21st Century Holding Company (“21st Century”, “Company”, “we”, “us”) is an insurance holding company, which, through our subsidiaries and our contractual relationships with our independent agents and general agents, controls substantially all aspects of the insurance underwriting, distribution and claims processes. We are authorized to underwrite homeowners’ multi-peril (“homeowners”), personal umbrella, commercial general liability, following form commercial excess liability, personal and commercial automobile, fire, allied lines, workers’ compensation, business personal property and commercial inland marine insurance. We are authorized to underwrite in various states on behalf of our wholly owned subsidiary, Federated National Insurance Company (“Federated National”) and other insurance carriers. Federated National is the resulting entity following the merger of Federated National into our other wholly owned subsidiary, American Vehicle Insurance Company (“American Vehicle”), in January 2011. In connection with this merger, the Company, Federated National and American Vehicle entered into the Consent Order with the Florida Office of Insurance Regulation (“Florida OIR”). See "Recent Developments - Consent Order”. We market and distribute our own and third-party insurers’ products and our other services through a network of independent agents. We also utilize a select number of general agents for the same purpose.
As part of its approval of the merger between Federated National and American Vehicle, the Florida OIR, the Company, Federated National and American Vehicle entered into a consent order with the Florida OIR dated January 25, 2011 (the “Consent Order”) pursuant to which the Company and the resulting company in the merger (the “Merged Company”) have agreed to the following:
The Merged Company shall surrender its surety license. The Merged Company currently has no Surety policy premium in force.
The claims service fees payable by the Merged Company to Superior Adjusting, Inc. (“Superior”), another of the Company’s wholly owned subsidiaries, will be reduced from 4.5% of gross earned premium to 3.6% of gross earned premium. This will have no impact on the Company’s consolidated financial results.
The Consent Order continues the prohibition on the Company from the payment of dividends until the Merged Company reports two consecutive quarters of net underwriting income.
The Company provided the Florida OIR with a plan of operation and has agreed to provide certain reports to the Florida OIR on a monthly basis, and agreed to obtain the Florida OIR’s approval prior to making any changes to the officers of the Merged Company during the first year following the effective date of the Merger.
Our business, results of operations and financial condition are subject to fluctuations due to a variety of factors. Abnormally high severity or frequency of claims in any period could have a material adverse effect on our business, results of operations and financial condition. When our estimated liabilities for unpaid losses and LAE are less than the actuarially determined amounts, we increase the expense in the current period. Conversely, when our estimated liabilities for unpaid losses and LAE are greater than the actuarially determined amounts, we decrease the expense in the current period.
We internally process claims made by our insureds through our wholly owned claims adjusting company, Superior Adjusting, Inc. (“Superior”). We also offer premium financing to our own and third-party insureds through our wholly owned subsidiary, Federated Premium Finance, Inc. (“Federated Premium”).
FASB issued guidance addresses accounting and reporting for (a) investments in equity securities that have readily determinable fair values and (b) all investments in debt securities. The guidance requires that these securities be classified into one of three categories, Held-to-maturity, Trading, or Available-for-sale securities.
Other recent accounting pronouncements issued by the FASB, the American Institute of Certified Public Accountants (“AICPA”), and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
Below is a summary of net unrealized gains and losses at December 31, 2010 and December 31, 2009 by category.
In reaching a conclusion that a security is either other-than-temporarily or permanently impaired we consider such factors as the timeliness and completeness of expected dividends, principal and interest payments, ratings from nationally recognized statistical rating organizations such as Standard and Poor’s and Moody’s Investors Service, Inc. (“Moody’s”), as well as information released via the general media channels. During 2010 and 2009, in connection with this process, we have not charged any net realized investment loss to operations.
As of December 31, 2010, 55.6% of the investment portfolio is in corporate bonds, 2.4% is in obligations of states and political subdivisions, and 27.4% is in United States government bonds. Approximately 1% of the common stock holdings are related to foreign entities.
The following table summarizes, by type, our investments as of December 31, 2010 and 2009.
During 2010, we reclassified $3.1 million of amortized cost to held-to-maturity from available-for-sale to fund trust agreements.
Premiums receivable, net of allowance for credit losses, decreased $4.7 million, or 45.3%, to $5.6 million as of December 31, 2010, compared with $10.3 million as of December 31, 2009.
Our homeowners’ insurance premiums receivable decreased $5.5 million, or 61.2%, to $3.5 million as of December 31, 2010, compared with $9.0 million as of December 31, 2009. The balance at December 31, 2009 included $5.4 million receivable in connection with our Citizens’ assumed policies.
Premiums receivable in connection with our automobile line of business increased $0.3 million, or 75.7%, to $0.8 million as of December 31, 2010, compared with $0.5 million as of December 31, 2009.
The Company’s consolidated federal income tax returns for 2009, 2008, 2007, 2006 and 2005 are open for review by the Internal Revenue Service (“IRS”). The federal income tax returns for 2003 and 2002 have been examined by the IRS. The IRS concluded its examination for 2003 and 2002 and there were no material changes in the tax liability for those years. The 2004 income tax return remains open due to net operating loss carryforward to open years.
The Florida Department of Revenue examination of the Company’s consolidated Florida income tax returns for 2007, 2006, 2005 and 2004 was settled and closed in early November 2010 with no change to tax years 2007, 2006 and 2005. The audit resulted in an immaterial adjustment to the 2004 tax year. The Florida income tax returns for 2008 and 2009 are open for review.
Unpaid losses and LAE decreased $4.1 million, or 5.8%, to $66.5 million as of December 31, 2010, compared with $70.6 million as of December 31, 2009. The composition of unpaid losses and LAE by product line is as follows.
Premium deposits and customer credit balances increased $0.3 million, or 11.0%, to $2.4 million as of December 31, 2010, compared with $2.1 million as of December 31, 2009. Premium deposits are monies received on policies not yet in-force as of December 31, 2010.
On September 30, 2009, Federated National announced it received approval from the Florida OIR for a premium rate increase for its voluntary homeowners’ program within the state of Florida. The premium rate increase, which averaged approximately 19%, was deployed on policies with effective dates of November 1, 2009 and December 1, 2009, for new and renewals, respectively.
The Company expects the recently approved additional rate increase for our voluntary property book of business, averaging 20.2% statewide, to gain momentum and accrete throughout 2011. On April 16, 2010, Federated National announced it received approval from the Florida OIR for a premium rate increase for its assumed homeowners’ program from Citizens within the state of Florida. The premium rate increase, which averaged approximately 15%, was implemented on Citizens take-out policies only with an effective date of July 1, 2010.
During 2010 and 2009, the change to the cumulative wind mitigation credits afforded our policyholders totaled ($0.3) million and $9.8 million, respectively. As of December 31, 2010, 60.1% of our in-force homeowners’ policyholders were receiving wind mitigation credits totaling approximately $27.3 million (a 26.0% reduction of in-force premium), while 56.8% of our in-force homeowners’ policyholders were receiving wind mitigation credits totaling approximately $27.6 million, (a 24.2 % reduction of in-force premium), as of December 31, 2009.
The Company’s decrease in the sale of homeowners’ policies by $7.9 million, or 9.3%, to $76.8 million in 2010, compared with $84.7 million in 2009 is gross of reinsurance costs and net of Florida’s mandated homeowners’ wind mitigation discounts. As a result of our expanded underwriting criteria, our in-force homeowners’ policies decreased by approximately 9,500, or approximately 18.0%, to approximately 43,100 as of December 31, 2010, as compared with approximately 52,600 as of December 31, 2009.
The Company’s sale of commercial general liability policies decreased by $3.4 million to $11.9 million in 2010, compared with $15.3 million in 2009. The primary factor for this decrease has been the slowdown in the economy, which had a dramatic impact on the artisan contractor portfolio written by American Vehicle. An additional factor is our decision to restrict underwriting authority within specific commercial general liability classes and geographic areas.
The Company’s sale of auto insurance policies increased to $3.7 million in 2010, compared with $0.8 million in 2009. The Company’s sale of auto insurance included new and renewal policies in 2010, but was limited to renewal policies in 2009.
Net realized investment gains were $6.8 million in 2010, compared with $1.1 million in 2009. Specifically, net realized gains for equity marketable securities were $2.5 million in 2010 compared with $1.5 million in 2009; and for bonds, net realized gains were $4.3 million in 2010, compared with net realized loss of $0.4 million in 2009. Realized investment gains recognized were higher in 2010 than in 2009 because of the Company’s investment in marketable securities in diverse industries and an overweight in corporate bonds. These securities performed well in 2010 and were sold to lock in gains and bolster surplus.
During 2010 and 2009, we did not mark any equity investments to market value pursuant to guidelines prescribed in FASB issued guidance. In reaching a conclusion that a security is either other than temporarily or permanently impaired we consider such factors as the timeliness and completeness of expected dividends, principal and interest payments, ratings from nationally recognized statistical rating organizations such as Standard and Poor’s and Moody’s, as well as information released via the general media channels.
Factors that affect unpaid losses and LAE include the estimates made on a claim-by-claim basis known as “case reserves” coupled with bulk estimates known as IBNR. Periodic estimates by management of the ultimate costs required to settle all claim files are based on the Company’s analysis of historical data and estimations of the impact of numerous factors such as (i) per claim information; (ii) company and industry historical loss experience; (iii) legislative enactments, judicial decisions, legal developments in the awarding of damages, and changes in political attitudes; and (iv) trends in general economic conditions, including the effects of inflation.
Management revises its estimates based on the results of its analysis. This process assumes that experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for estimating the ultimate settlement of all claims. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of the reserves, because the eventual redundancy or deficiency is affected by multiple factors. Because of our process, reserves were decreased by approximately $4.1 million in 2010. This overall change includes a $5.3 million decrease in our homeowners’ program and a $1.2 million decrease in our commercial general liability program; these decreases are due to favorable experience in these markets based in part on enhanced underwriting and claim processing techniques. The overall decrease also includes a $2.4 million increase in connection with our re-launched automobile program which has experienced adverse development in its initial phase.
Salaries and wages increased $0.7 million, or 8.6%, to $8.6 million in 2010, compared with $7.9 million in 2009. The increase is due to staffing for additional lines of business.
During 2009, the Florida OIR granted Federated National an average statewide increase of 19% for new and renewal policies which were not part of the Citizens assumptions, effective November 1, 2009 and December 1, 2009, respectively.
Federated National and American Vehicle are currently rated by Demotech as "A" ("Exceptional"), which is the third of seven ratings, and defined as “Regardless of the severity of a general economic downturn or deterioration in the insurance cycle, insurers earning a FSR of “A” possess “Exceptional” financial stability related to maintaining surplus as regards to policyholders”. Demotech’s ratings are based upon factors of concern to agents, reinsurers and policyholders and are not primarily directed toward the protection of investors. However, our Demotech rating could be jeopardized by such other factors including adverse development and various surplus related ratio exceptions. On June 11, 2009, Demotech reaffirmed Federated National’s FSR of “A” (“Exceptional”).
The change in unearned premiums was a $10.3 million increase in 2009, compared with a $15.9 million decrease in 2008. The change was due to a $13.5 million increase in unearned homeowners’ insurance premiums of which $7.4 million is associated with our assumption of policies from Citizens, a $3.8 million decrease in unearned commercial general liability premiums, a $0.4 million increase in unearned automobile premiums, net of a $0.2 million increase in unearned flood premiums in 2009. These changes are a result of differences in written premium volume during this period as compared with the same period last year. See Gross Premiums Written.
Commission income decreased $0.2 million, or 15.5%, to $1.4 million in 2009, compared with $1.6 million in 2008. The primary sources of our commission income are in connection with our managing general agent services and our independent insurance agency, Insure-Link.
Managing general agent fees decreased $0.1 million, or 7.2%, to $1.6 million in 2009, compared with $1.7 million in 2008.
Net realized investment gains were $1.1 million in 2009, compared with net realized investment losses of $10.6 million in 2008.
During 2009, we did not mark any equity investments to market value pursuant to guidelines prescribed in FASB issued guidance. In reaching a conclusion that a security is either other than temporary or permanently impaired we consider such factors as the timeliness and completeness of expected dividends, principal and interest payments, ratings from nationally recognized statistical rating organizations such as Standard and Poor’s and Moody’s, as well as information released via the general media channels. During 2008 the pretax charge to operations was approximately $9.9 million in connection with our estimates of the net realizable value of these investments.
The table below depicts the net realized investment gains (losses) by investment category in 2009 as compared with 2008.
In accordance with GAAP, our loss ratio is computed as losses and LAE divided by net premiums earned. A lower loss ratio generally results in higher operating income. Our loss ratio for 2009 was 91.1% compared with 64.3% for 2008. The table below reflects the loss ratios by product line.
Operating and underwriting expenses increased $2.5 million, or 34.3%, to $9.7 million for 2009, compared with $7.2 million for 2008.
Salaries and wages increased $0.5 million, or 6.8%, to $7.9 million for 2009, compared with $7.4 million for 2008.
The provision for income tax benefit was $5.9 million for 2009, compared with $1.3 million for 2008. The effective rate for income taxes was 36.5% for 2009, compared with 34.8% for 2008.
A summary of long-term contractual obligations as of December 31, 2010 follows. The amounts represent estimates of gross undiscounted amounts payable over time.
In 2010, 2009 and 2008, operations used net operating cash flow of $6.5 million, $11.6 million and $1.5 million, respectively.
In 2010, operations generated $19.8 million of gross cash flow, due to a $7.3 million decrease in reinsurance recoverable, a $4.7 million decrease in premiums receivable, a $4.7 million decrease in income taxes recoverable, $1.0 million of amortization of investment discount, a $0.9 million decrease in various other assets, $0.4 million of non-cash compensation, a $0.4 million decrease in policy acquisition costs, net of amortization, a $0.2 million increase in premium deposits and customer credit balances and $0.2 million of depreciation and amortization.
Federated National’s and American Vehicle’s statutory capital surplus levels as of December 31, 2010 were approximately $18.7 million and $22.0 million, respectively, and their statutory net losses in 2010 were $12.0 million and $1.6 million, respectively.
For the years ended December 31, 2010 and 2009, there were no off balance sheet transactions.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 21st Century Holding Company as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
21st Century is an insurance holding company, which, through our subsidiaries and our contractual relationships with our independent agents and general agents, controls substantially all aspects of the insurance underwriting, distribution and claims processes. We are authorized to underwrite homeowners’, personal umbrella, commercial general liability, following form commercial excess liability, personal and commercial automobile, fire, allied lines, workers’ compensation, business personal property and commercial inland marine insurance. We are authorized to underwrite in various states on behalf of our wholly owned subsidiary, Federated National and other insurance carriers. Federated National is the resulting entity following the merger of Federated National into our other wholly owned subsidiary, American Vehicle, in January 2011. In connection with this merger, the Company, Federated National and American Vehicle entered into the Consent Order with the Florida OIR. See "Subsequent Events" footnote 23. We market and distribute our own and third-party insurers’ products and our other services through a network of independent agents. We also utilize a select number of general agents for the same purpose.
We are not certain how hurricanes and other insurable events will affect our future results of operations and liquidity. Loss and LAE are affected by a number of factors including the following.
During 2008 Federated National applied for and was granted, by the Florida OIR, a license to underwrite fire and allied lines insurance as an admitted carrier. Operations under Federated National’s allied lines began in 2008 as a cedant for the insurance policies it underwrites to the federal flood program. Operations under Federated National’s granted fire line of business began in 2009.
The Company’s sale of homeowners’ policies decreased $7.9 million, or 9.3%, to $76.8 million in 2010, compared with $84.7 million in 2009, primarily due to the effects of Florida’s mandated homeowners’ wind mitigation discounts and the 2009 inclusion of $17.9 million from policies we assumed from Citizens. The primary factor for the decrease in commercial general liability production is a slowdown in the economy which has a dramatic impact on the artisan contractor portfolio written by American Vehicle.
Assurance MGA, a wholly owned subsidiary of the Company, acts as Federated National’s and American Vehicle’s exclusive managing general agent in the state of Florida and is also licensed as a managing general agent in the states of Alabama, Arkansas, Georgia, Illinois, Louisiana, North Carolina, Mississippi, Missouri, New York, Nevada, South Carolina, Texas and Virginia. Assurance MGA has contracted with several unaffiliated insurance companies to sell commercial general liability, workers compensation, personal umbrella and inland marine insurance through Assurance MGA’s existing network of agents.
We recognize the income and expense on reinsurance contracts principally on a pro-rata basis over the term of the reinsurance contracts or until the reinsurers maximum liability is exhausted, whichever comes first. We are reinsured under separate reinsurance agreements for the different lines of business underwritten. Reinsurance contracts do not relieve us from our obligations to policyholders. We continually monitor our reinsurers to minimize our exposure to significant losses from reinsurer insolvencies. We only cede risks to reinsurers whom we believe to be financially sound. At December 31, 2010, all reinsurance recoverables are considered current and deemed collectable.
In June 2009, the FASB issued FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162 (“SFAS No. 168”) related to accounting standards codification and the hierarchy of GAAP. This guidance provides for the FASB Accounting Standards Codification (the “Codification”) to become the single official source of authoritative, nongovernmental United States GAAP. The Codification did not change GAAP but reorganized the literature. The guidance is effective for interim and annual periods ending after September 15, 2009.
In May 2009, the FASB issued FASB Statement No. 165, “Subsequent Events” (“SFAS No. 165”), which is now part of ASU Topic 855, Subsequent Events. The objective of the guidance is to establish general standards of accounting for disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. In particular, the guidance sets forth:
In accordance with this guidance, an entity should apply the requirements to interim or annual financial periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on the Company’s financial statements or condition.
We have used nearly 100% of the reinsurance coverage available for Hurricane Wilma and if any claims exceed this coverage amount, it could adversely impact our business, results of operations and/or financial condition.
The effects of emerging claim and coverage issues on our business are uncertain.
The fair value of our investments is estimated based on prices published by financial services or quotations received from securities dealers and is reflective of the interest rate environment that existed as of the close of business on December 31, 2010 and 2009. Changes in interest rates subsequent to December 31, 2010 may affect the fair value of our investments. Refer to Footnote 3(a) of the Notes to Consolidated Financial Statements for details.
The carrying amounts for the following financial instrument categories approximate their fair values at December 31, 2010 and 2009 because of their short-term nature: cash and short term investments, premiums receivable, finance contracts, due from reinsurers, revolving credit outstanding, bank overdraft, accounts payable and accrued expenses.
During the year ended December 31, 2010, the Company had two stock-based employee compensation plans, which are described later in Footnote 15, Stock Compensation Plans. Prior to January 1, 2006, we accounted for the plans under the recognition and measurement provisions of stock-based compensation using the intrinsic value method prescribed by the Accounting Principles Board (“APB”) and related Interpretation, as permitted by FASB issued guidance. Under these provisions, no stock-based employee compensation cost was recognized in the Statement of Operations as all options granted under those plans had an exercise price equal to or less than the market value of the underlying common stock on the date of grant.
Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation on property, plant and equipment is calculated on a straight-line basis over the following estimated useful lives: building and improvements - 30 years and furniture and fixtures - 7 years. We capitalize betterments and any other expenditure in excess of $500 if the asset is expected to have a useful life greater than one year. The carrying value of property, plant and equipment is periodically reviewed based on the expected future undiscounted operating cash flows of the related item. Based upon our most recent analysis, we believe that no impairment of property, plant and equipment exists at December 31, 2010.
Additional provisions contained in FASB issued guidance addresses the determination as to when an investment is considered impaired, whether that impairment is other-than temporary, and the measurement of an impairment loss. The Company’s policy for the valuation of temporarily impaired securities is to determine impairment based on the analysis of the following factors.
rating downgrade or other credit event (eg., failure to pay interest when due);
In reaching a conclusion that a security is either other-than-temporarily or permanently impaired we consider such factors as the timeliness and completeness of expected dividends, principal and interest payments, ratings from nationally recognized statistical rating organizations such as Standard and Poor’s and Moody’s as well as information released via the general media channels. During 2010 and 2009, in connection with this process, we have not charged any net realized investment loss to operations.
As of December 31, 2010, all of our securities are in good standing and not impaired, compared with $0.4 million of securities that were considered impaired as of December 31, 2009.
As of December 31, 2009, all of our securities were in good standing and not impaired as defined by FASB issued guidance, except for our holdings in Blackrock Pfd, Inc., which continued to be impaired by $0.4 million as of December 31, 2009, compared to the total $2.1 million as of December 31, 2008.
As of December 31, 2009, 36.9% of the investment portfolio was in corporate bonds, 34.4% was in obligations of states and political subdivisions, and 11.2% was in United States government bonds. Approximately 17.5% of the holdings were in equities related to diverse industries.
During April 2006, American Vehicle finalized a $15.0 million irrevocable letter of credit in conjunction with the 100% Quota Share Reinsurance Agreement with Republic Underwriters Insurance Company (“Republic”) which was terminated in April 2007. As of December 31, 2007, the letter of credit in favor of Republic totaled $10.0 million. As of December 31, 2008, the letter of credit in favor of Republic totaled $3.0 million. As of December 31, 2009, a letter of credit in favor of Republic totaled $1.0 million. As of December 31, 2010, the letter of credit in favor of Republic was replaced by a fully funded trust agreement that totaled $1.0 million.
The table below reflects our unrealized investment losses by investment class, aged for length of time in an unrealized loss position.
Below is a summary of debt securities at December 31, 2010 and 2009 by contractual or expected maturity periods. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
United States Treasury notes with a book value of $1,036,000 and $1,041,000, both maturing in 2012, were on deposit with the Florida OIR as of December 31, 2010, as required by law for American Vehicle and Federated National respectively, and are included with other investments held until maturity. These same United States Treasury notes had a book value of $1,039,000 and $1,045,000, respectively, as of December 31, 2009.
Proceeds from sales of debt and equity securities in 2010, 2009 and 2008 were approximately $149.0 million, $59.2 million and $150.3 million, respectively.
The activity in the allowance for credit losses was as follows.
We reinsure (cede) a portion of written premiums on an excess of loss or a quota-share basis to nonaffiliated insurance companies in order to limit our loss exposure. To the extent that reinsuring companies are unable to meet their obligations assumed under these reinsurance agreements, we remain primarily liable to our policyholders.
Activity in the liability for unpaid losses and LAE is summarized as follows.
For the year ended December 31, 2010, our actuarial firm determined range of loss and LAE reserves on a net basis range from a low of $55.0 million to a high of $80.1 million, with a best estimate of $63.2 million. The Company’s net loss and LAE reserves are carried at $57.6 million. The Company’s point estimate for its reserves as of December 31, 2010 is 8.7% below our actuary’s best estimate, which reflects management’s current analysis of the status and expected timing of our anticipated claims, our analysis of expected weather patterns in the regions in which we sell policies, our re-focus of our business growth efforts to areas outside of South Florida, and other factors.
We select an estimate of ultimate loss & DCCE for each accident quarter after considering the results of each projection method for the quarter and the relative maturity of the quarter (the time elapsed between the start of the quarter and December 31, 2010). Reserves for unpaid losses & DCCE for each quarter are the differences between these ultimate estimates and the amount already paid. The reserves for each quarter and each coverage are summed, and the result is the overall estimate of unpaid losses & DCCE liability for the company.
Interim - During 2010 our interim approach was very similar to the annual process noted above.
Expected loss ratios for the latest accident year and, in some cases for accident years prior to the latest accident year. The expected loss ratio generally reflects the projected loss ratio from prior accident years, adjusted for the loss trend and the effect of rate changes and other quantifiable factors on the loss ratio.
The Company has recorded a net deferred tax asset of $7.9 million and $4.7 million as of December 31, 2010 and 2009, respectively. Realization of net deferred tax asset is dependent on generating sufficient taxable income in future periods. Management believes that it is more likely than not that the deferred tax assets will be realized and as such no valuation allowance has been recorded against the net deferred tax asset. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At December 31, 2010 and 2009, based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would record valuation allowances as deemed appropriate in the period that the change in circumstances occurs, along with a corresponding increase or charge to net income. The resolution of tax reserves and changes in valuation allowances could be material to the Company’s results of operations for any period, but is not expected to be material to the Company’s financial position.
The insurance companies are also required to adhere to prescribed premium-to-capital surplus ratios. As of December 31, 2010, 2009 and 2008, both Federated National and American Vehicle were in compliance with the prescribed premium-to-surplus ratio.
Federated National’s regularly scheduled statutory examination for the five years ended December 31, 2009 was performed by the Florida OIR during 2010, and there were no material findings by the independent auditors in connection with this examination. American Vehicle’s regularly scheduled statutory examination for the five years ended December 31, 2010 will be performed by the Florida OIR during 2011. We may be the subject of additional targeted examinations or analysis. These examinations or analysis may result in one or more corrective orders being issued by the Florida OIR.
The table below reflects the range and test results for both Federated National and American Vehicle for the years ended December 31, 2010 and 2009, respectively.
GAAP differs in some respects from reporting practices prescribed or permitted by the Florida OIR. Federated National's statutory capital and surplus was $18.7 million and $21.0 million as of December 31, 2010 and 2009, respectively. Federated National's statutory net loss was $12.0 million, $12.2 million and $2.2 million for the years ended December 31, 2010, 2009 and 2008, respectively. Federated National’s statutory non-admitted assets were approximately $3.1 million and $1.7 million as of December 31, 2010 and 2009, respectively.
The Company also faces, in the ordinary course of business, lawsuits that seek damages beyond policy limits, commonly known as bad faith claims. During 2010, one such suit was brought against one of the Company's Affiliates. This suit was dismissed and the dismissal is currently under appeal. In the opinion of management, the ultimate disposition of this matter will not have a material adverse effect on our financial condition or results of operations. The Company continually evaluates potential liabilities and reserves for litigation of these types using the criteria established by FASB issued guidance. Under this guidance, reserves for a loss are recorded if the likelihood of occurrence is probable and the amount can be reasonably estimated. If a loss, while not probable, is judged to be reasonably possible, management will make an estimate of a possible range of loss or state that an estimate cannot be made. Management considers each legal action using this guidance and records reserves for losses as warranted.
We operate in a regulatory environment where certain entities and organizations have the authority to require us to participate in assessments. Currently these entities and organizations include, but are not limited to, Florida Insurance Guaranty Association (“FIGA”), Citizens Property Insurance Corporation (“Citizens”), Florida Hurricane Catastrophe Fund (“FHCF”) and Florida Joint Underwriters Insurance Company (“JUA”).
As a direct premium writer in the state of Florida, we are required to participate in certain insurer solvency associations under Florida Statutes Section 631.57(3) (a), administered by FIGA. Participation in these pools is based on our written premium by line of business to total premiums written statewide by all insurers. Participation has resulted in assessments against us, as it had in 2006 and 2007, and again on October 30, 2009. There were no assessments made during the years ended December 31, 2008 or 2010. Through 2007, we were assessed $6.6 million and in 2009 we were assessed an additional $0.6 million in connection with the insolvencies of domestic insurance companies. For statutory accounting these assessments are not charged to operations, in contrast, GAAP treatment is to charge current operations for the assessments. Through policyholder surcharges, as approved by the Florida OIR, we have since recouped $7.1 million in connection with these assessments.
The State Board of Administration ("SBA") and the FHCF Financing Corporation agreed to a resolution that would authorize the issuance and sale of FHCF post-event revenue bonds not to exceed $710 million. The proceeds of the bonds would be used for the reimbursement of insurance companies for additional claims due to hurricanes during the 2005 season. These bonds will have fixed interest rates, be exempt from federal income taxes and be secured by not yet implemented emergency assessments and reimbursement premiums. The inability to issue these bonds could result in the FHCF's need to accelerate additional assessments. We have not recorded any liability in connection with this initiative.
During a subsequent regularly scheduled meeting on or about December 18, 2006, Citizens Board determined an additional 2004 plan year deficit existed in the High Risk Account. Citizens decided that a $515 million Regular Assessment was in the best interest of Citizens and consistent with Florida Statutes. On this basis, Citizens certified for a Regular Assessment. Federated National’s participation in this assessment totaled $0.3 million.
Pursuant to Florida Statutes Section 627.3512, Federated National has since recouped the assessments by adding a surcharge to policies. Provisions contained in our excess of loss reinsurance policies provided for participation of our reinsurers totaling $1.8 million of the $2.3 million in assessments. There was no assessment made during the years 2007-2010.
Federated National and American Vehicle are also required to participate in an insurance apportionment plan under Florida Statutes Section 627.351, which is referred to as a JUA Plan. The JUA Plan provides for the equitable apportionment of any profits realized, or losses and expenses incurred, among participating automobile insurers. In the event of an underwriting deficit incurred by the JUA Plan which is not recovered through the policyholders in the JUA Plan, such deficit shall be recovered from the companies participating in the JUA Plan in the proportion that the net direct written premiums of each such member during the preceding calendar year bear to the aggregate net direct premiums written in this state by all members of the JUA Plan. Neither Federated National nor American Vehicle was assessed by the JUA Plan during 2010, 2009 or 2008. Future assessments by this association are undeterminable at this time.
The Company’s consolidated federal income tax returns for 2009, 2008, 2007, 2006 and 2005 are open for review by the IRS. The federal income tax returns for 2003 and 2002 have been examined by the IRS. The IRS concluded its examination for 2003 and 2002 and there were no material changes in the tax liability for those years. The 2004 income tax return remains open due to net operating loss carryforward to open years.
From July 27, 2007 to August 7, 2007, several securities class action lawsuits were filed against the Company and certain of its executive officers in the United States District Court for the Southern District of Florida (“District Court”) on behalf of all persons and entities (the “plaintiffs”) who purchased the Company's securities during the various class periods specified in the complaints. A consolidated amended complaint (“Class Litigation”) was filed on behalf of the class on January 22, 2008, Case No. 07-61057. The complaint alleged that the defendants made false and misleading statements and failed to accurately project the Company's business and financial performance during the putative class period. The plaintiffs sought an unspecified amount of damages and claim violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. On March 18, 2008, a verified shareholder derivative complaint Case No. 08-cv-60374 (“Derivative Litigation”) was filed against certain current or former officers and directors of the Company in the District Court.
On November 7, 2008, the District Court granted in part and denied in part the Company's motion to dismiss the consolidated class litigation with leave to amend by December 8, 2009 or the allegations dismissed would be deemed dismissed with prejudice without further order of the District Court. Lead plaintiffs did not seek to amend the consolidated complaint and the defendants answered. On July 29, 2008, the District Court granted the defendant’s motion to dismiss the plaintiff’s shareholder derivative complaint without prejudice. On August 27, 2009, the derivative plaintiff filed an amended shareholder derivative complaint. On March 30, 2009, following various motions by the parties, the District Court entered an order granting defendant’s renewed motion to stay the shareholder derivative action pending resolution of the class action.
At a settlement hearing held on January 29, 2010, the District Court approved the terms of the Stipulation of Settlement. On March 15, 2010, counsel for Plaintiffs acknowledged receipt of $2.4 million in settlement funds paid under the Company’s directors' and officers’ insurance policy.
Relative to the Company’s commitments stemming from operational matters, we sold our interest in the building housing our operations in Lauderdale Lake on or about March 1, 2006 to an unrelated party. As part of this transaction, we agreed to lease the same facilities for a five-year term. We amended the lease agreement and the note receivable on September 1, 2010. As part of the amendment, we discounted the note receivable and have discontinued the interest on the note. In consideration, we will pay a reduced lease payment for the remainder of the lease. Our lease for this office space expires in December 2011.
The expected future lease payouts in connection with this lease are as follows.
Rent expense was $0.7 million in 2010 and $0.6 million in 2009 and 2008.
In accordance with GAAP, net loss per share is antidilutive; therefore the basic and diluted loss per share is the same.
Revenue, including unaffiliated and inter-segment sales or transfers, is 10% or more of total revenue of all operating segments.
We implemented a stock option plan in September 1998, which expired in September 2008, and provided for the granting of stock options to officers, key employees and consultants. The objectives of this plan included attracting and retaining the best personnel, providing for additional performance incentives, and promoting our success by providing employees the opportunity to acquire common stock. Options outstanding under this plan were granted at prices either equal to or above the market value of the stock on the date of grant, typically vest over a four-year or five-year period and expire six or ten years after the grant date. Under this plan, we were authorized to grant options to purchase up to 900,000 common shares, and, as of December 31, 2010 and December 31, 2009, we had outstanding exercisable options to purchase 89,750 and 124,599 shares, respectively.
In 2002, we implemented the 2002 Stock Option Plan. The purpose of this plan is to advance our interests by providing an additional incentive to attract, retain and motivate highly qualified and competent persons who are key to the Company, including employees, consultants, independent contractors, officers and directors. Our success is largely dependent upon their efforts and judgment; therefore, by authorizing the grant of options to purchase common stock, we encourage stock ownership. Options outstanding under the plan were granted at prices either equal to or above the market value of the stock on the date of grant, typically vest over a five-year period, and expire six or ten years after the grant date. Under this plan, we are authorized to grant options to purchase up to 1,800,000 common shares, and, as of December 31, 2010 and December 31, 2009, we had outstanding exercisable options to purchase 574,800 and 736,951 shares, respectively.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB issued guidance using the modified-prospective-transition method. Under that transition method, compensation costs recognized during 2010 and 2009 include the following.
As a result of adopting FASB issued guidance on January 1, 2006, the Company’s loss from continuing operations before provision for income tax benefit and net loss for 2010 are higher by approximately $395,000 and $246,000, respectively, than if it had continued to account for share-based compensation under APB guidance.
As a result of adopting FASB issued guidance on January 1, 2006, the Company’s loss from continuing operations before provision for income tax benefit and net loss for 2009 are higher by approximately $425,000 and $265,000, respectively, than if it had continued to account for share-based compensation under APB guidance.
Basic and diluted loss per share for 2009 would have been $1.25, if the Company had not adopted FASB issued guidance, compared with reported basic and diluted loss per share of $1.29.
The weighted average fair value of options granted during 2010, 2009 and 2008 estimated on the date of grant using the Black-Scholes option-pricing model was $1.54 to $1.81; $0.61 to $1.29 and $0.59 to $3.63, respectively.
We have established a profit sharing plan under Section 401(k) of the Internal Revenue Code. This plan allows eligible employees, except key and highly compensated employees, to contribute up to 100 percent of their compensation not to exceed statutory limits. The Company match totaled $0.1 million during each of the years 2010, 2009 and 2008. The Company matches 50% up to 6% of employee contributions which vest incrementally over five years of service.
21st Century (the parent company only) has no long term obligations, guarantees or material contingencies as of December 31, 2010. The following summarizes the major categories of the parent company’s financial statements.