UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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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
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Commission file number
000-51124
SeaBright Insurance Holdings,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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56-2393241
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(State or other jurisdiction
of
incorporation or organization)
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(IRS Employer
Identification No.)
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1501
4
th
Avenue,
Suite 2600
Seattle, Washington
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98101
(Zip code)
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(Address of principal executive
offices)
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(206) 269-8500
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which registered
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Common stock, par value $0.01 per share
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark whether the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act: Yes
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No
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Indicate by check mark whether the registrant is not required to
file reports pursuant to Section 13 or 15(d) of the
Act: Yes
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No
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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
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No
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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.
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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller reporting
company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act): Yes
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No
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The aggregate market value of the common stock held by
non-affiliates of the registrant, based on the closing price of
the common stock on June 30, 2007 as reported by the NASDAQ
Global Select Market (formerly the Nasdaq National Market), was
$352,665,538.
The number of shares of the registrants common stock
outstanding as of March 14, 2008 was 20,840,102.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the SeaBright Insurance Holdings, Inc. definitive
Proxy Statement for its 2008 annual meeting of stockholders to
be filed with the Commission pursuant to Regulation 14A not
later than 120 days after December 31, 2007 are
incorporated by reference in Part III of this
Form 10-K.
SEABRIGHT
INSURANCE HOLDINGS, INC.
INDEX TO
FORM 10-K
PART I
In this annual report:
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references to the Acquisition refer to the series
of transactions that occurred on September 30, 2003
described under the heading Our History in
Item 1 of this Part I;
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references to our predecessor, for periods prior
to the date of the Acquisition, refer collectively to PointSure
Insurance Services, Inc., Eagle Pacific Insurance Company and
Pacific Eagle Insurance Company;
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references to the Company, we,
us or our refer to SeaBright Insurance
Holdings, Inc. and its subsidiaries, SeaBright Insurance Company
and PointSure Insurance Services, Inc., and prior to the date of
the Acquisition, include references to our predecessor;
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the term our business refers to the business
conducted by the Company since October 1, 2003 and with
respect to periods prior to October 1, 2003, to the
business conducted by our predecessor; and
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references to SeaBright refer solely to SeaBright
Insurance Holdings, Inc., unless the context suggests
otherwise.
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Overview
We are a specialty provider of multi-jurisdictional
workers compensation insurance. We are domiciled in
Illinois, commercially domiciled in California and headquartered
in Seattle, Washington. We are licensed in 45 states and
the District of Columbia to write workers compensation
insurance. Traditional providers of workers compensation
insurance provide coverage to employers under one or more state
workers compensation laws, which prescribe benefits that
employers are obligated to provide to their employees who are
injured arising out of or in the course of employment. We focus
on employers with complex workers compensation exposures,
and provide coverage under multiple state and federal acts,
applicable common law or negotiated agreements. We also provide
traditional state act coverage in select markets. Our
workers compensation policies are issued to employers who
also pay the premiums. The policies provide payments to covered,
injured employees of the policyholder for, among other things,
temporary or permanent disability benefits, death benefits and
medical and hospital expenses. The benefits payable and the
duration of such benefits are set by statute, and vary by
jurisdiction and with the nature and severity of the injury or
disease and the wages, occupation and age of the employee.
SeaBright Insurance Holdings, Inc. was formed in 2003 by members
of our current management and entities affiliated with Summit
Partners, a leading private equity and venture capital firm, for
the purpose of completing a management-led buyout that closed on
September 30, 2003, which we refer to as the Acquisition.
In the Acquisition, we acquired the renewal rights and
substantially all of the operating assets and employees of Eagle
Pacific Insurance Company and Pacific Eagle Insurance Company,
which we collectively refer to as Eagle or the Eagle Entities.
Eagle Pacific began writing specialty workers compensation
insurance over 20 years ago. The Acquisition gave us
renewal rights to an existing portfolio of business,
representing a valuable asset given the renewal nature of our
business, and a fully-operational infrastructure that would have
taken many years to develop. These renewal rights gave us access
to Eagles customer lists and the right to seek to renew
Eagles continuing in-force insurance contracts. These
renewal rights were valued at the date of the Acquisition.
1
Introduction
to Insurance Terms
Throughout this annual report, we refer to certain terms that
are commonly used in the insurance industry. The following terms
when used herein have the following meanings:
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Accident year or accident year losses
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The year in which an accident or loss occurred, regardless of
when the accident was reported or when the related loss amount
was recognized in our financial statements. Losses grouped by
accident year are referred to as accident year losses.
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Assume
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To receive from a ceding company all or a portion of a risk in
consideration of receipt of a premium.
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Assumed premiums written
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Premiums that we have received from another company in
connection with a reinsurance agreement or from an authorized
state-mandated pool in connection with our involuntary
assumption of a portion of the insurance written by the pool.
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Cede
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To transfer to an assuming company, or reinsurer, all or a
portion of a risk in consideration of payment of a premium.
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Ceded premiums written
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The portion of our gross premiums written that is ceded to
reinsurers in return for the portion of our risk that they
reinsure. Also included in ceded premiums written are premiums
related to policies that we write on behalf of the Washington
USL&H Plan. We immediately cede 100% of direct premiums
written related to this business, net of our expenses, and 100%
of the associated losses back to the Washington USL&H Plan.
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Development
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The amount by which estimated losses, measured subsequently by
reference to payments and additional estimates, differ from
those originally reported for a period. Development is favorable
when losses ultimately settle for less than the amount reserved
or subsequent estimates indicate a basis for reducing loss
reserves on open claims. Development is unfavorable when losses
ultimately settle for more than the levels at which they were
reserved or subsequent estimates indicate a basis for reserve
increases on open claims. Favorable or unfavorable development
of loss reserves is reflected in our Consolidated Statement of
Operations in the period the change is made.
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Direct loss reserves
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Loss reserves related to business written directly by us, as
opposed to loss reserves related to business that is assumed or
ceded by us.
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Direct premiums written
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All premiums, billed and unbilled, written by us during a
specified policy period. Premiums are earned over the terms of
the related policies. At the end of each accounting period, the
portions of premiums that are not yet earned are included in
unearned premiums and are realized as revenue in subsequent
periods over the remaining terms of the policies.
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Excess of loss reinsurance
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A form of reinsurance in which the reinsurer pays all or a
specified percentage of a loss caused by a particular occurrence
or event in excess of a fixed amount and up to a stipulated
limit.
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Gross premiums written
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The sum of direct premiums written and assumed premiums written
during a specified period.
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Incurred but not reported claims
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Claims relating to insured events that have occurred but have
not yet been reported to us.
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In-force premiums
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The current annual gross premiums written on all active or
unexpired policies, excluding premiums received from the
Washington USL&H Plan.
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Loss adjustment expenses
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The expenses of investigating, administering and settling
claims, including legal expenses.
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Loss reserves
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The liability representing estimates of amounts needed to pay
reported and unreported claims and related loss adjustment
expenses.
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Net combined ratio
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The sum of the net loss ratio and the net underwriting expense
ratio.
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Net loss ratio
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A key financial measure that we use in monitoring our
profitability. Calculated by dividing loss and loss adjustment
expenses for the period less claims service income by premiums
earned for the period.
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Net premiums written
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Equal to gross premiums written minus ceded premiums written.
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Net underwriting expense ratio
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A key profitability measure. Calculated by dividing
underwriting, acquisition and insurance expenses for the period
less other service income by premiums earned for the period.
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Reinsurance
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A transaction between insurance companies in which an original
insurer, or ceding company, remits a portion of the premium to a
reinsurer, or assuming company, as payment for the
reinsurers assumption of a portion of the risk.
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Retention
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The amount of losses from a single occurrence or event which is
paid by the company prior to the attachment of excess of loss
reinsurance.
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Retrospectively-rated policy
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A policy containing a provision for determining the insurance
premium for a specified policy period on the basis of the loss
experience for the same period.
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Treaty
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A contract of reinsurance.
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Industry
Background
Workers compensation is a statutory system under which an
employer is required to pay for its employees medical,
disability, vocational rehabilitation and death benefits costs
for work-related injuries or illnesses. Most employers comply
with this requirement by purchasing workers compensation
insurance. The principal concept underlying workers
compensation laws is that an employee injured in the course of
his or her employment has only the legal remedies available
under workers compensation law and does not have any other
recourse against his or her employer. Generally, workers are
covered for injuries that occur in the course and within the
scope of their employment. An employers obligation to pay
workers compensation does not depend on any negligence or
wrongdoing on the part of the employer and exists even for
injuries that result from the negligence or wrongdoings of
another person, including the employee.
Workers compensation insurance policies generally provide
that the carrier will pay all benefits that the insured employer
may become obligated to pay under applicable workers
compensation laws. Each state has a regulatory and adjudicatory
system that quantifies the level of wage replacement to be paid,
determines the level of medical care required to be provided and
the cost of permanent impairment and specifies the options
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in selecting healthcare providers available to the injured
employee or the employer. Coverage under the United States
Longshore and Harbor Workers Compensation Act
(USL&H or the USL&H Act) is
similar to the state statutory system, but is administered on a
federal level by the U.S. Department of Labor. This
coverage is required for maritime employers with employees
working on or near the waterfront in coastal areas of the United
States and its inland waterways. As benefits under the
USL&H Act are generally more generous than in the
individual state systems, the rates charged for this coverage
are higher than those charged for comparable land-based
employment. These state and federal laws generally require two
types of benefits for injured employees: (1) medical
benefits, which include expenses related to diagnosis and
treatment of the injury, as well as any required rehabilitation
and (2) indemnity payments, which consist of temporary wage
replacement, permanent disability payments and death benefits to
surviving family members. To fulfill these mandated financial
obligations, virtually all employers are required to purchase
workers compensation insurance or, if permitted by state
law or approved by the U.S. Department of Labor, to
self-insure. In most states, employers may purchase
workers compensation insurance from a private insurance
carrier, a state-sanctioned assigned risk pool or a
self-insurance fund (an entity that allows employers to obtain
workers compensation coverage on a pooled basis, typically
subjecting each employer to joint and several liability for the
entire fund). Some states, including North Dakota, Ohio,
Washington, West Virginia and Wyoming, are known as
monopolistic states, meaning that employers in those
states are generally required to buy workers compensation
insurance from the state or, in some cases, may be allowed to
self-insure.
Our
History
On July 14, 2003, SeaBright entered into a purchase
agreement with Kemper Employers Group, Inc. (KEG),
Lumbermens Mutual Casualty Company (LMC) and the
Eagle Entities. Pursuant to the purchase agreement, we acquired
100% of the issued and outstanding capital stock of Kemper
Employers Insurance Company (KEIC) and PointSure
Insurance Services, Inc. (PointSure), a wholesale
insurance broker and third party claims administrator, and
acquired tangible assets, specified contracts, renewal rights
and intellectual property rights from LMC and the Eagle
Entities. We acquired KEIC, a shell company with no in-force
policies or employees, solely for the purpose of acquiring its
workers compensation licenses in 43 states and the
District of Columbia and for its certification with the United
States Department of Labor. SeaBright paid approximately
$6.5 million for KEICs insurance licenses,
Eagles renewal rights, internally developed software and
other assets and PointSure and approximately $9.2 million
for KEICs statutory surplus and capital, for a total
purchase price of $15.7 million. In September 2004 we paid
to LMC a purchase price adjustment in the amount of $771,116
based on the terms of the purchase agreement.
The Acquisition was completed on September 30, 2003, at
which time entities affiliated with Summit Partners, certain
co-investors and members of our management team invested
approximately $45.0 million in SeaBright and received
convertible preferred stock in return. See Certain
Relationships and Related Transactions, and Director
Independence in Part III, Item 13 of this annual
report. These proceeds were used to pay for the assets under the
purchase agreement and to contribute additional capital to KEIC,
which was renamed SeaBright Insurance Company.
SeaBright Insurance Company received an A−
(Excellent) rating from A.M. Best Company
(A.M. Best) following the completion of the
Acquisition. See the discussion under the heading
Ratings in this Item 1.
On January 26, 2005, we closed the initial public offering
of 8,625,000 shares of our common stock at a price of
$10.50 per share for net proceeds of approximately
$80.8 million, after deducting underwriters fees,
commissions and offering costs totaling approximately
$9.8 million. Approximately $74.8 million of the net
proceeds were contributed to SeaBright Insurance Company. In
connection with our initial public offering, all 508,365.25
outstanding shares of our Series A preferred stock were
converted into 7,777,808 shares of common stock.
On February 1, 2006, we closed a follow-on public offering
of 3,910,000 shares of common stock at a price of $15.75
per share for net proceeds of approximately $57.7 million,
after deducting underwriters fees, commissions and
offering costs totaling approximately $3.9 million.
Following the closing of this offering, we contributed
$50.0 million of the net proceeds to SeaBright Insurance
Company, which is using the capital to expand its business in
its core markets and to new territories.
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On December 17, 2007, we completed the acquisition of Total
HealthCare Management, Inc. (THM), a privately held
California provider of medical bill review, utilization review,
nurse case management and related services. The total purchase
price was $1.5 million, of which $1.2 million was paid
at closing. The remaining $0.3 million is scheduled to be
paid in three equal installments on the first three
anniversaries of the closing date, provided that THM achieves
certain revenue objectives in 2008, 2009 and 2010. Goodwill
recognized in connection with this acquisition totaled
approximately $1.4 million. Following the acquisition, THM
is a wholly owned subsidiary of SeaBright Insurance Holdings,
Inc.
Corporate
Structure
Our corporate structure was as follows at December 31, 2007:
SeaBright Insurance Company is our insurance company subsidiary
and a specialty provider of multi-jurisdictional workers
compensation insurance. PointSure acts primarily as an in-house
wholesale broker and third party administrator for SeaBright
Insurance Company. Total HealthCare Management, Inc. is a
provider of medical bill review, utilization review, nurse case
management and related services.
Services
Arrangements
In connection with the Acquisition, we entered into services
agreements with LMC and certain of its affiliates that require
us to provide certain service functions for the Eagle Entities
in exchange for fee income. The services that we are required to
provide to the Eagle Entities under these agreements include
administrative services, such as underwriting services, billing
and collections services, safety services and accounting
services, and claims services, including claims administration,
claims investigation and loss adjustment and settlement
services. For the years ended December 31, 2007, 2006 and
2005, we received approximately $0.9 million,
$1.0 million, and $1.5 million, respectively, in
service fee income from LMC and its affiliates under these
services arrangements.
We have entered into a service agreement with Broadspire
Services, Inc., a third-party claims administrator and former
subsidiary of LMC, pursuant to which Broadspire provides us with
claims services for the claims that we acquired from KEIC in
connection with the Acquisition. Fees for services with
Broadspire were prepaid by LMC prior to the Acquisition and the
services will continue until all claims are closed.
Issues
Relating to a Potential LMC Receivership
LMC and its affiliates had traditionally offered a wide array of
personal, risk management and commercial property and casualty
insurance products. However, due to the distressed financial
situation of LMC and its affiliates, LMC is no longer writing
new business and is now operating under a voluntary run off plan
which has been approved by the Illinois Department of Financial
and Professional Regulation, Division of Insurance (the
Illinois Division of Insurance). Run off
is the professional management of an insurance companys
discontinued, distressed or non-renewed lines of insurance and
associated liabilities outside of a judicial proceeding. Under
the run off plan, LMC has instituted aggressive expense control
measures in order to reduce its future loss exposure and allow
it to meet its obligations to current policyholders.
In the event that LMC is placed into receivership, a receiver
may seek to recover certain payments made by LMC to us in
connection with the Acquisition under applicable voidable
preference and fraudulent transfer laws. However, we believe
that there are factors that would mitigate the risk to us
resulting from a potential
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voidable preference or fraudulent conveyance action brought by a
receiver of LMC, including the fact that we believe LMC and KEIC
were solvent at the time of the Acquisition and that the
Acquisition was negotiated at arms length and for fair value,
the fact that the Director of the Illinois Division of Insurance
approved the Acquisition notwithstanding LMCs financial
condition and the fact that a substantial period of time has
elapsed since the date of the Acquisition.
In addition, if LMC is placed into receivership, various
arrangements that we established with LMC in connection with the
Acquisition, including the servicing arrangements, the
commutation agreement, the adverse development cover, and the
collateralized reinsurance trust could be adversely affected.
For a discussion of the risks relating to a potential LMC
receivership, see the risks described under Risks Related
to Our Business In the event LMC is placed into
receivership, we could lose our rights to fee income and
protective arrangements that were established in connection with
the Acquisition, our reputation and credibility could be
adversely affected and we could be subject to claims under
applicable voidable preference and fraudulent transfer
laws in Part I, Item 1A of this annual report.
Competitive
Strengths
We believe we enjoy the following competitive strengths:
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Niche Product Offering.
Our specialized
workers compensation insurance products in maritime,
alternative dispute resolution (ADR) and selected
state act markets enable us to address the needs of underserved
markets. Our management team and staff have extensive experience
serving the specific and complex needs of these customers.
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Specialized Underwriting Expertise.
We
identify individual risks with complex workers
compensation needs, such as multi-jurisdictional coverage, and
negotiate customized coverage plans to meet those needs. Our
underwriters average approximately 22 years of insurance
industry experience. Our specialized underwriting expertise
enables us to align our interests with those of our insureds by
encouraging the insured to bear a portion of the losses
sustained under their policies. Approximately 20.0% of our
direct premiums written for the year ended December 31,
2007 came from such arrangements. We achieved a calendar year
net loss ratio of 55.5% for the year ended December 31,
2007.
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Focus on Larger Accounts.
We target a
relatively small number of larger, more safety-conscious
employers (businesses with 50 to 400 employees) within our
niche markets. We had 953 customers, with an average estimated
annual premium size of approximately $282,000 at
December 31, 2007. We believe this focus, together with our
specialized underwriting expertise, increases the profitability
of our book of business primarily because the more extensive
loss history of larger customers enables us to better predict
future losses, allowing us to price our policies more
accurately. In addition, larger customers tend to purchase
policies whose premiums vary based on loss experience, and
therefore have aligned interests with us. Our focus on larger
accounts also enables us to provide individualized attention to
our customers, which we believe leads to higher satisfaction and
long-term loyalty.
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Proactive Loss Control and Claims
Management.
We consult with employers on
workplace safety, accident and illness prevention and safety
awareness training. We also offer employers medical and
disability management tools that help injured employees return
to work more quickly. These tools include access to a national
network of physicians, case management nurses and a national
discount pharmacy benefit program. Our strong focus on proven
claims management practices helps to minimize attorney
involvement and to expedite the settlement of valid claims. In
addition, our branch office network affords us extensive local
knowledge of claims and legal environments, further enhancing
our ability to achieve favorable results on claims. As of
December 31, 2007, approximately 99% of our total time loss
claims were handled in-house as opposed to being handled by
third-party administrators. Our claims managers and claims
examiners are highly experienced, with an average of over
20 years in the workers compensation insurance
industry.
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Experienced Management Team.
The members of
our senior management team, consisting of
John G. Pasqualetto, Richard J. Gergasko, Joseph S. De
Vita, Richard W. Seelinger, Marc B. Miller, M.D., D. Drue
Wax and Jeffrey C. Wanamaker, average over 28 years of
insurance industry experience, and over 23 years of
workers compensation insurance experience.
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Strong Distribution Network.
We market our
products through independent brokers and through PointSure. This
two-tiered distribution system provides us with flexibility in
originating premiums and managing our commission expense.
PointSure produced approximately 14.2% of our direct premiums
written and 11.3% of our customers in the year ended
December 31, 2007. We are highly selective in establishing
relationships with independent brokers. As of December 31,
2007, we had appointed 208 independent brokers to represent our
products. In addition, we negotiate commissions for the
placement of all risks that we underwrite, either through
independent brokers or through PointSure. For the year ended
December 31, 2007, our ratio of commission expense to net
premiums earned was 8.1%, excluding business assumed from the
National Council on Compensation Insurance, Inc., or NCCI,
residual market pool.
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Strategy
We pursue profitable growth and favorable returns on equity
through the following strategies:
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Expand Territorially.
We believe our
experience with maritime coverage issues in the states in which
we now operate can be readily applied to other areas of the
country that we do not currently serve. Nine states have
enabling legislation for collectively bargained ADR that is
similar to the ADR legislation in California. We have expanded
our business by writing policies in several more of the
45 states in which we are licensed to do business. In 2006,
we opened an office near Philadelphia, Pennsylvania to
facilitate our expansion into the Northeast region, and in early
2007, we opened an office in Atlanta, Georgia to facilitate our
expansion plans into the Southeast region.
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Expand Business in Target Markets.
We wrote
approximately 40.2% of our direct premiums in California, 9.3%
in Illinois and 8.8% in Louisiana for the year ended
December 31, 2007. Alaska and Hawaii accounted for 7.2% and
5.4%, respectively, of our direct premiums written in 2007.
Proceeds from our initial public offering in January 2005 and
follow-on offering in February 2006 have provided us with the
necessary capital to enable us to increase the amount of
insurance business that we are able to write in these and other
markets. We believe that our product offerings, combined with
our specialized underwriting expertise and niche market focus,
have positioned us to increase our market share in our target
markets.
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Increase Distribution and Leverage Key
Relationships.
As we expand geographically, we
are focusing our marketing efforts on developing relationships
with brokers that have expertise in our product offerings. We
also seek strategic partnerships with unions and union employers
to increase acceptance of our ADR product in new markets.
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Effectively Manage Overall Medical Claims
Cost.
With the help of our chief medical officer,
we are working within medical provider networks to expand our
own network of physicians that we believe will consistently
produce the best outcome for injured workers and permit them to
return to work more quickly. We believe this strategy enhances
our profitability over time by reducing our overall claims cost.
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Focus on Profitability.
We continue our focus
on underwriting discipline and profitability by selecting risks
prudently, by pricing our products appropriately and by focusing
on larger accounts in our target markets.
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Continue to Develop Scalable Technology.
Our
in-house technology department has developed effective,
customized analytical tools that we believe significantly
enhance our ability to write profitable business and
cost-effectively administer claims. In addition, these tools
also allow for seamless connectivity with our branch offices. We
intend to continue making investments in advanced and reliable
technological infrastructure.
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Customers
We currently provide workers compensation insurance to the
following types of customers:
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Maritime employers with complex coverage needs over land, shore
and navigable waters. This involves underwriting liability
exposures subject to various state and federal statutes and
applicable maritime common law. Our customers in this market are
engaged primarily in ship building and repair, pier and marine
construction and stevedoring.
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Employers, particularly in the construction industry in
California, who are party to collectively bargained
workers compensation agreements that provide for
settlement of claims out of court in a negotiated process.
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Employers who are obligated to pay insurance benefits
specifically under state workers compensation laws. We
primarily target employers in states that we believe are
underserved, such as the construction market in California,
Illinois and Louisiana, and the states of Alaska and Hawaii.
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Maritime
Customers
Providing workers compensation insurance to maritime
customers with multi-jurisdictional liability exposures was the
core of the business of Eagle Pacific Insurance Company, which
began writing specialty workers compensation insurance
over 20 years ago, and remains a key component of our
business today. We are authorized by the U.S. Department of
Labor to write maritime coverage under the USL&H Act in all
federal districts, and believe, based primarily on the
experience of our management team, that we are one of the most
capable underwriters in this niche in the United States. The
USL&H Act is a federal law that allows for compensation to
longshoremen employees if an injury or death occurs
upon navigable waters in the United States, including any
adjoining pier, wharf, dry dock, terminal, building way, marine
railway or other adjoining area customarily used by an employer
in loading, unloading, repairing, dismantling or building a
vessel. We also write maritime employers liability
coverage under the Jones Act. The Jones Act is a federal law,
the maritime employer provisions of which provide injured
offshore workers, or seamen, with a remedy against their
employer for injuries arising from negligent acts of the
employer or co-workers during the course of employment on a ship
or vessel.
The availability of maritime coverage has declined in recent
years due to several factors, including market tightening and
insolvency of insurers providing this type of insurance.
Offshore mutual organizations have increasingly become the
default mechanism for insuring exposures for maritime employers
due to the withdrawal of several traditional insurance carriers
from this market segment. Maritime employers that obtain
coverage through offshore mutual organizations are not able to
rely on the financial security of a rated domestic insurance
carrier. Accordingly, these employers are exposed to
joint-and-several
liability along with other members of the mutual organization.
We offer maritime employers cost-competitive insurance coverage
(usually under one policy) for liabilities under various state
and federal statutes and applicable maritime common law without
the uncertain financial exposure associated with
joint-and-several
liability. We believe we have very few competitors who focus on
maritime employers with multi-jurisdictional liability exposures.
We also provide coverage for exposures under The Outer
Continental Shelf Lands Act (the OCSLA). The OCSLA
is a federal workers compensation act that also provides
access to the benefits defined in the USL&H Act for
maritime employers with employees working on an off-shore
drilling platform on the Outer Continental Shelf.
In the year ended December 31, 2007, we received
approximately $56.7 million, or 21.1%, of our direct
premiums written from our maritime customers. We define a
maritime customer as a customer whose total workers
compensation exposure consists of at least 10% of maritime
exposure. When we use the term maritime exposure in this annual
report, we refer to exposure under the USL&H Act and its
extensions, including the OCSLA; the Jones Act; or both. Not all
of the gross premiums written from our maritime customers are
for maritime exposures. For the year ended December 31,
2007, approximately 77.4% of our direct premiums written for
maritime customers were for maritime exposures. Our experience
writing maritime coverage attracts maritime customers for whom
we can also write state act and ADR coverage.
8
Employers
Party to Collectively Bargained Workers Compensation
Agreements
We also provide workers compensation coverage for
employers, particularly in the construction industry in
California, that are party to collectively bargained
workers compensation agreements with trade unions, also
known as ADR programs. These programs use informal arbitration
instead of litigation to resolve disputes out of court in a
negotiated process. ADR insurance programs in California were
made possible by legislation passed in 1993 and expanded by
legislation passed in 2003. In 2003, these ADR programs became
available to all unionized employees in California, where
previously they were available only to unionized employees in
the construction industry. We are recognized by 17
labor/management programs as authorized to provide coverage for
employers that are party to collectively bargained workers
compensation agreements with trade unions. We are aware of seven
states in addition to California, Florida and Hawaii that have
enabling legislation allowing for the creation of ADR
collectively bargained workers compensation insurance
programs.
The primary objectives of an ADR program are to reduce
litigation costs, improve the quality of medical care, improve
the delivery of benefits, promote safety and increase the
productivity of union workers by reducing workers
compensation costs. The ADR process is generally handled by an
ombudsman, who is typically experienced in the workers
compensation system. The ombudsman gathers the facts and
evidence in a dispute and attempts to use his or her experience
to resolve the dispute among the employer, employee and
insurance carrier. If the ombudsman is unable to resolve the
dispute, the case goes to mediation or arbitration.
ADR programs have had many positive effects on the California
workers compensation process. For example, a 2004 study
conducted by the California Workers Compensation Institute
revealed that attorney involvement decreased by 72% for claims
handled under ADR programs as opposed to claims handled under
Californias statutory workers compensation system.
Although the California regulatory reforms enacted primarily in
2003 and 2004 have resulted in significant claim cost reductions
for non-ADR claims, our own September 2007 California studies
revealed that after adjusting for the mix in claim type, our
closed ADR indemnity claims had a 16.8% lower average cost per
claim than our non-ADR claims. We are one of the few insurance
companies that offers this product in the markets that we serve.
In the year ended December 31, 2007, we received
approximately $52.4 million, or 19.5%, of our direct
premiums written from customers who participate in ADR programs.
We define an ADR customer as any customer who pays us a premium
for providing the customer with insurance coverage in connection
with an ADR program. Not all of the gross premiums written from
our ADR customers are for ADR exposures. Our experience writing
ADR coverage attracts ADR customers for whom we can also write
state act and maritime coverage. For the year ended
December 31, 2007, approximately 79.5% of our direct
premiums written for ADR customers were for ADR exposures. We
believe we are a leading provider of the ADR product. As
awareness of this product by unions and employers increases over
time, we expect to have substantial opportunities for growth in
states that have passed enabling legislation.
State
Act Customers
We also provide workers compensation insurance to other
employers who are obligated to pay benefits to employees under
state workers compensation laws. Approximately 83.6% of
our state act business is written in the seven states of Alaska,
Arizona, California, Hawaii, Illinois, Louisiana, and Texas. We
provide coverage under state statutes that prescribe the
benefits that employers are required to provide to their
employees who may be injured in the course of their employment.
Our policies are issued to employers. The policies provide
payments to covered, injured employees of the policyholder for,
among other things, temporary or permanent disability benefits,
death benefits, medical benefits and hospital expenses. The
benefits payable and the duration of these benefits are set by
statute and vary by state and with the nature and severity of
the injury or disease and the wages, occupation and age of the
employee. We are one of a few insurance carriers that have a
local claim office in Alaska and Hawaii and, as such, we do not
need to rely on third party administrators in these two markets.
In the year ended December 31, 2007, we received
approximately $159.8 million, or 59.4%, of our direct
premiums written from state act customers. We define a state act
customer as a customer whose state act
9
exposure arises only under state workers compensation laws
and who is not a maritime customer or an ADR customer.
Customer
Concentration
As of December 31, 2007, our largest customer had annual
gross premiums written of approximately $4.3 million, or
1.6% of our total in-force premiums as of December 31,
2007. We are not dependent on any single customer, the loss of
which would have a material adverse effect on our business. As
of December 31, 2007, we had in-force premiums of
$269.2 million. In-force premiums refers to our current
annual gross premiums written for all customers that have active
or unexpired policies, excluding premiums received from the
Washington State USL&H Compensation Act Assigned Risk Plan
(the Washington USL&H Plan), and represents
premiums from our total customer base. Our three largest
customers have combined annual gross premiums written of
$12.5 million, or 4.6% of our total in-force premiums as of
December 31, 2007. We do not expect the size of our largest
customers to increase significantly over time. Accordingly, as
we grow in the future, we believe our largest customers will
account for a decreasing percentage of our total gross premiums
written.
Distribution
We distribute our products primarily by identifying independent
brokers with well-established maritime or construction
expertise. As of December 31, 2007, we had a network of
approximately 208 appointed insurance brokers. For the year
ended December 31, 2007, no broker, excluding PointSure,
accounted for more than 6.6% of our direct premiums written. We
do not employ sales representatives or use third-party managing
general agents. The licensed insurance brokers with whom we
contract are compensated by a commission set as a percentage of
premiums. Our standard broker agreement does not contain a
commission schedule because all commissions are specifically
negotiated as part of our underwriting process. Our ratio of
commissions to net premiums earned for the year ended
December 31, 2007 was 8.1%, excluding business assumed from
the NCCI residual market pool. For the year ended
December 31, 2007, the accounts for 61 of our customers,
constituting 10.7% of our direct premiums written for that
period, were written with no commissions. Brokers do not have
authority to underwrite or bind coverage on our behalf, and they
are contractually bound by our broker agreement.
We also distribute our products through PointSure, our licensed
in-house wholesale insurance broker and third-party
administrator. PointSure is a wholly-owned subsidiary of
SeaBright. PointSure has approximately 522 sub-producer
agreements as of December 31, 2007 compared to 482 as of
December 31, 2006, representing an increase of 8.3%.
PointSure is authorized to act as an insurance broker under
corporate licenses or licenses held by one of its officers in
49 states and the District of Columbia. In addition to
enhancing distribution for SeaBright Insurance Company,
PointSure provides SeaBright Insurance Company with a
cost-effective source of business. It provides the flexibility
needed to avoid the costly and time consuming process of
appointing brokers directly in both existing and new
territories. For the year ended December 31, 2007,
excluding premiums for the Washington USL&H Plan,
PointSures direct premiums written with SeaBright
Insurance Company were $43.5 million compared to $33.7
million in 2006 and $47.3 million in 2005. The majority of
the reduction from 2005 to 2007 resulted from the direct
appointment by SeaBright Insurance Company of brokers that
previously were sub-producers of PointSure.
PointSure acts in a variety of capacities for SeaBright
Insurance Company and for third parties. PointSure provides
marketing, sales, distribution, and some policyholder services
for SeaBright Insurance Company to brokers that are not directly
appointed with SeaBright Insurance Company. PointSure also
performs services for third parties unaffiliated with SeaBright.
For example, PointSure acts as a third party administrator for
self-insured employers and as a wholesale insurance broker for
non-affiliated insurance companies. For these services provided,
PointSure receives commissions from insurance carriers
and/or
brokerage fees on policies placed through PointSure. Incentive
commissions may also be received from non-affiliated carriers
based on the achievement of certain premium growth, retention
and profitability objectives. As of December 31, 2007, no
incentive commissions had been received by PointSure.
10
The following table provides the geographic distribution of our
risks insured as represented by direct premiums written by
product for the year ended December 31, 2007, excluding
premiums written under the Washington USL&H Plan and which
are ceded 100% back to the plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Premiums Written
|
|
|
|
|
|
|
Alternative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dispute
|
|
|
|
|
|
|
|
|
Percent of
|
|
State
|
|
Maritime
|
|
|
Resolution
|
|
|
State Act
|
|
|
Total
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Alabama
|
|
$
|
1,126
|
|
|
$
|
|
|
|
$
|
486
|
|
|
$
|
1,612
|
|
|
|
*
|
|
Alaska
|
|
|
851
|
|
|
|
|
|
|
|
18,629
|
|
|
|
19,480
|
|
|
|
7.2
|
%
|
Arizona
|
|
|
27
|
|
|
|
|
|
|
|
11,405
|
|
|
|
11,432
|
|
|
|
4.3
|
|
Arkansas
|
|
|
1
|
|
|
|
|
|
|
|
127
|
|
|
|
128
|
|
|
|
*
|
|
California
|
|
|
5,020
|
|
|
|
38,069
|
|
|
|
64,900
|
|
|
|
107,989
|
|
|
|
40.2
|
|
Colorado
|
|
|
|
|
|
|
|
|
|
|
353
|
|
|
|
353
|
|
|
|
*
|
|
Connecticut
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
47
|
|
|
|
*
|
|
District of Columbia
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
79
|
|
|
|
*
|
|
Delaware
|
|
|
|
|
|
|
|
|
|
|
1,573
|
|
|
|
1,573
|
|
|
|
*
|
|
Florida
|
|
|
3,695
|
|
|
|
2,825
|
|
|
|
3,389
|
|
|
|
9,909
|
|
|
|
3.7
|
|
Georgia
|
|
|
35
|
|
|
|
|
|
|
|
1,307
|
|
|
|
1,342
|
|
|
|
*
|
|
Hawaii
|
|
|
2,623
|
|
|
|
776
|
|
|
|
11,044
|
|
|
|
14,443
|
|
|
|
5.4
|
|
Idaho
|
|
|
|
|
|
|
|
|
|
|
161
|
|
|
|
161
|
|
|
|
*
|
|
Illinois
|
|
|
252
|
|
|
|
|
|
|
|
24,707
|
|
|
|
24,959
|
|
|
|
9.3
|
|
Indiana
|
|
|
104
|
|
|
|
|
|
|
|
646
|
|
|
|
750
|
|
|
|
*
|
|
Iowa
|
|
|
|
|
|
|
|
|
|
|
214
|
|
|
|
214
|
|
|
|
*
|
|
Kansas
|
|
|
|
|
|
|
|
|
|
|
306
|
|
|
|
306
|
|
|
|
*
|
|
Kentucky
|
|
|
|
|
|
|
|
|
|
|
708
|
|
|
|
708
|
|
|
|
*
|
|
Louisiana
|
|
|
13,915
|
|
|
|
|
|
|
|
9,817
|
|
|
|
23,732
|
|
|
|
8.8
|
|
Maryland
|
|
|
171
|
|
|
|
|
|
|
|
1,277
|
|
|
|
1,448
|
|
|
|
*
|
|
Massachusetts
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
5
|
|
|
|
*
|
|
Michigan
|
|
|
144
|
|
|
|
|
|
|
|
219
|
|
|
|
363
|
|
|
|
*
|
|
Minnesota
|
|
|
10
|
|
|
|
|
|
|
|
141
|
|
|
|
151
|
|
|
|
*
|
|
Mississippi
|
|
|
256
|
|
|
|
|
|
|
|
1,451
|
|
|
|
1,707
|
|
|
|
*
|
|
Missouri
|
|
|
75
|
|
|
|
|
|
|
|
1,817
|
|
|
|
1,892
|
|
|
|
*
|
|
Montana
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
30
|
|
|
|
*
|
|
Nebraska
|
|
|
|
|
|
|
|
|
|
|
392
|
|
|
|
392
|
|
|
|
*
|
|
Nevada
|
|
|
|
|
|
|
|
|
|
|
4,459
|
|
|
|
4,459
|
|
|
|
1.7
|
|
New Jersey
|
|
|
270
|
|
|
|
|
|
|
|
3,399
|
|
|
|
3,669
|
|
|
|
1.4
|
|
New Mexico
|
|
|
|
|
|
|
|
|
|
|
623
|
|
|
|
623
|
|
|
|
*
|
|
New York
|
|
|
34
|
|
|
|
|
|
|
|
257
|
|
|
|
291
|
|
|
|
*
|
|
Ohio
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
*
|
|
Oklahoma
|
|
|
|
|
|
|
|
|
|
|
157
|
|
|
|
157
|
|
|
|
*
|
|
Oregon
|
|
|
665
|
|
|
|
|
|
|
|
226
|
|
|
|
891
|
|
|
|
*
|
|
Pennsylvania
|
|
|
554
|
|
|
|
|
|
|
|
2,319
|
|
|
|
2,873
|
|
|
|
1.1
|
|
Rhode Island
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
|
|
*
|
|
South Carolina
|
|
|
122
|
|
|
|
|
|
|
|
872
|
|
|
|
994
|
|
|
|
*
|
|
Tennessee
|
|
|
|
|
|
|
|
|
|
|
939
|
|
|
|
939
|
|
|
|
*
|
|
Texas
|
|
|
1,826
|
|
|
|
|
|
|
|
11,923
|
|
|
|
13,749
|
|
|
|
5.1
|
|
Utah
|
|
|
|
|
|
|
|
|
|
|
1,637
|
|
|
|
1,637
|
|
|
|
*
|
|
Virginia
|
|
|
29
|
|
|
|
|
|
|
|
411
|
|
|
|
440
|
|
|
|
*
|
|
Washington
|
|
|
13,054
|
|
|
|
|
|
|
|
|
|
|
|
13,054
|
|
|
|
4.9
|
|
Wisconsin
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
(21
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
44,857
|
|
|
$
|
41,670
|
|
|
$
|
182,435
|
|
|
$
|
268,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total
|
|
|
16.7
|
%
|
|
|
15.5
|
%
|
|
|
67.8
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
*
|
|
Represents less than 1% of total.
|
11
Underwriting
We underwrite business on a guaranteed-cost basis and we also
underwrite dividend and loss sensitive plans that make use of
retrospective-rating plans and deductible plans. Guaranteed cost
plans allow for fixed premium rates for the term of the
insurance policy. Although the premium rates are fixed, the
final premium on a guaranteed cost plan will vary based on the
difference between the estimated term payroll at the time the
policy is issued and the final audited payroll of the customer
after the policy expires. Dividend plans allow a policyholder to
earn a cash dividend if its individual loss experience is lower
than predetermined levels established at the inception of the
policy. Policyholder dividends are payable only if declared by
the Board of Directors of SeaBright Insurance Company. Loss
sensitive plans, on the other hand, provide for a variable
premium rate for the policy term. The variable premium is based
on the customers actual loss experience for claims
occurring during the policy period, subject to a minimum and
maximum premium. The final premium for the policy may not be
known for five to seven years after the expiration of the policy
because the premium is recalculated at
12-month
intervals beginning six months following expiration of the
policy to reflect development on reported claims. Our loss
sensitive plans allow our customers to choose to actively manage
their insurance premium costs by sharing risk with us. For the
year ended December 31, 2007, approximately 80.0% of our
direct premiums written came from customers on guaranteed cost
plans, 2.5% from customers on dividend plans and the remaining
17.5% from customers on loss sensitive plans.
As opposed to using a class underwriting approach, which targets
specific classes of business or industries and where the
acceptability of a risk is determined by the entire class or
industry, our underwriting strategy is to identify and target
individual risks with specialized workers compensation
needs. We negotiate individual coverage plans to meet those
needs with competitive pricing and supportive underwriting, risk
management and service. Our underwriting is tailored to each
individual risk, and involves a financial evaluation, loss
exposure analysis and review of management control and
involvement. Each account that we underwrite is evaluated for
its acceptability, coverage, pricing and program design. We do
not underwrite books or blocks of business. We make use of risk
sharing (or loss sensitive) plans to align our interests with
those of the insured. Our underwriting department monitors the
performance of each account throughout the coverage period, and
upon renewal, the profitability of each account is reviewed and
integrated into the terms and conditions of coverage going
forward.
The underwriting of each piece of business begins with the
selection process. All of our underwriting submissions are
initially sent to the local underwriting office based on the
location of the producer. A submission is an application for
insurance coverage by a broker on behalf of a prospective
policyholder. Our underwriting professionals screen each
submission to ensure that the potential customer is a maritime
employer, an employer involved in an ADR program, or an employer
governed by a state workers compensation act with a record
of successfully controlling higher hazard workers
compensation exposures. The submission generally must meet a
minimum premium size of $75,000, higher for some classes of
business, and must not involve prohibited operations. For
example, we deem diving, ship breaking, employee leasing and
asbestos and lead abatement to be prohibited operations that we
generally do not insure. Once a submission passes the initial
clearance hurdle, members of our loss control and underwriting
departments jointly determine whether to ultimately accept the
account. If our underwriting department preliminarily determines
to accept the account, our loss control department conducts a
prospect survey. We require a positive loss control survey
before any piece of new business is bound, unless otherwise
approved by our underwriting department management. Our loss
control consultants independently verify the information
contained in the submission and communicate with our
underwriters to confirm the decision to accept the account.
We use a customized loss-rating model to determine the premium
on a particular account. We compare the loss history of each
customer to the expected losses underlying the rates in each
state and jurisdiction. Our loss projections are based on
comparing actual losses to expected losses. We estimate the
annual premium by adding our expenses and profit to the loss
projection selected by our underwriters. This process helps to
ensure that the premiums we charge are adequate for the risk
insured.
12
Our underwriting department is managed by experienced
underwriters who specialize in maritime and construction
exposures. We have underwriting offices in Seattle, Washington;
Orange, California; Anchorage, Alaska; Duluth, Georgia; Houston,
Texas; Concord, California; Phoenix, Arizona; Tampa, Florida;
Radnor, Pennsylvania; and Chicago, Illinois. As of
December 31, 2007, we had a total of 59 employees in
our underwriting department, consisting of 35 underwriting
professionals and 24 support-level staff members. Our
underwriting professionals average approximately 22 years
of insurance industry experience. We use audits and
authority letters to help ensure the quality of our
underwriting decisions. Our authority letters set forth the
underwriting authority for each individual underwriting staff
member based on their level of experience and demonstrated
knowledge of the product and market. We also maintain a table of
underwriting authority controls in our custom-built quote and
issue system that is designed to alert underwriters of pricing
and coverage conflicts that are outside their granted
underwriting authority. These controls compare the
underwriters authority for premium size, commission level,
pricing deviation, plan design and coverage jurisdiction to the
terms that are being proposed for the specific policyholder.
Proposals that are outside an underwriters authority
require appropriate review and approval from our senior
underwriting personnel, allowing our senior underwriting
personnel to mentor and manage the individual performance of our
underwriters and to monitor the selection of new accounts.
Loss
Control
We place a strong emphasis on our loss control function as an
integral part of the underwriting process as well as a
competitive differentiator. Our loss control department delivers
risk level evaluations to our underwriters with respect to the
degree of an employers management commitment to safety and
acts as a resource for our customers to effectively support the
promotion of a safe workplace. Our loss control staff has
extensive experience developed from years of servicing the
maritime and construction industries. Our loss control staff
consists of 22 employees as of December 31, 2007,
averaging 21 years of experience in the industry. We
believe that this experience benefits us by allowing us to serve
our customers more efficiently and effectively. Specifically,
our loss control staff grades each prospective customers
safety program elements and key loss control measures, supported
with explanations in an internal report to the appropriate
underwriter. Our loss control staff prepares risk improvement
recommendations as applicable and provides a loss control
opinion of risk with supporting comments. Our loss control staff
also prepares a customized loss control service plan for each
policyholder based upon identified servicing needs.
Our loss control staff works closely with Marc B.
Miller, M.D., our chief medical officer, to assist our
customers in developing tailored medical cost management
strategies. We believe that by analyzing our loss data, our
medical management needs and the current legal and regulatory
environment, our chief medical officer helps us reduce our
payments for medical costs and improve the delivery of medical
care to our policyholders employees.
Our loss control staff conducts large loss investigation visits
on site for traumatic or fatal incidents whenever possible. Our
loss control staff also conducts a comprehensive re-evaluation
visit prior to the expiration of a policy term to assist the
underwriter in making decisions on coverage renewal.
We have loss control staff located within, or in close proximity
to, our offices in Seattle, Washington; Orange, California;
Houston, Texas; Chicago, Illinois; Tampa, Florida; Anchorage,
Alaska; Concord, California; Honolulu, Hawaii; Radnor,
Pennsylvania; Duluth, Georgia; and Phoenix, Arizona. The
majority of our loss control staff work from resident offices. A
network of well-vetted independent consultants provides
supplemental loss control service support throughout the country.
Pricing
We use a loss-rating approach when pricing our products. Our
underwriting department determines expected ultimate losses for
each of our prospective accounts and renewals using a customized
loss-rating model developed by actuaries. This loss-rating model
projects expected losses for future policy periods by weighing
expected losses underlying specific workers compensation
class codes against our customers historical payroll and
loss information. Our underwriting department uses these
projections to produce an
13
expected loss amount for each account. This loss amount provides
the foundation for developing overall pricing terms for the
account. After the ultimate expected losses are calculated, our
underwriting department determines the appropriate premium for
the risk after adding specific expense elements to the expected
loss amount, including loss control expenses, commissions,
reinsurance cost, taxes and underwriting margins.
We also own a customized pricing model developed completely
in-house that we use to calculate insurance terms for our loss
sensitive plans. This program uses industry-published excess
loss factors and tables of insurance charges, as well as
company-specific expenses, to calculate the appropriate pricing
terms. As discussed above under the heading
Underwriting, our loss sensitive plans align our
interests with our customers interests by providing our
customers with the opportunity to pay a premium that would
otherwise be higher than under a guaranteed cost plan if they
are able to keep their losses below an expected level. The
premiums for our retrospectively rated loss sensitive plans are
reflective of the customers loss experience because,
beginning six months after the expiration of the relevant
insurance policy, and annually thereafter, we recalculate the
premium payable during the policy term based on the current
value of the known losses that occurred during the policy term.
Because of the long duration of our loss sensitive plans, there
is a risk that the customer will fail to pay the additional
premium. Accordingly, we obtain collateral in the form of
letters of credit to mitigate credit risk associated with our
loss sensitive plans.
We monitor the overall price adequacy of all new and renewal
policies using a weekly price monitoring report. Our rates upon
renewal were down approximately 16.8% in 2007, 22.8% in 2006 and
13.2% in 2005. The reductions were driven primarily by our
California business, where rates have declined since 2004 as a
result of reform legislation enacted primarily in 2003 and 2004.
In response to the reform legislation and a continuing drop in
the frequency of workers compensation claims, the pure
premium rates approved by the California Insurance Commissioner
effective January 1, 2008 were 65.1% lower than the pure
premium rates in effect as of July 1, 2003. The California
Insurance Commissioners rate decisions are advisory only
and insurance companies may choose whether or not to adopt the
new rates.
Claims
We believe we are particularly well qualified to handle
multi-jurisdictional workers compensation claims. Our
claims operation is organized around our unique product mix and
customer needs. We believe that we can achieve quality claims
outcomes because of our niche market focus, our local market
knowledge and our superior claims handling practices. We have
claims staff located in Seattle, Washington; Orange and Concord,
California; Anchorage, Alaska; Phoenix, Arizona; Honolulu,
Hawaii; Houston, Texas; Tampa, Florida; Chicago, Illinois;
Duluth, Georgia; and Radnor, Pennsylvania. We also maintain
resident claim examiners in San Diego, California, and
Western Washington to better serve our client base.
Our maritime claims are handled in our Seattle, Washington and
Houston, Texas offices. Upon completion of a thorough
investigation, our maritime claims staff is able to promptly
determine the appropriate jurisdiction for the claim and
initiate benefit payments to the injured worker. We believe our
ability to handle both USL&H Act and Jones Act claims in
one integrated process results in reduced legal costs for our
customers and improved benefit delivery to injured workers.
Claims for our California ADR product are handled in our Orange,
California office. Claims for our Hawaii ADR product are handled
in our Honolulu, Hawaii office and claims for our Florida ADR
product are handled in our Tampa, Florida office. By
centralizing these claims in key regional locations, we have
developed tailored claim handling processes, systems and
procedures. We believe this claims centralization also results
in enhanced focus and improved claims execution.
Claims for our state act products are handled in our regional
claims offices located in Anchorage, Alaska; Phoenix, Arizona;
Honolulu, Hawaii; Orange and Concord, California; Houston,
Texas; Chicago, Illinois; Tampa, Florida; Duluth, Georgia; and
Radnor, Pennsylvania. We believe in maintaining a local market
presence for our claims handling process. Our regional claims
staff has developed a thorough knowledge of the local medical
and legal community, enabling them to make more informed claims
handling decisions.
14
We seek to maintain an effective claims management strategy
through the application of sound claims handling practices. We
are devoted to maintaining a quality, professional staff with a
high level of technical proficiency. We practice a team approach
to claims management, seeking to distribute each claim to the
most appropriate level of technical expertise in order to obtain
the best possible outcome. Our claims examiners are supported by
claims assistants, at a ratio of approximately one claims
assistant for every two claims examiners. Claims assistants
perform a variety of routine tasks to assist our claims
examiners. This support enables our claims examiners to focus on
the more complex tasks associated with our unique products,
including analyzing jurisdictional issues; investigating,
negotiating and settling claims; considering causal connection
issues; and managing the medical, disability, litigation and
benefit delivery aspects of the claims process. We believe that
it is critical for our claims professionals to have regular
customer contact, to develop relationships with owners and risk
management personnel of the employer and to be familiar with the
activities of the employer.
Having a highly-experienced claims staff with manageable work
loads is an integral part of our business model. Our claims
staff is experienced in the markets in which we compete. As of
December 31, 2007, we had a total of 59 employees in
our claims department, including 43 claim management and
technical staff and 16 support-level staff members. Our claims
managers and examiners average 21 years of experience in
the insurance industry and over 20 years of experience with
workers compensation coverage. In addition, our in-house
claims examiners maintain manageable work loads so they can more
fully investigate individual claims, with each claims examiner
handling, on average, 109 time loss cases at one time as of
December 31, 2007. Our target time loss case load per
claims examiner is 125; consequently, we currently have capacity
to handle additional claim volume without making additions to
our claims staff.
Our claims examiners are focused on early return to work, timely
and effective medical treatment and prompt claim resolution.
Newly-hired examiners are assigned to experienced supervisors
who monitor all activity and decision-making to verify skill
levels. Like our underwriting department, we use audits and
authority letters in our claims department to help
ensure the quality of our claims decisions. The authority
letters set forth the claims handling authority for each
individual claims professional based on their level of
experience and demonstrated knowledge of the product and market.
We believe that our audits are a valuable tool in measuring
execution against performance standards and the resulting impact
on our business. Our home office audit function conducts an
annual review of each claims office for compliance with our best
claims handling practices, policies and procedures.
Our claims staff also works closely with Marc B.
Miller, M.D., our chief medical officer, to better manage
medical costs. Our chief medical officer performs a variety of
functions for us, including providing counsel and direction on
cases involving complex medical issues and assisting with the
development and implementation of innovative medical cost
management strategies tailored to the unique challenges of our
market niches.
We have a modern electronic claims management system that we
believe enables us to provide prompt, responsive service to our
customers. We offer a variety of claim reporting options,
including telephone, facsimile,
e-mail
and
online reporting from our website. This information flows into
Compass, our automated claims management system.
In those states where we do not have claims staff, we have made
arrangements with local third party administrators to handle
state act claims only. As of December 31, 2007,
approximately 99.0% of our time loss claims were being handled
in-house as opposed to being handled by third-party
administrators. To help ensure the appropriate level of claims
expertise, we allow only our own claims personnel to handle
maritime claims, regardless of where the claim occurs.
Broadspire Services, a third-party claims administrator,
services a small book of claims for us which we acquired in the
Acquisition. As of December 31, 2007, there were 87 open
claims in the book of claims being serviced by Broadspire
Services, compared to 107 open claims at December 31, 2006.
Outstanding loss reserves related to claims we assumed in the
Acquisition totaled $13.3 million (gross) and
$5.3 million (net of reinsurance) at December 31, 2007.
15
Loss
Reserves
We maintain amounts for the payment of claims and expenses
related to adjusting those claims. Unpaid losses are estimates
at a given point in time of amounts that an insurer expects to
pay for claims which have been reported and for claims which
have occurred but are unreported. We take into consideration the
facts and circumstances for each claim file as then known by our
claims department, as well as actuarial estimates of aggregate
unpaid losses and loss expense.
Our unpaid losses consist of case amounts, which are for
reported claims, and amounts for claims that have been incurred
but have not yet been reported (sometimes referred to as
IBNR) as well as adjustments to case amounts for
ultimate expected losses. The amount of unpaid loss for reported
claims is based primarily upon a
claim-by-claim
evaluation of coverage, liability or injury severity, and any
other information considered pertinent to estimating the
exposure presented by the claim. The amounts for unreported
claims and unpaid loss adjustment expenses are determined using
historical information as adjusted to current conditions. Unpaid
loss adjustment expense is intended to cover the ultimate cost
of settling claims, including investigation and defense of
lawsuits resulting from such claims. The amount of loss reserves
is determined by us on the basis of industry information,
historical loss information and anticipated future conditions. A
loss reserve committee, comprised of senior executives from our
Executive, Actuarial, Underwriting, Claims and Finance
departments, meets quarterly to review our loss reserves and to
make necessary recommendations regarding such amounts. Although
we review our loss reserve estimates on a quarterly basis and
believe that our estimates at any point in time are reasonable
and appropriate, loss reserves are estimates and are inherently
uncertain; they do not and cannot represent an exact measure of
liability.
We consider the following factors to be especially important at
this time because they increase the variability risk factors in
our current loss reserves:
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|
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We wrote our first policy on October 1, 2003 and, as a
result, our total reserve portfolio is relatively immature when
compared to other industry data.
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|
At December 31, 2007, approximately $130.3 million, or
54.6%, of our direct loss reserves were related to business
written in California. The California workers compensation
benefit system experienced significant reform activity in 2002
through 2004 which has resulted in uncertainty regarding the
impact of the reforms on loss reserves. In addition, several of
the reforms face ongoing challenges in the California court
system.
|
We review the following significant components of loss reserves
on a quarterly basis:
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|
|
|
IBNR reserves for pure losses, which includes amounts for the
medical and indemnity components of the workers
compensation claim payments, net of subrogation recoveries and
deductibles;
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|
|
IBNR reserves for defense and cost containment expenses
(DCC), also referred to as allocated loss adjustment
expenses (ALAE), net of subrogation recoveries and
deductibles;
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reserve for adjusting and other expenses, also known as
unallocated loss adjustment expense (ULAE); and
|
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|
reserve for loss based assessments, also referred to as the
8F reserve in reference to Section 8,
Compensation for Disability, subsection (f), Injury increasing
disability, of the USL&H Act.
|
The reserves for loss and DCC are also reviewed gross and net of
reinsurance (referred to as net). For gross losses,
the claims for the Washington USL&H Plan, the KEIC claims
assumed in the Acquisition and claims assumed from the NCCI
residual market pools are excluded from this discussion.
IBNR reserves include a provision for future development on
known claims, a reopened claims reserve, a provision for claims
incurred but not reported and a provision for claims in transit
(incurred and reported but not recorded).
In light of our short operating history and uncertainties
concerning the effects of recent legislative reforms,
specifically as they relate to our California workers
compensation experience, actuarial techniques
16
are applied that use historical experience of our predecessor as
well as industry information in the analysis of loss reserves.
It should be noted that a continuity of management and adjusting
staff exists between us and our predecessor. These techniques
recognize, among other factors:
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our claims experience and that of our predecessor;
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the industrys claim experience;
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historical trends in reserving patterns and loss payments;
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the impact of claim inflation
and/or
deflation;
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the pending level of unpaid claims;
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the cost of claim settlements;
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|
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legislative reforms affecting workers compensation;
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the overall environment in which insurance companies
operate; and
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trends in claim frequency and severity.
|
Our actuarial analysis is done separately for the indemnity,
medical and DCC components of the total loss reserves within
each accident year. In addition, the analysis is completed
separately for the following three categories: State Act
California; State Act excluding California; and USL&H.
Development factors, expected loss rates and expected loss
ratios are derived from the combined experience of us and our
predecessor.
Gross ultimate loss (indemnity, medical and ALAE separately) for
each category is estimated using the following actuarial methods:
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paid loss (or ALAE) development;
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incurred loss (or ALAE) development;
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Bornhuetter-Ferguson method (Bornhuetter-Ferguson),
a standard actuarial reserving methodology further described
below, using ultimate premiums and paid loss (or ALAE); and
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Bornhuetter-Ferguson using ultimate premiums and incurred loss
(or ALAE).
|
This Bornheutter-Ferguson method blends the loss development and
expected loss ratio methods by assigning partial weight to the
initial expected losses, calculated from the expected loss ratio
method, with the remaining weight applied to the actual losses,
either paid or incurred. The weights assigned to the initial
expected losses decrease as the accident year matures.
A gross ultimate value is selected by reviewing the various
ultimate estimates and applying actuarial judgment to achieve a
reasonable point estimate of the ultimate liability. The
gross IBNR reserve equals the selected gross ultimate loss
minus the gross paid losses and gross case reserves as of the
valuation date. The selected gross ultimate loss and ALAE are
currently reviewed and updated on a quarterly basis.
Excess loss and ALAE is used to determine the estimated ultimate
ceded losses. Excess loss and ALAE is estimated based on excess
loss factors and development factors derived from our experience
and that of our predecessor. Net losses equal gross losses minus
ceded losses.
ULAE reserves are estimated using a standard paid ULAE to paid
loss approach applied to gross loss and ALAE reserves. At
December 31, 2007, the selected paid ULAE to paid loss
ratio was based on experience from calendar years 2004, 2005,
2006 and the first 11 months of 2007.
We participate in a special fund administered by the
U.S. Department of Labor related to workers
compensation benefits under the USL&H Act. Annual
assessments levied by the special fund are treated as claim
payments by us and in our financial statements as loss and ALAE.
Our actuarial analysis of loss and ALAE reserves excludes these
payments. We separately review our liability for future
assessments related to claims incurred through the valuation
date of the study.
17
Reconciliation
of Loss Reserves
The table below shows the reconciliation of our loss reserves on
a gross and net basis for the periods indicated, reflecting
changes in losses incurred and paid losses.
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Year Ended December 31,
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2007
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2006
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2005
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(In thousands)
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Beginning balance:
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|
|
|
|
|
|
|
|
|
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Unpaid loss and loss adjustment expense
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$
|
198,356
|
|
|
$
|
142,211
|
|
|
$
|
68,228
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Reinsurance recoverables
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|
|
(13,504
|
)
|
|
|
(13,745
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)
|
|
|
(12,582
|
)
|
|
|
|
|
|
|
|
|
|
|
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Net balance, beginning of year
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184,852
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|
|
|
128,466
|
|
|
|
55,646
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|
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|
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|
|
|
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Incurred related to:
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Current year
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162,017
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|
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|
130,124
|
|
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|
108,424
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Prior years
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(34,080
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)
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|
(22,811
|
)
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(2,142
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)
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Receivable under adverse development cover
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248
|
|
|
|
571
|
|
|
|
(499
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)
|
|
|
|
|
|
|
|
|
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Total incurred
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128,185
|
|
|
|
107,884
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|
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|
105,783
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|
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Paid related to:
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Current year
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(35,480
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)
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|
(23,196
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)
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(18,698
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)
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Prior years
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(41,258
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)
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|
(27,731
|
)
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|
(14,764
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)
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|
|
|
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Total paid
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|
(76,738
|
)
|
|
|
(50,927
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)
|
|
|
(33,462
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)
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Receivable under adverse development cover
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|
|
(248
|
)
|
|
|
(571
|
)
|
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499
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net balance, end of year
|
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|
236,051
|
|
|
|
184,852
|
|
|
|
128,466
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Reinsurance recoverables
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|
|
14,034
|
|
|
|
13,504
|
|
|
|
13,745
|
|
|
|
|
|
|
|
|
|
|
|
|
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Unpaid loss and loss adjustment expense
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|
$
|
250,085
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|
|
$
|
198,356
|
|
|
$
|
142,211
|
|
|
|
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|
|
|
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|
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Our practices for determining loss reserves are designed to set
amounts that in the aggregate are adequate to pay all claims at
their ultimate settlement value. Our loss reserves are not
discounted for interest or other factors.
The figures in the above table include the development of the
KEIC loss reserves from January 1, 2004 through
December 31, 2007. See the discussion under the heading
Our History in this Item 1. Prior to the
Acquisition, KEIC had a limited operating history writing small
business workers compensation policies in California and
had established loss reserves in the amount of approximately
$16.0 million for these policies at September 30,
2003. In an effort to minimize our exposure to this past
business underwritten by KEIC and any adverse developments to
KEICs loss reserves as they existed at the date of the
Acquisition, we entered into various protective arrangements in
connection with the Acquisition, including the adverse
development cover and the collateralized reinsurance trust. See
Loss Reserves KEIC Loss Reserves in this
Item 1. For a discussion of the development of KEICs
loss reserves and related matters, see the discussion under the
following heading KEIC Loss Reserves.
SeaBright
Insurance Company Loss Reserves
SeaBright Insurance Company began writing insurance policies on
October 1, 2003. Shown below is the loss development
related to policies written from 2003 through 2007. The first
line of the table shows, for the years indicated, the gross
liability including the incurred but not reported losses as
originally estimated. For example, as of December 31, 2004
it was estimated that $46.0 million would be sufficient to
settle all claims not already settled that had occurred through
that date, whether reported or unreported. The next section of
the table shows, by year, the cumulative amounts of loss
reserves paid as of the end of each succeeding year. For
example, with respect to the gross loss reserves of
$46.0 million as of December 31, 2004, by
December 31, 2007 (three years later) $23.3 million
had actually been paid in settlement of the claims which pertain
to the
18
liabilities as of December 31, 2004. The next section of
the table sets forth the re-estimates in later years of incurred
losses, including payments, for the years indicated. For
example, with respect to the gross loss reserves of
$46.0 million as of December 31, 2004,
$38.0 million is the re-estimated gross loss reserve,
including payments, as of December 31, 2007.
The cumulative redundancy/(deficiency) represents,
as of December 31, 2007, the difference between the latest
re-estimated liability and the amounts as originally estimated.
A redundancy means the original estimate was higher than the
current estimate; a deficiency means that the current estimate
is higher than the original estimate. For example, with respect
to the gross loss reserves of $46.0 million as of
December 31, 2004, $8.0 million is the cumulative
redundancy as of December 31, 2007.
Analysis
of SeaBright Loss Reserve Development
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Year Ended December 31,
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2003
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2004
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2005
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2006
|
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|
2007
|
|
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|
(In thousands)
|
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Gross liability as originally estimated:
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|
$
|
2,054
|
|
|
$
|
45,981
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|
|
$
|
122,625
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|
$
|
180,929
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|
|
$
|
232,538
|
|
Gross cumulative payments as of:
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One year later
|
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|
609
|
|
|
|
11,693
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|
|
|
25,691
|
|
|
|
39,744
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|
|
|
|
|
Two years later
|
|
|
1,087
|
|
|
|
18,814
|
|
|
|
39,916
|
|
|
|
|
|
|
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Three years later
|
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|
1,574
|
|
|
|
23,329
|
|
|
|
|
|
|
|
|
|
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|
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Four years later
|
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|
1,685
|
|
|
|
|
|
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|
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|
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Gross liability re-estimated as of:
|
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|
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|
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|
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|
|
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|
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One year later
|
|
|
2,819
|
|
|
|
42,499
|
|
|
|
99,740
|
|
|
|
146,686
|
|
|
|
|
|
Two years later
|
|
|
3,453
|
|
|
|
36,428
|
|
|
|
85,850
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
3,314
|
|
|
|
37,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
3,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative redundancy/(deficiency):
|
|
|
(1,300
|
)
|
|
|
8,024
|
|
|
|
36,775
|
|
|
|
34,243
|
|
|
|
|
|
The $1.3 million of adverse development on 2003 reserves is
due to the small base of claims and losses from the NCCI pool.
Aside from 2003, we have experienced significant redundancies in
our year-end reserves as a result of the uncertainty around
claim cost reductions resulting from significant legislative
reforms enacted in California, primarily in 2003 and 2004, and,
to a lesser extent, in other states. In 2005, we reduced our
direct loss reserves by $3.5 million, the majority of which
related to an improvement in accident year 2004 results. In
2006, we reduced our direct loss reserves by $20.4 million,
of which approximately $14.6 million related to accident
year 2005 and approximately $5.8 million related to
accident year 2004. In 2007, we reduced our direct loss reserves
by $27.7 million, of which approximately $17.3 million
related to accident year 2006 and approximately
$11.6 million related to accident year 2005. Offsetting
these reductions were increases to reserves for accident years
2003 and 2004 totaling approximately $1.2 million. For
further discussion of the considerations and methodology
relating to the estimation of our unpaid loss and loss
adjustment expenses, see the related discussion under the
heading Critical Accounting Policies, Estimates and
Judgments Unpaid Loss and Loss Adjustment
Expenses in Part II, Item 7 of this annual
report.
KEIC
Loss Reserves
Shown below is the loss development from 2000 through 2007
related to KEIC policies written from 2000 through 2002. The
last direct policy written by KEIC was effective in May 2002 and
expired in May 2003. KEIC has claim activity in accident years
2000, 2001, 2002 and 2003. The first line of the table shows,
for the years indicated, the gross liability including the
incurred but not reported losses as originally estimated. For
example, as of December 31, 2001, it was estimated that
$14.5 million would be sufficient to settle all claims not
already settled that had occurred prior to December 31,
2001, whether reported or unreported. The next section of the
table shows, by year, the cumulative amounts of loss reserves
paid as of the end of each succeeding year. For example, with
respect to the gross loss reserves of $14.5 million as of
December 31,
19
2001, by December 31, 2007 (six years later)
$12.6 million had actually been paid in settlement of the
claims which pertain to the liabilities as of December 31,
2001. The next section of the table sets forth the re-estimates
in later years of incurred losses, including payments, for the
years indicated. For example, with respect to the gross loss
reserves of $14.5 million as of December 31, 2001,
$18.7 million is the re-estimated gross loss reserve,
including payments, as of December 31, 2007.
The cumulative redundancy/(deficiency) represents,
as of December 31, 2007, the difference between the latest
re-estimated liability and the amounts as originally estimated.
A redundancy means the original estimate was higher than the
current estimate; a deficiency means that the current estimate
is higher than the original estimate. For example, with respect
to the gross loss reserves of $14.5 million as of
December 31, 2001, $4.2 million is the cumulative
deficiency as of December 31, 2007.
Analysis
of KEIC Loss Reserve Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Gross liability as originally estimated:
|
|
$
|
3,258
|
|
|
$
|
14,458
|
|
|
$
|
30,748
|
|
|
$
|
27,677
|
|
|
$
|
22,248
|
|
|
$
|
17,497
|
|
|
$
|
14,126
|
|
|
$
|
13,261
|
|
Gross cumulative payments as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
723
|
|
|
|
7,525
|
|
|
|
(4,130
|
)
|
|
|
6,815
|
|
|
|
4,822
|
|
|
|
2,998
|
|
|
|
2,184
|
|
|
|
|
|
Two years later
|
|
|
2,070
|
|
|
|
4,443
|
|
|
|
2,283
|
|
|
|
11,637
|
|
|
|
7,820
|
|
|
|
5,182
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
1,438
|
|
|
|
8,107
|
|
|
|
6,884
|
|
|
|
14,635
|
|
|
|
10,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
1,792
|
|
|
|
10,312
|
|
|
|
9,651
|
|
|
|
16,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
2,304
|
|
|
|
11,701
|
|
|
|
11,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
2,584
|
|
|
|
12,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
2,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
3,013
|
|
|
|
19,562
|
|
|
|
23,374
|
|
|
|
29,063
|
|
|
|
23,319
|
|
|
|
17,124
|
|
|
|
15,445
|
|
|
|
|
|
Two years later
|
|
|
3,426
|
|
|
|
17,523
|
|
|
|
23,321
|
|
|
|
29,134
|
|
|
|
21,946
|
|
|
|
18,444
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
3,329
|
|
|
|
18,138
|
|
|
|
23,739
|
|
|
|
28,761
|
|
|
|
23,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
3,235
|
|
|
|
19,068
|
|
|
|
23,136
|
|
|
|
30,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
3,394
|
|
|
|
18,465
|
|
|
|
24,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
3,391
|
|
|
|
18,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
3,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative redundancy/(deficiency):
|
|
|
(540
|
)
|
|
|
(4,208
|
)
|
|
|
6,511
|
|
|
|
(2,404
|
)
|
|
|
(1,018
|
)
|
|
|
(947
|
)
|
|
|
(1,319
|
)
|
|
|
|
|
Prior to the Acquisition, KEIC had a limited operating history
writing small business workers compensation policies in
California. As of September 30, 2003, the acquired book of
business related to KEIC had gross reserves of
$25.9 million and net reserves of $16.0 million. The
September 30, 2003 gross and net liabilities
re-estimated as of December 31, 2007 are $32.5 million
and $18.6 million, respectively. The adverse development on
gross reserves of $6.6 million and net reserves of
$2.6 million has been recorded subsequent to
September 30, 2003. The adverse development on the net
reserves is subject to the adverse development cover. See the
discussion under the heading Loss Reserves
KEIC Loss Reserves in this Item 1.
The acquired book of business related to KEIC had gross reserves
of $13.3 million as of December 31, 2007. These
reserves represent a potential liability to us if the protective
arrangements that we have established prove to be inadequate.
Our initial source of protection is our external reinsurance,
which is described under the heading Reinsurance in
this Item 1. The total reserves net of external reinsurance
at December 31, 2007 were $5.3 million. The ceded
reserves of $8.0 million as of December 31, 2007 are
subject to collection from our external reinsurers. To the
extent we are not able to collect on our reinsurance
recoverables, these liabilities become our responsibility. See
the discussion under the heading Risks Related to Our
Business
20
Our loss reserves are based on estimates and may be inadequate
to cover our actual losses in Part I, Item 1A of
this annual report.
The net reserves as of December 31, 2007 of
$5.3 million are subject to the various protective
arrangements that we entered into in connection with the
Acquisition. Prior to the Acquisition, KEIC had a limited
operating history in California writing small business
workers compensation policies with an average annual
premium size of approximately $4,100 per customer. KEIC had
established loss reserves in the amount of approximately
$16.0 million for these policies at September 30,
2003. In light of the deteriorating financial condition of LMC
and its affiliates, we entered into a number of protective
arrangements in connection with the Acquisition for the purpose
of minimizing our exposure to this past business underwritten by
KEIC and any adverse developments to KEICs loss reserves
as they existed at the date of the Acquisition. One of our
primary objectives in establishing these arrangements was to
create security at the time of the Acquisition with respect to
LMCs potential obligations to us as opposed to having a
mere future contractual right against LMC with respect to these
obligations. The protective arrangements we established included
a commutation agreement, an adverse development cover and a
collateralized reinsurance trust.
Commutation Agreement.
Prior to the
Acquisition, LMC and KEIC had entered into a reinsurance
agreement requiring LMC to reinsure 80% of certain risks insured
by KEIC in exchange for a premium paid to LMC. To help insulate
us from the effects of a potential insolvency of LMC and the
possibility that LMC may not continue to have the ability to
make reinsurance payments to KEIC in the future, in connection
with the Acquisition, KEIC entered into a commutation agreement
with LMC to terminate the previously established reinsurance
agreement. Under the commutation agreement, LMC paid KEIC
approximately $13.0 million in cash in exchange for being
released from its obligations under the reinsurance agreement,
and KEIC reassumed all of the risks previously reinsured by LMC.
Adverse Development Cover.
At the time of the
Acquisition and after the commutation agreement, KEIC had loss
reserves in the amount of approximately $16.0 million. In
connection with the Acquisition, we entered into an agreement
with LMC under which we both agreed to indemnify each other with
respect to developments in these loss reserves over a period of
approximately eight years. December 31, 2011 is the date to
which the parties will look to determine whether the loss
reserves with respect to KEICs insurance policies in
effect at the date of the Acquisition have increased or
decreased from the $16.0 million amount existing at the
date of the Acquisition. If the loss reserves have increased,
LMC must indemnify us in the amount of the increase. If they
have decreased, we must indemnify LMC in the amount of the
decrease.
Collateralized Reinsurance Trust.
Because of
the poor financial condition of LMC and its affiliates, we
required LMC to fund a trust account in connection with the
Acquisition. The funds in the trust account serve as current
security for potential future obligations of LMC under the
adverse development cover. The minimum amount that must be
maintained in the trust account is equal to the greater of
(a) $1.6 million or (b) 102% of the then-existing
quarterly estimate of LMCs total obligations under the
adverse development cover, requiring LMC to fund additional
amounts into the trust account on a quarterly basis, if
necessary, based on a quarterly review of LMCs
obligations. We are entitled to access the funds in the trust
account from time to time to satisfy LMCs obligations
under the adverse development cover in the event that LMC fails
to satisfy its obligations.
As of December 31, 2007, we had recorded a receivable of
approximately $2.5 million for adverse loss development
under the adverse development cover since the date of the
Acquisition. The balance in the trust account, including
accumulated interest, totaled approximately $3.5 million at
December 31, 2007. We continue to assess the reasonableness
of reserves related to this business and believe that reserve
amounts are reasonable at December 31, 2007.
Due to the distressed financial condition of LMC and its
affiliates, LMC is no longer writing new business and is now
operating under a voluntary run off plan which has been approved
by the Illinois Division of Insurance. If LMC is placed into
receivership, various of the protective arrangements, including
the adverse development cover, the collateralized reinsurance
trust and the commutation agreement, could be adversely
affected. If LMC is placed into receivership and the amount held
in the collateralized reinsurance trust is inadequate to satisfy
the obligations of LMC to us under the adverse development
cover, it is unlikely that we
21
would recover any future amounts owed by LMC to us under the
adverse development cover in excess of the amounts currently
held in trust because the director of the Illinois Division of
Insurance would have control of the assets of LMC. In addition,
it is possible that a receiver or creditor could assert a claim
seeking to unwind or recover the $13.0 million payment made
by LMC to us under the commutation agreement or the funds
deposited by LMC into the collateralized reinsurance trust under
applicable voidable preference or fraudulent transfer laws. See
Risks Related to Our Business In the event LMC
is placed into receivership, we could lose our rights to fee
income and protective arrangements that were established in
connection with the Acquisition, our reputation and credibility
could be adversely affected and we could be subject to claims
under applicable voidable preference and fraudulent transfer
laws in Part I, Item 1A of this annual report.
If LMC is placed into receivership in the near future, we will
be responsible for the amount of any adverse development of
KEICs loss reserves in excess of the collateral that is
currently available to us, including the $3.5 million on
deposit as of December 31, 2007 under the collateralized
reinsurance trust. For example, if LMC is placed into
receivership at a time when the amount on deposit in the
collateralized reinsurance trust is deficient by
$1.0 million, we would have to absorb that amount. Because
the $13.0 million that we received under the commutation
agreement was not discounted for present value at the time of
payment, the earnings on these funds, if any, will help us to
absorb any adverse development on KEICs loss reserves in
excess of amounts on deposit under the collateralized
reinsurance trust. We believe that there are several factors
that would mitigate the risk to us resulting from a potential
voidable preference or fraudulent conveyance action brought by a
receiver, but if a receiver is successful under applicable
voidable preference and fraudulent transfer laws in recovering
from us the collateral that we received in connection with the
Acquisition, those funds would not be available to us to offset
any adverse development in KEICs loss reserves. See
Our History Issues Relating to a Potential LMC
Receivership in this Item 1.
Investments
We derive investment income from our invested assets. We invest
our statutory surplus and funds to support our loss reserves and
our unearned premiums. As of December 31, 2007, the
amortized cost of our investment portfolio was
$491.9 million and the fair value of the portfolio was
$494.4 million.
The following table shows the fair values of various categories
of invested assets, the percentage of the total fair value of
our invested assets represented by each category and the tax
equivalent book yield based on the fair value of each category
of invested assets as of December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
Category
|
|
Fair Value
|
|
|
Total
|
|
|
Yield
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
9,678
|
|
|
|
2.0
|
%
|
|
|
4.2
|
%
|
Government sponsored agency securities
|
|
|
45,108
|
|
|
|
9.1
|
|
|
|
4.8
|
|
Corporate securities
|
|
|
44,251
|
|
|
|
8.9
|
|
|
|
4.9
|
|
Tax-exempt municipal securities
|
|
|
246,702
|
|
|
|
49.9
|
|
|
|
5.8
|
|
Mortgage pass-through securities
|
|
|
77,083
|
|
|
|
15.6
|
|
|
|
5.5
|
|
Collateralized mortgage obligations
|
|
|
1,922
|
|
|
|
0.4
|
|
|
|
4.7
|
|
Asset-backed securities
|
|
|
50,012
|
|
|
|
10.1
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
474,756
|
|
|
|
96.0
|
|
|
|
5.5
|
|
Equity securities
|
|
|
11,193
|
|
|
|
2.3
|
|
|
|
|
|
Preferred stock
|
|
|
8,488
|
|
|
|
1.7
|
|
|
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available-for-sale
|
|
$
|
494,437
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Equity securities consist of investments in exchange traded
funds designed to correspond to the performance of certain
indexes based on domestic or international stocks. We had no
direct investments in equity securities at December 31,
2007 or 2006. The average credit rating for our fixed maturity
portfolio at December 31, 2007, using ratings assigned by
Standard and Poors, was AA+. The following table shows the
ratings distribution of our fixed income portfolio as of
December 31, 2007, as a percentage of total fair value.
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Total Fair
|
|
Rating
|
|
Value
|
|
|
AAA
|
|
|
79.0
|
%
|
AA
|
|
|
9.9
|
%
|
A
|
|
|
9.0
|
%
|
BBB
|
|
|
1.7
|
%
|
CCC
|
|
|
0.1
|
%
|
Not rated
|
|
|
0.3
|
%
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
|
|
|
The following table shows the composition of our fixed income
securities and preferred stock by remaining time to maturity at
December 31, 2007. For securities that are redeemable at
the option of the issuer and have a market price that is greater
than par value, the maturity used for the table below is the
earliest redemption date. For securities that are redeemable at
the option of the issuer and have a market price that is less
than par value, the maturity used for the table below is the
final maturity date. For mortgage-backed securities, mortgage
prepayment assumptions are utilized to project the expected
principal redemptions for each security, and the maturity used
in the table below is the average life based on those projected
redemptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
Total
|
|
Remaining Time to Maturity
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
Due in one year or less
|
|
$
|
45,378
|
|
|
|
9.4
|
%
|
Due after one year through five years
|
|
|
101,822
|
|
|
|
21.1
|
|
Due after five years through ten years
|
|
|
182,713
|
|
|
|
37.8
|
|
Due after ten years
|
|
|
22,163
|
|
|
|
4.6
|
|
Securities not due at a single maturity date
|
|
|
131,168
|
|
|
|
27.1
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities available-for-sale
|
|
$
|
483,244
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Our investment strategy is to conservatively manage our
investment portfolio by investing primarily in readily
marketable, investment grade fixed income securities. Prior to
March 2005, we did not invest in common equity securities and we
had no exposure to foreign currency risk. In November 2006, our
investment policy was revised to allow for investment in
domestic and international equities of up to 4% and 1%,
respectively, of our statutory consolidated capital and surplus.
Our investment portfolio is managed by a registered investment
advisory firm. We pay a variable fee based on assets under
management. Our Board of Directors has established investment
guidelines and periodically reviews portfolio performance for
compliance with our guidelines.
We regularly review our investment portfolio for declines in
value. In general, we focus on those securities whose fair
values were less than 80% of their amortized cost or cost, as
appropriate, for six or more consecutive months. We also analyze
the entire portfolio for other factors that might indicate a
risk of impairment, including credit ratings and interest rates.
If a decline in value is deemed temporary, we record the decline
as an unrealized loss in other comprehensive income (loss) on
our consolidated statement of changes in stockholders
equity and comprehensive income and in accumulated other
comprehensive income (loss) on our consolidated balance sheet.
As of December 31, 2007, we had two securities with fair
values less than 80% of their amortized cost or cost. The
unrealized loss related to these two securities totaled
23
approximately $181,000. As of December 31, 2007, we had a
net unrealized gain on our invested assets of $2.5 million.
If declines in market value are deemed other than
temporary, we write down the carrying value of the
investment and record a realized loss in our consolidated
statement of operations. Significant changes in the factors
considered when evaluating investments for impairment losses
could result in a significant change in impairment losses
reported in the financial statements. No other-than-temporary
declines in the fair value of our securities were recorded in
2007, 2006 or 2005.
We had no direct exposure to sub-prime mortgage exposure in our
investment portfolio as of December 31, 2007 and less than
$800,000 of indirect exposure to sub-prime mortgages. The
average credit quality of our $250.9 million fixed income
municipal portfolio was AA+ (AA− based on the
issuers underlying ratings). Insured municipal bonds
totaled $192.8 million and had a weighted average credit
rating of AAA (AA− based on the issuers underlying
ratings). The remaining $58.1 million in uninsured
municipal bonds carried a weighted average credit rating of AA.
Consequently, we do not expect a material impact to our
investment portfolio or financial position as a result of the
problems currently facing monoline bond insurers.
Reinsurance
We purchase reinsurance to reduce our net liability on
individual risks and to protect against possible catastrophes.
Reinsurance involves an insurance company transferring, or
ceding, a portion of its exposure on a risk to
another insurer, the reinsurer. The reinsurer assumes the
exposure in return for a portion of the premium. The cost and
limits of reinsurance we purchase can vary from year to year
based upon the availability of quality reinsurance at an
acceptable price and our desired level of retention, or the
amount of risk that we retain for our own account. In excess of
loss reinsurance, losses in excess of the retention level up to
the upper limit of the program, if any, are paid by the
reinsurer.
Regardless of type, reinsurance does not legally discharge the
ceding insurer from primary liability for the full amount due
under the reinsured policies. However, the assuming reinsurer is
obligated to indemnify the ceding company to the extent of the
coverage ceded. To reduce our risk of the possibility of a
reinsurer becoming unable to fulfill its obligations under the
reinsurance contracts, we attempt to select financially strong
reinsurers with an A.M. Best rating of A−
(Excellent) or better and continue to evaluate their financial
condition and monitor various credit risks to minimize our
exposure to losses from reinsurer insolvencies.
Our
Excess of Loss Reinsurance Treaty Program
Excess of loss reinsurance is reinsurance that indemnifies the
reinsured against all or a specified portion of losses on
underlying insurance policies in excess of a specified amount,
which is called an attachment level or
retention. Excess of loss reinsurance may be written
in layers, in which a reinsurer or group of reinsurers accepts a
band of coverage up to a specified amount. Any liability
exceeding the upper limit of the program reverts to the ceding
company, or the company seeking reinsurance. The ceding company
also bears the credit risk of a reinsurers insolvency. In
the ordinary course of our business, we entered into a new
workers compensation and employers liability excess
of loss reinsurance treaty program effective October 1,
2007, whereby our reinsurers are liable for the ultimate net
losses in excess of $1.0 million for the business we write,
up to a $75.0 million limit and subject to additional
exclusions and limits, including those described below. We have
reviewed the terms of our excess of loss reinsurance agreements
and have concluded that they provide sufficient transfer of risk
and meet other requirements necessary to qualify them for
reinsurance accounting under Statement of Financial Accounting
Standards (SFAS) No. 113,
Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts
, and related pronouncements. The agreements for
the current reinsurance program expire on October 1, 2008,
at which time we expect to renew the program. The program
provides coverage in five layers and applies to losses occurring
between October 1, 2007 and October 1, 2008 for
business written by us and classified as workers
compensation, employers liability and maritime
employers liability, except in the case of the third,
fourth and fifth layers, when classified by us as ocean marine.
In order for coverage to attach, we must report all losses to
our reinsurers before October 1, 2015.
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The first reinsurance layer affords coverage up to
$1.0 million for each loss occurrence in excess of
$1.0 million for each loss occurrence. The aggregate limit
for all claims under the first layer is $8.0 million. In
addition, under the first layer of reinsurance, there is a
sub-limit of $2.0 million for two or more losses caused by
any act of terrorism, as defined in the Terrorism Risk Insurance
Act of 2002, as extended and amended by the Terrorism Risk
Insurance Extension Act of 2005 and the Terrorism Risk Insurance
Program Reauthorization Act of 2007 (collectively referred to in
this annual report as the Terrorism Risk Act); a
sub-limit of $1.0 million for losses caused by occupational
disease or other disease or cumulative trauma; and a maximum
employers liability policy limit of $1.0 million
($2.0 million in Hawaii).
The second layer affords coverage up to $3.0 million for
each loss occurrence in excess of $2.0 million for each
loss occurrence. The aggregate limit for all claims under the
second layer is $12.0 million. In addition, under the
second layer of reinsurance, there is a sub-limit of
$6.0 million for two or more losses caused by any act of
terrorism, as defined in the Terrorism Risk Act; a sub-limit of
$3.0 million for losses caused by occupational disease or
other disease or cumulative trauma; and a maximum
employers liability policy limit of $1.0 million
($2.0 million in Hawaii).
The third layer affords coverage up to $5.0 million for
each loss occurrence in excess of $5.0 million for each
loss occurrence. The aggregate limit for all claims under the
third layer is $15 million. In addition, the third layer
has a sub-limit of $5.0 million for one or more losses
caused by any act of terrorism, as defined in the Terrorism Risk
Act.
The fourth layer affords coverage up to $10.0 million for
each loss occurrence in excess of $10.0 million for each
loss occurrence. The aggregate limit for all claims under the
fourth layer is $20 million. In addition, the fourth layer
has a sub-limit of $10.0 million for one or more losses
caused by any act of terrorism, as defined in the Terrorism Risk
Act. Under the fourth layer, the maximum amount applicable to
the ultimate net loss for any one loss suffered by any one
employee is $7.5 million.
The fifth layer in our excess of loss reinsurance treaty program
affords coverage up to $55.0 million for each loss
occurrence in excess of $20.0 million. The fifth layer is
divided into two sub-layers. The first sub-layer affords
coverage up to $30.0 million for each loss occurrence in
excess of $20.0 million for each loss occurrence, subject
to an aggregate limit of $60.0 million. The first sub-layer
has a sub-limit of $30 million for one or more losses
caused by any act of terrorism, as defined in the Terrorism Risk
Act. The second sub-layer affords coverage up to
$25.0 million for each loss occurrence in excess of
$50.0 million for each loss occurrence, subject to an
aggregate limit of $50.0 million. The second sub-layer has
a sub-limit of $25.0 million for one or more losses caused
by any act of terrorism, as defined in the Terrorism Risk Act.
Under both sub-layers of the fifth layer, the maximum amount
applicable to the ultimate net loss for any one loss suffered by
any one employee is $5.0 million.
Under the reinsurance treaty program, we are required to pay our
reinsurers an aggregate deposit premium of $10.9 million
for the term of the agreements. The agreements for the first,
second and third layers in our excess of loss reinsurance treaty
program have profit-sharing provisions requiring the reinsurers
to make payments to SeaBright Insurance Company if the
reinsurers experience favorable loss experience under these
contracts. In addition, under each layer of our reinsurance
treaty program, we are required to pay to our reinsurers the pro
rata share of the amount, if any, by which any financial
assistance paid to us under the Terrorism Risk Act for acts of
terrorism occurring during any one program year, combined with
our total private-sector reinsurance recoveries for those acts
of terrorism, exceeds the amount of insured losses paid by us
for those acts of terrorism.
Under each layer of our reinsurance treaty program, we may
terminate any reinsurers share under the applicable
agreement at any time by giving written notice to the reinsurer
under certain circumstances, including if the reinsurers
A.M. Best rating is downgraded below A−
and/or
its
Standard & Poors rating is downgraded below
BBB+. Each layer of our reinsurance treaty program
includes various exclusions in addition to the specific
exclusions, including an exclusion for war in specified
circumstances, an exclusion for reinsurance assumed and
exclusions for losses with respect to biological, chemical,
radioactive or nuclear explosion, pollution, contamination or
fire.
25
Please refer to Note 8 of the consolidated financial
statements in Part II, Item 8 of this annual report
for a listing of participants in our current excess of loss
reinsurance treaty program and a listing of our top ten
reinsurers, based on net amount recoverable, as of
December 31, 2007.
Reinsurance
Arrangements Established in Connection with Past
Transactions
In addition to the reinsurance program described above, we have
existing reinsurance arrangements which were established in
connection with past transactions into which we have entered. In
March 2002, KEIC sold the assets and business of its commercial
compensation specialty operation to Argonaut Insurance Company.
In connection with the sale, KEIC entered into a reinsurance
agreement effective March 31, 2002 with Argonaut pursuant
to which KEIC ceded and Argonaut assumed a 100% quota share
participation in the transferred insurance policies. Certain
reinsurance-type arrangements, including the commutation
agreement and the adverse development cover, were also
established with LMC in connection with the Acquisition. See
Loss Reserves KEIC Loss Reserves in this
Item 1.
Terrorism
Reinsurance
As extended and amended, the Terrorism Risk Act is effective
through December 31, 2014. The Terrorism Risk Act may
provide us with reinsurance protection under certain
circumstances and subject to certain limitations. The Secretary
of the Treasury must declare the act to be a certified act
of terrorism for it to be covered under this federal
program. As amended in 2007, the definition of terrorism for
purposes of the Terrorism Risk Act includes acts of terror
perpetrated by domestic, as well as foreign, persons or
interests. No federal compensation will be paid under the
Terrorism Risk Act unless aggregate insured losses from the act
for the entire insurance industry exceed certain threshold
amounts ($100.0 million for terrorism losses occurring in
2007 and for the remainder of the program). Each insurance
company is responsible for a deductible based on a percentage of
the direct earned premiums of its affiliated group in the
previous calendar year for commercial lines policies (except for
certain excluded lines such as commercial auto) covering risks
in the United States. This deductible amount is 20.0% of such
premiums for losses occurring in 2007 and subsequent years. For
losses in excess of the deductible, the federal government will
reimburse 85% of the insurers loss occurring in 2007 and
subsequent years. As stated above, all layers of our reinsurance
program contain sublimits for losses caused by an act of
terrorism, as defined in the Terrorism Risk Act, subject to
certain absolute exclusions.
Competition
We operate in niche markets where we believe we have few
competitors with a similar focus. The insurance industry in
general is highly competitive and there is significant
competition in the national workers compensation industry.
Competition in the insurance business is based on many factors,
including premiums charged, services provided, financial
strength ratings assigned by independent rating agencies, speed
of claims payments, reputation, perceived financial strength and
general experience. Many of the insurers with which we compete
have significantly greater financial, marketing and management
resources and experience than we do. In addition, our
competitive advantage may be limited due to the small number of
insurance products that we offer. Some of our competitors have
additional competitive leverage because of the wide array of
insurance products that they offer. For example, it may be more
convenient for a potential customer to purchase numerous
different types of insurance products from one insurance
carrier. We do not offer a wide array of insurance products due
to our targeted market niches, and we may lose potential
customers to our larger, more diverse competitors as a result.
We may also compete with new market entrants in the future.
While more than 400 insurance companies participate in the
national workers compensation market, our competitors are
relatively few in number because we operate in niche markets. We
compete with regional and national insurance companies and
state-sponsored insurance funds, as well as potential insureds
that have decided to self-insure. Our primary competitors vary
slightly based on the type of product and by region. We have a
number of competitors that limit their writings on a geographic
basis. For our maritime product, our primary competitors are
American International Group (AIG), American
Longshore Mutual Association Ltd. and Signal Mutual Indemnity
Association Ltd. Additional competitors by region are Alaska
National Insurance
26
Company in our Western Region; Louisiana Workers Compensation
Company (LWCC) and Texas Mutual in our Gulf Region;
and Liberty Mutual in our Northeastern Region. For our state act
construction product, our primary competitors are AIG, Zurich
and Liberty Mutual in all of our regions. Additional competitors
by region are State Compensation Insurance Fund of California
(SCIF), Arizona State Fund and Travelers in our
Western Region; Texas Mutual, LWCC and Amerisafe in our Gulf
Region; Acuity Group in our Midwestern Region; Hartford and PMA
in our Northeastern Region; and Bridgefield, FCCI and Zenith in
our Southeastern Region . For our ADR product, our primary
competitors are AIG, Zurich and SCIF. In Hawaii, our primary
competition is AIG and Hawaii Employers Mutual Insurance Company.
We believe our competitive advantages are our strong reputation
in our niche markets, our local knowledge in the markets where
we operate, our specialized underwriting expertise, our
client-driven claims and loss control service capabilities, our
focus on niche markets, our loyal brokerage distribution, our
low operating expense ratio and our customized systems. In
addition to these competitive advantages, as discussed above, we
offer our maritime customers regulated insurance coverage
without the
joint-and-several
liability associated with coverage provided by offshore mutual
organizations.
Ratings
Many insurance buyers, agents and brokers use the ratings
assigned by A.M. Best and other rating agencies to assist
them in assessing the financial strength and overall quality of
the companies from which they are considering purchasing
insurance. We have been rated A− (Excellent)
by A.M. Best since the completion of the Acquisition. An
A− rating is the fourth highest of 15 rating
categories used by A.M. Best. In evaluating a
companys financial and operating performance,
A.M. Best reviews the companys profitability,
indebtedness and liquidity, as well as its book of business, the
adequacy and soundness of its reinsurance, the quality and
estimated fair value of its assets, the adequacy of its loss
reserves, the adequacy of its surplus, its capital structure,
the experience and competence of its management and its market
presence. This rating is intended to provide an independent
opinion of an insurers ability to meet its obligations to
policyholders and is not an evaluation directed at investors.
Regulation
Holding
Company Regulation
As a member of an insurance holding company, SeaBright Insurance
Company, our insurance company subsidiary, is subject to
regulation by the states in which it is domiciled or transacts
business. SeaBright Insurance Company is domiciled in Illinois
and is considered to be commercially domiciled in California. An
insurer is deemed commercially domiciled in
California if, during the three preceding fiscal years, or a
lesser period of time if the insurer has not been licensed in
California for three years, the insurer has written an average
of more gross premiums in California than it has written in its
state of domicile, and such gross premiums written constitute
33% or more of its total gross premiums written in the United
States for such period. Pursuant to the insurance holding
company laws of Illinois and California, SeaBright Insurance
Company is required to register with the Illinois Division of
Insurance and the California Department of Insurance. In
addition, SeaBright Insurance Company is required to
periodically report certain financial, operational and
management data to the Illinois Division of Insurance and the
California Department of Insurance. All transactions within a
holding company system affecting an insurer must have fair and
reasonable terms, charges or fees for services performed must be
reasonable, and the insurers policyholder surplus
following any transaction must be both reasonable in relation to
its outstanding liabilities and adequate for its needs. Notice
to, and in some cases approval from, insurance regulators in
Illinois and California is required prior to the consummation of
certain affiliated and other transactions involving SeaBright
Insurance Company.
Changes
of Control
In addition, the insurance holding company laws of Illinois and
California require advance approval by the Illinois Division of
Insurance and the California Department of Insurance of any
change in control of
27
SeaBright Insurance Company. Control is generally
presumed to exist through the direct or indirect ownership of
10% or more of the voting securities of a domestic insurance
company or of any entity that controls a domestic insurance
company. In addition, insurance laws in many states contain
provisions that require prenotification to the insurance
commissioners of a change in control of a non-domestic insurance
company licensed in those states. Any future transactions that
would constitute a change in control of SeaBright Insurance
Company, including a change of control of us, would generally
require the party acquiring control to obtain the prior approval
of the Illinois Division of Insurance and the California
Department of Insurance and may require pre-acquisition
notification in applicable states that have adopted
pre-acquisition notification provisions. Obtaining these
approvals may result in a material delay of, or deter, any such
transaction.
These laws may discourage potential acquisition proposals and
may delay, deter or prevent a change of control of SeaBright,
including through transactions, and in particular unsolicited
transactions, that some or all of the stockholders of SeaBright
might consider to be desirable.
State
Insurance Regulation
Insurance companies are subject to regulation and supervision by
the department of insurance in the state in which they are
domiciled and, to a lesser extent, other states in which they
conduct business. SeaBright Insurance Company is primarily
subject to regulation and supervision by the Illinois Division
of Insurance and the California Department of Insurance. These
state agencies have broad regulatory, supervisory and
administrative powers, including, among other things, the power
to: grant and revoke licenses to transact business; license
agents; set the standards of solvency to be met and maintained;
determine the nature of, and limitations on, investments and
dividends; approve policy forms and rates in some states;
periodically examine an insurance companys financial
condition; determine the form and content of required financial
statements; and periodically examine market conduct.
Detailed annual and quarterly financial statements and other
reports are required to be filed with the departments of
insurance of the states in which we are licensed to transact
business. The financial statements and condition of SeaBright
Insurance Company are subject to periodic examination by the
Illinois Division of Insurance and the California Department of
Insurance. In 2007, the Illinois Division of Insurance completed
a routine comprehensive examination of our 2005 statutory annual
statement. On June 21, 2007, the Division officially
adopted, without fines or penalties assessed, its Report of
Examination as of December 31, 2005.
In addition, many states have laws and regulations that limit an
insurers ability to withdraw from a particular market. For
example, states may limit an insurers ability to cancel or
not renew policies. Furthermore, certain states prohibit an
insurer from withdrawing one or more lines of business from the
state, except pursuant to a plan that is approved by the state
insurance department. The state insurance department may
disapprove a plan that may lead to market disruption. Laws and
regulations that limit cancellation and non-renewal and that
subject program withdrawals to prior approval requirements may
restrict our ability to exit unprofitable markets.
Federal
Laws and Regulations
As a provider of maritime workers compensation insurance,
we are subject to the USL&H Act, which generally covers
exposures on the navigable waters of the United States and in
adjoining waterfront areas, including exposures resulting from
loading and unloading vessels, and the Jones Act, which covers
exposures at sea. We are also subject to regulations related to
the USL&H Act and the Jones Act.
The USL&H Act, which is administered by the
U.S. Department of Labor, provides medical benefits,
compensation for lost wages and rehabilitation services to
longshoremen, harbor workers and other maritime workers who are
injured during the course of employment or suffer from diseases
caused or worsened by conditions of employment. The Department
of Labor has the authority to require us to make deposits to
serve as collateral for losses incurred under the USL&H
Act. Several other statutes extend the provisions of the
USL&H Act to cover other classes of private-industry
workers. These include workers engaged in the extraction of
natural resources from the outer continental shelf, employees on
American defense bases, and
28
those working under contracts with the U.S. government for
defense or public-works projects, outside of the continental
United States. Our authorizations to issue workers
compensation insurance from the various state departments of
insurance regulating SeaBright Insurance Company are augmented
by our U.S. Department of Labor certificates of authority
to ensure payment of compensation under the USL&H Act and
extensions of the USL&H Act, including the OCSLA and the
Nonappropriated Fund Instrumentalities Act. This coverage,
which we write as an endorsement to workers compensation
and employers liability insurance policies, provides
employment-injury and occupational disease protection to workers
who are injured or contract occupational diseases while working
on the navigable waters of the United States, or in adjoining
areas, and for certain other classes of workers covered by the
extensions of the USL&H Act.
The Jones Act is a federal law, the maritime employer provisions
of which provide injured offshore workers, or seamen, with the
right to seek compensation for injuries resulting from the
negligence of their employers or co-workers during the course of
their employment on a ship or vessel. In addition, an injured
offshore worker may make a claim against a vessel owner on the
basis that the vessel was not seaworthy. Our authorizations to
issue workers compensation insurance from the various
state departments of insurance regulating SeaBright Insurance
Company allow us to write Jones Act coverage for our maritime
customers. We are not required to have a certificate from the
U.S. Department of Labor to write Jones Act coverage.
We also offer extensions of coverage under the OCSLA, a federal
workers compensation act that provides workers
compensation coverage for the death or disability of an employee
resulting from any injury occurring as a result of working on an
off-shore drilling platform on the Outer Continental Shelf,
where required by a prospective policyholder.
As a condition of authorization effective August 25, 2005,
the U.S. Department of Labor implemented new regulations
requiring insurance carriers authorized to write insurance under
the USL&H Act or any of its extensions to deposit security
to secure compensation payment obligations. The Department of
Labor determines the amount of this deposit annually by
calculating the carriers USL&H and extension Act
obligation by state and by the percentage of those obligations
deemed unsecured by those states guaranty funds.
SeaBrights current deposit obligation is approximately
$1.9 million.
Privacy
Regulations
In 1999, the United States Congress enacted the
Gramm-Leach-Bliley Act, which, among other things, protects
consumers from the unauthorized dissemination of certain
personal information. Subsequently, a majority of states have
implemented additional regulations to address privacy issues.
These laws and regulations apply to all financial institutions,
including insurance and finance companies, and require us to
maintain appropriate procedures for managing and protecting
certain personal information of our customers and to fully
disclose our privacy practices to our customers. We may also be
exposed to future privacy laws and regulations, which could
impose additional costs and impact our financial condition or
results of operations. For example, a National Association of
Insurance Commissioners, or NAIC, initiative that impacted the
insurance industry in 2001 was the adoption in 2000 of the
Privacy of Consumer Financial and Health Information Model
Regulation, which assisted states in promulgating regulations
consistent with the Gramm-Leach-Bliley Act. In 2002, to further
facilitate the implementation of the Gramm-Leach-Bliley Act, the
NAIC adopted the Standards for Safeguarding Customer Information
Model Regulation. Several states have now adopted similar
provisions regarding the safeguarding of customer information.
Our insurance subsidiary has established procedures to comply
with Gramm-Leach-Bliley privacy requirements.
Federal
and State Legislative and Regulatory Changes
From time to time, various regulatory and legislative changes
have been proposed in the insurance industry. Among the
proposals that have in the past been or are at present being
considered are the possible introduction of federal regulation
in addition to, or in lieu of, the current system of state
regulation of insurers and proposals in various state
legislatures (some of which proposals have been enacted) to
conform portions of their insurance laws and regulations to
various model acts adopted by the NAIC. We are unable to predict
whether any of these laws and regulations will be adopted, the
form in which any such laws and regulations
29
would be adopted, or the effect, if any, these developments
would have on our operations and financial condition.
On November 26, 2002, in response to the tightening of
supply in certain insurance and reinsurance markets resulting
from, among other things, the September 11, 2001 terrorist
attacks, the Terrorism Risk Insurance Act of 2002 was enacted.
In 2005, this law was extended and amended. The Terrorism Risk
Act is designed to ensure the availability of insurance coverage
for losses resulting from certain acts of terror in the United
States of America. As extended in 2005, the law established a
federal assistance program through the end of 2007 to help the
property and casualty insurance industry cover claims related to
future terrorism-related losses and required such companies to
offer coverage for certain acts of terrorism. On
December 26, 2007, the President signed an Extension Bill
which extended the Terrorism Risk Act to December 31, 2014.
The terms and conditions applying during each of the extension
years are essentially the same as those applied during 2007,
except that acts of terror perpetrated on behalf of domestic, as
well as foreign, persons or interests are now subject to the
Terrorism Risk Act. By law, SeaBright Insurance Company may not
exclude coverage for terrorism losses from its workers
compensation policies. Although SeaBright Insurance Company is
protected by federally funded terrorism reinsurance to the
extent provided for in the Terrorism Risk Act, there are
limitations and restrictions on this protection, including a
substantial deductible that must be met, which could have an
adverse effect on our financial condition or results of
operations. Potential future changes to the Terrorism Risk Act
could also adversely affect us by causing our reinsurers to
increase prices or withdraw from certain markets where terrorism
coverage is required.
Collectively bargained workers compensation insurance
programs in California were enabled by S.B. 983, the
workers compensation reform bill passed in 1993, and
greatly expanded by the passage of S.B. 228 in 2003. Among other
things, this legislation amended the California Labor Code to
include the specific requirements for the creation of an ADR
program for the delivery of workers compensation benefits.
The passage of S.B. 228 made these programs available to all
unionized employees, where previously they were available only
to unionized employees in the construction industry.
Our workers compensation operations are subject to
legislative and regulatory actions. In California, where we have
our largest concentration of business, significant workers
compensation legislation was enacted twice in recent years.
Effective January 1, 2003, legislation became effective
which provides for increases in indemnity benefits to injured
workers. In September 2003 and April 2004, workers
compensation legislation was enacted in California with the
principal objective of reducing costs. The legislation contains
provisions which primarily seek to reduce medical costs and does
not directly impact indemnity payments to injured workers. The
principal changes in the legislation that impact medical costs
are as follows: 1) a reduction in the reimbursable amount
for certain physician fees, outpatient surgeries, pharmaceutical
products and certain durable medical equipment; 2) a
limitation on the number of chiropractor or physical therapy
office visits; 3) the introduction of medical utilization
guidelines; 4) a requirement for second opinions on certain
spinal surgeries; and 5) a repeal of the presumption of
correctness afforded to the treating physician, except where the
employee has pre-designated a treating physician. Since the
passage of the 2003 and 2004 reforms, bills have been introduced
to roll back many areas of significant reform. Some compromise
measures have succeeded. For example, on October 13, 2007,
new legislation became effective that removed caps on physical
therapy but only when the administrative director adopts new
guidelines for occupational therapy and chiropractic care for
post-surgical care.
On March 30, 2007, the California Workers
Compensation Insurance Rating Bureau (the WCIRB)
submitted a filing with the California Insurance Commissioner
recommending an 11.3% decrease in advisory pure premium rates on
new and renewal policies effective on or after July 1,
2007. The filing was based on a review of loss and loss
adjustment experience through December 31, 2006 and was
made in response to continued reductions in California
workers compensation claim costs. On May 29, 2007,
the California Insurance Commissioner recommended a 14.2%
decrease in rates effective July 1, 2007. On June 8,
2007, after completing a study of our California loss data, we
filed with the California Insurance Commissioner our new rates
reflecting an average reduction of 14.2% from prior rates for
new and renewal workers compensation insurance policies
written in California on or after July 1, 2007. The filing
was approved on June 12, 2007. This was the eighth
California rate reduction we have filed since October 1,
2003, resulting in
30
a net cumulative reduction of our California rates of
approximately 54.8%. On September 20, 2007, the WCIRB
submitted a filing with the California Insurance Commissioner
recommending a 4.2% increase in advisory pure premium rates on
new and renewal policies effective on or after January 1,
2008. The filing was based on a review of loss and loss
adjustment experience through June 30, 2007. On
October 19, 2007, the WCIRB amended its filing, increasing
the proposed rate increase to 5.2% based on the projected impact
of Assembly Bill No. 338 (AB 338) that was
signed into law on October 13, 2007. AB 338 increases the
period of time, from two years to five years, from the date of
injury during which disability benefits, limited to a maximum of
104 weeks, may be provided. A public hearing to consider
the proposed rate increase was held on October 23, 2007. In
December 2007, the California Insurance Commissioner recommended
no overall change to workers compensation premium rates in
2008. On November 30, 2007, we followed the
Commissioners recommendation and filed for no change in
our rates effective on January 1, 2008. The filing was
approved on December 12, 2007.
The 2007 rate reductions are primarily in response to emerging
favorable trends in loss costs resulting from reform
legislation. If any of our competitors adopt premium rate
reductions that are greater than ours, we may be unable to
compete effectively and our business, financial condition and
results of operations could be materially adversely affected.
The
National Association of Insurance Commissioners
The NAIC is a group formed by state insurance commissioners to
discuss issues and formulate policy with respect to the
regulation, reporting and accounting of insurance companies.
Although the NAIC has no legislative authority and insurance
companies are at all times subject to the laws of their
respective domiciliary states and, to a lesser extent, other
states in which they conduct business, the NAIC is influential
in determining the form in which such laws are enacted. Model
Insurance Laws, Regulations and Guidelines (the Model
Laws) have been promulgated by the NAIC as a minimum
standard by which state regulatory systems and regulations are
measured. Adoption of state laws which provide for substantially
similar regulations to those described in certain of the Model
Laws is a requirement for accreditation by the NAIC. The NAIC
provides authoritative guidance to insurance regulators on
current statutory accounting issues by promulgating and updating
a codified set of statutory accounting practices in its
Accounting Practices and Procedures Manual. The Illinois
Division of Insurance and the California Department of Insurance
have adopted these codified statutory accounting practices.
Illinois and California have also adopted laws substantially
similar to the NAICs risk based capital
(RBC) laws, which require insurers to maintain
minimum levels of capital based on their investments and
operations. These RBC requirements provide a standard by which
regulators can assess the adequacy of an insurance
companys capital and surplus relative to its operations.
Among other requirements, an insurance company must maintain
capital and surplus of at least 200% of the RBC computed by the
NAICs RBC model (known as the Authorized Control
Level of RBC). At December 31, 2007, the capital and
surplus of SeaBright Insurance Company exceeded 200% of the
Authorized Control Level of RBC.
The NAICs Insurance Regulatory Information System
(IRIS) key financial ratios, developed to assist
insurance departments in overseeing the financial condition of
insurance companies, are reviewed by experienced financial
examiners of the NAIC and state insurance departments to select
those companies that merit highest priority in the allocation of
the regulators resources. IRIS identifies twelve industry
ratios and specifies usual values for each ratio.
Departure from the usual values on four or more of the ratios
can lead to inquiries from individual state insurance
commissioners as to certain aspects of an insurers
business.
The 2007 IRIS results for SeaBright Insurance Company showed no
results outside the usual range for such ratios; as
such ranges are determined by the NAIC.
Dividend
Limitations
SeaBright Insurance Companys ability to pay dividends is
subject to restrictions contained in the insurance laws and
related regulations of Illinois and California. The insurance
holding company laws in these states require that ordinary
dividends be reported to the Illinois Division of Insurance and
the California
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Department of Insurance prior to payment of the dividend and
that extraordinary dividends be submitted for prior approval. An
extraordinary dividend is generally defined as a dividend that,
together with all other dividends made within the past
12 months, exceeds the greater of 10% of its statutory
policyholders surplus as of the preceding year end or the
net income of the company for the preceding year. Statutory
policyholders surplus, as determined under statutory
accounting principles is the amount remaining after all
liabilities, including loss and loss adjustment expenses, are
subtracted from all admitted assets. Admitted assets are assets
of an insurer prescribed or permitted by a state insurance
regulator to be recognized on the statutory balance sheet.
Insurance regulators have broad powers to prevent the reduction
of statutory surplus to inadequate levels, and there is no
assurance that extraordinary dividend payments will be permitted.
Statutory
Accounting Practices
Statutory accounting practices (SAP) are a basis of
accounting developed to assist insurance regulators in
monitoring and regulating the solvency of insurance companies.
SAP is primarily concerned with measuring an insurers
surplus available for policyholders. Accordingly, statutory
accounting focuses on valuing assets and liabilities of insurers
at financial reporting dates in accordance with appropriate
insurance law and regulatory provisions applicable in each
insurers domiciliary state.
U.S. generally accepted accounting principles
(GAAP) are concerned with a companys solvency,
but such principles are also concerned with other financial
measurements, such as income and cash flows. Accordingly, GAAP
gives more consideration to appropriate matching of revenue and
expenses and accounting for managements stewardship of
assets than does SAP. As a direct result, different assets and
liabilities and different amounts of assets and liabilities will
be reflected in financial statements prepared in accordance with
GAAP as opposed to SAP.
Statutory accounting practices established by the NAIC and
adopted, in part, by the Illinois and California regulators,
determine, among other things, the amount of statutory surplus
and statutory net income or loss of SeaBright Insurance Company
and thus determine, in part, the amount of funds it has
available to pay dividends to us.
Guaranty
Fund Assessments
In Illinois, California and in most of the states where
SeaBright Insurance Company is licensed to transact business,
there is a requirement that property and casualty insurers doing
business within each such state participate in a guaranty
association, which is organized to pay contractual benefits owed
pursuant to insurance policies issued by impaired, insolvent or
failed insurers. These associations levy assessments, up to
prescribed limits, on all member insurers in a particular state
on the basis of the proportionate share of the premium written
by member insurers in the lines of business in which the
impaired, insolvent or failed insurer is engaged. Some states
permit member insurers to recover assessments paid through full
or partial premium tax offsets or policy surcharges.
Property and casualty insurance company insolvencies or failures
may result in additional security fund assessments to SeaBright
Insurance Company at some future date. At this time we are
unable to determine the impact, if any, such assessments may
have on the financial position or results of operations of
SeaBright Insurance Company. We have established liabilities for
guaranty fund assessments with respect to insurers that are
currently subject to insolvency proceedings.
PointSure
The brokerage and third party administrator activities of
PointSure are subject to licensing requirements and regulation
under the laws of each of the jurisdictions in which it
operates. PointSure is authorized to act as an insurance broker
under firm or officer licenses in 49 states and the
District of Columbia. PointSures business depends on the
validity of, and continued good standing under, the licenses and
approvals pursuant to which it operates, as well as compliance
with pertinent regulations. PointSure therefore devotes
significant effort toward maintaining its licenses to ensure
compliance with a diverse and complex regulatory structure.
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Licensing laws and regulations vary from state to state. In all
states, the applicable licensing laws and regulations are
subject to amendment or interpretation by regulatory
authorities. Generally such authorities are vested with
relatively broad and general discretion as to the granting,
renewing and revoking of licenses and approvals. Licenses may be
denied or revoked for various reasons, including the violation
of such regulations, conviction of crimes and the like. Possible
sanctions which may be imposed include the suspension of
individual employees, limitations on engaging in a particular
business for specified periods of time, revocation of licenses,
censures, redress to clients and fines. In some instances,
PointSure follows practices based on interpretations of laws and
regulations generally followed by the industry, which may prove
to be different from the interpretations of regulatory
authorities.
Employees
As of December 31, 2007, we had 236 full-time
equivalent employees. We have employment agreements with some of
our executive officers, which are described in our proxy
statement for the 2008 annual meeting of stockholders and
incorporated by reference into Part III, Item 11 of
this annual report. We believe that our employee relations are
good.
Corporate
Website
Through our Internet website at www.sbic.com, we provide free
access to our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission (the
SEC). A copy of the materials will be mailed to you
free of charge upon request to SeaBright Insurance Holdings,
Inc., Investor Relations, 1501
4
th
Avenue,
Suite 2600, Seattle, WA 98101. The following corporate
governance materials are also available on our website:
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Audit Committee, Compensation Committee, and Nominating and
Corporate Governance Committee charters;
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Code of Ethics for Senior Financial Employees;
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Conflict of Interest & Code of Conduct Policy; and
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Insider Trading Policy.
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If we waive or substantially change any material provision of
our Code of Ethics for Senior Financial Employees, we will
disclose that fact on our website within four business days of
the waiver or change.
Note on
Forward-Looking Statements
Some of the statements in Part I, Item 1 of this
annual report, some of the statements in this Item 1A, some
of the statements under the heading Managements
Discussion and Analysis of Financial Condition and Results of
Operation in Part II, Item 7 of this annual
report and statements elsewhere in this annual report, may
include forward-looking statements that reflect our current
views with respect to future events and financial performance.
These statements include forward-looking statements both with
respect to us specifically and the insurance sector in general.
Statements that include the words expect,
intend, plan, believe,
project, estimate, may,
should, anticipate, will and
similar statements of a future or forward-looking nature
identify forward-looking statements for purposes of the federal
securities laws or otherwise.
All forward-looking statements address matters that involve
risks and uncertainties. Accordingly, there are or will be
important factors that could cause our actual results to differ
materially from those indicated in these statements. We believe
that these factors include but are not limited to the following:
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ineffectiveness or obsolescence of our business strategy due to
changes in current or future market conditions;
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increased competition on the basis of pricing, capacity,
coverage terms or other factors;
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greater frequency or severity of claims and loss activity,
including as a result of natural or man-made catastrophic
events, than our underwriting, reserving or investment practices
anticipate based on historical experience or industry data;
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the effects of acts of terrorism or war;
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developments in financial and capital markets that adversely
affect the performance of our investments;
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changes in regulations or laws applicable to us, our
subsidiaries, brokers or customers;
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our dependency on a concentrated geographic market;
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changes in the availability, cost or quality of reinsurance and
failure of our reinsurers to pay claims timely or at all;
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decreased demand for our insurance products;
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loss of the services of any of our executive officers or other
key personnel;
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the effects of mergers, acquisitions and divestitures that we
may undertake;
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changes in rating agency policies or practices;
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changes in legal theories of liability under our insurance
policies;
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changes in accounting policies or practices; and
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changes in general economic conditions, including inflation and
other factors.
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The foregoing factors should not be construed as exhaustive and
should be read in conjunction with the other cautionary
statements that are included in this annual report. We undertake
no obligation to publicly update or review any forward-looking
statement, whether as a result of new information, future
developments or otherwise.
If one or more of these or other risks or uncertainties
materialize, or if our underlying assumptions prove to be
incorrect, actual results may vary materially from what we
project. Any forward-looking statements you read in this annual
report reflect our views as of the date of this annual report
with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to our operations,
results of operations, growth strategy and liquidity. Before
making an investment decision, you should carefully consider all
of the factors identified in this annual report that could cause
actual results to differ.
You should carefully consider the risks described below,
together with all of the other information included in this
annual report. The risks and uncertainties described below are
not the only ones facing our company. If any of the following
risks actually occurs, our business, financial condition or
operating results could be harmed. Any of the risks described
below could result in a significant or material adverse effect
on our financial condition or results of operations, and a
corresponding decline in the market price of our common stock.
You could lose all or part of your investment. The risks
discussed below also include forward-looking statements and our
actual results may differ substantially from those discussed in
those forward-looking statements. Please refer to the discussion
under the heading Note on Forward-Looking Statements
in Part I, Item 1 of this annual report.
Risks
Related to Our Business
Our
loss reserves are based on estimates and may be inadequate to
cover our actual losses.
If we fail to accurately assess the risks associated with the
businesses that we insure, our loss reserves may be inadequate
to cover our actual losses and we may fail to establish
appropriate premium rates. We establish loss reserves in our
financial statements that represent an estimate of amounts
needed to pay and administer claims with respect to insured
events that have occurred, including events that have not yet
been
34
reported to us. Loss reserves are estimates and are inherently
uncertain; they do not and cannot represent an exact measure of
liability. Accordingly, our loss reserves may prove to be
inadequate to cover our actual losses. Any changes in these
estimates are reflected in our results of operations during the
period in which the changes are made, with increases in our loss
reserves resulting in a charge to our earnings.
Our loss reserve estimates are based on estimates of the
ultimate cost of individual claims and on actuarial estimation
techniques. Several factors contribute to the uncertainty in
establishing these estimates. Judgment is required in actuarial
estimation to ascertain the relevance of historical payment and
claim settlement patterns under current facts and circumstances.
Key assumptions in the estimation process are the average cost
of claims over time, which we refer to as severity trends; the
increasing level of medical, legal and rehabilitation costs; and
costs associated with fraud or other abuses of the medical claim
process. If there are unfavorable changes in severity trends, we
may need to increase our loss reserves, as described above.
Our
geographic concentration ties our performance to the business,
economic and regulatory conditions in California, Illinois and
Louisiana. Any single catastrophe or other condition affecting
losses in these states could adversely affect our results of
operations.
Our business is concentrated in California (approximately 40.2%
of direct premiums written for the year ended December 31,
2007), Illinois (approximately 9.3% of direct premiums written
for the same period) and Louisiana (approximately 8.8% of direct
premiums written for the same period). Accordingly, unfavorable
business, economic or regulatory conditions in those states
could negatively impact our business. For example, California,
Illinois, and Louisiana are states that are susceptible to
severe natural perils, such as tsunamis, earthquakes, tornados
and hurricanes, along with the possibility of terrorist acts.
Accordingly, we could suffer losses as a result of catastrophic
events in those states. Although geographic concentration has
not adversely affected our business in the past, we may in the
future be exposed to economic and regulatory risks or risks from
natural perils that are greater than the risks faced by
insurance companies that conduct business over a greater
geographic area. This concentration of our business could have a
material adverse effect on our financial condition or results of
operations.
If we
are unable to obtain or collect on our reinsurance protection,
our business, financial condition and results of operations
could be materially adversely affected.
We buy reinsurance coverage to protect us from the impact of
large losses. Reinsurance is an arrangement in which an
insurance company, called the ceding company, transfers
insurance risk by sharing premiums with another insurance
company, called the reinsurer. Conversely, the reinsurer
receives or assumes reinsurance from the ceding company. In the
ordinary course of our business we participate in a
workers compensation and employers liability excess
of loss reinsurance treaty program covering all of the business
that we write or renew pursuant to which our reinsurers are
liable for varying percentages of the ultimate net losses in
excess of $1.0 million for the business we write, up to a
$75.0 million limit, subject to certain exclusions and
limitations. The treaty program provides coverage in several
layers. See the discussion under the heading
Reinsurance in Part I, Item 1 of this
annual report. The availability, amount and cost of reinsurance
depend on market conditions and may vary significantly. As a
result of catastrophic events, such as the events of
September 11, 2001, we may incur significantly higher
reinsurance costs, more restrictive terms and conditions, and
decreased availability. For example, each layer of our
reinsurance treaty program contains an aggregate limit for all
claims under that layer over which our reinsurers will not be
liable (
e.g.
, $8.0 million under the first layer,
$12.0 million under the second layer and $15.0 million
under the third layer). In addition, each layer of our
reinsurance treaty program covers acts of terrorism only up to a
modest limit (
e.g.
, $1.0 million per occurrence
under the first layer, $3.0 million per occurrence under
the second layer and $5.0 million under the third layer).
Because of these sub-limits and terrorism exclusions included in
our policies, which are common in the wake of the events of
September 11, 2001, we have significantly greater exposure
to losses resulting from acts of terrorism. The incurrence of
higher reinsurance costs and more restrictive terms could
materially adversely affect our business, financial condition
and results of operations.
The agreements for our current workers compensation excess
of loss reinsurance treaty program expire on October 1,
2008. Although we currently expect to renew the program upon its
expiration, any decrease in
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the amount of our reinsurance at the time of renewal, whether
caused by the existence of more restrictive terms and conditions
or decreased availability, will also increase our risk of loss
and, as a result, could materially adversely affect our
business, financial condition and results of operations. We have
not experienced difficulty in qualifying for or obtaining
sufficient reinsurance to appropriately cover our risks in the
past. We currently have 11 reinsurers participating in our
excess of loss reinsurance treaty program, and believe that this
is a sufficient number of reinsurers to provide us with
reinsurance in the volume that we require. However, it is
possible that one or more of our current reinsurers could cancel
participation, or we could find it necessary to cancel the
participation of one of our reinsurers, in our excess of loss
reinsurance treaty program. In either of those events, if our
reinsurance broker is unable to spread the cancelled or
terminated reinsurance among the remaining reinsurers in the
program, we estimate that it could take approximately one to
three weeks or longer to identify and negotiate appropriate
documentation with a replacement reinsurer. During this time, we
would be exposed to an increased risk of loss, the extent of
which would depend on the volume of cancelled reinsurance.
In addition, we are subject to credit risk with respect to our
reinsurers. Reinsurance protection that we receive does not
discharge our direct obligations under the policies we write. We
remain liable to our policyholders, even if we are unable to
make recoveries to which we believe we are entitled under our
reinsurance contracts. Losses may not be recovered from our
reinsurers until claims are paid, and, in the case of long-term
workers compensation cases, the creditworthiness of our
reinsurers may change before we can recover amounts to which we
are entitled. Although we have not experienced problems in the
past resulting from the failure of a reinsurer to pay our claims
in a timely manner, if we experience this problem in the future,
our costs would increase and our revenues would decline. As of
December 31, 2007, we had $14.2 million of amounts
recoverable from our reinsurers, excluding the receivable on our
adverse development cover, that we would be obligated to pay if
our reinsurers failed to pay us.
The
insurance business is subject to extensive regulation and
legislative changes, which impact the manner in which we operate
our business.
Our insurance business is subject to extensive regulation by the
applicable state agencies in the jurisdictions in which we
operate, perhaps most significantly by the Illinois Division of
Insurance and the California Department of Insurance. These
state agencies have broad regulatory powers designed to protect
policyholders, not stockholders or other investors. These powers
include, among other things, the ability to:
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place limitations on our ability to transact business with our
affiliates;
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regulate mergers, acquisitions and divestitures involving our
insurance company subsidiary;
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require SeaBright Insurance Company, PointSure and THM to comply
with various licensing requirements and approvals that affect
our ability to do business;
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approve or reject our policy coverage and endorsements;
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place limitations on our investments and dividends;
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set standards of solvency to be met and maintained;
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regulate rates pertaining to our business;
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require assessments for the provision of funds necessary for the
settlement of covered claims under certain policies provided by
impaired, insolvent or failed insurance companies;
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require us to comply with medical privacy laws; and
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prescribe the form and content of, and examine, our statutory
financial statements.
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On June 21, 2007, the Illinois Division of Insurance
adopted its Report of Examination as of December 31, 2005
after completing a routine comprehensive examination of our 2005
statutory annual statement. No fines or penalties were assessed.
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Our ability to transact business with our affiliates and to
enter into mergers, acquisitions and divestitures involving our
insurance company subsidiary is limited by the requirements of
the insurance holding company laws of Illinois and California.
To comply with these laws, we are required to file notices with
the Illinois Division of Insurance and the California Department
of Insurance to seek their respective approvals at least
30 days before engaging in any intercompany transactions,
such as sales, purchases, exchanges of assets, loans, extensions
of credit, cost sharing arrangements and extraordinary dividends
or other distributions to stockholders. Under these holding
company laws, any change of control transaction also requires
prior notification and approval. Because these governmental
agencies may not take action or give approval within the
30 day period, these notification and approval requirements
may subject us to business delays and additional business
expense. If we fail to give these notifications, we may be
subject to significant fines and penalties and damaged working
relations with these governmental agencies.
In addition, workers compensation insurance is statutorily
provided for in all of the states in which we do business. State
laws and regulations provide for the form and content of policy
coverage and the rights and benefits that are available to
injured workers, their representatives and medical providers.
For example, in California, on January 1, 2003,
workers compensation legislation became effective that
provided for increases in the benefits payable to injured
workers. Also, in California, workers compensation
legislation intended to reduce certain costs was enacted in
September 2003 and April 2004. Among other things, this
legislation established an independent medical review process
for resolving medical disputes, tightened standards for
determining impairment ratings by applying specific medical
treatment guidelines, capped temporary total disability payments
to 104 weeks from first payment and enabled injured workers
to access immediate medical care up to $10,000 but required them
to get medical care through a network of doctors chosen by the
employer. The implementation of these reforms affects the manner
in which we coordinate medical care costs with employers and the
manner in which we oversee treatment plans. However, the reforms
are subject to continuing opposition in the California
legislature, in the courts and by ballot initiatives, any of
which could overturn or substantially amend the reforms and
regulatory rules applicable to the legislation. Since the
passage of the 2003 and 2004 reforms, bills have been introduced
to roll back many areas of significant reform. Some compromise
measures have succeeded. For example, on October 13, 2007,
new legislation became effective that removed caps on physical
therapy but only when the administrative director adopts new
guidelines for occupational therapy and chiropractic care for
post-surgical care. We cannot predict the ultimate impact of the
reforms or of any amendments to them.
Our business is also affected by federal laws, including the
USL&H Act, which is administered by the Department of
Labor, and the Merchant Marine Act of 1920, or Jones Act. The
USL&H Act contains various provisions affecting our
business, including the nature of the liability of employers of
longshoremen, the rate of compensation to an injured
longshoreman, the selection of physicians, compensation for
disability and death and the filing of claims.
In addition, we are impacted by the Terrorism Risk Act and by
the Gramm-Leach-Bliley Act of 2002 related to disclosure of
personal information. The Terrorism Risk Act requires that
commercial property and casualty insurance companies offer
coverage for certain acts of terrorism and has established a
federal assistance program through the end of 2014 to help
insurers cover claims arising out of such acts. The Terrorism
Risk Act only covers certified acts of terrorism, and the
U.S. Secretary of the Treasury must declare the act to be a
certified act of terrorism for it to be covered
under this federal program. In addition, no federal compensation
will be paid under the Terrorism Risk Act unless aggregate
insured losses from the act for the entire insurance industry
exceed certain threshold amounts ($100.0 million for
terrorism losses occurring in 2007 and for the remainder of the
program). Under this program, the federal government covers 85%
of the losses from covered certified acts of terrorism occurring
in 2007 and for the remainder of the program on commercial risks
in the United States only, in excess of the applicable
deductible amount. This deductible is calculated based on a
percentage of an affiliated insurance groups prior year
direct earned premiums on commercial lines policies (except for
certain excluded lines such as commercial auto) covering risks
in the United States. This deductible amount is 20.0% of such
premiums for losses occurring in 2007 and subsequent years.
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This extensive regulation of our business may affect the cost or
demand for our products and may limit our ability to obtain rate
increases or to take other actions that we might desire to
increase our profitability. In addition, we may be unable to
maintain all required approvals or comply fully with the wide
variety of applicable laws and regulations, which are
continually undergoing revision, or the relevant
authoritys interpretation of such laws and regulations.
A
downgrade in the A.M. Best rating of our insurance
subsidiary could reduce the amount of business we are able to
write.
Rating agencies rate insurance companies based on each
companys ability to pay claims. Our insurance company
subsidiary currently has a rating of A−
(Excellent) from A.M. Best, which is the rating agency that
we believe has the most influence on our business. The ratings
of A.M. Best are subject to periodic review using, among
other things, proprietary capital adequacy models, and are
subject to revision or withdrawal at any time. Insurance ratings
are directed toward the concerns of policyholders and insurance
agents and are not intended for the protection of investors or
as a recommendation to buy, hold or sell any of our securities.
Our competitive position relative to other companies is
determined in part by our A.M. Best rating. We believe that
our business is particularly sensitive to our A.M. Best
rating because we focus on larger customers which tend to give
substantial weight to the A.M. Best rating of their
insurers. We expect that any reduction in our A.M. Best
rating below A− would cause a reduction in the
number of policies we write and could have a material adverse
effect on our results of operations and our financial position.
The
effects of emerging claim and coverage issues on our business
are uncertain.
As industry practices and legal, judicial, social and other
environmental conditions change, unexpected and unintended
issues related to claims and coverage may emerge. These issues
may adversely affect our business by either extending coverage
beyond our underwriting intent or by increasing the number or
size of claims. In some instances, these changes may not become
apparent until some time after we have issued insurance
contracts that are affected by the changes. As a result, the
full extent of liability under our insurance contracts may not
be known for many years after a contract is issued. For example,
the number or nature of existing occupational diseases may
expand beyond our expectation. In addition, medical claims costs
associated with permanent and partial disabilities may inflate
more rapidly or higher than we currently expect. Expansions of
this nature may expose us to more claims than we anticipated
when we wrote the underlying policy.
Intense
competition could adversely affect our ability to sell policies
at rates we deem adequate.
In most of the states in which we operate, we face significant
competition which, at times, is intense. If we are unable to
compete effectively, our business and financial condition could
be materially adversely affected. Competition in our businesses
is based on many factors, including premiums charged, services
provided, financial strength ratings assigned by independent
rating agencies, speed of claims payments, reputation, perceived
financial strength and general experience. We compete with
regional and national insurance companies and state-sponsored
insurance funds, as well as potential insureds that have decided
to self-insure. Our principal competitors include AIG, Liberty
Mutual, Zurich, Signal Mutual Indemnity Association Ltd., and
American Longshore Mutual Association Ltd. Many of our
competitors have substantially greater financial and marketing
resources than we do, and some of our competitors, including the
State Compensation Insurance Fund of California, benefit
financially by not being subject to federal income tax. Intense
competitive pressure on prices can result from the actions of
even a single large competitor, such as the State Compensation
Insurance Fund of California or AIG.
In addition, our competitive advantage may be limited due to the
small number of insurance products that we offer. Some of our
competitors, such as AIG, have additional competitive leverage
because of the wide array of insurance products that they offer.
For example, it may be more convenient for a potential customer
to purchase numerous different types of insurance products from
one insurance carrier. We do not offer a wide array of insurance
products due to our targeted market niches, and we may lose
potential customers to our larger, more diverse competitors as a
result.
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On March 30, 2007, the California Workers
Compensation Insurance Rating Bureau (the WCIRB)
submitted a filing with the California Insurance Commissioner
recommending an 11.3% decrease in advisory pure premium rates on
new and renewal policies effective on or after July 1,
2007. The filing was based on a review of loss and loss
adjustment experience through December 31, 2006 and was
made in response to continued reductions in California
workers compensation claim costs. On May 29, 2007,
the California Insurance Commissioner recommended a 14.2%
decrease in rates effective July 1, 2007. On June 8,
2007, after completing a study of our California loss data, we
filed with the California Insurance Commissioner our new rates
reflecting an average reduction of 14.2% from prior rates for
new and renewal workers compensation insurance policies
written in California on or after July 1, 2007. The filing
was approved on June 12, 2007. This was the eighth
California rate reduction we have filed since October 1,
2003, resulting in a net cumulative reduction of our California
rates of approximately 54.8%. On September 20, 2007, the
WCIRB submitted a filing with the California Insurance
Commissioner recommending a 4.2% increase in advisory pure
premium rates on new and renewal policies effective on or after
January 1, 2008. The filing was based on a review of loss
and loss adjustment experience through June 30, 2007. On
October 19, 2007, the WCIRB amended its filing, increasing
the proposed rate increase to 5.2% based on the projected impact
of AB 338 that was signed into law on October 13, 2007. AB
338 increases the period of time, from two years to five years,
from the date of injury during which disability benefits,
limited to a maximum of 104 weeks, may be provided. A
public hearing to consider the proposed rate increase was held
on October 23, 2007. In December 2007, the California
Insurance Commissioner recommended no overall change to
workers compensation premium rates in 2008. On
November 30, 2007, we followed the Commissioners
recommendation and filed for no change in our rates effective on
January 1, 2008. The filing was approved on
December 12, 2007.
Rate reductions have also been adopted in other states in which
we operate. For example, effective January 1, 2008, we
adopted the following rate decreases recommended by the National
Council for Compensation Insurance (the NCCI): 10.9%
in Alaska, 19.3% in Hawaii and 18.4% in Florida. Effective
July 1, 2007, we adopted the Louisiana Insurance
Commissioners recommendation of a 15.8% reduction in
Louisiana, which is 2.0% more than the 13.8% rate decrease
recommended by the NCCI. On February 5, 2008, the Louisiana
Insurance Commissioner approved an NCCI-proposed rate reduction
of 8.6%, effective May 1, 2008. On March 7, 2008,
after completing a study of our Louisiana loss data, we filed
with the Louisiana Insurance Commissioner our new rates
reflecting an average reduction of 8.6% from prior rates for new
and renewal workers compensation insurance policies
written in Louisiana on or after May 1, 2008. We have also
recently adopted rate increases in some states. For example,
effective October 1, 2007, we adopted a 4.1% rate increase
in Arizona and on January 1, 2008, we adopted a 4.0% rate
increase in Illinois.
If we
are unable to realize our investment objectives, our financial
condition may be adversely affected.
Investment income is an important component of our revenues and
net income. The ability to achieve our investment objectives is
affected by factors that are beyond our control. For example,
United States participation in hostilities with other countries
and large-scale acts of terrorism may adversely affect the
economy generally, and our investment income could decrease.
Interest rates are highly sensitive to many factors, including
governmental monetary policies and domestic and international
economic and political conditions. These and other factors also
affect the capital markets, and, consequently, the value of the
securities we own. The outlook for our investment income is
dependent on the future direction of interest rates and the
amount of cash flows from operations that are available for
investment. The fair values of fixed maturity investments that
are available-for-sale fluctuate with changes in
interest rates and cause fluctuations in our stockholders
equity. Any significant decline in our investment income as a
result of rising interest rates or general market conditions
would have an adverse effect on our net income and, as a result,
on our stockholders equity and our policyholders
surplus. See Investments in Part I, Item 1
of this annual report for a discussion of the limited exposure
in our investment portfolio at December 31, 2007 to
sub-prime mortgages and problems currently facing monoline bond
insurers.
39
We
could be adversely affected by the loss of one or more principal
employees or by an inability to attract and retain
staff.
Our success will depend in substantial part upon our ability to
attract and retain qualified executive officers, experienced
underwriting talent and other skilled employees who are
knowledgeable about our business. We rely substantially upon the
services of our senior management team and key employees,
consisting of John G. Pasqualetto, Chairman, President and Chief
Executive Officer; Richard J. Gergasko, Executive Vice
President Operations; Joseph S. De Vita, Senior Vice
President, Chief Financial Officer and Assistant Secretary; D.
Drue Wax Senior Vice President, General Counsel and
Corporate Secretary; Richard W. Seelinger, Senior Vice
President Policyholder Services; Marc B.
Miller, M.D., Senior Vice President and Chief Medical
Officer; Jeffrey C. Wanamaker, Senior Vice President
Underwriting; James L. Borland, III, Vice President and
Chief Information Officer; M. Philip Romney, Vice
President Finance, Principal Accounting Officer and
Assistant Secretary and Craig A. Pankow, President
PointSure. Although we are not aware of any planned departures
or retirements, if we were to lose the services of members of
our management team, our business could be adversely affected.
Many of our principal employees possess skills and extensive
experience relating to our market niches. Were we to lose any of
these employees, it may be challenging for us to attract a
replacement employee with comparable skills and experience in
our market niches. We have employment agreements with some of
our executive officers, which are described in our proxy
statement for the 2008 annual meeting of stockholders and
incorporated by reference into Part III, Item 11 of
this annual report. We do not currently maintain key man life
insurance policies with respect to any member of our senior
management team or other employees.
We may
require additional capital in the future, which may not be
available or only available on unfavorable terms.
Our future capital requirements depend on many factors,
including our ability to write new business successfully and to
establish premium rates and loss reserves at levels sufficient
to cover losses. To the extent that the funds generated by the
initial public offering of 8,625,000 shares of our common
stock in January 2005 and the follow-on offering of
3,910,000 shares of common stock in February 2006 are
insufficient to support future operating requirements
and/or
cover
claim losses, we may need to raise additional funds through
financings or curtail our growth. We believe that the net
proceeds to us from the above offerings and cash provided by
operations will satisfy our capital requirements for the
foreseeable future. However, because the timing and amount of
our future needs for capital will depend on our growth and
profitability, we cannot provide any assurance in that regard.
If we had to raise additional capital, equity or debt financing
may not be available at all or may be available only on terms
that are not favorable to us. In the case of equity financings,
dilution to our stockholders could result, and in any case such
securities may have rights, preferences and privileges that are
senior to those of the shares currently outstanding. If we
cannot obtain adequate capital on favorable terms or at all, we
may be unable to support future growth or operating requirements
and, accordingly, our business, financial condition or results
of operations could be materially adversely affected.
Our
status as an insurance holding company with no direct operations
could adversely affect our ability to pay dividends in the
future.
We are a holding company that transacts our business through our
operating subsidiaries, SeaBright Insurance Company, PointSure
and THM. Our primary assets are the stock of these operating
subsidiaries. Our ability to pay expenses and dividends depends,
in the long run, upon the surplus and earnings of our
subsidiaries and the ability of our subsidiaries to pay
dividends to us. Payment of dividends by SeaBright Insurance
Company is restricted by state insurance laws, including laws
establishing minimum solvency and liquidity thresholds, and
could be subject to contractual restrictions in the future,
including those imposed by indebtedness we may incur in the
future. SeaBright Insurance Company is required to report any
ordinary dividends to the Illinois Division of Insurance and the
California Department of Insurance prior to the payment of the
dividend. In addition, SeaBright Insurance Company is not
authorized to pay any extraordinary dividends to us under
Illinois or California insurance laws without prior regulatory
approval from the Illinois Division of Insurance or the
California Department of Insurance. See the discussion under the
heading Regulation Dividend Limitations
in Part I, Item 1 of this annual report. As a result,
at times, we may not be able to receive dividends from SeaBright
Insurance Company and we may not receive dividends in amounts
40
necessary to pay dividends on our capital stock. In addition,
the payment of dividends by us is within the discretion of our
Board of Directors and will depend on numerous factors,
including our financial condition, our capital requirements and
other factors that our Board of Directors considers relevant.
Currently, we do not intend to pay dividends on our capital
stock.
We
rely on independent insurance brokers to distribute our
products.
Our business depends in part on the efforts of independent
insurance brokers to market our insurance programs successfully
and produce business for us and on our ability to offer
insurance programs and services that meet the requirements of
the clients and customers of these brokers. The majority of the
business in our workers compensation operations is
produced by a group of licensed insurance brokers that totaled
approximately 208 at December 31, 2007. Brokers are not
obligated to promote our insurance programs and may sell
competitors insurance programs. Several of our
competitors, including AIG and Zurich, offer a broader array of
insurance programs than we do. Accordingly, our brokers may find
it easier to promote the broader range of programs of our
competitors than to promote our niche selection of insurance
products. If our brokers fail or choose not to market our
insurance programs successfully or to produce business for us,
our growth may be limited and our financial condition and
results of operations may be negatively affected.
Assessments
and other surcharges for guaranty funds and second injury funds
and other mandatory pooling arrangements may reduce our
profitability.
Virtually all states require insurers licensed to do business in
their state to bear a portion of the unfunded obligations of
impaired or insolvent insurance companies. These obligations are
funded by assessments that are expected to continue in the
future as a result of insolvencies. Assessments are levied by
guaranty associations within the state, up to prescribed limits,
on all member insurers in the state on the basis of the
proportionate share of the premium written by member insurers in
the lines of business in which the impaired, insolvent or failed
insurer is engaged. See the discussion under the heading
Regulation in Part I, Item 1 of this
annual report. Accordingly, the assessments levied on us may
increase as we increase our premiums written. Further,
Washington state legislation enacted on April 20, 2005
created a separate account within the Guaranty Fund for
USL&H Act claims and authorized prefunding of potential
insolvencies in order to establish a cash balance. Many states
also have laws that established second injury funds to provide
compensation to injured employees for aggravation of a prior
condition or injury, which are funded by either assessments
based on paid losses or premium surcharge mechanisms. For
example, Alaska requires insurers to contribute to its second
injury fund annually an amount equal to the compensation the
injured employee is owed multiplied by a contribution rate based
on the funds reserve rate. In addition, as a condition of
the ability to conduct business in some states, including
California, insurance companies are required to participate in
mandatory workers compensation shared market mechanisms or
pooling arrangements, which provide workers compensation
insurance coverage from private insurers. Although we price our
products to account for the obligations that we may have under
these pooling arrangements, we may not be successful in
estimating our liability for these obligations. Accordingly, our
prices may not fully account for our liabilities under pooling
arrangements, which may cause a decrease in our profits. As we
write policies in new states that have pooling arrangements, we
will be required to participate in additional pooling
arrangements. Further, the insolvency of other insurers in these
pooling arrangements would likely increase the liability for
other members remaining in the pool. The effect of these
assessments and mandatory shared market mechanisms or changes in
them could reduce our profitability in any given period or limit
our ability to grow our business.
In the
event LMC is placed into receivership, we could lose our rights
to fee income and protective arrangements that were established
in connection with the Acquisition, our reputation and
credibility could be adversely affected and we could be subject
to claims under applicable voidable preference and fraudulent
transfer laws.
The assets that SeaBright acquired in the Acquisition were
acquired from LMC and certain of its affiliates. LMC and its
insurance company affiliates are currently operating under a
voluntary run off plan approved by the Illinois
Division of Insurance. Run off is the professional
management of an insurance companys discontinued,
distressed or non-renewed lines of insurance and associated
liabilities outside of a judicial proceeding. Under the run off
plan, LMC has instituted aggressive expense control measures in
order
41
to reduce its future loss exposure and allow it to meet its
obligations to current policyholders. According to LMCs
statutory financial statements as of and for the year ended
December 31, 2007, LMC had a statutory surplus of
$150.7 million (unaudited), a decrease of approximately
$22.9 million from its surplus of $173.6 million
(audited) as of December 31, 2006. In connection with the
Acquisition, we established various arrangements with LMC and
certain of its affiliates, including (1) servicing
arrangements entitling us to fee income for providing claims
administration services for Eagle and (2) other protective
arrangements designed to minimize our exposure to any past
business underwritten by KEIC, the shell entity that we acquired
from LMC for its insurance licenses, and any adverse
developments in KEICs loss reserves as they existed at the
date of the Acquisition. See the discussion under the heading
Loss Reserves KEIC Loss Reserves in
Part I, Item 1 of this annual report. In the event LMC
is placed into receivership, our business could be adversely
affected in the following ways:
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A receiver could seek to reject or terminate one or more of the
services agreements that were established in connection with the
Acquisition between us and LMC or its affiliates, including
Eagle. In that event, we could lose the revenue we currently
receive under these services agreements.
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As discussed under Loss Reserves KEIC Loss
Reserves in Part I, Item 1 of this annual
report, to minimize our exposure to any past business
underwritten by KEIC, we entered into an arrangement with LMC at
the time of the Acquisition requiring LMC to indemnify us in the
event of adverse development of the loss reserves in KEICs
balance sheet as they existed on the date of closing of the
Acquisition. We refer to this arrangement as the adverse
development cover. To support LMCs obligations under the
adverse development cover, LMC funded a trust account at the
time of the Acquisition. The minimum amount that must be
maintained in the trust account is equal to the greater of
(a) $1.6 million or (b) 102% of the then existing
quarterly estimate of LMCs total obligations under the
adverse development cover. We refer to this trust account as the
collateralized reinsurance trust because the funds on deposit in
the trust account serve as collateral for LMCs potential
future obligations to us under the adverse development cover. At
December 31, 2007, the liability of LMC under the adverse
development cover was approximately $2.5 million. LMC
initially funded the trust account with $1.6 million to
support its obligations under the adverse development cover. In
accordance with the terms of the protective arrangements that we
have established with LMC, on December 23, 2004, LMC
deposited into the collateralized reinsurance trust an
additional $3.2 million, resulting in a total balance in
the trust account of $4.8 million. In February 2007, LMC
submitted a request to withdraw approximately $1.8 million
of excess funds on deposit in the trust account. After due
evaluation, we complied with LMCs request, resulting in a
balance in the trust account of approximately $3.4 million
immediately following the withdrawal. The balance of the trust
account, including accumulated interest, at December 31,
2007 was $3.5 million. If LMC is placed in receivership and
the amount held in the collateralized reinsurance trust is
inadequate to satisfy the obligations of LMC to us under the
adverse development cover, it is unlikely that we would recover
any future amounts owed by LMC to us under the adverse
development cover in excess of the amounts currently held in
trust because the director of the Illinois Division of Insurance
would have control of the assets of LMC.
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Some of our customers are insured under Eagle insurance policies
that we service pursuant to the claims administration servicing
agreement described above. Although SeaBright is a separate
legal entity from LMC and its affiliates, including Eagle,
Eagles policyholders may not readily distinguish SeaBright
from Eagle and LMC if those policies are not honored in the
event LMC is found to be insolvent and placed into court-ordered
liquidation. If that were to occur, our market reputation,
credibility and ability to renew the underlying policies could
be adversely affected.
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In connection with the Acquisition, LMC and its affiliates made
various transfers and payments to SeaBright, including
approximately $13.0 million under the commutation agreement
and an initial amount of approximately $1.6 million to fund
the collateralized reinsurance trust. In the event that LMC is
placed into receivership, it is possible that a receiver or
creditor could assert a claim seeking to unwind or recover these
payments under applicable voidable preference and fraudulent
transfer laws.
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42
Risks
Related to Our Industry
We may
face substantial exposure to losses from terrorism for which we
are required by law to provide coverage.
Under our workers compensation policies, we are required
to provide workers compensation benefits for losses
arising from acts of terrorism. The impact of any terrorist act
is unpredictable, and the ultimate impact on us would depend
upon the nature, extent, location and timing of such an act.
Notwithstanding the protection provided by the reinsurance we
have purchased and any protection provided by the Terrorism Risk
Act, the risk of severe losses to us from acts of terrorism has
not been eliminated because, as discussed above, our excess of
loss reinsurance treaty program contains various sub-limits and
exclusions limiting our reinsurers obligation to cover
losses caused by acts of terrorism. Accordingly, events may not
be covered by, or may exceed the capacity of, our reinsurance
protection and any protection offered by the Terrorism Risk Act
or any successor legislation. Thus, any acts of terrorism could
materially adversely affect our business and financial condition.
The
threat of terrorism and military and other actions may result in
decreases in our net income, revenue and assets under management
and may adversely affect our investment portfolio.
The threat of terrorism, both within the United States and
abroad, and military and other actions and heightened security
measures in response to these types of threats, may cause
significant volatility and declines in the equity markets in the
United States and abroad, as well as loss of life, property
damage, additional disruptions to commerce and reduced economic
activity. Actual terrorist attacks could cause a decrease in our
stockholders equity, net income
and/or
revenue. The effects of these changes may result in a decrease
in our stock price. In addition, some of the assets in our
investment portfolio may be adversely affected by declines in
the bond markets and declines in economic activity caused by the
continued threat of terrorism, ongoing military and other
actions and heightened security measures.
We cannot predict at this time whether and the extent to which
industry sectors in which we maintain investments may suffer
losses as a result of potential decreased commercial and
economic activity, or how any such decrease might impact the
ability of companies within the affected industry sectors to pay
interest or principal on their securities, or how the value of
any underlying collateral might be affected.
We can offer no assurances that terrorist attacks or the threat
of future terrorist events in the United States and abroad or
military actions by the United States will not have a material
adverse effect on our business, financial condition or results
of operations.
Our
results of operations and revenues may fluctuate as a result of
many factors, including cyclical changes in the insurance
industry, which may cause the price of our common stock to be
volatile.
The results of operations of companies in the insurance industry
historically have been subject to significant fluctuations and
uncertainties. Our profitability can be affected significantly
by:
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competition;
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rising levels of loss costs that we cannot anticipate at the
time we price our products;
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volatile and unpredictable developments, including man-made,
weather-related and other natural catastrophes or terrorist
attacks;
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changes in the level of reinsurance capacity and capital
capacity;
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changes in the amount of loss reserves resulting from new types
of claims and new or changing judicial interpretations relating
to the scope of insurers liabilities; and
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fluctuations in interest rates, inflationary pressures and other
changes in the investment environment, which affect returns on
invested assets and may impact the ultimate payout of losses.
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The availability of insurance is related to prevailing prices,
the level of insured losses and the level of industry surplus
which, in turn, may fluctuate in response to changes in rates of
return on investments being
43
earned in the insurance industry. As a result, the insurance
business historically has been a cyclical industry characterized
by periods of intense price competition due to excessive
underwriting capacity as well as periods when shortages of
capacity permitted favorable premium levels. During 1998, 1999
and 2000, the workers compensation insurance industry
experienced substantial pricing competition, and this pricing
competition greatly affected the ability of our predecessor to
increase premiums. Beginning in 2001, we witnessed a decrease in
pricing competition in the industry, which enabled us to raise
our rates. Although rates for many products increased from 2000
to 2003, legislative reforms caused premium rates in certain
states, including California, to decrease in 2004 through 2007,
and rates may continue to decrease. In addition, the
availability of insurance has and may continue to increase,
either by capital provided by new entrants or by the commitment
of additional capital by existing insurers, which may perpetuate
rate decreases. Any of these factors could lead to a significant
reduction in premium rates, less favorable policy terms and
fewer submissions for our underwriting services. In addition to
these considerations, changes in the frequency and severity of
losses suffered by insureds and insurers may affect the cycles
of the insurance business significantly, and we expect to
experience the effects of such cyclicality. This cyclicality may
cause the price of our securities to be volatile.
Risks
Related to Our Common Stock
The
price of our common stock may decrease.
The trading price of shares of our common stock may decline for
many reasons, some of which are beyond our control, including,
among others:
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quarterly variations in our results of operations;
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changes in expectations as to our future results of operations,
including financial estimates by securities analysts and
investors;
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announcements of claims against us by third parties;
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changes in law and regulation;
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results of operations that vary from those expected by
securities analysts and investors; and
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future sales of shares of our common stock.
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In addition, the stock market in recent years has experienced
substantial price and volume fluctuations that sometimes have
been unrelated or disproportionate to the operating performance
of companies whose shares are traded. As a result, the trading
price of shares of our common stock may decrease and you may not
be able to sell your shares at or above the price you pay to
purchase them.
Applicable
insurance laws may make it difficult to effect a change of
control of our company.
Our insurance company subsidiary is domiciled in the state of
Illinois and commercially domiciled in the state of California.
The insurance holding company laws of Illinois and California
require advance approval by the Illinois Division of Insurance
and the California Department of Insurance of any change in
control of SeaBright Insurance Company. Control is
generally presumed to exist through the direct or indirect
ownership of 10% or more of the voting securities of a domestic
insurance company or of any entity that controls a domestic
insurance company. In addition, insurance laws in many states
contain provisions that require prenotification to the insurance
commissioners of a change in control of a non-domestic insurance
company licensed in those states. Any future transactions that
would constitute a change in control of SeaBright Insurance
Company, including a change of control of us, would generally
require the party acquiring control to obtain the prior approval
of the Illinois Division of Insurance and the California
Department of Insurance and may require pre-acquisition
notification in applicable states that have adopted
pre-acquisition notification provisions. Obtaining these
approvals may result in a material delay of, or deter, any such
transaction. See the discussion under the heading
Regulation in Part I, Item 1 of this
annual report.
These laws may discourage potential acquisition proposals and
may delay, deter or prevent a change of control of us, including
through transactions, and in particular unsolicited
transactions, that some or all of our stockholders might
consider to be desirable.
44
Anti-takeover
provisions in our amended and restated certificate of
incorporation and by-laws and under the laws of the State of
Delaware could impede an attempt to replace or remove our
directors or otherwise effect a change of control of our
company, which could diminish the value of our common
stock.
Our amended and restated certificate of incorporation and
by-laws contain provisions that may make it more difficult for
stockholders to replace directors even if the stockholders
consider it beneficial to do so. In addition, these provisions
could delay or prevent a change of control that a stockholder
might consider favorable. For example, these provisions may
prevent a stockholder from receiving the benefit from any
premium over the market price of our common stock offered by a
bidder in a potential takeover. Even in the absence of an
attempt to effect a change in management or a takeover attempt,
these provisions may adversely affect the prevailing market
price of our common stock if they are viewed as discouraging
takeover attempts in the future. In addition, Section 203
of the Delaware General Corporation Law may limit the ability of
an interested stockholder to engage in business
combinations with us. An interested stockholder is defined to
include persons owning 15% or more of any class of our
outstanding voting stock.
Our amended and restated certificate of incorporation and
by-laws contain the following provisions that could have an
anti-takeover effect:
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stockholders have limited ability to call stockholder meetings
and to bring business before a meeting of stockholders;
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stockholders may not act by written consent; and
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our Board of Directors may authorize the issuance of preferred
stock with such rights, powers and privileges as the board deems
appropriate.
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These provisions may make it difficult for stockholders to
replace management and could have the effect of discouraging a
future takeover attempt which is not approved by our Board of
Directors but which individual stockholders might consider
favorable.
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Item 1B.
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Unresolved
Staff Comments.
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None.
Our principal executive offices are located in approximately
35,600 square feet of leased office space in Seattle,
Washington. We also lease office space consisting of
approximately 8,300 square feet in Orange, California;
6,100 square feet in Concord, California; 4,100 square
feet in Phoenix, Arizona; 4,000 square feet in Duluth,
Georgia; 3,900 square feet in Irvine, California;
3,900 square feet in Radnor, Pennsylvania;
3,700 square feet in Needham, Massachusetts;
3,300 square feet in Houston, Texas; 3,000 square feet
in Chicago, Illinois; 2,650 square feet in Honolulu,
Hawaii; 2,500 square feet in Anchorage, Alaska; and
1,800 square feet in Tampa, Florida. We conduct claims and
underwriting operations in our branch offices, with the
exception of our Honolulu office, where we conduct only claims
and loss control operations, and our Needham office, where we
conduct only underwriting and marketing operations. We do not
own any real property. We consider our leased facilities to be
adequate for our current operations.
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Item 3.
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Legal
Proceedings.
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We are, from time to time, involved in various legal proceedings
in the ordinary course of business. We believe we have
sufficient loss reserves and reinsurance to cover claims under
policies issued by us. Accordingly, we do not believe that the
resolution of any currently pending legal proceedings, either
individually or taken as a whole, will have a material adverse
effect on our business, financial condition or results of
operations.
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Item 4.
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Submission
of Matters to a Vote of Security Holders.
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None.
45
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
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Our common stock has been quoted on the NASDAQ Global Select
Market (formerly the Nasdaq National Market) under the symbol
SEAB since our initial public offering on
January 21, 2005. Prior to that time, there was no public
market for our common stock. The following table sets forth, for
the periods indicated, the high and low sales prices for our
common stock as quoted on the NASDAQ Global Select Market.
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High
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Low
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2007:
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First quarter
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$
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19.14
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$
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16.55
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Second quarter
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19.12
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16.89
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Third quarter
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19.98
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14.23
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Fourth quarter
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19.19
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14.40
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2006:
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First quarter
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$
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18.03
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$
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14.40
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Second quarter
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18.68
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14.31
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Third quarter
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16.18
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12.25
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Fourth quarter
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18.34
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12.91
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As of March 14, 2008, there were approximately 33 holders
of record of our common stock.
Dividend
Policy
We do not expect to pay any cash dividends on our common stock
for the foreseeable future. We currently intend to retain any
additional future earnings to finance our operations and growth.
Any future determination to pay cash dividends on our common
stock will be at the discretion of our Board of Directors and
will be dependent on our earnings, financial condition,
operating results, capital requirements, any contractual
restrictions, regulatory and other restrictions on the payment
of dividends by our subsidiaries to us, and other factors that
our Board of Directors deems relevant.
We are a holding company and have no direct operations. Our
ability to pay dividends in the future depends on the ability of
our operating subsidiaries to pay dividends to us. Our
subsidiary, SeaBright Insurance Company, is a regulated
insurance company and therefore is subject to significant
regulatory restrictions limiting its ability to declare and pay
dividends.
SeaBright Insurance Companys ability to pay dividends is
subject to restrictions contained in the insurance laws and
related regulations of Illinois and California. The insurance
holding company laws in these states require that ordinary
dividends be reported to the Illinois Division of Insurance and
the California Department of Insurance prior to payment of the
dividend and that extraordinary dividends be submitted for prior
approval. See Regulation in Part I, Item 1
of this annual report.
For information regarding restrictions on the payment of
dividends by us and SeaBright Insurance Company, see the
discussion under the heading Liquidity and Capital
Resources in Part II, Item 7 and the discussion
under the heading Business
Regulation Dividend Limitations in
Part I, Item 1 of this annual report.
Purchases
of Equity Securities
We did not purchase any of our equity securities during 2007.
46
Performance
Graph
The following graph and table compare the total return on $100
invested in SeaBright common stock for the period commencing on
January 21, 2005 (the date of our initial public offering)
and ending on December 31, 2007 with the total return on
$100 invested in each of the Nasdaq Stock Market (U.S.) Index
and in the Nasdaq Insurance Index. The closing market price for
SeaBright common stock at the end of fiscal year 2007 was $15.08.
Comparison
of 35 Month Cumulative Total Return*
Among SeaBright Insurance Holdings, Inc., The NASDAQ Composite
Index
And The NASDAQ Insurance Index
|
|
|
*
|
|
$100 invested on January 21, 2005 in stock or on
December 31, 2004 in index, including reinvestment of
dividends. Fiscal year ending December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Total Return
|
|
|
|
SeaBright
|
|
|
NASDAQ
|
|
|
NASDAQ
|
|
|
|
Insurance
|
|
|
Composite
|
|
|
Insurance
|
|
|
|
Holdings, Inc.
|
|
|
Index
|
|
|
Index
|
|
|
1/21/05
|
|
|
100.00
|
|
|
|
100.00
|
|
|
|
100.00
|
|
3/31/05
|
|
|
85.81
|
|
|
|
92.04
|
|
|
|
99.12
|
|
6/30/05
|
|
|
94.85
|
|
|
|
94.43
|
|
|
|
103.18
|
|
9/30/05
|
|
|
107.39
|
|
|
|
99.71
|
|
|
|
105.52
|
|
12/31/05
|
|
|
138.01
|
|
|
|
102.41
|
|
|
|
110.18
|
|
3/31/06
|
|
|
144.56
|
|
|
|
109.31
|
|
|
|
110.80
|
|
6/30/06
|
|
|
133.69
|
|
|
|
101.72
|
|
|
|
113.63
|
|
9/30/06
|
|
|
115.93
|
|
|
|
106.09
|
|
|
|
117.78
|
|
12/31/06
|
|
|
149.46
|
|
|
|
114.09
|
|
|
|
123.48
|
|
3/31/07
|
|
|
152.70
|
|
|
|
114.44
|
|
|
|
121.59
|
|
6/30/07
|
|
|
145.06
|
|
|
|
122.63
|
|
|
|
127.72
|
|
9/30/07
|
|
|
141.66
|
|
|
|
127.77
|
|
|
|
125.01
|
|
12/31/07
|
|
|
125.15
|
|
|
|
124.65
|
|
|
|
120.72
|
|
The information in the graph and table above is not
soliciting material, is not deemed filed
with the SEC and is not to be incorporated by reference in any
of our filings under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended (the
Exchange Act), whether made before or after the date
of this annual report and irrespective of any general
incorporation language in any such filing, except to the extent
that we specifically incorporate such information by reference.
47
|
|
Item 6.
|
Selected
Financial Data.
|
The following table sets forth our selected historical financial
information and that of our predecessor for the periods ended
and as of the dates indicated. This information comes from our
consolidated financial statements and those of our predecessor.
You should read the following selected financial information
along with the information contained in this annual report,
including Part II, Item 7 of this annual report
entitled Managements Discussion and Analysis of
Financial Condition and Results of Operation and the
combined and consolidated financial statements and related notes
and the reports of the independent registered public accounting
firm included in Part II, Item 8 and elsewhere in this
annual report. These historical results are not necessarily
indicative of results to be expected from any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003(1)
|
|
|
2003
|
|
|
|
($ in thousands, except share and per share data)
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
282,658
|
|
|
$
|
230,253
|
|
|
$
|
204,742
|
|
|
$
|
135,682
|
|
|
$
|
22,154
|
|
|
$
|
70,717
|
|
Ceded premiums written
|
|
|
(15,300
|
)
|
|
|
(15,490
|
)
|
|
|
(19,082
|
)
|
|
|
(16,067
|
)
|
|
|
(2,759
|
)
|
|
|
(4,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
267,358
|
|
|
$
|
214,763
|
|
|
$
|
185,660
|
|
|
$
|
119,615
|
|
|
$
|
19,395
|
|
|
$
|
66,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
227,995
|
|
|
$
|
185,591
|
|
|
$
|
158,850
|
|
|
$
|
77,960
|
|
|
$
|
3,134
|
|
|
$
|
36,916
|
|
Claims service income
|
|
|
1,711
|
|
|
|
2,026
|
|
|
|
2,322
|
|
|
|
2,916
|
|
|
|
663
|
|
|
|
698
|
|
Other service income
|
|
|
148
|
|
|
|
104
|
|
|
|
175
|
|
|
|
794
|
|
|
|
561
|
|
|
|
|
|
Net investment income
|
|
|
20,307
|
|
|
|
15,245
|
|
|
|
7,832
|
|
|
|
2,468
|
|
|
|
313
|
|
|
|
1,735
|
|
Net realized gain (loss)
|
|
|
(105
|
)
|
|
|
(410
|
)
|
|
|
(226
|
)
|
|
|
38
|
|
|
|
(4
|
)
|
|
|
14
|
|
Other income
|
|
|
4,369
|
|
|
|
3,371
|
|
|
|
3,297
|
|
|
|
2,493
|
|
|
|
655
|
|
|
|
1,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
254,425
|
|
|
|
205,927
|
|
|
|
172,250
|
|
|
|
86,669
|
|
|
|
5,322
|
|
|
|
40,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses
|
|
|
128,185
|
|
|
|
107,884
|
|
|
|
105,783
|
|
|
|
53,660
|
|
|
|
3,024
|
|
|
|
25,395
|
|
Underwriting, acquisition, and insurance expenses(2)
|
|
|
58,932
|
|
|
|
42,306
|
|
|
|
33,839
|
|
|
|
17,854
|
|
|
|
1,789
|
|
|
|
6,979
|
|
Interest expense
|
|
|
1,139
|
|
|
|
1,101
|
|
|
|
888
|
|
|
|
415
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
7,773
|
|
|
|
6,248
|
|
|
|
4,997
|
|
|
|
4,514
|
|
|
|
812
|
|
|
|
1,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
196,029
|
|
|
|
157,539
|
|
|
|
145,507
|
|
|
|
76,443
|
|
|
|
5,625
|
|
|
|
34,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
58,396
|
|
|
|
48,388
|
|
|
|
26,743
|
|
|
|
10,226
|
|
|
|
(303
|
)
|
|
|
6,712
|
|
Income tax expense (benefit)
|
|
|
18,484
|
|
|
|
15,159
|
|
|
|
8,451
|
|
|
|
3,020
|
|
|
|
(101
|
)
|
|
|
1,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
39,912
|
|
|
$
|
33,229
|
|
|
$
|
18,292
|
|
|
$
|
7,206
|
|
|
$
|
(202
|
)
|
|
$
|
4,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.96
|
|
|
$
|
1.66
|
|
|
$
|
1.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.90
|
|
|
$
|
1.63
|
|
|
$
|
1.13
|
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding(3)
|
|
|
20,341,931
|
|
|
|
19,986,244
|
|
|
|
15,509,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding(3)
|
|
|
20,976,525
|
|
|
|
20,403,089
|
|
|
|
16,195,855
|
|
|
|
7,387,276
|
|
|
|
|
|
|
|
|
|
Selected Insurance Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year loss ratio(4)
|
|
|
67.6
|
%
|
|
|
69.0
|
%
|
|
|
66.8
|
%
|
|
|
65.0
|
%
|
|
|
75.3
|
%
|
|
|
71.0
|
%
|
Prior accident years loss ratio(5)
|
|
|
(12.1
|
)%
|
|
|
(12.0
|
)%
|
|
|
(1.7
|
)%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
(4.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio
|
|
|
55.5
|
%
|
|
|
57.0
|
%
|
|
|
65.1
|
%
|
|
|
65.1
|
%
|
|
|
75.3
|
%
|
|
|
66.9
|
%
|
Net underwriting expense ratio(6)
|
|
|
25.8
|
%
|
|
|
22.7
|
%
|
|
|
21.2
|
%
|
|
|
21.9
|
%
|
|
|
39.2
|
%
|
|
|
18.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net combined ratio(7)
|
|
|
81.3
|
%
|
|
|
79.7
|
%
|
|
|
86.3
|
%
|
|
|
87.0
|
%
|
|
|
114.5
|
%
|
|
|
85.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
As of December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003(1)
|
|
|
2003
|
|
|
|
($ in thousands)
|
|
|
Selected Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for sale, at fair value
|
|
$
|
494,437
|
|
|
$
|
399,932
|
|
|
$
|
261,103
|
|
|
$
|
105,661
|
|
|
$
|
51,881
|
|
|
$
|
46,338
|
|
Cash and cash equivalents
|
|
|
20,292
|
|
|
|
20,412
|
|
|
|
12,135
|
|
|
|
8,279
|
|
|
|
5,008
|
|
|
|
52,271
|
|
Reinsurance recoverables
|
|
|
14,210
|
|
|
|
13,675
|
|
|
|
14,375
|
|
|
|
13,484
|
|
|
|
12,050
|
|
|
|
39,676
|
|
Deferred acquisition costs
|
|
|
19,832
|
|
|
|
15,433
|
|
|
|
10,299
|
|
|
|
7,588
|
|
|
|
1,936
|
|
|
|
4,313
|
|
Total assets
|
|
|
755,569
|
|
|
|
614,275
|
|
|
|
427,275
|
|
|
|
225,818
|
|
|
|
106,080
|
|
|
|
321,537
|
|
Unpaid loss and loss adjustment expense
|
|
|
250,085
|
|
|
|
198,356
|
|
|
|
142,211
|
|
|
|
68,228
|
|
|
|
29,733
|
|
|
|
161,538
|
|
Unearned premiums
|
|
|
147,033
|
|
|
|
114,312
|
|
|
|
86,863
|
|
|
|
67,626
|
|
|
|
18,602
|
|
|
|
40,657
|
|
Total stockholders equity
|
|
|
294,306
|
|
|
|
249,126
|
|
|
|
155,678
|
|
|
|
58,370
|
|
|
|
45,605
|
|
|
|
92,856
|
|
|
|
|
(1)
|
|
There was no activity for SeaBright from June 19, 2003, its
date of inception, through September 30, 2003.
|
|
(2)
|
|
Includes acquisition expenses such as commissions, premium taxes
and other general administrative expenses related to
underwriting operations in our insurance subsidiary and are
included in the amortization of deferred policy acquisition
costs.
|
|
(3)
|
|
There were no common shares or dilutive common stock equivalents
outstanding during the three months ended December 31, 2003.
|
|
(4)
|
|
The current accident year loss ratio is calculated by dividing
loss and loss adjustment expenses for the current accident year
less claims service income by the current years net
premiums earned.
|
|
(5)
|
|
The prior accident years loss ratio is calculated by
dividing the change in the loss and loss adjustment expenses for
the prior accident years by the current years net premiums
earned.
|
|
(6)
|
|
The underwriting expense ratio is calculated by dividing the net
underwriting expenses less other service income by the current
years net premiums earned.
|
|
(7)
|
|
The net combined ratio is the sum of the net loss ratio and the
net underwriting expense ratio.
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49
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Item 7.
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Managements
Discussion and Analysis of Financial Condition and Results of
Operation.
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The following discussion of our financial condition and
results of operations should be read in conjunction with our
financial statements and the notes to those statements included
elsewhere in this annual report. The discussion and analysis
below includes forward-looking statements that are subject to
risks, uncertainties and other factors described in Part I,
Item 1A of this annual report that could cause our actual
results of operations, performance and business prospects and
opportunities in 2008 and beyond to differ materially from those
expressed in, or implied by those forward-looking statements.
See Note on Forward-Looking Statements in
Part I, Item 1 of this annual report.
Overview
We provide workers compensation insurance coverage for
prescribed benefits that employers are required to provide to
their employees who may be injured in the course of their
employment. We currently provide workers compensation
insurance to customers in the maritime, ADR and state act
markets.
Principal
Revenue and Expense Items
We derive our revenue from premiums earned, service fee income,
net investment income and net realized gains and losses from
investments.
Premiums
Earned
Gross premiums written include all premiums billed and unbilled
by an insurance company during a specified policy period.
Premiums are earned over the terms of the related policies. At
the end of each accounting period, the portion of the premiums
that are not yet earned is included in unearned premiums and is
realized as revenue in subsequent periods over the remaining
terms of the policies. Our policies typically have terms of
12 months. Thus, for example, for a policy that is written
on July 1, 2007, one-half of the premiums would be earned
in 2007 and the other half would be earned in 2008.
Premiums earned is the earned portion of our net premiums
written. Net premiums written is the difference between gross
premiums written and premiums ceded or paid to reinsurers (ceded
premiums written). Our gross premiums written is the sum of both
direct premiums and assumed premiums before the effect of ceded
reinsurance. Assumed premiums are premiums that we have received
from another company under a reinsurance agreement or from an
authorized state mandated pool.
We earn our direct premiums written from our maritime, ADR and
state act customers. We also earn a small portion of our direct
premiums written from employers who participate in the
Washington USL&H Plan. We immediately cede 100% of those
premiums, net of our expenses, and 100% of the losses in
connection with that business to the plan. We do not include
premiums from the Washington USL&H Plan in our direct
premiums written because it is not indicative of our core
business or material to our results of operation.
Net
Investment Income and Realized Gains and Losses on
Investments
We invest our statutory surplus and the funds supporting our
insurance liabilities (including unearned premiums and unpaid
loss and loss adjustment expenses) in cash, cash equivalents,
fixed income securities and, to a lesser degree, in equity
securities and preferred stock. Our investment income includes
interest and dividends earned on our invested assets. Realized
gains and losses on invested assets are reported separately from
net investment income. We earn realized gains when invested
assets are sold for an amount greater than their amortized cost
in the case of fixed maturity securities and recognize realized
losses when investment securities are written down as a result
of an other-than-temporary impairment or sold for an amount less
than their carrying value.
Claims
Service Income
We receive claims service income in return for providing claims
administration services for other companies. The claims service
income we receive for providing these services approximates our
costs. For the
50
years ended December 31, 2007, 2006, and 2005,
approximately 52.6%, 66.8%, and 85.5%, respectively, of our
claims service income was generated by contracts we have with
LMC to provide claims handling services for the policies written
by the Eagle Entities prior to the Acquisition. We expect income
from these contracts to decrease substantially over the next
several years as transactions related to the Eagle Entities
diminish.
Other
Service Income
Following the Acquisition, we entered into servicing
arrangements with LMC to provide policy administration and
accounting services for the policies written by the Eagle
Entities prior to the Acquisition. The fee income we receive for
providing these services approximates our costs and will
decrease substantially over the next several years as
transactions related to the Eagle Entities diminish.
Our expenses consist primarily of:
Loss
and Loss Adjustment Expenses
Loss and loss adjustment expenses represent our largest expense
item and include (1) claim payments made,
(2) estimates for future claim payments and changes in
those estimates for current and prior periods and (3) costs
associated with investigating, defending and adjusting claims.
For further information regarding our loss and loss adjustment
expenses, including amounts paid and unpaid, see the discussion
under the heading Critical Accounting Policies, Estimates
and Judgments Unpaid Loss and Loss Adjustment
Expenses in Part II, Item 7 of this annual
report.
Underwriting,
Acquisition and Insurance Expenses
In our insurance subsidiary, we refer to the expenses that we
incur to underwrite risks as underwriting, acquisition and
insurance expenses. Underwriting expenses consist of commission
expenses, premium taxes and fees and other underwriting expenses
incurred in writing and maintaining our business. We pay
commission expense in our insurance subsidiary to our brokers
for the premiums that they produce for us. We pay state and
local taxes based on premiums; licenses and fees; assessments;
and contributions to workers compensation security funds.
Other underwriting expenses consist of general administrative
expenses such as salaries and employee benefits, rent and all
other operating expenses not otherwise classified separately,
and boards, bureaus and assessments of statistical agencies for
policy service and administration items such as rating manuals,
rating plans and experience data. Certain of these costs that
vary with and are primarily related to the acquisition of
insurance contracts (deferred acquisition costs) are
initially deferred and amortized over the typical policy term of
12 months. Therefore, with respect to deferred acquisition
costs, there are timing differences between when the costs are
incurred or paid and when the related expense is recognized in
our statements of operations.
Interest
Expense
Included in other expense is interest expense we incur on
$12.0 million in surplus notes that our insurance
subsidiary issued in May 2004. The interest expense is paid
quarterly in arrears. The interest expense for each interest
payment period is based on the three-month LIBOR rate two London
banking days prior to the interest payment period plus
400 basis points.
Results
of Operations
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Gross Premiums Written.
Gross premiums written
totaled $282.7 million in 2007 compared to
$230.3 million in 2006, representing an increase of
$52.4 million, or 22.8%, even though we continued to
experience rate reductions in California, our largest market, as
well as in other states. The average renewal rate change for our
state act, excluding California, and maritime markets for the
full year of 2007 was −10.8% and −3.5%,
respectively. Excluding work we perform as the servicing carrier
for the Washington USL&H Plan, the number of customers we
serviced at December 31, 2007 increased 45.7% to 953 from
654 at
51
December 31, 2006 and year-end in-force payrolls, one of
the factors used in determining premium charges, increased 44.6%
from 2006 to 2007. California continues to be our largest
market, accounting for approximately $108.0 million (40.2%)
of our direct premiums written in 2007, compared to
$113.4 million (52.3%) of our direct premiums written in
2006. The reduction in our California premium resulted from rate
reductions, the effects of competition and the growth of our
business in other geographies. Illinois and Louisiana were our
second and third largest markets in 2007, together accounting
for approximately $48.7 million (18.1%) of our total direct
premiums written, up from $33.5 million (15.5%) in 2006.
In 2007, we continued our geographical expansion program by
opening new offices in Phoenix, Arizona and Duluth, Georgia. We
expect these new offices to make a significant contribution to
our written premiums over the next
12-24 months.
Direct premiums written in these two states in 2007 were
approximately $12.8 million, or 4.7% of our total direct
premiums written.
We have experienced significant reductions in our California
premium rates over the past four years. In 2007, in response to
continued reductions in California workers compensation
claim costs, we reduced our rates by an average 14.2% for new
and renewal insurance policies written in California on or after
July 1, 2007. This was the eighth California rate reduction
we have filed since October 1, 2003, resulting in a net
cumulative reduction of our California rates of approximately
54.8%. Rate reductions have also been adopted in other states in
which we operate. For example, effective January 1, 2008,
we adopted the following rate decreases recommended by the NCCI:
10.9% in Alaska, 19.3% in Hawaii and 18.4% in Florida. Effective
July 1, 2007, we adopted the Louisiana Insurance
Commissioners recommendation of a 15.8% reduction in
Louisiana, which is 2.0% more than the 13.8% rate decrease
recommended by the NCCI. On February 5, 2008, the Louisiana
Insurance Commissioner approved an NCCI-proposed rate reduction
of 8.6%, effective May 1, 2008. On March 7, 2008,
after completing a study of our Louisiana loss data, we filed
with the Louisiana Insurance Commissioner our new rates
reflecting an average reduction of 8.6% from prior rates for new
and renewal workers compensation insurance policies
written in Louisiana on or after May 1, 2008. We have also
recently adopted rate increases in some states. For example,
effective October 1, 2007, we adopted a 4.1% rate increase
in Arizona and on January 1, 2008, we adopted a 4.0% rate
increase in Illinois.
Net Premiums Written.
Net premiums written
totaled $267.4 million in 2007 compared to
$214.8 million in 2006, representing an increase of
$52.6 million, or 24.5%. Net premiums written were affected
by premiums ceded under reinsurance agreements. Ceded written
premiums in 2007 totaled $15.3 million, or 5.4% of gross
premiums written, compared to $15.5 million, or 6.7%, of
gross premiums written, in 2006. The decrease in ceded premiums
as a percentage of gross premiums written resulted primarily
from the renewal of our excess of loss reinsurance program on
October 1, 2006 at average rates that were approximately
16.8% lower than rates under the prior reinsurance program.
Effective October 1, 2007, we renewed our reinsurance
program at average rates that are approximately 25.6% lower than
the expiring rates.
Net Premiums Earned.
Net premiums earned
totaled $228.0 million in 2007 compared to
$185.6 million in 2006, representing an increase of
$42.4 million, or 22.8%. We record the entire annual policy
premium as unearned premium at inception and earn the premium
over the life of the policy, which is generally twelve months.
Consequently, the amount of premiums earned in any given year
depends on when during the current or prior year the underlying
policies were written. Our direct premiums earned increased
$38.8 million or 19.8% to $234.5 million in 2007 from
$195.7 million in 2006 due to our premium growth as
described above. Net premiums earned are also affected by
premiums ceded under reinsurance agreements. Ceded premiums
earned in 2007 totaled $15.0 million compared to
$15.6 million in 2006, representing a decrease of
$0.6 million or 3.8%. A decrease in ceded premiums earned
is an increase to our overall net premiums earned. Also adding
to the increase in net premiums earned was an increase in the
amount of premiums we involuntarily assume on residual market
business from the NCCI, which operates residual market programs
on behalf of many states. Assumed premiums earned increased
$3.1 million from $5.5 million in 2006 to
$8.6 million in 2007.
Service Income.
Service income was
$1.9 million in 2007 compared to $2.1 million in 2006,
representing a decrease of $0.2 million, or 9.5%. Our
service income resulted primarily from service arrangements we
have with LMC for claims processing services, policy
administration and administrative services we performed for the
Eagle Entities insurance policies and from claims
processing services we perform for other unrelated
52
companies. Average monthly fees declined as the volume of work
required for policy administration decreased as a result of the
run off of our predecessors business. Service income
related to our arrangements with LMC decreased $100,000, or
10.0%, from $1.0 million in 2006 to $0.9 million in
2007. Service income related to claims processing services that
we perform for other unrelated companies decreased approximately
$215,000 in 2007.
Net Investment Income.
Net investment income
was $20.3 million in 2007 compared to $15.2 million in
2006, representing an increase of $5.1 million, or 33.6%.
Average invested assets increased $120.7 million, or 34.8%,
from $346.8 million in 2006 to $467.5 million in 2007.
This increase in our investment portfolio is due primarily to
cash flow from operations of $94.6 million for the year
ended December 31, 2007, which was invested primarily in
fixed income securities. Net investment income as a percentage
of average invested assets decreased slightly from 4.4% in 2006
to 4.3% in 2007.
Other Income.
Other income totaled
$4.4 million in 2007 compared to $3.4 million in 2006,
representing an increase of $1.0 million, or 29.4%. Other
income results primarily from the operations of PointSure, our
wholesale broker and third party administrator subsidiary whose
total revenues for the year ended December 31, 2007
increased approximately 21.4% over the same period in 2006, and
THM, a provider of medical bill review, utilization review,
nurse case management and related services that we acquired in
December 2007.
Loss and Loss Adjustment Expenses.
Loss and
loss adjustment expenses totaled $128.2 million in 2007
compared to $107.9 million in 2006, representing an
increase of $20.3 million, or 18.8%. The higher loss and
loss adjustment expenses in 2007 are attributable to the
increase in premiums earned for the period, offset by a
reduction of approximately $27.7 million of previously
recorded direct net loss reserves to reflect a continuation of
deflation trends in the paid loss data for recent accident
years. Our direct net loss reserves are net of reinsurance and
exclude reserves associated with KEIC and the business that we
involuntarily assume from the NCCI. Approximately
$17.3 million of the reserve adjustment related to accident
year 2006 and approximately $11.6 million related to
accident year 2005. These reductions were offset by adverse
development of $1.2 million in the 2004 accident year. As a
result of these reserve changes, our net loss ratio decreased
from 57.0% in 2006 to 55.5% in 2007.
There is uncertainty about whether recent lower paid loss
trends, which result primarily from California legislative
reforms enacted in 2003 and 2004, will be sustained,
particularly in light of current efforts to change or repeal
portions of the reforms. We will not know the full impact of
these reforms with a high degree of confidence for several
years. We have established loss reserves at December 31,
2007 that are based upon our current best estimate of ultimate
loss costs, taking into consideration the recent lower paid loss
claim data, incurred loss trends and the uncertainty regarding
the permanence of recent legislative reforms. See the discussion
under the headings Loss Reserves in Part I,
Item 1 and Critical Accounting Policies, Estimates
and Judgments Unpaid Loss and Loss Adjustment
Expenses in this Item 7 for a further discussion of
our loss reserving process.
As of December 31, 2007, we had recorded a receivable of
approximately $2.5 million for adverse loss development
under the adverse development cover since the date of the
Acquisition. We do not expect this receivable to have any
material effect on our future cash flows if LMC fails to perform
its obligations under the adverse development cover. At
December 31, 2007, we had access to approximately
$3.5 million under the collateralized reinsurance trust in
the event that LMC fails to satisfy its obligations under the
adverse development cover. See the discussion under the heading
Loss Reserves KEIC Loss Reserves in
Part I, Item 1 of this annual report.
Underwriting Expenses.
Underwriting expenses
totaled $58.9 million in 2007 compared to
$42.3 million in 2006, representing an increase of
$16.6 million, or 39.2%. Our net underwriting expense ratio
was 25.8% in 2007 compared to 22.7% in 2006. The increase in the
expense ratio was driven by $7.7 million in increased
staffing costs and other premium production related expenses as
we invest in the geographic expansion of our business. Increases
of approximately $6.7 million in commission costs, driven
in part by the increase in premiums written, and
$1.5 million in equity compensation costs related to the
grant of additional stock options and restricted stock also
contributed to the increase in our underwriting expense ratio.
53
Interest Expense.
Interest expense related to
the surplus notes issued by our insurance subsidiary in May 2004
totaled $1.1 million in 2007 and 2006. The surplus notes
interest rate, which is calculated at the beginning of each
interest payment period using the
3-month
LIBOR rate plus 400 basis points, ranged between 9.03% and
9.50% in 2007.
Other Expenses.
Other expenses totaled
$7.8 million in 2007 compared to $6.2 million in 2006,
representing an increase of $1.6 million, or 25.8%. Other
expenses result primarily from the operations of PointSure, our
wholesale broker and third party administrator subsidiary which
experienced increases in commissions and other operating
expenses associated with the expansion of its business.
Additionally, we incurred $0.6 million in acquisition
related costs in 2007.
Income Tax Expense.
Our effective tax rate in
2007 was 31.7% compared to 31.3% in 2006. Our effective tax rate
for 2007 was lower than the statutory tax rate of 35.0%
primarily as a result of tax exempt interest income of 4.4% in
2007 and 6.6% in 2006.
Net Income.
Net income totaled
$39.9 million in 2007 compared to $33.2 million in
2006, representing an increase of $6.7 million, or 20.2%.
The 2007 increase in net income resulted primarily from the
increase in premiums earned and investment income for the
period, offset by related increases in loss and loss adjustment
expenses, underwriting acquisition and insurance expenses, and
other expenses.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Gross Premiums Written.
Gross premiums written
were $230.3 million in 2006 compared to $204.7 million
in 2005, representing an increase of $25.6 million, or
12.5%, even though we continued to experience rate reductions in
California, our largest market, as well as in other states. The
average renewal rate change for our state act and maritime
markets, excluding California, for the full year of 2006 was
-7.3% and -10.1%, respectively. Excluding work we perform as the
servicing carrier for the Washington USL&H Plan, the number
of customers we serviced at December 31, 2006 increased
39.7% to 654 from 468 at December 31, 2005 and in-force
payrolls, one of the factors used in determining premium
charges, increased 54.6% from 2005. California continues to be
our largest market, accounting for approximately
$113.4 million (52.3%) of our direct premiums written in
2006. Illinois became our third largest market, accounting for
$19.9 million (9.2%) or our direct premiums written in
2006. This represents an increase of $16.7 million (521.9%)
from $3.2 million in direct premiums written in 2005.
On December 21, 2006, we announced the division of our
Southern region into two markets, allowing us to devote greater
focus and resources to further develop our key states in this
region. Our new Southeast region will pursue business in
selected southeastern states, including Florida. We opened an
office in Atlanta, Georgia in early 2007. As a result of this
division, the Gulf region, which is based in Houston, Texas,
will focus primarily on Texas and Louisiana. By dividing the
southern states in this manner, we substantially improved the
resource level dedicated to these regions and clarified the
focus on our target markets in each of the critical states.
During the fourth quarter of 2006, we opened an office in
Radnor, Pennsylvania, a Philadelphia suburb. This new office
contributed approximately $838,000 to our direct premiums
written in 2006.
Net Premiums Written.
Net premiums written
totaled $214.8 million in 2006 compared to
$185.7 million in 2005, representing an increase of
$29.1 million, or 15.7%. Net premiums written were affected
by premiums ceded under reinsurance agreements. Ceded written
premiums in 2006 totaled $15.5 million, or 6.7% of gross
premiums written, compared to $19.1 million, or 9.3%, of
gross premiums written, in 2005. The decrease in ceded premiums
as a percentage of gross premiums written resulted primarily
from the renewal of our excess of loss reinsurance program on
October 1, 2006 at average rates that are approximately
16.8% lower than rates under the prior reinsurance program. We
were able to achieve savings at the lower tiers of our program
while increasing our catastrophe coverage from
$50.0 million to $75.0 million.
Net Premiums Earned.
Net premiums earned
totaled $185.6 million in 2006 compared to
$158.9 million in 2005, representing an increase of
$26.7 million, or 16.8%. We record the entire annual policy
premium as unearned premium when written and earn the premium
over the life of the policy, which is generally twelve
54
months. Consequently, the amount of premiums earned in any given
year depends on when during the current or prior year the
underlying policies were written. Our direct premiums earned
increased $22.9 million or 13.3% to $195.7 million in
2006 from $172.8 million in 2005 due to our premium growth
as described above. Net premiums earned are also affected by
premiums ceded under reinsurance agreements. Ceded premiums
earned in 2006 totaled $15.6 million compared to
$22.3 million in 2005, representing a decrease of
$6.7 million or 30.0%. A decrease in ceded premiums earned
is an increase to our overall net premiums earned. Offsetting
the increases in net premiums earned is a decrease in the amount
of premiums we involuntarily assume on residual market business
from the NCCI, which operates residual market programs on behalf
of many states. Assumed premiums earned decreased
$2.9 million from $8.4 million in 2005 to
$5.5 million in 2006.
Net Investment Income.
Net investment income
was $15.2 million in 2006 compared to $7.8 million in
2005, representing an increase of $7.4 million, or 94.9%.
Average invested assets increased $153.2 million (79.1%)
from $193.6 million in 2005 to $346.8 million in 2006.
Approximately $57.6 million of the increase resulted from
the net proceeds of the follow-on offering of our common stock
in February 2006. During the first quarter of 2006, yields on
fixed income securities were at very high levels compared to
2005 and a significant portion of the net proceeds from the
follow-on offering were invested at these higher yields. Another
contributing factor to the increase in net investment income is
realized positive cash flow from operations of
$90.3 million in 2006, which was invested in fixed income
securities with higher yields in 2006 compared to 2005. Net
investment income as a percentage of average invested assets
rose from 4.0% in 2005 to 4.4% in 2006, reflecting the rising
interest rate environment.
Service Income.
Service income was
$2.1 million in 2006 compared to $2.5 million in 2005,
representing a decrease of $0.4 million, or 16.0%. Our
service income resulted primarily from service arrangements we
have with LMC for claims processing services, policy
administration and administrative services we performed for the
Eagle Entities insurance policies and from claims
processing services we perform for other unrelated companies.
Average monthly fees declined as the volume of work required for
policy administration decreased as a result of the run off of
our predecessors business. Service income related to our
arrangements with LMC decreased $0.7 million (33.3%) to
$1.4 million in 2006 from $2.1 million in 2005.
Service income related to claims processing services that we
perform for other unrelated companies increased approximately
$0.3 million in 2006 due to the addition of one new high
volume customer in early 2006.
Other Income.
Other income totaled
$3.4 million in 2006 compared to $3.3 million in 2005,
representing an increase of $0.1 million, or 3.0%. Other
income is derived primarily from the operations of PointSure,
our non-insurance subsidiary, which expanded its portfolio of
insurance products during 2006 to accelerate income growth from
sources other than us. The number of insurance companies that
PointSure represents increased by 11 to a total of 19 in 2006.
Loss and Loss Adjustment Expenses.
Loss and
loss adjustment expenses totaled $107.9 million in 2006
compared to $105.8 million in 2005, representing an
increase of $2.1 million, or 2.0%. The higher loss and loss
adjustment expenses in 2006 are attributable to the increase in
premiums earned for the period, offset by a reduction of
approximately $20.4 million of previously recorded direct
net loss reserves to reflect a continuation of deflation trends
in the paid loss data for recent accident years. Our direct net
loss reserves are net of reinsurance and exclude reserves
associated with KEIC and the business that we involuntarily
assume from the NCCI. Approximately $14.6 million of the
reserve adjustment related to accident year 2005 and
approximately $5.9 million related to accident year 2004.
These reductions were offset by modest adverse development of
$0.1 million in the 2003 accident year. As a result of
these reserve changes, our net loss ratio decreased from 65.1%
in 2005 to 57.0% in 2006.
There is uncertainty about whether recent lower paid loss
trends, which result primarily from California legislative
reforms enacted in 2003 and 2004, will be sustained,
particularly in light of current efforts to change or repeal
portions of the reforms. We will not know the full impact of
these reforms with a high degree of confidence for several
years. We have established loss reserves at December 31,
2006 that are based upon our current best estimate of ultimate
loss costs, taking into consideration the recent lower paid loss
claim data, incurred loss trends and the uncertainty regarding
the permanence of recent legislative reforms. See the
55
discussion under the heading Loss Reserves in
Part I, Item 1 of this annual report for a further
discussion of our loss reserve process.
As of December 31, 2006, we had recorded a receivable of
approximately $2.8 million for adverse loss development
under the adverse development cover since the date of the
Acquisition. We do not expect this receivable to have any
material effect on our future cash flows if LMC fails to perform
its obligations under the adverse development cover. At
March 2, 2007, we had access to approximately
$3.4 million under the collateralized reinsurance trust in
the event that LMC fails to satisfy its obligations under the
adverse development cover. See the discussion under the heading
Loss Reserves KEIC Loss Reserves in
Part I, Item 1 of this annual report.
Underwriting Expenses.
Underwriting expenses
totaled $42.3 million in 2006 compared to
$33.8 million in 2005, representing an increase of
$8.5 million, or 25.1%. Our net underwriting expense ratio
was 22.7% in 2006 compared to 21.2% in 2005. The increase in the
expense ratio is primarily the result of increased staffing
costs and other premium production related expenses as we invest
in the geographic expansion of our business. In addition, we
incurred increased professional consulting and audit fees
related to our initial compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 and costs related to restricted stock
and the implementation of SFAS No. 123R,
Share-Based Payment
.
Interest Expense.
Interest expense related to
the surplus notes issued by our insurance subsidiary in May 2004
totaled $1.1 million in 2006 compared to $0.9 in 2005,
representing an increase of $0.2 million, or 22.2%. The
surplus notes interest rate, which is calculated at the
beginning of each interest payment period using the
3-month
LIBOR rate plus 400 basis points, increased steadily
throughout 2006 from 8.39% at the beginning of 2006 to 9.37% at
the end of the year.
Other Expenses.
Other expenses totaled
$6.2 million in 2006 compared to $5.0 million in 2005,
representing an increase of $1.2 million, or 24.0%. Other
expenses are derived primarily from the operations of PointSure,
our non-insurance subsidiary which experienced direct costs
associated with the expansion of the insurance products they
offer. In October 2006, we incurred a one time charge of
$305,000 related to the settlement of a legal matter.
Income Tax Expense.
Our effective tax rate in
2006 was 31.3% compared to 31.6% in 2005. Our effective tax rate
for 2006 was lower than the statutory tax rate of 35.0%
primarily as a result of tax exempt interest income. The
effective tax rate decreased in 2006 primarily as a result of a
reduction in the proportion of investment income generated from
investments in tax-exempt bonds and a related
true-up
in
the amount of taxes due with our 2005 Federal income tax return.
Net Income.
Net income totaled
$33.2 million in 2006 compared to $18.3 million in
2005, representing an increase of $14.9 million, or 81.4%.
The 2006 increase in net income resulted primarily from the
increase in premiums earned and investment income for the
period, offset by related increases in loss and loss adjustment
expenses, underwriting acquisition and insurance expenses, and
other expenses, including interest expense related to the
surplus notes and amortization expense related to intangible
assets acquired in the Acquisition.
Liquidity
and Capital Resources
Our principal sources of funds are underwriting operations,
investment income and proceeds from sales and maturities of
investments. Our primary use of funds is to pay claims and
operating expenses and to purchase investments.
Our investment portfolio is structured so that investments
mature periodically over time in reasonable relation to current
expectations of future claim payments. Since we have a limited
claims history, we have derived our expected future claim
payments from industry and predecessor trends and included a
provision for uncertainties. Our investment portfolio as of
December 31, 2007 has an effective duration of
4.9 years with individual maturities extending out to
29 years. Currently, we make claim payments from positive
cash flow from operations and invest excess cash in securities
with appropriate maturity dates to balance against
56
anticipated future claim payments. As these securities mature,
we intend to invest any excess funds with appropriate durations
to match against expected future claim payments.
At December 31, 2007, approximately 96.0% of our investment
portfolio consisted of primarily investment-grade fixed income
securities with fair values subject to fluctuations in interest
rates. The remainder of our investment portfolio consisted of
investments in equity securities, which consist of investments
in exchange traded funds designed to correspond to the
performance of certain indexes based on domestic or
international stocks, and preferred stocks. In November 2006,
our investment policy was revised to allow for investment in
domestic and international equities of up to 4% and 1%,
respectively, of our statutory consolidated capital and surplus.
All of the securities in our investment portfolio are accounted
for as available for sale securities. While we have
structured our investment portfolio to provide an appropriate
matching of maturities with anticipated claim payments, if we
decide or are required in the future to sell securities in a
rising interest rate environment, we would expect to incur
losses from such sales.
We had no direct sub-prime mortgage exposure in our investment
portfolio as of December 31, 2007 and less than $800,000 of
indirect exposure to sub-prime mortgages. The average credit
quality of our $250.9 million fixed income municipal
portfolio was AA+ (AA− based on the issuers
underlying ratings). Insured municipal bonds totaled
$192.8 million and had a weighted average credit rating of
AAA (AA− based on the issuers underlying ratings).
The remaining $58.1 million in uninsured municipal bonds
carried a weighted average credit rating of AA. Consequently, we
do not expect a material impact to our investment portfolio or
financial position as a result of the problems currently facing
monoline bond insurers.
Our ability to adequately provide funds to pay claims comes from
our disciplined underwriting and pricing standards and the
purchase of reinsurance to protect us against severe claims and
catastrophic events. Effective October 1, 2007, our
reinsurance program provides us with reinsurance protection for
each loss occurrence in excess $1.0 million, up to
$75.0 million, subject to various deductibles and
exclusions. Our reinsurance program that was effective
October 1, 2006 to October 1, 2007, provides us with
the same levels of reinsurance protection as our
2007-2008
program, subject to similar deductibles and exclusions. See the
discussion under the heading Reinsurance in
Part I, Item 1 of this annual report. Given industry
and predecessor trends, we believe we are sufficiently
capitalized to retain our retained losses.
Our insurance subsidiary is required by law to maintain a
certain minimum level of surplus on a statutory basis. Surplus
is calculated by subtracting total liabilities from total
admitted assets. The NAIC has a risk-based capital standard
designed to identify property and casualty insurers that may be
inadequately capitalized based on inherent risks of each
insurers assets and liabilities and its mix of net
premiums written. Insurers falling below a calculated threshold
may be subject to varying degrees of regulatory action. As of
December 31, 2007, the statutory surplus of our insurance
subsidiary was in excess of the prescribed risk-based capital
requirements that correspond to any level of regulatory action.
SeaBright is a holding company with minimal unconsolidated
revenue and expenses. Currently there are no plans to have our
insurance or other subsidiaries pay a dividend to SeaBright.
Net cash provided by operating activities in 2007 totaled
$94.6 million, an increase of $4.3 million, or 4.8%,
from $90.3 million in 2006, which increased
$7.6 million, or 9.2%, from $82.7 million in 2005.
These increases are mainly attributable to increases in unpaid
loss and loss adjustment expense, amortization of deferred
policy acquisition costs and taxes payable, offset by increases
in policy acquisition costs deferred and deferred taxes, all as
a result of our growth.
We used net cash of $95.1 million for investing activities
in 2007 compared to $139.6 million in 2006 and
$159.7 million in 2005. The reduction in 2007 from 2006 and
2005 is primarily attributable to a reduction in funds available
for investing activities. In 2006, we invested net proceeds
totaling approximately $57.6 million resulting from a
follow-on public offering of 3,910,000 shares of our common
stock described below. In 2005, we invested net proceeds
totaling approximately $80.8 million resulting from the
sale of 8,625,000 shares of common stock in our initial
public offering.
Cash provided by financing activities totaled $0.4 million
in 2007, a decrease of $57.2 million from
$57.6 million in 2006, which decreased $23.2 million
from $80.8 million in 2005. As described below, the
57
majority of cash provided by financing activities in 2006 and
2005 resulted from the sale of our common stock and, to a much
lesser degree, from the exercise of common stock options by our
employees. In 2006, we received net proceeds of approximately
$57.6 million from a follow-on public offering of
3,910,000 shares of our common stock and in 2005, we
received net proceeds of approximately $80.8 million from
the initial public offering of our common stock.
Contractual
Obligations and Commitments
The following table identifies our contractual obligations by
payment due period as of December 31, 2007:
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Payments Due by Period
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Less than
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More than
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Total
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1 Year
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1-3 Years
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4-5 Years
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5 Years
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(In thousands)
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Long term debt obligations:
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Surplus notes
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$
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12,000
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|
|
$
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|
|
|
$
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|
|
|
$
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|
|
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$
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12,000
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|
Loss and loss adjustment expenses
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|
|
250,085
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|
|
|
82,528
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|
|
|
107,787
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|
|
|
23,008
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|
|
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36,762
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Operating lease obligations
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14,244
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2,239
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5,809
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2,954
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|
|
3,242
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Total
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$
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276,329
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|
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$
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84,767
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$
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113,596
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$
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25,962
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$
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52,004
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The loss and loss adjustment expense payments due by period in
the table above are based upon the loss and loss adjustment
expense estimates as of December 31, 2007 and actuarial
estimates of expected payout patterns and are not contractual
liabilities as to time certain. Our contractual liability is to
provide benefits under the policies we write. As a result, our
calculation of loss and loss adjustment expense payments due by
period is subject to the same uncertainties associated with
determining the level of unpaid loss and loss adjustment
expenses generally and to the additional uncertainties arising
from the difficulty of predicting when claims (including claims
that have not yet been reported to us) will be paid. For a
discussion of our unpaid loss and loss adjustment expense
process, see the heading Loss Reserves in
Part I, Item 1 of this annual report and
Critical Accounting Policies, Estimates and
Judgments Unpaid Loss and Loss Adjustment
Expenses in Part II, Item 7 of this annual
report. Actual payments of loss and loss adjustment expenses by
period will vary, perhaps materially, from the above table to
the extent that current estimates of loss and loss adjustment
expenses vary from actual ultimate claims amounts and as a
result of variations between expected and actual payout
patterns. See the discussion under the heading Risks
Related to our Business Our loss reserves are based
on estimates and may be inadequate to cover our actual
losses in Part I, Item 1A of this annual report
for a discussion of the uncertainties associated with estimating
unpaid loss and loss adjustment expenses.
Off-Balance
Sheet Arrangements
As of December 31, 2007, we had no off-balance sheet
arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Critical
Accounting Policies, Estimates and Judgments
It is important to understand our accounting policies in order
to understand our financial statements. Management considers
some of these policies to be critical to the presentation of our
financial results, since they require management to make
estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures at the financial reporting date
and throughout the period being reported upon. Some of the
estimates result from judgments that can be subjective and
complex, and consequently, actual results reflected in future
periods might differ from these estimates.
58
The most critical accounting policies involve the reporting of
unpaid loss and loss adjustment expenses including losses that
have occurred but were not reported to us by the financial
reporting date, the amount and recoverability of reinsurance
recoverable balances, deferred policy acquisition costs, income
taxes, the impairment of investments, earned but unbilled
premiums and retrospective premiums. The following should be
read in conjunction with the notes to our consolidated financial
statements.
Unpaid
Loss and Loss Adjustment Expenses
Unpaid loss and loss adjustment expense represents our estimate
of the expected cost of the ultimate settlement and
administration of losses, based on known facts and
circumstances. Our policy is to record the liability for unpaid
claims and claim adjustment expense equal to the point estimate
determined by our internal actuaries. Included in unpaid loss
and loss adjustment expense are amounts for case-based reserves,
including estimates of future developments on those claims, and
claims incurred but not yet reported to us, second injury fund
expenses, and allocated and unallocated claim adjustment
expenses. Due to the inherent uncertainty associated with the
cost of unsettled and unreported claims, the ultimate liability
may differ, perhaps materially, from the original estimate.
These estimates are regularly reviewed and updated and any
resulting adjustments are included in the current periods
operating results.
Following is a summary of the gross loss and loss adjustment
expense reserves by line of business as of December 31,
2007 and 2006. The workers compensation line of business
comprises over 99% of our total loss reserves as of
December 31, 2007.
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As of December 31, 2007
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As of December 31, 2006
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Line of Business
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Case
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IBNR
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Total
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Case
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IBNR
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Total
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(In thousands)
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Workers Compensation
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|
$
|
93,457
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|
|
$
|
155,042
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|
|
$
|
248,499
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|
|
$
|
66,866
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|
|
$
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130,838
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|
|
$
|
197,704
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|
Ocean Marine
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|
|
564
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|
|
|
1,022
|
|
|
|
1,586
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|
|
|
210
|
|
|
|
442
|
|
|
|
652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
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|
$
|
94,021
|
|
|
$
|
156,064
|
|
|
$
|
250,085
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|
|
$
|
67,076
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|
|
$
|
131,280
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|
|
$
|
198,356
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|
|
|
|
|
|
|
|
|
|
|
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Actuarial
Loss Reserve Estimation Methods
We use a variety of actuarial methodologies to assist us in
establishing the reserve for unpaid loss and loss adjustment
expense. We also make judgments relative to estimates of future
claims severity and frequency, length of time to achieve
ultimate resolution, judicial theories of liability and other
third-party factors that are often beyond our control.
For the current accident year, we establish the initial reserve
for claims incurred-but-not-reported (IBNR) using an
expected loss ratio (ELR) method. The ELR method is
based on an analysis of historical loss ratios adjusted for
current pricing levels, exposure growth, anticipated trends in
claim frequency and severity, the impact of reform activity and
any other factors that may have an impact on the loss ratio. The
actual paid and incurred loss data for the accident year is
reviewed each quarter and changes to the ELR may be made based
on the emerging data, although changes are typically not made
until the end of the accident year when the loss data can be
analyzed as a complete accident year. The ELR is multiplied by
the year-to-date earned premium to determine the ultimate losses
for the current accident year. The actual paid and case
outstanding losses are subtracted from the ultimate losses to
determine the IBNR for the accident year. As the accident year
matures, we incorporate a standard actuarial reserving
methodology referred to as the Bornhuetter-Ferguson method. This
method blends the loss development and expected loss ratio
methods by assigning partial weight to the initial expected
losses, calculated from the expected loss ratio method, with the
remaining weight applied to the actual losses, either paid or
incurred. The weights assigned to the initial expected losses
decrease as the accident year matures. A reserve estimate
implies a pattern of expected loss emergence. If this emergence
does not occur as expected, it may cause us to revisit our
previous assumptions. We may adjust loss development patterns,
the various method weights or the expected loss ratios used in
our analysis. Management employs judgment in each reserve
valuation as to how to make these adjustments to reflect current
information.
59
For all other accident years, the estimated ultimate losses are
developed using a variety of actuarial techniques as described
below. In reviewing this information, we consider the following
factors to be especially important at this time because they
increase the variability risk factors in our loss reserve
estimates:
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We wrote our first policy on October 1, 2003 and, as a
result, our total reserve portfolio is relatively immature when
compared to other industry data.
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We have been growing consistently since we began operations and
have entered into several new states that are not included in
our predecessors historical data.
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|
At December 31, 2007, approximately $102.5 million, or
51.5%, of our direct loss reserves were related to business
written in California. Over the last several years, three
significant comprehensive legislative reforms were enacted in
California: AB 749 was enacted in February 2002; AB 227 and SB
228 were enacted in September 2003; and SB 899 was enacted in
April 2004. This reform activity has resulted in uncertainty
regarding the impact of the reforms on loss payments, loss
development and, ultimately, loss reserves, making historical
data less reliable as an indicator of future loss. All four
bills enacted structural changes to the benefit delivery system
in California, in addition to changes in the indemnity and
medical benefits afforded injured workers. In response to the
reform legislation and a continuing drop in the frequency of
workers compensation claims, the pure premium rates
approved by the California Insurance Commissioner effective
January 1, 2008 were 65.1% lower than the pure premium
rates in effect as of July 1, 2003.
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Key elements of the reforms as they relate to indemnity and
medical benefits were as follows:
Indemnity
Benefits
AB 749 significantly increased most classes of workers
compensation indemnity benefits over a four-year period
beginning in 2003.
AB 227 and SB 228 repealed the mandatory vocational
rehabilitation benefits and replaced them with a system of
non-transferable education vouchers.
SB 899 required the Division of Workers Compensation
(DWC) Administrative Director to adopt, on or before
January 1, 2005, a new permanent disability rating schedule
(PDRS) based in part on American Medical Association
guidelines. Also, temporary disability was limited to a duration
of two years.
SB 899 provided that, effective April 19, 2004,
apportionment of disability for purposes of permanent disability
determination must be based on causation.
Medical
Benefits
AB 749 repealed the presumption given to the primary treating
physician (except when the worker has pre-designated a personal
physician), effective for injuries occurring on or after
January 1, 2003. (SB 228 and SB 899 later extended this to
all future medical treatment on earlier injuries.)
SB 228 required the DWC Administrative Director to establish, by
December 1, 2004, an Official Medical Treatment Utilization
Schedule meeting specific criteria. SB 228 also provided that
beginning three months after the publication date of the updated
American College of Occupational and Environmental Medical
(ACOEM) Practice Guidelines and continuing until
such time as the DWC Administrative Director establishes an
Official Medical Treatment Utilization Schedule, the ACOEM
standards will be presumed to be correct regarding the extent
and scope of all medical treatment. The DWC Administrative
Director has subsequently adopted the ACOEM Guidelines as the
Official Medical Treatment Utilization Schedule.
SB 228 limited the number of chiropractic visits and the number
of physical therapy visits to 24 each per claim.
SB 228 established a prescription medication fee schedule set at
100% of Medi-Cal Schedule amounts.
60
SB 228 provided that the maximum facility fee for services
performed in an ambulatory surgical center may not exceed 120%
of the Medicare fees for the same service performed in a
hospital outpatient facility.
SB 899 provided that after January 1, 2005, an employer or
insurer may establish medical provider networks meeting certain
conditions and, with limited exceptions, medical treatment can
be provided within those networks.
These reforms are a source of variability in the reserve
estimates as legislative changes affecting benefit levels not
only impact the cost of benefits but also the rate at which
accident year benefits or losses develop over time. In addition,
the PDRS, one of the most significant reforms, faces ongoing
challenges. The PDRS was revised effective January 1, 2005.
The revised schedule has resulted in significantly reduced
permanent disability awards, leading to concerns that injured
workers may not be adequately compensated for their work related
permanent injuries. The PDRS is currently being challenged on
three fronts legislative, administrative and legal.
Legislation has been proposed in the 2008 legislative session
that would modify the formula used to determine the amount of
permanent disability benefits. It is too early to determine what
impact the legislation may have on permanent disability
benefits, or if it will be enacted into law. A prior legislative
effort to modify the PDRS was vetoed by the Governor of
California in 2007. On the administrative front, the California
Division of Workers Compensation has undertaken a review
of the PDRS. The nature and extent of proposed changes, if any,
are not yet known. The Division of Workers Compensation
has not published a schedule to communicate their
recommendations. Finally, recent court decisions continue to
lend uncertainty to the interpretation and application of the
PDRS. All of these factors add uncertainty to this key driver of
California workers compensation claim costs.
Workers compensation is considered a long-tail line of
business, as it takes a relatively long period of time to
finalize claims from a given accident year. Management believes
that it generally takes workers compensation losses
approximately 48 to 60 months after the start of an
accident year until the data is viewed as fully credible for
paid and incurred reserve evaluation methods. Workers
compensation losses can continue to develop beyond
60 months and in some cases claims can remain open more
than 20 years. As indicated above, we wrote our first
policy on October 1, 2003 so our first complete accident
year is 2004. As of December 31, 2007, accident year 2004
is 48 months developed, accident year 2005 is
36 months developed, accident year 2006 is 24 months
developed and accident year 2007 is 12 months developed.
Our loss reserve estimates are subject to considerable variation
due to the relative immaturity of the accident years from a
development standpoint.
We review the following significant components of loss reserves
on a quarterly basis:
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IBNR reserves for losses This includes amounts for
the medical and indemnity components of the workers
compensation claim payments, net of subrogation recoveries and
deductibles;
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|
IBNR reserves for defense and cost containment expenses
(DCC, also referred to as allocated loss adjustment
expenses (ALAE)), net of subrogation recoveries and
deductibles;
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|
reserve for adjusting and other expenses, also known as
unallocated loss adjustment expenses (ULAE); and
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|
|
|
reserve for loss based assessments, also referred to as the
8F reserve in reference to Section 8,
Compensation for Disability, subsection (f), Injury increasing
disability, of the United States Longshore and Harbor
Workers Compensation Act (USL&H) Act.
|
The reserves for losses and DCC are also reviewed gross and net
of reinsurance (referred to as net). For gross
losses, the claims for the Washington USL&H Plan, the KEIC
claims assumed in the Acquisition and claims assumed from the
NCCI residual market pools are excluded from this discussion.
IBNR reserves include a provision for future development on
known claims, a reopened claims reserve, a provision for claims
incurred but not reported and a provision for claims in transit
(incurred and reported but not recorded).
61
Our analysis is done separately for the indemnity, medical and
DCC components of the total loss reserves within each accident
year. In addition, the analysis is completed separately for the
following three categories: State Act California; State Act
excluding California; and USL&H. The business is divided
into these three categories for the determination of ultimate
losses due to differences in the laws that cover each of these
categories.
Workers compensation insurance is statutorily provided for
in all of the states in which we do business. State laws and
regulations provide for the form and content of policy coverage
and the rights and benefits that are available to injured
workers, their representatives and medical providers. Because
the benefits are established by state statute there can be
significant variation in these benefits by state. We refer to
this coverage as State Act.
Our business is also affected by federal laws including the
USL&H Act, which is administered by the Department of
Labor, and the Merchant Marine Act of 1920, or Jones Act. The
USL&H Act contains various provisions affecting our
business, including the nature of the liability of employers of
longshoremen, the rate of compensation to an injured
longshoreman, the selection of physicians, compensation for
disability and death and the filing of claims. We refer to the
business covered under the USL&H Act and the Jones Act as
USL&H.
Because there are different laws and benefit levels that affect
the State Act versus USL&H business, there is a strong
likelihood that these categories will exhibit different loss
development characteristics which will influence the ultimate
loss calculations. Separating the data into the State Act and
USL&H categories allows us to use actuarial methods that
contemplate these differences.
The State Act category is further split into California and
excluding non-California groupings. This is due to the extensive
reform activity that has taken place in California as discussed
above. Since the California data is subject to additional
variation due to the reform activity, separating the data in
this fashion allows us to review the non-California State Act
data with no impact from the California reform activity.
Development factors, expected loss rates and expected loss
ratios are derived from the combined experience of us and our
predecessor.
Gross ultimate loss (indemnity, medical and ALAE separately) for
each category is estimated using the following actuarial methods:
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paid loss (or ALAE) development;
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incurred loss (or ALAE) development;
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Bornhuetter-Ferguson using ultimate premiums and paid loss (or
ALAE); and
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|
|
Bornhuetter-Ferguson using ultimate premiums and incurred loss
(or ALAE).
|
A gross ultimate value is selected by reviewing the various
ultimate estimates and applying actuarial judgment to achieve a
reasonable point estimate of the ultimate liability. The
gross IBNR reserve equals the selected gross ultimate loss
minus the gross paid losses and gross case reserves as of the
valuation date. The selected gross ultimate loss and ALAE are
reviewed and updated on a quarterly basis.
Variation
in Ultimate Loss Estimates
In light of our short operating history and uncertainties
concerning the effects of recent legislative reforms,
specifically as they relate to our California workers
compensation experience, the actuarial techniques discussed
above use the historical experience of our predecessor as well
as industry information in the analysis of loss reserves. We are
able to effectively draw on the historical experience of our
predecessor because most of the current members of our
management and adjusting staff also served as the management and
adjusting staff of our predecessor. Over time, we expect to
place more reliance on our own developed loss experience and
less on our predecessors and industry experience.
62
These techniques recognize, among other factors:
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our claims experience and that of our predecessor;
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|
the industrys claim experience;
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|
|
historical trends in reserving patterns and loss payments;
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|
|
the impact of claim inflation
and/or
deflation;
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|
|
|
the pending level of unpaid claims;
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|
|
the cost of claim settlements;
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|
|
|
legislative reforms affecting workers compensation;
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|
|
|
the overall environment in which insurance companies
operate; and
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|
|
|
trends in claim frequency and severity.
|
In addition, there are loss and loss adjustment expense risk
factors that affect workers compensation claims that can
change over time and also cause our loss reserves to fluctuate.
Some examples of these risk factors include, but are not limited
to, the following:
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|
|
recovery time from the injury;
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|
|
|
degree of patient responsiveness to treatment;
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|
|
|
use of pharmaceutical drugs;
|
|
|
|
type and effectiveness of medical treatments;
|
|
|
|
frequency of visits to healthcare providers;
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|
|
|
changes in costs of medical treatments;
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|
|
|
availability of new medical treatments and equipment;
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|
|
|
types of healthcare providers used;
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|
|
|
availability of light duty for early return to work;
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|
|
|
attorney involvement;
|
|
|
|
wage inflation in states that index benefits; and
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|
|
|
changes in administrative policies of second injury funds.
|
Variation can also occur in the loss reserves due to factors
that affect our book of business in general. Some examples of
these risk factors include, but are not limited to, the
following:
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|
|
|
|
injury type mix;
|
|
|
|
change in mix of business by state;
|
|
|
|
change in mix of business by employer type;
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|
|
|
small volume of internal data; and
|
|
|
|
significant exposure growth over recent data periods.
|
Impact
of Changes in Key Assumptions on Reserve
Volatility
The most significant factor currently impacting our loss reserve
estimates is the reliance on historical reserving patterns and
loss payments from our predecessor and the industry, also
referred to as loss development. This is due to our limited
operating history as discussed above. The actuarial methods that
we use depend at varying levels on loss development patterns
based on past information. Development is defined
63
as the difference, on successive valuation dates, between
observed values of certain fundamental quantities that may be
used in the loss reserve estimation process. For example, the
data may be paid losses, case incurred losses and the change in
case reserves or claim counts, including reported claims, closed
claims or reopened claims. Development can be expected, meaning
it is consistent with prior results; favorable (better than
expected); or unfavorable (worse than expected). In all cases,
we are comparing the actual development of the data in the
current valuation with what was expected based on the historical
patterns in the underlying data. Favorable development indicates
a basis for reducing the estimated ultimate loss amounts while
unfavorable development indicates a basis for increasing the
estimated ultimate loss amounts. We reflect the favorable or
unfavorable development in loss reserves in the results of
operations in the period in which the ultimate loss estimates
are changed.
Due to the relative immaturity of our book of business, the
challenge has been to give the right weight in the ultimate loss
estimation process to the new data as it becomes available. As
discussed above, management believes that it generally takes
workers compensation losses approximately 48 to
60 months after the start of an accident year until the
data is viewed as fully credible for paid and incurred reserve
evaluation methods. Due to our limited operating history, we
have four complete accident years that were developed
48 months, 36 months, 24 months and
12 months (2004, 2005, 2006 and 2007, respectively) at
December 31, 2007. Our oldest complete accident year was
48 months old as of December 31, 2007. The estimated
ultimate losses for accident year 2007 are based on the ELR
method described earlier. This is consistent with our reserving
approach for the current accident year at prior year-end
valuations. For accident years 2003 through 2006, we are using a
Bornhuetter-Ferguson approach, which blends the loss development
and expected loss ratio methods. Due to the favorable
development exhibited by the data for accident years 2004 and
2005 at 17 to 18 months of development, management began to
place more weight on the results of the Bornhuetter-Ferguson
method in its ultimate loss estimates for accident years 2005
and 2006. As new data emerges and continues to demonstrate
favorable development, this adds credibility to the existing
data which enables management to reflect it more fully in its
estimation process. For all accident years, we have not
completely relied on the most recent data points in our loss
development selections. Because of recent favorable development
trends, we believe this has the effect of increasing our
estimated reserves as compared to reserves calculated with
complete reliance on these data points. Estimating loss reserves
is an uncertain and complex process which involves actuarial
techniques and management judgment. Actuarial analysis generally
assumes that past patterns demonstrated in the data will repeat
themselves and that the data provides a basis for estimating
future loss reserves. However, since conditions and trends that
have affected losses in the past may not occur in the future in
the same manner, if at all, future results may not be reliably
predicted by the prior data. Our paid loss data for state act
indemnity, both California and excluding California, displayed
decreasing, or deflationary, trends over the most recent three
valuations at December 31, 2007. The decreasing trends are
exhibited in the paid loss development data for the
11 months to 48 months development period. The
decisions to decrease the estimated ultimate losses for accident
years 2004 and 2005 at December 31, 2006 and for accident
years 2005 and 2006 at December 31, 2007 were appropriately
made, as the underlying loss data showed sustained and continued
improvement over the prior twelve months, which we determined
was an appropriate amount of time to be considered reliable for
our estimate. We believe that our loss development factor
selections are appropriate given the relative immaturity of our
data. Over time, as the data for these accident years mature and
uncertainty surrounding the ultimate outcome of the claim costs
diminishes, the full impact of the actual loss development will
be factored into our assumptions and selections.
Reserve
Sensitivities
Although many factors influence the actual cost of claims and
the corresponding unpaid loss and loss adjustment expense
estimates, we do not measure and estimate values for all of
these variables individually. This is due to the fact that many
of the factors that are known to impact the cost of claims
cannot be measured directly. This is the case for the impact of
economic inflation on claim costs, coverage interpretations and
jury determinations. In most instances, we rely on historical
experience or industry information to estimate values for the
variables that are explicitly used in the unpaid loss and loss
adjustment expense analysis. We assume that the historical
effect of these unmeasured factors, which is embedded in our
experience or industry experience, is representative of future
effects of these factors. It is important to note that actual
claims costs
64
will vary from our estimate of ultimate claim costs, perhaps by
substantial amounts, due to the inherent variability of the
business written, the potentially significant claim settlement
lags and the fact that not all events affecting future claim
costs can be estimated.
As discussed in the previous section, there are a number of
variables that can impact, individually or in combination, the
adequacy of our loss and loss adjustment expense liabilities.
While the actuarial methods employed factor in amounts for these
circumstances, the loss reserves may prove to be inadequate
despite the actuarial methods used. Several examples are
provided below to highlight the potential variability present in
our loss reserves. Each of these examples represents scenarios
that are reasonably likely to occur over time. For example,
there may be a number of claims where the unpaid loss and loss
adjustment expense associated with future medical treatment
proves to be inadequate because the injured workers do not
respond to medical treatment as expected by the claims examiner.
If we assume this affects 10% of the open claims and, on
average, the unpaid loss and loss adjustment expenses on these
claims are 20% inadequate, this would result in our unpaid loss
and loss adjustment expense liability being inadequate by
approximately $5.0 million, or 2%, as of December 31,
2007. Another example is claim inflation. Claim inflation can
result from medical cost inflation or wage inflation. As
discussed above, the actuarial methods employed include an
amount for claim inflation based on historical experience. We
assume that the historical effect of this factor, which is
embedded in our experience and industry experience, is
representative of future effects for claim inflation. To the
extent that the historical factors, and the actuarial methods
utilized, are inadequate to recognize future inflationary
trends, our unpaid loss and loss adjustment expense liabilities
may be inadequate. If our estimate of future medical trend is
two percentage points inadequate (e.g., if we estimate a 9%
annual trend and the actual trend is 11%), our unpaid loss and
loss adjustment expense liability could be inadequate. The
amount of the inadequacy would depend on the mix of medical and
indemnity payments and the length of time until the claims are
paid. For example, if we assume that 50% of the unpaid loss and
loss adjustment expense is associated with medical payments and
an average payout period of 5 years, our unpaid loss and
loss adjustment expense liabilities would be inadequate by
approximately $12.5 million on a pre-tax basis, or 5%, as
of December 31, 2007. Under these assumptions, the
inadequacy of approximately $12.5 million represents
approximately 4.2% of total stockholders equity at
December 31, 2007. The impact of any reserve deficiencies,
or redundancies, on our reported results and future earnings is
discussed below.
In the event that our estimates of ultimate unpaid loss and loss
adjustment expense liabilities prove to be greater or less than
the ultimate liability, our future earnings and financial
position could be positively or negatively impacted. Future
earnings would be reduced by the amount of any deficiencies in
the year(s) in which the claims are paid or the unpaid loss and
loss adjustment expense liabilities are increased. For example,
if we determined our unpaid loss and loss adjustment expense
liability of $250.1 million as of December 31, 2007 to
be 5% inadequate, we would experience a pre-tax reduction in
future earnings of approximately $12.5 million. This
reduction could be realized in one year or multiple years,
depending on when the deficiency is identified. The deficiency
would also impact our financial position because our statutory
surplus would be reduced by an amount equivalent to the
reduction in net income. Any deficiency is typically recognized
in the unpaid loss and loss adjustment expense liability and,
accordingly, it typically does not have a material effect on our
liquidity because the claims have not been paid. Since the
claims will typically be paid out over a multi-year period, we
have generally been able to adjust our investments to match the
anticipated future claim payments. Conversely, if our estimates
of ultimate unpaid loss and loss adjustment expense liabilities
prove to be redundant, our future earnings and financial
position would be improved.
Reinsurance
Recoverables
Reinsurance recoverables on paid and unpaid losses represent the
portion of the loss and loss adjustment expenses that is assumed
by reinsurers. These recoverables are reported on our balance
sheet separately as assets, as reinsurance does not relieve us
of our legal liability to policyholders and ceding companies. We
are required to pay losses even if a reinsurer fails to meet its
obligations under the applicable reinsurance agreement.
Reinsurance recoverables are determined based in part on the
terms and conditions of reinsurance contracts, which could be
subject to interpretations that differ from ours based on
judicial theories of liability. We calculate amounts recoverable
from reinsurers based on our estimates of the underlying loss
and loss
65
adjustment expenses, which themselves are subject to significant
judgments and uncertainties described above under the heading
Unpaid Loss and Loss Adjustment Expenses. Changes in
the estimates and assumptions underlying the calculation of our
loss reserves may have an impact on the balance of our
reinsurance recoverables. In general, one would expect an
increase in our underlying loss reserves on claims subject to
reinsurance to have an upward impact on our reinsurance
recoverables. The amount of the impact on reinsurance
recoverables would depend on a number of considerations
including, but not limited to, the terms and attachment points
of our reinsurance contracts and the incurred amount on various
claims subject to reinsurance. We also bear credit risk with
respect to our reinsurers, which can be significant considering
that some claims may remain open for an extended period of time.
We periodically evaluate our reinsurance recoverables, including
the financial ratings of our reinsurers, and revise our
estimates of such amounts as conditions and circumstances
change. Changes in reinsurance recoverables are recorded in the
period in which the estimate is revised. We assessed the
collectibility of our year-end receivables and believe that all
amounts are collectible based on currently available
information. Therefore, as of December 31, 2007 and 2006,
we had no reserve for uncollectible reinsurance recoverables.
Deferred
Policy Acquisition Costs
We defer commissions, premium taxes and certain other costs that
vary with and are primarily related to the acquisition of
insurance contracts. These costs are capitalized and charged to
expense in proportion to the recognition of premiums earned. The
method followed in computing deferred policy acquisition costs
limits the amount of these deferred costs to their estimated
realizable value, which gives effect to the premium to be
earned, related estimated investment income, anticipated losses
and settlement expenses and certain other costs we expect to
incur as the premium is earned. Judgments regarding the ultimate
recoverability of these deferred costs are highly dependent upon
the estimated future costs associated with our unearned
premiums. If our expected claims and expenses, after considering
investment income, exceed our unearned premiums, we would be
required to write-off a portion of deferred policy acquisition
costs. To date, we have not needed to write-off any portion of
our deferred acquisition costs. If our estimate of anticipated
losses and related costs was 10% inadequate, our deferred
acquisition costs as of December 31, 2007 would still be
fully recoverable and no write-off would be necessary. We will
continue to monitor the balance of deferred acquisition costs
for recoverability.
Income
Taxes
We use the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carry-forwards. Deferred tax
assets and liabilities are measured using tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in the income statement in the period that
includes the enactment date.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. This analysis requires management to make various
estimates and assumptions, including the scheduled reversal of
deferred tax liabilities, projected future taxable income and
the effect of tax planning strategies. If actual results differ
from managements estimates and assumptions, we may be
required to establish a valuation allowance to reduce the
deferred tax assets to the amounts more likely than not to be
realized. The establishment of a valuation allowance could have
a significant impact on our financial position and results of
operations in the period in which it is deemed necessary. To
date, we have not needed to record a valuation allowance against
our deferred tax assets. We anticipate that our deferred tax
assets will increase as our business continues to grow. We will
continue to monitor the balance of our deferred tax assets for
realizability.
66
Effective January 1, 2007, we adopted the Financial
Accounting Standards Board (FASB) Interpretation
No. 48,
Accounting for Uncertainties in Income Taxes, an
Interpretation of FASB Statement No. 109
(FIN 48), and it did not have a significant
impact on our financial position or results of operations.
FIN 48 prescribes a recognition threshold and measurement
process for financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return, and
also provides guidance on the derecognition of previously
recorded benefits and their classification, as well as the
proper recording of interest and penalties, accounting in
interim periods, disclosures and transition. As of the
January 1, 2007 date of adoption of FIN 48 and as of
December 31, 2007, we had no unrecognized tax benefits. We
do not anticipate that the amount of unrecognized tax benefits
will significantly increase in the next 12 months. Our
policy is to recognize interest and penalties on unrecognized
tax benefits as an element of income tax expense (benefit) in
our consolidated statements of operations. We file consolidated
U.S. federal and state income tax returns. The tax years
which remain subject to examination by the taxing authorities
are the years ending December 31, 2004, 2005 and 2006.
Impairment
of Investment Securities
Impairment of investment securities results in a charge to
operations when the fair value of a security declines below our
cost and is deemed to be other-than-temporary. We regularly
review our investment portfolio to evaluate the necessity of
recording impairment losses for other-than-temporary declines in
the fair value of investments. A number of criteria are
considered during this process, including but not limited to the
following: the current fair value as compared to amortized cost
or cost, as appropriate, of the security; the length of time the
securitys fair value has been below amortized cost; our
intent and ability to retain the investment for a period of time
sufficient to allow for an anticipated recovery in value;
specific credit issues related to the issuer; and current
economic conditions, including interest rates.
In general, we focus on those securities whose fair value was
less than 80% of their amortized cost or cost, as appropriate,
for six or more consecutive months. We also analyze the entire
portfolio for other factors that might indicate a risk of
impairment. Other-than-temporary impairment losses result in a
permanent reduction of the carrying value of the underlying
investment. To date, we have not needed to record any
other-than-temporary impairments of our investment securities.
Please refer to the tables in Note 3 of the consolidated
financial statements in Part II, Item 8 of this annual
report for additional information on unrealized losses on our
investment securities. Please refer to Part II,
Item 7A of this annual report for tables showing the
sensitivity of the fair value of our fixed-income investments to
selected hypothetical changes in interest rates. See
Investments in Part I, Item 1 of this
annual report for a discussion of the limited exposure in our
investment portfolio at December 31, 2007 to sub-prime
mortgages and problems currently facing monoline bond insurers.
Earned
But Unbilled Premiums
Shortly following the expiration of an insurance policy, we
perform a final payroll audit of each insured to determine the
final premium to be billed and earned. These final audits
generally result in an audit adjustment, either increasing or
decreasing the estimated premium earned and billed to date. We
estimate the amount of premiums that have been earned but are
unbilled at the end of a reporting period by analyzing
historical earned premium adjustments made at final audit for
the preceding 12 months and applying the average adjustment
percentage against our in-force earned premium for the period.
These estimates are subject to changes in policyholders
payrolls due to growth, economic conditions, seasonality and
other factors and to fluctuations in our in-force premium. For
example, the amount of our accrual for premiums earned but
unbilled fluctuated between zero and $1.2 million in 2007
and between $1.2 million and $1.7 million in 2006. The
balance of our accrual for premiums earned but unbilled totaled
approximately $44,000 and $1.5 million at December 31,
2007 and 2006, respectively. Although considerable variability
is inherent in such estimates, management believes that the
accrual for earned but unbilled premiums is reasonable. The
estimates are reviewed quarterly and adjusted as necessary as
experience develops or new information becomes known. Any such
adjustments are included in current operations.
67
Retrospective
Premiums
The premiums for our retrospectively rated loss sensitive plans
are reflective of the customers loss experience because,
beginning six months after the expiration of the relevant
insurance policy, and annually thereafter, we recalculate the
premium payable during the policy term based on the current
value of the known losses that occurred during the policy term.
While the typical retrospectively rated policy has around five
annual adjustment or measurement periods, premium adjustments
continue until mutual agreement to cease future adjustments is
reached with the policyholder. Retrospective premiums for
primary and reinsured risks are included in income as earned on
a pro rata basis over the effective period of the respective
policies. Earned premiums on retrospectively rated policies are
based on our estimate of loss experience as of the measurement
date. Unearned premiums are deferred and include that portion of
premiums written that is applicable to the unexpired period of
the policies in force and estimated adjustments of premiums on
policies that have retrospective rating endorsements.
We bear credit risk with respect to retrospectively rated
policies. Because of the long duration of our loss sensitive
plans, there is a risk that the customer will fail to pay the
additional premium. Accordingly, we obtain collateral in the
form of letters of credit or deposits to mitigate credit risk
associated with our loss sensitive plans. If we are unable to
collect future retrospective premium adjustments from an
insured, we would be required to write-off the related amounts,
which could impact our financial position and results of
operations. To date, there have been no such write-offs.
Retrospectively rated policies accounted for approximately 11.9%
of direct premiums written in 2007 and approximately 17.0% of
direct premiums written in 2006.
Recent
Accounting Pronouncements
In September 2005, the American Institute of Certified Public
Accountants (AICPA) released Statement of Position
05-1,
Accounting by Insurance Enterprises for Deferred Acquisition
Costs in Connection with Modifications or Exchanges of Insurance
Contracts
(SOP 05-1).
SOP 05-1
requires identification of transactions that result in a
substantial change in an insurance contract. If it is determined
that a substantial change to an insurance contract has occurred,
the related unamortized deferred policy acquisition costs,
unearned premiums and other related balances must be written
off.
SOP 05-1
is effective for fiscal years beginning after December 15,
2006. We adopted the provisions of
SOP 05-1
as of January 1, 2007, which did not have a material effect
on the consolidated financial condition or results of operations.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109
(FIN 48), which provides for the recognition,
measurement, presentation and disclosure of uncertain tax
positions. A tax benefit from an uncertain position may be
recognized only if it is more likely than not that the position
is sustainable based on its technical merits. The provisions of
FIN 48 are effective for fiscal years beginning after
December 15, 2006. We adopted the provisions of FIN 48
as of January 1, 2007, which did not have a material effect
on the consolidated financial condition or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements, which defines fair value and establishes a
framework for measuring fair value in GAAP and expands
disclosures about fair value measurements. The provisions for
SFAS No. 157 are effective for fiscal years beginning
after November 15, 2007, and interim periods within those
fiscal years. Early adoption is permitted. We must adopt these
new requirements no later than its first fiscal quarter of 2008.
We expect that SFAS No. 157 will not have a material
effect on our consolidated financial condition or result of
operations. In February 2008, the FASB issued FASB Staff
Position (FSP)
No. FAS 157-2,
Effective Date of FASB Statement No. 157
, to
partially defer the effective date of SFAS No. 157 for
one year for nonfinancial assets and nonfinancial liabilities
that are disclosed at fair value in the financial statements on
a non-recurring basis. The FSP does not defer the recognition
and disclosure requirements for financial or nonfinancial assets
and liabilities that are measured at least annually.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115
, which permits entities to choose
68
to measure many financial instruments and certain other items at
fair value in order to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently
and without having to apply complex hedge accounting provisions.
The provisions for SFAS No. 159 are effective for
fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. Early adoption is permitted.
The Company must adopt these new requirements no later than its
first fiscal quarter of 2008. The Company is currently
evaluating the impact that adoption of SFAS No. 159
will have on its consolidated financial condition and results of
operations.
|
|
Item 7A.
|
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
and interest rate risk.
Credit
Risk
Credit Risk is the potential economic loss principally arising
from adverse changes in the financial condition of a specific
debt issuer. We address this risk by investing generally in
fixed-income securities which are rated A or higher
by Standard & Poors. We also independently, and
through our outside investment managers, monitor the financial
condition of all of the issuers of fixed-income securities in
the portfolio. To limit our exposure to risk we employ stringent
diversification rules that limit the credit exposure to any
single issuer or business sector. See Investments in
this Part I, Item 1 of this annual report for a
discussion of the limited exposure in our investment portfolio
at December 31, 2007 to sub-prime mortgages and problems
currently facing monoline bond insurers.
Interest
Rate Risk
We had fixed-income investments with a fair value of
$474.8 million at December 31, 2007 that are subject
to interest rate risk compared with $399.1 million at
December 31, 2006. We manage the exposure to interest rate
risk through a disciplined asset/liability matching and capital
management process. In the management of this risk, the
characteristics of duration, credit and variability of cash
flows are critical elements. These risks are assessed regularly
and balanced within the context of the liability and capital
position.
The table below summarizes our interest rate risk as of
December 31, 2007 and December 31, 2006. It
illustrates the sensitivity of the fair value of fixed-income
investments to selected hypothetical changes in interest rates
as of December 31, 2007 and December 31, 2006. The
selected scenarios are not predictions of future events, but
rather illustrate the effect that such events may have on the
fair value of our fixed-income portfolio and stockholders
equity.
Interest Rate Risk as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical
|
|
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|
|
|
|
|
|
Percentage
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|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
Estimated
|
|
|
|
|
|
(Decrease) in
|
|
|
|
Change in
|
|
|
|
|
|
Stockholders
|
|
Hypothetical Change in Interest Rates
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Equity
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
200 basis point increase
|
|
$
|
(40,927
|
)
|
|
$
|
433,829
|
|
|
|
(8.6
|
)%
|
100 basis point increase
|
|
|
(20,041
|
)
|
|
|
454,715
|
|
|
|
(4.2
|
)%
|
No change
|
|
|
|
|
|
|
474,756
|
|
|
|
|
|
100 basis point decrease
|
|
|
19,195
|
|
|
|
493,951
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|
|
|
4.0
|
%
|
200 basis point decrease
|
|
|
37,545
|
|
|
|
512,301
|
|
|
|
7.9
|
%
|
69
Interest Rate Risk as of December 31, 2006:
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|
|
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|
Hypothetical
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Percentage
|
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|
|
|
|
|
|
|
|
Increase
|
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|
|
Estimated
|
|
|
|
|
|
(Decrease) in
|
|
|
|
Change in
|
|
|
|
|
|
Stockholders
|
|
Hypothetical Change in Interest Rates
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Equity
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
200 basis point increase
|
|
$
|
(33,246
|
)
|
|
$
|
365,873
|
|
|
|
(8.3
|
)%
|
100 basis point increase
|
|
|
(16,349
|
)
|
|
|
382,770
|
|
|
|
(4.1
|
)%
|
No change
|
|
|
|
|
|
|
399,119
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|
|
|
|
|
100 basis point decrease
|
|
|
15,802
|
|
|
|
414,921
|
|
|
|
4.0
|
%
|
200 basis point decrease
|
|
|
31,056
|
|
|
|
430,175
|
|
|
|
7.8
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%
|
70
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|
Item 8.
|
Financial
Statements and Supplementary Data.
|
Index to
Financial Statements
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Page
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SeaBright Insurance Holdings, Inc. and Subsidiaries
Consolidated Financial Statements
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72
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73
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74
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75
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76
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77
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71
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
SeaBright Insurance Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of
SeaBright Insurance Holdings, Inc. and subsidiaries (the
Company) as of December 31, 2007 and 2006, and the related
consolidated statements of operations, changes in
stockholders equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
December 31, 2007. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of SeaBright Insurance Holdings, Inc. and subsidiaries
as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2007, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 2 of the consolidated financial
statements, effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment
.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
SeaBright Insurance Holdings, Inc. and subsidiaries
internal control over financial reporting as of
December 31, 2007, 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 17, 2008 expressed an
unqualified opinion on the effectiveness of SeaBright Insurance
Holdings, Inc and subsidiaries internal control over
financial reporting.
Seattle, Washington
March 17, 2008
72
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
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December 31,
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2007
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2006
|
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|
|
(In thousands, except share and per share information)
|
|
|
ASSETS
|
Fixed income securities available-for-sale, at fair value
(amortized cost $471,131 in 2007 and $399,433 in 2006)
|
|
$
|
474,756
|
|
|
$
|
399,119
|
|
Equity securities available-for-sale, at fair value (cost
$11,301 in 2007 and $802 in 2006)
|
|
|
11,193
|
|
|
|
813
|
|
Preferred stock available for sale, at fair value (cost $9,485)
|
|
|
8,488
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
20,292
|
|
|
|
20,412
|
|
Accrued investment income
|
|
|
5,055
|
|
|
|
4,208
|
|
Premiums receivable, net of allowance
|
|
|
9,223
|
|
|
|
8,877
|
|
Deferred premiums
|
|
|
150,066
|
|
|
|
118,788
|
|
Federal income tax recoverable
|
|
|
|
|
|
|
1,263
|
|
Service income receivable
|
|
|
436
|
|
|
|
792
|
|
Reinsurance recoverables
|
|
|
14,210
|
|
|
|
13,675
|
|
Receivable under adverse development cover
|
|
|
2,533
|
|
|
|
2,781
|
|
Prepaid reinsurance
|
|
|
1,820
|
|
|
|
1,917
|
|
Property and equipment, net
|
|
|
1,707
|
|
|
|
1,241
|
|
Deferred income taxes, net
|
|
|
16,488
|
|
|
|
12,198
|
|
Deferred policy acquisition costs, net
|
|
|
19,832
|
|
|
|
15,433
|
|
Intangible assets, net
|
|
|
1,233
|
|
|
|
1,217
|
|
Goodwill
|
|
|
2,881
|
|
|
|
1,527
|
|
Other assets
|
|
|
15,356
|
|
|
|
10,014
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
755,569
|
|
|
$
|
614,275
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Unpaid loss and loss adjustment expense
|
|
$
|
250,085
|
|
|
$
|
198,356
|
|
Unearned premiums
|
|
|
147,033
|
|
|
|
114,312
|
|
Reinsurance funds withheld and balances payable
|
|
|
220
|
|
|
|
309
|
|
Premiums payable
|
|
|
4,136
|
|
|
|
3,047
|
|
Accrued expenses and other liabilities
|
|
|
47,789
|
|
|
|
37,125
|
|
Surplus notes
|
|
|
12,000
|
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
461,263
|
|
|
|
365,149
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Series A preferred stock, $0.01 par value;
750,000 shares authorized; no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Undesignated preferred stock, $0.01 par value;
10,000,000 shares authorized; no shares issued and
outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 75,000,000 shares
authorized; issued and outstanding
20,831,102 shares at December 31, 2007 and
20,553,400 shares at December 31, 2006
|
|
|
208
|
|
|
|
205
|
|
Paid-in capital
|
|
|
194,023
|
|
|
|
190,593
|
|
Accumulated other comprehensive income (loss)
|
|
|
1,638
|
|
|
|
(197
|
)
|
Retained earnings
|
|
|
98,437
|
|
|
|
58,525
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
294,306
|
|
|
|
249,126
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
755,569
|
|
|
$
|
614,275
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
73
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share and earnings per share
information)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
227,995
|
|
|
$
|
185,591
|
|
|
$
|
158,850
|
|
Claims service income
|
|
|
1,711
|
|
|
|
2,026
|
|
|
|
2,322
|
|
Other service income
|
|
|
148
|
|
|
|
104
|
|
|
|
175
|
|
Net investment income
|
|
|
20,307
|
|
|
|
15,245
|
|
|
|
7,832
|
|
Net realized loss
|
|
|
(105
|
)
|
|
|
(410
|
)
|
|
|
(226
|
)
|
Other income
|
|
|
4,369
|
|
|
|
3,371
|
|
|
|
3,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
254,425
|
|
|
|
205,927
|
|
|
|
172,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses
|
|
|
128,185
|
|
|
|
107,884
|
|
|
|
105,783
|
|
Underwriting, acquisition and insurance expenses
|
|
|
58,932
|
|
|
|
42,306
|
|
|
|
33,839
|
|
Interest expense
|
|
|
1,139
|
|
|
|
1,101
|
|
|
|
888
|
|
Other expenses
|
|
|
7,773
|
|
|
|
6,248
|
|
|
|
4,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196,029
|
|
|
|
157,539
|
|
|
|
145,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
58,396
|
|
|
|
48,388
|
|
|
|
26,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
23,762
|
|
|
|
18,609
|
|
|
|
13,203
|
|
Deferred
|
|
|
(5,278
|
)
|
|
|
(3,450
|
)
|
|
|
(4,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,484
|
|
|
|
15,159
|
|
|
|
8,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
39,912
|
|
|
$
|
33,229
|
|
|
$
|
18,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.96
|
|
|
$
|
1.66
|
|
|
$
|
1.18
|
|
Diluted earnings per share
|
|
$
|
1.90
|
|
|
$
|
1.63
|
|
|
$
|
1.13
|
|
Weighted average basic shares outstanding
|
|
|
20,341,931
|
|
|
|
19,986,244
|
|
|
|
15,509,547
|
|
Weighted average diluted shares outstanding
|
|
|
20,976,525
|
|
|
|
20,403,089
|
|
|
|
16,195,855
|
|
See accompanying notes to consolidated financial statements.
74
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
AND
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Retained
|
|
|
|
|
|
|
Outstanding Shares
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
Earnings
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-in
|
|
|
Income
|
|
|
(Accumulated
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
(Loss)
|
|
|
Deficit)
|
|
|
Equity
|
|
|
|
($ in thousands)
|
|
|
Balance at December 31, 2004
|
|
|
508,365
|
|
|
|
|
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
50,831
|
|
|
$
|
530
|
|
|
$
|
7,004
|
|
|
$
|
58,370
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,292
|
|
|
|
18,292
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized losses recorded into
income, net of tax of $79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
147
|
|
Increase in unrealized loss on investment securities
available-for-sale, net of tax benefit of $1,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,944
|
)
|
|
|
|
|
|
|
(1,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,495
|
|
Preferred stock conversion
|
|
|
(508,365
|
)
|
|
|
7,777,808
|
|
|
|
(5
|
)
|
|
|
78
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial public offering
|
|
|
|
|
|
|
8,625,000
|
|
|
|
|
|
|
|
86
|
|
|
|
80,688
|
|
|
|
|
|
|
|
|
|
|
|
80,774
|
|
Restricted stock grants
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
Exercise of stock options, including tax benefit of $6
|
|
|
|
|
|
|
2,335
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
|
16,411,143
|
|
|
|
|
|
|
|
164
|
|
|
|
131,485
|
|
|
|
(1,267
|
)
|
|
|
25,296
|
|
|
|
155,678
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,229
|
|
|
|
33,229
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized losses recorded into
income, net of tax of $144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
266
|
|
|
|
|
|
|
|
266
|
|
Decrease in unrealized loss on investment securities
available-for-sale, net of tax of $432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
804
|
|
|
|
|
|
|
|
804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,299
|
|
Follow on public offering
|
|
|
|
|
|
|
3,910,000
|
|
|
|
|
|
|
|
39
|
|
|
|
57,516
|
|
|
|
|
|
|
|
|
|
|
|
57,555
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,554
|
|
|
|
|
|
|
|
|
|
|
|
1,554
|
|
Restricted stock grants
|
|
|
|
|
|
|
227,875
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Exercise of stock options, including tax benefit of $6
|
|
|
|
|
|
|
4,382
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
|
|
|
20,553,400
|
|
|
|
|
|
|
|
205
|
|
|
|
190,593
|
|
|
|
(197
|
)
|
|
|
58,525
|
|
|
|
249,126
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,912
|
|
|
|
39,912
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized losses recorded into
income, net of tax of $36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
69
|
|
Decrease in unrealized loss on investment securities
available-for-sale, net of tax of $951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,766
|
|
|
|
|
|
|
|
1,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,747
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,010
|
|
|
|
|
|
|
|
|
|
|
|
3,010
|
|
Restricted stock grants
|
|
|
|
|
|
|
240,005
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Exercise of stock options, including tax benefit of $110
|
|
|
|
|
|
|
37,697
|
|
|
|
|
|
|
|
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
|
20,831,102
|
|
|
$
|
|
|
|
$
|
208
|
|
|
$
|
194,023
|
|
|
$
|
1,638
|
|
|
$
|
98,437
|
|
|
$
|
294,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
75
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
39,912
|
|
|
$
|
33,229
|
|
|
$
|
18,292
|
|
Adjustments to reconcile net income to cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs
|
|
|
36,481
|
|
|
|
26,497
|
|
|
|
19,686
|
|
Policy acquisition costs deferred
|
|
|
(40,880
|
)
|
|
|
(31,631
|
)
|
|
|
(22,397
|
)
|
Provision for depreciation and amortization
|
|
|
2,934
|
|
|
|
2,763
|
|
|
|
2,632
|
|
Compensation cost on restricted shares of common stock
|
|
|
2,311
|
|
|
|
1,057
|
|
|
|
18
|
|
Compensation cost on stock options
|
|
|
698
|
|
|
|
497
|
|
|
|
|
|
Net realized loss on investments
|
|
|
105
|
|
|
|
410
|
|
|
|
226
|
|
Benefit for deferred income taxes
|
|
|
(5,278
|
)
|
|
|
(3,450
|
)
|
|
|
(4,752
|
)
|
Changes in certain assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid loss and loss adjustment expense
|
|
|
51,729
|
|
|
|
56,145
|
|
|
|
73,983
|
|
Other assets and other liabilities
|
|
|
195
|
|
|
|
6,008
|
|
|
|
10,804
|
|
Reinsurance recoverables, net of reinsurance withheld
|
|
|
2,465
|
|
|
|
1,857
|
|
|
|
(2,250
|
)
|
Income taxes payable (recoverable)
|
|
|
3,636
|
|
|
|
(596
|
)
|
|
|
335
|
|
Accrued investment income
|
|
|
(847
|
)
|
|
|
(1,149
|
)
|
|
|
(1,963
|
)
|
Unearned premiums, net of deferred premiums and premiums
receivable
|
|
|
1,097
|
|
|
|
(1,374
|
)
|
|
|
(11,882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
94,558
|
|
|
|
90,263
|
|
|
|
82,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities, net of effects of
acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(163,780
|
)
|
|
|
(342,749
|
)
|
|
|
(352,980
|
)
|
Sales of investments
|
|
|
24,160
|
|
|
|
155,011
|
|
|
|
173,881
|
|
Maturities and redemptions of investments
|
|
|
45,948
|
|
|
|
48,963
|
|
|
|
20,115
|
|
Purchases of property and equipment
|
|
|
(1,431
|
)
|
|
|
(805
|
)
|
|
|
(687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(95,103
|
)
|
|
|
(139,580
|
)
|
|
|
(159,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from initial public offering of common stock
|
|
|
|
|
|
|
|
|
|
|
80,774
|
|
Net proceeds from follow on public offering of common stock
|
|
|
|
|
|
|
57,556
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
310
|
|
|
|
32
|
|
|
|
15
|
|
Excess tax benefit from disqualifying dispositions
|
|
|
110
|
|
|
|
6
|
|
|
|
6
|
|
Proceeds from grants of restricted shares of common stock
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
425
|
|
|
|
57,594
|
|
|
|
80,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(120
|
)
|
|
|
8,277
|
|
|
|
3,856
|
|
Cash and cash equivalents at beginning of period
|
|
|
20,412
|
|
|
|
12,135
|
|
|
|
8,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
20,292
|
|
|
$
|
20,412
|
|
|
$
|
12,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income taxes paid
|
|
$
|
19,350
|
|
|
$
|
19,050
|
|
|
$
|
12,935
|
|
Interest paid on surplus notes
|
|
|
1,150
|
|
|
|
1,088
|
|
|
|
863
|
|
Accrued expenses for purchases of investments
|
|
|
|
|
|
|
1,633
|
|
|
|
971
|
|
See accompanying notes to consolidated financial statements.
76
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
SeaBright Insurance Holdings, Inc. (SIH), a Delaware
corporation, was formed in June 2003. On July 14, 2003, SIH
entered into a purchase agreement, effective September 30,
2003, with Kemper Employers Group, Inc. (KEG), Eagle
Insurance Companies (Eagle), and Lumbermens Mutual
Casualty Company (LMC), the ultimate owner of KEG
and Eagle (the Acquisition). Under this agreement,
SIH acquired Kemper Employers Insurance Company
(KEIC), PointSure Insurance Services, Inc.
(PointSure), and certain assets of Eagle, primarily
renewal rights.
At the time of the Acquisition, KEIC was licensed to write
workers compensation insurance in 45 states and the
District of Columbia. Domiciled in the State of Illinois and
commercially domiciled in the State of California, it wrote both
state act workers compensation insurance and United States
Longshore and Harborworkers Compensation insurance
(USL&H). Prior to the Acquisition, beginning in
2000, KEIC wrote business only in California. In May 2002, KEIC
ceased writing business and by December 31, 2003, all
premiums related to business prior to the Acquisition were 100%
earned. As further discussed in Note 8.a., in connection
with the Acquisition, KEIC and LMC entered into an agreement
whereby LMC agreed to indemnify KEIC in the event of adverse
development of the reserves stated on KEICs balance sheet
at the Acquisition date, for a period of approximately eight
years. In addition, KEIC agreed to share with LMC any positive
development of those reserves. December 31, 2011 is the
date to which the parties will look to determine whether the
loss and loss adjustment expenses with respect to KEICs
insurance policies in effect at the date of the Acquisition have
increased or decreased from the amount existing at the date of
the Acquisition.
KEIC resumed writing business effective October 1, 2003,
primarily targeting policy renewals for former Eagle business in
the States of California, Hawaii and Alaska. In November 2003,
permission was granted by the Illinois Department of Financial
and Professional Regulation, Division of Insurance (the
Illinois Division of Insurance) for KEIC to change
its name to SeaBright Insurance Company (SBIC).
PointSure is engaged primarily in administrative and brokerage
activities. Eagle consists of Eagle Pacific Insurance Company,
Inc. and Pacific Eagle Insurance Company, Inc., both writers of
state act workers compensation insurance and USL&H
that are in run-off as of December 31, 2007.
In December 2007, SIH acquired 100% of the outstanding common
stock of Total HealthCare Management, Inc., a privately held
California based provider of medical bill review, utilization
review, nurse case management and other related services.
|
|
2.
|
Summary
of Significant Accounting Policies
|
The accompanying consolidated financial statements include the
accounts of SIH and its wholly owned subsidiaries, SBIC,
PointSure and THM (collectively, the Company). All
significant intercompany transactions among these affiliated
entities have been eliminated in consolidation.
The consolidated financial statements of the Company have been
prepared in accordance with U.S. generally accepted
accounting principles (GAAP) and include amounts
based on the best estimates and judgments of management. Such
estimates and judgments could change in the future, as more
information becomes known which could impact the amounts
reported and disclosed herein.
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 131,
Disclosures About Segments
of an Enterprise and Related Information
, the Company
considers an operating segment to be any component of its
business whose operating results are regularly reviewed by the
Companys chief operating decision maker to make decisions
about resources to be allocated to the segment and assess its
performance. Currently, the Company has one operating segment,
workers compensation insurance and related services.
77
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investment securities are classified as available-for-sale and
carried at fair value, adjusted for other-than-temporary
declines in fair value, with changes in unrealized gains and
losses recorded in other comprehensive income (loss), net of
applicable income taxes. The estimated fair value of investments
in available-for-sale securities is generally based on quoted
market prices for securities traded in the public marketplace.
If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities. The
estimated fair value of all of our investment securities at
December 31, 2007 was based on quoted market prices.
The Company regularly reviews its investment portfolio to
evaluate the necessity of recording impairment losses for
other-than-temporary declines in the fair value of investments.
In general, the Company focuses on those securities whose fair
values were less than 80% of their amortized cost or cost, as
appropriate, for six or more consecutive months. The Company
also analyzes the entire portfolio for other factors that might
indicate a risk of impairment, including credit ratings and
interest rates. A decline in the fair value of any
available-for-sale security below cost that is deemed to be
other-than-temporary results in a reduction in the carrying
amount of the security to fair value. The impairment is charged
to earnings and a new cost basis for the security is established.
Mortgage-backed securities represent participating interests in
pools of first mortgage loans originated and serviced by the
issuers of securities. These securities are carried at fair
value. Premiums and discounts are amortized using a method that
approximates the level yield method over the remaining period to
contractual maturity, adjusted for anticipated prepayments. To
the extent that the estimated lives of such securities change as
a result of changes in prepayment rates, the adjustment is also
included in net investment income. Prepayment assumptions used
for mortgage-backed and asset-backed securities were obtained
from an external securities information service and are
consistent with the current interest rate and economic
environment.
Investment income is recorded when earned. For the purpose of
determining realized gains and losses, which arise principally
from the sale of investments, the cost of securities sold is
based on specific-identification as of the trade date.
|
|
c.
|
Cash
and Cash Equivalents
|
Cash and cash equivalents, which consist primarily of amounts
deposited in banks and financial institutions, and all highly
liquid investments with maturities of 90 days or less when
purchased, are stated at cost. Cash in excess of daily
requirements is invested in money market funds and repurchase
agreements with maturities of 90 days or less. Such
investments are deemed to be cash equivalents for purposes of
the consolidated balance sheets and statements of cash flows.
The Company had $20.6 million and $19.2 million of
cash equivalents at December 31, 2007 and 2006,
respectively.
The preparation of the consolidated financial statements in
conformity with GAAP requires management of the Company to make
a number of estimates and assumptions relating to the reported
amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the period. Actual results could
differ from those estimates. The Company has used significant
estimates in determining fair value and impairment of investment
securities, unpaid loss and loss adjustment expenses, goodwill
and other intangibles, earned premiums on retrospectively rated
policies, earned but unbilled premiums, deferred acquisition
costs, federal income taxes and certain amounts related to
reinsurance.
78
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Premiums receivable are recorded at the invoiced amount as they
are earned over the life of the contract in proportion to the
amount of insurance protection provided. The allowance for
doubtful accounts is the Companys best estimate of the
amount of uncollectible premium in the Companys existing
premiums receivable balance. Account balances are charged off
against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote.
|
|
f.
|
Deferred
Policy Acquisition Costs
|
Acquisition costs related to premiums written are deferred and
amortized over the periods in which the premiums are earned.
Such acquisition costs vary with and are primarily related to
the acquisition of insurance contracts and include commissions,
premium taxes, and certain underwriting and policy issuance
costs. Deferred policy acquisition costs are limited to amounts
recoverable from unearned premiums and anticipated investment
income.
|
|
g.
|
Property
and Equipment
|
Furniture and equipment are recorded at cost and depreciated
using the straight-line method over their estimated useful
lives, which range from three to five years. Leasehold
improvements are depreciated on a straight-line basis over
ranging from approximately two to seven years, which is the
shorter of their estimated useful lives or the remaining term of
the respective lease. Depreciation expense totaled $965,000,
$435,000 and $310,000 for the years ended December 31,
2007, 2006, and 2005, respectively.
|
|
h.
|
Goodwill
and Other Intangible Assets
|
Goodwill represents the excess of costs over fair value of
assets of businesses acquired. Goodwill and other intangible
assets acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized,
but are instead tested for impairment at least annually. No
impairments were identified as of December 31, 2007 and
2006. Intangible assets with estimable useful lives are
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144,
Accounting for
Impairment or Disposal of Long-Lived Assets
.
Premiums for primary and reinsured risks are included in revenue
over the life of the contract in proportion to the amount of
insurance protection provided (i.e., ratably over the policy
period). The portion of the premium that is applicable to the
unexpired period of a policy in-force is not included in revenue
but is deferred and recorded as unearned premium in the
liability section of the balance sheet. Deferred premiums
represent the unbilled portion of annual premiums.
Earned premiums on retrospectively rated policies are based on
the Companys estimate of loss experience as of the
measurement date. Loss experience includes known losses
specifically identifiable to a retrospective policy as well as
provisions for future development on known losses and for losses
incurred but not yet reported using actuarial loss development
factors and is consistent with how the Company projects losses
in general. For retrospectively rated policies, the governing
contractual minimum and maximum rates are established at policy
inception and are made a part of the insurance contract. While
the typical retrospectively rated policy has five annual
adjustment or measurement periods, premium adjustments continue
until mutual agreement to cease future adjustments is reached
with the policyholder. For the years ended December 31,
2007, 2006 and 2005, approximately 11.9%, 17.0% and 25.9%,
respectively, of direct premiums written related to
retrospectively rated policies.
79
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company estimates the amount of premiums that have been
earned but are unbilled at the end of the period by analyzing
historical earned premium adjustments made and applying an
adjustment percentage against premiums earned for the period.
Included in deferred premiums at December 31, 2007 and 2006
and premiums earned for the years then ended are accruals for
earned but unbilled premiums of $44,000 and $1.5 million,
respectively.
Service income generated from various underwriting and claims
service agreements with third parties is recognized as income in
the period in which services are performed.
|
|
j.
|
Unpaid
Loss and Loss Adjustment Expense
|
Unpaid loss and loss adjustment expense represents an estimate
of the ultimate net cost of all unpaid losses incurred through
the specified period. Loss adjustment expenses are estimates of
unpaid expenses to be incurred in settlement of the claims
included in the liability for unpaid losses. These liabilities,
which anticipate salvage and subrogation recoveries and are
presented gross of amounts recoverable from reinsurers, include
estimates of future trends in claim severity and frequency and
other factors that could vary as the losses are ultimately
settled. Liabilities for unpaid loss and loss adjustment
expenses are not discounted to account for the time value of
money.
In light of the Companys short operating history, and
uncertainties concerning the effects of legislative reform
specifically as it relates to the Companys California
workers compensation class of business, actuarial techniques are
applied that use the historical experience of the Companys
predecessor as well as industry information in the analysis of
unpaid loss and loss adjustment expense. These techniques
recognize, among other factors:
|
|
|
|
|
the Companys claims experience and that of its predecessor;
|
|
|
|
the industrys claims experience;
|
|
|
|
historical trends in reserving patterns and loss payments;
|
|
|
|
the impact of claim inflation
and/or
deflation;
|
|
|
|
the pending level of unpaid claims;
|
|
|
|
the cost of claim settlements;
|
|
|
|
legislative reforms affecting workers compensation;
|
|
|
|
the environment in which insurance companies operate; and
|
|
|
|
trends in claim frequency and severity.
|
Although it is not possible to measure the degree of variability
inherent in such estimates, management believes that the
liability for unpaid loss and loss adjustment expense is
reasonable. The estimates are reviewed periodically and any
necessary adjustments are included in the results of operations
of the period in which the adjustment is determined.
The Company protects itself from excessive losses by reinsuring
certain levels of risk in various areas of exposure with
nonaffiliated reinsurers. Regardless of type, reinsurance does
not legally discharge the ceding insurer from primary liability
for the full amount due under the reinsured policies.
Reinsurance premiums, commissions, expense reimbursements and
reserves related to ceded business are accounted for on a basis
consistent with the accounting for the original policies issued
and the terms of reinsurance contracts. The unpaid loss and loss
adjustment expense subject to the adverse development cover with
LMC is calculated on
80
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
a quarterly basis using generally accepted actuarial
methodologies for estimating unpaid loss and loss adjustment
expense liabilities, including incurred loss and paid loss
development methods. Amounts recoverable in excess of acquired
reserves at September 30, 2003 are recorded gross in unpaid
loss and loss adjustment expense in accordance with
SFAS No. 141,
Business Combinations
, with a
corresponding amount receivable from the seller. Amounts are
shown net in the statement of operations. Premiums ceded to
other companies are reported as a reduction of premiums written
and earned. Reinsurance recoverables are determined based on the
terms and conditions of the reinsurance contracts.
Balances due from reinsurers on unpaid loss and loss adjustment
expenses, including an estimate of such recoverables related to
reserves for IBNR losses, are reported as assets and are
included in reinsurance recoverables even though amounts due on
unpaid loss and loss adjustment expenses are not recoverable
from the reinsurer until such losses are paid. The Company
monitors the financial condition of its reinsurers and does not
believe that it is currently exposed to any material credit risk
through its reinsurance agreements because most of its
reinsurance is recoverable from large, well-capitalized
reinsurance companies. Historically, no amounts from reinsurers
have been written-off as uncollectible.
The asset and liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities
are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that are estimated
to be in effect when the differences are expected to reverse,
net of any applicable valuation allowances. The Company
evaluates the necessity of a deferred tax asset valuation
allowance by determining, based on the weight of available
evidence, whether it is more likely than not that some portion
or all of the deferred tax asset will not be realized. When
necessary, a valuation allowance is recorded to reduce the
deferred tax asset to the amount that is more likely than not to
be realized.
The following table provides the reconciliation of weighted
average common share equivalents outstanding used in calculating
earnings per share for the years ended December 31, 2007,
2006, and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted average basic shares outstanding
|
|
|
20,341,931
|
|
|
|
19,986,244
|
|
|
|
15,509,547
|
|
Weighted average shares issuable upon conversion of preferred
stock
|
|
|
|
|
|
|
|
|
|
|
426,181
|
|
Weighted average shares issuable upon exercise of outstanding
stock options and vesting of nonvested stock
|
|
|
634,594
|
|
|
|
416,845
|
|
|
|
260,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
20,976,525
|
|
|
|
20,403,089
|
|
|
|
16,195,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n.
|
Stock
Based Compensation
|
The Company adopted SFAS No. 123R,
Share-Based
Payment
, on January 1, 2006, using the
modified-prospective transition method. Prior to adoption, the
Company measured its employee stock-based compensation
arrangements using the provisions outlined in Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees
, which is an
intrinsic value-based method of recognizing compensation costs,
and adopted the disclosure-only provisions of
SFAS No. 123,
Accounting for Stock-based
Compensation
. None of the Companys stock options
granted prior to adoption had an intrinsic value at grant date
and, accordingly, no compensation cost was recognized for its
stock option plan activity prior to adoption.
81
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under the modified-prospective transition method, stock-based
compensation cost is recognized in the consolidated financial
statements for granted, modified, or settled share-based
payments. Compensation cost recognized includes the estimated
cost for stock options granted on or after January 1, 2006,
based on the grant date fair value estimated in accordance with
the provisions of SFAS No. 123R, and the estimated
expense for the portion of awards granted prior to
January 1, 2006 vesting in the current period, based on the
grant date fair value estimated in accordance with the original
provisions of SFAS No. 123. Results for prior periods
have not been restated, as provided for under the
modified-prospective method.
Total stock-based compensation expense recognized in the
consolidated statement of operations for the years ended
December 31, 2007 and 2006 are shown in the following
table. No compensation cost was capitalized during years ended
December 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Stock option compensation expense related to:
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
698
|
|
|
$
|
497
|
|
Nonvested stock
|
|
|
2,312
|
|
|
|
1,057
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,010
|
|
|
$
|
1,554
|
|
|
|
|
|
|
|
|
|
|
Total related tax benefit
|
|
$
|
839
|
|
|
$
|
445
|
|
Disclosures for the years ended December 31, 2007 and 2006
are not presented because the amounts are recognized in the
consolidated financial statements. The compensation cost
included in pro forma net income is not likely to be
representative of the effect on reported net income for future
years because options vest over several years and additional
awards may be made each year.
The following table presents the impact of our adoption of
SFAS No. 123R on selected line items from our
consolidated financial statements for the year ended
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
As Reported
|
|
|
If Reported
|
|
|
|
Following
|
|
|
Following
|
|
|
|
SFAS 123R
|
|
|
APB 25
|
|
|
|
(In thousands, except
|
|
|
|
per share data)
|
|
|
Condensed consolidated statement of operations:
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
48,388
|
|
|
$
|
48,885
|
|
Net income
|
|
|
33,229
|
|
|
|
33,652
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.66
|
|
|
$
|
1.68
|
|
Diluted
|
|
$
|
1.63
|
|
|
$
|
1.65
|
|
Condensed consolidated statement of cash flows:
|
|
|
|
|
|
|
|
|
Net cash provided by operations
|
|
$
|
90,263
|
|
|
$
|
90,263
|
|
Net cash provided by financing activities
|
|
|
57,594
|
|
|
|
57,594
|
|
|
|
o.
|
Recent
Accounting Pronouncements
|
In September 2005, the American Institute of Certified Public
Accountants (AICPA) released Statement of Position
05-1,
Accounting by Insurance Enterprises for Deferred Acquisition
Costs in Connection with Modifications or Exchanges of Insurance
Contracts
(SOP 05-1).
SOP 05-1
requires identification of transactions that result in a
substantial change in an insurance contract. If it is determined
that a substantial
82
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
change to an insurance contract has occurred, the related
unamortized deferred policy acquisition costs, unearned premiums
and other related balances must be written off.
SOP 05-1
is effective for fiscal years beginning after December 15,
2006. The Company adopted the provisions of
SOP 05-1
as of January 1, 2007, which did not have a material effect
on the consolidated financial condition or results of operations.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109
(FIN 48), which provides for the recognition,
measurement, presentation and disclosure of uncertain tax
positions. A tax benefit from an uncertain position may be
recognized only if it is more likely than not that the position
is sustainable based on its technical merits. The provisions of
FIN 48 are effective for fiscal years beginning after
December 15, 2006. The Company adopted the provisions of
FIN 48 as of January 1, 2007, which did not have a
material effect on the consolidated financial condition or
results of operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
, which defines fair value and
establishes a framework for measuring fair value in GAAP and
expands disclosures about fair value measurements. The
provisions for SFAS No. 157 are effective for fiscal
years beginning after November 15, 2007, and interim
periods within those fiscal years. Early adoption is permitted.
The Company must adopt these new requirements no later than its
first fiscal quarter of 2008 and expects that the adoption of
SFAS No. 157 will not have a material effect on its
consolidated financial condition or result of operations. In
February 2008, the FASB issued FASB Staff Position
(FSP)
No. FAS 157-2,
Effective Date of FASB Statement No. 157
, to
partially defer the effective date of SFAS No. 157 for
one year for nonfinancial assets and nonfinancial liabilities
that are disclosed at fair value in the financial statements on
a non-recurring basis. The FSP does not defer the recognition
and disclosure requirements for financial or nonfinancial assets
and liabilities that are measured at least annually.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115
, which permits entities to choose to measure
many financial instruments and certain other items at fair value
in order to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently and without
having to apply complex hedge accounting provisions. The
provisions for SFAS No. 159 are effective for fiscal
years beginning after November 15, 2007, and interim
periods within those fiscal years. Early adoption is permitted.
The Company must adopt these new requirements no later than its
first fiscal quarter of 2008 and expects that the adoption of
SFAS No. 159 will not have a material effect on its
consolidated financial condition and results of operations.
83
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The consolidated cost or amortized cost, gross unrealized gains
and losses, and estimated fair value of investment securities
available-for-sale
at December 31, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
9,488
|
|
|
$
|
190
|
|
|
$
|
|
|
|
$
|
9,678
|
|
Government sponsored agency securities
|
|
|
44,639
|
|
|
|
469
|
|
|
|
|
|
|
|
45,108
|
|
Corporate securities
|
|
|
44,490
|
|
|
|
308
|
|
|
|
(547
|
)
|
|
|
44,251
|
|
Tax-exempt municipal securities
|
|
|
244,546
|
|
|
|
2,682
|
|
|
|
(526
|
)
|
|
|
246,702
|
|
Mortgage pass-through securities
|
|
|
76,309
|
|
|
|
905
|
|
|
|
(131
|
)
|
|
|
77,083
|
|
Collateralized mortgage obligations
|
|
|
1,948
|
|
|
|
1
|
|
|
|
(27
|
)
|
|
|
1,922
|
|
Asset-backed securities
|
|
|
49,711
|
|
|
|
351
|
|
|
|
(50
|
)
|
|
|
50,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
471,131
|
|
|
|
4,906
|
|
|
|
(1,281
|
)
|
|
|
474,756
|
|
Equity securities
|
|
|
11,301
|
|
|
|
135
|
|
|
|
(243
|
)
|
|
|
11,193
|
|
Preferred stocks
|
|
|
9,485
|
|
|
|
|
|
|
|
(997
|
)
|
|
|
8,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
$
|
491,917
|
|
|
$
|
5,041
|
|
|
$
|
(2,521
|
)
|
|
$
|
494,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
13,546
|
|
|
$
|
|
|
|
$
|
(214
|
)
|
|
$
|
13,331
|
|
Government sponsored agency securities
|
|
|
26,880
|
|
|
|
7
|
|
|
|
(243
|
)
|
|
|
26,644
|
|
Corporate securities
|
|
|
35,113
|
|
|
|
37
|
|
|
|
(621
|
)
|
|
|
34,529
|
|
Tax-exempt municipal securities
|
|
|
203,584
|
|
|
|
1,643
|
|
|
|
(690
|
)
|
|
|
204,537
|
|
Mortgage pass-through securities
|
|
|
74,055
|
|
|
|
353
|
|
|
|
(442
|
)
|
|
|
73,966
|
|
Collateralized mortgage obligations
|
|
|
2,650
|
|
|
|
2
|
|
|
|
(34
|
)
|
|
|
2,618
|
|
Asset-backed securities
|
|
|
43,606
|
|
|
|
49
|
|
|
|
(161
|
)
|
|
|
43,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
399,433
|
|
|
|
2,091
|
|
|
|
(2,405
|
)
|
|
|
399,119
|
|
Equity securities
|
|
|
802
|
|
|
|
11
|
|
|
|
|
|
|
|
813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
$
|
400,235
|
|
|
$
|
2,102
|
|
|
$
|
(2,405
|
)
|
|
$
|
399,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities at December 31, 2007 and 2006 consist of
investments in exchange traded funds designed to correspond to
the performance of certain indexes based on domestic or
international stocks. The
84
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company had no direct investments in equity securities at
December 31, 2007 or 2006. The following table presents
information about investment securities with unrealized losses
at December 31, 2007 and 2006.
Unrealized losses at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Aggregate
|
|
|
|
Aggregate
|
|
|
Unrealized
|
|
|
Aggregate
|
|
|
Unrealized
|
|
|
Aggregate
|
|
|
Unrealized
|
|
Investment Category
|
|
Fair Value
|
|
|
Loss
|
|
|
Fair Value
|
|
|
Loss
|
|
|
Fair Value
|
|
|
Loss
|
|
|
|
(In thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
$
|
8,358
|
|
|
$
|
(179
|
)
|
|
$
|
14,355
|
|
|
$
|
(368
|
)
|
|
$
|
22,713
|
|
|
$
|
(547
|
)
|
Tax-exempt municipal securities
|
|
|
44,843
|
|
|
|
(470
|
)
|
|
|
12,043
|
|
|
|
(56
|
)
|
|
|
56,886
|
|
|
|
(526
|
)
|
Mortgage pass-through securities
|
|
|
3,149
|
|
|
|
(7
|
)
|
|
|
12,262
|
|
|
|
(124
|
)
|
|
|
15,411
|
|
|
|
(131
|
)
|
Collateralized mortgage obligations
|
|
|
286
|
|
|
|
(16
|
)
|
|
|
886
|
|
|
|
(11
|
)
|
|
|
1,172
|
|
|
|
(27
|
)
|
Asset-backed securities
|
|
|
2,945
|
|
|
|
(9
|
)
|
|
|
5,926
|
|
|
|
(41
|
)
|
|
|
8,871
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
59,581
|
|
|
|
(681
|
)
|
|
|
45,472
|
|
|
|
(600
|
)
|
|
|
105,053
|
|
|
|
(1,281
|
)
|
Equity securities
|
|
|
6,783
|
|
|
|
(243
|
)
|
|
|
|
|
|
|
|
|
|
|
6,783
|
|
|
|
(243
|
)
|
Preferred stock
|
|
|
8,488
|
|
|
|
(997
|
)
|
|
|
|
|
|
|
|
|
|
|
8,488
|
|
|
|
(997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
74,852
|
|
|
$
|
(1,921
|
)
|
|
$
|
45,472
|
|
|
$
|
(600
|
)
|
|
$
|
120,324
|
|
|
$
|
(2,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Aggregate
|
|
|
|
Aggregate
|
|
|
Unrealized
|
|
|
Aggregate
|
|
|
Unrealized
|
|
|
Aggregate
|
|
|
Unrealized
|
|
Investment Category
|
|
Fair Value
|
|
|
Loss
|
|
|
Fair Value
|
|
|
Loss
|
|
|
Fair Value
|
|
|
Loss
|
|
|
|
(In thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
4,158
|
|
|
$
|
(17
|
)
|
|
$
|
9,173
|
|
|
$
|
(197
|
)
|
|
$
|
13,331
|
|
|
$
|
(214
|
)
|
Government sponsored agency securities
|
|
|
14,533
|
|
|
|
(38
|
)
|
|
|
7,186
|
|
|
|
(205
|
)
|
|
|
21,719
|
|
|
|
(243
|
)
|
Corporate securities
|
|
|
3,496
|
|
|
|
(53
|
)
|
|
|
24,059
|
|
|
|
(569
|
)
|
|
|
27,555
|
|
|
|
(622
|
)
|
Tax-exempt municipal securities
|
|
|
38,844
|
|
|
|
(211
|
)
|
|
|
38,553
|
|
|
|
(479
|
)
|
|
|
77,397
|
|
|
|
(690
|
)
|
Mortgage pass-through securities
|
|
|
17,425
|
|
|
|
(65
|
)
|
|
|
19,902
|
|
|
|
(376
|
)
|
|
|
37,327
|
|
|
|
(441
|
)
|
Collateralized mortgage obligations
|
|
|
1,950
|
|
|
|
(2
|
)
|
|
|
2,092
|
|
|
|
(34
|
)
|
|
|
4,042
|
|
|
|
(36
|
)
|
Asset-backed securities
|
|
|
22,008
|
|
|
|
(81
|
)
|
|
|
6,052
|
|
|
|
(78
|
)
|
|
|
28,060
|
|
|
|
(159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
102,414
|
|
|
$
|
(467
|
)
|
|
$
|
107,017
|
|
|
$
|
(1,938
|
)
|
|
$
|
209,431
|
|
|
$
|
(2,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the $45.5 million of securities with unrealized losses
of 12 months or longer at December 31, 2007 in the
above table, only two securities with a combined fair value of
$585,000 had fair values that were less than 90% of the
securities amortized cost. The combined unrealized loss on
those securities is $181,000.
The Company regularly reviews its investment portfolio to
evaluate the necessity of recording impairment losses for
other-than-temporary
declines in the fair value of investments. A number of criteria
are considered during this process including, but not limited
to, the following: the current fair value as compared to
amortized cost or cost, as appropriate, of the security; the
length of time the securitys fair value has been below
amortized cost; the Companys intent and ability to retain
the investment for a period of time sufficient to
85
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
allow for an anticipated recovery in value; specific credit
issues related to the issuer; and current economic conditions.
In general, the Company focuses on those securities whose fair
values were less than 80% of their amortized cost or cost, as
appropriate, for six or more consecutive months.
Other-than-temporary
impairment losses result in a permanent reduction of the
carrying amount of the underlying investment. Significant
changes in the factors considered when evaluating investments
for impairment losses could result in a significant change in
impairment losses reported in the financial statements. At
December 31, 2007 and 2006, the Company evaluated
investment securities with fair values less than amortized cost
and has determined that the decline in value is temporary and is
related primarily to the change in market rates since purchase
or to other market anomalies that are expected to correct
themselves over time. Furthermore, the Company has the ability
to hold the impaired investments to maturity or for a period of
time sufficient for recovery of their carrying amount.
Therefore, no
other-than-temporary
impairment losses were recorded in the years ended
December 31, 2007, 2006 and 2005.
The Company had no direct
sub-prime
mortgage exposure in its investment portfolio as of
December 31, 2007 and less than $800,000 of indirect
exposure to
sub-prime
mortgages. The average credit quality of the Companys
$250.9 million fixed income portfolio was AA+ (AA−
based on the issuers underlying ratings). Insured
municipal bonds totaled $192.8 million and had a weighted
average credit rating of AAA (AA− based on the
issuers underlying ratings). The remaining
$58.1 million in uninsured municipal bonds carried a
weighted average credit rating of AA. Consequently, the Company
does not expect a material impact to our investment portfolio or
financial position as a result of the problems currently facing
monoline bond insurers.
The amortized cost and estimated fair value of fixed income
securities and preferred stock
available-for-sale
at December 31, 2007, by contractual maturity, are set
forth below. Actual maturities may differ from contractual
maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Estimated
|
|
Maturity
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Due in one year or less
|
|
$
|
45,591
|
|
|
$
|
45,378
|
|
Due after one year through five years
|
|
|
101,777
|
|
|
|
101,822
|
|
Due after five years through ten years
|
|
|
181,185
|
|
|
|
182,713
|
|
Due after ten years
|
|
|
21,945
|
|
|
|
22,163
|
|
Securities not due at a single maturity date
|
|
|
130,118
|
|
|
|
131,168
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities and preferred stock
|
|
$
|
480,616
|
|
|
$
|
483,244
|
|
|
|
|
|
|
|
|
|
|
The consolidated amortized cost of fixed income securities
available-for-sale
deposited with various regulatory authorities was
$179.7 million and $118.8 million at December 31,
2007 and 2006, respectively.
86
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Major categories of consolidated net investment income are
summarized as follows for the years ended December 31,
2007, 2006, and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Fixed income securities
|
|
$
|
19,307
|
|
|
$
|
14,525
|
|
|
$
|
7,700
|
|
Equity securities
|
|
|
65
|
|
|
|
58
|
|
|
|
37
|
|
Preferred stock
|
|
|
210
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments
|
|
|
1,403
|
|
|
|
1,328
|
|
|
|
622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross investment income
|
|
|
20,985
|
|
|
|
15,911
|
|
|
|
8,359
|
|
Less investment expenses
|
|
|
(678
|
)
|
|
|
(666
|
)
|
|
|
(527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
20,307
|
|
|
$
|
15,245
|
|
|
$
|
7,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sales of fixed income and equity securities,
related realized gains and losses and changes in unrealized
gains (losses) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
Realized
|
|
|
Realized
|
|
|
Unrealized
|
|
|
|
Proceeds
|
|
|
Gains
|
|
|
Losses
|
|
|
Gains (Losses)
|
|
|
|
(In thousands)
|
|
|
Year Ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
70,108
|
|
|
$
|
30
|
|
|
$
|
(135
|
)
|
|
$
|
2,941
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(119
|
)
|
Year Ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
200,863
|
|
|
$
|
182
|
|
|
$
|
(614
|
)
|
|
$
|
1,652
|
|
Equity securities
|
|
|
3,111
|
|
|
|
22
|
|
|
|
|
|
|
|
(6
|
)
|
Year Ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
193,996
|
|
|
$
|
476
|
|
|
$
|
(702
|
)
|
|
$
|
(2,782
|
)
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
4.
|
Fair
Value of Financial Instruments
|
Estimated fair value amounts, defined as the quoted market price
of a financial instrument, have been determined using available
market information and other appropriate valuation
methodologies. However, considerable judgment is required in
developing the estimates of fair value. Accordingly, these
estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange. The use of
different market assumptions or estimating methodologies may
have an effect on the estimated fair value amounts.
The following methods and assumptions were used by the Company
in estimating the fair value disclosures for financial
instruments in the accompanying consolidated financial
statements and notes:
|
|
|
|
|
Cash and cash equivalents, premiums receivable, accrued
expenses, other liabilities and surplus notes
: The carrying
amounts for these financial instruments as reported in the
accompanying consolidated balance sheets approximate their fair
values.
|
|
|
|
Investment securities:
The estimated fair
values for
available-for-sale
securities generally represent quoted market value prices for
securities traded in the public marketplace. Additional
information with respect to fair values of the Companys
investment securities is disclosed in Note 3.
|
87
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other financial instruments qualify as insurance-related
products and are specifically exempted from fair value
disclosure requirements.
Direct premiums written totaled $273.0 million,
$221.8 million, and $195.5 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
Premiums receivable consisted of the following at
December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Premiums receivable
|
|
$
|
10,639
|
|
|
$
|
9,986
|
|
Allowance for doubtful accounts
|
|
|
(1,416
|
)
|
|
|
(1,109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,223
|
|
|
$
|
8,877
|
|
|
|
|
|
|
|
|
|
|
The activity in the allowance for doubtful accounts for the
years ended December 31, 2007, 2006, and 2005 is as follows
(in thousands):
|
|
|
|
|
Balance at December 31, 2004
|
|
$
|
(671
|
)
|
Additions charged to bad debt expense
|
|
|
(267
|
)
|
Write offs charged against allowance
|
|
|
51
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
(887
|
)
|
Additions charged to bad debt expense
|
|
|
(257
|
)
|
Write offs charged against allowance
|
|
|
35
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
(1,109
|
)
|
Additions charged to bad debt expense
|
|
|
(512
|
)
|
Write offs charged against allowance
|
|
|
205
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
(1,416
|
)
|
|
|
|
|
|
|
|
6.
|
Property
and Equipment
|
Property and equipment consisted of the following at
December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Computer equipment and software
|
|
$
|
2,301
|
|
|
$
|
1,235
|
|
Furniture and equipment
|
|
|
904
|
|
|
|
684
|
|
Leasehold improvements
|
|
|
397
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,602
|
|
|
|
2,170
|
|
Less accumulated depreciation and amortization
|
|
|
(1,895
|
)
|
|
|
(929
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
1,707
|
|
|
$
|
1,241
|
|
|
|
|
|
|
|
|
|
|
88
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Deferred
Policy Acquisition costs
|
The following reflects the amounts of policy acquisition costs
deferred and amortized for the years ended December 31,
2007, 2006, and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
15,433
|
|
|
$
|
10,299
|
|
|
$
|
7,588
|
|
Policy acquisition costs deferred
|
|
|
40,880
|
|
|
|
31,631
|
|
|
|
22,397
|
|
Amortization of deferred policy acquisition costs
|
|
|
(36,481
|
)
|
|
|
(26,497
|
)
|
|
|
(19,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
19,832
|
|
|
$
|
15,433
|
|
|
$
|
10,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under reinsurance agreements, the Company cedes various amounts
of risk to nonaffiliated insurance companies for the purpose of
limiting the maximum potential loss arising from the underlying
insurance risks. These reinsurance contracts do not relieve the
Company from its obligations to policyholders. For the period
from October 1, 2006 through October 1, 2007 and for
the period from October 1, 2007 through October 1,
2008, the Company entered into reinsurance agreements with
nonaffiliated reinsurers wherein it retains the first
$1.0 million of each loss occurrence. Losses in excess of
$1.0 million up to $75.0 million are reinsured as
follows:
|
|
|
Layer
|
|
General Description
|
|
$1.0 million excess of $1.0 million each loss
occurrence
|
|
Fully reinsured, subject to an aggregate annual limit of $8.0
million
|
$3.0 million excess of $2.0 million each loss
occurrence
|
|
Fully reinsured, subject to an aggregate annual limit of $12.0
million
|
$5.0 million excess of $5.0 million each loss
occurrence
|
|
Fully reinsured, subject to an aggregate annual limit of $15.0
million
|
$10.0 million excess of $10.0 million each loss
occurrence
|
|
Fully reinsured, subject to a limit of $7.5 million maximum for
any one life and an aggregate limit of $20.0 million.
|
$55.0 million excess of $20.0 million each loss
occurrence
|
|
Fully reinsured in two sub-layers. The first sub-layer affords
coverage of up to $30.0 million for each loss occurrence in
excess of $20.0 million, subject to an aggregate annual limit of
$60.0 million, and the second sub-layer affords coverage up to
$25.0 million for each loss occurrence in excess of $50.0
million, subject to an annual aggregate limit of $50.0 million.
Both sub-layers are subject to a limit of $5.0 million maximum
for any one life.
|
89
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2007, the Companys current excess
of loss reinsurance treaties were placed with the following
reinsurers:
|
|
|
Reinsurer
|
|
A.M. Best Rating
|
|
Allied World Assurance Company Ltd.
|
|
A (Excellent)
|
Aspen Insurance UK Limited
|
|
A (Excellent)
|
Catlin Underwriting (US) o/b/o Lloyds Syndicate 2003 (SJC)
|
|
A (Excellent)
|
Endurance Specialty Insurance Ltd.
|
|
A (Excellent)
|
Various syndicates from Lloyds of London
|
|
A (Excellent)
|
Hannover Rueckversicherung AG
|
|
A (Excellent)
|
Hannover Re (Bermuda) Limited
|
|
A (Excellent)
|
MAX Bermuda
|
|
A− (Excellent)
|
Odyssey America Reinsurance Corporation
|
|
A (Excellent)
|
Partner Reinsurance Company of the U.S.
|
|
A+ (Excellent)
|
Tokio Millennium Reinsurance Limited
|
|
A+ (Excellent)
|
Effective from October 1, 2005 through October 1,
2006, the Company entered into reinsurance agreements wherein it
retains the first $500,000 of each loss occurrence. Losses in
excess of $500,000 up to $50.0 million are reinsured with
nonaffiliated reinsurers as follows:
|
|
|
Layer
|
|
General Description
|
|
$500,000 excess of $500,000 each loss occurrence
|
|
Reinsured 50%, subject to an annual aggregate deductible of $1.5
million and an aggregate limit of $10.0 million.
|
$4.0 million excess of $1.0 million each loss
occurrence
|
|
Fully reinsured, subject to an annual aggregate deductible of
$2.0 million and an aggregate limit of $16.0 million.
|
$5.0 million excess of $5.0 million each loss
occurrence
|
|
Fully reinsured, subject to an annual aggregate limit of $15.0
million
|
$40.0 million excess of $10.0 million each loss
occurrence
|
|
Fully reinsured in two sub-layers. The first sub-layer affords
coverage of up to $10.0 million for each loss occurrence in
excess of $10.0 million, subject to an aggregate limit of $20.0
million. The second sub-layer affords coverage up to $30.0
million for each loss occurrence in excess of $20.0 million,
subject to an aggregate limit of $60.0 million.
|
Effective from October 1, 2004 through October 1,
2005, the Company entered into reinsurance agreements wherein it
retains the first $500,000 of each loss occurrence. Losses in
excess of $500,000 up to $100.0 million are 100% reinsured
with nonaffiliated reinsurers.
Effective from October 1, 2003 through October 1,
2004, the Company entered into reinsurance agreements wherein it
retains the first $500,000 of each loss occurrence. The next
$500,000 of such loss occurrence is 50% retained by SBIC after
meeting a $1.5 million aggregate deductible. Losses in
excess of $1.0 million up to $100.0 million are 100%
reinsured with nonaffiliated reinsurers.
All of the reinsurance policies described in this Note 8
are subject to various additional limitations and exclusions as
more fully described in the reinsurance agreements.
SBIC has in place a series of reinsurance agreements that were
entered into prior to its acquisition by SIH which are as
follows: Effective from January 1, 1999 through
January 1, 2001, SBIC retains the first
90
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$250,000 of each loss occurrence; the next $750,000 of such loss
occurrence is 100% reinsured with nonaffiliated reinsurers.
Losses in excess of $1.0 million up to $4.0 million
for this time period are 100% reinsured with nonaffiliated
reinsurers. Effective July 1, 2000 through July 1,
2002, SBIC retains the first $500,000 of each loss occurrence;
the next $500,000 of such loss occurrence is 100% reinsured with
nonaffiliated reinsurers. Effective January 1, 2001 through
January 1, 2002, SBIC retains the first $1.0 million
of each loss occurrence; losses up to $5.0 million are 100%
reinsured with nonaffiliated reinsurers. Effective
October 1, 2000 through October 1, 2001, SBIC has a
quota-share agreement whereby 10% of the first $250,000 loss
plus a pro-rata share of expenses are 100% reinsured with Swiss
Reinsurance Company. Effective January 1, 2002 through
May 31, 2002, 100% of all losses are 100% quota-shared to
Argonaut Insurance Company.
As part of the Acquisition, SIH and LMC entered into an adverse
development excess of loss reinsurance agreement (the
Agreement). The Agreement, after taking into account
any recoveries from third party reinsurers, calls for LMC to
reimburse SBIC 100% of the excess of the actual loss at
December 31, 2011 over the initial loss reserves at
September 30, 2003. The Agreement also calls for SBIC to
reimburse LMC 100% of the excess of the initial loss reserves at
September 30, 2003 over the actual loss results at
December 31, 2011. The amount of adverse loss development
under the Agreement was $2.5 million at December 31,
2007 and $2.8 million at December 31, 2006. The
decrease in the amount receivable from LMC is netted against
loss and loss adjustment expense in the accompanying
consolidated statements of operations.
As part of the Agreement, LMC placed into trust (the
Trust) $1.6 million, equal to 10% of the
balance sheet reserves of SBIC at the date of the Acquisition.
Thereafter, the Trust shall be adjusted each quarter, if
warranted, to an amount equal to the greater of
(a) $1.6 million or (b) 102% of LMCs
obligations under the Agreement. The balance of the Trust,
including accumulated interest, was $3.5 million at
December 31, 2007 and $5.2 million at
December 31, 2006.
The Company involuntarily assumes residual market business
either directly from various states that operate their own
residual market programs or indirectly from the National Council
for Compensation Insurance, which operates residual market
programs on behalf of some states. The states in which the
Company assumed residual market business in 2007 and 2006
include the following: Alabama, Alaska, Arizona, Arkansas,
Connecticut, Delaware, the District of Columbia, Georgia, Idaho,
Illinois, Iowa, Kansas, Massachusetts, Michigan, Nevada, New
Jersey, New Mexico, Oregon, South Carolina, and Virginia.
|
|
c.
|
Reinsurance
Recoverables and Income Statement Effects
|
Balances affected by reinsurance transactions are reported gross
of reinsurance in the balance sheets. Reinsurance recoverables
comprise the following amounts at December 31, 2007 and
2006:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Reinsurance recoverables on unpaid loss and loss adjustment
expenses
|
|
$
|
14,034
|
|
|
$
|
13,504
|
|
Reinsurance recoverables on paid losses
|
|
|
176
|
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
Total reinsurance recoverables
|
|
$
|
14,210
|
|
|
$
|
13,675
|
|
|
|
|
|
|
|
|
|
|
The Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk arising from
activities or economic characteristics of the reinsurers to
minimize its exposure to losses from reinsurer insolvencies. In
the event a reinsurer is unable to meet its obligations, the
Company would be liable for the losses under the agreement.
91
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the Companys top ten
reinsurers, based on net amount recoverable, as of
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Amount
|
|
|
|
|
|
|
Recoverable as of
|
|
|
|
A.M. Best
|
|
|
December 31,
|
|
Reinsurer
|
|
Rating
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Swiss Reinsurance America Corporation
|
|
|
A+
|
|
|
$
|
3,500
|
|
Hannover Rueckversicherung AG*
|
|
|
A
|
|
|
|
2,764
|
|
Max Re Limited*
|
|
|
A-
|
|
|
|
1,924
|
|
Argonaut Insurance Company
|
|
|
A
|
|
|
|
1,808
|
|
Scor Reinsurance Company
|
|
|
A-
|
|
|
|
675
|
|
Munich Reinsurance America (FDBA: American Re-insurance Company)
|
|
|
A+
|
|
|
|
674
|
|
ACE Property & Casualty Insurance Company
|
|
|
A+
|
|
|
|
456
|
|
Rhine Re (Alea Europe Ltd)
|
|
|
NR-4
|
|
|
|
449
|
|
Partner Reinsurance Company of the U.S.*
|
|
|
A+
|
|
|
|
421
|
|
Berkley Insurance Company
|
|
|
A+
|
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
12,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Participant in current excess of loss reinsurance treaty program
or individual risk reinsurance placements.
|
The Company recorded no write-offs of uncollectible reinsurance
recoverables in the years ended December 31, 2007, 2006,
and 2005.
The effects of reinsurance are as follows for the years ended
December 31, 2007, 2006, and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Reinsurance assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Written premiums
|
|
$
|
9,668
|
|
|
$
|
8,440
|
|
|
$
|
9,209
|
|
Earned premiums
|
|
|
8,576
|
|
|
|
5,480
|
|
|
|
8,360
|
|
Losses and loss adjustment expenses incurred
|
|
|
5,607
|
|
|
|
3,092
|
|
|
|
5,936
|
|
Reinsurance ceded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Written premiums
|
|
$
|
15,300
|
|
|
$
|
15,490
|
|
|
$
|
19,082
|
|
Earned premiums
|
|
|
14,979
|
|
|
|
15,592
|
|
|
|
22,317
|
|
Losses and loss adjustment expenses incurred
|
|
|
2,121
|
|
|
|
1,571
|
|
|
|
3,599
|
|
The Company did not commute any reinsurance agreements in the
years ended December 31, 2007, 2006 and 2005.
92
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
Unpaid
Loss and Loss Adjustment Expenses
|
The following table summarizes the activity in unpaid loss and
loss adjustment expense for the years ended December 31,
2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Beginning balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid loss and loss adjustment expense
|
|
$
|
198,356
|
|
|
$
|
142,211
|
|
|
$
|
68,228
|
|
Reinsurance recoverables
|
|
|
(13,504
|
)
|
|
|
(13,745
|
)
|
|
|
(12,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, beginning of year
|
|
|
184,852
|
|
|
|
128,466
|
|
|
|
55,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
162,018
|
|
|
|
130,124
|
|
|
|
108,424
|
|
Prior years
|
|
|
(34,080
|
)
|
|
|
(22,811
|
)
|
|
|
(2,142
|
)
|
Receivable under adverse development cover
|
|
|
248
|
|
|
|
571
|
|
|
|
(499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
128,186
|
|
|
|
107,884
|
|
|
|
105,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
(35,480
|
)
|
|
|
(23,196
|
)
|
|
|
(18,698
|
)
|
Prior years
|
|
|
(41,258
|
)
|
|
|
(27,731
|
)
|
|
|
(14,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
(76,738
|
)
|
|
|
(50,927
|
)
|
|
|
(33,462
|
)
|
Receivable under adverse development cover
|
|
|
(248
|
)
|
|
|
(571
|
)
|
|
|
499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, end of year
|
|
|
236,051
|
|
|
|
184,852
|
|
|
|
128,466
|
|
Reinsurance recoverables
|
|
|
14,034
|
|
|
|
13,504
|
|
|
|
13,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid loss and loss adjustment expense
|
|
$
|
250,085
|
|
|
$
|
198,356
|
|
|
$
|
142,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of changes in estimates of insured events in prior
periods, the unpaid loss and loss adjustment expenses decreased
by approximately $19.5 million in 2007 due to positive
development on previously reported claims in accident year 2006
and $15.1 million due to positive development on previously
reported claims in accident year 2005. For accident years 2004
and prior, unpaid loss and loss adjustment expenses increased
$560,000 as a result of unfavorable development on previously
reported claims due to the small base of claims and losses
assumed from the NCCI pools. According to the terms of the
adverse development cover, the Company is obligated to reimburse
LMC for $248,000 of the positive development of KEIC reserves
existing at the date of the Acquisition. In connection with the
Acquisition, KEIC and LMC entered into an agreement to indemnify
each other with respect to developments in KEICs unpaid
loss and loss adjustment expenses over a period of approximately
eight years. December 31, 2011 is the date to which the
parties will look to determine whether the loss and loss
adjustment expenses with respect to KEICs insurance
policies in effect at the Acquisition have increased or
decreased from the amount existing at the date of the
Acquisition.
As a result of changes in estimates of insured events in prior
periods, the unpaid loss and loss adjustment expenses decreased
by approximately $16.0 million in 2006 due to positive
development on previously reported claims in accident year 2005
and $6.3 million due to positive development on previously
reported claims in accident year 2004. For accident years 2003
and prior, unpaid loss and loss adjustment expenses decreased
$486,000 due to positive development on previously reported
claims. According to the terms of the adverse development cover,
the Company is obligated to reimburse LMC for $571,000 of the
prior period positive development.
93
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Approximately $3.6 million of the $2.1 million
reduction in 2005 related to positive development on previously
reported claims in accident year 2004. This adjustment was
offset by an increase of approximately $1.5 million in
reserves for reported claims in accident year 2003 and prior. Of
that amount, the Company was entitled to recover from LMC,
according to the terms of the adverse development cover,
approximately $499,000 of adverse development of KEIC losses.
Approximately $385,000 of the $451,000 adverse development in
2004 related to KEIC claims, which the Company was entitled to
recover from LMC according to the terms of the adverse
development cover. The remaining amount of $66,000 related to
adverse development of the Companys reserves for reported
claims in accident year 2003.
At December 31, 2007 and 2006, the Company reduced unpaid
loss and loss adjustment expense by $4.3 million and
$3.3 million, respectively, for anticipated salvage and
subrogation recoveries.
On May 26, 2004, SBIC issued in a private placement
$12.0 million in subordinated floating rate Surplus Notes
due in 2034. The transaction was underwritten by Morgan
Stanley & Company and Cochran & Caronia
Securities, LLC. The note holder is ICONS, Ltd. and Wilmington
Trust Company acts as Trustee. Interest, paid quarterly in
arrears, is calculated at the beginning of the interest payment
period using the
3-month
LIBOR rate plus 400 basis points. The quarterly interest
rate cannot exceed the initial interest rate by more than 10%
per year, cannot exceed the corporate base (prime) rate by more
than 2% and cannot exceed the highest rate permitted by New York
law. The rate or amount of interest required to be paid in any
quarter is also subject to limitations imposed by the Illinois
Insurance Code. Interest amounts not paid as a result of these
limitations become Excess Interest, which the
Company may be required to pay in the future, subject to the
same limitations and all other provisions of the Surplus Notes
Indenture. To date, there has been no Excess Interest. The
interest rate at December 31, 2007 was 9.03%. Interest and
principal may be paid only upon the prior approval of the
Illinois Division of Insurance. In the event of default, as
defined, or failure to pay interest due to lack of Illinois
Division of Insurance approval, the Company cannot pay dividends
on its capital stock, is limited in its ability to redeem,
purchase or acquire any of its capital stock and cannot make
payments of interest or principal on any debt issued by the
Company which ranks equal with or junior to the Surplus Notes.
If an event of default occurs and is continuing, the principal
and accrued interest can become immediately due and payable.
Interest expense for the years ended December 31, 2007,
2006, and 2005 was $1.1 million, $1.1 million, and
$888,000, respectively.
The notes are redeemable prior to 2034 by the Company, in whole
or in part, from time to time, on or after May 24, 2009 on
an interest payment date or at any time prior to May 24,
2009, in whole but not in part, upon the occurrence and
continuation of a tax event as defined in the agreement. The
Company may not exercise its option to redeem with respect to a
tax event unless it pays a premium in addition to the redemption
price.
Issuance costs of $591,000 incurred in connection with the
Surplus Notes are being amortized over the life of the notes
using the effective interest method. Amortization expense for
the years ended December 31, 2007, 2006, and 2005 was
$56,000, $54,000 and $44,000, respectively.
The operations of SIH and its subsidiaries are included in a
consolidated federal income tax return.
94
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a reconciliation of the difference between the
expected income tax computed by applying the federal
statutory income tax rate to income before income taxes and the
total income taxes reflected on the books for the years ended
December 31, 2007, 2006, and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Expected income tax expense at statutory rates
|
|
$
|
20,439
|
|
|
$
|
16,936
|
|
|
$
|
9,360
|
|
State income tax expense, net of federal benefit
|
|
|
374
|
|
|
|
296
|
|
|
|
|
|
Tax exempt bond interest income
|
|
|
(2,562
|
)
|
|
|
(2,201
|
)
|
|
|
(1,172
|
)
|
True up of prior year tax return
|
|
|
(12
|
)
|
|
|
(5
|
)
|
|
|
220
|
|
Other
|
|
|
245
|
|
|
|
133
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
18,484
|
|
|
$
|
15,159
|
|
|
$
|
8,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred federal income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and those amounts
used for federal income tax reporting purposes. The significant
components of the deferred tax assets and liabilities at
December 31, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Unpaid loss and loss adjustment expenses
|
|
$
|
12,040
|
|
|
$
|
8,376
|
|
Unearned premium
|
|
|
9,578
|
|
|
|
7,610
|
|
Unrealized net loss on investment securities
|
|
|
|
|
|
|
106
|
|
Bad debt reserves
|
|
|
495
|
|
|
|
388
|
|
Restricted stock grants
|
|
|
1,185
|
|
|
|
376
|
|
Amortizable assets
|
|
|
209
|
|
|
|
299
|
|
Accrued vacation and bonus
|
|
|
338
|
|
|
|
364
|
|
Guaranty fund payable
|
|
|
245
|
|
|
|
222
|
|
Net capital loss carryover
|
|
|
239
|
|
|
|
202
|
|
Other
|
|
|
1,008
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
25,337
|
|
|
|
18,263
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
|
|
|
|
(19
|
)
|
Prepaid expenses
|
|
|
(309
|
)
|
|
|
(215
|
)
|
Unrealized net gain on investment securities
|
|
|
(882
|
)
|
|
|
|
|
State insurance licenses
|
|
|
(420
|
)
|
|
|
(420
|
)
|
Deferred acquisition costs
|
|
|
(6,941
|
)
|
|
|
(5,401
|
)
|
Other
|
|
|
(297
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(8,849
|
)
|
|
|
(6,065
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
16,488
|
|
|
$
|
12,198
|
|
|
|
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred
95
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income and
tax planning strategies in making this assessment. Based upon
the projections of future taxable income over the periods in
which the deferred taxes are deductible, management believes it
is more likely than not that the Company will realize the
benefits of these deductible differences.
As of December 31, 2007, the Company has capital loss
carryforwards of approximately $682,000. Approximately $146,000
expires in 2010, $431,000 expires in 2011 and $105,000 expires
in 2012.
|
|
12.
|
Statutory
Net Income and Stockholders Equity
|
SBIC is required to file annually with state regulatory
insurance authorities financial statements prepared on an
accounting basis as prescribed or permitted by such authorities
(statutory basis accounting or SAP). Statutory net
income and capital and surplus (stockholders equity)
differ from amounts reported in accordance with GAAP, primarily
because of the following accounting treatments prescribed by
SAP: policy acquisition costs are expensed when incurred;
certain assets designated as nonadmitted for
statutory purposes are charged to surplus; fixed-income
securities are reported primarily at amortized cost or fair
value based on their rating by the National Association of
Insurance Commissioners (NAIC); policyholders
dividends are expensed as declared rather than accrued as
incurred; deferred income taxes are charged or credited directly
to unassigned surplus; and any change in the admitted net
deferred tax asset is offset to equity. Following is a summary
of SBICs statutory net gain for the years ended
December 31, 2007, 2006, and 2005 and statutory capital and
surplus as of December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Statutory net gain
|
|
$
|
33,693
|
|
|
$
|
26,967
|
|
|
$
|
12,494
|
|
Statutory capital and surplus
|
|
|
256,322
|
|
|
|
222,310
|
|
|
|
144,732
|
|
The maximum amount of dividends that can be paid to stockholders
by insurance companies domiciled in the State of Illinois
without prior approval of regulatory authorities is restricted
if such dividend, together with other distributions during the
12 preceding months, would exceed the greater of 10% of the
insurers statutory surplus as of the preceding December 31
or the statutorily adjusted net income for the preceding
calendar year. If the limitation is exceeded, then such proposed
dividend must be reported to the Director of Insurance at least
30 days prior to the proposed payment date and may be paid
only if not disapproved. The Illinois insurance laws also permit
payment of dividends only out of earned surplus, exclusive of
most unrealized gains. At December 31, 2007, SBIC had
statutory earned surplus of $42.0 million. Consequently,
SBIC would be able to pay up to $33.7 million of
stockholder dividends in 2008 without the prior approval of the
regulators.
In June 2007, the Illinois Division of Insurance completed a
comprehensive financial examination of SBICs 2005
statutory annual statement. The examination report contained
three findings, none of which resulted in any fines, penalties
or adjustments to SBICs financial statements. Prior to
this examination, KEIC was last examined by the Illinois
Division of Insurance as of December 31, 2000.
The State of Illinois imposes minimum risk-based capital
requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various
weighting factors that are applied to financial balances or
various levels of activity based on the perceived degree of
risk. Regulatory compliance is determined by a ratio of the
enterprises regulatory total adjusted capital to certain
minimum capital amounts as defined by the NAIC. Enterprises
below specified trigger points or ratios are classified within
certain levels, each of which requires specified corrective
action. SBIC exceeded the minimum risk-based capital
requirements at December 31, 2007 and 2006.
96
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company leases certain office space for its headquarters and
regional offices under agreements that are accounted for as
operating leases. Lease expense totaled $1.3 million,
$1.0 million and $1.1 million for the years ended
December 31, 2007, 2006, and 2005, respectively. Total
rent, including the effect of rent increases and concessions, is
expensed on a straight-line basis over the respective lease
terms.
Future minimum payments required under the agreements are as
follows:
|
|
|
|
|
|
|
Operating
|
|
|
|
leases
|
|
|
|
(In thousands)
|
|
|
2008
|
|
$
|
2,239
|
|
2009
|
|
|
2,349
|
|
2010
|
|
|
1,778
|
|
2011
|
|
|
1,682
|
|
2012
|
|
|
1,593
|
|
Thereafter
|
|
|
4,603
|
|
|
|
|
|
|
|
|
$
|
14,244
|
|
|
|
|
|
|
The Company maintains a defined contribution 401(k) retirement
savings plan covering substantially all of its employees. In
2007 and 2006, the Company matched 100% of the first five
percent of eligible compensation contributed to the plan on a
pre-tax basis. In 2005, the Company matched 100% of the first
three percent and 50% of the next two percent of such
compensation. For the years ended December 31, 2007, 2006,
and 2005, the Company made additional contributions equal to one
percent of compensation for all persons who were employed at the
end of the year. Additionally, the Company made discretionary
year-end contributions of one percent for 2005 to the accounts
of all persons who were employed at the end of year. Employees
are 100% vested in all matching contributions when they are
made. Contribution expense for the years ended December 31,
2007, 2006, and 2005 was $824,000, $640,000 and $571,000,
respectively.
a.
SBIC is subject to guaranty fund and other
assessments by the states in which it writes business. Guaranty
fund assessments are accrued at the time premiums are written.
Other assessments are accrued either at the time of assessment
or in the case of premium-based assessments, at the time the
premiums are written, or in the case of loss-based assessments,
at the time the losses are incurred. SBIC has accrued a
liability for guaranty fund and other assessments of
$3.5 million at December 31, 2007 and has recorded a
related asset for premium tax offset and policy surcharges of
$3.8 million at that date. This amount represents
managements best estimate based on information received
from the states in which it writes business and may change due
to many factors including the Companys share of the
ultimate cost of current insolvencies. Most assessments are paid
out in the year following the year in which the premium is
written or the losses are paid. Policy surcharges are generally
collected in the year following assessment and premium tax
offsets are generally recognized over a period of up to five
years following the year of assessment.
b.
The Company is involved in various claims and
lawsuits arising in the ordinary course of business. Management
believes the outcome of these matters will not have a material
adverse effect on the Companys financial position.
97
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
16.
|
Retrospectively
Rated Contracts
|
On October 1, 2003, the Company began selling workers
compensation insurance policies for which the premiums vary
based on loss experience. Accrued retrospective premiums are
determined based upon the loss experience of business subject to
such experience rating adjustment. Accrued retrospectively rated
premiums are determined by and allocated to individual
policyholder accounts. Accrued retrospective premiums and return
retrospective premiums are recorded as additions to and
reductions from written premium, respectively. Approximately
11.9%, 17.0% and 25.9% of the Companys direct premiums
written for the years ended December 31, 2007, 2006 and
2005, respectively, related to retrospectively rated contracts.
The Company accrued $9.3 million for retrospective premiums
receivable and $17.8 million for return retrospective
premiums at December 31, 2007 and $9.6 million for
retrospective premiums receivable and $12.7 million for
return retrospective premiums at December 31, 2006.
On July 14, 2003, SIH entered into a purchase agreement,
effective September 30, 2003, with KEG, Eagle and LMC, all
ultimately owned by KIC. In the Acquisition, SIH acquired
PointSure, KEIC, and the renewal rights and substantially all of
the operating assets and employees of Eagle Pacific Insurance
Company and Pacific Eagle Insurance Company. Eagle Pacific
Insurance Company began writing specialty workers
compensation insurance approximately 20 years ago. The
Acquisition gave SIH renewal rights to an existing portfolio of
business, representing a valuable asset given the renewal nature
of the workers compensation insurance business, and a
fully-operational infrastructure that would have taken many
years to develop. These renewal rights gave the Company access
to customer lists and the right to seek to renew its continuing
in-force insurance contracts. In addition, KEIC provided the
requisite insurance licenses needed to write business.
The initial aggregate purchase price, including acquisition
costs of $1.3 million, was $16.0 million. The acquired
assets and liabilities were recorded on the Companys books
at their respective fair values as of the date of Acquisition.
Goodwill, the excess of the purchase price over the net fair
value of the assets and liabilities acquired, was
$2.1 million.
The Company and LMC negotiated a final purchase price adjustment
settlement on September 28, 2004. Included in the original
purchase price allocation was an estimated purchase price
settlement amount of $1.1 million. The final purchase price
adjustment settlement of $771,000 reduced the October 1,
2003 balance of reinsurance recoverables by $155,000 and
increased the liability for unpaid loss and loss adjustment
expenses by $226,000. The Company was required to pay interest
expense of $30,000 related to the settlement period. In
addition, the Company recorded an entry to increase other assets
and reduce goodwill by $535,000.
On December 17, 2007, the Company completed the acquisition
of Total Health Care Management, Inc. (THM), a
provider of medical bill review, utilization review, nurse case
management and other related services. The total purchase price
was $1.5 million, of which $1.2 million was paid at
closing. The remaining $0.3 million is scheduled to be paid
in three equal installments on the first three anniversaries of
the closing date, provided that THM achieves certain revenue
objectives in 2008, 2009 and 2010. As a result of this
acquisition, the Company recorded additional goodwill of
$1.4 million.
98
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible assets, other than goodwill, consist of the following
at December 31, 2007 and 2006 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Amortization
|
|
|
|
Amortization
|
|
|
Gross Carrying
|
|
|
at December 31,
|
|
|
|
Period (years)
|
|
|
Amount
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State insurance licenses
|
|
|
|
|
|
$
|
1,200
|
|
|
$
|
|
|
|
$
|
|
|
State business licenses
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
Renewal rights
|
|
|
2
|
|
|
|
783
|
|
|
|
783
|
|
|
|
783
|
|
Internally developed software
|
|
|
3
|
|
|
|
944
|
|
|
|
944
|
|
|
|
944
|
|
Trademark
|
|
|
5
|
|
|
|
50
|
|
|
|
42
|
|
|
|
33
|
|
Customer relations
|
|
|
2
|
|
|
|
30
|
|
|
|
30
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,032
|
|
|
$
|
1,799
|
|
|
$
|
1,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average amortization period for all intangible
assets subject to amortization is 2.6 years. Aggregate
amortization expense was $10,000, $246,000 and $629,000 for the
years ended December 31, 2007, 2006, and 2005,
respectively. Estimated remaining amortization expense is $7,500
in 2008.
On February 1, 2006, the Company closed a follow-on public
offering of 3,910,000 shares of common stock, including the
underwriters over-allotment option to purchase
510,000 shares of common stock, at a price of $15.75 per
share for net proceeds of approximately $57.6 million,
after deducting underwriters fees, commissions and
offering costs totaling approximately $4.0 million. The
Company contributed $50.0 million of the net proceeds to
SBIC, which is using the capital to expand its business in its
core markets and to new territories. The remaining proceeds are
being used for general corporate purposes, including supporting
the growth of PointSure. The use of proceeds from the offering
does not represent a material change from the use of proceeds
described in the prospectus that was included in the related
Registration Statement on
Form S-1.
Except for the contribution of proceeds to SBIC, no proceeds or
expenses were paid to the Companys directors, officers,
ten percent shareholders or affiliates.
|
|
20.
|
Share-Based
Payment Arrangements
|
At December 31, 2007, the Company had outstanding stock
options and nonvested stock granted according to the terms of
two equity incentive plans. The stockholders and Board of
Directors approved the 2003 Stock Option Plan (the 2003
Plan) in September 2003, and amended and restated the 2003
Plan in February 2004, and approved the 2005 Long-Term Equity
Incentive Plan (the 2005 Plan and, together with the
2003 Plan, the Stock Option Plans) in December 2004.
In April 2007, the Board of Directors further amended the 2003
Plan and amended the 2005 Plan.
The Board of Directors reserved an initial total of
776,458 shares of common stock under the 2003 Plan and
1,047,755 shares of common stock under the 2005 Plan, plus
an automatic annual increase on the first day of each fiscal
year beginning in 2006 and ending in 2015 equal to the lesser
of: (i) 2% of the shares of common stock outstanding on the
last day of the immediately preceding fiscal year or
(ii) such lesser number of shares as determined by the
Board of Directors. At December 31, 2007, the Company
reserved 776,458 shares of common stock for issuance under
the 2003 Plan, of which options to purchase 481,946 shares
had been granted, and 1,787,046 shares for issuance under
the 2005 Plan, of which 1,051,669 shares had been
99
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
granted. In January 2006, the Compensation Committee of the
Board of Directors terminated the ability to grant future stock
options awards under the 2003 Plan. Therefore, the Company
anticipates that all future awards will be made under the 2005
Plan.
The 2005 Plan provides for the grant of incentive or
non-qualified stock options, restricted stock, restricted stock
units, deferred stock units, performance awards, or any
combination of the foregoing. The Board of Directors has the
authority to determine all matters relating to awards granted
under the Stock Option Plans, including designation as incentive
or nonqualified stock options, the selection of individuals to
be granted options, the number of shares subject to each grant,
the exercise price, the term and the vesting period, if any.
Options to purchase the Companys common stock are granted
at prices at or above the fair value of the common stock on the
date of grant, generally vest 25% per year on each of the first
four anniversaries of the vesting start date, and expire
10 years from the date of grant. Options granted to
non-employee directors generally vest one-third on the first
anniversary of the grant date and the remaining two-thirds in
equal monthly installments over the following 24 months.
Nonvested stock issued to employees and directors generally
vests on the third anniversary of the grant date, assuming the
holder is still employed by or providing service to the Company
and satisfies all other conditions of the grant. Generally,
stock options granted to employees are incentive stock options,
while options granted to non-employee directors are
non-qualified stock options.
The Company issues new shares of common stock upon exercise of
stock options or award of nonvested shares.
The fair values of stock options granted during the years ended
December 31, 2007, 2006 and 2005 were determined on the
dates of grant using the Black-Scholes-Merton option valuation
model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected term (years)
|
|
|
6.3
|
|
|
|
6.2
|
|
|
|
7.0
|
|
Expected stock price volatility
|
|
|
26.3
|
%
|
|
|
26.1
|
%
|
|
|
15.5
|
%
|
Risk-free interest rate
|
|
|
4.58
|
%
|
|
|
4.75
|
%
|
|
|
3.96
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value per option
|
|
$
|
6.75
|
|
|
$
|
6.37
|
|
|
$
|
3.09
|
|
For 2006 and 2007, the expected term of options was determined
using the simplified method, which averages an
awards weighted average vesting period and its contractual
term and expected stock price volatility was based on a weighted
average of the Companys historical stock price volatility
since the initial public offering of its common stock in January
2005 and the historical volatility of a peer companys
stock for a period of time equal to the expected term of the
option. Prior to the adoption of SFAS No. 123R,
expected term was based on the Companys historical
experience and future expectations and price volatility was
estimated using the Companys historical volatility. The
risk-free interest rate is based on the yield of
U.S. Treasury securities with an equivalent remaining term.
The Company has not paid stockholder dividends in the past and
has no current plan to pay any stockholder dividends in the
future.
The assumptions used to calculate the fair value of options
granted are evaluated and revised, as necessary, to reflect
market conditions and the Companys historical experience
and future expectations. The calculated fair value is recognized
as compensation cost in the Companys financial statements
over the requisite service period of the entire award.
Compensation cost is recognized only for those options expected
to vest, with forfeitures estimated at the date of grant and
evaluated and adjusted periodically to reflect the
Companys historical experience and future expectations.
Any change in the forfeiture assumption is accounted
100
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
for as a change in estimate, with the cumulative effect of the
change on periods previously reported being reflected in the
financial statements of the period in which the change is made.
The following table summarizes stock option activity for the
years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Shares
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Subject to
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
per Share
|
|
|
(years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Outstanding at December 31, 2005
|
|
|
804,524
|
|
|
$
|
8.13
|
|
|
|
8.3
|
|
|
$
|
|
|
Granted
|
|
|
124,350
|
|
|
|
17.42
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(5,860
|
)
|
|
|
9.05
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4,382
|
)
|
|
|
7.40
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(478
|
)
|
|
|
6.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
918,154
|
|
|
|
9.39
|
|
|
|
7.6
|
|
|
|
7,916
|
|
Granted
|
|
|
148,700
|
|
|
|
18.30
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(13,710
|
)
|
|
|
12.22
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(37,697
|
)
|
|
|
8.22
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(126
|
)
|
|
|
18.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
1,015,321
|
|
|
|
10.70
|
|
|
|
7.0
|
|
|
|
4,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December, 2007
|
|
|
616,647
|
|
|
|
8.15
|
|
|
|
6.3
|
|
|
|
4,275
|
|
Exercisable at December, 2006
|
|
|
417,503
|
|
|
|
7.35
|
|
|
|
7.1
|
|
|
|
4,450
|
|
The aggregate intrinsic values in the table above are before
applicable income taxes and are based on the Companys
closing stock price of $15.08 and $18.01 at December 31,
2007 and 2006, respectively. As of December 31, 2007, total
unrecognized stock-based compensation cost related to nonvested
stock options was approximately $1.4 million, which is
expected to be recognized over a weighted average period of
approximately 30.4 months. Proceeds from the exercise of
stock options totaled approximately $310,000 in 2007 and
approximately $32,400 in 2006. The total intrinsic value of
stock options exercised was approximately $373,500 in 2007 and
approximately $42,300 in 2006.
As of December 31, 2007, there were 735,377 shares of
common stock available for issuance of future share-based
awards. The following table presents additional information
regarding options outstanding as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Life (years)
|
|
|
Exercise Price
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
$ 6.54
|
|
|
451,778
|
|
|
|
5.83
|
|
|
$
|
6.54
|
|
|
|
433,135
|
|
|
$
|
6.54
|
|
10.50-12.54
|
|
|
299,093
|
|
|
|
7.08
|
|
|
|
10.61
|
|
|
|
149,295
|
|
|
|
10.68
|
|
15.44-18.68
|
|
|
264,450
|
|
|
|
8.83
|
|
|
|
17.90
|
|
|
|
34,217
|
|
|
|
17.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,015,321
|
|
|
|
6.98
|
|
|
|
10.70
|
|
|
|
616,647
|
|
|
|
8.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes nonvested stock activity for the
years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Outstanding at December 31, 2005
|
|
|
6,000
|
|
|
$
|
11.40
|
|
Granted
|
|
|
227,875
|
|
|
|
17.55
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
233,875
|
|
|
|
17.39
|
|
Granted
|
|
|
255,755
|
|
|
|
18.18
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(15,750
|
)
|
|
|
17.97
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
473,880
|
|
|
|
17.80
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, there was $4.9 million of
total unrecognized compensation cost related to nonvested stock
granted under the 2005 Plan. That cost is expected to be
recognized over a weighted-average period of 23.4 months.
102
SEABRIGHT
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
21.
|
Quarterly
Financial Information (unaudited)
|
The following table summarizes selected unaudited quarterly
financial data for each quarter of the years ended
December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In thousands, except earnings per share)
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
48,631
|
|
|
$
|
54,757
|
|
|
$
|
59,721
|
|
|
$
|
64,886
|
|
Loss and loss adjustment expenses
|
|
|
25,918
|
|
|
|
29,012
|
|
|
|
34,921
|
|
|
|
38,334
|
|
Underwriting, acquisition and insurance expenses
|
|
|
12,631
|
|
|
|
14,692
|
|
|
|
15,172
|
|
|
|
16,437
|
|
Net income
|
|
|
10,073
|
|
|
|
10,203
|
|
|
|
9,650
|
|
|
|
9,986
|
|
Fully diluted earnings per common share equivalent
|
|
$
|
0.48
|
|
|
$
|
0.49
|
|
|
$
|
0.46
|
|
|
$
|
0.48
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
43,963
|
|
|
$
|
41,794
|
|
|
$
|
47,819
|
|
|
$
|
52,015
|
|
Loss and loss adjustment expenses
|
|
|
28,471
|
|
|
|
22,057
|
|
|
|
27,871
|
|
|
|
29,485
|
|
Underwriting, acquisition and insurance expenses
|
|
|
9,732
|
|
|
|
9,780
|
|
|
|
10,129
|
|
|
|
12,665
|
|
Net income
|
|
|
5,968
|
|
|
|
9,383
|
|
|
|
9,097
|
|
|
|
8,781
|
|
Fully diluted earnings per common share equivalent
|
|
$
|
0.31
|
|
|
$
|
0.45
|
|
|
$
|
0.44
|
|
|
$
|
0.42
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
29,159
|
|
|
$
|
39,645
|
|
|
$
|
40,719
|
|
|
$
|
49,327
|
|
Loss and loss adjustment expenses
|
|
|
20,267
|
|
|
|
26,988
|
|
|
|
27,095
|
|
|
|
31,433
|
|
Underwriting, acquisition and insurance expenses
|
|
|
6,379
|
|
|
|
8,637
|
|
|
|
8,058
|
|
|
|
10,765
|
|
Net income
|
|
|
2,708
|
|
|
|
4,216
|
|
|
|
5,067
|
|
|
|
6,301
|
|
Fully diluted earnings per common share equivalent
|
|
$
|
0.18
|
|
|
$
|
0.25
|
|
|
$
|
0.30
|
|
|
$
|
0.38
|
|
103
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
Item 9A.
|
Controls
and Procedures.
|
Disclosure
Controls and Procedures
Under the supervision and with the participation of management,
including our Chief Executive Officer and our Chief Financial
Officer, we have carried out an evaluation of our disclosure
controls and procedures (as defined in
Rule 13a-15(e)
under the Exchange Act). Based on that evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that
our disclosure controls and procedures were effective as of the
end of the period covered by this annual report to ensure that
information we are required to disclose in reports that are
filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the rules and forms specified by the SEC and is
accumulated and communicated to our management, including our
Chief Executive Officer and our Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.
Managements
Report on Internal Control Over Financial
Reporting
The management of SeaBright Insurance Holdings, Inc. is
responsible for establishing and maintaining adequate internal
control over financial reporting as required by the
Sarbanes-Oxley Act of 2002 and as defined in Exchange Act
Rule 13a-15(f).
Our system of internal control over financial reporting is
designed to provide reasonable assurance to our management and
Board of Directors regarding the preparation and fair
presentation of published financial statements. A system of
internal control can provide only reasonable, not absolute
assurance, that the objectives of the control system are met.
Our management, including our Chief Executive Officer and Chief
Financial Officer, conducted an assessment of the design and
operating effectiveness of our internal control over financial
reporting based on the framework in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, our management has
concluded that, as of December 31, 2007, our internal
control over financial reporting was effective.
KPMG LLP, an independent registered public accounting firm, has
audited the effectiveness of our internal control over financial
reporting as of December 31, 2007, which is included in
this Item 9A.
Changes
in Internal Controls
There have not been any changes in our internal controls over
financial reporting during our fourth fiscal quarter of 2007
that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial
reporting.
104
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
SeaBright Insurance Holdings, Inc.:
We have audited SeaBright Insurance Holdings, Inc and
subsidiaries (the Company) internal control over financial
reporting as of December 31, 2007, based on criteria
established in
Internal Control Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, SeaBright Insurance Holdings, Inc. and
subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2007, based on criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of SeaBright Insurance Holdings,
Inc. and subsidiaries as of December 31, 2007 and 2006, and
the related consolidated statements of operations, changes in
stockholders equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
December 31, 2007, and our report dated March 17, 2008
expressed an unqualified opinion on those consolidated financial
statements.
Seattle, Washington
March 17, 2008
105
|
|
Item 9B.
|
Other
Information.
|
We had no information that was required to be disclosed in a
report on
Form 8-K
during the fourth quarter of 2007, but that was not disclosed.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
The information required by this item is incorporated by
reference from the sections captioned Board of Directors
and Corporate Governance and Common Stock
Ownership contained in our proxy statement for the 2008
annual meeting of stockholders, to be filed with the Commission
pursuant to Regulation 14A not later than 120 days
after December 31, 2007.
|
|
Item 11.
|
Executive
Compensation.
|
The information required by this item is incorporated by
reference from the sections captioned Executive
Compensation and Director Compensation
contained in our proxy statement for the 2008 annual meeting of
stockholders, to be filed with the Commission pursuant to
Regulation 14A not later than 120 days after
December 31, 2007.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this item is incorporated by
reference from the sections captioned Common Stock
Ownership and Executive Compensation contained
in our proxy statement for the 2008 annual meeting of
stockholders, to be filed with the Commission pursuant to
Regulation 14A not later than 120 days after
December 31, 2007.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by this item is incorporated by
reference from the section captioned Certain Relationships
and Related Transactions contained in our proxy statement
for the 2008 annual meeting of stockholders, to be filed with
the Commission pursuant to Regulation 14A not later than
120 days after December 31, 2007.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
The information required by this item is incorporated by
reference from the sections captioned Principal Accounting
Fees and Services contained in our proxy statement for the
2008 annual meeting of stockholders, to be filed with the
Commission pursuant to Regulation 14A not later than
120 days after December 31, 2007.
106
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules.
|
The following documents are being filed as part of this annual
report.
(a) (1)
Financial Statements.
The following
financial statements and notes are filed under Part II,
Item 8 of this annual report.
|
|
|
|
|
|
|
Page
|
|
|
SeaBright Insurance Holdings, Inc.
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
72
|
|
Consolidated Balance Sheets
|
|
|
73
|
|
Consolidated Statements of Operations
|
|
|
74
|
|
Consolidated Statements of Changes in Stockholders Equity
and Comprehensive Income
|
|
|
75
|
|
Consolidated Statements of Cash Flows
|
|
|
76
|
|
Notes to Consolidated Financial Statements
|
|
|
77
|
|
(2)
Financial Statement Schedules.
SeaBright Insurance Holdings, Inc.
Schedule II Condensed Financial Information of
Registrant
Schedule IV Reinsurance
Schedule VI Supplemental Information Concerning
Insurance Operations
All other schedules for which provision is made in the
applicable accounting requirements of the Securities and
Exchange Commission are not required or the required information
has been included within the financial statements or the notes
thereto.
(3)
Exhibits.
The list of exhibits in the
Exhibit Index to this annual report is incorporated herein
by reference.
107
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SEABRIGHT INSURANCE HOLDINGS, INC.
|
|
|
|
By:
|
/s/ John
G. Pasqualetto
|
John G. Pasqualetto
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities indicated below on
March 17, 2008.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ John
G. Pasqualetto
John
G. Pasqualetto
|
|
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
/s/ Joseph
S. De Vita
Joseph
S. De Vita
|
|
Senior Vice President,
Chief Financial Officer and Assistant Secretary
(Principal Financial Officer)
|
|
|
|
/s/ M.
Philip Romney
M.
Philip Romney
|
|
Vice President-Finance and
Assistant Secretary
(Principal Accounting Officer)
|
|
|
|
/s/ Peter
Y. Chung
Peter
Y. Chung
|
|
Director
|
|
|
|
/s/ Joseph
A. Edwards
Joseph
A. Edwards
|
|
Director
|
|
|
|
/s/ William
M. Feldman
William
M. Feldman
|
|
Director
|
|
|
|
/s/ Mural
R. Josephson
Mural
R. Josephson
|
|
Director
|
|
|
|
/s/ George
M. Morvis
George
M. Morvis
|
|
Director
|
|
|
|
/s/ Michael
D. Rice
Michael
D. Rice
|
|
Director
|
108
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
SeaBright Insurance Holdings, Inc.:
Under date of March 17, 2008, we reported on the
consolidated balance sheets of SeaBright Insurance Holdings,
Inc. and subsidiaries (the Company) as of
December 31, 2007 and 2006, and the related consolidated
statements of operations, changes in stockholders equity
and comprehensive income, and cash flows for each of the years
in the three-year period ended December 31, 2007, which
report is included in this annual report on
Form 10-K.
In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated
financial statement schedules in this annual report on
Form 10-K.
These financial statement schedules are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these financial statement schedules based on our
audits.
As noted on Schedule II (condensed statements of cash
flows), equity in earnings of subsidiaries for 2005 has been
corrected.
In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
As discussed in Note 2 of the consolidated financial
statements, effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment
.
Seattle, Washington
March 17, 2008
109
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SEABRIGHT
INSURANCE HOLDINGS, INC.
CONDENSED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share and per share information)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
11,765
|
|
|
$
|
13,472
|
|
Federal income tax recoverable
|
|
|
|
|
|
|
1,233
|
|
Other assets
|
|
|
7,014
|
|
|
|
455
|
|
Investment in subsidiaries
|
|
|
277,932
|
|
|
|
235,004
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
296,711
|
|
|
$
|
250,164
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Federal income tax payable
|
|
$
|
2,373
|
|
|
$
|
|
|
Payable to subsidiaries
|
|
|
|
|
|
|
990
|
|
Accrued expenses and other liabilities
|
|
|
32
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,405
|
|
|
|
1,038
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Series A preferred stock, $0.01 par value;
750,000 shares authorized; no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Undesignated preferred stock, $0.01 par value;
10,000,000 shares authorized; no shares issued and
outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 75,000,000 authorized;
issued and outstanding 20,831,102 shares at
December 31, 2007 and 20,553,400 at December 31, 2006
|
|
|
208
|
|
|
|
205
|
|
Paid-in capital
|
|
|
194,023
|
|
|
|
190,593
|
|
Accumulated other comprehensive income (loss)
|
|
|
1,638
|
|
|
|
(197
|
)
|
Retained earnings
|
|
|
98,437
|
|
|
|
58,525
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
294,306
|
|
|
|
249,126
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
296,711
|
|
|
$
|
250,164
|
|
|
|
|
|
|
|
|
|
|
See report of independent registered public accounting firm.
110
SEABRIGHT
INSURANCE HOLDINGS, INC.
CONDENSED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share and earnings per share
information)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from subsidiaries
|
|
$
|
42,418
|
|
|
$
|
34,103
|
|
|
$
|
18,334
|
|
Net investment income
|
|
|
734
|
|
|
|
656
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,152
|
|
|
|
34,759
|
|
|
|
18,472
|
|
Losses and expenses
|
|
|
4,375
|
|
|
|
1,991
|
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
38,777
|
|
|
|
32,768
|
|
|
|
18,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(303
|
)
|
|
|
(18
|
)
|
|
|
(169
|
)
|
Deferred
|
|
|
(832
|
)
|
|
|
(443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,135
|
)
|
|
|
(461
|
)
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
39,912
|
|
|
$
|
33,229
|
|
|
$
|
18,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.96
|
|
|
$
|
1.66
|
|
|
$
|
1.18
|
|
Diluted earnings per share
|
|
$
|
1.90
|
|
|
$
|
1.63
|
|
|
$
|
1.13
|
|
Weighted average basic shares outstanding
|
|
|
20,341,931
|
|
|
|
19,986,244
|
|
|
|
15,509,547
|
|
Weighted average diluted shares outstanding
|
|
|
20,976,525
|
|
|
|
20,403,089
|
|
|
|
16,195,855
|
|
See report of independent registered public accounting firm.
111
SEABRIGHT
INSURANCE HOLDINGS, INC.
CONDENSED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
AND
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Retained
|
|
|
|
|
|
|
Outstanding Shares
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
Earnings
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-in
|
|
|
Income
|
|
|
(Accumulated
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
(Loss)
|
|
|
Deficit)
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2004
|
|
|
508
|
|
|
|
|
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
50,831
|
|
|
$
|
530
|
|
|
$
|
7,004
|
|
|
$
|
58,370
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,292
|
|
|
|
18,292
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
realized losses recorded into
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income, net of tax of $79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
147
|
|
Increase in unrealized loss on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investment securities avail-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
able for sale, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax of $1,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,944
|
)
|
|
|
|
|
|
|
(1,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,495
|
|
Preferred stock conversion
|
|
|
(508
|
)
|
|
|
7,778
|
|
|
|
(5
|
)
|
|
|
78
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial public offering
|
|
|
|
|
|
|
8,625
|
|
|
|
|
|
|
|
86
|
|
|
|
80,688
|
|
|
|
|
|
|
|
|
|
|
|
80,774
|
|
Restricted stock grants
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
Exercise of stock options, including tax benefit of $6
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
|
16,411
|
|
|
|
|
|
|
|
164
|
|
|
|
131,485
|
|
|
|
(1,267
|
)
|
|
|
25,296
|
|
|
|
155,678
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,229
|
|
|
|
33,229
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
realized losses recorded into
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income, net of tax of $144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
266
|
|
|
|
|
|
|
|
266
|
|
Decrease in unrealized loss on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investment securities avail-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
able for sale, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax of $432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
804
|
|
|
|
|
|
|
|
804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,299
|
|
Follow on public offering
|
|
|
|
|
|
|
3,910
|
|
|
|
|
|
|
|
39
|
|
|
|
57,516
|
|
|
|
|
|
|
|
|
|
|
|
57,555
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,554
|
|
|
|
|
|
|
|
|
|
|
|
1,554
|
|
Restricted stock grants
|
|
|
|
|
|
|
228
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Exercise of stock options, including tax benefit of $6
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
|
|
|
20,553
|
|
|
|
|
|
|
|
205
|
|
|
|
190,593
|
|
|
|
(197
|
)
|
|
|
58,525
|
|
|
|
249,126
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,912
|
|
|
|
39,912
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
realized losses recorded into
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income, net of tax of $36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
69
|
|
Decrease in unrealized loss on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investment securities avail-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
able for sale, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax of $951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,766
|
|
|
|
|
|
|
|
1,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,747
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,010
|
|
|
|
|
|
|
|
|
|
|
|
3,010
|
|
Restricted stock grants
|
|
|
|
|
|
|
240
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Exercise of stock options, including tax benefit of $110
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
|
20,831
|
|
|
$
|
|
|
|
$
|
208
|
|
|
$
|
194,023
|
|
|
$
|
1,638
|
|
|
$
|
98,437
|
|
|
$
|
294,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See report of independent registered public accounting firm.
112
SEABRIGHT
INSURANCE HOLDINGS, INC.
CONDENSED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities, net of effect of
acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
39,912
|
|
|
$
|
33,229
|
|
|
$
|
18,292
|
|
Adjustment to reconcile net income to net cash used in operating
activities, net of effect of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries
|
|
|
(42,418
|
)
|
|
|
(34,103
|
)
|
|
|
(18,334
|
)
|
Benefit for deferred income taxes
|
|
|
(832
|
)
|
|
|
(443
|
)
|
|
|
|
|
Amortization of intangible assets
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
Compensation cost on stock options
|
|
|
698
|
|
|
|
497
|
|
|
|
|
|
Grant of restricted shares of common stock
|
|
|
2,311
|
|
|
|
1,057
|
|
|
|
24
|
|
Changes in certain assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable from subsidiaries
|
|
|
(4,026
|
)
|
|
|
851
|
|
|
|
(2,015
|
)
|
Federal income taxes payable (recoverable)
|
|
|
3,606
|
|
|
|
(1,171
|
)
|
|
|
335
|
|
Other assets
|
|
|
(68
|
)
|
|
|
(1
|
)
|
|
|
1,240
|
|
Accrued expenses and other liabilities
|
|
|
(15
|
)
|
|
|
(102
|
)
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(842
|
)
|
|
|
(186
|
)
|
|
|
(306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities, net of effects of
acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisition, net of cash acquired
|
|
|
(1,178
|
)
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
|
|
|
|
(50,005
|
)
|
|
|
(74,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,178
|
)
|
|
|
(50,005
|
)
|
|
|
(74,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering of common stock
|
|
|
|
|
|
|
|
|
|
|
80,774
|
|
Proceeds from follow on public offering of common stock
|
|
|
|
|
|
|
57,556
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
313
|
|
|
|
32
|
|
|
|
15
|
|
Deferred tax benefit from disqualifying dispositions
|
|
|
|
|
|
|
6
|
|
|
|
6
|
|
Proceeds from issuance of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
313
|
|
|
|
57,594
|
|
|
|
80,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(1,707
|
)
|
|
|
7,403
|
|
|
|
5,943
|
|
Cash and cash equivalents at beginning of period
|
|
|
13,472
|
|
|
|
6,069
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
11,765
|
|
|
$
|
13,472
|
|
|
$
|
6,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: Equity in earnings of subsidiaries for the year ended
December 31, 2005 has been corrected as follows:
|
|
|
|
|
As originally presented
|
|
$
|
|
|
Adjustment
|
|
|
(18,334
|
)
|
|
|
|
|
|
As corrected
|
|
$
|
(18,334
|
)
|
|
|
|
|
|
See report of independent registered public accounting firm.
113
SCHEDULE IV
REINSURANCE
SEABRIGHT
INSURANCE HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
Ceded to
|
|
|
Assumed
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
Other
|
|
|
from Other
|
|
|
|
|
|
Assumed
|
|
|
|
Direct
|
|
|
Companies
|
|
|
Companies
|
|
|
Net
|
|
|
to Net
|
|
|
|
(In thousands)
|
|
|
Year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
234,398
|
|
|
$
|
14,979
|
|
|
$
|
8,576
|
|
|
$
|
227,995
|
|
|
|
3.8
|
%
|
Year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
|
195,702
|
|
|
|
15,591
|
|
|
|
5,480
|
|
|
|
185,591
|
|
|
|
3.0
|
%
|
Year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
|
172,806
|
|
|
|
22,317
|
|
|
|
8,361
|
|
|
|
158,850
|
|
|
|
5.3
|
%
|
See report of independent registered public accounting firm.
114
SCHEDULE VI
SUPPLEMENTAL INFORMATION
CONCERNING INSURANCE OPERATIONS
SEABRIGHT INSURANCE HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
|
|
|
Loss and Loss
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Loss and
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment Expenses Incurred
|
|
|
of Deferred
|
|
|
Paid Loss
|
|
|
|
|
|
|
Policy
|
|
|
Loss
|
|
|
Net
|
|
|
Net
|
|
|
Net
|
|
|
Related to
|
|
|
Policy
|
|
|
and Loss
|
|
|
Gross
|
|
|
|
Acquisition
|
|
|
Adjustment
|
|
|
Unearned
|
|
|
Earned
|
|
|
Investment
|
|
|
Current
|
|
|
Prior
|
|
|
Acquisition
|
|
|
Adjustment
|
|
|
Premiums
|
|
|
|
Costs, Net
|
|
|
Expense
|
|
|
Premium(1)
|
|
|
Premium
|
|
|
Income
|
|
|
Year
|
|
|
Years
|
|
|
Costs
|
|
|
Expenses
|
|
|
Written
|
|
|
|
(In thousands)
|
|
|
Year ended December 31, 2007
|
|
$
|
19,832
|
|
|
$
|
250,085
|
|
|
$
|
145,213
|
|
|
$
|
227,995
|
|
|
$
|
20,307
|
|
|
$
|
162,018
|
|
|
$
|
(33,832
|
)
|
|
$
|
36,480
|
|
|
$
|
76,738
|
|
|
$
|
282,658
|
|
Year ended December 31, 2006
|
|
|
15,433
|
|
|
|
198,356
|
|
|
|
112,395
|
|
|
$
|
185,591
|
|
|
|
15,245
|
|
|
|
130,124
|
|
|
|
(22,240
|
)
|
|
|
26,497
|
|
|
|
50,927
|
|
|
|
230,253
|
|
Year ended December 31, 2005
|
|
|
10,299
|
|
|
|
142,211
|
|
|
|
84,844
|
|
|
|
158,850
|
|
|
|
7,832
|
|
|
|
108,424
|
|
|
|
(2,641
|
)
|
|
|
19,686
|
|
|
|
33,462
|
|
|
|
204,742
|
|
|
|
|
(1)
|
|
Net unearned premium represents unearned premiums minus prepaid
reinsurance.
|
See report of independent registered public accounting firm.
115
EXHIBIT INDEX
The list of exhibits in the Exhibit Index to this annual
report is incorporated herein by reference.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of SeaBright
Insurance Holdings, Inc. (incorporated by reference to the
Companys Form S-8 Registration Statement (File No.
333-123319), filed March 15, 2005)
|
|
3
|
.2
|
|
Amended and Restated By-laws of SeaBright Insurance Holdings,
Inc. (incorporated by reference to the Companys Form S-8
Registration Statement (File No. 333-123319), filed March 15,
2005)
|
|
4
|
.1
|
|
Specimen Common Stock Certificate (incorporated by reference to
Amendment No. 2 to the Companys Registration Statement on
Form S-1 (File No. 333-119111), filed November 22, 2004)
|
|
4
|
.2
|
|
Indenture dated as of May 26, 2004 by and between SeaBright
Insurance Company and Wilmington Trust Company (incorporated by
reference to the Companys Registration Statement on Form
S-1 (File No. 333-119111), filed September 17, 2004)
|
|
10
|
.1
|
|
Employment Agreement, dated as of September 30, 2003, by and
between SeaBright Insurance Company and John G. Pasqualetto
(incorporated by reference to Amendment No. 1 to the
Companys Registration Statement on Form S-1 (File No.
333-119111), filed November 1, 2004)
|
|
10
|
.2
|
|
Employment Agreement, dated as of September 30, 2003, by and
between SeaBright Insurance Company and Richard J. Gergasko
(incorporated by reference to the Companys Registration
Statement on Form S-1 (File No. 333-119111), filed September 17,
2004)
|
|
10
|
.3
|
|
Employment Agreement, dated as of September 30, 2003, by and
between SeaBright Insurance Company and Joseph S. De Vita
(incorporated by reference to the Companys Registration
Statement on Form S-1 (File No. 333-119111), filed September 17,
2004)
|
|
10
|
.4
|
|
Employment Agreement, dated as of September 30, 2003, by and
between SeaBright Insurance Company and Richard W. Seelinger
(incorporated by reference to the Companys Registration
Statement on Form S-1 (File No. 333-119111), filed September 17,
2004)
|
|
10
|
.5
|
|
Employment Agreement, dated as of September 30, 2003, by and
between SeaBright Insurance Company and Jeffrey C. Wanamaker
(incorporated by reference to the Companys Registration
Statement on Form S-1 (File No. 333-119111), filed September 17,
2004)
|
|
10
|
.6
|
|
Employment Agreement, dated as of March 31, 2005, by and between
SeaBright Insurance Company and Debra Drue Wax (incorporated by
reference to the Companys Current Report on Form 8-K,
filed April 5, 2005)
|
|
10
|
.7
|
|
Purchase Agreement, dated as of July 14, 2003, by and among
Insurance Holdings, Inc., Kemper Employers Group, Inc.,
Lumbermens Mutual Casualty Company and Pacific Eagle Insurance
Company (incorporated by reference to the Companys
Registration Statement on Form S-1 (File No. 333-119111), filed
September 17, 2004)
|
|
10
|
.8
|
|
Amendment Letter to Purchase Agreement, dated as of July 30,
2003, by and among Insurance Holdings, Inc., Kemper Employers
Group, Inc., Lumbermens Mutual Casualty Company, Eagle Pacific
Insurance Company and Pacific Eagle Insurance Company
(incorporated by reference to the Companys Registration
Statement on Form S-1 (File No. 333-119111), filed September 17,
2004)
|
|
10
|
.9
|
|
Amendment Letter to Purchase Agreement, dated as of September
15, 2003, by and among SeaBright Insurance Holdings, Inc.,
Kemper Employers Group, Inc., Lumbermens Mutual Casualty
Company, Eagle Pacific Insurance Company and Pacific Eagle
Insurance Company (incorporated by reference to the
Companys Registration Statement on Form S-1 (File No.
333-119111), filed September 17, 2004)
|
|
10
|
.10
|
|
Escrow Agreement, dated as of September 30, 2003, by and among
Wells Fargo Bank Minnesota, National Association, SeaBright
Insurance Holdings, Inc. and Kemper Employers Group, Inc.
(incorporated by reference to the Companys Registration
Statement on Form S-1 (File No. 333-119111), filed September 17,
2004)
|
116
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.11
|
|
Adverse Development Excess of Loss Reinsurance Agreement, dated
as of September 30, 2004, between Lumbermens Mutual Casualty
Company and Kemper Employers Insurance Company (incorporated by
reference to the Companys Registration Statement on Form
S-1 (File No. 333-119111), filed September 17, 2004)
|
|
10
|
.12
|
|
Amended and Restated Reinsurance Trust Agreement dated as of
February 29, 2004 by and among Lumbermens Mutual Casualty
Company and SeaBright Insurance Company (incorporated by
reference to Amendment No. 1 to the Companys Registration
Statement on Form S-1 (File No. 333-119111), filed November 1,
2004)
|
|
10
|
.13
|
|
Commutation Agreement, dated as of September 30, 2003, by and
between Kemper Employers Insurance Company and Lumbermens Mutual
Casualty Company (incorporated by reference to the
Companys Registration Statement on Form S-1 (File No.
333-119111), filed September 17, 2004)
|
|
10
|
.14
|
|
Administrative Services Agreement dated as of September 30, 2003
by and among Kemper Employers Insurance Company, Eagle Pacific
Insurance Company and Pacific Eagle Insurance Company
(incorporated by reference to the Companys Registration
Statement on Form S-1 (File No. 333-119111), filed September 17,
2004)
|
|
10
|
.15
|
|
Administrative Services Agreement dated as of September 30, 2003
by and among Kemper Employers Insurance Company and Lumbermens
Mutual Casualty Company (incorporated by reference to the
Companys Registration Statement on Form S-1 (File No.
333-119111), filed September 17, 2004)
|
|
10
|
.16
|
|
Claims Administration Services Agreement dated as of September
30, 2003 by and among Kemper Employers Insurance Company, Eagle
Pacific Insurance Company and Pacific Eagle Insurance Company
(incorporated by reference to the Companys Registration
Statement on Form S-1 (File No. 333-119111), filed September 17,
2004)
|
|
10
|
.17
|
|
Side Letter dated as of September 29, 2003 by and among
SeaBright Insurance Holdings, Inc., Kemper Employers Group,
Inc., Lumbermens Mutual Casualty Company, Eagle Pacific
Insurance Company and Pacific Eagle Insurance Company
(incorporated by reference to the Companys Registration
Statement on Form S-1 (File No. 333-119111), filed September 17,
2004)
|
|
10
|
.18
|
|
Amendment to Employment Agreement by and between SeaBright
Insurance Company and John G. Pasqualetto (incorporated by
reference to Amendment No. 2 to the Companys Registration
Statement on Form S-1 (File No. 333-119111), filed November 22,
2004)
|
|
10
|
.19
|
|
Executive Stock Agreement dated as of September 30, 2003, by and
between SeaBright Insurance Holdings, Inc. and John Pasqualetto
(incorporated by reference to the Companys Registration
Statement on Form S-1 (File No. 333-119111), filed September 17,
2004)
|
|
10
|
.20
|
|
Executive Stock Agreement dated as of September 30, 2003, by and
between SeaBright Insurance Holdings, Inc. and Richard J.
Gergasko (incorporated by reference to the Companys
Registration Statement on Form S-1 (File No. 333-119111), filed
September 17, 2004)
|
|
10
|
.21
|
|
Executive Stock Agreement dated as of September 30, 2003, by and
between SeaBright Insurance Holdings, Inc. and Joseph De Vita
(incorporated by reference to the Companys Registration
Statement on Form S-1 (File No. 333-119111), filed September 17,
2004)
|
|
10
|
.22
|
|
Executive Stock Agreement dated as of September 30, 2003, by and
between SeaBright Insurance Holdings, Inc. and Richard Seelinger
(incorporated by reference to the Companys Registration
Statement on Form S-1 (File No. 333-119111), filed September 17,
2004)
|
|
10
|
.23
|
|
Executive Stock Agreement dated as of September 30, 2003, by and
between SeaBright Insurance Holdings, Inc. and Jeffrey C.
Wanamaker (incorporated by reference to the Companys
Registration Statement on Form S-1 (File No. 333-119111), filed
September 17, 2004)
|
|
10
|
.24
|
|
Executive Stock Agreement dated as of June 30, 2004 by and
between SeaBright Insurance Holdings, Inc. and Chris Engstrom
(incorporated by reference to the Companys Registration
Statement on Form S-1 (File No. 333-119111), filed September 17,
2004)
|
|
10
|
.25
|
|
Executive Stock Agreement dated as of June 30, 2004 by and
between SeaBright Insurance Holdings, Inc. and James Louden
Borland III (incorporated by reference to the
Companys Registration Statement on Form S-1 (File No.
333-119111), filed September 17, 2004)
|
117
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.26
|
|
Stock Purchase Agreement dated as of June 30, 2004 by and
between SeaBright Insurance Holdings, Inc. and each of the
purchasers named therein (incorporated by reference to the
Companys Registration Statement on Form S-1 (File No.
333-119111), filed September 17, 2004)
|
|
10
|
.27
|
|
Form of Incentive Stock Option Agreement (incorporated by
reference to the Companys Registration Statement on Form
S-1 (File No. 333-119111), filed September 17, 2004)
|
|
10
|
.28
|
|
Tax and Expense Sharing Agreement dated as of March 12, 2004 by
and among SeaBright Insurance Holdings, Inc., SeaBright
Insurance Company and PointSure Insurance Services, Inc.
(incorporated by reference to Amendment No. 1 to the
Companys Registration Statement on Form S-1 (File No.
333-119111), filed November 1, 2004)
|
|
10
|
.29
|
|
Agency Services Agreement effective as of October 1, 2003 by and
between SeaBright Insurance Company and PointSure Insurance
Services, Inc. (incorporated by reference to Amendment No. 1 to
the Companys Registration Statement on Form S-1 (File No.
333-119111), filed November 1, 2004)
|
|
10
|
.30
|
|
Floating Rate Surplus Note dated May 26, 2004 from SeaBright
Insurance Company to Wilmington Trust Company, as trustee, for
$12,000,000 (incorporated by reference to the Companys
Registration Statement on Form S-1 (File No. 333-119111), filed
September 17, 2004)
|
|
10
|
.31
|
|
Side Letter dated as of September 28, 2004 by and among
SeaBright Insurance Holdings, Inc., SeaBright Insurance Company
and Lumbermens Mutual Casualty Company (incorporated by
reference to Amendment No. 1 to the Companys Registration
Statement on Form S-1 (File No. 333-119111), filed November 1,
2004)
|
|
10
|
.32
|
|
Form of Stock Option Award Agreement for awards granted under
2005 Long-Term Equity Incentive Plan (incorporated by reference
to Amendment No. 4 to the Companys Registration Statement
on Form S-1 (File No. 333-119111), filed January 3, 2005)
|
|
10
|
.33
|
|
Form of Restricted Stock Grant Agreement for grants to directors
under the 2005 Long-Term Equity Incentive Plan (incorporated by
reference to the Companys Annual Report on Form 10-K,
filed March 28, 2005)
|
|
10
|
.34 *
|
|
SeaBright Insurance Holdings, Inc. Bonus Plan 2007
|
|
10
|
.35
|
|
Form of Restricted Stock Grant Agreement for grants to officers
under the 2005 Long-Term Equity Incentive Plan (incorporated by
reference to the Companys Annual Report on Form 10-K,
filed March 29, 2006)
|
|
10
|
.36
|
|
Employment Agreement, dated as of August 15, 2006, by and
between SeaBright Insurance Company and Marc B.
Miller, M.D. (incorporated by reference to the
Companys Current Report on Form 8-K, filed August 17, 2006)
|
|
10
|
.37
|
|
Second Amended and Restated 2003 Stock Option Plan (incorporated
by reference to the Companys Current Report on Form 8-K,
filed April 3, 2007)
|
|
10
|
.38
|
|
Amended and Restated 2005 Long-Term Equity Incentive Plan
(incorporated by reference to the Companys Current Report
on Form 8-K, filed April 3, 2007)
|
|
21
|
.1*
|
|
Subsidiaries of the registrant
|
|
23
|
.1*
|
|
Consent of KPMG LLP
|
|
31
|
.1*
|
|
Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)
|
|
31
|
.2*
|
|
Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)
|
|
32
|
.1*
|
|
Section 1350 Certification (Chief Executive Officer)
|
|
32
|
.2*
|
|
Section 1350 Certification (Chief Financial Officer)
|
|
|
|
*
|
|
Filed herewith.
|
|
|
|
Indicates a management contract, compensatory plan, contract or
arrangement required to be filed pursuant to Item 601 of
Regulation S-K.
|
118
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