Properties We own a 63,000 square foot building in Cleveland, Ohio. In addition, we lease an aggregate of approximately 175,000 square feet of office space in over twenty locations. See “Certain Relationships and Related Transactions.”
Selected Financial Data The following tables set forth our selected historical consolidated financial and operating information for the periods ended and as of the dates indicated. The selected consolidated income statement data for the years ended December 31, 2007, 2006 and 2005 and the balance sheet data as of December 31, 2007, 2006 are derived from our audited financial statements included elsewhere in this report, which have been audited by BDO Seidman LLP, our independent auditors. The selected balance sheet data as of December 31, 2005 is derived from our audited financial statements, which have been prepared in accordance with GAAP and have been audited by BDO Seidman, LLP. The selected consolidated income statement data for the years ended December 31, 2004 and 2003 and the balance sheet data as of December 31, 2004 and 2003 are derived from our audited financial statements, which have been prepared in accordance with GAAP and have been audited by Berenson LLP. These historical results are not necessarily indicative of results to be expected from any future period. You should read the following selected consolidated financial information together with the other information contained in this report, including the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this report.
(1) Results for a number of periods were affected by our various acquisitions from 2003 to 2007.
(2) Also included is the finance income of AFS Capital Corporation prior to its disposition in April 2005.
(3) Policy acquisition expenses include commissions paid directly to producers as well as premium taxes and assessments.
(7) In January 2006, the holder of our preferred stock agreed to a reduction of the dividend in 2005 to $1.2 million. Our preferred stock was exchanged for an aggregate of 10,285,714 shares of our common stock in February 2006.
Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Form 10-K. This discussion and analysis includes forward-looking statements that are subject to risks, uncertainties and other factors described under the caption “Risk Factors” beginning on page 40. These factors could cause our actual results in current and future periods to differ materially from those expressed in, or implied by, those forward-looking statements.
Overview The Company is a multinational specialty property and casualty insurer focused on generating consistent underwriting profits. We provide insurance coverage for small businesses and products with high volumes of insureds and loss profiles which we believe are predictable. We target lines of insurance that we believe generally are underserved by larger insurance carriers. The Company has grown by hiring teams of underwriters with expertise in our specialty lines and through acquisitions of access to distribution networks and renewal rights to established books of specialty insurance business. We have operations in three business segments:
The Company transacts business through seven insurance company subsidiaries: Technology Insurance Company, Inc. (“TIC”), Rochdale Insurance Company (“RIC”), Wesco Insurance Company (“WIC” or “Wesco”) and Associated Industries Insurance Company, Inc. (“AIIC”), which are domiciled in New Hampshire, New York, Delaware and Florida, respectively; and AmTrust International Insurance Ltd. (“AII”), AmTrust International Underwriters Limited (“AIU”) and IGI Insurance Company, Ltd. (“IGI”), which are domiciled in Bermuda, Ireland and England, respectively.
• TIC, which underwrites workers’ compensation insurance, specialty risk insurance and extended warranty coverage, and specialty middle-market property and casualty coverages in the United States;
• AIIC, which underwrites workers’ compensation insurance in the southeastern United States;
• IGI, which underwrites specialty risk and extended warranty coverage in the European Union; and
• AII, which reinsures the underwriting activities of TIC, RIC, AIIC, IGI and AIU.
Investment income is an important part of our business. Because the period of time between our receipt of premiums and the ultimate settlement of claims is often several years or longer, we are able to invest cash from premiums for significant periods of time. As a result, we are able to generate more investment income from our premiums as compared to insurance companies that operate in many other lines of business. Our net investment income (including finance income of AFS Capital Corporation prior to its disposition in April 2005) was $50.9 million, $27.6 million and $11.5 million for the years ended 2007, 2006 and 2005, respectively. As of December 31, 2007, the Company held 11.5% of total invested assets in cash and cash equivalents. This relatively high concentration of cash and cash equivalents represents our reaction to the relatively flat debt yield curve and should enable the Company to quickly redeploy substantial assets should the interest rate environment change.
Maiden is a Bermuda insurance holding company formed by Michael Karfunkel, George Karfunkel and Barry Zyskind, the principal shareholders, and, respectively, the Chairman of the Board of Directors, a Director, and the Chief Executive Officer and Director of AmTrust. Messrs. Karfunkel and Mr. Zyskind contributed $50 million to Maiden Insurance and have a 18.6% ownership interest, inclusive of warrant exercise, in Maiden. In July 2007, Maiden raised approximately $480.6 million in a private placement. Maiden Insurance Company, Ltd. (“Maiden Insurance”), a wholly-owned subsidiary of Maiden, is a Bermuda reinsurer.
Acquisitions Associated In September 2007, we acquired 100% of the issued and outstanding stock of Associated Industries Insurance Services, Inc. (“AIIS”) a Florida-based workers’ compensation managing general agency, and its wholly-owned subsidiary, Associated Industries Insurance Company (“AIIC”), (collectively, “Associated”). Associated is a Florida workers’ compensation insurer, also licensed in Alabama, Georgia and Mississippi. We paid approximately $38.9 million for AIIS. From the date of acquisition, Associated wrote approximately $17.7 million of premiums in 2007.
Principal Revenue and Expense Items Gross Premium Written. Gross premium written represent estimated premiums from each insurance policy that we write, including as part of an assigned risk plan, during a reporting period based on the effective date of the individual policy. Certain policies that are underwritten by the Company are subject to premium audit at that policy’s cancellation or expiration. The final actual gross premiums written may vary from the original estimate based on changes to the final rating parameters or classifications of the policy.
Net Premium Written. Net premium written are gross premiums written less that portion of premium that is ceded to third party reinsurers under reinsurance agreements. The amount ceded under these reinsurance agreements is based on a contractual formula contained in the individual reinsurance agreement.
Net Investment Income. We invest our statutory surplus funds and the funds supporting our insurance liabilities in fixed maturity and equity securities. A portion of these funds are held in cash and cash equivalents. Our net investment income includes interest and dividends earned on our invested assets. Net realized gains and losses on our investments are reported separately from our net investment income. Net realized gains occur when our investment securities are sold for more than their costs or amortized costs, as applicable. Net realized losses occur when our investment securities are sold for less than their costs or amortized costs, as applicable, or are written down as a result of an other-than-temporary impairment. We classify equity securities and most of our fixed maturity securities as available-for-sale and the remainder of our fixed maturity securities as held-to-maturity . Net unrealized gains (losses) on those securities classified as available-for-sale are reported separately within accumulated other comprehensive income on our balance sheet.
Commission and Fee Income. We recognize commission and fee revenue as a servicing carrier for the Georgia and Virginia assigned risk plans. In addition, we also offer claims adjusting and loss control services for fees to unaffiliated third parties. We also recognize fee income associated with the issuance of workers’ compensation policies for installment fees, in jurisdictions where it is permitted and approved, and reinstatement fees, fees charged to reinstate a policy after it has been cancelled for non-payment, in jurisdictions where it is permitted and approved. Our specialty risk and extended warranty business generates fee revenue
Policy Acquisition Expenses. Policy acquisition expenses comprise commissions directly attributable to those agents, wholesalers or brokers that produce premiums written on our behalf. In most instances, commissions are paid based on collected premium, which reduces our credit risk exposure associated with producers in case a policyholder does not pay a premium. We pay state and local taxes, licenses and fees, assessments and contributions to various state workers’ compensation guaranty funds based on our premiums or losses in each state. Surcharges that the Company may be required to charge insureds in certain jurisdictions are considered accrued liabilities, rather than expense.
Other Insurance General and Administrative Expenses. Other insurance general and administrative expenses are comprised of other costs associated with the Company’s insurance activities such as federal excise tax, postage, telephones and internet access charges as well as legal and auditing fees and board and bureau charges.
Net Expense Ratio. The net expense ratio is a measure of an insurance company’s operational efficiency in administering its business. Expressed as a percentage, this is the ratio of the sum of policy acquisition expenses, salaries and benefits, and other insurance general and administrative expenses less ceding commission to net premiums earned.
Net Combined Ratio. The net combined ratio is a measure of an insurance company’s overall underwriting profit. This is the sum of the net loss and net expense ratios. If the net combined ratio is at or above 100, an insurance company cannot be profitable without investment income, and may not be profitable if investment income is insufficient.
Annualized Return on Equity. Return on equity is calculated by dividing net income (net income excludes results of discontinued operations as well as any currency gain or loss associated with discontinued operations on an after tax basis) by the average of shareholders’ equity.
In the event of a 5% increase in claims frequency as measured by payroll, which we believe is the most important assumption regarding our business, the Company’s loss reserves as of December 31, 2007 would be understated by $8.5 million and would result in an after tax reduction in shareholders’ equity of $5.5 million. In the event of a 5% increase in claim severity, which is the average incurred loss per claim, the Company’s loss and loss adjustment expense reserves would be understated by $1.8 million and would result in an after tax reduction in shareholders’ equity of $1.2 million.
Premiums. Insurance premiums, other than specialty risk and extended warranty, are recognized as earned on the straight-line basis over the contract period. Insurance premiums on specialty risk and extended warranty are earned based on estimated program coverage periods. These estimates are based on the expected distribution of coverage periods by contract at inception, because a single contract may contain multiple coverage period options and these estimates are revised based on the actual coverage periods selected by the insured. Unearned premiums represent the portion of premiums written which is applicable to the unexpired term of the contract or policy in force. Premium adjustments on contracts and audit premiums are based on estimates made over the contract period. The Company also estimates an allowance for doubtful accounts based on a percentage of premium. The Company reviews its bad debt write-offs at least annually and adjusts
Deferred Income Taxes. Deferred income taxes reflect the impact of “temporary differences” between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The deferred tax asset primarily consists of the book versus tax differences for premiums earned, loss and loss adjustment expense reserve discounting, policy acquisition costs, earned but unbilled premiums, and unrealized holding gains and losses on marketable equity securities. Changes in deferred income tax assets and liabilities that are associated with components of other comprehensive income, primarily unrealized investment gains and losses, are recorded directly to other comprehensive income. Otherwise, changes in deferred income tax assets and liabilities are included as a component of income tax expense. The Company evaluates the recoverability of deferred tax assets. A valuation allowance is recorded to reduce any
portion of the deferred tax asset that is expected to more likely not be realized. Adjustments to the valuation allowance will be made if there is a change in management’s assessment of the amount of the deferred tax asset that’s realizable.
Impairment of Investment Securities. Impairment of an investment security results in a reduction of the carrying value of the security and the realization of a loss when the fair value of the security declines below our cost or amortized cost, as applicable, for the security and the impairment is deemed to be other-than-temporary. The Company’s Investment Committee (“Committee”) reviews quarterly for other-than-temporary-impairment (“OTTI”), whereby it evaluates each security which has an unrealized loss as of the end of each reporting period. The Committee uses a set of quantitative and qualitative criteria to review our investment portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of our investments. Some of the criteria we consider include:
specialty risk and extended warranty segment resulted, primarily, from the underwriting of new coverage plans in the United States and the acquisition of IGI in the second quarter of 2007, which contributed $58.2 million of premiums. The increase in the specialty middle-market gross premiums written resulted from, primarily, from the underwriting of new programs and the growth of existing programs.
Net Premium Written. Net premiums written decreased $16.4 million or 3.8% from $436.3 million to $419.9 million for the year ended December 31, 2006 and 2007, respectively. The decrease of $16.4 million was net of $247.3 million of written premium ceded to Maiden Insurance during the second half of 2007 under the terms of a reinsurance agreement entered into during the third quarter of 2007. Before cessions to Maiden Insurance, net written premium increased $230.9 million for 2007 compared 2006. The increase before cessions by segment was: small business workers’ compensation - $40.5 million; specialty risk and extended warranty - $125.2 million; and specialty middle market property and casualty - $65.2 million.
Net Realized Gains on Investments. Net realized gains on investments for the year ended December 31, 2007 were $4.6 million, compared to $14.8 million for the same period in 2006. The decrease relates primarily to the write-down of four equity securities by approximately $8.4 million that were other-than-temporarily-impaired during 2007.
Policy Acquisition Expense, Salaries and Benefits Expense and Other Insurance General and Administrative Expense less Ceding Commission. Policy acquisition expense, salaries and benefits expense and other insurance general and administrative expense less ceding commission increased $0.1 million or 0.2% from
$92.4 million to $92.5 million for the year ended December 31, 2006 and 2007, respectively. The expense ratio for the same periods decreased from 28.0% to 20.8%, respectively. The decrease in expense ratio resulted primarily from ceding commissions of $59.1 million in 2007 earned through the reinsurance agreement with Maiden Insurance in 2007.
Interest Expense. Interest expense for the year ended December 31, 2007 was $10.1 million, compared to $5.3 million for the same period in 2006. The increase was attributable primarily from the issuance of $40 million and $30 million of junior subordinated debentures issued by the Company in March 2007 and July 2006, respectively.
Commission and Fee Income. Fee income increased from $8.2 million for the year ended December 31, 2005 to $12.4 million for the year ended December 31, 2006. This $4.2 million or 51.2% increase is the result of increased fee revenue from the both the administration of the Georgia Assigned Risk Plan and specialty risk and extended warranty clients for which a subsidiary of the Company acts as program administrator.
Net Premium Earned. Net premium earned increased $16.6 million or 7.5% from $221.1 million to $237.7 million for the year ended December 31, 2006 and 2007, respectively. The increase of $16.6 million was net of earned premium of $47.4 million ceded to Maiden Insurance during the second half of 2007. Before cessions to Maiden Insurance, earned premium increased $64.0 million for 2007 compared to 2006. This increase resulted from an increase in gross premium written.
Net Premiums Earned less Expenses Included in Combined Ratio (Underwriting Income). Underwriting income increased to $43.5 million for the year ended December 31, 2007, from $19.5 million for the year ended December 31, 2006, an increase of $24.0 million or 123.4%. This increase is attributable to strong growth in revenue combined with an improvement in the loss ratio and a consistent expense ratio.
Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased $24.9 million or 23.1% from $107.9 million for the year ended December 31, 2005 to $132.8 million for the year ended December 31, 2006. Nevertheless, the Company’s loss ratio for the segment for the year ended December 31, 2006 decreased to 60.1% from 65.0% for the year ended December 31, 2005. The decrease in the loss ratio resulted from revised actuarially projected ultimate losses based on the Company’s experience. As the Company writes more business in the small workers’ compensation segment and its data becomes more reliable, the Company assigns more weight to its individual loss development factors than to industry-wide factors in setting its reserves. Because the Company’s losses (with the exception of losses attributable to the NCCI Pools) have developed more favorably than the industry, as a whole, the Company’s actuarially projected reserves have proportionally decreased.
Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased $32.7 million or 66.2% from $49.2 million to $81.9 million for the year ended December 31, 2006 and 2007, respectively. The loss ratio for the segment for decreased to 70.5% for 2007 from 77.9% for 2006. Before cessions to Maiden, loss and loss adjustment expense would have been $109.4 million and the loss ratio would have been 73.1% in 2007. The decrease in the loss ratio is primarily the result of the Company discontinuing a 2006 program from its European book of business.
Specialty Risk and Extended Warranty Segment Results of Operation 2006 Compared to 2005 Gross Premiums Written. Gross premiums written increased from $81.6 million for the year ended December 31, 2005 to $132.8 million for the year ended December 31, 2006. The increase of $51.3 million or 62.8% is the result of writing several new programs in 2006 as well as expanding programs with existing clients. The majority of the increase came from growth in the U.S. and this trend is expected to continue in 2007.
Net Premiums Written. Net premiums written increased from $70.9 million to $113.5 million for the years ended December 31, 2005 and 2006, respectively. This $42.6 million or 60.1% increase was the result of an increase in gross premiums written in 2006. In addition, certain coverage plans written in the United States were not covered by the Munich Re variable quota-share reinsurance treaty. As a result, the Company ceded a smaller percentage of gross premiums written to its reinsurers.
Net Premiums Earned less Expenses Included in Combined Ratio (Underwriting Income). Underwriting income increased to $4.3 million for the year ended December 31, 2006 from $4.1 million for the year ended December 31, 2005, a increase of $0.2 million or 14%. This increase is attributable to growth in revenue offset by an increase in the loss ratio.
Net Premium Earned. Net premium earned increased $45.8 million or 102.4% from $44.7 million to $90.5 million for the year ended 2006 and 2007, respectively. The increase of $45.8 million was net of earned premium ceded to Maiden Insurance during the second half of 2007. Before cessions to Maiden Insurance, earned premium increased $119.6 million for the year ended December 31, 2007 compared to the year ended December 31, 2006. This increase was a result of an increase in gross premium written.
Policy Acquisition Expense, Salaries and Benefits Expense and Other Insurance General and Administrative Expense less Ceding Commission. Policy acquisition expense, salaries and benefits expense and other insurance general and administrative expense less Ceding Commission increased $11.6 million from $13.9 million for the year ended December 31, 2006 to $25.5 million for the year ended December 31, 2007. The expense ratio for the same periods decreased from 31.0% to 28.2%, respectively. The decrease in expense ratio resulted primarily from ceding commission of $14.9 million earned in the second half of 2007 through the reinsurance agreement with Maiden Insurance during the third quarter of 2007.
Our investment portfolio, including cash and cash equivalents, had a carrying value of $1,261.6 million and $810.3 million (excluding $28.0 million and $13.9 million of other investments) as of December 31, 2007 and 2006, respectively, and is summarized in the table below by type of investment.
Other investments represented approximately 2.2% and 1.7% of the Company’s total investment portfolio as of December 31, 2007 and 2006, respectively. At December 31, 2007 other investments consisted primarily of limited partnerships or hedge funds totaling $16.5 million, its equity investment in Warrantech of $3.1 million, real estate of $1.3 million and miscellaneous investments of $2.1 million. Additionally, the Company has an equity investment in a company in the amount of $5.0 million in the form of a secured loan. The loan bears interest at 6.0% per annum and is payable quarterly. The loan matures in 2008 at which time Amtrust expects to convert the loan into common shares.
As of December 31, 2007, our fixed maturity portfolio (excluding time and short-term deposits) had a carrying value of $888.7 million, which represented approximately 70.4% of the carrying value of our investments, including cash and cash equivalents. The table below summarizes the credit quality of our fixed maturity securities as of December 31, 2007 as rated by Standard and Poor’s.
At December 31, 2007, the Company had $30.8 million of gross unrealized losses related to marketable equity securities. The Company’s investments in marketable equity securities consist of investments in common stock across a wide range of sectors. The Company evaluated the near-term prospects for recovery of fair value in relation to the severity and duration of the impairment and has determined in each case that the probability of recovery is reasonable. Within the Company’s portfolio of common stocks, 23 equity securities
At December 31, 2007, the company held 205 fixed maturity issues with a net unrealized loss position, which included 78 fixed maturities with an unrealized loss greater than 12 months and 127 fixed maturities with an unrealized loss less than 12 months. The unrealized loss is attributable to the credit crunch that had developed in the third quarter of 2007 and kept on deteriorating. This condition caused credit spreads to widen significantly, especially when it concerns borrowers relatively more involved in the financial market. Unrealized losses in bank and financial issues increased due to concerned about sub-prime mortgage market and widening corporate spreads. Spreads on 10-year A-rated financials increased from +96 at year-end 2006 to +225 at year-end 2007. Corporate bonds represent 32.6% of the fair value of our fixed maturities and 95.7% of our total unrealized losses of our fixed maturities. The company owns 149 corporate bonds in the industrial, bank & financial and other sectors, which have a fair value of approximately 6.3 percent, 26.1 percent, and 0.2%, respectfully, and 20.1%, 75.1% and 0.5% of total unrealized losses of our fixed maturities. The company expects the spreads to narrow again as the economic situation is improved and the market price for these securities recovers.
Based on the Company’s ability and intent to hold these investments for a sufficient time for recovery of fair value, the Company does not consider these investments to be other-than-temporarily-impaired at December 31, 2007. The table below summarizes the gross unrealized losses of our fixed maturity and equity securities as of December 31, 2007:
Pursuant to an Intercompany Management Agreement, AmTrust performs certain management functions for RIC, TIC and WIC, including:
• retention and maintenance of all files, books, records and accounts;
• submission of form and rate filings, preparation and submission of applications for certificates of authority; and
AmTrust’s income is generated primarily from our insurance subsidiaries. The laws of New York, New Hampshire, Delaware, Florida, Ireland, Great Britain and Bermuda regulate and restrict, under certain circumstances, the ability of our insurance subsidiaries to pay dividends to AmTrust. In addition, the terms of AmTrust’s junior subordinated debentures limit AmTrust’s ability to pay dividends on its common stock, and future borrowings may include prohibitions and restrictions on dividends. See “Dividend Policy,” “Regulation” and “Risk Factors.” We paid a dividend of $9.6 million to the holders of our preferred stock in July 2005 and an additional dividend of $1.2 million in December 2005. We paid a dividend of $1.2 million to our shareholders in 2006. We paid $5.4 million of dividends in 2007. In December 2007, our board of directors approved a quarterly cash dividend of $0.04 per share on its Common Stock beginning in the fourth quarter of 2007, subject to financial results, quarterly approval and declaration by our board of directors.
The use of reinsurance is an important component of our business strategy. See “Business - Reinsurance.” As losses are incurred and recorded, we record amounts recoverable from third party reinsurers for the portion of the paid loss and loss adjustment expense as well as outstanding loss and loss adjustment expense reserve and IBNR that is ceded to third party reinsurers.
We purchase excess of loss workers’ compensation reinsurance to protect us from the impact of large losses. Under this reinsurance program, we pay our reinsurers a percentage of our net or gross earned insurance premiums, subject to certain minimum reinsurance premium requirements. Our reinsurance program for 2007 and 2008 includes multiple reinsurers in five layers of reinsurance that provide us with coverage in excess of a certain specified amount per loss occurrence, or retention level. Our reinsurance program for 2007 and 2008 provides coverage for claims in excess of $1.0 million per occurrence with coverage up to $130.0 million per occurrence, subject to certain exclusions and restrictions, including a $1.25 million aggregate deductible applicable to the first layer of this reinsurance coverage. Our reinsurance for workers’ compensation losses caused by acts of terrorism is more limited than our reinsurance for other types of workers’ compensation losses. We have obtained reinsurance for this line of business with higher limits as our exposures have increased. As the scale of our workers’ compensation business has increased, we have also increased the amount of risk we retain.
Since January, 2003, we have maintained quota share reinsurance for our extended warranty and accidental damage insurance underwritten in the European Union and certain coverage plans underwritten in the United States. This reinsurance also covers certain other risks we underwrite in the European Union. Under these quota share reinsurance arrangements, we cede a portion (15% for the majority of the risks) of each reinsured risk to our reinsurers and recover the same percentage of ceded loss and loss adjustment expenses, subject to certain exclusions and restrictions. In return for this reinsurance protection, we pay the reinsurers their pro rata shares of the insurance premiums on the ceded business, less a ceding or overriding commission. For the most part, coverage for losses arising out of acts of terrorism is excluded from this reinsurance. The majority of our extended warranty and accidental damage insurance underwritten in the United States is not reinsured with third party reinsurers.
The following table summarizes the ten reinsurers that account for approximately 85% of our reinsurance recoverables on paid and unpaid losses and loss adjustment expenses.
(2) In connection with the acquisition of WIC, HSBC reinsures 100% of WIC’s pre-acquisition business. In addition, we agreed to write certain types of insurance that is 100% reinsured by HSBC.
Comparison of Years Ended December 31, 2007 and 2006 Net cash provided by operating activities was $248.2 million for the year ended December 31, 2007, compared to $191.0 million for the same period in 2006. For the year ended 2007, major components of cash provided by operating activities were premiums settled of $729.4 million, partially offset by claim payments of $180.1 million. Major components of cash provided by operating activities for the year ended December 31, 2006 were premiums settled of $369.9 million, partially offset by claim payments of $108.8 million.
Comparison of Years Ended December 31, 2006 and 2005 Net cash provided by operating activities was $191.0 million for the year ended December 31, 2006, compared to $118.0 million for the same period in 2005. For the year ended 2006, major components of cash provided by operating activities were premiums collected of $369.6 million, partially offset by claim payments
Contractual Obligations and Commitments The following table sets forth certain of our contractual obligations as of December 31, 2007:
(3) We are required by the terms of certain purchase agreements to pay the seller an annual minimum override payment based on a contractually defined formula. The amount payable to the seller under these agreements could be materially higher if the premiums produced generate a higher payment than the calculated minimum payment. Additionally, the Company is holding approximately $4.3 million of the purchase price, which will be distributed upon resolution of a pending tax matter.