condition. Based on the current assumptions used in
calculating reserves, management believes our overall reserve
levels at December 31, 2005 make a reasonable provision for
our future obligations.
Activity in the liability for loss and loss expense reserves is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Loss and loss expense reserves at beginning of year, as reported
|
|
$ |
153,236 |
|
|
|
129,236 |
|
|
|
90,855 |
|
Less reinsurance recoverables on unpaid losses at beginning of
year
|
|
|
29,485 |
|
|
|
36,739 |
|
|
|
31,853 |
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss expense reserves at beginning of year
|
|
|
123,751 |
|
|
|
92,497 |
|
|
|
59,002 |
|
Provision for loss and loss expense incurred for claims related
to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
112,946 |
|
|
|
78,015 |
|
|
|
53,961 |
|
|
Prior years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property/ casualty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty
|
|
|
7,384 |
|
|
|
12,842 |
|
|
|
22,190 |
|
|
|
|
Property
|
|
|
(2,388 |
) |
|
|
(3,244 |
) |
|
|
2,254 |
|
|
|
Other (including exited lines):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial automobile
|
|
|
439 |
|
|
|
789 |
|
|
|
1,350 |
|
|
|
|
Workers compensation
|
|
|
(35 |
) |
|
|
664 |
|
|
|
1,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total prior years
|
|
|
5,400 |
|
|
|
11,051 |
|
|
|
27,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
118,346 |
|
|
|
89,066 |
|
|
|
81,004 |
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense payments for claims related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
24,548 |
|
|
|
22,095 |
|
|
|
15,932 |
|
|
Prior years
|
|
|
43,350 |
|
|
|
35,717 |
|
|
|
31,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
67,898 |
|
|
|
57,812 |
|
|
|
47,509 |
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss expense reserves at end of year
|
|
|
174,199 |
|
|
|
123,751 |
|
|
|
92,497 |
|
Plus reinsurance recoverables on unpaid losses at end of year
|
|
|
37,448 |
|
|
|
29,485 |
|
|
|
36,739 |
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense reserves at end of year, as reported
|
|
$ |
211,647 |
|
|
|
153,236 |
|
|
|
129,236 |
|
|
|
|
|
|
|
|
|
|
|
11
An explanation of significant components of loss and loss
expense reserve development by segment (net of reinsurance,
unless otherwise indicated) follows.
Casualty. Our changes in the reserve estimates related to
prior accident years for the years ended December 31, 2005,
2004 and 2003 for the casualty lines resulted in increases in
incurred losses and loss expenses of $7.4 million,
$12.8 million, and $22.19 million respectively. A
significant portion of our casualty reserve development relates
to construction defect claims in certain states. See
Business General. Starting with
California in December 2000, we began to exit contractors
liability business written on an occurrence form. By the end of
the first quarter of 2001, we had significantly reduced our
underwriting of contractors liability written on an
occurrence form underwriting in all states, and completely
eliminated our underwriting of contractors liability
written on an occurrence form underwriting in Arizona,
California, Colorado, Hawaii, Louisiana, Nevada, New Jersey,
North Carolina, Oregon, South Carolina and Washington. Reserves
and claim frequency on this business may be impacted by
decisions by California and other states courts affecting
insurance law and tort law. They may also be impacted by
legislation enacted in California. This legislation continues to
impact claim severity, frequency and time to settlement
assumptions underlying our reserves. Accordingly, our ultimate
liability may exceed or be less than current estimates due to
this variable, among others.
In addition, during 2004, as a result of court decisions that
further defined the legal environment California, we decided to
enhance our defense strategy for certain types of construction
defect claims in prior years. As a result, we revised the
construction defect defense team by retaining appellate and new
trial counsel and restaffing the in-house team responsible for
management of the litigation. Once the new legal teams were
established late in 2004 and into 2005, it was determined that
there were certain cases that should be settled and the defense
budgets for the remaining cases had to be revised to reflect the
added resources, resulting in higher than expected loss and
defense costs in 2005.
Of our construction defect net loss and loss expense reserves at
December 31, 2005, 52.6% was for incurred but not reported
losses (which are referred to as IBNR) and 61.0% of our
construction defect net loss and loss expense reserves at
December 31, 2004 was for IBNR. As of December 31,
2005, we had 480 open claims relating to construction defects,
compared to 566 open claims as of December 31, 2004. During
2005, 840 new claims were reported and 926 existing claims were
settled or dismissed. Our net loss and loss expense reserves for
construction defects as of December 31, 2005 was
$17.6 million. The re-estimation of construction defect
reserves primarily affected the 1996 and 1997 accident years and
the 1999 to 2001 accident years.
In addition, we have also experienced development above
expectations on our non-construction defect casualty reserves
for the 2000 to 2002 accident years that led to reassessments of
the initial loss ratio expectations and the claim reporting and
settlement patterns.
As of December 31, 2005, the projected loss and loss
expense ratios, after the effects of reinsurance, for the
casualty lines were 57.3%, 48.7% and 43.4% for accident periods
2005, 2004, and 2003, respectively.
Property. Our change in estimates for the years ended
December 31, 2005, 2004 and 2003 for the property lines
resulted in (decreases) increases of ($2.4) million,
($3.2) million and $2.3 million, respectively. These
amounts primarily relate to changes in the selected development
patterns on multiple accident years, as the number of claims and
claim severity were below expectations at December 31, 2005
and 2004, but exceeded expectations at December 31, 2003.
As of December 31, 2005, the projected loss and loss
expense ratios, after the effects of reinsurance, for the
property lines were 77.8%, 54.5% and 47.7% for accident periods
2005, 2004 and 2003, respectively. Included in the 2005 accident
year property loss ratio is 14.8% related to the 2005 fall
hurricane season.
|
|
|
Other (Including Exited Lines) |
We began writing commercial automobile/trucking coverage for
commercial vehicles and trucks in 1997. In 2000, we exited the
commercial automobile line of business due to unsatisfactory
underwriting results. At
12
December 31, 2005 and 2004, all of our net loss and loss
expense reserves related to commercial automobile was for case
reserves. As of December 31, 2005, we had 21 open claims
relating to commercial automobile, compared to 38 open claims as
of December 31, 2004. During 2005, two new claims were
reported and 19 existing claims were settled or dismissed.
Our net loss and loss expense reserves for commercial automobile
as of December 31, 2005 were $936,000.
We offered workers compensation coverage from 1997 through
January 2002. We exited this line of business beginning
January 1, 2002 due to unsatisfactory underwriting results
and the lack of availability of acceptable reinsurance. Until
July 2000, we purchased 100% quota share reinsurance on this
book of business. Beginning in 2000, we started to retain some
risk. No new policies have been written since the first quarter
of 2002. Of our net loss and loss expense reserves at
December 31, 2005, 57.6% related to workers
compensation claims IBNR, and 49.8% of our net loss and loss
expense reserves at December 31, 2004 was for workers
compensation IBNR. As of December 31, 2005, we had 199 open
claims relating to workers compensation compared to 257
open claims as of December 31, 2004. During 2005, 11 new
claims were reported, and 69 existing claims were settled
or dismissed. Our net loss and loss expense reserves for
workers compensation as of December 31, 2005 was
$2.7 million.
The table provided below presents the development of reserves,
net of reinsurance, from 1996 through 2005. The top line of the
table presents the reserves at the balance sheet date for each
of the periods indicated. This represents the estimated amounts
of loss and loss expenses for claims arising in the period that
were unpaid at the balance sheet date, including losses that had
been incurred but not yet reported to us. The upper portion of
the table presents the re-estimated amount of the previously
recorded reserves based on experience as of the end of each
succeeding period, including cumulative payments made since the
end of the respective period. The estimate changes as more
information becomes known about the payments, as well as the
frequency and severity of claims for individual periods.
Favorable loss development, shown as a cumulative redundancy in
the table, exists when the original reserve estimate is greater
than the re-estimated reserves. The lower portion of the table
presents the cumulative amounts paid as of the end of each
successive period with respect to those claims. Information with
respect to the cumulative development of gross reserves (that
is, without deduction for reinsurance ceded) also appears at the
bottom portion of the table.
13
In evaluating the information in the table provided below, note
that each amount entered incorporates the cumulative effects of
all changes in amounts entered for prior periods. The table does
not present accident or policy year development data. In
addition, conditions and trends that have affected the
development of liability in the past may not necessarily recur
in the future.
Analysis of Loss and Loss Adjustment Expense Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1996 | |
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net liability for losses and loss expenses
|
|
$ |
30,321 |
|
|
|
39,644 |
|
|
|
42,262 |
|
|
|
46,649 |
|
|
|
44,915 |
|
Liability re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
29,871 |
|
|
|
36,789 |
|
|
|
44,269 |
|
|
|
49,382 |
|
|
|
50,265 |
|
|
Two years later
|
|
|
27,206 |
|
|
|
38,022 |
|
|
|
45,006 |
|
|
|
52,390 |
|
|
|
66,745 |
|
|
Three years later
|
|
|
27,761 |
|
|
|
38,869 |
|
|
|
47,237 |
|
|
|
66,299 |
|
|
|
84,178 |
|
|
Four years later
|
|
|
28,380 |
|
|
|
40,234 |
|
|
|
58,059 |
|
|
|
77,477 |
|
|
|
94,930 |
|
|
Five years later
|
|
|
29,407 |
|
|
|
52,448 |
|
|
|
65,977 |
|
|
|
84,861 |
|
|
|
100,422 |
|
|
Six years later
|
|
|
34,926 |
|
|
|
59,130 |
|
|
|
72,691 |
|
|
|
88,590 |
|
|
|
|
|
|
Seven years later
|
|
|
37,827 |
|
|
|
63,389 |
|
|
|
76,396 |
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
39,706 |
|
|
|
66,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
39,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cumulative redundancy (deficiency)
|
|
|
(9,404 |
) |
|
|
(27,298 |
) |
|
|
(34,134 |
) |
|
|
(41,941 |
) |
|
|
(55,507 |
) |
Cumulative amount of net liability paid as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
8,623 |
|
|
|
12,042 |
|
|
|
14,221 |
|
|
|
18,741 |
|
|
|
19,047 |
|
|
Two years later
|
|
|
15,562 |
|
|
|
21,304 |
|
|
|
25,237 |
|
|
|
31,444 |
|
|
|
37,562 |
|
|
Three years later
|
|
|
19,842 |
|
|
|
28,707 |
|
|
|
33,559 |
|
|
|
45,199 |
|
|
|
54,598 |
|
|
Four years later
|
|
|
23,211 |
|
|
|
33,508 |
|
|
|
42,754 |
|
|
|
55,536 |
|
|
|
68,806 |
|
|
Five years later
|
|
|
25,824 |
|
|
|
40,788 |
|
|
|
49,406 |
|
|
|
65,559 |
|
|
|
78,743 |
|
|
Six years later
|
|
|
29,778 |
|
|
|
45,935 |
|
|
|
57,133 |
|
|
|
72,538 |
|
|
|
|
|
|
Seven years later
|
|
|
31,113 |
|
|
|
51,349 |
|
|
|
63,589 |
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
34,693 |
|
|
|
57,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
36,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability end of year
|
|
|
36,694 |
|
|
|
45,608 |
|
|
|
55,844 |
|
|
|
76,357 |
|
|
|
84,974 |
|
Reinsurance recoverable on unpaid losses
|
|
|
6,373 |
|
|
|
5,964 |
|
|
|
13,582 |
|
|
|
29,708 |
|
|
|
40,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability end of year
|
|
|
30,321 |
|
|
|
39,644 |
|
|
|
42,262 |
|
|
|
46,649 |
|
|
|
44,915 |
|
Gross liability re-estimated latest
|
|
|
43,948 |
|
|
|
77,741 |
|
|
|
85,359 |
|
|
|
123,506 |
|
|
|
141,208 |
|
Reinsurance recoverable on unpaid losses
re-estimated latest
|
|
|
4,223 |
|
|
|
10,779 |
|
|
|
8,963 |
|
|
|
34,916 |
|
|
|
40,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability re-estimated latest
|
|
|
39,725 |
|
|
|
66,942 |
|
|
|
76,396 |
|
|
|
88,590 |
|
|
|
100,422 |
|
Gross cumulative redundance (deficiency)
|
|
$ |
(7,254 |
) |
|
|
(32,133 |
) |
|
|
(29,515 |
) |
|
|
(47,149 |
) |
|
|
(56,234 |
) |
14
Analysis of Loss and Loss Adjustment Expense Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net liability for losses and loss expenses
|
|
$ |
48,944 |
|
|
|
59,002 |
|
|
|
92,497 |
|
|
|
123,763 |
|
|
|
174,199 |
|
Liability re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
64,818 |
|
|
|
86,045 |
|
|
|
103,548 |
|
|
|
129,163 |
|
|
|
|
|
|
Two years later
|
|
|
86,480 |
|
|
|
101,553 |
|
|
|
111,189 |
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
98,983 |
|
|
|
109,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
104,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cumulative redundancy (deficiency)
|
|
|
(56,031 |
) |
|
|
(50,800 |
) |
|
|
(18,692 |
) |
|
|
(5400 |
) |
|
|
|
|
Cumulative amount of net liability paid as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
24,805 |
|
|
|
30,585 |
|
|
|
35,717 |
|
|
|
43,363 |
|
|
|
|
|
|
Two years later
|
|
|
46,413 |
|
|
|
56,457 |
|
|
|
62,569 |
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
65,472 |
|
|
|
76,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
78,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability end of year
|
|
|
94,146 |
|
|
|
91,011 |
|
|
|
129,558 |
|
|
|
153,236 |
|
|
|
211,647 |
|
Reinsurance recoverable on unpaid losses
|
|
|
45,202 |
|
|
|
32,009 |
|
|
|
37,061 |
|
|
|
29,485 |
|
|
|
37,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability end of year
|
|
|
48,944 |
|
|
|
59,002 |
|
|
|
92,497 |
|
|
|
123,751 |
|
|
|
174,199 |
|
Gross liability re-estimated latest
|
|
|
138,570 |
|
|
|
140,914 |
|
|
|
133,980 |
|
|
|
162,831 |
|
|
|
|
|
Reinsurance recoverable on unpaid losses re-
estimated latest
|
|
|
33,595 |
|
|
|
31,112 |
|
|
|
22,791 |
|
|
|
33,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability re-estimated latest
|
|
|
104,975 |
|
|
|
109,802 |
|
|
|
111,189 |
|
|
|
129,163 |
|
|
|
|
|
Gross cumulative redundance (deficiency)
|
|
$ |
(44,424 |
) |
|
|
(49,903 |
) |
|
|
(4,422 |
) |
|
|
(9,595 |
) |
|
|
|
|
|
|
(1) |
For calendar years and diagonals between 1996 and 2003, the
amounts have been restated to remove the net effects of the
discontinued operations (i.e. the net surety business). |
|
(2) |
In 2004, we entered in a loss portfolio transfer agreement with
Evergreen and Continental whereby we assume all of Evergreen and
Continentals business excluding surety and assumed
workers compensation. Evergreen and Continental were
spun-off to our class A shareholders in 2004 and are,
therefore, no longer our subsidiaries. Therefore, for years
prior to 2004 gross reserves include our gross reserves for all
lines excluding surety (including the gross reserves for
Evergreen and Continental) and the 2004 year and the gross
liability re-estimated latest excludes the gross
reserves for Evergreen and Continental and includes the
assumption of the net business of Evergreen and Continental. In
addition, due to the above transactions in 2004, the gross
cumulative redundancy (deficiency) includes the effects of
eliminating Evergreen and Continentals gross reserves and
the assumption of Evergreen and Continentals net reserves
(excluding surety). Therefore, while the trend of the gross
cumulative redundancy (deficiency) remains, the results may
not represent the actual redundancy or deficiency of our gross
reserves. |
15
Reinsurance
We purchase reinsurance to reduce our exposure to liability on
individual risks and claims and to protect against catastrophic
losses. Reinsurance involves an insurance company transferring,
or ceding, a portion of its exposure on a risk to
another insurer, the reinsurer. The reinsurer assumes the
exposure in return for a portion of the premium. The ceding of
liability to a reinsurer does not legally discharge the primary
insurer from its liability for the full amount of the policies
on which it obtains reinsurance. The primary insurer remains
liable for the entire loss if the reinsurer fails to meet its
obligations under the reinsurance agreement.
In formulating our reinsurance programs, we are selective in our
choice of reinsurers and consider numerous factors, the most
important of which are the financial stability of the reinsurer,
its history of responding to claims and its overall reputation.
In an effort to minimize our exposure to the insolvency of our
reinsurers, we evaluate the acceptability and review the
financial condition of each reinsurer annually. Generally we use
only those reinsurers that have an A.M. Best rating of
A- (excellent) or better and that have at least
$500 million in policyholders surplus, or Lloyds of
London syndicates that have an A.M. Best rating of
A- (excellent) or better. In the event that a
reinsurers policyholders surplus falls below
$500 million or the A.M. Best rating falls below an
A-, we will attempt to replace the reinsurer with a
reinsurer that fits our criteria, or we will try to commute the
contract. Retention levels are reviewed each year to maintain a
balance between the growth in surplus and the cost of
reinsurance.
The following is a summary of our 2005 and 2006 multiple-line
excess of loss reinsurance treaty:
|
|
|
|
|
Line of Business |
|
Company Policy Limit |
|
Reinsurance Coverage/ Company Retention |
|
|
|
|
|
Property
|
|
Up to $12.5 million per risk |
|
Up to $12.5 million per risk in excess of $500,000 per
risk through treaty and automatic facultative agreements.
Additional certificate facultative coverage is available for
risks exceeding $12.5 million. |
Casualty primary
|
|
$1.0 million per occurrence |
|
$500,000 per occurrence in excess of $500,000 per
occurrence for 2005. In 2006, we will participate on a 50% quota
share basis in $500,000 per occurrence in excess of
$500,000 per occurrence. |
Casualty excess and umbrella
|
|
Up to $5.0 million per occurrence in excess of the
$1.0 million primary policy |
|
90% of first $1.0 million per occurrence and 100% of up to
$4.0 million per occurrence. |
Terrorism aggregate excess of loss
|
|
Insurer deductible as defined in Section 102 for the
Terrorism Risk Insurance Act of 2002 and amended by the
Terrorism Risk Insurance Extension Act of 2005 |
|
$28 million excess of $4 million. |
Since 2004, we have maintained casualty clash
coverage of $19.0 million in excess of $1.0 million to
cover exposures such as punitive damages and other
extra-contractual obligations, losses in excess of policy limits
and exposure to a larger single loss than intended due to losses
incurred under two or more coverages or policies for the same
event.
In 2005, we maintained property catastrophe coverage of 95.0% of
the $16.0 million layer above $4.0 million of
cumulative net property retentions. We have maintained the same
catastrophe coverage for 2006. We annually evaluate the probable
maximum loss using a catastrophe exposure model developed by
independent experts. The most recent model suggests we are
insured for a 250 year catastrophic event. Our primary
catastrophic risk is structural property exposures as a result
of hurricanes, tornados, hail storms,
16
winter storms and freezing. We do not write wind coverage on
non-mobile properties in Florida or within two counties of the
Gulf of Mexico and the eastern seaboard states.
We purchased Terrorism Aggregate Excess of Loss reinsurance
coverage effective February 1, 2006 to reduce our retention
under the Insurer Deductible as defined in
Section 102 of the Terrorism Risk Insurance Act of 2002 and
as amended by the Terrorism Risk Insurance Extension Act of 2005
(collectively called the Act). We will retain and be
liable for $4 million of our aggregate ultimate net loss
arising out of all insured losses, as defined by the Act, for
the term of the contract. The reinsurer shall then be liable for
the amount by which such aggregate ultimate net loss exceed our
retention, but the liability of the reinsurer will not exceed
$28 million for the term of the contract.
The following is a summary of our top ten reinsurers, based on
net amount recoverable, as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
A.M. Best |
|
Net Amount |
|
|
Rating |
|
Recoverable |
|
|
|
|
|
Reinsurer |
|
As of December 31, 2005 |
|
|
|
|
|
(In thousands) |
Hannover Ruckvesicherungs-Aktiengeselischaft
|
|
|
A |
|
|
$ |
10,348,000 |
|
GE Reinsurance Corporation
|
|
|
A |
|
|
|
9,655,000 |
|
Ace Property and Casualty
|
|
|
A + |
|
|
|
6,261,000 |
|
General Reinsurance Corporation
|
|
|
A ++ |
|
|
|
3,452,000 |
|
American Re-Inusrance Company
|
|
|
A |
|
|
|
3,116,000 |
|
Berkley Insurance Company
|
|
|
A |
|
|
|
2,806,000 |
|
Folksamerica Reinsurance Company
|
|
|
A |
|
|
|
2,178,000 |
|
Swiss Reinsurance America Corporation
|
|
|
A + |
|
|
|
1,805,000 |
|
Gerling Global Reinsurance Corporation(1)
|
|
|
NR3 |
|
|
|
1,632,000 |
|
SCOR Reinsurance Company(1)
|
|
|
B ++ |
|
|
|
1,314,000 |
|
|
|
(1) |
We are closely monitoring the financial status of Gerling Global
Reinsurance Corporation (which is not rated as it is no longer
accepting new business) and SCOR Reinsurance Company, each of
which is continuing to pay claims. |
The reinsurance market has changed dramatically over the past
few years as a result of inadequate pricing, poor underwriting
and the significant losses incurred in conjunction with the
terrorist attacks on September 11, 2001 and the 2004/2005
hurricane seasons. As a result, reinsurers have exited some
lines of business, reduced available capacity and implemented
provisions in their contracts designed to reduce their exposure
to loss.
Investment Portfolio
Our investment strategy is designed to capitalize on our ability
to generate positive cash flow from our underwriting activities.
Preservation of capital is our first priority, with a secondary
focus on maximizing appropriate risk adjusted returns. We seek
to maintain sufficient liquidity from operations, investing and
financing activities to meet our anticipated insurance
obligations and operating and capital expenditure needs. The
majority of our fixed-maturity portfolio is rated investment
grade to mitigate our exposure to credit risk. Our investment
portfolio is managed by three outside independent investment
managers that operate under investment guidelines approved by
Centurys investment committee. Centurys investment
committee meets at least quarterly and reports to Centurys
board of directors. In addition, we employ stringent
diversification rules and balance our investment credit risk and
related underwriting risks to minimize total potential exposure
to any one security. In limited circumstances, we will invest in
non-investment grade fixed maturity securities that have an
appropriate risk adjusted return, subject to satisfactory credit
analysis performed by us and our investment managers.
17
Our cash and investment portfolio totaled $366.4 million as
of December 31, 2005 and is summarized by type of
investment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of | |
|
|
Amount | |
|
Portfolio | |
|
|
| |
|
| |
|
|
(Dollars in thousands) | |
Fixed-maturity:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$ |
3,725 |
|
|
|
1.0 |
% |
|
Agencies not backed by the full faith and credit by the
U.S. Government
|
|
|
15,335 |
|
|
|
4.2 |
|
|
Corporate securities
|
|
|
35,853 |
|
|
|
9.8 |
|
|
Mortgage-backed securities
|
|
|
40,061 |
|
|
|
10.9 |
|
|
Asset-backed securities
|
|
|
39,152 |
|
|
|
10.7 |
|
|
Collateralized mortgage obligations
|
|
|
27,352 |
|
|
|
7.5 |
|
|
Obligations of states and political subdivisions
|
|
|
142,282 |
|
|
|
38.8 |
|
|
|
|
|
|
|
|
|
|
Total fixed-maturity
|
|
|
303,760 |
|
|
|
82.9 |
|
|
|
|
|
|
|
|
Cash and short-term investments
|
|
|
17,857 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Bond mutual funds
|
|
|
17,852 |
|
|
|
4.9 |
|
|
Preferred shares
|
|
|
22,337 |
|
|
|
6.1 |
|
|
Common shares
|
|
|
4,604 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
44,793 |
|
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
366,410 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
Competition
The property and casualty insurance industry is highly
competitive. We compete with domestic and international
insurers, many of which have greater financial, marketing and
management resources and experience than we do. We also may
compete with new market entrants in the future. Competition is
based on many factors, including the perceived market strength
of the insurer, pricing and other terms and conditions, services
provided, the speed of claims payment, the reputation and
experience of the insurer and ratings assigned by independent
rating organizations such as A.M. Best. Century has a rating
from A.M. Best of A- (excellent). Ratings for an
insurance company are based on its ability to pay policyholder
obligations and are not directed toward the protection of
investors.
Today our primary competitors are Nationwide Mutual Insurance
Company (Scottsdale Insurance), Markel Corporation (Essex
Insurance Company), Burlington Insurance Group, W.R. Berkley
Corporation (Nautilus Insurance Company), The Argonaut Group
(Colony Insurance Company), United American Group (Penn-America
Insurance Company), James River Group, and RLI Corp. We
generally compete on the basis of service, as most market
competitors have maintained both pricing and underwriting
discipline. Moreover, the market we serve has increased as
standard carriers have exited many lines and classes of business
served by the excess and surplus lines market.
Ratings
A.M. Best, which rates insurance companies based on factors of
concern to policyholders, issued a rating of A-
(excellent) as its 2005 annual rating of our property and
casualty insurance subsidiary. A.M. Best assigns 16 ratings to
insurance companies, which currently range from A++
(superior) to F (in liquidation). In evaluating
a companys financial and operating performance, A.M. Best
reviews the companys profitability, leverage and
liquidity, as well as its book of business, the adequacy and
soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its loss and loss expense
18
reserves, the adequacy of its surplus, its capital structure,
the experience and competence of its management and its market
presence. A.M. Bests ratings reflect its opinion of an
insurance companys financial strength, operating
performance and ability to meet its obligations to policyholders
and are not evaluations directed to purchasers of an insurance
companys securities.
Regulatory Environment
Insurance Regulation. We are regulated by insurance
regulatory agencies in the states in which we conduct business.
State insurance regulations generally are designed to protect
the interests of policyholders, state insurance consumers or
claimants rather than shareholders or other investors. The
nature and extent of state regulation varies by jurisdiction,
and state insurance regulators generally have broad
administrative power relating to, among other matters, setting
capital and surplus requirements, licensing of insurers and
agents, establishing standards for reserve adequacy, prescribing
statutory accounting methods and the form and content of
statutory financial reports, regulating certain transactions
with affiliates, and prescribing the types and amounts of
investments.
Regulation of insurance companies constantly changes as
governmental agencies and legislatures react to real or
perceived issues. In recent years, the state insurance
regulatory framework has come under increased federal scrutiny,
and some state legislatures have considered or enacted laws that
alter and, in many cases, increase state authority to regulate
insurance companies and insurance holding company systems.
Further, the National Association of Insurance Commissioners
(NAIC) and some state insurance regulators are
re-examining existing laws and regulations specifically focusing
on issues relating to the solvency of insurance companies,
interpretations of existing laws and the development of new
laws. Although the federal government does not directly regulate
the business of insurance, federal initiatives often affect the
insurance industry in a variety of ways.
Required Licensing. In its home state of Ohio and the
states of Arizona, Indiana, West Virginia and Wisconsin, Century
operates on an admitted, or licensed, basis. In addition, PIC is
admitted in Texas, its state of domicile, and California, South
Carolina and Oklahoma. Each of Century and PICs licenses
in these states are in good standing as of December 31,
2005. Insurance licenses are issued by state insurance
regulators upon application and may be of perpetual duration or
may require periodic renewal. We must apply for and obtain
appropriate new licenses before we can expand into a new state
on an admitted basis or offer new lines of insurance that
require separate or additional licensing.
In most states, Century operates on a surplus lines basis. While
Century does not have to apply for and maintain a license in
those states, it is subject to maintaining suitability standards
or approval under each particular states surplus lines
laws to be included as an approved carrier. Century maintains
surplus lines approvals in all states except where it is
admitted, as identified above, and Massachusetts, Maine and
Rhode Island. In states in which it operates on a surplus lines
basis, Century has freedom of rate and form on the majority of
its business. This means that Century can implement a change in
policy form, underwriting guidelines, or rates for a product on
an immediate basis.
Insurers operating on an admitted basis must file premium rate
schedules and policy or coverage forms for review and approval
by the insurance regulators. In many states, rates and policy
forms must be approved prior to use, and insurance regulators
have broad discretion in judging whether an insurers rates
are adequate, not excessive and not unfairly discriminatory.
Insurance Holding Company Regulation. We operate as an
insurance holding company system and are subject to regulation
in the jurisdictions in which Century conducts business. These
regulations require that each insurance company in the system
register with the insurance department of its state of domicile
and furnish information concerning the operations of companies
within the holding company system that may materially affect the
operations, management or financial condition of the insurers
within the system domiciled in that state. The insurance laws
similarly provide that all transactions among members of a
holding company system must be fair and reasonable. Transactions
between insurance subsidiaries and their parents and affiliates
generally must be disclosed to the state regulators, and prior
approval of the applicable state insurance regulator generally
is required for any material or extraordinary transaction. In
addition, a change of
19
control of a domestic insurer or of any controlling person
requires the prior approval of the state insurance regulator
Generally, any person who acquires 10% or more of the
outstanding voting securities of the insurer or its parent
company is presumed to have acquired control of the domestic
insurer. In August 2005, one investor reported that it
beneficially owned more than 10% of our outstanding common
shares. According to the Schedule 13G filed by the investor
with the U.S. Securities and Exchange Commission, the
ProCentury common shares are held in the ordinary course of
business and were not acquired and are not held for the purpose
of or with the effect of changing or influencing the control of
the issuer of the securities. Based on the information contained
in the Schedule 13G, a change of control was deemed not to
have occurred and a disclaimer of affiliation was filed, as
contemplated under applicable statutes, with the appropriate
state insurance regulator to disclose the information about the
shares being held and the basis for disclaiming the affiliation.
Restrictions on Paying Dividends. ProCentury is a holding
company with no business operations of its own. Consequently,
our ability to pay dividends to shareholders and meet debt
payment obligations will be largely dependent on dividends and
other distributions from Century. State insurance law restricts
the ability of Century to declare shareholder dividends. State
insurance regulators require insurance companies to maintain
specified levels of statutory capital and surplus. The amount of
an insurers surplus following payment of any dividends
must be reasonable in relation to the insurers outstanding
liabilities and adequate to meet its financial needs. Further,
prior approval from the Ohio Department of Insurance generally
is required in order for Century to declare and pay
extraordinary dividends. An extraordinary dividend
is defined as any dividend or distribution that, together with
other distributions made within the preceding 12 months,
exceeds the greater of 10% of the insurers surplus as of
the preceding December 31, or the insurers net income
for the 12 month period ending the preceding
December 31, in each case determined in accordance with
statutory accounting practices. The maximum amount of dividends
our insurance subsidiary can pay us during 2006 without
regulatory approval is $12.1 million. State insurance
regulatory authorities that have jurisdiction over the payment
of dividends by our insurance subsidiary may in the future adopt
statutory provisions more restrictive than those currently in
effect.
Guaranty Funds. Under state insurance guaranty fund laws,
insurers doing business on an admitted basis in a state can be
assessed for certain obligations of insolvent insurance
companies to policyholders and claimants. Maximum contributions
required by law in any one year vary between 1% and 2% of annual
premiums written in that state. In most states, guaranty fund
assessments are recoverable either through future policy
surcharges or offsets to state premium tax liability. Except for
New Jersey, the business that is written on a surplus line basis
is not subject to state guaranty fund assessments.
Investment Regulation. Century is subject to state law
which requires diversification of its investment portfolio and
limits the amount of investments in certain categories. Failure
to comply with these laws and regulations would cause
non-conforming investments to be treated as non-admitted assets
in the states in which we are licensed to sell insurance
policies for purposes of measuring statutory surplus and, in
some instances, would require us to sell those investments.
Restrictions on Cancellation, Non-Renewal or Withdrawal.
Many states have laws and regulations that limit the ability of
an insurance company licensed by that state to exit a market.
For example, certain states limit an automobile insurers
ability to cancel or not renew policies. Some states prohibit an
insurer from withdrawing one or more lines of business from the
state, except pursuant to a plan approved by the state insurance
regulator, which may disapprove a plan that may lead to market
disruption. Increasingly, state statutes, explicitly or by
interpretation, apply these restrictions to insurers operating
on a surplus line basis.
Licensing of Our Employees and Adjustors. In certain
states in which we operate, insurance claims adjusters are also
required to be licensed and some must fulfill annual continuing
education requirements. In most instances, our employees who are
negotiating coverage terms are underwriters and employees of the
company and are not required to be licensed agents.
Approximately thirty of our employees currently maintain
requisite licenses for these activities in most states in which
we conduct business.
Privacy Regulations. In 1999, the United States Congress
enacted the Gramm-Leach-Bliley Act, which, among other things,
protects consumers from the unauthorized dissemination of
certain personal
20
information. Subsequently, a majority of states have implemented
additional regulations to address privacy issues. These laws and
regulations apply to all financial institutions, including
insurance and finance companies, and require us to maintain
appropriate procedures for managing and protecting certain
personal information of our customers and to fully disclose our
privacy practices to our customers. We may also be exposed to
future privacy laws and regulations, which could impose
additional costs and impact our results of operations or
financial condition. A recent NAIC initiative that impacted the
insurance industry in 2001 was the adoption in 2000 of the
Privacy of Consumer Financial and Health Information Model
Regulation, which assisted states in promulgating regulations to
comply with the Gramm-Leach-Bliley Act. In 2002, to further
facilitate the implementation of the Gramm-Leach-Bliley Act, the
NAIC adopted the Standards for Safeguarding Customer Information
Model Regulation. Several states have now adopted similar
provisions regarding the safeguarding of customer information.
We have adopted a privacy policy for safeguarding customer
information and our insurance subsidiaries follow procedures
pertaining to applicable customers to comply with the
Gramm-Leach-Bliley related privacy requirements.
Trade Practices. The manner in which insurance companies
and insurance agents conduct the business of insurance is
regulated by state statutes in an effort to prohibit practices
that constitute unfair methods of competition or unfair or
deceptive acts or practices. Prohibited practices include, but
are not limited to, disseminating false information or
advertising; unfair discrimination, rebating, and false
statements. We set business conduct policies and provide regular
training to make our employee-agents and other sales personnel
aware of these prohibitions, and we require them to conduct
their activities in compliance with these statutes.
Unfair Claims Practices. Generally, insurance companies,
adjusting companies and individual claims adjusters are
prohibited by state statutes from engaging in unfair claims
practices. Unfair claims practices include, but are not limited
to, knowingly misrepresenting pertinent facts or insurance
policy provisions; failing to acknowledge and act reasonably
promptly upon communications with respect to claims arising
under insurance policies; and failing to attempt in good faith
to effectuate fair and equitable settlement of claims submitted
in which liability has become reasonably clear. We set business
conduct policies and conduct regular training to make our
employee-adjusters and other claims personnel aware of these
prohibitions, and we require them to conduct their activities in
compliance with these statutes.
Quarterly and Annual Financial Reporting. We are required
to file quarterly and annual financial reports with state
insurance regulators utilizing statutory accounting practices
(SAP) rather than generally accepted accounting
principles (GAAP). In keeping with the intent to
assure policyholder protection, SAP financial reports generally
are based on a liquidation concept. For a summary of the
significant differences for our insurance subsidiaries between
statutory accounting practices and GAAP, see Note 13 to our
audited consolidated financial statements included in this
report.
Periodic Financial and Market Conduct Examinations. The
Ohio Department of Insurance conducts
on-site visits and
examinations of Centurys affairs, including its financial
condition and its relationships and transactions with
affiliates, every three to five years, and may conduct special
or target examinations to address particular concerns or issues
at any time. Insurance regulators of other states in which we do
business may also conduct examinations. The results of these
examinations can give rise to regulatory orders requiring
remedial, injunctive or other corrective action.
Risk-Based Capital. Risk-Based Capital (RBC)
requirements laws are designed to assess the minimum amount of
capital that an insurance company needs to support its overall
business operations and to ensure that it has an acceptably low
expectation of becoming financially impaired. Regulators use RBC
to set capital requirements considering the size and degree of
risk taken by the insurer and taking into account various risk
factors including asset risk, credit risk, underwriting risk and
interest rate risk. As the ratio of an insurers total
adjusted capital and surplus decreases relative to its
risk-based capital, the RBC laws provide for increasing levels
of regulatory intervention culminating with mandatory control of
the operations of the insurer by the domiciliary insurance
department at the so-called mandatory control level. At
December 31, 2005, both Century and PIC maintained an RBC
level in excess of an amount that would require any corrective
actions on our part.
21
IRIS Ratios. The NAIC Insurance Regulatory Information
System or IRIS is part of a collection of analytical tools
designed to provide state insurance regulators with an
integrated approach to screening and analyzing the financial
condition of insurance companies operating in their respective
states. IRIS is intended to assist state insurance regulators in
targeting resources to those insurers in greatest need of
regulatory attention. IRIS consists of two phases: statistical
and analytical. In the statistical phase, the NAIC database
generates key financial ratio results based on financial
information obtained from insurers annual statutory
statements. The analytical phase is a review of the annual
statements, financial ratios and other automated solvency tools.
The primary goal of the analytical phase is to identify
companies that appear to require immediate regulatory attention.
A ratio result falling outside the usual range of IRIS ratios is
not considered a failing result; rather, unusual values are
viewed as part of the regulatory early monitoring system.
Furthermore, in some years, it may not be unusual for
financially sound companies to have several ratios with results
outside the usual ranges. An insurance company may fall out of
the usual range for one or more ratios because of specific
transactions that are in themselves immaterial.
As of December 31, 2005, Century and PIC had three IRIS
ratios outside the usual range, as set forth in the following
table:
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|
|
|
Company |
|
Ratio |
|
Usual Range |
|
Our Ratio | |
|
|
|
|
|
|
| |
PIC
|
|
Net change in adjusted surplus |
|
25.0 - 10.0 |
|
|
(38.8 |
) |
PIC
|
|
Change in policyholders surplus |
|
50.0 - 10.0 |
|
|
(75.0 |
) |
Century
|
|
Two-year reserve development to surplus |
|
20.0 - 0.0 |
|
|
33.0 |
|
Our results for these ratios are attributable to the capital
activities around the purchase of PIC and adverse development of
prior years loss and loss expense reserves related to
Century.
We are monitoring the following:
Broker Contingent Commission. In 2004, the New York
attorney general began an investigation into insurance broker
activities connected with contingent commission agreements. The
investigation led to lawsuits and prompted other attorneys
general and state insurance departments to conduct further
investigations. We have not received any formal inquiries from
state attorneys general and insurance departments. However, we
did conduct an internal investigation of our contingent
commission arrangements and related underwriting practices and
found no improper actions. The NAIC has proposed a model act on
these agreements for agents and brokers, and several states have
indicated they will adopt the model act or some variation of the
proposed act. We continue to closely monitor all proposals.
Federal Insurance Charter. The Senate Commerce Committee
recently has held hearings on federal involvement in the
regulation of the insurance industry. The hearings included a
discussion of a proposed federal charter that would allow
companies to operate under federal, rather than state,
regulation. Any proposed legislation would have a significant
impact on the insurance industry, and we continue to monitor all
proposals. We anticipate there will be further legislative
activity during 2006.
Terrorism Exclusion Regulatory Activity. After the events
of September 11, 2001, the NAIC urged states to grant
conditional approval to commercial lines endorsements that
excluded coverage for acts of terrorism consistent with language
developed by ISO. The ISO endorsement included certain coverage
limitations. Many states allowed the endorsements for commercial
lines, but rejected such exclusions for personal exposures.
The Terrorism Risk Insurance Act of 2002 (TRIA), was enacted on
November 26, 2002, to provide for a federal backstop for
terrorism losses to insurance companies providing coverage, and
was intended to expire on December 31, 2005. The act
provides for a federal backstop for terrorism losses as defined
by the act and certified by the Secretary of the Treasury in
concurrence with the Secretary of State and the
U.S. Attorney General. Under TRIA, coverage provided for
losses caused by acts of terrorism is partially reimbursed by
the United States under a formula whereby the government pays a
percentage of covered terrorism losses exceeding a prescribed
deductible to the insurance company providing the coverage. TRIA
was amended and
22
extended until December 31, 2007. The amendments increased
the minimum amount of damages from $5 million to
$50 million for 2006, and $100 million for 2007. In
addition, the amount of the insurers deductible was raised
from 15% to 17.5% in 2006, and 20% in 2007. The amendments also
reduced the amount of coverage available under TRIA. For 2006,
once the deductible is met, the government will pay for 90% of
the losses. For 2007, the amount the government will pay after
deductibles are met is reduced to 85%, with the insurance
industry absorbing the rest. We are in compliance with the TRIA
requirements, as extended, and make terrorism coverage available
to policyholders accordingly.
Mold Contamination. The property/casualty insurance
industry experienced an increase in claim activity beginning in
2001 pertaining to mold contamination. Significant
plaintiffs verdicts and increased media attention to the
subject have caused insurers to develop and/or refine relevant
insurance policy language that excludes mold coverage. The
insurance industry foresees increased state legislative activity
pertaining to mold contamination. We will closely monitor
regulatory and litigation trends and continue to review relevant
insurance policy exclusion language.
OFAC. The Treasury Departments Office of Foreign
Asset Control (OFAC) maintains a list of
Specifically Designated Nationals and Blocked
Persons (the SDN List). The SDN List
identifies persons and entities that the government believes are
associated with terrorists, rogue nations and/or drug
traffickers. OFACs regulations prohibit insurers, among
others, from doing business with persons or entities on the SDN
List. If the insurer finds and confirms a match, the insurer
must take steps to block or reject the transaction, notify the
affected person and file a report with OFAC. The focus on
insurers responsibilities with respect to the SDN List has
increased significantly since September 11. Century has
implemented procedures to comply with OFACs SDN List
regulations.
Class Action Reform. Legislation was enacted by
Congress that curtailed forum shopping and allows defendants to
move large national class action cases to federal courts. The
legislation also includes provisions to protect consumer class
members on matters such as non-cash settlements and written
settlement information. We view this as favorable legislation to
us and the industry.
Employees
We employ approximately 295 people. Our employees are not
covered by any collective bargaining agreements. We believe our
relationship with our employees is satisfactory.
Forward Looking Statements
Forward looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 appear
throughout this report. Forward looking statements, which
generally include words such as anticipates,
expects, believes, intends,
estimates and similar expressions and include those
statements regarding our expectations, hopes, beliefs,
intentions, goals or strategies regarding the future and are
based on certain underlying assumptions by us. Such assumptions
are, in turn, based on information available and internal
estimates and analyses of general economic conditions,
competitive factors, conditions specific to the property and
casualty insurance industry, claims development and the impact
thereof on our loss reserves, the adequacy of our reinsurance
programs, developments in the securities market and the impact
on our investment portfolio, regulatory changes and conditions,
and other factors. Actual results could differ materially from
those in forward looking statements. We assume no obligation to
update any such statements. You should review the various risks,
uncertainties and other factors listed from time to time in our
Securities and Exchange Commission filings.
23
Risks Related To Our Business and Industry
|
|
|
Our actual incurred losses may be greater than our loss
and loss expense reserves, which could cause our future
earnings, liquidity and financial rating to decline. |
We are liable for loss and loss expenses under the terms of the
insurance policies we underwrite. In many cases, several years
may elapse between the occurrence of an insured loss, the
reporting of the loss to us and our payment of the loss. We
establish loss and loss expense reserves for the ultimate
payment of all loss and loss expenses incurred. If any of our
reserves should prove to be inadequate, we will be required to
increase reserves resulting in a reduction in our net income in
the period in which the inadequacy is identified. Future loss
experience substantially in excess of established reserves could
also cause our future earnings, liquidity and financial rating
to decline. These reserves are based on historical data and
estimates of future events and by their nature are imprecise.
Our ultimate loss and loss expenses may vary from established
reserves.
Furthermore, factors that are subject to change, such as:
|
|
|
|
|
claims inflation; |
|
|
|
claims development patterns; |
|
|
|
legislative and judicial activity; |
|
|
|
social and economic patterns; and |
|
|
|
litigation and regulatory trends |
may have a substantial impact on our future loss experience.
Additionally, we have established loss and loss expense reserves
for certain lines of business we have exited, but circumstances
could develop that would make these reserves insufficient. As of
December 31, 2005, unpaid loss and loss expense reserves
(net of reserves ceded to our reinsurers) were
$174.2 million, consisting of case loss and loss expense
reserves of $60.7 million and incurred but not reported
loss and loss expense reserves of $113.5 million.
We have re-estimated our loss and loss expense reserves
attributable to insured events in prior years, which includes
re-estimations with respect to excess and surplus lines and
products we no longer write. These re-estimations resulted in an
increase in reserves of $5.4 million, $11.1 million
and $27.0 million for the years ended December 31,
2005, 2004 and 2003, respectively.
|
|
|
A decline in our financial rating assigned by A.M. Best
may result in a reduction of new or renewal business. |
Our insurance subsidiary received an A-
(excellent) annual rating for 2005 from A.M. Best, the
fourth highest of 16 A.M. Best ratings. A.M. Best assigns
ratings that generally are based on an insurance companys
ability to pay policyholder obligations (not towards protection
of investors) and focus on capital adequacy, loss and loss
expense reserve adequacy and operating performance. A reduction
in our performance in these criteria could result in a downgrade
of our rating. A downgrade of our rating could cause our current
and future general agents, retail brokers and insureds to choose
other, more highly rated competitors.
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|
We are subject to extensive regulation and judicial
decisions affecting insurance and tort law, which may adversely
affect our ability to achieve our business objectives. In
addition, if we fail to comply with these regulations, we may be
subject to penalties, including fines and suspensions, which may
adversely affect our financial condition and results of
operations. |
General. Century is subject to regulations, administered
primarily by Ohio, our domiciliary state, and to a lesser
degree, the four other states in which Century is licensed or
admitted to sell insurance. Most insurance regulations are
designed to protect the interests of insurance policyholders, as
opposed to the interests of shareholders. These regulations,
generally are administered by a department of insurance in each
state and relate to, among other things, excess and surplus
lines of business authorizations, capital and surplus
24
requirements, rate and form approvals, investment parameter
restrictions, underwriting limitations, affiliate transactions,
dividend limitations, changes in control and a variety of other
financial and non-financial components of our business.
Significant changes in these laws and regulations could further
limit our discretion or make it more expensive to conduct our
business. State insurance departments also conduct periodic
examinations of the affairs of insurance companies and require
the filing of annual and other reports relating to financial
condition, holding company issues and other matters. These
regulatory requirements may adversely affect or inhibit our
ability to achieve some or all of our business objectives.
Required Licensing. Regulatory authorities have broad
discretion to deny or revoke licenses for various reasons,
including the violation of regulations. In some instances, where
there is uncertainty as to applicability, we follow practices
based on our interpretations of regulations or practices that we
believe generally to be followed by the industry. These
practices may turn out to be different from the interpretations
of regulatory authorities. If we do not have the requisite
licenses and approvals or do not comply with applicable
regulatory requirements, insurance regulatory authorities could
preclude or temporarily suspend us from carrying on some or all
of our activities or otherwise penalize us. This could adversely
affect our ability to operate our business. Further, changes in
the level of regulation of the insurance industry or changes in
laws or regulations themselves or interpretations by regulatory
authorities could adversely affect our ability to operate our
business.
Risk-Based Capital. The NAIC has adopted a system to test
the adequacy of statutory capital, known as risk-based
capital. This system establishes the minimum amount of
risk-based capital necessary for a company to support its
overall business operations. It identifies property and casualty
insurers that may be inadequately capitalized by looking at
certain inherent risks of each insurers assets and
liabilities and its mix of net written premiums. Insurers
falling below a calculated threshold may be subject to varying
degrees of regulatory action, including supervision,
rehabilitation or liquidation. Failure to maintain our
risk-based capital at the required levels could cause our
insurance subsidiary to lose its regulatory authority to conduct
its business. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources for
a discussion of our risk-based capital as of December 31,
2005.
IRIS Ratios. The NAIC Insurance Regulatory Information
System (IRIS) is part of a collection of analytical
tools designed to provide state insurance regulators with an
integrated approach to screening and analyzing the financial
condition of insurance companies. IRIS has two phases of
screening: statistical and analytical. In the statistical phase,
the NAIC database generates financial ratios based on financial
information obtained from insurance companies annual
statutory statements. The analytical phase is a review of the
annual statements, financial ratios and other automated solvency
tools. A ratio result falling outside the usual range of IRIS
ratios is viewed as part of the regulatory early monitoring
system. As of December 31, 2005, Century and PIC had a
combined three IRIS ratios outside the usual range, as described
in Business Regulatory Environment
IRIS Ratios, which could result in regulatory action.
Judicial Decisions. State courts may render decisions
impacting our liability for losses under insurance and tort law.
This case law, as well as any legislation enacted in response,
can impact claim severity, frequency and time to settlement
assumptions underlying our reserves. Accordingly, our ultimate
liability may exceed our estimates due to this variable, among
others.
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|
Our general agents may exceed their authority and bind us
to policies outside our underwriting guidelines, and until we
effect a cancellation, we may incur loss and loss expenses
related to that policy. |
As of December 31, 2005, we underwrote 57.0% of our
property and casualty premiums on a binding authority basis.
Binding authority business represents risks that may be quoted
and bound by our general agents prior to our underwriting
review. If a general agent exceeds this authority by binding us
on a risk that does not comply with our underwriting guidelines,
we are at risk for claims under that policy that occur during
the period from its issue date until we receive the policy and
cancel it. Since current management assumed control in 2000,
there have been four instances in which we have recovered paid
loss amounts from a general agent due to a violation of
underwriting authority. Such funds were covered by the required
errors and omissions insurance carried by each of our agents.
25
To cancel a policy for exceeding underwriting authority, we must
receive and cancel the policy within statutorily prescribed time
limits, typically 60 days. Our general agents are required
by contract to have bound policies issued and a copy sent to our
office within 30 days of the effective date of coverage.
Our policy review generally takes two to four weeks, depending
on the time of year. Upon review of a policy, we issue
instructions to cure any material errors discovered. If
cancellation of the policy is the only cure, we order the
cancellation of the policy at that time pursuant to state law.
As a result, we may be bound by a policy that does not comply
with our underwriting guidelines, and until we can effect a
cancellation, we may incur loss and loss expenses related to
that policy.
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|
If we lose key personnel or are unable to recruit
qualified personnel, our ability to implement our business
strategies could be delayed or hindered. |
Our future success will depend, in large part, upon the efforts
of our executive officers and other key personnel. We rely
substantially upon the services of Edward F. Feighan, our
Chairman of the Board, President and Chief Executive Officer,
Erin E. West, our Vice President, Chief Financial Officer and
Treasurer and Christopher J. Timm, our Executive Vice President
and Director. Messrs. Feighan and Timm and Ms. West
each have an employment agreement with us. The loss of any of
these officers or other key personnel could cause our ability to
implement our business strategies to be delayed or hindered. We
do not have key person insurance on the lives of any of our key
management personnel, except one officer. As we continue to
grow, we will need to recruit and retain additional qualified
personnel, but we may not be able to do so. As we have grown, we
have generally been successful in filling key positions, but our
ability to continue to recruit and retain such personnel will
depend upon a number of factors, such as our results of
operations, prospects and the level of competition then
prevailing in the market for qualified personnel.
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|
Our investment results and, therefore, our financial
condition may be impacted by changes in the business, financial
condition or operating results of the entities in which we
invest, as well as changes in government monetary policies,
general economic conditions and overall capital market
conditions, all of which impact interest rates. |
Our results of operations depend, in part, on the performance of
our investments. Fluctuations in interest rates affect our
returns on and the fair value of fixed-maturity securities.
Unrealized gains and losses on fixed-maturity securities are
recognized in accumulated other comprehensive income, net of
taxes and increase or decrease our shareholders equity.
Interest rates in the United States are currently low relative
to historical levels. An increase in interest rates would reduce
the fair value of our investments in fixed-maturity securities.
In addition, defaults by third parties who fail to pay or
perform obligations could reduce our investment income and
realized investment gains and could result in investment losses
in our portfolio.
We had fixed-maturity and equity investments with a fair value
of $348.5 million as of December 31, 2005 that are
subject to:
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credit risk, which is the risk that our investments will
decrease in value due to unfavorable changes in the financial
prospects or a downgrade in the credit rating of an entity in
which we have invested; |
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|
equity price risk, which is the risk that we will incur economic
loss due to a decline in common or preferred stock or bond
mutual fund share prices; and |
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|
interest rate risk, which is the risk that our investments may
decrease in value due to changes in interest rates. |
Our fixed-maturity investment portfolio includes mortgage-backed
and other asset-backed securities. As of December 31, 2005,
mortgage-backed securities, asset-backed securities and
collateralized mortgage obligations constituted 29.1% of our
cash and investment portfolio. As with other fixed-maturity
investments, the fair value of these securities fluctuates
depending on market and other general economic conditions and
the interest rate environment. Changes in interest rates can
expose us to prepayment risks on these investments. In periods
of declining interest rates, mortgage prepayments generally
increase and
26
mortgage-backed
securities and other asset-backed securities are paid more
quickly, requiring us to reinvest the proceeds at the then
prevailing market rates.
Our equity portfolio totaled $44.8 million as of
December 31, 2005. This total includes $26.9 million
of investments in preferred and common securities of individual
companies, which are subject to economic loss from the decline
in preferred and common share prices. As a result, the value of
these investments will be determined by the specific financial
prospects of these individual companies, as well as the equity
markets in general. In addition, we have $17.9 million
invested in bond mutual funds.
Since the end of 2002, the U.S. financial markets have
experienced a moderate rise in the value of the broader equity
markets and a high degree of volatility in interest rates, which
affect the value of our fixed-maturity securities. Our
fixed-maturity securities, preferred shares and bond mutual
funds, which represent $343.9 million, or 93.9% of our
total cash and investment portfolio, are subject to changes in
fair value based on fluctuations in interest rates. As of
December 31, 2005, a 200 basis point decline in
interest rates would result in a $30.9 million, or 9.0%
increase in fair value of our portfolio and a 200 basis
point increase would result in a $31.2 million, or 9.1%,
decrease in fair value of our portfolio. As of December 31,
2005, our investment portfolio had a net unrealized investment
loss, after the effect of income taxes of $3.2 million.
However, these unrealized losses may not persist in the current
economic environment or may not be realized.
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We distribute our products through a select group of
general agents, five of which account for a significant part of
our business, and such relationships could be discontinued or
cease to be profitable. |
We distribute our products through a select group of general
agents. Approximately 41.7% of our gross written premiums for
the year ended December 31, 2005 were distributed through
five general agents. In 2005, our largest agency group, with
locations in five states, accounted for $41.6 million
(19.3%) of our total gross written premiums. A loss of all or
substantially all the business produced by one or more of these
general agents could have a negative impact on our revenues.
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Our reinsurers may not pay claims made by us on losses in
a timely fashion or may not pay some or all of these claims, in
each case causing our costs to increase and our revenues to
decline. |
We purchase reinsurance by transferring part of the risk we have
assumed (known as ceding) to a reinsurance company in exchange
for part of the premium we receive in connection with the risk.
Although reinsurance makes the reinsurer liable to us to the
extent the risk is transferred or ceded to the reinsurer, it
does not relieve us (the reinsured) of our liability to our
policyholders. Accordingly, we bear credit risk with respect to
our reinsurers. That is, our reinsurers may not pay claims made
by us on a timely basis, or they may not pay some or all of
these claims. Either of these events would increase our costs.
As of December 31, 2005, we had $43.9 million of
amounts recoverable from our reinsurers that we would be
obligated to pay if our reinsurers failed to pay. We have
recorded a provision for uncollectible amounts of
$1.3 million at December 31, 2005, which relates to
balances due from a reinsurer that are in dispute.
|
|
|
If we are not able to renew our existing reinsurance or
obtain new reinsurance, either our net exposure would increase
or we would have to reduce the level of our underwriting
commitment. |
In 2005 we purchased property and casualty excess of loss
reinsurance to limit our loss from a single occurrence on any
one coverage part from any one policy to $500,000. For example,
if we issue a policy that provides $600,000 of coverage for a
risk, we purchase excess of loss reinsurance from a reinsurer
for $100,000 to provide coverage for any claim under the policy
that is greater than $500,000. We are maintaining the same
reinsurance structure during 2006, except that we will retain
coverage for 50% of the loss amount that exceeds $500,000 on our
casualty policies. Further, we purchase catastrophe reinsurance
to limit losses arising from any single occurrence, regardless
of how many policyholders are involved or the extent of their
loss, to $4.0 million. We purchase casualty clash coverage
for the loss amount above $1.0 million for any single
occurrence, regardless of the number of policyholders involved.
However, we may choose in the future to re-evaluate the use of
reinsurance to increase, decrease or eliminate the amount of
liability we cede to reinsurers, depending upon the cost and
availability of reinsurance.
27
Market conditions beyond our control determine the availability
and cost of the reinsurance protection that we purchase. The
reinsurance market has changed dramatically over the past few
years as a result of inadequate pricing, poor underwriting and
the significant losses incurred in conjunction with the
terrorist attacks on September 11, 2001 and the 2004 and
2005 storm seasons. As a result, reinsurers have exited some
lines of business, reduced available capacity and implemented
provisions in their contracts designed to reduce their exposure
to loss. In addition, the historical results of reinsurance
programs and the availability of capital also affect the
availability of reinsurance. Our reinsurance facilities
generally are subject to annual renewal. If we are unable to
renew our expiring facilities or to obtain new reinsurance
facilities, either our net exposures would increase, which could
increase our exposure to loss, or, if we were unwilling to bear
an increase in net exposures, we would have to reduce the level
of our underwriting commitments, especially catastrophe exposed
risks, which would reduce our revenues. To the extent that we
are forced to pay more for reinsurance or retain more liability
than we do currently, we may need to reduce the volume of
insurance we write. Due to the underwriting profile of our
business, we have not been significantly impacted by the changes
in the reinsurance market described above, including the events
of September 11, 2001, or the 2004/2005 storm seasons
either in claims or reinsurance terms and pricing.
|
|
|
Our business is cyclical in nature, which will affect our
financial performance and may affect the price of our common
shares. |
Historically, the financial performance of the property and
casualty insurance industry has tended to fluctuate in cyclical
patterns. Although an individual insurance companys
financial performance is dependent on its own specific business
characteristics, the profitability of most property and casualty
insurance companies tends to follow this cyclical market
pattern. This cyclicality is due in large part to the actions of
industry participants, such as inadequate pricing and
increasingly broad policy terms, and general economic factors,
such as low interest rates, and the impact of terrorist attacks,
and severe weather that are not within our control. These
cyclical patterns cause our revenues and net income to
fluctuate, which may cause the price of our common shares to be
volatile.
|
|
|
If we are unable to compete effectively with the large
number of companies in the insurance industry for underwriting
revenues, we may incur increased costs and our underwriting
revenues and net income may decline. |
We compete with a large number of other companies in our
selected lines of business. We face competition from specialty
insurance companies, underwriting agencies and intermediaries,
as well as from diversified financial services companies that
are significantly larger than we are and that have significantly
greater financial, marketing, management and other resources
than we do. Some of these competitors also have significantly
greater experience and market recognition than we do.
In its Annual Review of the Excess & Surplus Lines
Industry, published in September 2004, A.M. Best stated that
large insurance carriers continue to dominate the excess and
surplus lines market, with the top 25 insurance groups
commanding an 82.0% share of the market, and while opportunities
are available in this market, the leading insurance carriers
have a firm stronghold. Based on the A.M. Best report, we would
not be one of the 25 largest insurance carriers in the excess
and surplus lines market. Competition in this market is
generally based on many factors, including the perceived market
strength of the insurer, pricing, service, speed of claims
payment and the reputation and experience of the insurer. We
compete primarily on the basis of service.
We may incur increased costs in competing for underwriting
revenues. If we are unable to compete effectively in the markets
in which we operate or to expand our operations into new
markets, our underwriting revenues and net income may decline.
A number of new, proposed or potential legislative and industry
developments could further increase competition in our industry.
These developments include:
|
|
|
|
|
an increase in capital-raising by companies in our lines of
business, which could result in new entrants to our markets and
an excess of capital in the industry; |
28
|
|
|
|
|
the implementation of commercial lines deregulation in several
states, which could increase competition from standard carriers
for our excess and surplus lines of insurance business; |
|
|
|
programs in which state-sponsored entities provide property
insurance in catastrophe prone areas or other alternative
markets types of coverage and; |
|
|
|
changing practices caused by the Internet, which may lead to
greater competition in the insurance business. |
New competition from these developments could cause the supply
and/or demand for insurance or reinsurance to change, which
could affect our ability to price our products at attractive
rates and thereby affect our underwriting results.
We also may compete with new entrants in the future. Competition
is based on many factors, including:
|
|
|
|
|
the perceived market strength of the insurer; |
|
|
|
pricing and other terms and conditions; |
|
|
|
services provided; |
|
|
|
the speed of claims payment; |
|
|
|
the reputation and experience of the insurer; and |
|
|
|
ratings assigned by independent rating organizations such as
A.M. Best. |
Ultimately, this competition could affect our ability to attract
business at premium rates that are likely to generate
underwriting profits.
|
|
|
Severe weather conditions and other catastrophes may
result in an increase in the number and amount of claims
experienced by our insureds. |
Most of our property business is exposed to the risk of severe
weather conditions and other catastrophes. Catastrophes can be
caused by various events, including natural events such as
severe hurricanes, winter weather, tornadoes, windstorms,
earthquakes, hailstorms, severe thunderstorms and fires, and
other events such as explosions, terrorist attacks and riots.
The incidence and severity of catastrophes and severe weather
conditions are inherently unpredictable. Severe weather
conditions and catastrophes can cause losses in all of our
property lines and generally result in an increase in the number
of claims incurred as well as the amount of compensation sought
by claimants because every geographic location in which we
provide insurance policies is subject to the risk of severe
weather conditions. In 2005, we recorded $5.4 million after
tax losses related to the fall hurricane season. Prior to
December 31, 2004, we have not been materially impacted by
severe weather. It is possible that a catastrophic event or
multiple catastrophic events could cause our loss and loss
expense reserves to increase and our liquidity and financial
condition to decline.
|
|
|
As a holding company, we are dependent on the results of
operations of our insurance subsidiary and the regulatory and
contractual capacity of our subsidiary to pay dividends to us.
Some states limit the aggregate amount of dividends our
subsidiary may pay to us in any twelve-month period, thereby
limiting our funds to pay expenses and dividends. |
We are an insurance holding company and our principal asset is
the shares we hold in Century. Dividends and other payments from
this company are our primary source of funds to pay expenses and
dividends to our shareholders. The payment of dividends by
Century to us is limited by statute. In general, these
restrictions limit the aggregate amount of dividends or other
distributions that Century may declare or pay within any
twelve-month period without advance regulatory approval.
Generally, this limitation is the greater of statutory net
income for the preceding calendar year or 10% of the statutory
surplus at the end of the preceding calendar year. In addition,
insurance regulators have broad powers to prevent reduction of
statutory surplus to inadequate levels and could refuse to
permit the payment of dividends of the maximum amounts
calculated under any applicable formula. As a result, we may not
be able to receive dividends from our subsidiary at
29
times and in amounts necessary to meet our debt service
obligations or to pay dividends to our shareholders or corporate
expenses. The amount of dividends that can be paid to us from
our subsidiaries in 2006 without regulatory approval is
$12.1 million.
|
|
Item 1(b). |
Unresolved Staff Comments |
None
In November 2003, we moved our corporate headquarters to a
newly-constructed approximately 44,000 square foot office
building located in Westerville, Ohio. We lease this building
pursuant to a lease agreement with an initial term of ten years
and have an option to renew the lease agreement for two
five-year terms.
We also lease an aggregate of approximately 20,000 square
feet of office space in Phoenix, Arizona, which we first
occupied in September 2003. Our lease of this space has an
initial term that expires in 2009.
|
|
Item 3. |
Legal Proceedings |
We are named from time to time as defendants in various legal
actions that are incidental to our business and arise out of or
are related to claims made in connection with our insurance
policies, claims handling, premium finance agreements and other
contracts and employment related disputes. The plaintiffs in
some of these lawsuits have alleged bad faith or extra
contractual damages and some have claimed punitive damages. The
resolution of these legal actions are not expected to have a
material adverse effect on our financial position or results of
operations.
|
|
Item 4. |
Submission of Matters to a Vote of the Security
Holders |
There were no matters submitted to a vote of security holders in
the fourth quarter of 2005.
Information regarding our executive officers is contained in
Item 10 of Part III of this report and incorporated by
reference into Part I.
PART II
|
|
Item 5. |
Market for the Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
ProCentury Corporation (symbol: PROS) common shares are listed
on the NASDAQ National Market. As of February 28, 2005,
there were 18 holders of record of the 13,211,019 outstanding
common shares of the Company. The high, low and closing sale
prices of our common shares for each quarter in 2005 are listed
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter of 2005 | |
|
|
| |
|
|
1st | |
|
2nd | |
|
3rd | |
|
4th | |
|
|
| |
|
| |
|
| |
|
| |
High
|
|
$ |
12.50 |
|
|
|
11.05 |
|
|
|
10.75 |
|
|
|
11.45 |
|
Low
|
|
|
10.11 |
|
|
|
9.75 |
|
|
|
9.81 |
|
|
|
9.96 |
|
Close
|
|
|
10.49 |
|
|
|
10.20 |
|
|
|
10.22 |
|
|
|
10.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter of 2004 | |
|
|
| |
|
|
1st | |
|
2nd(2) | |
|
3rd | |
|
4th | |
|
|
| |
|
| |
|
| |
|
| |
High
|
|
$ |
(1 |
) |
|
|
10.99 |
|
|
|
10.24 |
|
|
|
12.65 |
|
Low
|
|
|
(1 |
) |
|
|
9.37 |
|
|
|
9.30 |
|
|
|
9.62 |
|
Close
|
|
|
(1 |
) |
|
|
9.73 |
|
|
|
9.91 |
|
|
|
12.40 |
|
30
|
|
(1) |
The Companys common shares were privately held prior to
April 26, 2004. Therefore, information for the first
quarter of 2004 is not provided. |
The Company declared a $0.02 per share cash dividend in the
first, second and third quarters of 2005. In the fourth quarter,
the Company declared a $0.025 per share cash dividend. As
an insurance holding company, our principal asset is the shares
we hold in Century. The dividends and other payments from
Century are our primary source of funds; however, the payment of
dividends by Century to us is limited by statute. As a result,
we may not be able to receive funds at times and in amounts
necessary to meet our debt service obligations or to pay
dividends to our shareholders or corporate expenses.
In December 2005 our board of directors approved a
$10.0 million share repurchase plan. As of
December 31, 2005, no shares have been repurchased under
this plan.
|
|
Item 6. |
Selected Financial and Operating Data |
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial
information for the periods ended and as of the dates indicated.
The selected data presented below under the captions
Operating Data and Balance Sheet Data
for, and as of the end of, each of the periods in the five-year
period ended December 31, 2005 are derived from our
consolidated financial statements, which financial statements
have been audited by KPMG LLP, an independent registered public
accounting firm. The consolidated financial statements as of
December 31, 2005 and 2004 and for each of the periods in
the three-year period ended December 31, 2005, and the
report thereon, are included elsewhere in
this 10-K filing.
These historical results are not necessarily indicative of
results to be expected from any future period. You should read
this selected consolidated financial information together with
our consolidated financial statements and related notes and the
section of this report entitled Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$ |
177,630 |
|
|
|
148,702 |
|
|
|
108,294 |
|
|
|
63,290 |
|
|
|
42,524 |
|
Net investment income
|
|
|
14,487 |
|
|
|
10,048 |
|
|
|
6,499 |
|
|
|
5,075 |
|
|
|
4,595 |
|
Net realized investment gains (losses)
|
|
|
(326 |
) |
|
|
50 |
|
|
|
1,932 |
|
|
|
2,438 |
|
|
|
364 |
|
Total revenues
|
|
|
191,791 |
|
|
|
158,800 |
|
|
|
116,725 |
|
|
|
71,203 |
|
|
|
48,058 |
|
Discontinued operations(1)
|
|
|
|
|
|
|
1,259 |
|
|
|
1,548 |
|
|
|
881 |
|
|
|
(519 |
) |
Net income
|
|
|
10,241 |
|
|
|
14,980 |
|
|
|
314 |
|
|
|
6,080 |
|
|
|
1,393 |
|
Comprehensive income (loss)
|
|
|
6,271 |
|
|
|
14,566 |
|
|
|
(405 |
) |
|
|
6,693 |
|
|
|
1,845 |
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations before cumulative
effect of change in accounting principle
|
|
$ |
0.78 |
|
|
|
1.29 |
|
|
|
(0.25 |
) |
|
|
0.88 |
|
|
|
0.38 |
|
Discontinued operations
|
|
|
|
|
|
|
0.12 |
|
|
|
0.31 |
|
|
|
0.18 |
|
|
|
(0.10 |
) |
Cumulative effect of change in accounting principle, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.78 |
|
|
|
1.41 |
|
|
|
0.06 |
|
|
|
1.22 |
|
|
|
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
|
|
|
13,060,509 |
|
|
|
10,623,645 |
|
|
|
5,000,532 |
|
|
|
5,000,532 |
|
|
|
5,000,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted
|
|
|
13,129,425 |
|
|
|
10,653,316 |
|
|
|
5,000,532 |
|
|
|
5,000,532 |
|
|
|
5,000,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Performance Data: (for the periods ended)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums(2)
|
|
$ |
216,164 |
|
|
|
191,405 |
|
|
|
149,708 |
|
|
|
100,542 |
|
|
|
70,484 |
|
Net written premiums(3)
|
|
|
189,519 |
|
|
|
166,024 |
|
|
|
131,839 |
|
|
|
78,362 |
|
|
|
44,990 |
|
GAAP Underwriting Ratios:(for the periods ended)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio(4)
|
|
|
66.6 |
% |
|
|
59.9 |
% |
|
|
74.8 |
% |
|
|
71.7 |
% |
|
|
70.4 |
% |
Expense ratio(5)
|
|
|
32.6 |
% |
|
|
31.9 |
% |
|
|
34.2 |
% |
|
|
38.3 |
% |
|
|
42.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio(6)
|
|
|
99.2 |
% |
|
|
91.8 |
% |
|
|
109.0 |
% |
|
|
110.0 |
% |
|
|
112.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:(at the end of the period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
$ |
366,410 |
|
|
|
312,399 |
|
|
|
171,201 |
|
|
|
130,101 |
|
|
|
77,791 |
|
Reinsurance recoverables on paid and unpaid losses, net
|
|
|
43,870 |
|
|
|
33,382 |
|
|
|
42,042 |
|
|
|
35,323 |
|
|
|
48,550 |
|
Assets available for sale
|
|
|
|
|
|
|
|
|
|
|
59,018 |
|
|
|
51,229 |
|
|
|
49,306 |
|
Total assets
|
|
|
474,145 |
|
|
|
394,927 |
|
|
|
332,113 |
|
|
|
260,758 |
|
|
|
212,677 |
|
Loss and loss expense reserves
|
|
|
211,647 |
|
|
|
153,236 |
|
|
|
129,236 |
|
|
|
90,855 |
|
|
|
93,998 |
|
Liabilities available for sale
|
|
|
|
|
|
|
|
|
|
|
51,431 |
|
|
|
36,179 |
|
|
|
32,793 |
|
Long term debt
|
|
|
25,000 |
|
|
|
25,000 |
|
|
|
34,133 |
|
|
|
9,813 |
|
|
|
10,000 |
|
Trust preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,545 |
|
|
|
|
|
Total shareholders equity
|
|
|
121,203 |
|
|
|
115,237 |
|
|
|
36,397 |
|
|
|
36,396 |
|
|
|
29,703 |
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net writings ratio, including discontinued operations(7)
|
|
|
1.6 |
|
|
|
1.4 |
|
|
|
1.7 |
|
|
|
1.3 |
|
|
|
1.4 |
|
Return on average equity(8)
|
|
|
8.7 |
% |
|
|
18.5 |
% |
|
|
0.9 |
% |
|
|
18.4 |
% |
|
|
5.3 |
% |
|
|
(1) |
Immediately prior to the completion of the IPO, the common
shares of Evergreen and its wholly owned subsidiary, Continental
were distributed as dividends from Century to ProCentury and
then by ProCentury to ProCenturys existing Class A
shareholders. Prior to the dividends, Evergreen was a controlled
subsidiary of Century. The operations of Evergreen and
Continental consisted of ProCenturys historical surety and
assumed excess workers compensation lines of insurance,
which were re-classified (net of minority interest and income
taxes) as discontinued operations in the above selected
consolidated financial data. |
32
|
|
(2) |
The amount received or to be received for insurance policies
written by us during a specific period of time without reduction
for acquisition costs, reinsurance costs or other deductions. |
|
(3) |
Gross written premiums less the portion of such premiums ceded
to (reinsured by) other insurers during a specific period of
time. |
|
(4) |
The ratio of losses and loss expenses to premiums earned, net of
the effects of reinsurance. |
|
(5) |
The ratio of amortization of deferred policy acquisition costs
and other underwriting expenses to premiums earned, net of the
effects of reinsurance. |
|
(6) |
The sum of the loss and loss expense ratio, net of the effects
of reinsurance. |
|
(7) |
The ratio of net written premiums to our insurance
subsidiaries combined statutory surplus. Management
believes this measure is useful in gauging our exposure to
pricing errors in our current book of business. It may not be
comparable to the definition of net writings ratio used by other
companies. For periods prior to 2004, this ratio includes
discontinued operations, as the insurance subsidiaries
combined statutory surplus is not allocated by line of business.
Therefore, in computing the ratio of net written premiums to our
insurance subsidiaries combined statutory surplus we did
not restate the net written premium for discontinued operations
to be consistent with that of the subsidiaries combined
statutory surplus. |
|
(8) |
Return on average equity consists of the ratio of net income to
the average of the beginning of period and end of period total
shareholders equity. For 2004, return on average equity
consists of the ratio of net income to the average equity, which
is based on the average of the beginning of period and the end
of each quarters total shareholders equity. |
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and
results of operations should be read in conjunction with our
consolidated financial statements and the notes to those
statements included in this report. The discussion and analysis
below includes certain forward-looking statements that are
subject to risks, uncertainties and other factors described in
Risk Factors and elsewhere in this report that could
cause our actual growth, results of operations, performance and
business prospects and opportunities in 2005 and beyond to
differ materially from those expressed in, or implied by, those
forward-looking statements. See Forward-Looking
Statements.
Overview
ProCentury is a holding company that underwrites selected
property and casualty and surety insurance through its
subsidiaries collectively known as Century Insurance
Group®.
As a niche company, we offer specialty insurance
products designed to meet specific insurance needs of targeted
insured groups. The excess and surplus lines market provides an
alternative market for customers with
hard-to-place risks and
risks that insurance companies licensed by the state in which
the insurance policy is sold, which are also referred to as
admitted insurers, specifically refuse to write.
When we underwrite within the excess and surplus lines market,
we are selective in the lines of business and types of risks we
choose to write. Typically, the development of these specialty
insurance products is generated through proposals brought to us
by an agent or broker seeking coverage for a specific group of
clients.
We evaluate our insurance operations by monitoring key measures
of growth and profitability. The following provides further
explanation of the key GAAP measures that we use to evaluate our
results:
Gross Written Premiums. Gross written premiums are the
sum of direct written premiums and assumed written premiums. We
use gross written premiums, which excludes the impact of
premiums ceded to reinsurers, as a measure of the underlying
growth of our insurance business from period to period.
33
Net Written Premiums. Net written premiums are the sum of
direct written premiums and assumed written premiums less ceded
written premiums. We use net written premiums, primarily in
relation to gross written premiums, to measure the amount of
business retained after cessions to reinsurers.
Earned Premiums. Earned premiums are the portion of a
premium paid by an insured that has been allocated to our
revenue, loss experience, expenses, and profit year to date.
Loss Ratio. Loss ratio is the ratio (expressed as a
percentage) of losses and loss expenses incurred to premiums
earned. Loss ratio generally is measured on both a gross (direct
and assumed) and net (gross less ceded) basis. We use the gross
loss ratio as a measure of the overall underwriting
profitability of the insurance business we write and to assess
the adequacy of our pricing. Our net loss ratio is meaningful in
evaluating our financial results, which are net of ceded
reinsurance, as reflected in our consolidated financial
statements.
Expense Ratio. Expense ratio is the ratio (expressed as a
percentage) of net operating expenses to premiums earned and
measures a companys operational efficiency in producing,
underwriting and administering its insurance business. We reduce
our operating expenses by ancillary income (excluding net
investment income and realized gains (losses) on securities) to
calculate our net operating expenses. Due to our historically
high levels of reinsurance, we calculate our expense ratio on
both a gross basis (before the effect of ceded reinsurance) and
a net basis (after the effect of ceded reinsurance). Although
the net basis is meaningful in evaluating our financial results
that are net of ceded reinsurance, as reflected in our
consolidated financial statements, we believe that the gross
expense ratio better reflects the operational efficiency of the
underlying business and is a better measure of future trends.
Interest expense is not included in the calculation of the
expense ratio.
Combined Ratio. Combined ratio is the sum of the loss
ratio and the expense ratio and measures a companys
overall underwriting profit. If the combined ratio is at or
above 100, an insurance company cannot be profitable without
investment income (and may not be profitable if investment
income is insufficient). We use the combined ratio in evaluating
our overall underwriting profitability and as a measure for
comparing our profitability relative to the profitability of our
competitors.
Critical Accounting Policies
It is important to understand our accounting policies in order
to understand our financial statements. Management considers
certain of these policies to be critical to the presentation of
our financial results, since they require management to make
estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures at the financial reporting date
and throughout the period being reported upon. Certain of the
estimates result from judgments that can be subjective and
complex and consequently actual results may differ from these
estimates, which would be reflected in future periods.
Our most critical accounting policies involve the reporting of
loss and loss expense reserves (including losses that have
occurred but were not reported to us by the financial reporting
date), reinsurance recoverables, the impairment of investments,
deferred policy acquisition costs and federal income taxes.
Loss and Loss Expense Reserves. Loss and loss expense
reserves represent an estimate of the expected cost of the
ultimate settlement and administration of losses, based on facts
and circumstances then known. We use actuarial methodologies to
assist us in establishing these estimates, including judgments
relative to estimates of future claims severity and frequency,
length of time to develop to ultimate resolution, judicial
theories of liability and other third-party factors that are
often beyond our control. Due to the inherent uncertainty
associated with the cost of unsettled and unreported claims, the
ultimate liability may be different from the original estimate.
Such estimates are regularly reviewed and updated and any
resulting adjustments are included in the current periods
results. Additional information regarding our loss and loss
expense reserves can be found in Results of
Operations Expenses Losses and Loss
Expenses Incurred, Business Loss and
Loss Expense Reserves, and Note 4 to our audited
consolidated financial statements, all of which are included in
this report.
34
Reinsurance Recoverables. Reinsurance recoverables on
paid and unpaid losses, net, are established for the portion of
our loss and loss expense reserves that are ceded to reinsurers.
Reinsurance recoverables are determined based in part on the
terms and conditions of reinsurance contracts which could be
subject to interpretations that differ from our own based on
judicial theories of liability. In addition, we bear credit risk
with respect to our reinsurers which can be significant
considering that certain of the reserves remain outstanding for
an extended period of time. We are required to pay losses even
if a reinsurer fails to meet its obligations under the
applicable reinsurance agreement. See Business
Reinsurance and Note 5 to our audited consolidated
financial statements, both included in this report.
Impairment of Investments. Impairment of investment
securities results in a charge to operations when a market
decline below cost is deemed to be other-than-temporary. Under
the Companys accounting policy for equity securities and
fixed-maturity securities, an impairment is deemed to be
other-than-temporary unless the Company has both the ability and
intent to hold the investment for a reasonable period until the
securitys forecasted recovery and evidence exists
indicating that recovery will occur in a reasonable period of
time.
For other fixed-maturity and equity securities, an
other-than-temporary impairment charge is taken when the Company
does not have the ability and intent to hold the security until
the forecasted recovery or if it is no longer probable that the
Company will recover all amounts due under the contractual terms
of the security. Many criteria are considered during this
process including, but not limited to, the current fair value as
compared to amortized cost or cost, as appropriate, of the
security; the amount and length of time a securitys fair
value has been below amortized cost or cost; specific credit
issues and financial prospects related to the issuer; the
Companys intent to hold or dispose of the security; and
current economic conditions. Other-than-temporary impairment
losses result in a permanent reduction to the cost basis of the
underlying investment.
Additionally, for certain securitized financial assets with
contractual cash flows (including asset-backed securities), FASB
Emerging Task Force (EITF) 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets,
requires us to periodically update our best estimate of cash
flows over the life of the security. If management determines
that the fair value of a securitized financial asset is less
than its carrying amount and there has been a decrease in the
present value of the estimated cash flows since the last revised
estimate, considering both timing and amount, then an other
than-temporary impairment is recognized.
For additional detail regarding our investment portfolio at
December 31, 2005 and 2004, including disclosures regarding
other-than-temporary declines in investment value, see
Investment Portfolio below and Note 2 to our
audited consolidated financial statements, both included in this
report.
Deferred Policy Acquisition Costs. We defer commissions,
premium taxes and certain other costs that vary with and are
primarily related to the acquisition of insurance contracts.
These costs are capitalized and charged to expense in proportion
to premium revenue recognized. The method followed in computing
deferred policy acquisition costs limits the amount of such
deferred costs to their estimated realizable value, which gives
effect to the premium to be earned, related investment income,
anticipated losses and settlement expenses and certain other
costs expected to be incurred as the premium is earned.
Judgments as to ultimate recoverability of such deferred costs
are highly dependent upon estimated future loss costs associated
with the written premiums. See Note 7 to our audited
consolidated financial statements included in this report.
Federal Income Taxes. The Company provides for federal
income taxes based on amounts the Company believes it ultimately
will owe. Inherent in the provision for federal income taxes are
estimates regarding the deductibility of certain items and the
realization of certain tax credits. In the event the ultimate
deductibility of certain items or the realization of certain tax
credits differs from estimates, the Company may be required to
significantly change the provision for federal income taxes
recorded in the consolidated financial statements. Any such
change could significantly affect the amounts reported in the
consolidated statements of income.
We utilize the asset and liability method of accounting for
income tax. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and
35
operating loss and tax credit carry-forwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date. Valuation allowances are established when
necessary to reduce the deferred tax assets to the amounts more
likely than not to be realized. See Note 9 to our audited
consolidated financial statements included in this report.
Results of Operations
The table below summarizes certain operating results and key
measures we use in monitoring and evaluating our operations. The
information is intended to summarize and supplement information
contained in our consolidated financial statements and to assist
the reader in gaining a better understanding of our results of
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Selected Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
|
$ |
216,164 |
|
|
|
191,405 |
|
|
|
149,708 |
|
Net premiums earned
|
|
|
177,630 |
|
|
|
148,702 |
|
|
|
108,294 |
|
Net investment income
|
|
|
14,487 |
|
|
|
10,048 |
|
|
|
6,499 |
|
Net realized investment (losses) gains
|
|
|
(326 |
) |
|
|
50 |
|
|
|
1,932 |
|
Total revenues
|
|
|
191,791 |
|
|
|
158,800 |
|
|
|
116,725 |
|
Total expenses
|
|
|
178,212 |
|
|
|
138,496 |
|
|
|
119,546 |
|
Other transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of minority interest in subsidiary, net
|
|
|
|
|
|
|
|
|
|
|
(503 |
) |
|
Discontinued operations
|
|
|
|
|
|
|
1,259 |
|
|
|
1,548 |
|
Net income
|
|
$ |
10,241 |
|
|
|
14,980 |
|
|
|
314 |
|
Key Financial Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
|
66.6 |
% |
|
|
59.9 |
% |
|
|
74.8 |
% |
Expense ratio
|
|
|
32.6 |
|
|
|
31.9 |
|
|
|
34.2 |
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
99.2 |
% |
|
|
91.8 |
% |
|
|
109.0 |
% |
|
|
|
|
|
|
|
|
|
|
Overview of Operating Results
Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004. We reported net income of
$10.2 million for the year ended December 31, 2005
compared to net income of $15.0 million for the same period
in 2004. Included in the net income for 2005 is
$5.4 million of after tax losses related to the 2005 fall
hurricane season. Prior to 2005, hurricane losses have not had a
significant impact to net income. Without the impact of the
hurricanes, net income would have increased over 2004 as a
direct result of our 19.4% growth in our net premiums earned and
an increase in our investment income.
More specifically, our net premiums earned increased to
$177.6 million in 2005 from $148.7 million in 2004.
Included in this increase is growth in our gross written premium
from our casualty segment of 17.0% and 0.9% from our property
segment. Our casualty business continues to grow profitably with
stable rates and a current accident year loss and loss expense
ratio of 57.3%. The property market in general did not perform
as well as the casualty market given the downward pricing
pressure from standard carriers that began in 2004 and continued
into 2005. Despite this tighter market, we were still able to
grow while only slightly decreasing our average rate. Our
current year loss and loss expense ratio for the property
business was 77.8%, which included 14.8% related to the 2005
fall hurricane season.
36
In addition, we reported a 44.2% increase in net investment
income from $10.0 million in 2004 to $14.5 million in
2005. This increase is a result of our operating cash flows and
higher pretax investment yields. In addition, we continued our
efforts in 2005 to increase our after tax yield by increasing
our allocation to tax exempt municipal bonds. As a result of the
relationship between our pretax income, which was adversely
affected by the 2005 hurricane losses, and increase in our tax
exempt municipal bonds, we reported an annual effective tax rate
of 24.6% in 2005 compared to 32.4% in 2004.
The combined ratio increased to 99.2% in 2005 from 91.8% in
2004. Our loss and loss expense ratio increased 6.7% primarily
as a result of the current year hurricane losses and the slight
premium rate decrease that resulted late in 2004 and into the
first half of 2005. In addition, included in our loss and loss
expenses is $5.4 million in incurred amounts related to
prior accident years compared to $11.1 million in 2004. Our
expense ratio increased 0.7% in 2005 from 31.9% in 2004 to 32.6%
at the end of 2005. This increase is a direct result of our
efforts in our first year of required compliance with Sarbanes
Oxley Section 404.
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003. Net income increased to
$15.0 million for the year ended December 31, 2004,
compared to net income of $314,000 for the same period in 2003.
The increase in net income was primarily attributable to an
increase in net earned premium of $40.4 million principally
from an increase in the volume of business and slightly offset
by rate declines in both the property and casualty lines of
business. In addition, we experienced $3.5 million of
growth in our investment income that was driven by higher
investment balances as a result of the IPO and operational cash
flow and an increase in investment yield.
Our combined ratio also improved from 109.0% in 2003 to 91.8% in
2004. The primary reason for the combined ratio improvement was
the decrease in amount of re-estimation of prior accident
years loss and loss expense reserves that negatively
impacted our pre-tax results by $27.0 million in 2003
compared to $11.1 million in 2004 offset by an increase in
the current accident year loss and loss expenses. As of
December 31, 2004, our current accident year loss and loss
expense ratios for accident years 2004 and 2003 were 52.5% and
49.8%, respectively, and reflect the overall rate declines
experienced in 2004. The overall expense ratio declined from
34.2% in 2003 to 31.9% in 2004. This decrease in expense ratio
is directly attributable to the Companys cost containment
efforts that began in the fourth quarter of 2003.
Revenues
Premiums include insurance premiums underwritten by Century
(which are referred to as direct premiums) and insurance
premiums assumed from other insurers generally in states where
Century is not licensed (which are referred to as assumed
premiums). We refer to direct and assumed premiums together as
gross premiums.
Written premiums are 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. Written
premiums become premiums earned as the policy ages. Barring
premium changes, if an insurance company writes the same mix of
business each year, written premiums 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 written
premiums. Conversely, during periods of decline, the unearned
premium reserve will decrease, causing premiums earned to be
greater than written premiums.
We have historically relied on quota share, excess of loss, and
catastrophe reinsurance primarily to manage our regulatory
capital requirements and also to limit our exposure to loss.
Generally, we have ceded a significant portion of our premiums
to unaffiliated reinsurers in order to maintain a net written
premiums to statutory surplus ratio of less than
2-to-1.
Our underwriting business is currently divided into two primary
segments:
|
|
|
|
|
property/casualty; and |
|
|
|
other (including exited lines). |
37
Our property/casualty segment primarily includes general
liability, commercial property and multi-peril insurance for
small and mid-sized businesses. The other (including exited
lines) segment primarily includes our surety business, including
landfill and specialty surety that is written in order to
maintain Centurys U.S. Treasury listing,
workers compensation, which was exited in January 2002,
and commercial auto/trucking, which was exited in May 2000.
The following table presents our gross written premiums in our
primary segments and provides a summary of gross, ceded and net
written premiums and net premiums earned for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Gross written premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property/ casualty
|
|
$ |
212,127 |
|
|
|
190,591 |
|
|
|
150,900 |
|
|
Other (including exited lines)
|
|
|
4,037 |
|
|
|
814 |
|
|
|
(1,192 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total gross written premiums
|
|
|
216,164 |
|
|
|
191,405 |
|
|
|
149,708 |
|
Ceded written premiums
|
|
|
26,645 |
|
|
|
25,381 |
|
|
|
17,869 |
|
|
|
|
|
|
|
|
|
|
|
Net written premiums
|
|
$ |
189,519 |
|
|
|
166,024 |
|
|
|
131,839 |
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$ |
177,630 |
|
|
|
148,702 |
|
|
|
108,294 |
|
|
|
|
|
|
|
|
|
|
|
Net written premiums to gross written premiums
|
|
|
87.7 |
% |
|
|
86.7 |
% |
|
|
88.1 |
% |
Net premiums earned to net written premiums
|
|
|
93.7 |
% |
|
|
89.6 |
% |
|
|
82.1 |
% |
Net writings ratio, including discontinued operations(1)
|
|
|
1.6 |
|
|
|
1.4 |
|
|
|
1.7 |
|
|
|
(1) |
The ratio of net written premiums (including discontinued
operations) to our insurance subsidiaries combined
statutory surplus. This ratio is not restated to exclude
discontinued operations as the insurance subsidiaries
combined statutory surplus is not allocated by line of business.
Therefore, in computing the ratio of net written premiums to our
insurance subsidiaries combined statutory surplus we did
not restate the net written premium for discontinued operations
to be consistent with that of the subsidiaries combined
statutory surplus. Management believes this measure is useful in
gauging our exposure to pricing errors in the current book of
business. It may not be comparable to the definition of net
writings ratio used by other companies. |
Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004. Gross written premiums increased
$24.8 million or 12.9% for the year ended December 31,
2005 compared to the same period in 2004. This increase was due
primarily to increased business in our property/casualty segment
which increased $21.5 million or 11.3%. The growth in the
property/casualty segment resulted principally from an increase
in volume in our casualty lines of business of
$20.9 million or 17.0%. Our property lines of business
increased slightly to $68.2 million in 2005 compared to
$67.5 million in 2004. For casualty business, rates
increased slightly during 2005.
Gross written premium for the other (including exited lines)
segment increased $3.2 million for the year ended
December 31, 2005 compared to the year ended
December 31, 2004. This increase represents surety business
written in order to maintain the Companys
U.S. Treasury listing.
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003. Gross written premiums increased
$41.7 million or 27.9% for the year ended December 31,
2004 compared to the same period in 2003. This increase was due
primarily to increased business in our property/casualty segment
which increased $39.7 million or 26.3%. The growth in the
property/casualty segment resulted principally from an increase
in volume in our casualty lines of business of
$39.3 million or 46.9%. Our property lines of business
remained constant at $67.5 million in 2004 compared to
$67.2 million in 2003 due to a rate plateau followed by a
38
moderate decline that continued throughout much of the year. For
casualty business, rates slightly increased throughout 2003 and
stabilized in 2004.
In addition, gross written premium for the other (including
exited lines) segment was $814,000 for 2004, which represents
surety premium amounts directly written and assumed by us and
then ceded under a 100% quota share agreement with Evergreen.
The 2003 amounts for the surety were reclassified as
discontinued operations as a result of the disposition of
Evergreen in 2004.
|
|
|
Net Written and Earned Premiums |
Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004. Net written premiums for the year
ended December 31, 2005 were $189.5 million,
representing an increase of 14.2% compared to the same period in
2004. Net written premiums were 87.7% of gross written premiums
for the year ended December 31, 2005, which is consistent
with the year ended December 31, 2004. Net premiums earned,
a function of net written premiums, amounted to
$177.6 million for the year ended December 31, 2005
and equaled 93.7% of net written premiums compared to 89.6% in
2004. This increase directly relates to a stabilization of the
rate of growth in 2005.
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003. Net written premiums for the year
ended December 31, 2004 were $166.0 million,
representing an increase of 25.9% compared to the same period in
2003. Net written premiums were 86.7% of gross written premiums
for the year ended December 31, 2004, compared to 88.1% for
the same period in 2003, reflecting a slightly higher percentage
of business ceded due to an overall increase in reinsurance
rates offset by the change in our retention level from $300,000
in 2003 to $500,000 in 2004. In addition, we increased the
amount of cession on our surety business with the quota share
agreement with Evergreen that was effective January 1,
2004. Net premiums earned, a function of net written premiums,
amounted to $148.7 million for the year ended
December 31, 2004 and equaled 89.6% of net written premiums
compared to 82.1% in 2003. This increase directly relates to a
stabilization of the rate of growth in 2004 compared to that of
2003.
In addition, during 2003, we made significant improvements in
the collections of premiums in the course of collection. These
improvements include hiring additional staff, weekly monitoring
of account aging and improved communication with our agents. Due
to these improvements we significantly lowered our aged amount,
which allowed us to maintain a lower provision for uncollectible
accounts despite higher amounts of gross receivables.
We evaluate the collectibility of our agents balances both
individually and on an aggregate basis. In the event that we
determine that an individual agent balance is in question, we
will record a provision in part or in whole for that
agents balance. On an aggregate basis, we evaluate
historical write-offs and premium growth rates to determine a
general allowance.
Our investment portfolio generally consists of liquid, readily
marketable and investment-grade fixed-maturity and equity
securities. Net investment income is primarily comprised of
interest and dividend earned on these securities, net of related
investment expenses.
Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004. Net investment income increased to
$14.5 million for the year ended December 31, 2005,
compared to $10.0 million for the same period in 2004. The
increase was the result of higher investments and cash balances,
as well as higher investment yields. Due to an increase in our
operating cash flows, the investment portfolio and cash
increased to $366.4 million as of December 31, 2005,
which is an increase of $51.4 million from
December 31, 2004. Our average investment yield for 2005
was 4.6%, compared to 4.1% for the same period in 2004. On a tax
equivalent yield basis, our yield increased to 5.2% in 2005
compared to 4.8% in 2004.
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003. Net investment income increased to
$10.0 million for the year ended December 31, 2004,
compared to $6.5 million for the same period in 2003. The
increase was due primarily to an increase in investments and
cash, which was
39
supplemented by a slight increase in investment yields.
Investments and cash increased 82.5% to $312.4 million as
of December 31, 2004 from $171.2 million as of
December 31, 2003 as a direct result of the proceeds from
the IPO and an increase in our operating cash flows. Our average
investment yield for 2004 was 4.1%, compared to 4.0% for the
same period in 2003.
In 2004, we increased our allocation to municipal bonds in an
effort to increase our tax equivalent yield. On a tax equivalent
yield basis, our yield increased to 4.8% in 2004 compared to
4.0% in 2003.
|
|
|
Realized Gains (Losses) on Securities |
Realized gains and losses on securities are principally affected
by changes in interest rates, the timing of sales of investments
and changes in credit quality of the securities we hold as
investments.
Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004. During the year ended
December 31, 2005, we incurred net realized losses of
$326,000 on the sale and write down of securities compared to
$50,000 in net realized gains for the year ended
December 31, 2004. Included in the realized net losses in
2005 was $150,000 related to other-than-temporary impairments
for two securities. There were no impairment losses in 2004.
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003. We realized net gains of $50,000 on
the sale of securities for the year ended December 31, 2004
and $1.9 million for the same period in 2003. These gains
included a realized loss of $87,000 related to adjustments for
other-than-temporary impairment of securities for the year ended
December 31, 2003 and no impairment losses in 2004.
Expenses
Losses and loss expenses represent our largest expense item and
include (1) payments made to settle claims,
(2) estimates for future claim payments and changes in
those estimates for current and prior periods, and
(3) costs associated with settling claims. The items that
influence the incurred losses and loss expenses for a given
period include, but are not limited to, the following:
|
|
|
|
|
the number of exposures covered in the current year; |
|
|
|
trends in claim frequency and claim severity; |
|
|
|
changes in the cost of adjusting claims; |
|
|
|
changes in the legal environment relating to coverage
interpretation, theories of liability and jury determinations; |
|
|
|
and the re-estimation of prior years reserves in the
current year. |
We establish or adjust (for prior accident quarters) our best
estimate of the ultimate incurred losses and loss expenses to
reflect loss development information and trends that have been
updated for the most recent quarters activity through
quarterly internal actuarial analysis. As of December 31 of
each year, we have an independent actuarial analysis performed
of the adequacy of our reserves. Our estimate of ultimate loss
and loss expenses is evaluated and re-evaluated by accident year
and by major coverage grouping and changes in estimates are
reflected in the period the additional information becomes known.
Our reinsurance program significantly influences our net
retained losses. In exchange for premiums ceded to reinsurers
under quota share and excess of loss reinsurance agreements, our
reinsurers assume a portion of the losses and loss expenses
incurred. See Business Reinsurance. We
remain obligated for amounts ceded in the event that the
reinsurers do not meet their obligations under the agreements
(due to, for example, disputes with the reinsurer or the
reinsurers insolvency).
40
The following table presents our incurred losses and loss
expenses (net of the effects of reinsurance) from the most
current accident year and from re-estimation of ultimate losses
on prior accident years and provides a summary of losses
incurred to premiums earned (loss and loss expense ratio) for
the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net incurred losses and loss expenses attributable to insured
events of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
$ |
112,946 |
|
|
|
78,015 |
|
|
|
53,961 |
|
Prior years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property/ casualty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty
|
|
|
7,384 |
|
|
|
12,842 |
|
|
|
22,190 |
|
|
|
Property
|
|
|
(2,388 |
) |
|
|
(3,244 |
) |
|
|
2,254 |
|
|
Other (including exited lines):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial automobile
|
|
|
439 |
|
|
|
789 |
|
|
|
1,350 |
|
|
|
Workers compensation
|
|
|
(35 |
) |
|
|
664 |
|
|
|
1,249 |
|
|
|
|
|
|
|
|
|
|
|
Net incurred
|
|
$ |
118,346 |
|
|
|
89,066 |
|
|
|
81,004 |
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss expense ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
63.6 |
% |
|
|
52.5 |
% |
|
|
49.8 |
% |
Prior years
|
|
|
3.0 |
|
|
|
7.4 |
|
|
|
25.0 |
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss expense ratio
|
|
|
66.6 |
% |
|
|
59.9 |
% |
|
|
74.8 |
% |
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004. Net loss and loss expenses increased
to $118.3 million for the year ended December 31, 2005
compared to $89.1 for the year ended December 31, 2004, as
discussed in more detail below. Net loss and loss expense ratios
were 66.6% and 59.9% for the years ended December 31, 2005
and 2004, respectively.
Our gross reserves for loss and loss expenses were
$211.6 million and $153.2 million (before the effects
of reinsurance) at December 31, 2005 and 2004,
respectively. In 2005, we determined that the December 31,
2004 net reserve for losses and loss expenses of $123.8
(after the effects of reinsurance) was deficient by
$5.4 million.
Our reserve for losses and loss expenses (net of the effects of
reinsurance) at December 31, 2005 by line was as follows:
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
2005 | |
|
|
| |
|
|
(In thousands) | |
Property/ casualty:
|
|
|
|
|
|
Casualty
|
|
$ |
142,451 |
|
|
Property
|
|
|
27,972 |
|
Other (including exited lines):
|
|
|
|
|
|
Commercial auto
|
|
|
936 |
|
|
Workers compensation
|
|
|
2,657 |
|
|
Landfill
|
|
|
183 |
|
|
|
|
|
Net reserves for losses and loss expenses
|
|
|
174,199 |
|
Plus reinsurance recoverables on unpaid losses at end of period
|
|
|
37,448 |
|
|
|
|
|
Gross reserves for losses and loss expenses
|
|
$ |
211,647 |
|
|
|
|
|
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003. Net loss and loss expenses increased
to $89.1 million for the year ended December 31, 2004
from $81.0 million for the same
41
period in 2003, as a result of the factors discussed below. Net
loss and loss expense ratios for the year ended
December 31, 2004 and 2003 were 59.9% and 74.8%,
respectively.
Our reserve for losses and loss expenses as of December 31,
2004 was $153.2 million (before the effects of reinsurance)
and $123.8 million (after the effects of reinsurance) as of
December 31, 2003, as estimated through our internal
actuarial analysis. During 2004, we concluded, through our
actuarial analysis, that the December 31, 2003 reserve for
losses and loss expenses of $92.5 million (after the
effects of reinsurance) was deficient by $11.1 million.
Our reserve for losses and loss expenses (net of the effects of
reinsurance) at December 31, 2004 by line was as follows:
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
2004 | |
|
|
| |
|
|
(In thousands) | |
Property/ casualty:
|
|
|
|
|
|
Casualty
|
|
$ |
102,430 |
|
|
Property
|
|
|
16,115 |
|
Other (including exited lines):
|
|
|
|
|
|
Commercial auto
|
|
|
1,780 |
|
|
Workers compensation
|
|
|
3,426 |
|
|
|
|
|
Net reserves for losses and loss expenses
|
|
|
123,751 |
|
Plus reinsurance recoverables on unpaid losses at end of period
|
|
|
29,485 |
|
|
|
|
|
Gross reserves for losses and loss expenses
|
|
$ |
153,236 |
|
|
|
|
|
An explanation of significant components of reserve development
by segment (net of reinsurance unless otherwise indicated) for
the years ended December 31, 2005, 2004 and 2003 is as
follows:
Casualty. Our changes in the reserve estimates related to
prior accident years for the years ended December 31, 2005,
2004 and 2003 for the casualty lines resulted in increases in
incurred losses and loss expenses of $7.4 million,
$12.8 million, and $22.2 million respectively. A
significant portion of our casualty reserves development relate
to construction defect claims in certain states. See
Business General. Starting with
California in December 2000, we began to exit contractors
liability business written on an occurrence form. By the end of
the first quarter of 2001, we had significantly reduced our
contractors liability written on an occurrence form
underwriting in all states, and completely eliminated
contractors liability written on an occurrence form in
Arizona, California, Colorado, Hawaii, Louisiana, Nevada, New
Jersey, North Carolina, Oregon, South Carolina and Washington.
Reserves and claim frequency on this business may be impacted by
decisions by California and other states courts affecting
insurance law and tort law. They may also be impacted by
legislation enacted in California. This legislation continues to
impact claim severity, frequency and time to settlement
assumptions underlying our reserves. Accordingly, our ultimate
liability may exceed or be less than current estimates due to
this variable, among others.
During 2004, as a result of court decisions that further defined
the legal environment in California, the Company decided to
enhance its defense strategy in for certain types of
construction defect claims. As a result, the Company revised the
construction defect defense team by retaining appellate and new
trial counsel and restaffing the in-house team responsible for
management of the litigation. Once the new legal teams were
established late in 2004 and into 2005, it was determined that
there were certain cases that should be settled and the defense
budgets for the remaining cases had to be revised to reflect the
added resources, resulting in higher than expected loss and
defense costs in 2005.
During 2004, the Companys newly reported construction
defect claims were 36.9% greater than expected as of
December 31, 2003. Based on the Companys experience
during 2004 and industry information, the Company substantially
increased its projected ultimate construction defect claim count
as of December 31, 2004.
42
During 2003, the Companys newly reported construction
defect claims were 118.8% greater than expected as of
December 31, 2002. Based on the Companys experience
during 2003 and industry information, the Company substantially
increased its projected ultimate construction defect claim count
as of December 31, 2003.
Of our construction defect net loss and loss expense reserves at
December 31, 2005, 52.6% was for incurred but not reported
losses (which are referred to as IBNR) and 61.0% of our
construction defect net loss and loss expense reserves at
December 31, 2004 was for IBNR. As of December 31,
2005, we had 480 open claims relating to construction defects,
compared to 566 open claims as of December 31, 2004. During
2005, 840 new claims were reported and 926 existing claims were
settled or dismissed. Our net loss and loss expense reserves for
construction defects as of December 31, 2005 were
$17.7 million. The re-estimation of construction defect
reserves primarily affected the 1996 and 1997 accident years and
the 1999 to 2001 accident years.
Of our construction defects net loss and loss expense reserves
at December 31, 2004, 61.0% was for incurred but not
reported losses (which are referred to as IBNR), and 52.5% of
our construction defect net loss and loss expense reserves at
December 31, 2003 was for IBNR. As of December 31,
2004, we had 566 open claims relating to construction defects,
compared to 597 open claims as of December 31, 2003. During
2004, 986 new claims were reported and 1,017 existing claims
were settled or dismissed. Our net loss and loss expense
reserves for construction defects as of December 31, 2004
were $19.0 million. The re-estimation of construction
defect reserves primarily affected the 1996 and 1997 accident
years and the 1999 to 2001 accident years.
In addition, we have also experienced development above
expectations on our non-construction defect casualty reserves
for the 2000 to 2002 accident years that led to reassessments of
the initial loss ratio expectations and the claim reporting and
settlement patterns.
As of December 31, 2005, the projected loss and loss
expense ratios, after the effects of reinsurance, for the
casualty lines were 57.3%, 48.7% and 43.4% for accident periods
2005, 2004, and 2003, respectively.
Our internal actuaries generally apply actuarial techniques in
the analysis of loss and loss expense reserves using the
following factors, among others:
|
|
|
|
|
our experience and the industrys experience; |
|
|
|
historical trends in reserving patterns and loss payments; |
|
|
|
the impact of claim inflation; |
|
|
|
the pending level of unpaid claims; |
|
|
|
the cost of claim settlements; |
|
|
|
the line of business mix; and |
|
|
|
the environment in which property and casualty insurance
companies operate. |
Although many factors influence the actual cost of claims and
our corresponding reserve estimates, we do not measure and
estimate values for all of these variables individually. This is
due to the fact that many of the factors that are known to
impact the cost of claims cannot be measured directly, such as
the impact on claim costs due to economic inflation, coverage
interpretations and jury determinations. In most instances, we
rely on our historical experience or industry information to
estimate values for the variables that are explicitly used in
our reserve analyses. We assume that the historical effect of
these unmeasured factors, which is embedded in our experience or
industry experience, is representative of future effects of
these factors. Where we have reason to expect a change in the
effect of one of these factors, we perform analysis to quantify
the necessary adjustments.
For claim liabilities other than construction defect, our
internal actuaries apply multiple traditional actuarial
techniques to compute loss and loss expense reserve estimates.
Each technique produces a unique loss and loss expense reserve
estimate for the line being analyzed. The set of techniques
applied produces a
43
range of loss and loss expense reserve estimates. From these
estimates, the actuaries form a best estimate which considers
the assumptions and factors that influence ultimate claim costs,
including but not limited to those identified above. As of
December 31, 2005, for casualty lines, other than
construction defect claims, the low end of the range of
techniques was 11.6% below the actuarial best estimate, and the
high end of the range of techniques was 1.0% above the actuarial
best estimate. These low and high loss and loss expense reserve
estimates reflect the fact that the methodologies applied do not
produce identical estimates, and these estimates do not
constitute the range of all possible outcomes. It is important
to note that actual claim costs will vary from the selected
estimate, perhaps by substantial amounts, due to the inherent
variability of the business written, the potentially significant
claim settlement lags and the fact that not all events affecting
future claim costs can be estimated at this time.
For construction defect claim liabilities, our internal
actuaries apply one actuarial technique, under various sets of
assumptions, which considers the factors that influence ultimate
claim costs. The actuarial technique for construction defect
claim liabilities includes several variables relating to the
number of IBNR claims and the average cost per IBNR claim. In
addition to computing best estimate parameter values for the
actuarial projection, the actuaries also consider the impact on
resulting IBNR related to reasonably foreseeable fluctuations in
these variables, which is used to quantify a range of techniques
of loss and loss expense reserves for construction defect. As of
December 31, 2005, for construction defect claims the low
end of the range of techniques was 16.1% below the actuarial
best estimate and the high end of the range of techniques was
21.5% above the actuarial best estimate. These low and high loss
and loss expense reserve estimates reflect the uncertainty in
estimating the parameter values, and these estimates do not
constitute the range of all possible outcomes. It is important
to note that actual claim costs will vary from the selected
estimate, perhaps by substantial amounts, due to the inherent
variability of these types of claims, the potentially
significant claim settlement lags and the fact that not all
events affecting future claim costs can be estimated at this
time.
Property. Our changes in reserve estimates for the years
ended December 31, 2005, 2004 and 2003 for the property
lines resulted in (decreases) increases of
($2.4) million, ($3.2) million and $2.3 million,
respectively. These amounts primarily relate to changes in the
selected development patterns on multiple accident years, as the
number of claims and claim severity were below expectations at
December 31, 2004 and 2005 and exceeded expectations at
December 31, 2003.
As of December 31, 2005, the projected loss and loss
expense ratios, after the effects of reinsurance, for the
property lines were 77.8%, 54.5% and 47.7% for accident periods
2005, 2004 and 2003, respectively. Included in the 2005 accident
year property loss ratio is 14.8% related to the 2005 fall
hurricane season.
Our internal actuaries apply multiple actuarial techniques
utilizing the same factors discussed above under
Casualty to compute loss and loss expense reserve
estimates for property claim liabilities. Each technique
produces a unique loss and loss expense reserve estimate for the
line being analyzed. The set of techniques applied produces a
range of loss and loss expense reserve estimates. From these
estimates, the actuaries form a best estimate that considers
assumptions and factors, as discussed above, that influence
ultimate claim costs. As of December 31, 2005, for property
lines the low end of the range of techniques was 22.6% below the
actuarial best estimate and the high end of the range of
techniques was 3.0% above the actuarial best estimate. These low
and high loss and loss expense reserve estimates reflect the
fact that the methodologies applied do not produce identical
estimates, and these estimates do not constitute the range of
all possible outcomes. It is important to note that actual claim
costs will vary from the selected estimate, perhaps by
substantial amounts, due to the inherent variability of the
business written, the potentially significant claim settlement
lags and the fact that not all events affecting future claim
costs can be estimated at this time.
|
|
|
Other (Including Exited Lines) |
We began writing commercial automobile/trucking coverage for
commercial vehicles and trucks in 1997. In 2000, we exited the
commercial automobile line of business due to unsatisfactory
underwriting results. At December 31, 2005 and 2004, all of
our net loss and loss expense reserves related to commercial
automobile
44
was for case reserves. As of December 31, 2005, we had 21
open claims relating to commercial automobile, compared to 38
open claims as of December 31, 2004. During 2005, two new
claims were reported and 19 existing claims were settled or
dismissed. Our net loss and loss expense reserves for commercial
automobile as of December 31, 2005 were $936,000.
We offered workers compensation coverage from 1997 through
January 2002. We exited this line of business beginning
January 1, 2002 due to unsatisfactory underwriting results
and the lack of availability of acceptable reinsurance. Until
July 2000, we purchased 100% quota share reinsurance on this
book of business. Beginning in 2000, we started to retain some
risk. No new policies have been written since the first quarter
of 2002. Of our net loss and loss expense reserves at
December 31, 2005, 57.6% related to workers
compensation claims IBNR, and 49.8% of our net loss and loss
expense reserves at December 31, 2004 was for workers
compensation IBNR. As of December 31, 2005, we had 199 open
claims relating to workers compensation compared to 257
open claims as of December 31, 2004. During 2005, 11 new
claims were reported, and 69 existing claims were settled
or dismissed. Our net loss and loss expense reserves for
workers compensation as of December 31, 2004 were
$2.7 million.
Of our net loss and loss expense reserves at December 31,
2004, 49.8% related to workers compensation claims IBNR,
and 2.3% of our net loss and loss expense reserves at
December 31, 2003 was for workers compensation IBNR.
As of December 31, 2004, we had 257 open claims relating to
workers compensation compared to 414 open claims as of
December 31, 2003. During 2004, 13 new claims were
reported, and 170 existing claims were settled or
dismissed. Our net loss and loss expense reserves for
workers compensation as of December 31, 2004 were
$3.4 million.
Operating expenses include the costs to acquire a policy
(included in amortization of deferred policy acquisition costs),
other operating expenses (including corporate expenses) and
interest expense. The following table presents our amortization
of deferred policy acquisition costs, other operating expenses
and related ratios and interest expense for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Amortization of deferred policy acquisition costs
(ADAC)
|
|
$ |
42,935 |
|
|
|
33,872 |
|
|
|
25,237 |
|
Other operating expenses
|
|
|
14,265 |
|
|
|
13,292 |
|
|
|
11,757 |
|
Severance expense
|
|
|
793 |
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADAC and other operating expenses
|
|
|
57,993 |
|
|
|
47,414 |
|
|
|
36,994 |
|
Interest expense on the redemption of Class B shares
|
|
|
|
|
|
|
518 |
|
|
|
|
|
Interest expense
|
|
|
1,873 |
|
|
|
1,498 |
|
|
|
1,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$ |
59,866 |
|
|
|
49,430 |
|
|
|
38,542 |
|
|
|
|
|
|
|
|
|
|
|
Expense ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADAC
|
|
|
24.2 |
% |
|
|
22.8 |
% |
|
|
23.3 |
% |
|
Other operating expenses
|
|
|
8.0 |
|
|
|
8.9 |
|
|
|
10.9 |
|
|
Severance expense
|
|
|
0.4 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense ratio(1)
|
|
|
32.6 |
% |
|
|
31.9 |
% |
|
|
34.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Interest expense is not included in the calculation of the
expense ratio. |
Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004. Operating expenses increased to
$59.9 million for the year ended December 31, 2005
from $49.4 million for the comparable period in 2004. The
majority of the increase was due $9.1 million in additional
amortization of deferred policy acquisition costs that is a
direct result of the growth in our overall book of business. In
addition, included in
45
the ADAC expense for 2004 was an offset of $655,000 of
reductions to amortization expense that related to the
termination of an inter-company pooling agreement and the
implementation of the loss portfolio transfers that occurred on
January 1, 2004.
Other operating expenses also increased by 7.3% as a direct
result of our first year of expenses related to compliance with
Sarbanes Oxley Section 404. In addition, interest expense
increased from $1.5 million in 2004 to $1.9 million in
2005. This increase is a direct result of the increase in
interest rates on our long-term debt.
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003. Operating expenses increased
$10.9 million, or 28.2%, to $49.4 million in 2004 from
$38.5 million for the same period in 2003. The increase was
primarily attributable to an $8.6 million increase in
amortized deferred policy acquisition costs, including
commission expenses, associated with the increase in the volume
of insurance written and other increases to support future
growth. For the year ended December 31, 2004, the increase
is offset by $655,000 of reductions to amortization expense that
related to the termination of the inter-company pooling
agreement and the implementation of the loss portfolio transfers
that occurred on January 1, 2004.
Other operating expenses increased to $13.5 million in 2004
compared to $11.8 million for the same period in 2003. This
increase is a direct result of the current year growth in
overall business. The lower expense ratio in 2004 is due to an
increase in operational efficiencies achieved through a focus on
expense management. In addition, the year ended
December 31, 2004 balance includes $250,000 of expenses
related to a non-recurring severance agreement and $105,000 of
expenses related to the IPO that could not be capitalized.
In addition, in 2004, we incurred $518,000 of interest expense
related to the redemption of our outstanding Class B shares
immediately prior to the IPO.
Income Taxes
We have historically filed a consolidated federal income tax
return that has included all of our subsidiaries. However,
Evergreen filed a separate federal income tax return in 2003.
The statutory rate used in calculating our tax provision was
35.0% in 2005, 2004 and 2003. Income tax expense (benefit)
differed from the amounts computed at the statutory rate as
demonstrated in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Federal income tax expense at statutory rate
|
|
|
35.00 |
% |
|
|
35.00 |
% |
|
|
35.00 |
% |
(Decrease) increase attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nontaxable interest income
|
|
|
(9.77 |
) |
|
|
(2.82 |
) |
|
|
0.07 |
|
|
Dividend received deduction net of proration
|
|
|
(0.33 |
) |
|
|
(0.12 |
) |
|
|
5.63 |
|
|
Difference between the book and tax basis of Evergreen
|
|
|
|
|
|
|
|
|
|
|
9.33 |
|
|
Other nontaxable income
|
|
|
(0.32 |
) |
|
|
(0.04 |
) |
|
|
1.00 |
|
|
Other
|
|
|
|
|
|
|
0.40 |
|
|
|
(0.46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
24.58 |
% |
|
|
32.42 |
% |
|
|
50.57 |
% |
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
ProCentury is a holding company, the principal asset of which is
the common shares of Century. Although we have the capacity to
generate cash through loans from banks and issuances of equity
securities, our primary source of funds to meet our short-term
liquidity needs, including the payment of dividends to our
shareholders and corporate expenses, is dividends from Century.
Centurys principal sources of funds are underwriting
operations, investment income and proceeds from sales and
maturities of investments. Centurys primary use of funds
is to pay claims and operating expenses, to purchase investments
and to make dividend payments to us. ProCenturys future
liquidity is dependent on the ability of Century to pay
dividends.
46
Century is restricted by statute as to the amount of dividends
it may pay without the prior approval of regulatory authorities.
Century may pay dividends to ProCentury without advance
regulatory approval only from unassigned surplus and only to the
extent that all dividends in the current twelve months do not
exceed the greater of 10% of total statutory surplus as of the
end of the prior fiscal year or statutory net income for the
prior year. Using these criteria, the available ordinary
dividend payable by Century to ProCentury during 2006 is
$12.1 million. Century paid ordinary dividends of
$2.5 million in 2005, $6.0 million in 2004, and
$3.0 million in 2003. In addition, Century paid
$3.1 million of extraordinary dividend in 2004 related to
the dividend distribution of Evergreen. Centurys ability
to pay future dividends to ProCentury without advance regulatory
approval is dependent upon maintaining a positive level of
unassigned surplus, which in turn, is dependent upon Century
generating net income in excess of dividends to ProCentury.
Century is required by law to maintain a certain minimum level
of surplus on a statutory basis. Surplus is calculated by
subtracting total liabilities from total admitted assets. The
National Association of Insurance Commissioners
(NAIC) has a risk-based capital standard designed to
identify property and casualty insurers that may be inadequately
capitalized based on inherent risks of each insurers
assets and liabilities and its mix of net written premiums.
Insurers falling below a calculated threshold may be subject to
varying degrees of regulatory action. As of December 31,
2005, the statutory surplus of Century was in excess of the
prescribed risk-based capital requirements that correspond to
any level of regulatory action. Centurys statutory surplus
at December 31, 2005 was $121.8 million and the
authorized control level was $33.6 million.
|
|
|
Year ended December 31, 2005 compared to Year ended
December 31, 2004 |
Consolidated net cash provided by operating activities was
$63.7 million for the year ended December 31, 2005,
compared to $81.0 million for the year ended
December 31, 2004. This decrease was primarily attributable
to the decrease in receivable from subsidiary available-for-sale
that was received in 2004. No such amounts were received in 2005.
Net cash used by investing activities was $64.6 million for
the year ended December 31, 2005, compared to
$141.5 million for the year ended December 31, 2004.
The net cash used by investing activities was higher in 2004
because the proceeds from the IPO were used to purchase fixed
maturities and equity securities.
Net cash used by financing activities was $1.1 million for
the year ended December 31, 2005, compared to net cash
provided by financing activities of $62.0 million for the
year ended December 31, 2004. This fluctuation was
attributable to the 2004 proceeds from the issuance of common
shares related to the IPO, which was partially offset by the
redemption of Class B shares and principal payment on
long-term debt in 2004.
|
|
|
Year ended December 31, 2004 compared to Year ended
December 31, 2003 |
Consolidated net cash provided by operating activities was
$81.0 million for the year ended December 31, 2004,
compared to $34.3 million for the year ended
December 31, 2003. This increase was primarily attributable
to the increase in our total premium and investment income
growth and payments received from Evergreen and Continental
related to the settlement of the termination of the intercompany
pooling agreement and the loss portfolio transfers during 2004.
Net cash used by investing activities was $141.5 million
for the year ended December 31, 2004, compared to
$52.0 million for the year ended December 31, 2003.
This increase was primarily attributable to the proceeds from
the IPO and improved operating cash flows noted above that were
used to purchase fixed maturities and equity securities.
Net cash provided by financing activities was $62.0 million
for the year ended December 31, 2004, compared to
$16.2 million for the year ended December 31, 2003.
This increase was primarily attributable to the 2004 proceeds
from the issuance of common shares related to the current year
IPO, which was partially offset by the redemption of
Class B shares and principal payment on long-term debt in
2004.
Interest on our debt issued to a related party trust is variable
and resets quarterly based on a spread over three-month London
Interbank Offered Rates (LIBOR). As part of our
asset/liability matching program, we have short-term
investments, investments in bond mutual funds, as well as
available cash balances from
47
operations and investment maturities, that are available for
reinvestment during periods of rising or falling interest rates.
The following table summarizes information about our contractual
obligations and commercial commitments. The minimum payments
under these agreements as of December 31, 2005 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Years | |
|
|
| |
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Long Term Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issues to a related party trust(1)(2)
|
|
$ |
2,128 |
|
|
|
2,128 |
|
|
|
2,128 |
|
|
|
2,128 |
|
|
|
2,128 |
|
|
|
72,246 |
|
|
|
82,886 |
|
Loss and loss expense payments, net of the effects of
reinsurance(3)
|
|
|
65,623 |
|
|
|
42,457 |
|
|
|
31,296 |
|
|
|
15,363 |
|
|
|
7,697 |
|
|
|
11,763 |
|
|
|
174,199 |
|
Operating leases on facilities
|
|
|
978 |
|
|
|
998 |
|
|
|
1,018 |
|
|
|
734 |
|
|
|
594 |
|
|
|
1,745 |
|
|
|
6,067 |
|
Other operating leases
|
|
|
245 |
|
|
|
245 |
|
|
|
181 |
|
|
|
15 |
|
|
|
4 |
|
|
|
|
|
|
|
690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$ |
68,974 |
|
|
|
45,828 |
|
|
|
34,623 |
|
|
|
18,240 |
|
|
|
10,423 |
|
|
|
85,754 |
|
|
|
263,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Amounts include interest payments associated with these
obligations using applicable interest rates as of
December 31, 2005. |
|
(2) |
In connection with the adoption of FIN 46R, ProCentury has
deconsolidated the trusts established in connection with the
issuance of trust preferred securities effective
December 31, 2003. As a result, ProCentury reports as a
component of long term debt the junior subordinated debentures
payable by ProCentury to the trusts. See Note 8(b) to our
audited consolidated financial statements included in
Item 8 of this Annual Report on
Form 10-K.
|
|
(3) |
The timing for payment of our estimated losses, net of the
effects of reinsurance is determined by periods based on our
historical claims payment experience. Due to the uncertainty in
estimating the timing of such payments, there is a risk that the
amounts paid in any period can be significantly different than
the amounts disclosed above. |
Line of Credit. ProCentury has a $5.0 million line
of credit. Interest on the note is payable quarterly and is
based on a floating rate of LIBOR plus 2.5%. The note matures on
September 8, 2006. Under the terms of the line of credit,
100% of the common shares of Century are pledged as collateral.
In April 2005, we made a $2.3 million draw on the line of
credit for general corporate purposes. The $2.3 million
draw was paid off on May 17, 2005. Interest paid on the
line of credit was $5,000. Due to the late filing of the
Quarterly Report on
Form 10-Q for the
quarter ended June 30, 2005, we became non-compliant with
the debt covenants in its line of credit. On September 7,
2005, we received a waiver from the bank and now have the
ability to draw on the line of credit. We do not have any
borrowings outstanding under the line of credit at
December 31, 2005.
Reserve Guarantee. In conjunction with the investment in
Evergreen by certain waste companies, Century entered into
agreements with the investors pursuant to which Century
guaranteed that (a) Evergreens loss reserves
(including claim reserves, contingent commissions and
unrecoverable reinsurance balances) as of the date of the
investment will be adequate to pay Evergreens actual
losses incurred prior to that date and (b) that
Evergreens net unearned premiums for business in force, as
reflected in Evergreens balance sheet at that date, will
not run off at more than a 100% combined ratio. An estimate of
these guarantees was made and a reserve for $919,000 is
reflected as an other operating expense in the accompanying
audited consolidated statement of operations for the year ended
December 31, 2003. In 2004, this agreement was assumed by
Evergreen.
Given our historical cash flow, we believe cash flow from
operating activities in 2006 will provide sufficient liquidity
for our operations, as well as to satisfy debt service
obligations and to pay other operating expenses. Although we
anticipate that we will be able to meet our cash requirements,
we can give no assurance in this regard.
48
Investment Portfolio
Our investment strategy is designed to capitalize on our ability
to generate positive cash flow from our underwriting activities.
Preservation of capital is our first priority, with a secondary
focus on maximizing appropriate risk adjusted return. We seek to
maintain sufficient liquidity from operations, investing and
financing activities to meet our anticipated insurance
obligations and operating and capital expenditure needs. The
majority of our fixed-maturity portfolio is rated investment
grade to protect investments. Our investment portfolio is
managed by three outside independent investment managers that
operate under investment guidelines approved by Centurys
investment committee. Centurys investment committee meets
at least quarterly and reports to ProCenturys board of
directors. In addition, we employ stringent diversification
rules and balance our investment credit risk and related
underwriting risks to minimize total potential exposure to any
one security. In limited circumstances, we will invest in
non-investment grade fixed maturity securities that have an
appropriate risk adjusted return, subject to satisfactory credit
analysis performed by us and our investment managers. Our cash
and investment portfolio totaled $366.4 million as of
December 31, 2005 and is summarized by type of investment
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of | |
|
|
Amount | |
|
Portfolio | |
|
|
| |
|
| |
|
|
(Dollars in thousands) | |
Fixed-maturity:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$ |
3,725 |
|
|
|
1.0 |
% |
|
Agencies not backed by the full faith and credit by the
U.S. Government
|
|
|
15,335 |
|
|
|
4.2 |
|
|
Corporate securities
|
|
|
35,853 |
|
|
|
9.8 |
|
|
Mortgage-backed securities
|
|
|
40,061 |
|
|
|
10.9 |
|
|
Asset-backed securities
|
|
|
39,152 |
|
|
|
10.7 |
|
|
Collateralized mortgage obligations
|
|
|
27,352 |
|
|
|
7.5 |
|
|
Obligations of states and political subdivisions
|
|
|
142,282 |
|
|
|
38.8 |
|
|
|
|
|
|
|
|
|
|
Total fixed-maturity
|
|
|
303,760 |
|
|
|
82.9 |
|
|
|
|
|
|
|
|
Cash and short-term investments
|
|
|
17,857 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Bond mutual funds
|
|
|
17,852 |
|
|
|
4.9 |
|
|
Preferred shares
|
|
|
22,337 |
|
|
|
6.1 |
|
|
Common shares
|
|
|
4,604 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
44,793 |
|
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
366,410 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
At December 31, 2005, our fixed-maturity portfolio of
$303.8 million represented 82.9% of the carrying value of
our total of cash and investments. Standard &
Poors Rating Services (Standard &
Poors) or Moodys Investors Service, Inc.
(Moodys) rated 89.3% of these securities
A or better. Equity securities, which consist of
preferred and common shares and bond mutual funds, totaled
$44.8 million or 12.2% of total cash and investments. The
following is a summary of the credit quality of the
fixed-maturity portfolio at December 31, 2005:
|
|
|
|
|
|
AAA
|
|
|
69.0 |
% |
AA
|
|
|
14.2 |
|
A
|
|
|
6.1 |
|
BBB
|
|
|
2.8 |
|
Below BBB
|
|
|
7.9 |
|
|
|
|
|
|
Total
|
|
|
100.0 |
% |
|
|
|
|
49
At December 31, 2005, our investment portfolio contained
corporate fixed-maturity and corporate equity securities with a
fair value of $58.2 million. The following is a summary of
these securities by industry segment at December 31, 2005:
|
|
|
|
|
|
Financial
|
|
|
60.3 |
% |
Consumer, non-cyclical
|
|
|
13.3 |
|
Utilities
|
|
|
8.0 |
|
Energy
|
|
|
2.7 |
|
Industrial
|
|
|
6.9 |
|
Consumer, cyclical
|
|
|
2.2 |
|
Communications
|
|
|
4.6 |
|
Basic materials
|
|
|
1.8 |
|
Governments
|
|
|
0.2 |
|
|
|
|
|
|
Total
|
|
|
100.0 |
% |
|
|
|
|
At December 31, 2005, the investment portfolio contained
$106.6 million of mortgage-backed, asset-backed and
collateralized mortgage obligations. Of these securities, 79.8%
were rated AA or better and 78.7% were rated
AAA by Standard & Poors or the
equivalent rating by Moodys. These securities are publicly
registered and had fair values obtained from independent pricing
services. Changes in estimated cash flows due to changes in
prepayment assumptions from the original purchase assumptions
are revised based on current interest rates and the economic
environment. We had no derivative financial instruments, real
estate or mortgages in the investment portfolio at
December 31, 2005.
Under our accounting policy for equity securities and
fixed-maturity securities an impairment is deemed to be
other-than-temporary unless we have both the ability and intent
to hold the investment for a reasonable period until the
securitys forecasted recovery and evidence exists
indicating that recovery will occur within a reasonable period
of time.
For other fixed-maturity and equity securities, an
other-than-temporary impairment charge is taken when we do not
have the ability and intent to hold the security until the
forecasted recovery or if it is no longer probable that we will
recover all amounts due under the contractual terms of the
security. Many criteria are considered during this process
including, but not limited to, the current fair value as
compared to amortized cost or cost, as appropriate, of the
security; the amount and length of time a securitys fair
value has been below amortized cost or cost; specific credit
issues and financial prospects related to the issuer; our intent
to hold or dispose of the security; and current economic
conditions.
Additionally, for certain securitized financial assets with
contractual cash flows (including asset-backed securities), FASB
Emerging Task Force (EITF) 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets,
requires the Company to periodically update its best
estimate of cash flows over the life of the security. If
management determines that the fair value of a securitized
financial asset is less than its carrying amount and there has
been a decrease in the present value of the estimated cash flows
since the last revised estimate, considering both timing and
amount, then an other than-temporary impairment is
recognized.
Other-than-temporary impairment losses result in a permanent
reduction to the cost basis of the underlying investment. For
the year ended December 31, 2005, two fixed maturity
securities were written down in the aggregate amount of
$150,000, which was included as a realized loss in the
consolidated statement of operations. No other-than-temporary
declines were realized in the year ended December 31, 2004.
For the year ended December 31, 2003 one fixed maturity
security was written down in the amount of $87,000, which was
included as a realized loss in the consolidated statement of
operations.
50
The estimated fair value, related gross unrealized losses, and
the length of time that the securities have been impaired for
available-for-sale securities that are considered temporarily
impaired are as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
Less Than 12 Months | |
|
12 Months or Longer | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
Estimated | |
|
Gross | |
|
Estimated | |
|
Gross | |
|
Estimated | |
|
Gross | |
|
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
|
|
Value | |
|
Loss | |
|
Value | |
|
Loss | |
|
Value | |
|
Loss | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$ |
2,097 |
|
|
|
(18 |
) |
|
|
1,329 |
|
|
|
(35 |
) |
|
|
3,426 |
|
|
|
(53 |
) |
|
Agencies not backed by the full faith and credit of the
U.S. Government
|
|
|
6,497 |
|
|
|
(44 |
) |
|
|
7,604 |
|
|
|
(186 |
) |
|
|
14,101 |
|
|
|
(230 |
) |
|
Obligations of states and political subdivisions
|
|
|
73,534 |
|
|
|
(538 |
) |
|
|
30,571 |
|
|
|
(499 |
) |
|
|
104,105 |
|
|
|
(1,037 |
) |
|
Corporate securities
|
|
|
15,042 |
|
|
|
(357 |
) |
|
|
15,158 |
|
|
|
(519 |
) |
|
|
30,200 |
|
|
|
(876 |
) |
|
Mortgage-backed securities
|
|
|
33,314 |
|
|
|
(680 |
) |
|
|
6,208 |
|
|
|
(200 |
) |
|
|
39,522 |
|
|
|
(880 |
) |
|
Collateralized mortgage obligations
|
|
|
17,004 |
|
|
|
(358 |
) |
|
|
9,055 |
|
|
|
(248 |
) |
|
|
26,059 |
|
|
|
(606 |
) |
|
Asset-backed securities
|
|
|
18,521 |
|
|
|
(393 |
) |
|
|
7,821 |
|
|
|
(242 |
) |
|
|
26,342 |
|
|
|
(635 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
166,009 |
|
|
|
(2,388 |
) |
|
|
77,746 |
|
|
|
(1,929 |
) |
|
|
243,755 |
|
|
|
(4,317 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
10,523 |
|
|
|
(490 |
) |
|
|
3,873 |
|
|
|
(305 |
) |
|
|
14,396 |
|
|
|
(795 |
) |
|
Bond mutual funds
|
|
|
8,305 |
|
|
|
(390 |
) |
|
|
9,095 |
|
|
|
(289 |
) |
|
|
17,400 |
|
|
|
(679 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18,828 |
|
|
|
(880 |
) |
|
|
12,968 |
|
|
|
(594 |
) |
|
|
31,796 |
|
|
|
(1,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand Total
|
|
$ |
184,837 |
|
|
|
(3,268 |
) |
|
|
90,714 |
|
|
|
(2,523 |
) |
|
|
275,551 |
|
|
|
(5,791 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, the Company had 104 fixed income
securities and 10 equity securities that have been in an
unrealized loss position for one year or longer. Of the fixed
income securities, 103 are investment grade, of which 101 of
these securities are rated A1/ A or better (including 70
securities which are rated AAA). The one remaining
non-investment grade fixed income security is rated BB- and has
a fair value equal to 99.8% of its book value as of
December 31, 2005. One of the equity securities that has
been in an unrealized loss position for one year or longer
relates to a closed end preferred stock fund, which continues to
pay its regular dividend on a monthly basis and has an
underlying net asset value per share that exceeds its price per
share as of December 31, 2005. One of the equity securities
relates to an investment in an open end, high quality short
duration bond fund, of which the underlying assets are all rated
AAA. Finally, the eight remaining equity securities that have
been in an unrealized loss position for one year or longer
relate to preferred share investments in issuers each of which
has shown an improved financial performance during 2005. In
addition, these eight equity securities have an aggregate fair
market value of equal to 95.7% of their book value as of
December 31, 2005. All one hundred and four of the fixed
income securities are current on interest and principal and all
ten of the equity securities continue to pay dividends at a
level consistent with the prior year. Management believes the
declines are temporary and are not indicative of
other-than-temporary impairments.
Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential economic loss principally arising
from adverse changes in the fair value of financial instruments.
The major components of market risk affecting us are credit
risk, equity price risk and interest rate risk.
51
Credit Risk. Credit risk is the potential economic loss
principally arising from adverse changes in the financial
condition of a specific debt issuer. We attempt to address this
risk by investing in fixed-maturity securities that are either
investment grade, which are those bonds rated BBB-
or higher by Standard & Poors or securities that
although not investment grade, meet our credit requirements and
targeted risk adjusted return. We also independently and through
our outside independent investment managers, monitor the
financial condition of all of the issuers of fixed-maturity
securities in our portfolio. We utilize a rating change report,
a rating watch report and a focus list as part of this process.
Finally, we employ stringent diversification rules that limit
our credit exposure to any single issuer.
Equity Price Risk. Equity price risk is the potential
that we will incur economic loss due to decline in common stock
prices. We attempt to manage this risk by focusing on a
long-term, conservative, value oriented, dividend driven
investment philosophy for our equity portfolio. The equity
securities in our portfolio are primarily
mid-to-large
capitalization issues with strong dividend performance. Our
strategy remains one of value investing, with security selection
taking precedence over market timing. We also employ stringent
diversification rules that limit our exposure to any individual
stock.
Interest Rate Risk. We had fixed-maturity, preferred
shares and bond mutual fund investments with a fair value of
$343.9 million at December 31, 2005 that are subject
to interest rate risk. We attempt to manage our exposure to
interest rate risk through a disciplined asset/liability
matching and capital management process. In the management of
this risk, the characteristics of duration, credit and
variability of cash flows are critical elements. These risks are
assessed regularly and balanced within the context of our
liability and capital position.
The table below summarizes our interest rate risk. It
illustrates the sensitivity of the fair value of fixed-maturity,
preferred share and bond mutual fund investments to selected
hypothetical changes in interest rates at December 31,
2005. The selected scenarios are not predictions of future
events, but rather illustrate the effect that such events may
have on the fair value of the fixed-maturity, preferred share
and bond mutual fund portfolio and shareholders equity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical Percentage | |
|
|
|
|
|
|
Increase (Decrease) in | |
|
|
|
|
Estimated | |
|
| |
|
|
Estimated | |
|
Change in | |
|
Fair | |
|
Shareholders | |
Hypothetical Change in Interest Rates |
|
Fair Value | |
|
Fair Value | |
|
Value | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
200 basis point increase
|
|
$ |
312,767 |
|
|
|
(31,171 |
) |
|
|
(9.1 |
)% |
|
|
(25.7 |
)% |
100 basis point increase
|
|
|
328,237 |
|
|
|
(15,702 |
) |
|
|
(4.6 |
)% |
|
|
(13.0 |
)% |
No change
|
|
|
343,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
100 basis point decrease
|
|
|
359,553 |
|
|
|
15,614 |
|
|
|
4.5 |
% |
|
|
12.9 |
% |
200 basis point decrease
|
|
|
374,847 |
|
|
|
30,908 |
|
|
|
9.0 |
% |
|
|
25.5 |
% |
Accounting Standards
See note 1 of notes to our consolidated financial
statements for a discussion of recently issued accounting
pronouncements.
|
|
Item 7A. |
Quanitative and Qualitative Disclosures about Market
Risk |
The information required by Item 7A is included in
Item 7 on pages of this report.
52
|
|
Item 8. |
Financial Statements and Supplementary Data |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page | |
|
|
| |
Financial Statements:
|
|
|
|
|
|
|
|
54 |
|
|
|
|
56 |
|
|
|
|
57 |
|
|
|
|
58 |
|
|
|
|
59 |
|
|
|
|
60 |
|
Financial Statement Schedules:
|
|
|
|
|
|
|
|
92 |
|
|
|
|
93 |
|
|
|
|
96 |
|
|
|
|
97 |
|
|
|
|
98 |
|
|
|
|
99 |
|
53
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
ProCentury Corporation:
We have audited the accompanying consolidated balance sheets of
ProCentury Corporation and subsidiaries (the Company) as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, shareholders equity, and cash
flows for each of the years in the three-year period ended
December 31, 2005. These consolidated financial statements
and financial statement schedules are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2005 and 2004,
and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2005,
in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth
therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated March 15, 2006 expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.
/s/ KPMG LLP
March 15, 2006
54
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
ProCentury Corporation:
We have audited managements assessment, included in the
accompanying Management Report on Internal Control Over
Financial Reporting contained in Item 9A, Controls and
Procedures, of ProCentury Corporation and subsidiaries
(the Company) 2005 Annual Report on
Form 10-K, that
the Company maintained effective internal control over financial
reporting as of December 31, 2005, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).The
Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
U.S. generally accepted accounting principles. A
companys internal control over financial reporting
includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that ProCentury
Corporation and subsidiaries maintained effective internal
control over financial reporting as of December 31, 2005,
is fairly stated, in all material respects, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2005, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of ProCentury Corporation and
subsidiaries as of December 31, 2005 and 2004, and the
related consolidated statements of operations,
shareholders equity, and cash flows for each of the years
in the three-year period ended December 31, 2005, and our
report dated March 15, 2006 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
March 15, 2006
55
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Consolidated Balance Sheets
December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
ASSETS |
Investments:
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value (amortized cost 2005,
$306,237; 2004, $262,470)
|
|
$ |
302,632 |
|
|
|
263,401 |
|
|
|
Held-to-maturity, at amortized cost (fair value 2005, $1,118;
2004, $1,156)
|
|
|
1,128 |
|
|
|
1,142 |
|
|
Equities (available-for-sale):
|
|
|
|
|
|
|
|
|
|
|
Equity securities, at fair value (cost 2005, $27,521; 2004,
$17,944)
|
|
|
26,941 |
|
|
|
18,228 |
|
|
|
Bond mutual funds, at fair value (cost 2005, $18,516; 2004,
$18,943)
|
|
|
17,852 |
|
|
|
18,921 |
|
|
Short-term investments, at amortized cost
|
|
|
12,229 |
|
|
|
5,584 |
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
360,782 |
|
|
|
307,276 |
|
Cash
|
|
|
5,628 |
|
|
|
7,732 |
|
Premiums in course of collection, net
|
|
|
14,849 |
|
|
|
10,696 |
|
Deferred policy acquisition costs
|
|
|
20,649 |
|
|
|
17,411 |
|
Prepaid reinsurance premiums
|
|
|
10,989 |
|
|
|
9,382 |
|
Reinsurance recoverable on paid losses, net
|
|
|
6,422 |
|
|
|
3,897 |
|
Reinsurance recoverable on unpaid losses, net
|
|
|
37,448 |
|
|
|
29,485 |
|
Deferred federal income tax asset
|
|
|
9,151 |
|
|
|
5,442 |
|
Other assets
|
|
|
8,227 |
|
|
|
3,606 |
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
474,145 |
|
|
|
394,927 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Loss and loss expense reserves
|
|
$ |
211,647 |
|
|
|
153,236 |
|
Unearned premiums
|
|
|
95,631 |
|
|
|
82,135 |
|
Long term debt
|
|
|
25,000 |
|
|
|
25,000 |
|
Accrued expenses and other liabilities
|
|
|
6,893 |
|
|
|
6,703 |
|
Reinsurance balances payable
|
|
|
2,572 |
|
|
|
2,348 |
|
Collateral held
|
|
|
11,014 |
|
|
|
7,008 |
|
Federal income taxes payable
|
|
|
185 |
|
|
|
3,260 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$ |
352,942 |
|
|
|
279,690 |
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
Common stock, without par value:
|
|
|
|
|
|
|
|
|
|
|
Common shares issued and outstanding
13,211,019 shares at December 31, 2005 and
13,155,995 shares issued and outstanding at
December 31, 2004
|
|
$ |
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
100,202 |
|
|
|
100,110 |
|
|
Retained earnings
|
|
|
24,846 |
|
|
|
15,727 |
|
|
Unearned share compensation
|
|
|
(695 |
) |
|
|
(1,420 |
) |
|
Accumulated other comprehensive (loss) income, net of taxes
|
|
|
(3,150 |
) |
|
|
820 |
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
121,203 |
|
|
|
115,237 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
474,145 |
|
|
|
394,927 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
56
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Consolidated Statements of Operations
Years ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Premiums earned
|
|
$ |
177,630 |
|
|
|
148,702 |
|
|
|
108,294 |
|
Net investment income
|
|
|
14,487 |
|
|
|
10,048 |
|
|
|
6,499 |
|
Net realized investment (losses) gains
|
|
|
(326 |
) |
|
|
50 |
|
|
|
1,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
191,791 |
|
|
|
158,800 |
|
|
|
116,725 |
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses
|
|
|
118,346 |
|
|
|
89,066 |
|
|
|
81,004 |
|
Amortization of deferred policy acquisition costs
|
|
|
42,935 |
|
|
|
33,872 |
|
|
|
25,237 |
|
Other operating expenses
|
|
|
14,265 |
|
|
|
13,292 |
|
|
|
11,757 |
|
Severance expense
|
|
|
793 |
|
|
|
250 |
|
|
|
|
|
Interest expense
|
|
|
1,873 |
|
|
|
1,498 |
|
|
|
1,548 |
|
Interest expense on the redemption of Class B shares
|
|
|
|
|
|
|
518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
178,212 |
|
|
|
138,496 |
|
|
|
119,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before loss on sale of minority interest in
subsidiary, net
|
|
|
13,579 |
|
|
|
20,304 |
|
|
|
(2,821 |
) |
Loss on sale of minority interest in subsidiary, net of
transaction fees
|
|
|
|
|
|
|
|
|
|
|
(503 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest and income tax
|
|
|
13,579 |
|
|
|
20,304 |
|
|
|
(3,324 |
) |
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(409 |
) |
Income tax expense (benefit)
|
|
|
3,338 |
|
|
|
6,583 |
|
|
|
(1,681 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before discontinued operations
|
|
|
10,241 |
|
|
|
13,721 |
|
|
|
(1,234 |
) |
Discontinued operations, net of tax
|
|
|
|
|
|
|
1,259 |
|
|
|
1,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
10,241 |
|
|
|
14,980 |
|
|
|
314 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before discontinued operations
|
|
$ |
0.78 |
|
|
|
1.29 |
|
|
|
(0.25 |
) |
|
Discontinued operations, net of tax
|
|
|
|
|
|
|
0.12 |
|
|
|
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
0.78 |
|
|
|
1.41 |
|
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before discontinued operations
|
|
$ |
0.78 |
|
|
|
1.29 |
|
|
|
(0.25 |
) |
|
Discontinued operations, net of tax
|
|
|
|
|
|
|
0.12 |
|
|
|
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
0.78 |
|
|
|
1.41 |
|
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average of shares outstanding basic
|
|
|
13,060,509 |
|
|
|
10,623,645 |
|
|
|
5,000,532 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average of shares outstanding diluted
|
|
|
13,129,425 |
|
|
|
10,653,316 |
|
|
|
5,000,532 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
57
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Consolidated Statements of Shareholders Equity and
Comprehensive Income
Years ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
SHAREHOLDERS EQUITY |
Capital stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Stock issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
100,110 |
|
|
|
26,866 |
|
|
|
26,460 |
|
|
Issuance of common shares
|
|
|
|
|
|
|
77,931 |
|
|
|
|
|
|
Issuance costs
|
|
|
|
|
|
|
(1,298 |
) |
|
|
|
|
|
Redemption of Class B shares
|
|
|
|
|
|
|
(5,000 |
) |
|
|
|
|
|
Share compensation under employee share based award plans
|
|
|
92 |
|
|
|
1,611 |
|
|
|
|
|
|
Gain on sale of minority interest in subsidiary, net of tax
|
|
|
|
|
|
|
|
|
|
|
406 |
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
100,202 |
|
|
|
100,110 |
|
|
|
26,866 |
|
|
|
|
|
|
|
|
|
|
|
Retained earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
15,727 |
|
|
|
8,297 |
|
|
|
7,983 |
|
|
Net income
|
|
|
10,241 |
|
|
|
14,980 |
|
|
|
314 |
|
|
Dividend of subsidiary available for sale
|
|
|
|
|
|
|
(7,025 |
) |
|
|
|
|
|
Dividends declared ($0.085/share for 2005 and $0.04/share for
2004)
|
|
|
(1,122 |
) |
|
|
(525 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
24,846 |
|
|
|
15,727 |
|
|
|
8,297 |
|
|
|
|
|
|
|
|
|
|
|
Unearned share compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
(1,420 |
) |
|
|
|
|
|
|
|
|
|
Shares issued under share compensation plans
|
|
|
|
|
|
|
(1,611 |
) |
|
|
|
|
|
Vesting of restricted shares
|
|
|
324 |
|
|
|
191 |
|
|
|
|
|
|
Shares forfeited under share compensation plans
|
|
|
401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
(695 |
) |
|
|
(1,420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive (loss) income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
820 |
|
|
|
1,234 |
|
|
|
1,953 |
|
|
Unrealized holding (losses) gains arising during the period, net
of reclassification adjustment
|
|
|
(3,970 |
) |
|
|
144 |
|
|
|
(562 |
) |
|
Unrealized holding losses arising during the period,
discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(157 |
) |
|
Dividend of subsidiary available for sale
|
|
|
|
|
|
|
(558 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
(3,150 |
) |
|
|
820 |
|
|
|
1,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$ |
121,203 |
|
|
|
115,237 |
|
|
|
36,397 |
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
Net income
|
|
$ |
10,241 |
|
|
|
14,980 |
|
|
|
314 |
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains arising during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding (losses) gains arising during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
(6,368 |
) |
|
|
298 |
|
|
|
1,054 |
|
|
|
Related federal income tax benefit (expense)
|
|
|
2,186 |
|
|
|
(121 |
) |
|
|
(360 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (losses) gains
|
|
|
(4,182 |
) |
|
|
177 |
|
|
|
694 |
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for (losses) gains included in net
income Gross
|
|
|
(326 |
) |
|
|
50 |
|
|
|
1,932 |
|
|
|
Related federal income tax benefit (expense)
|
|
|
114 |
|
|
|
(18 |
) |
|
|
(676 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reclassification adjustment
|
|
|
(212 |
) |
|
|
32 |
|
|
|
1,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
(3,970 |
) |
|
|
144 |
|
|
|
(562 |
) |
|
|
|
|
Other comprehensive loss, discontinued operations
|
|
|
|
|
|
|
(558 |
) |
|
|
(157 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
|
(3,970 |
) |
|
|
(414 |
) |
|
|
(719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$ |
6,271 |
|
|
|
14,566 |
|
|
|
(405 |
) |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
58
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Consolidated Statements of Cash Flows
Years ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
10,241 |
|
|
|
14,980 |
|
|
|
314 |
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred retroactive reinsurance gain
|
|
|
|
|
|
|
|
|
|
|
(2,506 |
) |
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(409 |
) |
|
|
Net realized investment losses (gains)
|
|
|
326 |
|
|
|
(50 |
) |
|
|
(1,932 |
) |
|
|
Gain on the sale of minority interest in subsidiary
|
|
|
|
|
|
|
|
|
|
|
(313 |
) |
|
|
Deferred federal income tax benefit
|
|
|
(1,781 |
) |
|
|
(2,512 |
) |
|
|
(3,205 |
) |
|
|
Federal income tax expense included in additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
(1,418 |
) |
|
|
Discontinued operations
|
|
|
|
|
|
|
(1,259 |
) |
|
|
(1,548 |
) |
|
|
Share compensation under employee share based award plans
|
|
|
817 |
|
|
|
191 |
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums in course of collection, net
|
|
|
(4,153 |
) |
|
|
(1,525 |
) |
|
|
(10,224 |
) |
|
|
|
Deferred policy acquisition costs
|
|
|
(3,238 |
) |
|
|
(5,697 |
) |
|
|
(5,441 |
) |
|
|
|
Prepaid reinsurance premiums
|
|
|
(1,607 |
) |
|
|
(2,682 |
) |
|
|
389 |
|
|
|
|
Reinsurance recoverable on paid, unpaid losses, and retroactive,
net
|
|
|
(10,488 |
) |
|
|
8,660 |
|
|
|
7,160 |
|
|
|
|
Federal income taxes payable
|
|
|
(3,075 |
) |
|
|
1,196 |
|
|
|
1,165 |
|
|
|
|
Losses and loss expense reserves
|
|
|
58,411 |
|
|
|
24,000 |
|
|
|
38,381 |
|
|
|
|
Unearned premiums
|
|
|
13,496 |
|
|
|
19,996 |
|
|
|
23,164 |
|
|
|
|
Collateral held
|
|
|
4,006 |
|
|
|
1,292 |
|
|
|
1,509 |
|
|
|
|
Funds held under retroactive reinsurance contract
|
|
|
|
|
|
|
|
|
|
|
(11,089 |
) |
|
|
|
Receivable from subsidiary available for sale
|
|
|
|
|
|
|
26,687 |
|
|
|
(12,034 |
) |
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
14,032 |
|
|
|
|
Other, net
|
|
|
702 |
|
|
|
(2,303 |
) |
|
|
(1,647 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
63,657 |
|
|
|
80,974 |
|
|
|
34,348 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of equity securities
|
|
|
(55,903 |
) |
|
|
(60,755 |
) |
|
|
(114,454 |
) |
|
Purchase of fixed maturity securities available-for-sale
|
|
|
(120,162 |
) |
|
|
(193,030 |
) |
|
|
(129,094 |
) |
|
Purchase of fixed maturity securities held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
(1,069 |
) |
|
Proceeds from sales of equity securities
|
|
|
46,246 |
|
|
|
48,797 |
|
|
|
111,206 |
|
|
Proceeds from sales and maturities of fixed maturities
available-for-sale
|
|
|
75,139 |
|
|
|
49,807 |
|
|
|
93,232 |
|
|
Proceeds from maturities of fixed maturities held-to-maturity
|
|
|
|
|
|
|
325 |
|
|
|
1,100 |
|
|
Acquisition, net of cash acquired
|
|
|
(1,041 |
) |
|
|
|
|
|
|
|
|
|
Net proceeds from (purchases) sale of short-term investments
|
|
|
(6,645 |
) |
|
|
12,060 |
|
|
|
(3,312 |
) |
|
Changes in receivable/payable for securities
|
|
|
(2,273 |
) |
|
|
1,250 |
|
|
|
308 |
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(9,909 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(64,639 |
) |
|
|
(141,546 |
) |
|
|
(51,992 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows (used) provided by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
77,931 |
|
|
|
|
|
|
Issuance costs
|
|
|
|
|
|
|
(1,298 |
) |
|
|
|
|
|
Proceeds from the issuance of Trust Preferred Securities
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
Redemption of Class B shares
|
|
|
|
|
|
|
(5,000 |
) |
|
|
|
|
|
Principal payment on long term debt
|
|
|
|
|
|
|
(9,133 |
) |
|
|
(680 |
) |
|
Dividend paid to shareholders
|
|
|
(1,122 |
) |
|
|
(525 |
) |
|
|
|
|
|
Draw on line of credit
|
|
|
2,300 |
|
|
|
|
|
|
|
|
|
|
Principal payment on line of credit
|
|
|
(2,300 |
) |
|
|
|
|
|
|
|
|
|
Gain on sale of minority interest in subsidiary
|
|
|
|
|
|
|
|
|
|
|
(625 |
) |
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
7,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by financing activities
|
|
|
(1,122 |
) |
|
|
61,975 |
|
|
|
16,195 |
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(2,104 |
) |
|
|
1,403 |
|
|
|
(1,449 |
) |
Cash and equivalents at beginning of year
|
|
|
7,732 |
|
|
|
6,329 |
|
|
|
7,778 |
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents at end of year
|
|
$ |
5,628 |
|
|
|
7,732 |
|
|
|
6,329 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
1,873 |
|
|
|
1,632 |
|
|
|
1,521 |
|
|
|
|
|
|
|
|
|
|
|
|
Federal income taxes paid
|
|
$ |
8,194 |
|
|
|
7,900 |
|
|
|
3,540 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
59
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial Statements
|
|
(1) |
Basis of Presentation |
ProCentury Corporation (formerly known as ProFinance Holdings
Corporation) (ProCentury or the Company) was formed on
July 17, 2000 by Colonial Banc Corp., Richmond Mutual
Bancorporation, Inc., DCB Financial Corp., Ohio Heritage Bancorp
Inc., Ohio Valley Banc Corp., Stonehenge Opportunity Fund, LLC,
and a group of individual investors including members of
management. On July 7, 2003, ProFinance Holdings
Corporations name was changed to ProCentury Corporation.
On October 5, 2000, ProCentury acquired Century Surety
Company (Century) (and its subsidiaries, Evergreen National
Indemnity Company (Evergreen), Continental Heritage Insurance
Company (Continental), and CSC Insurance Agency, Inc.) from
Century Business Services, Inc. and acquired ProCentury
Insurance Agency, Inc. (PIA) (formerly Century Workers
Compensation Agency, Inc.) from Avalon National Corporation.
ProCentury and its subsidiaries are collectively referred to
herein as the Company.
In 2001, ProCentury authorized 5,000 nonvoting $0 par
Class B and 10,000 nonvoting $0 par Class C
common shares. In September 2001, ProCentury issued 531.68
Class B shares to an unrelated third party for
$5.0 million.
In 2002 and 2003, the Company sold approximately 69.65% of the
outstanding shares of Evergreen in a series of transactions, see
further information in Note 3. As of December 31,
2003, the Company owned 65.06% of the voting shares of Evergreen
and approximately 23.06% of the economic interest in Evergreen.
On April 26, 2004, the Company issued 8,000,000 common
shares in an initial public offering (the IPO) and
received net proceeds (before expenses) of $77.9 million,
based on an initial public offering price of $10.50. The
following transactions occurred in connection with the IPO:
|
|
|
|
|
Immediately prior to the completion of the IPO, each outstanding
Class A common share was converted into 500 common shares.
After the conversion, but prior to the completion of the IPO,
the Company had 4,999,995 Class A common shares
outstanding. The share conversion is reflected for all periods
presented; |
|
|
|
Immediately prior to the completion of the IPO, the common
shares of Evergreen were distributed as dividends from Century
to ProCentury and then by ProCentury to ProCenturys
existing Class A shareholders; |
|
|
|
The Company issued 8,000,000 common shares and received net
proceeds (before expenses) of $77.9 million; |
|
|
|
The Company granted 101,200 restricted common shares and 364,000
stock options to certain employees of ProCentury; |
|
|
|
The Company repaid $8.7 million of bank indebtedness
outstanding at the closing of the IPO; |
|
|
|
The Company redeemed all of its outstanding Class B common
shares for an aggregate redemption price of $5.0 million
and recorded interest expense of $518,000 in connection with the
redemption; and |
|
|
|
The Company amended its articles of incorporation to eliminate
the authority to issue Class B and Class C common
shares. |
In addition, on August 5, 2004 and March 22, 2005 the
Company issued 54,800 and 55,024, respectively of restricted
common shares to certain executives of ProCentury.
The Company issued 6,000 and 12,000 options to the Board of
Directors on March 22, 2005 and June 1, 2005,
respectively.
60
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
On June 1, 2005, Century acquired 100% of the outstanding
shares of the Firemans Fund of Texas (FFTX) for
$5.9 million. FFTX is a Texas domiciled property and
casualty company licensed in Texas, Oklahoma and California. On
August 16, 2005, FFTX was renamed ProCentury Insurance
Company.
In December of 2005, the Companys board of directors
approved a $10.0 million share repurchase plan. As of
December 31, 2005, no shares have been repurchased under
this plan.
Century markets and underwrites general liability, commercial
property, multi-peril, garage liability and limited bonding
coverages to commercial and individual customers through
independent and affiliated agents throughout the United States.
The Company writes business on both an admitted and nonadmitted
basis in 48 states and the District of Columbia, on an
admitted basis only in five states and on a nonadmitted basis
only in 42 states and the District of Columbia. Century
competes with other property and casualty insurance companies
and is subject to the regulations of certain state and federal
agencies and undergoes periodic financial examinations by those
regulatory authorities.
Following is a description of the most significant risks facing
the Company and how the Company attempts to mitigates those
risks:
|
|
|
|
|
Legal/ Regulatory Risk is the risk that changes in the
legal or regulatory environment in which an insurer operates
will occur and create additional loss costs or expenses not
anticipated by the insurer in pricing its products. That is,
regulatory initiatives designed to reduce insurer profits or new
legal theories may create costs for the insurer beyond those
recorded in the consolidated financial statements. Management
attempts to reduce this risk by underwriting and loss adjusting
practices that identify and minimize the adverse impact of these
risks. |
|
|
|
Credit Risk is the risk that issuers of securities owned
by the Company will default or other parties, including
reinsurers that owe the Company money, will not pay. The Company
attempts to minimize this risk by adhering to a conservative
investment strategy and by maintaining reinsurance and credit
and collection policies. |
|
|
|
Interest Rate Risk is the risk that interest rates will
change and cause a change in the value of an insurers
investments. The Company attempts to mitigate this risk by
attempting to match the maturity schedule of its assets with the
expected payouts of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer
may have to sell assets prior to maturity and recognize a gain
or loss. |
|
|
|
Ratings Risk is the risk that rating agencies change
their outlook or rating of Century. The rating agencies
generally utilize proprietary capital adequacy models in the
process of establishing ratings for Century. Century is at risk
to changes in these models and the impact that changes in the
underlying business that it is engaged in can have on such
models. To help mitigate this risk, Century maintains regular
communications with the rating agencies and evaluates the impact
of significant transactions on such capital adequacy models and
considers the same in the design of transactions to minimize the
adverse impact of this risk. |
|
|
|
Significant Business Concentrations: As of
December 31, 2005, the Company did not have a material
concentration of financial instruments in a single investee or
geographic location. Also, the Company did not have a
concentration of business transactions with a particular
distribution source, a market or geographic area in which
business is conducted that makes it overly vulnerable to a
single event which could cause a severe impact to the
Companys financial position. The Company did, however,
have a concentration of business transactions with a particular
customer. See Note 12(d). |
|
|
|
Reinsurance: The Company has entered into reinsurance
contracts to cede a portion of its business. Total amounts
recoverable under these reinsurance contracts include ceded
reserves, paid and unpaid |
61
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
claims, and certain other amounts, which totaled
$52.3 million as of December 31, 2005. The ceding of
risk does not discharge the original insurer from its primary
obligation to the contract holder. The Company is selective in
its choice of reinsurers and considers numerous factors, the
most important of which are the financial stability of the
reinsurer, its history of responding to claims and its overall
reputation. In an effort to minimize the Companys exposure
to the insolvency of its reinsurers, the Company evaluates the
acceptability and reviews the financial condition of each
reinsurer annually. The Company generally uses only those
reinsurers that have an A.M. Best rating of A-
(excellent) or better and that have at least
$500 million in policyholders surplus, or Lloyds of
London syndicates that have an A.M. Best rating of
A- (excellent) or better. See Note 5. |
|
|
|
Catastrophe Exposures: Certain insurance coverages that
the Company writes includes exposure to catastrophic events such
as hurricanes, tornados, hail storms, winter storms and
freezing. As a result, a single catastrophe occurrence or
destructive weather pattern could materially adversely affect
the results of operations and surplus of our insurance
subsidiaries. The Company attempts to mitigate this risk by
excluding wind peril on non-mobile properties in Florida and
within two counties of the Gulf of Mexico and eastern seaboard.
In addition, the Company maintains a property catastrophe
reinsurance treaty to mitigate future potential catastrophe loss
exposure. The property catastrophe reinsurance coverage in 2005
provided coverage of up to 95% of a loss of $16.0 million
in excess of the Companys loss retention of
$4.0 million per occurrence. |
|
|
(b) |
Summary of Significant Accounting Policies |
The accompanying consolidated financial statements have been
prepared in accordance with U.S. generally accepted
accounting principles (GAAP).
Immediately prior to the completion of the IPO, the common
shares of Evergreen and its wholly owned subsidiary, Continental
were distributed as dividends from Century to ProCentury and
then by ProCentury to ProCenturys existing Class A
shareholders. Prior to the dividends, Evergreen was a 30.35%
controlled subsidiary of Century. The operations of Evergreen
and Continental consisted of ProCenturys historical surety
and assumed workers compensation lines of insurance, which
were re-classified (net of minority interest and income taxes)
as discontinued operations in the accompanying consolidated
financial statements and notes for all periods presented.
In preparing the consolidated financial statements, management
is required to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date
of the consolidated financial statements, and the reported
amounts of revenue and expenses for the reporting period. Actual
results could differ significantly from those estimates.
Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination
of loss and loss expense reserves, the recoverability of
deferred policy acquisition costs, the determination of federal
income taxes, the net realizable value of reinsurance
recoverables, and the determination of other-than-temporary
declines in the fair value of investments. Although considerable
variability is inherent in these estimates, management believes
that the amounts provided are reasonable. These estimates are
continually reviewed and adjusted as necessary. Such adjustments
are reflected in current operations.
The consolidated financial statements include the accounts of
ProCentury and its wholly owned subsidiaries.
62
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
In 2003 the Company owned a controlling interest of Evergreen
and therefore, consolidated 100% of Evergreens assets,
liabilities, revenues, and expenses, with reductions on the
balance sheets and statements of operations for the minority
shareholders proportionate interest in Evergreens
equity and earnings (see Note 3). As of the IPO, Evergreen
is no longer a subsidiary of the Company (see Note 1(a)).
All significant intercompany balances and transactions have been
eliminated.
|
|
(d) |
Investment Securities |
The Company classifies its fixed maturity and equity securities
into one of two categories:
held-to-maturity or
available-for-sale.
Held-to-maturity
securities are those securities that the Company has the ability
and intent to hold the security until maturity. All securities
not classified as
held-to-maturity are
classified as available-for-sale.
Held-to-maturity fixed
maturity securities are recorded at amortized cost, adjusted for
the amortization or accretion of premiums or discounts to
maturity date using the effective interest method.
Available-for-sale securities are recorded at fair value.
Unrealized gains and losses, net of the related tax effect and
minority interest, on available-for-sale securities are excluded
from earnings and are reported as a component of accumulated
other comprehensive income within shareholders equity,
until realized.
For mortgage-backed securities, the Company recognizes income
using a constant effective yield method based on prepayment
assumptions and the estimated economic life of the securities.
When estimated prepayments differ significantly from anticipated
prepayments, the effective yield is recalculated to reflect
actual payments to date and anticipated future payments. Any
resulting adjustment is included in net investment income. All
other investment income is recorded using the interest-method
without anticipating the impact of prepayments.
Realized gains or losses represent the difference between the
book value of securities sold and the proceeds realized upon
sale, and are recorded on the trade date. The Company uses the
specific identification method to determine the cost of
securities sold.
Under the Companys accounting policy for equity securities
and fixed-maturity securities, an impairment is deemed to be
other-than-temporary unless the Company has both the ability and
intent to hold the investment for a reasonable period until the
securitys forecasted recovery and evidence exists
indicating that recovery will occur in a reasonable period of
time.
For other fixed-maturity and equity securities, an
other-than-temporary impairment charge is taken when the Company
does not have the ability and intent to hold the security until
the forecasted recovery or if it is no longer probable that the
Company will recover all amounts due under the contractual terms
of the security. Many criteria are considered during this
process including, but not limited to, the current fair value as
compared to amortized cost or cost, as appropriate, of the
security; the amount and length of time a securitys fair
value has been below amortized cost or cost; specific credit
issues and financial prospects related to the issuer;
managements intent to hold or dispose of the security; and
current economic conditions.
Additionally, for certain securitized financial assets with
contractual cash flows (including asset-backed securities), FASB
Emerging Task Force (EITF) 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets,
requires the Company to periodically update its best estimate of
cash flows over the life of the security. If management
determines that the fair value of a securitized financial asset
is less than its carrying amount and there has been a decrease
in the present value of the estimated cash flows since the last
revised estimate, considering timing and amount, then an
other than-temporary impairment is recognized.
63
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
Other-than-temporary impairment losses result in a permanent
reduction to the cost basis of the underlying investment and are
included in realized gains (losses) in the accompanying
Consolidated Statements of Operations.
Premiums and discounts are amortized or accreted over the life
of the related
held-to-maturity or
available-for-sale security as an adjustment to yield using the
effective interest method. Dividend and interest income is
recognized when earned.
Prior to May 2003, gains or losses resulting from the sale or
issuance of a consolidated subsidiarys stock are included
in the consolidated statements of operations. Beginning in May
2003, such gains or losses are excluded from earnings and are
reported within shareholders equity. See Note 3.
|
|
(e) |
Premiums in Course of Collection |
Premiums in course of collection include amounts due from agents
and amounts relating to assumed reinsurance. These balances are
stated net of certain commission payable amounts, prepaid
agents balances, and allowance for uncollectible premiums
in course of collection. The Company evaluates the
collectibility of premiums in course of collection based on a
combination of factors. In circumstances in which the Company is
aware of a specific customers inability to meet its
financial obligations to the Company, a specific allowance for
bad debt against amounts due is recorded to reduce the net
receivable to the amount believed to be collectible. For all
remaining balances, allowances are recognized for bad debts
based on the length of time the receivables are past due using
the Companys historical experience of write-offs. The
allowance for uncollectible premiums in course of collection was
$58,000 and $79,000, at December 31, 2005 and 2004,
respectively.
|
|
(f) |
Loss and Loss Expense Reserves |
Loss and loss expense reserves represent an estimate of the
expected cost of the ultimate settlement and administration of
losses, based on facts and circumstances then known. The Company
uses actuarial methodologies to assist in establishing these
estimates, including judgments relative to estimates of future
claims severity and frequency, length of time to develop to
ultimate resolution, judicial theories of liability and other
third-party factors that are often beyond our control. Due to
the inherent uncertainty associated with the cost of unsettled
and unreported claims, the ultimate liability may be different
from the original estimate. Such estimates are regularly
reviewed and updated and any resulting adjustments are included
in the current periods results. The loss and loss expense
reserves are not discounted.
|
|
(g) |
Premium Earned and Unearned |
Insurance premiums are earned in proportion to the insurance
coverage provided, which is generally on the daily pro-rata
basis and are stated after deduction for reinsurance placed with
other insurers and reinsurers. The portion of premiums that will
be earned in the future are deferred and reported as unearned
premiums.
The Company records policies that have fully funded limits as
deposit type contracts as they are not considered to transfer
insurance risk.
|
|
(i) |
Deferred Policy Acquisition Costs |
The Company defers commissions, premium taxes and certain other
costs that vary with and are primarily related to the
acquisition of insurance contracts. These costs are capitalized
and charged to expense in proportion to premium revenue
recognized. The method followed in computing deferred policy
acquisition
64
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
costs limits the amount of such deferred costs to their
estimated realizable value, which gives effect to the premium to
be earned, related investment income, anticipated losses and
settlement expenses and certain other costs expected to be
incurred as the premium is earned. Judgments as to ultimate
recoverability of such deferred costs are highly dependent upon
estimated future loss costs associated with the written
premiums. The amounts that are not considered realizable are
charged as an expense through amortization of deferred policy
acquisition costs.
In the ordinary course of business, Century reinsures certain
risks, generally on an
excess-of-loss basis,
with other insurance companies which primarily are rated
A or higher by A.M. Best. Such reinsurance
arrangements serve to limit the Companys maximum loss.
Reinsurance does not discharge the Company from its primary
liability to policyholders, and to the extent that a reinsurer
is unable to meet its obligations, the Company would be liable.
Reinsurance recoverables are determined based in part on the
terms and conditions of reinsurance contracts. Reinsurance
recoverables on paid and unpaid losses, net, are established for
the portion of our loss and loss expense reserves that are ceded
to reinsurers and are reported separately as assets, net of any
valuation allowance. Reinsurance recoverables on paid and unpaid
losses are accounted for and reported separately as assets, net
of any valuation allowance, while ceded premiums payable are
reported separately as liabilities. Reinsurance premiums paid
and reinsurance recoveries on claims incurred are deducted from
the respective revenue and expense accounts. The estimated
valuation allowance on reinsurance recoverables on paid losses
at December 31, 2005 and 2004 was $1.3 million.
|
|
(k) |
Intangibles and Goodwill |
On June 1, 2005, Century acquired 100% of the outstanding
shares of the Firemans Fund of Texas (FFTX) for
$5.9 million. FFTX is a Texas domiciled property and
casualty company licensed in Texas, Oklahoma and California. The
acquisition is part of the Companys long-term plan to
develop business that requires admitted status, as well as its
continued focus on growing its excess and surplus lines
business. On August 16, 2005, FFTX was renamed ProCentury
Insurance Company. The total purchase price of the acquisition
was allocated to the assets and the liabilities acquired based
upon the respective fair values as of the date of acquisition.
Intangible assets included in the purchase were valued at
$375,000. The excess of the fair value of the net identifiable
assets acquired over the purchase price was $240,000 and was
recorded as non-deductible goodwill. In accordance with
Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets,
the amortization of goodwill and indefinite-lived intangible
assets is not permitted. Goodwill and indefinite-lived
intangible assets remain on the balance sheet and are tested for
impairment on an annual basis, or when there is reason to
suspect that their values may have been diminished or impaired.
The indefinite-life intangible assets and goodwill are included
in other assets in the Consolidated Balance Sheets.
ProCentury and its subsidiaries file a consolidated federal
income tax return in accordance with a tax sharing agreement.
Each entity within the consolidated group pays its share of
federal income taxes primarily based on separate return
calculations. ProCenturys tax sharing agreement with its
subsidiaries allowed it to make certain code elections in its
consolidated federal tax return. In the event such code
elections are made, any benefit or liability is the
responsibility of ProCentury and is not accrued or paid by the
subsidiary.
65
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
The Company provides for federal income taxes based on amounts
the Company believes it ultimately will owe. Inherent in the
provision for federal income taxes are estimates regarding the
deductibility of certain items and the realization of certain
tax credits. In the event the ultimate deductibility of certain
items or the realization of certain tax credits differs from
estimates, the Company may be required to significantly change
the provision for federal income taxes recorded in the
consolidated financial statements. Any such change could
significantly affect the amounts reported in the consolidated
statements of income.
The Company utilizes the asset and liability method of
accounting for income tax. Under this method, deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. Under this method, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date. Valuation allowances are established when necessary to
reduce the deferred tax assets to the amounts which are more
likely than not to be realized.
Basic net income per share excludes dilution and is calculated
by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the dilution that could occur if
securities or other contracts to issue common shares (common
share equivalents) were exercised. When inclusion of common
share equivalents increases the EPS or reduces the loss per
share, the effect on earnings is antidilutive. Under these
circumstances, diluted net income per share is computed
excluding the common share equivalents.
Pursuant to disclosure requirements contained in
SFAS No. 128, Earnings per Share, the following
information represents a reconciliation of the numerator and
denominator of the basic and diluted EPS computations contained
in the Companys consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2005 | |
|
|
| |
|
|
Income | |
|
Shares | |
|
Per Share | |
|
|
(Numerator) | |
|
(Denominator) | |
|
Amount | |
|
|
| |
|
| |
|
| |
|
|
(In thousands except per share data) | |
Basic Net Income Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before discontinued operations
|
|
$ |
10,241 |
|
|
|
13,060,509 |
|
|
|
0.78 |
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted common shares
|
|
|
|
|
|
|
68,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
$ |
10,241 |
|
|
|
13,129,425 |
|
|
|
0.78 |
|
|
|
|
|
|
|
|
|
|
|
66
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2004 | |
|
|
| |
|
|
Income | |
|
Shares | |
|
Per Share | |
|
|
(Numerator) | |
|
(Denominator) | |
|
Amount | |
|
|
| |
|
| |
|
| |
|
|
(In thousands except per share data) | |
Basic Net Income Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
$ |
13,721 |
|
|
|
10,623,645 |
|
|
|
1.29 |
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted common shares
|
|
|
|
|
|
|
29,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
$ |
13,721 |
|
|
|
10,653,316 |
|
|
|
1.29 |
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS is the same as Basic EPS for the year ended
December 31, 2003 because the Company had no common share
equivalents granted during that period.
Comprehensive income encompasses all changes in
shareholders equity (except those arising from
transactions with shareholders) and includes net income and
changes in net unrealized investment gains and losses on fixed
maturity investments classified as available-for-sale and equity
securities, net of taxes.
|
|
(o) |
Fair Value Disclosures |
The Company, in estimating its fair value disclosures for
financial instruments, uses the following methods and
assumptions:
|
|
|
|
|
Cash and short-term investments The carrying
amounts reported approximate their fair value. |
|
|
|
Investment securities Fair values for fixed
maturity securities are based on quoted market prices, where
available. For fixed maturity securities not actively traded,
fair values are estimated using values obtained from independent
pricing services. Fair values for equity securities, consisting
of preferred and common stocks and bond mutual funds, are based
on quoted market prices or independent pricing services. Fair
value disclosures for investments are included in Note 2. |
|
|
|
Other The carrying amounts reported for
premiums in the course of collection, reinsurance recoverables,
accrued investment income, and other assets approximate their
fair value. The Companys long term debt, accrued expenses
and other liabilities, collateral, and reinsurance balances
payable are either short term in nature or based on current
market price, which also approximates fair value. |
|
|
(p) |
Share Based Compensation |
The Company follows the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), the Financial
Accounting Standards Board (FASB) Interpretation
No. 44, Accounting for Certain Transactions involving
Stock Compensation (an interpretation of APB Opinion
No. 25), and other related accounting interpretations
for the Companys share option and restricted common share
plans utilizing the intrinsic value method. The
Company also follows the disclosure provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation, for the Companys share option grants, as
amended by SFAS No. 148, Accounting for Stock-Based
Compensation Transition and
67
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
Disclosure; an amendment of FASB Statement No. 123.
This disclosure requires pro forma net income and earnings per
share information, which is calculated assuming the Company has
accounted for its stock option plans under the fair value
method described in SFAS No. 123 and
SFAS No. 148.
If the Company recorded compensation expense for its share
option grants based on the fair value method, the
Companys net income and earnings per share would have been
adjusted to the pro forma amounts as indicated in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except for per | |
|
|
share data) | |
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
10,241 |
|
|
|
14,980 |
|
|
|
314 |
|
|
Add: Share-based employee compensation expense included in
reported net income, net of related tax effects
|
|
|
530 |
|
|
|
124 |
|
|
|
|
|
|
Less: Additional share-based employee compensation expense
determined under fair value-based method for all awards, net of
related tax effects
|
|
|
(824 |
) |
|
|
(677 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
$ |
9,947 |
|
|
|
14,427 |
|
|
|
314 |
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.78 |
|
|
|
1.41 |
|
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
$ |
0.76 |
|
|
|
1.36 |
|
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.78 |
|
|
|
1.41 |
|
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
$ |
0.76 |
|
|
|
1.35 |
|
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
No share option or restricted common share-based compensation
expense is included in reported net income for 2003, as the
Company had no common share equivalents granted during 2003.
The fair values of the share options are estimated on the date
of grant using the Black Scholes option pricing model with the
following weighted average assumptions:
|
|
|
|
|
|
|
Year Ended |
|
|
December 31, 2005 |
|
|
|
Risk free interest rate
|
|
|
3.97% |
|
Dividend yield
|
|
|
0.76% |
|
Volatility factor
|
|
|
23.14% |
|
Weighted average expected option life
|
|
|
7.00 Years |
|
|
|
|
|
|
|
|
Year Ended |
|
|
December 31, 2004 |
|
|
|
Risk free interest rate
|
|
|
3.74% |
|
Dividend yield
|
|
|
0.76% |
|
Volatility factor
|
|
|
23.14% |
|
Weighted average expected option life
|
|
|
6.15 Years |
|
68
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
|
|
(q) |
Recently Issued Accounting Standards |
In December 2004, the FASB revised Statement No. 123
(SFAS 123R), Share-Based Payment, which
requires companies to expense the estimated fair value of
employee stock options and similar awards, for all options
vesting, granted, or modified after the effective date of this
revised statement. The accounting provisions of SFAS 123R
were to become effective for interim periods beginning after
June 15, 2005. In April 2005, the Securities and Exchange
Commission (SEC) adopted a final rule amending
Rule 4-01(a) of
Regulation S-X
regarding the compliance date for SFAS 123R. This ruling
delays the effective date of SFAS 123R to the first interim
or annual reporting period of the registrants first fiscal
year beginning on or after June 15, 2005. As a result, the
accounting provisions of SFAS 123R will become effective
beginning in 2006 for our financial statements. The Company
continues to evaluate the impact of implementing SFAS 123R
and anticipates that it will not differ materially from the
SFAS 123 proforma information provided under Note 1(p).
In May of 2005, the FASB issued SFAS 154, Accounting
Changes and Error Corrections. This Statement replaces,
APB 20, Accounting Changes, and SFAS 3,
Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the
accounting for and reporting of a change in accounting
principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions.
When a pronouncement includes specific transition provisions,
those provisions should be followed. This statement applies to
accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Company will
adopt this guidance prospectively.
In March 2004, the FASB issued EITF Issue
No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments which provides new
guidance for assessing impairment losses on debt and equity
investments. Additionally, EITF Issue
No. 03-1 includes
disclosure requirements for investments that are deemed to be
temporarily impaired. In September 2004, the FASB delayed the
accounting provisions of EITF Issue
No. 03-1; however,
the disclosure requirements remain effective and were adopted
for the year ended December 31, 2004.
Late in 2005, the FASB issued FSP FAS 115-1 and
FAS 124-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.
This FASB Staff Position (FSP) addresses the determination
as to when an investment is considered impaired, whether that
impairment is other than temporary, and the measurement of an
impairment loss. This FSP also includes accounting
considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures
about unrealized losses that have not been recognized as
other-than-temporary impairments. The guidance in this FSP
amends FASB Statements No. 115, Accounting for
Certain Investments in Debt and Equity Securities, and
No. 124, Accounting for Certain Investments Held by
Not-for-Profit Organizations, and APB Opinion No. 18,
The Equity Method of Accounting for Investments in Common
Stock. The Company will adopt the provisions of this
guidance in 2006 as required.
In late 2005, the AICPA Accounting Standards Executive Committee
(AcSEC) issued Statement of Position (SOP) 05-1, Accounting
by Insurance Enterprises for Deferred Acquisition Costs in
Connection with Modifications or Exchanges of Insurance
Contracts, effective for contract replacements occurring in
fiscal years beginning after December 15, 2006. The SOP
defines an internal replacement of an insurance contract as a
modification in product features, rights, or coverages that
occurs by the exchange of an existing contract for a new
contract, or by amendment endorsement, or rider to a contract,
or by the election of a feature or coverage with a contract.
Insurance contracts meeting this replacement criteria should be
accounted for as an extinguishment of the replaced contract. The
Company will review the guidance during 2006 and determine the
applicability to its various insurance contracts.
69
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
Certain 2004 and 2003 amounts have been reclassified in order to
conform to the 2005 presentation.
The Company invests primarily in investment-grade fixed
maturities. The amortized cost, gross unrealized gains and
losses and estimated fair value of fixed maturity securities
classified as
held-to-maturity were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
|
|
Gross | |
|
Gross | |
|
|
|
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Estimated | |
|
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
U.S. Treasury securities
|
|
$ |
89 |
|
|
|
13 |
|
|
|
|
|
|
|
102 |
|
Agencies not backed by the full faith and credit of the
U.S. Government
|
|
|
1,039 |
|
|
|
|
|
|
|
(23 |
) |
|
|
1,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,128 |
|
|
|
13 |
|
|
|
(23 |
) |
|
|
1,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
|
| |
|
|
|
|
Gross | |
|
Gross | |
|
|
|
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Estimated | |
|
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
U.S. Treasury securities
|
|
$ |
89 |
|
|
|
13 |
|
|
|
|
|
|
|
102 |
|
Agencies not backed by the full faith and credit of the
U.S. Government
|
|
|
1,053 |
|
|
|
1 |
|
|
|
|
|
|
|
1,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,142 |
|
|
|
14 |
|
|
|
|
|
|
|
1,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
The amortized cost, gross unrealized gains and losses, and
estimated fair value of fixed maturity and equity securities
classified as available-for-sale were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
|
|
Gross | |
|
Gross | |
|
|
|
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Estimated | |
|
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$ |
3,688 |
|
|
|
1 |
|
|
|
(53 |
) |
|
|
3,636 |
|
|
Agencies not backed by the full faith and credit of the
U.S. Government
|
|
|
14,526 |
|
|
|
|
|
|
|
(230 |
) |
|
|
14,296 |
|
|
Obligations of states and political subdivisions
|
|
|
142,932 |
|
|
|
387 |
|
|
|
(1,037 |
) |
|
|
142,282 |
|
|
Corporate securities
|
|
|
36,689 |
|
|
|
40 |
|
|
|
(876 |
) |
|
|
35,853 |
|
|
Mortgage-backed securities
|
|
|
40,910 |
|
|
|
31 |
|
|
|
(880 |
) |
|
|
40,061 |
|
|
Collateralized mortgage obligations
|
|
|
27,943 |
|
|
|
15 |
|
|
|
(606 |
) |
|
|
27,352 |
|
|
Asset-backed securities
|
|
|
39,549 |
|
|
|
238 |
|
|
|
(635 |
) |
|
|
39,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
306,237 |
|
|
|
712 |
|
|
|
(4,317 |
) |
|
|
302,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
27,521 |
|
|
|
215 |
|
|
|
(795 |
) |
|
|
26,941 |
|
|
Bond mutual funds
|
|
|
18,516 |
|
|
|
15 |
|
|
|
(679 |
) |
|
|
17,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equities
|
|
|
46,037 |
|
|
|
230 |
|
|
|
(1,474 |
) |
|
|
44,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
352,274 |
|
|
|
942 |
|
|
|
(5,791 |
) |
|
|
347,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
|
| |
|
|
|
|
Gross | |
|
Gross | |
|
|
|
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Estimated | |
|
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$ |
4,169 |
|
|
|
35 |
|
|
|
(32 |
) |
|
|
4,172 |
|
|
Agencies not backed by the full faith and credit of the
U.S. Government
|
|
|
16,805 |
|
|
|
98 |
|
|
|
(84 |
) |
|
|
16,819 |
|
|
Obligations of states and political subdivisions
|
|
|
119,893 |
|
|
|
1,225 |
|
|
|
(399 |
) |
|
|
120,717 |
|
|
Corporate securities
|
|
|
46,249 |
|
|
|
200 |
|
|
|
(300 |
) |
|
|
46,149 |
|
|
Mortgage-backed securities
|
|
|
33,148 |
|
|
|
276 |
|
|
|
(48 |
) |
|
|
33,376 |
|
|
Collateralized mortgage obligations
|
|
|
23,825 |
|
|
|
72 |
|
|
|
(120 |
) |
|
|
23,777 |
|
|
Asset-backed securities
|
|
|
18,383 |
|
|
|
135 |
|
|
|
(127 |
) |
|
|
18,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
262,470 |
|
|
|
2,041 |
|
|
|
(1,110 |
) |
|
|
263,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
17,944 |
|
|
|
458 |
|
|
|
(174 |
) |
|
|
18,228 |
|
|
Bond mutual funds
|
|
|
18,943 |
|
|
|
3 |
|
|
|
(25 |
) |
|
|
18,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equities
|
|
|
36,887 |
|
|
|
461 |
|
|
|
(199 |
) |
|
|
37,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
299,358 |
|
|
|
2,501 |
|
|
|
(1,309 |
) |
|
|
300,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
Other-than-temporary impairment losses result in a permanent
reduction to the cost basis of the underlying investment and are
recorded as a realized gain (loss) in the consolidated statement
of operations. For the year ended December 31, 2005, the
Company determined that two of the fixed maturity securities
were other than temporarily impaired and were written down in
the amount of $35,000 and $115,000, respectively which were
included as realized losses in the consolidated statements of
operations. No other-than-temporary declines were realized in
the year ended December 31, 2004. For the year ended
December 31, 2003, one fixed maturity security was written
down in the amount of $87,000 which was included as a realized
loss in the accompanying consolidated statements of operations
for that period.
The estimated fair value, related gross unrealized loss, and the
length of time that the securities have been impaired for
available-for-sale securities that are considered temporarily
impaired are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
Less Than 12 Months | |
|
12 Months or Longer | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
Estimated | |
|
Gross | |
|
Estimated | |
|
Gross | |
|
Estimated | |
|
Gross | |
|
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
|
|
Value | |
|
Loss | |
|
Value | |
|
Loss | |
|
Value | |
|
Loss | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$ |
2,097 |
|
|
|
(18 |
) |
|
|
1,329 |
|
|
|
(35 |
) |
|
|
3,426 |
|
|
|
(53 |
) |
|
Agencies not backed by the full faith and credit of the
U.S. Government
|
|
|
6,497 |
|
|
|
(44 |
) |
|
|
7,604 |
|
|
|
(186 |
) |
|
|
14,101 |
|
|
|
(230 |
) |
|
Obligations of states and political subdivisions
|
|
|
73,534 |
|
|
|
(538 |
) |
|
|
30,571 |
|
|
|
(499 |
) |
|
|
104,105 |
|
|
|
(1,037 |
) |
|
Corporate securities
|
|
|
15,042 |
|
|
|
(357 |
) |
|
|
15,158 |
|
|
|
(519 |
) |
|
|
30,200 |
|
|
|
(876 |
) |
|
Mortgage-backed securities
|
|
|
33,314 |
|
|
|
(680 |
) |
|
|
6,208 |
|
|
|
(200 |
) |
|
|
39,522 |
|
|
|
(880 |
) |
|
Collateralized mortgage obligations
|
|
|
17,004 |
|
|
|
(358 |
) |
|
|
9,055 |
|
|
|
(248 |
) |
|
|
26,059 |
|
|
|
(606 |
) |
|
Asset-backed securities
|
|
|
18,521 |
|
|
|
(393 |
) |
|
|
7,821 |
|
|
|
(242 |
) |
|
|
26,342 |
|
|
|
(635 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
166,009 |
|
|
|
(2,388 |
) |
|
|
77,746 |
|
|
|
(1,929 |
) |
|
|
243,755 |
|
|
|
(4,317 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
10,523 |
|
|
|
(490 |
) |
|
|
3,873 |
|
|
|
(305 |
) |
|
|
14,396 |
|
|
|
(795 |
) |
|
Bond mutual funds
|
|
|
8,305 |
|
|
|
(390 |
) |
|
|
9,095 |
|
|
|
(289 |
) |
|
|
17,400 |
|
|
|
(679 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18,828 |
|
|
|
(880 |
) |
|
|
12,968 |
|
|
|
(594 |
) |
|
|
31,796 |
|
|
|
(1,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand Total
|
|
$ |
184,837 |
|
|
|
(3,268 |
) |
|
|
90,714 |
|
|
|
(2,523 |
) |
|
|
275,551 |
|
|
|
(5,791 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, the Company had 104 fixed income
securities and 10 equity securities that have been in an
unrealized loss position for one year or longer. Of the fixed
income securities, 103 are investment grade, of which 101 of
these securities are rated A1/ A or better (including 70
securities which are rated AAA). The one remaining
non-investment grade fixed income security is rated BB- and has
a fair value equal to 99.8% of its book value as of
December 31, 2005. One of the equity securities that has
been in an unrealized loss position for one year or longer
relates to a closed end preferred stock fund, which continues to
pay its regular dividend on a monthly basis and has an
underlying net asset value per share that exceeds its price per
share as of December 31, 2005. One of the equity securities
relates to an investment in an open end, high quality short
duration bond fund, of which the underlying assets are all rated
AAA. Finally, the eight remaining equity securities that have
been in an unrealized loss position for one year or longer
relate to
72
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
preferred share investments in issuers each of which has shown
an improved financial performance during 2005. In addition,
these eight equity securities have an aggregate fair market
value of equal to 95.7% of their book value as of
December 31, 2005. All one hundred and four of the fixed
income securities are current on interest and principal and all
ten of the equity securities continue to pay dividends at a
level consistent with the prior year. Management believes the
declines are temporary and are not indicative of
other-than-temporary impairments.
Fixed maturities, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities
because borrowers may have the right to call or to prepay
obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
Amortized | |
|
Estimated Fair | |
|
|
Cost | |
|
Value | |
|
|
| |
|
| |
|
|
(In thousands) | |
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$ |
|
|
|
|
|
|
|
Due after one year through five years
|
|
|
1,039 |
|
|
|
1,016 |
|
|
Due after five years through ten years
|
|
|
|
|
|
|
|
|
|
Due after ten years
|
|
|
89 |
|
|
|
102 |
|
|
|
|
|
|
|
|
|
|
$ |
1,128 |
|
|
|
1,118 |
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$ |
1,663 |
|
|
|
1,648 |
|
|
Due after one year through five years
|
|
|
47,846 |
|
|
|
46,870 |
|
|
Due after five years through ten years
|
|
|
68,212 |
|
|
|
67,706 |
|
|
Due after ten years
|
|
|
80,114 |
|
|
|
79,843 |
|
|
Mortgage-backed, collateralized obligations and asset backed
|
|
|
108,402 |
|
|
|
106,565 |
|
|
|
|
|
|
|
|
|
|
$ |
306,237 |
|
|
|
302,632 |
|
|
|
|
|
|
|
|
The components of net investment income in 2005, 2004 and 2003
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Interest on fixed maturities
|
|
$ |
12,393 |
|
|
|
8,781 |
|
|
|
5,778 |
|
Dividends on equity securities
|
|
|
2,832 |
|
|
|
1,904 |
|
|
|
1,255 |
|
Interest on cash and short-term investments
|
|
|
486 |
|
|
|
199 |
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,711 |
|
|
|
10,884 |
|
|
|
7,154 |
|
Less investment expenses
|
|
|
1,224 |
|
|
|
836 |
|
|
|
655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,487 |
|
|
|
10,048 |
|
|
|
6,499 |
|
|
|
|
|
|
|
|
|
|
|
73
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
All investments in fixed-maturity securities were income
producing during 2005, 2004 and 2003. Net realized investment
gains, including other-than-temporary impairments, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Realized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$ |
590 |
|
|
|
289 |
|
|
|
713 |
|
|
|
Gross realized losses
|
|
|
(417 |
) |
|
|
(240 |
) |
|
|
(538 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
173 |
|
|
|
49 |
|
|
|
175 |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
116 |
|
|
|
294 |
|
|
|
1,900 |
|
|
|
Gross realized losses
|
|
|
(615 |
) |
|
|
(293 |
) |
|
|
(143 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
(499 |
) |
|
|
1 |
|
|
|
1,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment losses/gains
|
|
$ |
(326 |
) |
|
|
50 |
|
|
|
1,932 |
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2005, 2004 and 2003, net
income tax (benefit) expense on net realized investment (losses)
gains was ($114,000), $18,000, and $676,000, respectively.
Proceeds from the sale of fixed maturity securities
available-for-sale were $48.3 million, $28.0 million,
and $72.6 million for the years ended December 31,
2005, 2004 and 2003, respectively.
The change in unrealized appreciation on investments recorded in
shareholders equity and in other comprehensive income is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Fixed maturities securities
|
|
$ |
(4,536 |
) |
|
|
363 |
|
|
|
(1,112 |
) |
Equity securities
|
|
|
(1,506 |
) |
|
|
(115 |
) |
|
|
234 |
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized appreciation on investments before
adjustment to taxes
|
|
|
(6,042 |
) |
|
|
248 |
|
|
|
(878 |
) |
Change in deferred income taxes
|
|
|
(2,072 |
) |
|
|
103 |
|
|
|
(316 |
) |
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized appreciation on investments, net of tax
|
|
$ |
(3,970 |
) |
|
|
145 |
|
|
|
(562 |
) |
|
|
|
|
|
|
|
|
|
|
Century and PIC held fixed maturity securities with a carrying
value of approximately $8.7 million and $7.1 million
on deposit with regulatory authorities as required by law at
December 31, 2005 and 2004, respectively.
At December 31, 2005 and 2004, Century maintained a trust
fund (consisting of cash and investments) with a combined
carrying value of approximately $236,000 and $234,000,
respectively. The assets of the trust are recorded as cash and
investments and are held as security for unearned premiums and
outstanding loss reserves under an assumed reinsurance contract.
74
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
|
|
(3) |
Sale of Minority Interest of Evergreen |
In 2002 and through March of 2003, ProCentury sold a total of
49.8% of Evergreen (25.0% of the voting shares) in three
transactions in order to raise capital to support current
operations. The intent at the time of these transactions was to
retain a controlling interest in Evergreen. In May of 2003,
management of the Company began initial discussions and
contemplation concerning adopting a formal plan of
reorganization, that would be contingent on the successful
completion of an initial public offering (IPO), that included
the disposition of the remaining shares of Evergreen (see
further discussion below).
In 2002, Evergreen created two additional classes of nonvoting
common shares. The nonvoting Class B shares are $1 par
with 25,000 shares authorized of which 18,000 were issued
through a stock dividend to Century. The Class B shares
have all of the same characteristics as the Class A shares
except there are no voting rights. The Class C shares are
$1 dollar par with 100 shares authorized. The liquidation
preferences for all classes of common stock are as follows:
|
|
|
(a) The Class A and B shareholders are entitled to
receive (on a pro rata basis) the lesser of the total amount of
the liquidation proceeds or $25 million. |
|
|
(b) The Class C shareholders are entitled to receive
(on a pro rata basis) the lesser of the amount of liquation
proceeds (net of the first distribution as defined in
(a) above) or $5 million per Class C share plus
5% per annum simple interest thereon between the date of
issuance of such Class C share and the date of the
liquidation event. |
|
|
(c) Any liquidation proceeds remaining after the previous
distributions are distributed to the Class A and B and C
shareholders on a pro rata basis. |
In April 2002, Century sold 599 Class A shares and 4,177
Class B shares of Evergreen for net proceeds of
$5.0 million to a nonvoting shareholder of ProCentury.
Simultaneously, Evergreen issued to the nonvoting shareholder of
ProCentury 1 Class C share for net proceeds of
$5.0 million. In December 2002, Century sold 599
Class A shares and 4,177 Class B shares of Evergreen
for net proceeds of $5.0 million. Simultaneously, Evergreen
issued to the acquirer of the shares 1 Class C share for
net proceeds of $5.0 million. These transactions resulted
in a pretax gain of $10,109,329, which is included, net of
transaction fees of $450,000, in the accompanying 2002
consolidated statement of operations.
In March 2003, Century sold 299.5 Class A shares and
2,088.5 Class B shares of Evergreen for net proceeds of
$2.8 million. Simultaneously, Evergreen issued to the
acquirer .5 Class C share for net proceeds of
$2.5 million. This transaction resulted in a pretax gain of
$312,500, which is included, net of transaction fees of
$215,000, in the accompanying 2003 consolidated statement of
operations.
In May of 2003 management of the Company began discussions and
contemplation of adopting a formal plan of reorganization which
included the disposition of the remaining interests of
Evergreen. At this point, the Company determined that the result
of all subsequent sales of subsidiary stock would be required to
be reflected directly in shareholders equity, rather than
in the statement of operations. This plan was formalized and
approved at the November 2003 board meeting. As part of this
plan, in August 2003 Century sold 299.5 Class A shares and
2,088.5 Class B shares for net proceeds of
$2.8 million. Simultaneously, Evergreen issued to the
acquirer of the shares .5 Class C share for net proceeds of
$2.5 million. In addition, in December 2003, Century sold
299.5 Class A shares and 2,088.5 Class B shares for
net proceeds of $2.8 million. Simultaneously, Evergreen
issued to the acquirer .5 Class C share for net proceeds of
$2.5 million. These transactions resulted in a pretax gain
of $625,000 ($406,250 after tax gain), which is included as
additional paid in capital in the accompanying 2003 consolidated
balance sheet. In addition, transaction fees related to these
sales of $600,000 are recorded in the 2003 consolidated
statement of operations. The remaining interest in Evergreen was
distributed as a dividend to existing shareholders in 2004.
75
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
As a result of the aforementioned transactions, effective
January 1, 2003, Evergreen is no longer part of the
consolidated ProCentury federal income tax return.
In conjunction with these transactions, Century entered into an
agreement with the parties that purchased the shares of
Evergreen that guarantees that (a) Evergreens loss
reserves (including claim reserves, contingent commissions and
unrecoverable reinsurance balances) as of the date of the sale
of securities are adequate to pay Evergreens actual losses
incurred prior to that date and (b) that Evergreens
net unearned premiums for business in force, as reflected in
Evergreens balance sheet at that date, will not run off at
more than a 100% combined ratio. In 2003, the Company made an
estimate related to these guarantees, approximately $919,000 of
this amount was charged to expense in the accompanying 2003
consolidated statement of operations and $465,000 was
contributed to Evergreen in order to restore Evergreens
statutory surplus to $30.0 million. Effective
January 1, 2004, the guarantee was assumed by Evergreen.
|
|
(4) |
Loss and Loss Expense Reserves |
The rollforward of loss and loss expense reserves are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Loss and loss expense reserves at beginning of year,
|
|
|
|
|
|
|
|
|
|
|
|
|
as reported
|
|
$ |
153,236 |
|
|
|
129,236 |
|
|
|
90,855 |
|
Less reinsurance recoverables on unpaid losses at beginning of
year
|
|
|
29,485 |
|
|
|
36,739 |
|
|
|
31,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss expense reserves at beginning of year
|
|
|
123,751 |
|
|
|
92,497 |
|
|
|
59,002 |
|
|
|
|
|
|
|
|
|
|
|
Provision for loss and loss expenses incurred for claims related
to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
112,946 |
|
|
|
78,015 |
|
|
|
53,961 |
|
|
Prior years
|
|
|
5,400 |
|
|
|
11,051 |
|
|
|
27,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
118,346 |
|
|
|
89,066 |
|
|
|
81,004 |
|
Losses and loss expense payments for claims related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
24,548 |
|
|
|
22,095 |
|
|
|
15,932 |
|
|
Prior years
|
|
|
43,350 |
|
|
|
35,717 |
|
|
|
31,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
67,898 |
|
|
|
57,812 |
|
|
|
47,509 |
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss expense reserves at end of year
|
|
|
174,199 |
|
|
|
123,751 |
|
|
|
92,497 |
|
Plus reinsurance recoverables on unpaid losses at end of year
|
|
|
37,448 |
|
|
|
29,485 |
|
|
|
36,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense reserves at end of year, as reported
|
|
$ |
211,647 |
|
|
|
153,236 |
|
|
|
129,236 |
|
|
|
|
|
|
|
|
|
|
|
The Company increased incurred loss and loss expenses
attributable to insured events of prior periods by approximately
$5.4 million, $11.1 million and $27.0 million in
2005, 2004 and 2003, respectively.
A significant portion of the loss and loss expenses attributable
to insured events of prior periods for 2005 resulted from
construction defect claims in the other liability line. As a
result of court decisions that further defined the legal
environment in California, the Company decided to enhance its
defense strategy for certain types of construction defect
claims. As a result, the Company revised the construction defect
defense team by retaining appellate and new trial counsel and
restaffing the in-house team responsible for management of the
76
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
litigation. Once the new legal teams were established late in
2004 and into 2005, it was determined that there were certain
cases that should be settled and the defense budgets for the
remaining cases had to be revised to reflect the added
resources, resulting in higher than expected loss and defense
costs in 2005. In 2004 and 2003, the Company received an
unanticipated increase in the number of construction defect
claims which led to an increase in the number of future expected
claims.
During 2004 and 2003, the Company also incurred development
above expectations on our non-construction defect casualty,
commercial automobile and workers compensation that led to
reassessments of the initial loss ratio expectations and the
claim reporting and settlement patterns.
Management believes the loss and loss expense reserves make a
reasonable provision for expected losses, however, ultimate
settlement of this amount could vary significantly from that
recorded.
In the ordinary course of business, Century assumes and cedes
reinsurance with other insurers and reinsurers. These
arrangements provide greater diversification of business and
limit the maximum net loss potential on large risks. Excess of
loss contracts in effect through December 31, 2005
generally protect against individual property and casualty
losses over $500,000. Excess of loss contracts in effect for
workers compensation losses protect against individual
losses over $200,000. Additionally, from January 1, 2001
through June 30, 2001, and from July 1, 2001 through
December 31, 2002 the first $200,000 in workers
compensation losses were 80% and 60% ceded on a quota share
basis, respectively. Catastrophe and clash coverage is also
maintained. In addition, effective January 1, 2004, Century
entered into a loss portfolio transfer and quota share
arrangement with Evergreen and Continental whereby Century
assumed all of Evergreen and Continentals property and
casualty, workers compensation, and commercial automobile
lines of business and Evergreen assumed all of Centurys
traditional surety lines of business.
Approximately 76.1% of the total reinsurance recoverable on paid
and unpaid losses at December 31, 2005 was with reinsurance
companies which had an A. M. Best rating of A or higher at
December 31, 2005. The amounts of ceded loss and loss
expense reserves and ceded unearned premiums would represent a
liability of the Company in the event that its reinsurers would
be unable to meet existing obligations under reinsurance
agreements.
77
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
The effects of assumed and ceded reinsurance on premiums
written, premiums earned and loss and loss expenses incurred
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$ |
212,953 |
|
|
|
191,136 |
|
|
|
150,616 |
|
|
Assumed
|
|
|
3,211 |
|
|
|
269 |
|
|
|
(908 |
) |
|
Ceded
|
|
|
(26,645 |
) |
|
|
(25,381 |
) |
|
|
(17,869 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$ |
189,519 |
|
|
|
166,024 |
|
|
|
131,839 |
|
|
|
|
|
|
|
|
|
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$ |
200,805 |
|
|
|
171,718 |
|
|
|
127,114 |
|
|
Assumed
|
|
|
1,863 |
|
|
|
497 |
|
|
|
(551 |
) |
|
Ceded
|
|
|
(25,038 |
) |
|
|
(23,513 |
) |
|
|
(18,269 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$ |
177,630 |
|
|
|
148,702 |
|
|
|
108,294 |
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$ |
136,406 |
|
|
|
106,492 |
|
|
|
99,156 |
|
|
Assumed
|
|
|
(721 |
) |
|
|
22 |
|
|
|
990 |
|
|
Ceded
|
|
|
(17,339 |
) |
|
|
(17,448 |
) |
|
|
(19,142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss expenses incurred
|
|
$ |
118,346 |
|
|
|
89,066 |
|
|
|
81,004 |
|
|
|
|
|
|
|
|
|
|
|
In 1998 and 1999, the Company had both quota share and excess of
loss reinsurance agreements with three reinsurance companies
related to the workers compensation line of business. As
of December 31, 2005 and 2004, the Company had
approximately $2.9 million of recoverables related to these
reinsurance agreements, of which, $1.1 million related to
the quota share agreements and $1.8 million related to the
excess of loss agreements.
During 2004, the Company lost binding arbitration with one of
the reinsurers. This reinsurer was the only reinsurer on the
quota share agreements and was a participant on the excess of
loss treaties. The arbitration centered on the quota share
agreements and did not fully contemplate evidence related to the
excess of loss treaties. As such, the Company is pursuing
further litigation on the collection of the excess of loss
treaties and has fully reserved the collectibles related to the
recoverable amounts on the quota share agreements. In addition,
the Company has established an additional $200,000 reserve on
the amounts recoverable related to the excess of loss treaties.
The Company believes that it will ultimately prevail on the
collection of the excess of loss recoverable amounts and are
beginning to pursue collection related to the other two
reinsurers.
In addition, in 2005, the Company had given notice of a
potential claim against our reinsurers for $4.0 million for
which coverage is disputed by certain reinsurers. The
companys liability on the underlying loss has not been
finally adjusted; therefore, the Company has not begun
arbitration on this claim. If the claim must be arbitrated, the
Company believes that it will ultimately prevail.
78
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
The following table displays net reinsurance balances
recoverable, from our top ten reinsurers, as of
December 31, 2005. All other reinsurance balances
recoverable, when considered by individual reinsurer, are less
than 3 percent of shareholders equity.
|
|
|
|
|
|
|
|
|
|
|
A.M. Best | |
|
Net Amount | |
|
|
Rating | |
|
Recoverable | |
|
|
| |
|
| |
Reinsurer |
|
As of December 31, 2005 | |
|
|
| |
|
|
(In thousands) | |
Hannover Ruckvesicherungs Aktiengeselischaft
|
|
|
A |
|
|
$ |
10,348,000 |
|
GE Reinsurance Corporation
|
|
|
A |
|
|
|
9,655,000 |
|
Ace Property and Casualty
|
|
|
A+ |
|
|
|
6,261,000 |
|
General Reinsurance Corporation
|
|
|
A++ |
|
|
|
3,452,000 |
|
American Re-Inusrance Company
|
|
|
A |
|
|
|
3,116,000 |
|
Berkley Insurance Company
|
|
|
A |
|
|
|
2,806,000 |
|
Folksamerica Reinsurance Company
|
|
|
A |
|
|
|
2,178,000 |
|
Swiss Reinsurance America Corporation
|
|
|
A+ |
|
|
|
1,805,000 |
|
Gerling Global Reinsurance Corporation(1)
|
|
|
NR3 |
|
|
|
1,632,000 |
|
SCOR Reinsurance Company(1)
|
|
|
B++ |
|
|
|
1,314,000 |
|
|
|
(1) |
We are closely monitoring the financial status of Gerling Global
Reinsurance Corporation (which is not rated as it is no longer
accepting new business) and SCOR Reinsurance Company, each of
which is continuing to pay claims. |
|
|
(6) |
Retroactive Reinsurance |
Effective January 1, 2001, Century entered into a
retroactive reinsurance treaty with a nonaffiliated reinsurer
covering losses occurring on or before January 1, 2001, and
unrecoverable reinsurance. The following activity occurred
related to this reinsurance treaty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 |
|
2004 | |
|
2003 | |
|
|
|
|
| |
|
| |
|
|
(In thousands) | |
Reserves transferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial reserves
|
|
$ |
|
|
|
|
|
|
|
|
20,000 |
|
|
Adjustments prior years
|
|
|
|
|
|
|
|
|
|
|
(6,120 |
) |
|
Adjustments current year
|
|
|
|
|
|
|
|
|
|
|
(13,880 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverables on retroactive reinsurance, end of year
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds held:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration for reserves transferred
|
|
$ |
|
|
|
|
|
|
|
|
20,000 |
|
|
Consideration paid in cash to reinsurer
|
|
|
|
|
|
|
|
|
|
|
(500 |
) |
|
Interest credited prior years
|
|
|
|
|
|
|
|
|
|
|
2,109 |
|
|
Interest credited current year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid losses recovered prior years
|
|
|
|
|
|
|
|
|
|
|
(10,520 |
) |
|
Adjustments current year
|
|
|
|
|
|
|
|
|
|
|
(11,089 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Funds held under retroactive reinsurance contract, end of year
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
Effective January 1, 2003, the retroactive reinsurance
contract was commuted. The commutation resulted in a release of
ceded reserves of $13.9 million, which was primarily offset
by a release of the funds held account of $11.1 million and
the release of the remaining deferred retroactive reinsurance
gain of $2.5 million. The net of these transactions
resulted in a $285,000 pre-tax loss in 2003, which was recorded
as other operating expense in the accompanying
2003 statement of operations.
|
|
(7) |
Deferred Policy Acquisition Costs |
The following reflects the amounts of policy acquisitions costs
deferred and amortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance at beginning of year
|
|
$ |
17,411 |
|
|
|
11,714 |
|
|
|
6,274 |
|
|
Policy acquisition costs deferred
|
|
|
46,173 |
|
|
|
39,569 |
|
|
|
30,677 |
|
|
Amortization of deferred policy acquisition costs
|
|
|
(42,935 |
) |
|
|
(33,872 |
) |
|
|
(25,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$ |
20,649 |
|
|
|
17,411 |
|
|
|
11,714 |
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition cost for the year
ended December 31, 2004 includes a reduction of
amortization expense of $2.5 million relating to the
transfer of capitalized acquisition costs from Evergreen and
Continental for the property and casualty segment, which was
partially offset by $1.9 million of capitalized acquisition
costs for the surety business that was transferred from Century
to Evergreen and Continental. These transactions occurred in
conjunction with the termination of the intercompany pooling
agreement and the implementation of the loss portfolio
agreements discussed in the Companys Registration
Statement on
Form S-1 (file
No. 333-111794) in
The Evergreen and Continental Transactions.
The Company borrowed $10.0 million from Eaton National
Bank & Trust Co., a subsidiary of Colonial Banc Corp.,
a shareholder of the Company, on October 5, 2000. The
initial terms of the note were interest only for the first year
at 9.5%, with the first quarterly payment due April 5,
2001. Beginning October 5, 2001, principal and interest
payments of $327,889 were due quarterly at a rate adjusted to
the prime rate of 5.5%. In April of 2002, the terms of the note
were changed from quarterly principal and interest payments to
quarterly interest only payments for the April 2002 payment and
the next three consecutive quarters.
Beginning April 5, 2003, principal payments recommenced
with principal and interest payments due quarterly with a
maturity date of October 5, 2012. From October 5, 2002
to October 4, 2003, interest on the outstanding principal
balance accrued at a floating rate of interest equal to the
prime rate of interest at any given time. Beginning on
October 4, 2003, the rate is adjusted annually to the
current prime rate on October 5 until final maturity of the note
on October 5, 2012. All of the stock of Century and PIA
secure the loan. The loan was paid in full in April 2004 with a
portion of the proceeds from the Companys IPO.
|
|
(b) |
Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures |
On December 4, 2002, ProFinance Statutory Trust I (the
Trust), a Connecticut statutory business trust
formed by the Company, issued 15,000 floating rate capital
securities (Trust Preferred Securities)
generating gross proceeds of $15.0 million. Net proceeds
were approximately $14.5 million, after deducting offering
costs of $454,000. In addition, on May 15, 2003, ProFinance
Statutory Trust II (the Trust), a
80
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
Connecticut statutory business trust formed by the Company,
issued 10,000 floating rate capital securities
(Trust Preferred Securities) generating gross
proceeds of $10.0 million. Net proceeds were approximately
$9.7 million, after deducting offering costs of $300,000.
In December 2003, FASB issued Interpretation No. 46
(revised December 2003), Consolidation of Variable Interest
Entities an interpretation of ARB No. 51
(FIN 46R), which required all public
companies to apply the provisions of FIN 46 or FIN 46R
to special purpose entities created prior to February 1,
2003. Once adopted by an entity, FIN 46R replaces
FIN 46. Public companies, including the Company, at a
minimum, must apply the unmodified provisions of FIN 46 to
entities that were considered special-purpose
entities in practice and under applicable FASB
pronouncements or guidance by the end of the first reporting
period ending after December 15, 2003. Companies may apply
either FIN 46 or FIN 46R to special-purpose entities
at the initial effective date on an entity-by-entity basis. The
Company has early adopted FIN 46R in its entirety as of
December 31, 2003.
The Companys special purpose entities where the Company is
the primary beneficiary are the trusts that were established in
connection with the issuance of mandatorily redeemable preferred
securities. As a result of the adoption of FIN 46R, the
Company has deconsolidated these trusts as of December 31,
2003 This resulted in the Company classifying the trust
preferred securities as long term debt and recording an increase
of $733,000 in other assets and long term debt, both of which
were previously eliminated when consolidating the trust. The
$733,000 recorded in other assets is being amortized over the
remaining life of the trusts. There was no other impact to the
Companys consolidated financial statements as a result of
the adoption of FIN 46R.
The Trust Preferred Securities have a 30 year maturity
and are redeemable by the Company at par on or after
December 15, 2007 and May 15, 2008, respectively.
Holders of the Trust Preferred Securities are entitled to
receive cumulative cash distributions accruing from the date of
issuance and payable quarterly in arrears at a rate of 400 and
410 basis points, respectively, over the three-month London
Interbank Offered Rates (LIBOR). The maximum
distribution rate is 12.5% through December 4, 2007 and
May 15, 2008, respectively. Under certain circumstances,
the Company has the right to defer distributions and interest on
the Trust Preferred Securities for up to five years. The
obligations of the Trust are guaranteed by the Company with
respect to distributions and payments of the
Trust Preferred Securities. These distributions are
recorded as interest expense in the accompanying consolidated
statements of operations, as the Trust Preferred Securities
are considered a debt instrument. Interest paid totaled
$1.9 million, $1.4 million and $1.1 million in
2005, 2004 and 2003, respectively.
Proceeds from the sale of the Trust Preferred Securities
were used to purchase the Companys Floating Rate Junior
Subordinated Deferrable Interest Debentures (the
Debentures). The Debentures, which are the sole
asset of the Trust, have the same terms with respect to
maturity, payments and distributions as the Trust Preferred
Securities. The Company has the right to defer payments of
interest on the Debentures for up to five years.
Of the proceeds from the sale of the Trust Preferred
Securities, ProCentury contributed and/or settled outstanding
amounts with Century in the amounts of $9.0 million in 2003.
The Company has a $5.0 million line of credit with a
maturity date of September 8, 2006, and interest only
payments due quarterly based on LIBOR plus 2.5% multiplied times
the outstanding balance. All of the outstanding shares of
Century are pledged as collateral. In April 2005, the Company
made a $2.3 million draw on the line of credit for general
corporate purposes. The $2.3 million draw was paid off on
May 17, 2005. Interest paid on the line of credit was
$5,000. Due to the late filing of the Companys Quarterly
Report on
Form 10-Q for the
quarter ended June 30, 2005, the Company became
non-compliant with the debt covenants
81
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
for the line of credit. On September 7, 2005, the Company
received a waiver from the bank and the ability to draw on the
line of credit. The Company does not have any borrowings
outstanding under the line of credit at December 31, 2005.
The components of the income tax expense (benefit) are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Federal current tax expense
|
|
$ |
5,119 |
|
|
|
9,095 |
|
|
|
1,524 |
|
Federal deferred tax benefit
|
|
|
(1,781 |
) |
|
|
(2,512 |
) |
|
|
(3,205 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total federal income tax expense (benefit)
|
|
$ |
3,338 |
|
|
|
6,583 |
|
|
|
(1,681 |
) |
|
|
|
|
|
|
|
|
|
|
The income tax expense (benefit) differed from the amounts
computed by applying the U.S. federal income tax rate of
35% in 2005, 2004 and 2003 to income before minority interest
and income taxes as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Federal income tax expense at statutory rate
|
|
|
35.00 |
% |
|
|
35.00 |
% |
|
|
35.00 |
% |
(Decrease) increase attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nontaxable interest income
|
|
|
(9.77 |
) |
|
|
(2.82 |
) |
|
|
0.07 |
|
|
Dividend received deduction net of proration
|
|
|
(0.33 |
) |
|
|
(0.12 |
) |
|
|
5.63 |
|
|
Difference between the book and tax basis of Evergreen
|
|
|
|
|
|
|
|
|
|
|
9.33 |
|
|
Other nontaxable income
|
|
|
(0.32 |
) |
|
|
(0.04 |
) |
|
|
1.00 |
|
|
Other
|
|
|
|
|
|
|
0.40 |
|
|
|
(0.46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
24.58 |
% |
|
|
32.42 |
% |
|
|
50.57 |
% |
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to
significant portions of the net deferred federal income tax
asset/liability were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Unearned premiums not deductible
|
|
$ |
5,925 |
|
|
|
5,093 |
|
|
|
3,368 |
|
Loss and loss expense reserves discounting
|
|
|
8,303 |
|
|
|
6,621 |
|
|
|
4,114 |
|
Unrealized loss on investments
|
|
|
1,700 |
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
450 |
|
|
|
193 |
|
|
|
423 |
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
16,378 |
|
|
|
11,907 |
|
|
|
7,905 |
|
Less valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
16,378 |
|
|
|
11,907 |
|
|
|
7,905 |
|
|
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
(7,227 |
) |
|
|
(6,094 |
) |
|
|
(4,196 |
) |
Difference between the book and tax basis of Evergreen
|
|
|
|
|
|
|
|
|
|
|
(1,666 |
) |
Unrealized appreciation on investments
|
|
|
|
|
|
|
(371 |
) |
|
|
(269 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
(7,227 |
) |
|
|
(6,465 |
) |
|
|
(6,131 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net deferred federal income tax asset
|
|
$ |
9,151 |
|
|
|
5,442 |
|
|
|
1,774 |
|
|
|
|
|
|
|
|
|
|
|
82
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
The Company has recorded the deferred tax assets and liabilities
using the statutory federal tax rate of 35%. Management believes
when these deferred items reverse in future years, our taxable
income will be taxed at an effective rate of 35%. The Company is
required to establish a valuation allowance for any portion of
the gross deferred federal income tax asset that management
believes will not be realized. In the opinion of management, it
is more likely than not that the Company will realize the
benefit of the deferred federal income tax assets through
deductions against future earnings and, therefore, no such
valuation allowance has been established.
During 2004, the Company adopted and the shareholders approved a
stock option plan that provided tax-favored incentive stock
options (qualified options), non-qualified share options to
employees and qualified board members that do not qualify as
tax-favored incentive share options (non-qualified options),
time-based restricted shares that vest solely on service
provided and restricted shares that vest based on achieved
performance metrics. The Company accounts for this plan in
accordance with APB Opinion No. 25. Any compensation cost
recorded in accordance with APB No. 25 is recorded in the
same captions as the salary expense of the employee (i.e. the
compensation cost for the Chief Investment Officer is recorded
in net investment income).
With respect to qualified options, an employee may be granted an
option to purchase shares at the grant date fair market value,
payable as determined by the Companys board of directors.
An optionee must exercise an option within 10 years from
the grant date. Full vesting of options granted occurs at the
end of four years.
With respect to non-qualified options, an employee or a board
member may be granted an option to purchase shares at the grant
date fair market value, payable as determined by the
Companys board of directors. An optionee must exercise an
option within 10 years from the grant date. Full vesting of
options granted occurs at the end of three years.
For both non-qualified and qualified options, the option
exercise price equals the stocks fair market value on the
date of the grant. In accordance with APB No. 25, no
compensation is recorded for the qualified and non-qualified
share options as the market value on the grant dates equals the
exercise price.
The time-based restricted shares are granted to key executives
and vest in equal installments upon the lapse of a period of
time, typically over, four and five year periods and include
both monthly and annual vesting periods. Compensation expense
for time-based restricted shares is measured on the grant date
at the current market value and then recognized over the
respective service period, which typically matches the vesting
period.
The performance based restricted shares are granted to key
executives and vest annually over a four year period based on
achieved specified performance metrics. Compensation expense for
performance based restricted share awards is recognized based on
the fair value of the awards at the end of the period.
The Company may grant options for up to 1.2 million shares
under the plan. Through December 31, 2005, the Company had
granted 287,000 non-qualified options, 95,000 qualified options,
156,000 time-based restricted shares and 55,024 performance
based restricted shares under the share plan.
83
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
A summary of the status of the option plan at December 31,
2005 and 2004, and changes during the years then ended are
presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
|
|
Weighted- | |
|
|
|
Weighted- | |
|
|
Number of | |
|
Average | |
|
Number of | |
|
Average | |
|
|
Shares | |
|
Exercise Price | |
|
Shares | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
|
| |
Outstanding at beginning of year
|
|
|
364,000 |
|
|
$ |
10.50 |
|
|
|
|
|
|
|
|
|
Granted
|
|
|
18,000 |
|
|
|
10.30 |
|
|
|
364,000 |
|
|
$ |
10.50 |
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
382,000 |
|
|
$ |
10.49 |
|
|
|
364,000 |
|
|
$ |
10.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
217,393 |
|
|
$ |
10.50 |
|
|
|
75,611 |
|
|
$ |
10.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options granted during year
|
|
|
|
|
|
$ |
2.99 |
|
|
|
|
|
|
$ |
3.04 |
|
The stock option plan was not effective until 2004 and,
accordingly there is no such information to disclose for 2003.
The fair market value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants in
2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Year Ended |
|
|
December 31 |
|
December 31 |
|
|
2005 |
|
2004 |
|
|
|
|
|
Risk free interest rate
|
|
|
4.03 |
% |
|
|
3.97 |
% |
Dividend yield
|
|
|
0.76 |
% |
|
|
0.76 |
% |
Volatility factor
|
|
|
23.14 |
% |
|
|
23.14 |
% |
Weighted average expected option life
|
|
|
7 Years |
|
|
|
7 Years |
|
Information on the range of exercise prices for options
outstanding as of December 31, 2005, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Excercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
|
|
|
|
|
Average | |
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Remaining | |
|
Average | |
|
Exercisable | |
|
Average | |
|
|
Outstanding | |
|
Contract | |
|
Exercise | |
|
as of | |
|
Exercise | |
Price Range |
|
Options | |
|
Life | |
|
Price | |
|
12/31/2005 | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$10.20
|
|
|
12,000 |
|
|
|
9.4 |
|
|
$ |
10.20 |
|
|
|
2,328 |
|
|
$ |
10.20 |
|
$10.50
|
|
|
370,000 |
|
|
|
8.3 |
|
|
$ |
10.50 |
|
|
|
215,065 |
|
|
$ |
10.50 |
|
84
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
A summary of all employee time-based restricted share activity
during the years ended December 31, 2005 and 2004 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
Number of | |
|
Average | |
|
Number of | |
|
Average | |
|
|
Shares | |
|
Grant Price | |
|
Shares | |
|
Grant Price | |
|
|
| |
|
| |
|
| |
|
| |
Beginning of year
|
|
|
137,049 |
|
|
$ |
10.31 |
|
|
|
|
|
|
$ |
|
|
Add (deduct):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
156,000 |
|
|
|
10.32 |
|
Vested
|
|
|
(31,593 |
) |
|
|
10.28 |
|
|
|
(18,951 |
) |
|
|
10.44 |
|
Cancelled
|
|
|
(37,423 |
) |
|
|
10.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
68,033 |
|
|
$ |
10.22 |
|
|
|
137,049 |
|
|
$ |
10.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In January 2005 and September 2005, the Company modified two
executives time-based restricted share awards in connection with
the termination of their employment to accelerate the vesting
period. As such, the Company accounted for the modifications as
cancellations of a fixed award and a grant of a variable award,
which are valued at the fair market value on the monthly vesting
date. During 2005, the Company recorded $231,924 of compensation
expense related the January modification and $42,617 related to
the September modification. All shares related to the January
modification have vested and 12,255 shares related to the
September modification remain unvested at December 31, 2005.
In March of 2005, the Company granted 37,365 of performance
based restricted shares to certain executives that vest annually
over a four year period subject to the achievement of certain
performance metrics. The Company accounts for these awards as
variable awards that are recorded at fair value as of the date
of the most recent reporting date. As of December 31, 2005,
the fair value of the performance based restricted shares is
$400,916 which is earned over the four year service period.
During 2005, the Company recorded $150,343 of compensation
expense related to the performance based restricted shares and
all shares related to the performance based restricted shares
remain unvested at December 31, 2005.
Of the performance based restricted share awards granted in
March of 2005, an award for 17,659 shares was modified in
accordance with the agreement entered into in connection with
the termination of an executive officer in September 2005. As
such, the award was treated as cancelled on October 1, 2005
due to a modification of the award to accelerate the vesting of
the shares, change the vesting from annual vesting to monthly
vesting and remove the performance based restrictions. As such,
the award is treated as variable award which is valued at the
fair market value on the monthly vesting date. During 2005, the
Company recorded $46,058 compensation expense related to the
restricted shares and 13,244 shares remain unvested at
December 31, 2005.
|
|
(11) |
Transactions with Related Parties |
|
|
(a) |
Evergreen National Indemnity Company and Continental
Heritage Insurance Company |
Transitional Administrative Agreement. Prior to the
Evergreen and Continental dispositions, the Company provided
Evergreen and Continental with all executive, managerial,
supervisory, administrative, technical, claims handling,
investment management, regulatory affairs, legal, accounting,
financial reporting, professional and clerical services
necessary to operate their respective businesses. In order to
provide Evergreen and Continental with a transition period
before the cessation of these services, the Company entered into
a Transitional Administrative Agreement with Evergreen and
Continental pursuant to which the Company continues to provide
these services to Evergreen and Continental for an initial term
of 18 months.
85
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
This agreement was renewed for one six-month term to expire on
December 31, 2005, without any changes in the terms
thereof. On December 29, 2005, the agreement was amended to
extend the term thereof to June 30, 2006, reduce the
administrative fee to $75,000 per calendar quarter payable
during the first month of each quarter and providing for
termination upon not less than thirty (30) days advance
written notice to the Company. For the year ended
December 31, 2005 and 2004, the Company received $690,000
and $900,000 under this agreement, respectively.
Reinsurance Agreements. The Company entered into loss
portfolio transfer reinsurance contracts that provided for
Century to reinsure Evergreen and Continental for business that
was written in Centurys name prior to December 31,
2003 and transferred to one of the other companies in connection
with the termination of an intercompany pooling agreement among
the parties and for Evergreen to reinsure Century in the same
manner. For example, Century will reinsure property business
transferred to it in connection with the termination of the
intercompany pooling agreement that had been written for it in
Evergreens name. These contracts will remain in force
until all outstanding loss and assignable loss adjustment
expense covered has been settled or commuted in accordance with
the provisions of the applicable contract. The Company ceded
$423,000 reserves and assumed $2.9 million reserves under
this contract in 2005.
Quota Share Reinsurance Agreements. The Company entered
into 100% quota share reinsurance contracts that provided for
Century to reinsure Evergreen and Continental for property and
casualty business that was written on Evergreen or
Continentals paper for Century in states that Century was
not licensed and for Evergreen to reinsure Century in the same
manner for bonding business. Under these contracts, the ceding
company is entitled to receive a 5% commission and reimbursement
of any premium taxes or other direct costs such as boards and
bureaus fees. These fronting contracts will remain in force
until December 31, 2007. During 2005, the Company assumed
$723,000 of premiums and ceded $318,000 of premiums under this
contract.
In addition, in 2005, the Company entered into 50% quota share
agreement with Evergreen whereby, the Company would assume
certain special surety bonds (including closure and post closure
solid waste industry bonds). During 2005, the Company recorded
approximately $2.4 million of assumed bonds.
Software License Agreement and Software Support and
Maintenance Agreement. Century has entered into a software
license agreement with Evergreen and Continental pursuant to
which Century granted to Evergreen and Continental a fully
paid-up, royalty free, non-exclusive perpetual license to use
certain of Centurys proprietary software that relates to
underwriting and claims processing and that has been developed
for the mutual benefit of the Company, Evergreen and
Continental. In addition, Century has entered into a software
support and maintenance agreement with Evergreen and
Continental, pursuant to which Century provides certain
technical support and maintenance services for the software in
return for an annual support and maintenance fee. For the year
ended December 31, 2005 and 2004, this fee totaled $100,000
and $100,000. On December 29, 2005, the software support
and maintenance agreement was amended to adjust the Annual Fee
effective January 1, 2006, to be at the rate of
$50,000 per calendar quarter payable during the first month
of each quarter. In all other respects, the agreement continues
unchanged. Evergreen and Continental may terminate the software
support and maintenance agreement by providing
90 days prior written notice, and Century may
terminate the agreement by providing twelve months prior
written notice.
Century paid Evergreen-UNI (formerly an affiliate through
significant shareholders of ProCentury) commissions for business
produced for our surety business through an agency agreement of
$12.0 million during 2003. There were no amounts due to
Evergreen-UNI at December 31, 2003. These amounts are
included in discontinued operations. Effective with the IPO,
Evergreen-UNI is no longer an affiliate of ProCentury.
86
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
|
|
(c) |
Shareholders of ProCentury |
In 2004 and 2003, ProCentury paid approximately $484,000 and
$1.9 million, respectively in fees relating to various
consulting agreements with certain shareholders of ProCentury
that were all terminated on December 31, 2003, including
the following significant agreements:
|
|
|
|
|
Accretive Agreements. These agreements were entered into
as of July 1, 2002. Pursuant to these agreements, the
Companys shareholders assisted the Company in developing
financial products and services to be offered to and through the
community banks. Pursuant to these agreements the Company paid
approximately $241,000 and $966,000 in 2004 and 2003,
respectively. |
|
|
|
Stonehenge Monitoring Agreement. This agreement was
entered into as of July 1, 2002. In connection with its
investment in the Company, the Company has paid Stonehenge
Opportunity Fund, LLC a monitoring fee for the time and effort
it expended in monitoring its investment in the Company, which
included reviewing and evaluating the financial statements,
attending meetings with management and board of directors and
consulting with the Company with respect to business and
prospects. Pursuant to this agreement the Company paid
approximately $85,000 and $342,000 in 2004 and 2003,
respectively. |
|
|
|
Full Circle Consulting Arrangement. Pursuant to this
agreement, the Company paid Full Circle Holdings, LTD fees for
managing the investment in the Company made by its members.
Pursuant to this agreement the Company paid approximately
$158,000 and $625,000 in 2004 and 2003, respectively. |
No amounts were accrued at December 31, 2005 or
December 31, 2004 related to these agreements.
Approximately, $483,000 was accrued at December 31, 2003.
In addition, in 2003, the Company paid a total of
$1.3 million of finders fees to two shareholders of
ProCentury related to the sale of the minority interest in
Evergreen.
|
|
(12) |
Commitments, Contingencies and Concentration |
The following table summarizes information about contractual
obligations and commercial commitments. The minimum payments
under these agreements as of December 31, 2005 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Years | |
|
|
| |
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Operating leases on facilities
|
|
$ |
978 |
|
|
|
998 |
|
|
|
1,018 |
|
|
|
734 |
|
|
|
594 |
|
|
|
1,745 |
|
|
|
6,067 |
|
Other operating leases
|
|
|
245 |
|
|
|
245 |
|
|
|
181 |
|
|
|
15 |
|
|
|
4 |
|
|
|
|
|
|
|
690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$ |
1,223 |
|
|
|
1,243 |
|
|
|
1,199 |
|
|
|
749 |
|
|
|
598 |
|
|
|
1,745 |
|
|
|
6,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expense on the operating leases on facilities for the
years ended December 31, 2005, 2004 and 2003 was
$1.3 million, $1.2 million, and $934,000, respectively.
The Company is named from time to time as defendants in various
legal actions that are incidental to our business and arise out
of or are related to claims made in connection with our
insurance policies, claims handling, premium finance agreements
and other contracts and employment related disputes. The
plaintiffs in some of these lawsuits have alleged bad faith or
extra contractual damages and some have claimed punitive
damages. The resolution of these legal actions is not expected
to have a material adverse effect on the Companys
financial position or results of operations.
87
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
|
|
(c) |
Concentration of Revenues |
Five of the Companys 119 agents contributed, on a combined
basis, approximately 41.7% of the Companys 2005
consolidated direct and assumed premiums written. One of the
Companys agents individually contributed an amount greater
than 10% of the Companys direct and assumed premiums
written and combined represented approximately 19.3% of the
Companys 2005 consolidated direct and assumed premiums
written. There was no concentration of revenue with respect to
geographic area as of December 31, 2005.
|
|
(13) |
Dividends from Subsidiaries and Statutory Information |
Century is regulated by its state of domicile, Ohio, and the
states in which it does business. Such regulations, among other
things, limit the payment of dividends without prior regulatory
approval. ProCentury is dependent on dividends from Century for
operating expenses and interest and principal on long term debt
and the Debentures. The maximum dividend that may be paid
without prior approval of the Director of Insurance is limited
to the extent that all dividends in the past 12 months do
not exceed the greater of the statutory income of the preceding
calendar year or 10% of total statutory surplus as of the prior
December 31. As a result, the maximum dividend Century may
pay to ProCentury in 2006 without prior approval is
approximately $12.1 million. Dividends paid to ProCentury
from Century were $2.5 million, $9.1 million (of which
$6.0 million were ordinary dividends and $3.1 million
were extraordinary dividends), and $3.0 million in 2005,
2004 and 2003, respectively.
The Company does not expect such regulatory requirements to
impair its ability to pay operating expenses and interest and
principal during 2006.
ProCentury contributed $55.0 million and $9.0 million
in 2004 and 2003, respectively, to Century.
The National Association of Insurance Commissioners
(NAIC) has developed property and casualty risked based
capital (RBC) standards that relate an insurers
reported statutory surplus to the risks inherent in overall
operations. The RBC formula uses the statutory annual statement
to calculate the minimum indicated capital level required to
support asset and underwriting risk. The NAIC calls for various
levels of regulatory action based on the magnitude of an
indicated RBC capital deficiency, if any. Century regularly
monitors capital requirements along with the NAICs RBC
developments. Century has determined that its capital levels are
in excess of the minimum capital requirements for all RBC action
levels as of December 31, 2005.
Century maintains its accounts in conformity with accounting
practices prescribed or permitted by the Ohio Department of
Insurance that vary in certain respects from GAAP. In converting
from statutory to GAAP, typical adjustments include deferral of
policy acquisition costs, the inclusion of statutory nonadmitted
assets, and the inclusion of net unrealized holdings gains or
losses in shareholders equity relating to fixed maturity
securities. The statutory capital and surplus of Century as of
December 31, 2005 and 2004 was approximately
$121.8 million and $115.8 million, respectively. The
statutory net (loss) income of Century for the years ended
December 31, 2005, 2004 and 2003, was approximately
$7.8 million, $13.8 million and $(2.4) million,
respectively.
|
|
(14) |
Segment Reporting Disclosures |
The Company primarily operates in the Property and Casualty
Lines (P/ C) (including general liability, multi-peril,
commercial property and garage liability).
The Companys other (including exited lines) include the
surety business and the Companys exited lines such as
workers compensation and commercial auto (trucking). A
limited amount of surety business is written in order to
maintain Centurys U.S. Treasury listing.
88
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
All investment activities are included in the Investing
operating segment.
The Company considers many factors, including economic
similarity, the nature of the underwriting units insurance
products, production sources, distribution strategies and
regulatory environment in determining how to aggregate operating
segments.
Segment profit or loss for each of the Companys operating
segments is measured by underwriting profit or loss. The
property and casualty insurance industry commonly defines
underwriting profit or loss as earned premium net of loss and
loss expenses and underwriting, acquisition and insurance
expenses. Underwriting profit or loss does not replace operating
income or net income computed in accordance with GAAP as a
measure of profitability. Segment profit for the Investing
operating segment is measured by net investment income and net
realized gains or losses. The Company does not allocate assets,
including goodwill, to the P/ C and Other operating segments for
management reporting purposes. The total investment portfolio
and cash are allocated to the Investment operating segment.
Following is a summary of segment disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P/ C
|
|
$ |
176,404 |
|
|
|
148,708 |
|
|
|
108,319 |
|
|
Investing
|
|
|
14,161 |
|
|
|
10,098 |
|
|
|
8,431 |
|
|
Other (including exited lines)
|
|
|
1,226 |
|
|
|
(6 |
) |
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenue
|
|
$ |
191,791 |
|
|
|
158,800 |
|
|
|
116,725 |
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P/ C
|
|
$ |
2,200 |
|
|
|
11,873 |
|
|
|
(5,018 |
) |
|
Investing
|
|
|
14,161 |
|
|
|
10,098 |
|
|
|
8,431 |
|
|
Other (including exited lines)
|
|
|
121 |
|
|
|
(1,580 |
) |
|
|
(3,336 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
|
$ |
16,482 |
|
|
|
20,391 |
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
|
|
$ |
366,410 |
|
|
|
312,399 |
|
|
|
171,201 |
|
|
Assets not allocated
|
|
|
107,735 |
|
|
|
82,528 |
|
|
|
160,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
$ |
474,145 |
|
|
|
394,927 |
|
|
|
332,113 |
|
|
|
|
|
|
|
|
|
|
|
89
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
The following summary reconciles significant segment items to
the Companys consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues
|
|
$ |
191,791 |
|
|
|
158,800 |
|
|
|
116,725 |
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
$ |
191,791 |
|
|
|
158,800 |
|
|
|
116,725 |
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
|
$ |
16,482 |
|
|
|
20,391 |
|
|
|
77 |
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses
|
|
|
(1,030 |
) |
|
|
893 |
|
|
|
(1,350 |
) |
|
Loss on sale of minority interest in subsidiary, net
|
|
|
|
|
|
|
|
|
|
|
(503 |
) |
|
Interest expense on the redemption of Class B shares
|
|
|
|
|
|
|
518 |
|
|
|
|
|
|
Interest expense
|
|
|
(1,873 |
) |
|
|
(1,498 |
) |
|
|
(1,548 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest and income taxes
|
|
$ |
13,579 |
|
|
|
20,304 |
|
|
|
(3,324 |
) |
|
|
|
|
|
|
|
|
|
|
The following is a summary of segment earned premium by group of
products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property | |
|
Casualty | |
|
Other | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P/ C
|
|
$ |
56,224 |
|
|
|
120,180 |
|
|
|
|
|
|
|
176,404 |
|
|
Other (including exited lines)
|
|
|
|
|
|
|
|
|
|
|
1,226 |
|
|
|
1,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
$ |
56,224 |
|
|
|
120,180 |
|
|
|
1,226 |
|
|
|
177,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P/ C
|
|
$ |
56,901 |
|
|
|
91,807 |
|
|
|
|
|
|
|
148,708 |
|
|
Other (including exited lines)
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
$ |
56,901 |
|
|
|
91,807 |
|
|
|
(6 |
) |
|
|
148,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P/ C
|
|
$ |
46,433 |
|
|
|
61,886 |
|
|
|
|
|
|
|
108,319 |
|
|
Other (including exited lines)
|
|
|
|
|
|
|
|
|
|
|
(25 |
) |
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
$ |
46,433 |
|
|
|
61,886 |
|
|
|
(25 |
) |
|
|
108,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company does not manage property and casualty products at
this level of detail.
90
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Notes to Consolidated Financial
Statements (Continued)
|
|
(15) |
Unaudited Interim Financial Information |
Selected quarterly financial information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
|
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Year-to-Date | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$ |
41,520 |
|
|
|
43,025 |
|
|
|
44,934 |
|
|
|
48,151 |
|
|
|
177,630 |
|
Net investment income
|
|
|
3,159 |
|
|
|
3,495 |
|
|
|
3,866 |
|
|
|
3,967 |
|
|
|
14,487 |
|
Net realized investment losses
|
|
|
(59 |
) |
|
|
(94 |
) |
|
|
(66 |
) |
|
|
(107 |
) |
|
|
(326 |
) |
|
Income (loss) before income tax
|
|
|
4,398 |
|
|
|
5,571 |
|
|
|
(2,921 |
) |
|
|
6,531 |
|
|
|
13,579 |
|
|
|
Net income (loss)
|
|
|
3,079 |
|
|
|
3,999 |
|
|
|
(1,793 |
) |
|
|
4,956 |
|
|
|
10,241 |
|
Basic earnings per share(1)
|
|
$ |
0.24 |
|
|
|
0.31 |
|
|
|
(0.14 |
) |
|
|
0.38 |
|
|
|
0.78 |
|
Diluted earning per share(1)
|
|
$ |
0.23 |
|
|
|
0.30 |
|
|
|
(0.14 |
) |
|
|
0.38 |
|
|
|
0.78 |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$ |
32,059 |
|
|
|
35,819 |
|
|
|
39,543 |
|
|
|
41,281 |
|
|
|
148,702 |
|
Net investment income
|
|
|
1,965 |
|
|
|
2,410 |
|
|
|
2,719 |
|
|
|
2,954 |
|
|
|
10,048 |
|
Net realized investment gains (losses)
|
|
|
123 |
|
|
|
21 |
|
|
|
(22 |
) |
|
|
(72 |
) |
|
|
50 |
|
|
Income before minority interest and income tax
|
|
|
4,150 |
|
|
|
4,486 |
|
|
|
5,459 |
|
|
|
6,209 |
|
|
|
20,304 |
|
|
|
Net income
|
|
|
2,887 |
|
|
|
2,986 |
|
|
|
3,712 |
|
|
|
5,395 |
|
|
|
14,980 |
|
Basic earnings per share(1)
|
|
$ |
0.58 |
|
|
|
0.27 |
|
|
|
0.28 |
|
|
|
0.41 |
|
|
|
1.41 |
|
Diluted earning per share(1)
|
|
$ |
0.58 |
|
|
|
0.26 |
|
|
|
0.28 |
|
|
|
0.41 |
|
|
|
1.41 |
|
|
|
(1) |
Since the weighted-average shares for the quarters are
calculated independently of the weighted-average shares for the
year, quarterly income per share may not total to annual income
per share. |
On March 13, 2006, the Companys Board of Directors
approved a cash dividend of $0.03 per share, payable on
April 17, 2006 to stockholders of record on March 27,
2006.
91
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Schedule I Summary of
Investments
Other than Investments in Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
|
|
Amount | |
|
|
|
|
Shown on | |
|
|
Amortized | |
|
|
|
Balance | |
|
|
Cost | |
|
Fair Value | |
|
Sheet | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
$ |
3,688 |
|
|
|
3,636 |
|
|
|
3,636 |
|
|
Agencies not backed by the full faith and credit of the
U.S. Government
|
|
|
14,526 |
|
|
|
14,296 |
|
|
|
14,296 |
|
|
States, municipals and political subdivisions
|
|
|
142,932 |
|
|
|
142,282 |
|
|
|
142,282 |
|
|
Convertibles and bonds with warrants attached
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
1,000 |
|
|
All other corporate bonds
|
|
|
144,091 |
|
|
|
141,418 |
|
|
|
141,418 |
|
Redeemable preferred stocks
|
|
|
5,364 |
|
|
|
5,265 |
|
|
|
5,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale
|
|
|
311,601 |
|
|
|
307,897 |
|
|
|
307,897 |
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
|
89 |
|
|
|
102 |
|
|
|
89 |
|
|
Agencies not backed by the full faith and credit of the
U.S. Government
|
|
|
1,039 |
|
|
|
1,016 |
|
|
|
1,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity
|
|
|
1,128 |
|
|
|
1,118 |
|
|
|
1,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-maturities
|
|
|
312,729 |
|
|
|
309,015 |
|
|
|
309,025 |
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trust and insurance companies
|
|
|
2,150 |
|
|
|
2,035 |
|
|
|
2,035 |
|
|
Industrial, miscellaneous and all other
|
|
|
21,419 |
|
|
|
20,422 |
|
|
|
20,422 |
|
Nonredeemable preferred stocks
|
|
|
17,140 |
|
|
|
17,071 |
|
|
|
17,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
40,709 |
|
|
|
39,528 |
|
|
|
39,528 |
|
Short-term investments
|
|
|
12,229 |
|
|
|
XXXX |
|
|
|
12,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$ |
365,667 |
|
|
|
XXXX |
|
|
|
360,782 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying report of independent registered public
accounting firm.
92
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Schedule II Condensed Financial Information
of Parent Company
Condensed Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Assets |
Investments
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value (cost 2005, $1,000; 2004,
$ )
|
|
$ |
1,000 |
|
|
|
|
|
|
Equities (available-for-sale):
|
|
|
|
|
|
|
|
|
|
|
Bond mutual funds, at fair value (cost 2005, $237; 2004, $6,549)
|
|
|
230 |
|
|
|
6,549 |
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
1,230 |
|
|
|
6,549 |
|
Cash
|
|
|
870 |
|
|
|
10 |
|
Investment in consolidated subsidiaries, equity method
|
|
|
142,407 |
|
|
|
135,057 |
|
Receivable from consolidated subsidiaries
|
|
|
1,303 |
|
|
|
1,303 |
|
Federal income taxes receivable
|
|
|
472 |
|
|
|
|
|
Other assets
|
|
|
705 |
|
|
|
733 |
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
146,987 |
|
|
|
143,652 |
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
Liabilities:
|
|
|
|
|
|
|
|
|
|
Long term debt
|
|
$ |
25,000 |
|
|
|
25,000 |
|
|
Accrued expenses and other liabilities
|
|
|
690 |
|
|
|
161 |
|
|
Deferred federal income tax liability
|
|
|
94 |
|
|
|
264 |
|
|
Federal income taxes payable
|
|
|
|
|
|
|
2,990 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
25,784 |
|
|
|
28,415 |
|
Shareholders equity:
|
|
|
121,203 |
|
|
|
115,237 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
146,987 |
|
|
|
143,652 |
|
|
|
|
|
|
|
|
See accompanying report of independent registered public
accounting firm.
93
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Schedule II Condensed Financial Information
of Parent Company
Condensed Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net investment income
|
|
$ |
153 |
|
|
|
113 |
|
|
|
|
|
Net realized loss
|
|
|
(46 |
) |
|
|
(32 |
) |
|
|
|
|
Cash dividends on common stock of consolidated subsidiaries
|
|
|
2,500 |
|
|
|
9,088 |
|
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
2,607 |
|
|
|
9,169 |
|
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
2,312 |
|
|
|
694 |
|
|
|
1,381 |
|
Interest expense of Class B shares
|
|
|
|
|
|
|
518 |
|
|
|
|
|
Interest expense
|
|
|
1,873 |
|
|
|
1,498 |
|
|
|
1,548 |
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
4,185 |
|
|
|
2,710 |
|
|
|
2,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before transaction fees on sale of minority
interest in subsidiary
|
|
|
(1,578 |
) |
|
|
6,459 |
|
|
|
71 |
|
Transaction fees on sale of minority interest in subsidiary
|
|
|
|
|
|
|
|
|
|
|
(815 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before equity in undistributed earnings of
consolidated subsidiaries and income taxes
|
|
|
(1,578 |
) |
|
|
6,459 |
|
|
|
(744 |
) |
Equity in undistributed earnings of consolidated subsidiaries
|
|
|
10,391 |
|
|
|
7,671 |
|
|
|
1,319 |
|
Income tax (benefit) expense
|
|
|
(1,428 |
) |
|
|
(850 |
) |
|
|
261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
10,241 |
|
|
|
14,980 |
|
|
|
314 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying report of independent registered public
accounting firm.
94
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Schedule II Condensed Financial Information
of Parent Company
Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
10,241 |
|
|
|
14,980 |
|
|
|
314 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
(14,517 |
) |
|
|
(15,400 |
) |
|
|
(1,261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(4,276 |
) |
|
|
(420 |
) |
|
|
(947 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments
|
|
|
(5,069 |
) |
|
|
(10,063 |
) |
|
|
(10,017 |
) |
|
Sale of investments
|
|
|
11,327 |
|
|
|
3,490 |
|
|
|
10,637 |
|
|
Capital contributions to subsidiaries
|
|
|
|
|
|
|
(55,000 |
) |
|
|
(9,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
6,258 |
|
|
|
(61,573 |
) |
|
|
(8,380 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of trust preferred securities
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
Principal payments on long term debt
|
|
|
|
|
|
|
(9,133 |
) |
|
|
(680 |
) |
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
77,931 |
|
|
|
|
|
|
Issuance costs
|
|
|
|
|
|
|
(1,298 |
) |
|
|
|
|
|
Redemption of Class B shares
|
|
|
|
|
|
|
(5,000 |
) |
|
|
|
|
|
Dividend paid to shareholders
|
|
|
(1,122 |
) |
|
|
(525 |
) |
|
|
|
|
|
Draw on line of credit
|
|
|
2,300 |
|
|
|
|
|
|
|
|
|
|
Principal payment on line of credit
|
|
|
(2,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(1,122 |
) |
|
|
61,975 |
|
|
|
9,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash
|
|
|
860 |
|
|
|
(18 |
) |
|
|
(7 |
) |
Cash at beginning of year
|
|
|
10 |
|
|
|
28 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$ |
870 |
|
|
|
10 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
1,873 |
|
|
|
1,632 |
|
|
|
1,521 |
|
|
|
|
|
|
|
|
|
|
|
|
Federal income taxes paid
|
|
$ |
8,194 |
|
|
|
7,900 |
|
|
|
3,540 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying report of independent registered public
accounting firm.
95
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Schedule III Supplementary Insurance
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid | |
|
|
|
|
|
|
|
|
|
Amortization | |
|
|
|
|
|
|
Deferred | |
|
Losses and | |
|
|
|
|
|
|
|
Losses and | |
|
of Deferred | |
|
|
|
|
|
|
Policy | |
|
Loss | |
|
|
|
|
|
Net | |
|
Loss | |
|
Policy | |
|
Other | |
|
Net | |
|
|
Acquisition | |
|
Adjustment | |
|
Unearned | |
|
Earned | |
|
Investment | |
|
Adjustment | |
|
Acquisition | |
|
Underwriting | |
|
Premiums | |
|
|
Costs | |
|
Expenses | |
|
Premiums | |
|
Premiums | |
|
Income | |
|
Expenses | |
|
Costs | |
|
Expenses | |
|
Written | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P/ C
|
|
$ |
20,021 |
|
|
|
199,633 |
|
|
|
93,467 |
|
|
|
176,404 |
|
|
|
|
|
|
|
117,864 |
|
|
|
42,326 |
|
|
|
14,014 |
|
|
|
187,033 |
|
Investing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (including Exited Lines)
|
|
|
628 |
|
|
|
12,014 |
|
|
|
2,164 |
|
|
|
1,226 |
|
|
|
|
|
|
|
482 |
|
|
|
609 |
|
|
|
14 |
|
|
|
2,486 |
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
20,649 |
|
|
|
211,647 |
|
|
|
95,631 |
|
|
|
177,630 |
|
|
|
14,487 |
|
|
|
118,346 |
|
|
|
42,935 |
|
|
|
14,265 |
|
|
|
189,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P/ C
|
|
$ |
17,411 |
|
|
|
141,511 |
|
|
|
81,843 |
|
|
|
148,708 |
|
|
|
|
|
|
|
87,463 |
|
|
|
33,872 |
|
|
|
15,500 |
|
|
|
166,020 |
|
Investing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (including Exited Lines)
|
|
|
|
|
|
|
11,725 |
|
|
|
292 |
|
|
|
(6 |
) |
|
|
|
|
|
|
1,603 |
|
|
|
|
|
|
|
(29 |
) |
|
|
4 |
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
17,411 |
|
|
|
153,236 |
|
|
|
82,135 |
|
|
|
148,702 |
|
|
|
10,048 |
|
|
|
89,066 |
|
|
|
33,872 |
|
|
|
13,292 |
|
|
|
166,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P/ C
|
|
$ |
11,714 |
|
|
|
97,117 |
|
|
|
62,126 |
|
|
|
108,319 |
|
|
|
|
|
|
|
77,942 |
|
|
|
24,642 |
|
|
|
10,753 |
|
|
|
132,010 |
|
Investing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (including Exited Lines)
|
|
|
|
|
|
|
32,119 |
|
|
|
13 |
|
|
|
(25 |
) |
|
|
|
|
|
|
3,062 |
|
|
|
595 |
|
|
|
(346 |
) |
|
|
(171 |
) |
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
11,714 |
|
|
|
129,236 |
|
|
|
62,139 |
|
|
|
108,294 |
|
|
|
6,499 |
|
|
|
81,004 |
|
|
|
25,237 |
|
|
|
11,757 |
|
|
|
131,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying report of independent registered public
accounting firm.
96
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Schedule IV Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded to | |
|
Assumed from | |
|
|
|
Percentage of | |
|
|
|
|
Other | |
|
Other | |
|
Net Premium | |
|
Assumed to | |
|
|
Direct | |
|
Companies | |
|
Companies | |
|
Written | |
|
Net | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Year ended December 31, 2005
|
|
$ |
212,953 |
|
|
|
(26,645 |
) |
|
|
3,211 |
|
|
|
189,519 |
|
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
|
|
$ |
191,136 |
|
|
|
(25,381 |
) |
|
|
269 |
|
|
|
166,024 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003
|
|
$ |
150,616 |
|
|
|
(17,869 |
) |
|
|
(908 |
) |
|
|
131,839 |
|
|
|
(0.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying report of independent registered public
accounting firm.
97
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Schedule V Valuation and Qualifying
Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Charged/ | |
|
|
|
|
|
|
|
|
Balance at | |
|
(Credited) | |
|
Charged to | |
|
|
|
Balance at | |
|
|
Beginning | |
|
to Costs and | |
|
Other | |
|
Deductions | |
|
End of | |
|
|
of Period | |
|
Expenses | |
|
Accounts | |
|
(1) | |
|
Period | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums in course of collection
|
|
$ |
79 |
|
|
|
(10 |
) |
|
|
|
|
|
|
11 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
$ |
1,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums in course of collection
|
|
$ |
204 |
|
|
|
(118 |
) |
|
|
|
|
|
|
7 |
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
$ |
1,382 |
|
|
|
(97 |
) |
|
|
|
|
|
|
|
|
|
|
1,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums in course of collection
|
|
$ |
898 |
|
|
|
(127 |
) |
|
|
|
|
|
|
567 |
|
|
|
204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
$ |
1,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Deductions include write-offs of amounts determined to be
uncollectible. |
See accompanying report of independent registered public
accounting firm.
98
PROCENTURY CORPORATION AND SUBSIDIARIES
(Formerly ProFinance Holdings Corporation)
Schedule VI Supplemental Information
Concerning Property
Casualty Insurance Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and Loss | |
|
|
|
|
Liability for | |
|
|
|
Adjustment Expenses | |
|
|
|
|
Unpaid | |
|
Discount, | |
|
(Benefits) Incurred | |
|
|
|
|
Losses and | |
|
if any, | |
|
Related to | |
|
Paid Losses and | |
|
|
Loss | |
|
Deducted | |
|
| |
|
Loss | |
|
|
Adjustment | |
|
from | |
|
Current | |
|
Prior | |
|
Adjustment | |
|
|
Expenses | |
|
Reserves | |
|
Period | |
|
Periods | |
|
Expenses | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Year ended December 31, 2005
|
|
$ |
211,647 |
|
|
|
|
|
|
|
112,946 |
|
|
|
5,400 |
|
|
|
67,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
|
|
$ |
153,236 |
|
|
|
|
|
|
|
78,015 |
|
|
|
11,051 |
|
|
|
57,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003
|
|
$ |
129,236 |
|
|
|
|
|
|
|
53,961 |
|
|
|
27,043 |
|
|
|
47,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying report of independent registered public
accounting firm.
99
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
No disagreements with accountants on any accounting or financial
disclosure or auditing scope or procedure occurred during 2005.
|
|
Item 9A. |
Controls and Procedures |
Disclosure Controls and Procedures
As of the end of the period covered by this report, ProCentury
carried out an evaluation, under the supervision and with the
participation of the our management, including the Chairman and
Chief Executive Officer (CEO) and the Chief
Financial Officer (CFO) and Treasurer, of the
effectiveness of the design and operation of the our disclosure
controls and procedures pursuant to Securities Exchange Act
Rule 13a-15
(Disclosure Controls).
Our management, including the CEO and CFO, does not expect that
its Disclosure Controls will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of
a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. The design of any system of
controls also is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under
all potential future conditions.
Based upon the ProCenturys controls evaluation, the CEO
and CFO have concluded that our Disclosure Controls provide
reasonable assurance that the information required to be
disclosed by us in our periodic reports is accumulated and
communicated to management, including the CEO and CFO, as
appropriate to allow timely decisions regarding disclosure and
is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange
Commissions rules and forms.
Managements Report on Internal Control over Financial
Accounting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f).
Under the supervision and with the participation of our
management, including our CEO and CFO, we conducted an
evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on
our evaluation under the framework in Internal
Control Integrated Framework, our management
concluded that our internal control over financial reporting was
effective as of December 31, 2005.
Our managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2005 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in
their report which is included in Part II, Item 8 of
this annual report on
Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in ProCenturys internal control over
financial reporting during our most recent fiscal quarter that
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
100
PART III.
|
|
Item 10. |
Directors and Executive Officers of the Registrant |
EXECUTIVE OFFICERS
The following table sets forth certain information concerning
our executive officers as of March 15, 2006:
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position with ProCentury |
|
|
| |
|
|
Edward F. Feighan
|
|
|
58 |
|
|
Chairman of the Board, President, Chief Executive Officer |
Erin E. West
|
|
|
30 |
|
|
Chief Financial Officer and Treasurer |
Christopher J. Timm
|
|
|
49 |
|
|
Executive Vice President and Director |
Greg D. Ewald
|
|
|
52 |
|
|
Senior Vice President of Underwriting |
Edward F. Feighan has been our Chairman, President and
Chief Executive Officer since October 2003. Mr. Feighan was
President of Avalon National Corporation, a holding company for
a workers compensation insurance agency, from 1998 until
2000. From September 1998 until May 2003, Mr. Feighan was
Managing Partner of Alliance Financial, Ltd., a merchant banking
firm specializing in mergers and acquisitions. He has served as
a director of our company and our insurance company subsidiaries
from 1993 to 1996 and from 2000 to the present. Mr. Feighan
has served at times as our Special Counsel.
Erin E. West was named Chief Financial Officer and
Treasurer in October 2005. Ms. West served under our former
Chief Financial Officer, Mr. Charles D. Hamm, Jr., as
Chief Financial Officer of Century since July 2004 and Vice
President of Century since December 2003. Ms. West also
serves as Director, Secretary and Treasurer of both insurance
subsidiaries, Century Surety Company and ProCentury Insurance
Company. Ms. West is a certified public accountant and was
formerly a Supervising Senior with KPMG LLP from 1997 to 2001.
Christopher J. Timm was named Executive Vice President
and President of Century in May 2003. Since 2000, he has served
as a Director and Vice President of ProCentury and a senior
officer and director of most companies within the Century
Insurance
Group®.
From 1998 until 2000, following the sale of
Environmental & Commercial Insurance Agency, Inc.,
Mr. Timm complied with the terms of a non-compete agreement
and pursued non-insurance business ventures. From 1990 through
1998, Mr. Timm was an owner and President of
Environmental & Commercial Insurance Agency, Inc., a
managing underwriting agency.
Greg D. Ewald has served as Senior Vice President of
Underwriting for Century Surety Company, the main insurance
subsidiary of ProCentury Corporation, since 2000. Mr. Ewald
also serves as a Director of both Century Surety Company and
ProCentury Insurance Company and is a Director and President of
ProCentury Risk Partners Insurance Company, a D.C. captive
insurer subsidiary of ProCentury Corporation. Previously,
Mr. Ewald was Senior Vice President for Acceptance
Insurance Company from 1990 to 2000 and for Underwriters
Reinsurance Company (now Swiss Re) from 1979 to 1990.
The other information required by Item 10 is incorporated
herein by reference to the information under the headings
Election of Directors, Corporate
Governance Board of Directors
Committees Audit Committee, Corporate
Governance Code of Business Conduct and Ethics
and Section 16(a) Beneficial Ownership Reporting
Compliance of our proxy statement relating to our annual
meeting of shareholders to be held May 15, 2006.
|
|
Item 11. |
Executive Compensation |
The information required by Item 11 is incorporated herein
by reference to the information under the heading
Executive Compensation contained in our proxy
statement relating to our annual meeting of shareholders to be
held on May 15, 2006.
101
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The information required by Item 12 is incorporated herein
by reference to the information under the heading Security
Ownership of Certain Beneficial Owners and Management
contained in our proxy statement relating to its annual meeting
of shareholders to be held on May 15, 2006.
Equity Compensation Plans
The following table shows certain information as of
December 31, 2005 with respect to compensation plans under
which our common shares are authorized for issuance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Common Shares to |
|
|
|
Number of |
|
|
be Issued Upon |
|
Weighted Average |
|
Common Shares |
|
|
Exercise of |
|
Exercise Price of |
|
Remaining |
|
|
Outstanding |
|
Outstanding |
|
Available for Future |
Plan Category |
|
Options |
|
Options |
|
Issuance(1) |
|
|
|
|
|
|
|
Equity compensation plans approved by shareholders
|
|
|
382,000 |
|
|
$ |
10.50 |
|
|
|
586,084 |
|
Equity compensation plans not approved by shareholders
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
Total
|
|
|
382,000 |
|
|
$ |
10.50 |
|
|
|
586,084 |
|
|
|
(1) |
Shares may be issued upon exercise of options or in the form of
appreciation rights, performance units, restricted stock or
restricted stock units. |
|
|
Item 13. |
Certain Relationships and Related Transactions |
The information required in Item 13 is incorporated herein
by reference to the information under heading Certain
Relationships and Related Transactions contained in our
proxy statement relating to it annual meeting of shareholder to
be held May 15, 2006.
|
|
Item 14. |
Principal Accountant Fees and Services |
The information required by Item 14 is incorporated by
reference to the information under the heading Independent
Accountants Fees contained in our proxy statement
relating to its annual meeting of shareholders to be held on
May 15, 2006.
PART IV
|
|
Item 15. |
Exhibits and Financial Statement Schedules |
(a)(1) Financial Statements
|
|
|
Reports of independent registered public accounting firm |
|
|
Consolidated Balance Sheets at December 31, 2005 and 2004 |
|
|
Consolidated Statements of Operations for the three years ended
December 31, 2005 |
|
|
Consolidated Statements of Shareholders Equity and
Comprehensive Income for the three years ended December 31,
2005 |
|
|
|
Consolidated Statements of Cash Flows for the three years ended
December 31, 2005 |
|
|
|
Notes to Consolidated Financial Statements |
102
(a)(2) Financial Statement Schedules
|
|
|
Schedule I Summary of Investments
Other than Investments in Related Parties |
|
|
Schedule II Condensed Financial Information of
Parent Company |
|
|
Schedule III Supplementary Insurance Information |
|
|
Schedule IV Reinsurance |
|
|
Schedule V Valuation and Qualifying Accounts |
|
|
Schedule VI Supplemental Information Concerning
Property Casualty Insurance Operations |
(a)(3) Exhibits See
Exhibit Index immediately following the
signature page hereto.
(b) Exhibits.
See Exhibit Index immediately following the
signature page hereto.
(c) Financial Statement Schedules.
Schedules required to be filed in response to this portion are
listed above in Item 15(a)(2).
103
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
Edward F. Feighan, |
|
Chairman, President and Chief |
|
Executive Officer |
Date: March 15, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities on the date
indicated.
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
Edward F. Feighan |
|
Chairman of the Board of Directors, President and Chief
Executive Officer (Principal Executive Officer) |
|
March 15, 2006 |
|
Erin E. West |
|
Chief Financial Officer and Treasurer (Principal Financial and
Accounting Officer) |
|
March 15, 2006 |
|
Michael J. Endres |
|
Director |
|
March 15, 2005 |
|
Robert F. Fix |
|
Director |
|
March 15, 2006 |
|
Jeffrey A. Maffett |
|
Director |
|
March 15, 2006 |
|
Press C. Southworth III |
|
Director |
|
March 15, 2006 |
|
Christopher J. Timm |
|
Director |
|
March 15, 2006 |
|
Alan R. Weiler |
|
Director |
|
March 15, 2006 |
|
Robert J. Woodward, Jr. |
|
Director |
|
March 15, 2006 |
104
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
3.1 |
|
|
Amended and Restated Articles of Incorporation of ProCentury
Corporation (incorporated herein by reference to ProCentury
Corporations Quarterly Report on Form 10-Q for the
period ended March 31, 2004 (File No. 000-50641)) |
|
3.2 |
|
|
Amended and Restated Code of Regulations of ProCentury
Corporation (incorporated herein by reference to ProCentury
Corporations Quarterly Report on Form 10-Q for the
period ended March 31, 2004 (File No. 000-50641)) |
|
|
4.1 |
|
|
Specimen Certificate for common shares, without par value, of
ProCentury Corporation (incorporated herein by reference to
ProCentury Corporations Registration Statement on
Form S-1 (File No. 333-111294), as amended) |
|
|
4.2 |
|
|
Indenture, dated as of December 4, 2002, by and between
ProFinance Holdings Corporation and State Street Bank and Trust
Company of Connecticut (incorporated herein by reference to
ProCentury Corporations Registration Statement on
Form S-1 (File No. 333-111294), as amended) |
|
|
4.3 |
|
|
Amended and Restated Declaration of Trust, dated as of
December 4, 2002, by and among State Street Bank and Trust
Company of Connecticut, ProFinance Holdings Corporation and
Steven R. Young and John Marazza, as Administrators
(incorporated herein by reference to ProCentury
Corporations Registration Statement on Form S-1 (File
No. 333-111294), as amended) |
|
|
4.4 |
|
|
Guarantee Agreement, dated as of December 4, 2002, by and
between ProFinance Holdings Corporation and State Street Bank
and Trust Company of Connecticut (incorporated herein by
reference to ProCentury Corporations Registration
Statement on Form S-1 (File No. 333-111294), as
amended) |
|
|
4.5 |
|
|
Indenture, dated as of May 15, 2003, by and between
ProFinance Holdings Corporation and U.S. Bank National
Association (incorporated herein by reference to ProCentury
Corporations Registration Statement on Form S-1 (File
No. 333-111294), as amended) |
|
|
4.6 |
|
|
Amended and Restated Declaration of Trust, dated as of
May 15, 2003, by and among U.S. Bank National
Association, ProFinance Holdings Corporation and Steven R. Young
and John Marazza, as Administrators (incorporated herein by
reference to ProCentury Corporations Registration
Statement on Form S-1 (File No. 333-111294), as
amended) |
|
|
4.7 |
|
|
Guarantee Agreement, dated as of May 15, 2003, by and
between ProFinance Holdings Corporation and U.S. Bank
National Association (incorporated herein by reference to
ProCentury Corporations Registration Statement on
Form S-1 (File No. 333-111294), as amended) |
|
|
10.1 |
|
|
Employment Agreement, dated as of December 15, 2003, by and
between ProCentury Corporation and Edward F. Feighan
(incorporated herein by reference to ProCentury
Corporations Registration Statement on Form S-1 (File
No. 333-111294), as amended)(1) |
|
|
10.2 |
|
|
Employment Agreement, dated as of December 15, 2003, by and
between ProCentury Corporation and John A. Marazza (incorporated
herein by reference to ProCentury Corporations
Registration Statement on Form S-1 (File
No. 333-111294), as amended)(1) |
|
|
10.3 |
|
|
Employment Agreement, dated as of December 15, 2003, by and
between ProCentury Corporation and Christopher J. Timm
(incorporated herein by reference to ProCentury
Corporations Registration Statement on Form S-1 (File
No. 333-111294), as amended)(1) |
|
|
10.4 |
|
|
Employment Agreement, dated as of December 15, 2003, by and
between ProCentury Corporation and Charles D. Hamm (incorporated
herein by reference to ProCentury Corporations
Registration Statement on Form S-1 (File
No. 333-111294), as amended)(1) |
|
|
10.5 |
|
|
Employment Agreement, dated as of February 22, 2006, by and
between ProCentury Corporation and Erin E. West(1) |
|
|
10.6 |
|
|
Separation Agreement by and between ProCentury Corporation and
John A. Marazza, dated January 21, 2005 (incorporated
herein by reference to ProCentury Corporations Current
Report on Form 8-K dated January 21, 2005 (File
No. 000-50641))(1) |
|
|
10.7 |
|
|
Consulting Agreement by and between ProCentury Corporation and
Charles D. Hamm, dated September 20, 2005 (incorporated
herein by reference to ProCentury Corporations Quarterly
Report on Form 10-Q for the period ended September 30,
2005 (File No. 000-50641))(1) |
105
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
10.8 |
|
|
Form of ProCentury Corporation Indemnification Agreement by and
between ProCentury Corporation and each member of its Board of
Directors (incorporated herein by reference to ProCentury
Corporations Registration Statement on Form S-1 (File
No. 333-111294), as amended)(1) |
|
|
10.9 |
|
|
ProCentury Corporation 2004 Stock Option and Award Plan
(incorporated herein by reference to ProCentury
Corporations Registration Statement on Form S-1 (File
No. 333-111294), as amended)(1) |
|
|
10.10 |
|
|
ProCentury Corporation Deferred Compensation Plan (incorporated
herein by reference to ProCentury Corporations
Registration Statement on Form S-1 (File
No. 333-111294), as amended)(1) |
|
|
10.11 |
|
|
ProCentury Corporation Deferred Compensation Plan Rabbi
Trust Agreement (incorporated herein by reference to
ProCentury Corporations Registration Statement on
Form S-1 (File No. 333-111294), as amended)(1) |
|
|
10.12 |
|
|
ProCentury Corporation Annual Incentive Plan (incorporated
herein by reference to ProCentury Corporations
Registration Statement on Form S-1 (File
No. 333-111294), as amended)(1) |
|
|
10.13 |
|
|
Form of Restricted Stock Award Agreement for Restricted Stock
under the ProCentury Corporation 2004 Stock Option and Award
Plan (incorporated herein by reference to ProCentury
Corporations Annual Report on Form 10-K for the
fiscal year ended 2004 (File No. 000-50641))(1) |
|
|
10.14 |
|
|
Form of Stock Option Agreement for Non-Qualified Stock Options
under the ProCentury Corporation 2004 Stock Option and Award
Plan (incorporated herein by reference to ProCentury
Corporations Annual Report on Form 10-K for the
fiscal year ended 2004 (File No. 000-50641))(1) |
|
|
10.15 |
|
|
Form of Stock Option Agreement for Incentive Stock Options under
the ProCentury Corporation 2004 Stock Option and Award Plan
(incorporated herein by reference to ProCentury
Corporations Annual Report on Form 10-K for the
fiscal year ended 2004 (File No. 000-50641))(1) |
|
|
10.16 |
|
|
Form of Restricted Stock Award Agreement for Restricted Stock
for Executive Officers under the ProCentury Corporation 2004
Stock Option and Award Plan (incorporated herein by reference to
ProCentury Corporations Annual Report on Form 10-K
for the fiscal year ended 2004 (File No. 000-50641))(1) |
|
|
10.17 |
|
|
Form of Stock Option Agreement for Non-Qualified Stock Options
for Executive Officers under the ProCentury Corporation 2004
Stock Option and Award Plan (incorporated herein by reference to
ProCentury Corporations Annual Report on Form 10-K
for the fiscal year ended 2004 (File No. 000-50641))(1) |
|
|
10.18 |
|
|
Form of Restricted Stock Award Agreement for Performance Vesting
Restricted Stock under the ProCentury Corporation 2004 Stock
Option and Award Plan (incorporated herein by reference to
ProCentury Corporations Quarterly Report on Form 10-Q
for the period ended March 31, 2005 (File
No. 000-50641))(1) |
|
|
10.19 |
|
|
Form of Stock Option Agreement for Non-Qualified Stock Options
Granted to Non-Employee Directors under the ProCentury
Corporation 2004 Stock Option and Award Plan (incorporated
herein by reference to ProCentury Corporations Quarterly
Report on Form 10-Q for the period ended March 31,
2005 (File No. 000-50641))(1) |
|
|
10.20 |
|
|
Transitional Administrative Agreement, effective as of
January 1, 2004, by and among ProCentury Corporation,
Evergreen National Indemnity Corporation and Continental
Heritage Insurance Company (incorporated herein by reference to
ProCentury Corporations Registration Statement on
Form S-1 (File No. 333-111294), as amended) |
|
|
10.21 |
|
|
Loss Portfolio Transfer Reinsurance Contract, effective as of
January 1, 2004, issued to Century Surety Company by
Evergreen National Indemnity Company (incorporated herein by
reference to ProCentury Corporations Registration
Statement on Form S-1 (File No. 333-111294), as
amended) |
|
|
10.22 |
|
|
Loss Portfolio Transfer Reinsurance Contract, effective as of
January 1, 2004, issued to Continental Heritage Insurance
Company by Century Surety Company (incorporated herein by
reference to ProCentury Corporations Registration
Statement on Form S-1 (File No. 333-111294), as
amended) |
|
|
10.23 |
|
|
Loss Portfolio Transfer Reinsurance Contract, effective as of
January 1, 2004, issued to Evergreen National Indemnity
Company by Century Surety Company (incorporated herein by
reference to ProCentury Corporations Registration
Statement on Form S-1 (File No. 333-111294), as
amended) |
106
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
10.24 |
|
|
Quota Share Reinsurance Contract, effective as of
January 1, 2004, issued to Evergreen National Indemnity
Company by Century Surety Company (incorporated herein by
reference to ProCentury Corporations Registration
Statement on Form S-1 (File No. 333-111294), as
amended) |
|
|
10.25 |
|
|
Quota Share Reinsurance Contract, effective as of
January 1, 2004, issued to Continental Heritage Insurance
Company by Century Surety Company (incorporated herein by
reference to ProCentury Corporations Registration
Statement on Form S-1 (File No. 333-111294), as
amended) |
|
|
10.26 |
|
|
Quota Share Reinsurance Contract, effective as of
January 1, 2004, issued to Century Surety Company by
Evergreen National Indemnity Company (incorporated herein by
reference to ProCentury Corporations Registration
Statement on Form S-1 (File No. 333-111294), as
amended) |
|
|
10.27 |
|
|
Software License Agreement, effective as of January 1,
2004, by and among Century Surety Company, Evergreen National
Indemnity Company and Continental Heritage Insurance Company
(incorporated herein by reference to ProCentury
Corporations Registration Statement on Form S-1 (File
No. 333-111294), as amended) |
|
|
10.28 |
|
|
Software Support and Maintenance Agreement, effective as of
January 1, 2004, by and among Century Surety Company,
Evergreen National Indemnity Company and Continental Heritage
Insurance Company (incorporated herein by reference to
ProCentury Corporations Registration Statement on
Form S-1 (File No. 333-111294), as amended) |
|
|
21 |
|
|
Subsidiaries of ProCentury Corporation |
|
|
23 |
|
|
Consent of KPMG LLP |
|
|
31.1 |
|
|
Certification of Principal Executive Officer pursuant to
Rule 13a-14(a) of the Exchange Act |
|
|
31.2 |
|
|
Certification of Principal Financial Officer pursuant to
Rule 13a-14(a) of the Exchange Act |
|
|
32.1 |
|
|
Certification of Principal Executive Officer pursuant to
Rule 13a-14(b) of the Exchange Act and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002(2) |
|
32.2 |
|
|
Certification of Principal Financial Officer pursuant to
Rule 13a-14(b) of the Exchange Act and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002(2) |
|
|
(1) |
Management contracts and compensatory plans or arrangements
required to be filed as an exhibit pursuant to Item 15(b)
of Form 10-K.
|
|
(2) |
These certifications are not deemed to be filed for
purposes of Section 18 of the Exchange Act, or otherwise
subject to the liability of that section. These certifications
will not be deemed to be incorporated by reference into any
filing under the Securities Act or the Exchange Act, except to
the extent that the registrant specifically incorporates them by
reference. |
107