We lease our principal executive offices in Hamilton Bermuda, which also houses our reinsurance operations. Our U.S. executive offices are located in leased premises of approximately 34 thousand square feet in Poughkeepsie, New York. We operate our primary insurance east coast operations from these offices. Our west coast insurance operations are located in leased premises of approximately 26 thousand square feet in San Francisco, California. We also rent additional office for our insurance operations in 2 other locations. We believe that such leased properties are suitable and adequate for our current business operations.
Our direct premiums written decreased $18.1 million, or 11%, to $153.5 million in 2009, compared to $171.6 million in 2008. Of this decrease, $14.0 million was attributable to excess insurance policy business and $4.1 million was attributable to primary insurance policy business.
Premiums ceded to reinsurers under quota share agreements were in the following proportions in 2010, 2009 and 2008:
An increase in professional fees related to the regulatory proceedings and pending litigation described in “Part I. Item 3 - Legal Proceedings” and “Part II. Item 8 - Financial Statements - Note 21. Contingencies” ;and
$8.0 million for lease obligations related to its integrated policy administration software, and
$1.0 million to the State of California Self Insurance Plans for an excess workers’ compensation insurance policy issued to former members of a self-insured group previously managed by CRM CA.
Majestic Insurance’s inability to pay any dividends without prior approval of the CA DOI as discussed in “Item 1 - Regulation - State Insurance Regulation in the United States - Dividend Limitations;” and
Deferral of Junior Debt Payments. Beginning December 15, 2009, we elected to defer our regularly scheduled quarterly interest payments with respect to our Junior Debt in order to conserve cash. The terms of the debt securities allow us to defer payment of interest at any time or from time to time for up to 20 consecutive quarters provided no event of default (as defined in the debt securities) has occurred and is continuing. We are not in default with respect to the debt securities, and the deferral of interest does not constitute an event of default under the debt securities. While we defer the payment of interest, we will continue to accrue expense for interest owed at a compounded rate. Upon the expiration of the deferral, all accrued and unpaid interest is due and payable.
Deferred policy acquisition costs include ceding commissions, broker commissions, premium taxes and certain underwriting and other policy issuance costs and are primarily related to the production of new and renewal business. These costs are deferred and amortized as the related premiums are earned. Deferred policy acquisition costs are evaluated to determine if recorded amounts exceed estimated recoverable amounts after allowing for anticipated investment income. Premium deficiency, if any, is recorded as amortization of deferred policy acquisition costs. All other acquisition expenses are charged to operations as incurred.
In conjunction with the voluntary termination of the New York self-insured groups, the Company has ceased the operations of Eimar, a provider of medical bill review and case management services, because the majority of Eimar’s business was derived from these New York self-insured groups. Medical bill review services for Majestic Insurance and certain self-insured groups formerly managed by CRM CA were performed by the Company until the medical bill review function was transitioned to a third party medical bill review provider. This transition was completed in the third quarter of 2009.
Basic earnings per share is calculated using the weighted average number of common and Class B shares outstanding excluding any dilutive effects of warrants, options and convertible securities. As of December 31, 2010, 2009 and 2008, there were 23 thousand, 42 thousand and 38 thousand restricted shares outstanding, respectively, and no warrants, options or convertible securities outstanding during the periods ended December 31, 2010, and 2009.
Premiums and accounts receivable and reinsurance payable - The carrying values reported in the accompanying consolidated balance sheets for these financial instruments approximate their fair value.
Effective September 8, 2008, the results of Eimar were classified as discontinued operations. Consequently, goodwill of $0.1 million and the unamortized portion of the covenant not to compete of $0.1 million related to Eimar were deemed to be impaired. These amounts were written off and are included in loss from discontinued operations for the year ended December 31, 2008.
The Company’s long-term debt obligations contain various administrative, reporting, legal and financial covenants. Non-compliance with these covenants, which include (1) Majestic Insurance maintaining an A.M. Best rating of B- or better, and (2) Majestic Insurance’s renewing more than 51% of its net premiums written during any twelve month period, could cause the long-term debt obligations to become immediately due and payable. Pursuant to the previously announced acquisition of Majestic Capital by Bayside, certain of the Company’s debt covenants were amended in 2011 as described under the heading Modification of Trust Preferred Covenants in Note 24.
On March 12, 2010, the plaintiffs filed an amended complaint which contains substantially the same allegations as the original complaint, but seeks to add additional claims, including: (i) the imposition of a constructive trust upon certain assets of CRM, its affiliated entities and two former director and officers; (ii) an accounting to determine the amount and location of any assets improperly obtained by CRM, its affiliated entities and two former directors and officers; (iii) indemnification from CRM for amounts paid by plaintiffs; and (iv) an injunction pursuant to New York’s Debtor and Creditor Law restraining the disposition and appointing a receiver to take charge of the property of CRM Holdings and two former directors and officers and the setting aside of certain payments. The plaintiffs have granted CRM and its affiliates an unlimited extension of time to respond to the complaint, which may be revoked on 20 days notice. In April 2010, CRM submitted an application to the Panel seeking to coordinate pretrial proceedings and on February 23, 2011, the Panel issued an order that this action would be one of the Coordinated Lawsuits. An initial conference was held on April 18, 2011. Pursuant to that conference, an order will be circulated whereby within thirty days of the order, HITNY plaintiff will circulate its proposed third amended complaint and the parties will then either consent to the service of same or require motion practice which will be scheduled at a later date. In the interim, all discovery proceedings and pending motions are presently stayed. For information regarding the proposed settlement of this lawsuit, please see above under the heading “- Proposed Settlement of Litigation Involving New York Self-Insured Groups.”
California Plastering, Inc., et al. v. Pridemark-Everest Insurance Services, Inc., et al. On November 1, 2010, California Plastering, Inc., Collins Builders, Inc., Evans & Son, Inc., Pacific Wall Systems, Inc., Quality Production Services, Inc., Rutherford Co., Inc., Sound Control Company, Southern California Boiler, Inc., Summer Systems, Inc., Versatile Coatings, Inc. and Vision Builders Group, all of which were former members of the Contractors Access Program of California (CAP), sued CRM, CRM CA, Majestic USA and Majestic Insurance Company in California Superior Court, County of Orange. The plaintiffs also named their former insurance broker and two former trustees of CAP. Plaintiffs are seeking damages from the defendants’ alleged mismanagement and wrongful conduct with respect to CAP. As against CRM CA and its affiliated entities, the lawsuit alleges that CRM CA and its affiliated entities: (1) engaged in common law fraud during the administration of CAP; (2) negligently misrepresented information relative to CAP; (3) breached fiduciary duties and aided and abetted in breached of fiduciary duties owed to CAP; (4) violated California state securities laws by (a) selling membership interests in CAP which were unregistered securities and (b) making such sales by means of untrue statements of fact and material omissions; and (5) engaged in deceptive business practices. The plaintiffs are seeking damages (a) for the amount of CAP’s underfunding, which the plaintiffs have currently estimated to be in excess of $30 million, or as established at trial, (b) punitive damages, (c) rescission of plaintiffs’ purchase of membership interests in CAP and the return of their contributions paid into the program, or damages according to proof at trial, and (d) costs and attorney fees. On or about February 10, 2011, CRM CA filed a demurrer. On March 10, 2011, the Court rendered a decision sustaining with leave to amend as to the cause of action regarding breach of fiduciary duty and overruled the demurrer as to the remaining causes of action. On or about February 10, 2011, CRM filed a motion to quash service for lack of personal jurisdiction. On March 10, 2011, the Court rendered a decision denying CRM’s motion to quash service of the summons for lack of personal jurisdiction. The Company intends to vigorously defend this litigation and the Company cannot estimate what impact, if any, the litigation may have on its business reputation, results of operations, financial condition or cash flows. If, however, this matter is decided adversely to the Company, it may result in a material adverse effect on its business, results of operations, financial conditions and cash flows.
The CA DOI applied to the Superior Court of San Francisco County, California (the Conservation Court) for an order placing Majestic Insurance into a statutory conservation proceeding on April 21, 2011. Upon the execution of the order of conservation, the Insurance Commissioner of the State of California (the Commissioner) took over the operations of Majestic Insurance. The court order grants the Commissioner a broad range of discretionary authority, and will provide the Commissioner the ability to, among other things, conduct the business of Majestic Insurance, dispose of any or all of the assets and liabilities of Majestic Insurance, and act in all ways and exercise all powers necessary for the purpose of carrying out the court order.
Provisions of the LPT include: (1) AmTrust assuming the gross reserves for the loss and loss adjustment expenses of Majestic Insurance which are carried at $314.5 million at December 31, 2010; and (2) AmTrust assuming the related reinsurance recoverables which are carried at $130.4 million at December 31, 2010; and (3) Majestic Insurance transferring cash and securities equal to the net reserves transferred under the LPT and an additional $26 million to AmTrust. The additional $26 million represents the transaction value that AmTrust has attributed to the exposure to potential adverse development in excess of the carried reserves that it will assume in the LPT. This amount gave considerations to the loss reserve deficiency indicated by the CA DOI.