Retail agencies, which provide multiple points of sale under established local brands with personnel licensed and trained to sell insurance policies and ancillary products to individual consumers; and
Our recent history of recurring losses from operations, our failure to comply with the Financial Covenants in our senior secured credit facility, our failure to comply with the Illinois Department of Insurance reserve requirement, and the substantial liquidity needs we will face when its senior secured credit facility expires in January 2014 raise substantial doubt about the Company’s ability to continue as a going concern.
Frequency and Severity Trends - We use historical claim count development over discrete periods of time to estimate future claim count development. These projected ultimate claim counts are then divided by earned car years and expected claim frequency is selected. We utilize internal and external information to determine trends in loss severity and select ultimate severity by accident period. The resulting frequency and severity measures are then reviewed to ascertain their reasonableness in ultimate selections.
There are numerous factors, both internal and external, that we consider when evaluating the reasonableness of the various methods used to determine the actuarial best estimate of loss and loss adjustment expense reserves. Many of the factors vary for different states, programs, coverage groups, and accident periods. Some examples of internal factors considered are changes in product mix, changes in claims-handling practices, loss cost trends and underwriting standards and rules. With the most recent change in claims practices, a key variable that we are monitoring is the decrease in claim duration and the effect on the claims tail and severity. External factors considered include frequency, severity, changes in the limits required by the states, the effect of inflation on medical hospitalization, material repair and replacement costs, as well as general economic and legal trends.
We routinely monitor the collectability of the reinsurance recoverables of our insurance companies to determine if an amount is potentially uncollectible. Our evaluation is based on periodic reviews of our aged recoverables, as well as our assessment of recoverables due from reinsurers known to be in financial difficulty. Excluding VFIC, all significant reinsurers are currently rated A- or better by A. M. Best. Our estimates and judgment about collectability of the recoverables and the financial condition of reinsurers can change, and these changes can affect the level of reserve required.
At December 31, 2012, our receivables from reinsurers included $13.7 million net recoverable from VFIC. At December 31, 2012, the VFIC Trust held $16.8 million to collateralize the $13.7 million net recoverable from VFIC. We have, with the approval of the VFIC Special Deputy Receiver and the District Court, Austin, Texas, withdrawn $8.7 million through December 31, 2012 from the trust securing our reinsurance recoverables from VFIC, which represented 100% of the amount we paid in losses as of the date of the withdrawal covered by the VFIC reinsurance. We have made arrangements with the VFIC Special Deputy Receiver to submit quarterly statements for approval to withdraw additional funds from the trust based upon losses paid.
As of December 31, 2012 and 2011, we had no reserve for uncollectible reinsurance recoverables. We assessed the collectability of our year-end receivables and believe all amounts are collectible based on currently available information.
We conduct regular reviews to assess whether our investments are impaired and if any impairment is other than temporary. Factors considered by us in assessing whether an impairment is other than temporary include the credit quality of the investment, the duration of the impairment, our ability and intent to hold the investment until recovery or maturity and overall economic conditions. An other-than-temporary impairment is triggered in circumstances where (1) an entity has an intent to sell the security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, or (3) the entity does not expect to recover the entire amortized cost basis of the security (that is, a credit loss exists). Other-than-temporary impairments are separated into amounts representing credit losses which are recognized in earnings and amounts related to all other factors which are recognized in other comprehensive income (loss), a component of stockholders’ equity (deficit). All impairments on our available-for-sale investment securities were considered temporary in nature as of December 31, 2012 and 2011, respectively. Accordingly, unrealized losses are recorded in other comprehensive income (loss) on our consolidated balance sheet.
We completed our annual goodwill and indefinite lived intangible asset impairment analyses as of September 30, 2012. Current trends and recent developments resulted in management concluding that it was more likely than not that a goodwill impairment existed at September 30, 2012. Specifically, operating income and cash flow was less than plan, and premium production was below forecast. Due to our negative equity position as of September 30, 2012, GAAP required that we perform step two of the goodwill impairment test.
Due to prior period adverse loss development on our Michigan business recorded in 2011 and negative premium production trends, we revised our five-year forecast and updated our discounted cash flow model to assess the recoverability of recorded goodwill at December 31, 2011. A discount rate of 14.5% was used at December 31, 2011, which we believe remained an appropriate risk-adjusted discount rate based on our overall cost of capital. Based on this updated discounted cash flow analysis, we concluded that the carrying amount of goodwill was not recoverable. In step two of the goodwill impairment analysis, we determined the fair values of the Company’s assets and liabilities (including any unrecognized intangible assets) as if the Company had been acquired in a business combination. The resulting implied fair value was compared to the carrying value of goodwill with the excess carrying value resulting in an impairment. The step two analysis resulted in the recognition of a non-cash, pretax goodwill impairment charge of $140.1 million.
Indefinite-lived intangible assets primarily consist of trade names. In measuring the fair value of these intangible assets, the Company utilizes the relief-from-royalty method. This method assumes that trade names have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires an estimate of future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. This analysis indicated an impairment of indefinite-lived intangible assets of $0.2 million as of September 30, 2012. There was no impairment of indefinite-lived intangible assets in 2011.
Deferred acquisition costs. Deferred acquisition costs represent the deferral of expenses that we incur in the successful acquisition of new business or renewing existing business. Policy acquisition costs (primarily commissions, premium taxes, net of ceding commission income, related to the successful issuance of a policy) are deferred and charged against income ratably over the terms of the related policies. Management regularly reviews the categories of acquisition costs that are deferred and assesses the recoverability of this asset. A premium deficiency and a corresponding charge to income is recognized if the sum of the expected losses and loss adjustment expenses, unamortized acquisition costs and maintenance costs exceeds related unearned premiums and anticipated investment income. At December 31, 2012 and 2011, there were no premium deficiencies. Judgments as to the ultimate recoverability of such deferred costs are highly dependent upon estimated future loss costs associated with unearned premiums.
Income taxes. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, and the valuation allowance recorded against net deferred tax assets. The process involves summarizing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. In addition, we assess whether valuation allowances should be established against deferred tax assets based on consideration of all available evidence using a “more likely than not” standard. To the extent a valuation allowance is established in a period, an expense must be recorded within the income tax provision in the consolidated statement of operations. We carry a full valuation allowance as of December 31, 2012 and 2011 that was initially established in 2009.
ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, provides identical guidance with concurrently issued International Financial Reporting Standard (IFRS) 13, Fair Value Measurements. Most of the changes in the new standard are clarifications of existing guidance, but it expands the disclosures about fair value measurements, and requires the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position, but for which the fair value is required to be disclosed, which would consist of our debt, cash and cash equivalents, and fiduciary and restricted cash. In addition, for fair value measurements categorized as Level 3 within the fair value hierarchy, the valuation processes and sensitivity of the fair value measurements to changes in unobservable inputs shall be disclosed. This standard is effective for interim and annual periods beginning after December 15, 2011, and should be applied prospectively. The adoption of this standard did not impact our consolidated financial position, results of operations or cash flows.
As part of our corporate strategy, we treat our retail stores as independent agents (except those in Louisiana and Alabama), encouraging them to sell to their individual customers whatever products are most appropriate for and affordable to those customers. We believe that this offers our retail customers the best combination of service and value, developing stronger customer loyalty and improving customer retention. In practice, this means that in our retail stores, the relative proportion of the sales of our own insurance products as compared to the sales of the third-party policies will vary depending upon the competitiveness of our insurance products in the marketplace during the period. This reflects our intention of maintaining the margins in our insurance company subsidiaries, even at the cost of business lost to third-party carriers.
Premiums. One measurement of our performance is the level of gross premiums written and a second measurement is the relative proportion of premiums written through our three distribution channels. The following table displays our gross premiums written and assumed by distribution channel (in thousands):
Total gross premiums written for 2012 increased $7.8 million, or 3.4%, compared with 2011. This increase was primarily due to an increase in new business policies generated in Texas from independent agencies during 2012. New business policies in Texas increased 41.4% for 2012 compared with 2011, which was comprised of a 12.6% increase from our retail stores and a 131.3% increase from independent agents. We anticipate further gross written premium growth in 2013.
Total gross premiums written for 2011 decreased $124.7 million, or 35.2%, compared with 2010 as pricing increases and changes in underwriting guidelines as well as the suspension or limitation of new business production for unprofitable independent agent relationships, which included our withdrawal from the Michigan market, were the primary causes of the decline.
Gross premiums written of our policies in our retail distribution channel for 2012 decreased $8.9 million, or 5.6%, compared with 2011. This decrease is a result of a decline in renewal policies as a result of the pricing and underwriting actions undertaken in 2011. Third-party policies for 2012 decreased $4.8 million, or 8.8%, compared with 2011. In 2011, our policies produced by our retail agencies decreased $26.1 million, or 14.1%, compared with 2010 primarily due to the pricing and underwriting actions. Third-party policies for 2011 increased $6.1 million, or 12.6%, compared with 2010.
We introduced a multivariate pricing product in May 2011 for new business in Louisiana, in June 2011 for new business in Alabama and Texas, and in September 2011 for new business in Illinois.
Total net premiums earned for 2012 decreased $32.8 million, or 18.6%, compared with 2011. The decrease was primarily due to the decline in gross written premium for the first half of 2012. Total net premiums earned for 2011 decreased $156.7 million, or 47.0%, compared with 2010. The decrease was primarily due to the decline in gross written premium and the effects of reinsurance purchased for the fourth quarter of 2010 and year ended December 31, 2011.
In 2011, we entered into an additional quota-share agreement with a third-party reinsurance company under which we ceded 10% of business produced in Louisiana, Alabama, Texas and Illinois from September 1, 2011 through December 31, 2011. At December 31, 2011, this contract converted to a 40% quota-share reinsurance contract on the in-force business for the applicable states throughout 2012 and was extended to March 31, 2013. Written premiums ceded under this agreement totaled $82.0 million during 2012. Written premiums ceded under this agreement totaled $104.9 million since inception through December 31, 2012. In March 2013, we entered into a new quota-share agreement with this third-party reinsurance company effective March 31, 2013, which we cede 40% for the same four states as the expiring agreement and 100% of business originated through the Texas county mutual. This agreement is through December 31, 2013 but has automatic one-year renewals unless either party provides notice of intent not to renew within 75 days.
The Michigan Catastrophic Claims Association (MCCA) is the mandatory reinsurance facility that covers no-fault medical losses above a specific retention amount in Michigan. We stopped writing policies in Michigan in 2011. For policies effective in 2011 and 2010, the retention amount was $0.5 million. When we wrote personal automobile policies in the state of Michigan, we ceded premiums and claims to the MCCA. Funding for MCCA comes from assessments against active automobile insurers based upon their proportionate market share of the state’s automobile liability insurance market. Insurers are allowed to pass along this cost to Michigan automobile policyholders.
In February 2012, we entered into a one-year excess of loss reinsurance contract with third-party reinsurers which provides coverage for individual losses in excess of $100,000 up to $1.0 million.
Commissions, premium finance and agency fees are earned on sales of third-party companies’ products sold by our retail agencies. As described above, in our owned stores, there can be a shift in the relative proportion of the sales of third-party insurance products as compared to sales of our own carriers’ products due to the relative competitiveness of our insurance products that could result in an increase in our commission income and fees from non-affiliated third-party insurers. We negotiate commission rates with the various third-party carriers whose products we agree to sell in our retail stores. As a result, the level of third-party commission income will also vary depending upon the mix by carrier of third-party products that are sold. In addition, we earn fees from the sales of other products and services such as auto club memberships and bond cards offered by unaffiliated companies.
Commission income and fees for 2012 decreased $6.4 million, or 9.4%, compared with 2011. Premium finance revenue decreased $1.8 million, or 7.9%, due to decreases in the number of policies financed and revenue per policy. Policyholder fees decreased $3.6 million, or 15.0%, due to the lower overall volume of premiums written and a change in mix of states. Commissions and fees decreased $0.2 million, or 1.0%, due to a decrease in ancillary product sales.
Net investment income for 2011 increased $0.1 million, or 1.3%, compared with 2010. The increase was primarily due to a $1.3 million increase in income from our investment in real estate and from our investment in a hedge fund, which was partially offset by a 31.4% decrease in total average invested assets to $159.4 million during 2011 from $232.3 million during 2010 and a reduction in yields. The average investment yield was 2.3% (2.4% on a taxable equivalent basis) in 2011, compared with 2.3% (2.6% on a taxable equivalent basis) in 2010. The $1.3 million net increase in income from our investment in real estate is due to a new long-term lease with a federal agency for our Baton Rouge building that commenced in the fourth quarter of 2010.
In 2012, the percentage of calendar year losses and loss adjustment expense to net premiums earned (the net loss ratio) was 77.8% compared with 78.0% in 2011. On an accident year basis, the net loss ratio was 74.0% in 2012 compared with 75.1% in 2011. Loss adjustment expenses include all of the business subject to the quota-share treaties with ceding commission income booked as an offset to selling, general and administrative expenses. As such, the quota-share treaties’ impact on the loss ratio was to increase it by 4.6 points for 2012 and 3.1 points for 2011. Excluding the impact of the quota-share, the net loss ratio for the 2012 accident year was 69.4% and 71.1% for the 2011 accident year. This decrease reflects the pricing, claims and underwriting actions that commenced in the second half of 2010 through 2011. Also reflected in the above numbers is the effect of catastrophes. In the current accident year we have incurred catastrophes, net of reinsurance, equal to 2.0 points for 2012 compared to 1.5 points in 2011. Both of these numbers are higher than our long term average expectation of 0.5 points. The adverse prior period development taken in 2012 was primarily due to an increase in the estimated severity for Louisiana bodily injury claims in 2011.
compared with the 2010 accident year was due to the pricing and underwriting actions that were taken as well as additional process changes implemented in the handling of claims to mitigate the significant increases in severity that occurred due to the claims initiatives. Also, there was $10.1 million of adverse prior period development related to our Michigan business and $5.0 million of favorable prior period development in 2011 due to Vesta-related reserves, compared with 2010’s adverse loss development of $28.0 million primarily related to our 2009 Texas and Michigan business. The accident year decline was even more significant when the impact of the quota-share treaties that were entered into for the fourth quarter of 2010 and for all of 2011 are taken into account. As such, the quota-share treaties’ impact on the calendar year loss ratio was to increase it by 3.1 points for 2011 and 1.7 points for 2010. We ceased writing new business in Michigan in March 2011 and renewal business in June 2011.
Our losses and loss adjustment expenses are a blend of the specific estimated and actual costs of providing the coverage contracted by the purchasers of our insurance policies. We maintain reserves to cover our estimated ultimate liability for losses and related loss adjustment expenses for both reported and unreported claims on the insurance policies issued by our insurance companies. The establishment of appropriate reserves is an inherently uncertain process, involving actuarial and statistical projections of what we expect to be the cost of the ultimate settlement and administration of claims based on historical claims information, estimates of future trends in claims severity and other variable factors such as inflation. Significant change in claims practices that began in the third quarter of 2009 and continued throughout 2010 and 2011 added additional uncertainty to the reserving process. Due to the inherent uncertainty of estimating reserves, reserve estimates can be expected to vary from period to period. To the extent that our reserves prove to be inadequate in the future, we would be required to increase our reserves for losses and loss adjustment expenses and incur a charge to earnings in the period during which such reserves are increased. The historic development of our reserves for losses and loss adjustment expenses is not necessarily indicative of future trends in the development of these amounts.
Our losses, loss adjustment expense reserves and deposit liabilities of $138.9 million on a gross basis and $71.7 million on a net basis are our best estimates as of December 31, 2012. The analysis provided by our internal valuation methods indicated that the expected range for the ultimate liability for our losses and loss adjustment expense reserves, as of December 31, 2012, was between $107.9 million and $149.3 million on a gross basis and between $59.5 million and $77.9 million on a net basis.
Selling, General and Administrative Expenses. Another measurement of our performance that addresses our overall efficiency is the level of selling, general and administrative expenses. We recognize that our customers are primarily motivated by low prices. As a result, we strive to keep our costs as low as possible to be able to keep our prices affordable and thus to maximize our sales while still maintaining profitability. Our selling, general and administrative expenses include not only the cost of acquiring the insurance policies through our insurance carriers (the amortization of the deferred acquisition costs) and managing our insurance carriers and the retail stores, but also the costs of the holding company. The largest component of selling, general and administrative expenses is personnel costs, including compensation and benefits. Selling, general and administrative expenses for 2012 decreased $14.7 million, or 13.2%, compared with 2011, primarily due to a $10.0 million decline in policy acquisition expenses, a $2.2 million impairment in the fourth quarter of 2011 related to our office space, and a $3.7 million decline in employee compensation and benefits due to management actions to reduce expenses.
Selling, general and administrative expenses for 2011 decreased $54.2 million, or 32.9%, compared with 2010, primarily due to a decrease in premium production and recognition of ceding commission income from the quota-share reinsurance agreements. The primary drivers of the decrease were a drop in independent agent expense with lower premium volume and ceding commission income in 2011 from the quota-share reinsurance agreements. There was no ceding commission income in the first nine months of 2010. Also, the decrease for 2011 reflected a $9.0 million decrease in employee compensation and benefits primarily due to management actions to reduce expenses, a $5.2 million decrease due to lease termination and related charges incurred in 2010, a $3.1 million decrease due to lower IT consulting, a $1.9 million decrease in temporary labor costs and a $1.5 million decrease in severance costs.
terms of the related policies through amortization of the deferred policy acquisition costs. Thus, the amortization of deferred acquisition costs is correlated with earned premium and the ratio of amortization of deferred acquisition costs to earned premium in an accounting period is another measurement of performance.
Additions to deferred acquisition costs in 2012 increased by $8.5 million, and additions to the related amortization increased by $5.0 million compared with 2011. The increase in additions is primarily due to an increase in business written by independent agents and a decrease in ceded deferred policy acquisition expenses. The increase in amortization is due to an increase in net written premium and higher policy acquisition expenses.
Additions to deferred acquisition costs in 2011 decreased by $43.7 million and additions to the related amortization decreased by $37.8 million compared with 2010. The decrease in additions is primarily due to a decline in gross written premium and an increase in ceded commissions in 2011. The decrease in amortization is due to a decline in net written premium and lower policy acquisition expenses.
Interest expense for 2011 decreased $1.2 million, or 5.3%, compared with 2010. This decrease was due to a decrease in the amortization of debt discount, a decrease in the average debt outstanding and lower interest rates on the notes payable, which were partially offset by increases in the interest rate on the senior secured credit facility and interest expense on the lease obligation entered into in May 2010. The average principal balance of our senior secured credit facility was $105.2 million during 2011, a decrease of $13.8 million, or 11.6%, from the
average principal balance during 2010. In 2011, we repaid $9.8 million of the senior secured facility. Amortization of debt discount was $4.5 million in 2011 as compared with $6.1 million in 2010.
Our gross deferred tax assets prior to recognition of valuation allowance were $103.4 million and $91.2 million at December 31, 2012 and 2011, respectively. In assessing the realizability of our deferred tax assets, we considered whether it was more likely than not that our deferred tax assets will be realized based upon all available evidence, including scheduled reversal of deferred tax liabilities, historical operating results, projected future operating results, tax carry-back availability, and limitations pursuant to Section 382 of the Internal Revenue Code, among others. Based on this assessment, we began recording a valuation allowance against deferred taxes in December 2009. The valuation allowance was $101.9 million and $88.9 million at December 31, 2012 and 2011, respectively.
There are no restrictions on the payment of dividends by our non-insurance company subsidiaries other than state corporate laws regarding solvency. As a result, our non-insurance company subsidiaries generate revenues, profits and net cash flows that are generally unrestricted as to their availability for the payment of dividends and we have and expect to continue to use those revenues to service our corporate financial obligations, such as debt service and stockholder dividends. As of December 31, 2012, we had $2.3 million of cash and cash equivalents at our holding company and non-insurance company subsidiaries.
immediately seek recovery of an amount equal to the casualty loss value of the leased property, together with all other sums allegedly due to Lessor, which Lessor calculated as $9.6 million. Lessor informed the Company that it had directed the escrow agent to redeem the CDs securing the Company’s lease payment obligation and disburse to it the approximately $8.3 million in proceeds, which Lessor received on October 15, 2012. Lessor threatened legal action against the Company to recover the remaining $1.3 million, alleged liquidated damages. The Company contests that any event of default has occurred and also disputes Lessor’s demand for payment of the casualty loss value of the leased property. The Company has demanded that Lessor pay the Company approximately $0.5 million, the amount by which the CD redemption proceeds exceeded Lessor’s remaining interest in the lease at the time it declared default. On December 26, 2012, Lessor conveyed all right and interest in the leased property back to the Company, although both parties reserved all claims with respect to the disputed demands for payment. Neither party has filed suit at this time.
Our insurance company subsidiaries are subject to risk-based capital standards and other minimum capital and surplus requirements imposed under applicable state laws, including the laws of their state of domicile. The risk-based capital standards, based upon the Risk-Based Capital Model Act, adopted by the National Association of Insurance Commissioners (NAIC), require our insurance company subsidiaries to report their results of risk-based capital calculations to state departments of insurance and the NAIC. Failure to meet applicable risk-based capital requirements or minimum statutory capital requirements could subject us to further examination or corrective action imposed by state regulators, including limitations on our writing of additional business, state supervision or liquidation. Any changes in existing risk-based capital requirements or minimum statutory capital requirements may require us to increase our statutory capital levels. At December 31, 2012 and 2011, each of our insurance subsidiaries maintained a risk-based capital level that was in excess of an amount that would require any corrective actions. Effective January 1, 2012, the State of Illinois adopted the revised NAIC Risk-Based Capital Model Act that includes a risk-based capital trend test as another manner under which the company action level could be triggered and will be applied as of December 31, 2012. The test is applicable when an insurance company has a risk-based capital ratio between 200% and 300% and a combined ratio of more than 120%. All of our insurance subsidiaries were in compliance with the RBC trend test as of December 31, 2012.
Face amount of $8.0 million with a funded amount of $5.5 million, of which we contributed $4.6 million to Affirmative Insurance Company.
All additional proceeds not used to satisfy Affirmative Insurance Company’s reserve requirement as of September 30, 2012 as described in Note 12 are to be used solely for paying the incremental term loan lenders’ and administrative agent’s professional fees.
The incremental term loan lenders will receive an 8% prepayment premium of the principal amount if the incremental term loan is prepaid.
(2) In 2010, we entered into a capital lease obligation related to certain computer software, software licenses, and hardware currently used by and on the books of Affirmative Insurance Company.
(3) All of the outstanding notes payable at December 31, 2012 are redeemable in whole or in part after five years from issuance. For this disclosure, it is assumed that none of these notes will be redeemed before their contractual maturities and interest rates on these notes will remain at their current levels.
(5) On October 16, 2012, Affirmative and Accenture materially amended the Master Agreement effective September 1, 2012 (“Amended Agreement”), whereby we reassumed responsibility for managing substantially all of our IT operations, including our data center and applications management at an annual cost of $6.1 million. The Amended Agreement terminates on October 30, 2016, subject to termination for convenience provisions that may be invoked by us at any time, subject to the payment of certain stranded costs and other termination fees. Termination costs may be incurred for early termination under other specific circumstances as well. In addition, we contracted with a third party to provide network infrastructure services for $1.2 million annually.
We have audited the accompanying consolidated balance sheets of Affirmative Insurance Holdings, Inc. and subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company’s recent history of recurring losses from operations, failure to comply with the financial covenants in the senior secured credit facility, failure to comply with the Illinois Department of Insurance reserve requirement, and substantial liquidity needs the Company will face when the senior secured credit facility expires in January 2014 raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 3 to the consolidated financial statements, effective January 1, 2012 the Company adopted ASU 2010-26, Financial Services-Insurance (ASC Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.
The Illinois Insurance Code includes a reserve requirement that an insurer maintain an amount of qualifying investments, as defined, at least equal to the lesser of $250.0 million or 100% of its adjusted loss reserves and loss adjustment expenses reserves, as defined. As of December 31, 2011, Affirmative Insurance Company (AIC) was deficient in meeting the qualifying investments requirement by $18.9 million, but submitted a plan to cure such deficiency to the Illinois Department of Insurance by September 30, 2012, which was approved and through various actions AIC was deemed by the Illinois Department of Insurance to be in compliance with the reserve requirement as of September 30, 2012. As of December 31, 2012, AIC was deficient in meeting the qualifying investments requirement by $16.5 million. Management submitted a plan to cure the deficiency as of June 30, 2013, which includes a number of actions. The Illinois Department of Insurance has not yet responded to the plan. If the Illinois Department of Insurance does not approve the proposed plan or if AIC is not compliant as of the plan date of June 30, 2013, the Director of the Illinois Department of Insurance could deem AIC to be in
The Company is pursuing various actions to address these issues including, but not limited to, refinancing of its debt, obtaining additional financing or entering into certain transactions, such as sales of assets or operations.
The Company’s recent history of recurring losses from operations, its failure to comply with the Financial Covenants in its senior secured credit facility, its failure to comply with the Illinois Department of Insurance reserve requirement, and the substantial liquidity needs the Company will face when the senior secured credit facility expires in January 2014 raise substantial doubt about the Company’s ability to continue as a going concern.
Cash and Cash Equivalents • Cash and cash equivalents are highly liquid investments with an original maturity of ninety days or less and include principally money market funds, repurchase agreements, and other bank deposits. Unless the right-of-setoff requirements have been met, bank overdrafts or negative book cash balances, if material, are recorded in other liabilities in the consolidated balance sheet. As of December 31, 2012, $4.5 million negative book cash balance was reflected in other liabilities in the consolidated balance sheet.
income (loss), a separate component of stockholders’ equity (deficit). No income tax effect of unrealized gains and losses is reflected in other comprehensive income (loss) due to the Company carrying a full deferred tax valuation allowance. The Investment Committee periodically reviews investment portfolio results and evaluates strategies to maximize yields, to match maturity durations with anticipated needs, and to maintain compliance with investment guidelines.
Premium Finance Receivable • The Company recognizes interest and origination fees from finance receivables over the term of the finance contract. Late fee revenue is recognized when received. Premium finance receivables are secured by the underlying unearned policy premiums for which the Company obtains assignment from the policyholder in the event of non-payment. When a payment becomes past due, the Company cancels the underlying policy with the insurance carrier and receives the unearned premium to clear unpaid principal and interest. The loan is closed by writing off any uncollected amounts or refunding any overpayment to the customer. An insignificant amount of finance receivables are past due in excess of thirty days.
Deferred Policy Acquisition Costs, net of ceding commission • Deferred policy acquisition costs represent the deferral of expenses that the Company incurs in the successful acquisition of new business or renew existing
Identifiable intangible assets consist of brand names and state insurance company licenses. The Company reviews such intangibles for impairment whenever an impairment indicator exists. Management continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances occur, management assesses recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, an impairment loss is recognized based on the excess of the carrying amount over the fair value of the assets.
Variable Interest Entities • Affirmative Insurance Holdings Statutory Trust I (“Trust I”), is an unconsolidated trust subsidiary, for the sole purpose of issuing $30.0 million trust preferred securities in 2004. Trust I used the proceeds from the sale of these securities and the Company’s initial capital contribution to purchase $30.9 million of subordinated debt securities from the Company. The debt securities are the sole assets of Trust I, and the payments under the debt securities are the sole revenues of Trust I. The Company’s initial capital contribution consisted of the purchase of 928,000 common securities issued by Trust I for $928 thousand, which represented 3% of the total dollar amount of subordinated debentures issued.
The investment in the common securities totaling $1.7 million is reflected in other assets in the Company’s consolidated balance sheets. The subordinated debentures totaling $56.7 million are included in notes payable in the Company’s consolidated balance sheets.
Fair Value of Financial Instruments • The Company determines fair value for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.
Segment Reporting • The Company’s operations consist of designing, selling, underwriting and servicing non-standard personal automobile insurance policies. The Company is a holding company, with no operating revenues and only interest expense on corporate debt. The Company’s subsidiaries consist of several types of legal entities: insurance companies, underwriting agencies, retail agencies, premium finance companies and a service company from which all employees are paid. Insurance subsidiaries possess the certificates of authority and capital necessary to transact insurance business and issue policies, but they rely on both affiliated and unaffiliated underwriting agencies to design, distribute and service those policies. Underwriting agencies primarily design, distribute and service policies issued or reinsured by the Company’s insurance subsidiaries and that are distributed by the Company’s retail entities and by independent agents. Given the homogeneity of the Company’s products, the regulatory environments in which the Company operates, the nature of the Company’s customers and distribution channels, Company management monitors, controls and manages the business as an integrated entity offering non-standard personal automobile insurance products through multiple distribution channels.
Under SAP, all sales and other policy acquisition costs are expensed as they are incurred rather than capitalized and amortized over the expected life of the policy as required by GAAP. The immediate charge off of sales and acquisition expenses and other conservative valuations under SAP generally cause a lag between the sale of a policy and the emergence of reported earnings. Since this lag can reduce income from operations on a SAP basis, it can have the effect of reducing the amount of funds available for dividends from insurance companies.
Under SAP, certain assets, including deferred taxes, are designated as “non-admitted” and are charged directly to unassigned surplus, whereas under GAAP, such assets are included in the consolidated balance sheet net of an appropriate valuation allowance.
Recently Adopted Accounting Standards • In October 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-26, Financial Services-Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. ASU 2010-26 modified the definitions of the type of costs that can be capitalized in the successful acquisition of new and renewal insurance contracts. ASU 2010-26 requires incremental direct costs of successful contract acquisition as well as certain costs related to underwriting, policy issuance and processing, medical and inspection and sales force contract selling for successful contract acquisition to be capitalized. These incremental direct costs and other costs are those that are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. The Company retrospectively adopted ASU 2010-26 on January 1, 2012. The cumulative effect of the adoption was a decrease of shareholders’ equity by $11.3 million, net of tax, as of January 1, 2011.
(deficit). No income tax effect of unrealized gains and losses is reflected in other comprehensive income (loss) due to the Company carrying a full deferred tax valuation allowance. Gains and losses realized on the disposition of investment securities are determined on the specific-identification basis and credited or charged to income at the time of disposal.
Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties. The Company’s amortized cost and estimated fair values of fixed-income securities at December 31, 2012 by contractual maturity were as follows (in thousands):
The Company’s portfolio contained approximately 16 and 34 individual investment securities that were in an unrealized loss position as of December 31, 2012 and 2011, respectively.
The unrealized losses at December 31, 2012 were primarily attributable to changes in market interest rates since the securities were purchased. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. On a quarterly basis, the Company considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, duration and extent to which the fair value is less than cost. If the fair value of a debt security is less than its amortized cost basis, an other-than-temporary impairment may be triggered in circumstances where (1) an entity
The Company discontinued writing new policies in Michigan in March 2011 and renewing policies in June 2011.
The quota-share reinsurers and the excess of loss reinsurers all have A- ratings from A.M. Best. Accordingly, the Company believes there is minimal credit risk related to these reinsurance receivables. Under the reinsurance agreement with Vesta Insurance Group (VIG), including primarily Vesta Fire Insurance Corporation (VFIC), the Company’s wholly-owned subsidiary, Affirmative Insurance Company (AIC) had the right, under certain circumstances, to require VFIC to provide a letter of credit or establish a trust account to collateralize gross amounts due from VFIC under the reinsurance agreement. Accordingly, AIC and VFIC entered into a Security Fund Agreement effective September 2004. In August 2005, AIC received a letter from VFIC’s President that irrevocably confirmed VFIC’s duty and obligation under the Security Fund Agreement to provide security sufficient to satisfy VFIC’s gross obligations under the reinsurance agreement (the VFIC Trust). At December 31, 2012, the VFIC Trust held $16.8 million (after cumulative withdrawals of $8.7 million through December 31, 2012), consisting of $14.7 million of a U.S. Treasury money market account held in cash and cash equivalents, and $2.1 million of corporate bonds rated BBB+ or higher, to collateralize the $13.7 million net recoverable from VFIC.
The Company assumes reinsurance from a Texas county mutual insurance company (the county mutual) whereby the Company has assumed 100% of the policies issued by the county mutual for business produced by the Company’s owned general agents. The county mutual does not retain any of this business and there are no loss limits other than the underlying policy limits. AIC has established a trust to secure the Company’s obligation under this reinsurance contract with a balance of $27.7 million and $34.4 million as of December 31, 2012 and 2011, of which $9.9 million and $0.4 million was held in cash equivalents as of December 31, 2012 and 2011, respectively.
Property and equipment, net, consisted of the following as of December 31, 2012 and 2011 (in thousands):
The Company’s depreciation expense was $10.0 million, $9.5 million and $9.3 million for the years ended December 31, 2012, 2011 and 2010, respectively.
The Company completed its annual goodwill and indefinite lived intangible asset impairment analyses as of September 30, 2012. The Company reports under a single reporting segment and, as such, the goodwill analysis is measured under one reporting unit. Current trends and recent developments resulted in management concluding that it is more likely than not that a goodwill impairment existed at September 30, 2012. Specifically, operating income and cash flow was less than plan, and premium production was below forecast. Due to the Company’s negative equity position of $101.3 million as of September 30, 2012, prior to goodwill impairment, ASC 350-20-35-30 required that the Company perform step two of the goodwill impairment test.
Consistent with prior assessments, the fair value of the Company was determined using an internally developed discounted cash flow method. Management made significant assumptions and estimates about the extent and timing of future cash flows, growth rates, and discount rates that represent unobservable inputs into the valuation methodologies used to calculate fair value. A discount rate of 19% was used at September 30, 2012, which the Company believes adequately reflected an appropriate risk-adjusted discount rate based on its overall cost of capital and company-specific risk factors related to cash flow, debt covenants compliance, and regulatory risk, as discussed in Note 2. The cash flows were estimated over a significant future period of time, which made those estimates and assumptions subject to a high degree of uncertainty. Based upon the results of the assessment, the Company concluded that the carrying value of goodwill was fully impaired as of September 30, 2012. In step two of the goodwill impairment analysis, the Company determined the fair values of the Company’s assets and liabilities (including any unrecognized intangible assets) as if the Company had been acquired in a business combination. Determining the implied fair value of goodwill was judgmental in nature and involved the use of significant estimates and assumptions. The resulting implied fair value of goodwill was compared to the carrying value of goodwill, resulting in the write-off of the remaining goodwill balance of $23.4 million.
flow model to assess the recoverability of recorded goodwill at December 31, 2011. A discount rate of 14.5% was used at December 31, 2011, which the Company believed was an appropriate risk-adjusted discount rate based on the Company’s overall cost of capital. Based on this updated analysis, the Company concluded that the carrying amount of goodwill was not recoverable. In step two of the goodwill impairment analysis, the Company determined the fair values of the Company’s assets and liabilities (including any unrecognized intangible assets) as if the Company had been acquired in a business combination. The resulting implied fair value was compared to the carrying value of goodwill with the excess carrying value resulting in an impairment. The step two analysis resulted in the recognition of a non-cash, pretax goodwill impairment charge of $140.1 million.
Other intangible assets at December 31, 2012 and 2011 were as follows (in thousands):
In 2012, the percentage of calendar year losses and loss adjustment expense to net premiums earned (the net loss ratio) was 77.8% compared with 78.0% in 2011. On an accident year basis, the net loss ratio was 74.0% in 2012 compared with 75.1% in 2011. Loss adjustment expenses include all of the business subject to the quota-share treaties with ceding commission income booked as an offset to selling, general and administrative expenses. As such, the quota-share treaties’ impact on the loss ratio was to increase it by 4.6 points for 2012 and 3.1 points for 2011. Excluding the impact of the quota-share, the net loss ratio for the 2012 accident year was 69.4% and 71.1%
for the 2011 accident year. Management believes this decrease reflects the pricing, claims and underwriting actions that commenced in the second half of 2010 through 2011. Also reflected in the above numbers is the effect of catastrophes. In the current accident year we have incurred catastrophes, net of reinsurance, equal to 2.0 points for 2012 compared to 1.5 points in 2011. The adverse prior period development recognized in 2012 was primarily due to an increase in the estimated severity for Louisiana bodily injury claims in 2011.
In 2011, the percentage of calendar year losses and loss adjustment expense to net premiums earned (the loss ratio) was 78.0% compared with 93.8% in 2010. The accident year loss ratio for 2011 decreased 13.7 points compared with the current 2010 accident year loss ratio of 88.8% based on estimates as of December 31, 2011. The decline in the loss ratio for 2011 compared with the 2010 accident year was due to the pricing and underwriting actions that were taken as well as additional process changes implemented in the handling of claims to mitigate the significant increases in severity that occurred due to the claims initiatives. Also, there was $10.1 million of adverse prior period development related to our Michigan business and $5.0 million of favorable prior period development in 2011 due to Vesta-related reserves, compared with 2010’s adverse loss development of $28.0 million primarily related to our 2009 Texas and Michigan business. The accident year decline was even more significant when the impact of the quota-share treaties that were entered into for the fourth quarter of 2010 and for all of 2011 are taken into account. As such, the quota-share treaties’ impact on the calendar year loss ratio was to increase it by 3.1 points for 2011 and 1.7 points for 2010. We ceased writing new business in Michigan in March 2011 and renewal business in June 2011.
In 2010, the increase in the accident year loss ratio was due to increased losses on the Texas and Michigan businesses as well as significantly increased severity, which was primarily due to the claims transformation project that began in the third quarter of 2009. Significant pricing and underwriting actions were taken to address Texas and Michigan profitability in 2010 and in 2011. Also, additional controls were instituted in the handling of claims intended to mitigate the significant increases in severity that occurred.
The $25.8 million notes payable due 2035 are redeemable in whole or in part by the Company. The notes adjust quarterly to the three-month LIBOR rate plus 3.55%. The interest rate as of December 31, 2012 was 3.86%.
On February 28, 2012, the Company exercised its right to defer interest payments on the two Notes Payable mentioned above beginning with the scheduled interest payment due in March 2012 and continuing for a period of up to five years. The affected notes are associated with obligations to the Company’s unconsolidated trusts. The outstanding balance of the affected notes was $56.7 million as of December 31, 2012. The Company will continue to accrue interest on the principal during the interest deferral period and the unpaid deferred interest will also accrue interest. Deferred interest will be due and payable at the expiration of the interest deferral period and totaled $2.3 million as of December 31, 2012.
The $20.1 million notes payable due 2035 are redeemable in whole or in part by the Company. The notes adjust quarterly to the three-month LIBOR rate plus 3.95%. The interest rate as of December 31, 2012 was 4.26%.
The pricing under the senior secured credit facility is currently subject to a LIBOR floor of 3.00% plus 6.25%, and is tiered based on the Company’s leverage ratio. The interest rate as of December 31, 2012 was 11.25%. As of December 31, 2012 and 2011, the principal balance of the senior secured credit facility was $105.6 million and $99.6 million, respectively. The facility expires in January 2014.
The facility provides that on any interest payment date, the Company has the option to capitalize some of the interest payable and therefore increase the outstanding principal balance of the credit facility. The amount of interest eligible to be capitalized with each payment represents the excess interest above a minimum cash amount. During 2012 and 2011, the Company elected this option at certain interest payment dates and capitalized interest totaling $1.5 million and $1.0 million, respectively, which has been accrued as an increase to the principal balance of the credit facility.
The facility contains certain financial covenants, which include capital expenditure limitations, minimum interest coverage requirements, maximum leverage ratio requirements, minimum risk-based capital requirements, maximum loss ratio limitations, minimum fixed charge coverage ratios and a minimum consolidated net worth requirement, as well as other restrictive covenants. As time passes, certain of the financial covenants become increasingly more restrictive. The Company breached its leverage ratio, interest coverage and risk-based capital covenants under the senior secured credit facility as of December 31, 2012. However, the lenders for the facility have agreed to temporarily forbear from exercising their rights and remedies under the facility until the earlier of June 1, 2013, or the occurrence of a further event of default under the facility. See Note 2 regarding going concern and breach of covenants.
Of the total proceeds, $900 thousand was held in escrow to be used solely for paying the incremental term loan lenders’ and administrative agent’s professional fees.
The assets and stock of Affirmative Premium Finance Company were pledged and this entity became a guarantor of the debt.
The Company’s obligations under the facility are guaranteed by its material operating subsidiaries (other than the Company’s insurance companies) and are secured by a first lien security interest on all of the Company’s assets and the assets of its material operating subsidiaries (other than the Company’s insurance companies), including a pledge of 100% of the stock of AIC.
In 2007 and 2008, the Company entered into two interest rate swap arrangements to hedge its exposure to variable cash flows related to interest payments on its senior secured credit facility. One swap instrument expired in February 2011 and the remaining swap instrument expired in April 2011.
securities as collateral against all of the Company’s obligations under the lease. Securities pledged as collateral and held as available-for-sale securities were $8.3 million and $21.2 million as of December 31, 2012 and 2011, respectively. The dollar amount of collateral pledged is set to decline over the term of the lease as the Company makes the scheduled lease payments. The lease term is 60 months with monthly rental payments totaling approximately $0.6 million. At the end of the initial term, the Company will have the right to purchase the software for a nominal fee, after which all rights, title and interest would transfer to the Company.
On October 17, 2012, the Company received notice from one of the lessors (Lessor) under a capital lease obligation that, based upon Lessor’s claim of an alleged default under the terms of the applicable lease and security agreements, it elected to immediately seek recovery of an amount equal to the casualty loss value of the leased property, together with all other sums allegedly due to Lessor, which Lessor calculated as $9.6 million. Lessor informed the Company that it had directed the escrow agent to redeem the CDs securing the Company’s lease payment obligation and disburse to it the approximately $8.3 million in proceeds, which Lessor received on October 15, 2012. Lessor threatened legal action against the Company to recover the remaining $1.3 million, alleged liquidated damages. The Company contests that any event of default has occurred and also disputes Lessor’s demand for payment of the casualty loss value of the leased property. The Company has demanded that Lessor pay the Company approximately $0.5 million, the amount by which the CD redemption proceeds exceeded Lessor’s remaining interest in the lease at the time it declared default. On December 26, 2012, Lessor conveyed all right and interest in the leased property back to the Company, although both parties reserved all claims with respect to the disputed demands for payment. Neither party has filed suit at this time.
Property under capital lease consisted of the following as of December 31, 2012 and 2011 (in thousands):
As of December 31, 2012, the Company has available for income tax purposes federal net operating loss carryforwards (NOL’s), which may be used to offset future taxable income. The Company’s NOL’s expire as follows (in thousands):
At December 31, 2012, the Company’s 2007 and prior tax years were closed by the IRS.
On May 27, 2011, PropertyOne, Inc. filed suit against USAgencies, LLC and Affirmative Insurance Holdings, Inc. in the 19th Judicial District Court, Parish of East Baton Rouge, Louisiana. PropertyOne’s petition asserts equitable claims for payment of broker commissions arising out of the December 2009 execution of a lease with a federal agency for the Company’s building located in Baton Rouge, Louisiana. The Company removed the lawsuit to the U.S. District Court for the Middle District of Louisiana. The parties are now engaged in discovery. The Company believes that these claims lack merit and intends to defend itself vigorously. No estimate of the range of potential loss can be made at this time.
The Company has a 1998 Omnibus Incentive Plan (1998 Plan) under which the Company may grant options to employees, directors and consultants for up to 803,169 shares of common stock. The exercise prices are determined by the board of directors, but shall not be less than 100% of the fair market value on the grant date or, in the case of any employee who is deemed to own more than 10% of the voting power of all classes of the Company’s stock, not less than 110% of the fair market value. The terms of the options are also determined by the board of directors, but shall never exceed ten years or, in the case of any employee who is deemed to own more than 10% of the voting power of all classes of the Company’s common stock, shall not exceed five years. The Company does not expect to grant any further equity awards under the 1998 Plan, but intends to make all future awards under the 2004 Plan. While all awards previously granted under the 1998 Plan will remain outstanding, 1998 Plan shares will not be available for re-grant if these outstanding awards are forfeited or cancelled.
The Company recognized total compensation expense related to the stock options of $403,000, $378,000 and $472,000 during 2012, 2011 and 2010, respectively. Compensation expense is included in selling, general and administrative expenses in the consolidated statements of operations. Total unrecognized compensation expense related to unvested stock options was $578,000 at December 31, 2012, which will be recognized over a weighted-average period of approximately 1.6 years.
The Company recognized total compensation expense related to the restricted stock awards of $4,000, $159,000 and $553,000 during 2012, 2011 and 2010, respectively. Compensation expense is included in selling, general and administrative expenses in the consolidated statements of operations. As of December 31, 2012, there was no unrecognized compensation cost related to unvested restricted stock awards.
The aggregate fair value of restricted stock awards vested during 2012, 2011 and 2010 was $1,000, $15,000 and $141,000 at the date of vesting, respectively.
The Company sponsors a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees who meet specified service requirements. Under the plan, the Company may, at its discretion, match 100% of each employee’s contribution, up to 3% of the employee’s earnings, plus 50% of each employee’s contribution for the next 2% of the employee’s salary. There were no employer matching contributions to the 401(k) plan in 2012, 2011 or 2010.
Insurance Company. However, as mentioned previously, management believes the Company’s non-insurance company subsidiaries provide adequate cash flow to fund their own operations.
Level 3 - Unobservable inputs based on the Company’s own judgment as to assumptions a market participant would use, including inputs derived from extrapolation and interpolation that are not corroborated by observable market data.
Financial assets classified as Level 2 in the fair value hierarchy include mortgage-backed securities, tax-exempt securities, corporate bonds and FDIC-insured certificates of deposit. The fair value of these securities is determined based on observable market inputs provided by independent third-party pricing services. To date, the Company has not experienced a circumstance where it has determined that an adjustment is required to a quote or price received from independent third-party pricing sources. To the extent the Company determines that a price or quote is inconsistent with actual trading activity observed in that investment or similar investments, the Company would determine a fair value using this observable market information and disclose the occurrence of this circumstance. All of the fair values of securities disclosed in Level 2 are estimated based on independent third-party pricing services.
At December 31, 2012, the Company’s Level 3 financial assets include an investment in a hedge fund, which is presented as other invested assets in the consolidated balance sheets. The Company elected the fair value option for its investment in the hedge fund and measures the fair value of the hedge fund on the basis of the net asset value of the fund as reported by the fund manager. The hedge fund is primarily invested in residential mortgage-backed securities and other asset-backed securities which are recorded at fair value as determined by the fund manager. Such fair value determination is based on quoted marked prices, bid prices, or the fund manager’s proprietary valuation models where quoted prices are unavailable or deemed to be inadequately representative of fair value. Significant decreases in the fair value of the underlying securities in the hedge fund would result in a significantly lower fair value measurement of other invested assets as reported in the consolidated balance sheets.
Fair value measurements for assets in Level 3 for the year ended December 31, 2011 were as follows (in thousands):
Fair value measurements for liabilities in Level 3 for the year ended December 31, 2011 were as follows (in thousands):
The following table presents the carrying value and estimated fair value of the Company’s financial assets and liabilities disclosed, but not carried, at fair value at December 31, 2011 and the level within the fair value hierarchy (in thousands):
Affirmative Insurance Company of Michigan (AIC of Michigan), USAgencies Casualty Insurance Company, Inc. (Casualty), and USAgencies Direct Insurance Company (Direct) are wholly-owned subsidiaries of AIC and are included as common stock investments on AIC’s balance sheet in its statutory surplus. In November 2012, Insura was merged into AIC and Direct was sold from AIC to Casualty. The following table summarizes selected statutory information of the Company’s insurance subsidiaries ended December 31 (in thousands):
The following is a summary of the Company’s unaudited quarterly consolidated results from continuing operations for the years ended December 31, 2012 and 2011 (in thousands, except per share data):
The condensed financial information of the parent company, Affirmative Insurance Holdings, Inc. as of December 31, 2012 and 2011, and for each of the three years ended December 31, 2012, 2011 and 2010 is presented as follows (in thousands, except share data):
On March 15, 2013, the Company, through one of its indirect, wholly-owned subsidiaries, entered into a $4.8 million loan secured by commercial real estate to provide liquidity to AIC. The loan is evidenced by a promissory note secured by a mortgage security agreement and assignment of leases and rents on real estate located in Baton Rouge, Louisiana, which is held as investment in real property in the consolidated balance sheets.
The promissory note bears interest at a per annum fixed rate of 4.95%. The promissory note requires monthly payments of principal and interest with the final payment due on the maturity date of December 15, 2015. As security for payments, the Company has assigned rents due under the federal agency lease to a trustee. Pursuant to an escrow and servicing agreement, the trustee will receive rent due under the lease, make required payments due under the promissory note and maintain certain escrow accounts to pay for the necessary expenses of the property until the promissory note is paid in full.