THE SELECTED CONSOLIDATED STATEMENT OF OPERATIONS DATA FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 AND THE SELECTED CONSOLIDATED BALANCE SHEET DATA AS OF DECEMBER 31, 2005 AND 2004 ARE DERIVED FROM OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT. THE SELECTED CONSOLIDATED STATEMENT OF OPERATIONS DATA FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 AND THE SELECTED CONSOLIDATED BALANCE SHEET DATA AS OF DECEMBER 31, 2003, 2002, 2001 ARE DERIVED FROM OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS NOT INCLUDED IN THIS REPORT. THESE FINANCIAL STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. OUR HISTORICAL RESULTS MAY NOT BE INDICATIVE OF THE OPERATING RESULTS TO BE EXPECTED IN ANY FUTURE PERIOD.
Year Ended December 31, --------------------------------------------------------------------- 2005 2004 2003 2002 2001 --------- --------- --------- --------- --------- (Dollars and shares in thousands, except per-share data)
STATEMENT OF OPERATIONS DATA: REVENUES: Net premiums earned $ 256,603 $ 181,186 $ 164,287 $ 196,478 $ 141,303 Net investment income 10,798 6,077 4,803 5,689 5,776 Net realized investment (loss) gain (385) 982 2,644 320 524 Other income (loss) 285 332 (2,464)(1) 1,446 1,103 --------- --------- --------- --------- --------- Total revenue $ 267,301 $ 188,577 $ 169,270 $ 203,933 $ 148,706 --------- --------- --------- --------- --------- EXPENSES: Losses and loss adjustment expenses(2) $ 143,663 $ 119,121 $ 109,518 $ 126,386 $ 100,831 Policy acquisition expenses 51,508(3) 19,499 21,735 40,925 21,379 Underwriting and other expenses 34,447 32,280 30,244 25,579 33,478(4) Dividends to policyholders 8,612 6,983 5,796 5,931 8,519 Interest expense 2,960 1,389 410 352 848 --------- --------- --------- --------- --------- Total expenses $ 241,190 $ 179,272 $ 167,703 $ 199,173 $ 165,055 --------- --------- --------- --------- --------- Income (loss) before income taxes 26,111 9,305 1,567 4,760 (16,349) Income tax expense (benefit) 9,326 4,275 632 1,379 (6,391) --------- --------- --------- --------- --------- Net income (loss) before cumulative effect of accounting change 16,785 5,030 935 3,381 (9,958) --------- --------- --------- --------- --------- Cumulative effect of accounting change -- -- -- 2,455(5) -- --------- --------- --------- --------- --------- Net income (loss) $ 16,785 $ 5,030 $ 935 $ 5,836 $ (9,958) ========= ========= ========= ========= ========= OPERATING DATA: Direct premiums written $ 270,331 $ 260,173 $ 231,083 $ 227,241 $ 175,305 Gross premiums written 277,095 270,981 239,484 232,536 178,215 Net premiums written 267,652 217,472 144,952 209,537 173,432 PER SHARE DATA: Earnings (loss) per share Basic $ 3.13 $ 0.94 $ 0.17 $ 1.07 $ (1.83) Diluted 1.76 0.53 0.10 0.61 (1.83) Weighted average common shares outstanding Basic 5,367 5,368 5,368 5,437 5,437 Diluted 9,562 9,564 9,562 9,628 5,437 SELECTED INSURANCE RATIOS: Net loss ratio(6) 56.0% 65.7% 66.7% 64.3% 71.4% Net policy acquisition expense ratio(7) 20.1 10.8 13.2 20.8 15.1 Underwriting and other expense ratio(8) 13.4 17.8 18.4 13.0 23.7 --------- --------- --------- --------- --------- Net combined ratio, excluding policyholder dividends(9) 89.5% 94.3% 98.3% 98.1% 110.2% --------- --------- --------- --------- --------- Dividend ratio(10) 3.4 3.9 3.5 3.0 6.0 --------- --------- --------- --------- --------- Net combined ratio, including policyholder dividends(11) 92.9% 98.2% 101.8% 101.1% 116.2% ========= ========= ========= ========= =========
As of December 31, ----------------------------------------------- 2005 2004 2003 2002 2001 ------- ------- ------- ------- ------- (Dollars and shares in thousands, except per share data)
Balance Sheet Data: ASSETS Cash and investments 332,186 261,119 183,884 141,532 118,547 Premiums receivable--net 104,522 101,638 96,818 94,133 76,583 Reinsurance recoverables 83,880 115,870 99,894 84,907 89,206 Deferred policy acquisition costs 19,413 14,695 4,902 16,149 12,241 Deferred income taxes 20,871 17,646 19,368 12,065 14,268 Other assets 22,455 32,814 52,506 64,351 45,968 Total assets 583,327 543,782 457,372 413,137 356,813 LIABILITIES AND STOCKHOLDER'S EQUITY Unpaid losses and loss adjustment expenses 309,857 297,698 251,122 227,714 198,954 Unearned and advance premiums 115,574 114,235 102,804 89,350 69,284 Long term debt 40,036 41,821 11,607 7,438 10,313 Other liabilities 45,879 31,693 37,055 32,492 30,242 Total liabilities 511,346 485,447 402,588 356,994 308,793 Preferred stock 23,098 23,098 23,098 23,098 23,098 Total stockholders' equity 71,981 58,335 54,784 56,143 48,020 Total liabilities and stockholder's equity 583,327 543,782 457,372 413,137 356,813
(4) Reflects a $10.8 million write off of reinsurance recoverables of $8.3 million owed to us by Reliance Insurance Company and $2.5 million owed to us by Legion Insurance Company. We considered these reinsurance recoverables uncollectible because Reliance was subject to an order of liquidation and Legion was placed into rehabilitation by the Pennsylvania Insurance Commissioner.
(11) Sum of ratios computed in footnotes 6, 7, 8, 9 and 10.
o insurance losses and LAE relating to the insurance policies we write directly and to the portion of the losses assumed from the NWCRP, including estimates for losses incurred during the period and changes in estimates from prior periods, which we refer to in this report as gross losses and LAE, less the portion of those insurance losses and LAE that we cede to our reinsurers, which we refer to in this report as ceded losses and LAE. We refer to the difference as net losses and LAE;
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"), requires management to make estimates and assumptions that affect amounts reported in the financial statements. As more information becomes known, these estimates and assumptions could change, which would have an impact on the amounts reported in the future. We view as our critical accounting policies the estimates and assumptions used in establishing our loss reserves, reinsurance, deposit accounting, reinsurance recoverables, premium revenues, deferred policy acquisition costs, valuation of investments and dividends to policyholders.
We are directly liable for losses and LAE under the terms of insurance policies our insurance subsidiaries underwrite. We are also liable for a proportional share of losses from the NWCRP. The NWCRP is a mechanism used to reinsure the risk underwritten by state created workers' compensation insurance. Insurance companies are generally required to participate in these state created workers' compensation insurance programs as a condition to conducting business in these states. The NWCRP is administered by NCCI. Each year, NCCI establishes an estimated reserve for losses arising from this pool and notifies us of our proportionate share of loss reserves from this pool. We add our share of the loss reserves from this pool to the loss reserves for the insurance policies our insurance subsidiaries underwrite. Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the insurer's payment of that loss. To recognize liabilities for unpaid loss and LAE, insurers establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported net losses and loss expenses. Except as mandated by Texas statutes on fatality claims where the calculation takes into account the life expectancy of a surviving spouse, we do not discount our reserves for estimated losses and LAE.
o development in excess of claim reserves on claims that have been reported to us.
We develop our IBNR estimate separately, for each state and accident year, based on our review of the results of nine separate actuarial methods (five separate methods for accident years prior to 1998) and actuarial judgment. After reviewing the nine actuarial methods for each state and accident year, we select an estimate of ultimate losses (the "point estimate") for each state and accident year. Our point estimate of IBNR is the compilation of the estimate of ultimate losses by state for each accident year and equals the total ultimate loss estimate minus the incurred losses. We book to this point estimate. We observe that the selected estimate ultimate loss is most sensitive to four of the nine actuarial methods examined:
All of the methods described above utilize expected loss payment and reporting patterns for losses and our actual paid and reported losses and LAE to estimate the reserve. The expected payment and reporting patterns are based on state specific industry patterns as well as our historical patterns. The expected payment and reporting patterns can change whenever there is new information that leads the consulting actuary to believe that the pattern of future loss payments will be different from what has historically been expected. In addition, the first two methods utilize our initial expected loss ratio (the ratio of losses and LAE incurred to net premiums earned) to estimate the reserve. The initial expected loss ratio is estimated based on the average premium level of our risks relative to industry expected losses for the size and types of risks we write. The initial expected loss ratio will change between accident years depending on our pricing in those accident years, but will not change between successive evaluations of losses.
Reserve estimates derived using the Bornhuetter-Ferguson methods are driven by our assumptions related to the expected loss ratio and the expected reporting or payment pattern for losses, while reserve estimates derived using the loss development methods are solely driven by our assumptions related to the expected reporting and payment patterns, and are not at all affected by our assumptions related to the expected loss ratio. Reporting and payment pattern refers to the estimated percentage of the ultimate losses for a particular state that have been reported or paid at a particular valuation date. The table below quantifies the impact that reasonably likely changes in these three variables--the expected loss ratio, the expected payment pattern and the expected reporting pattern for losses--would have on the recorded net and gross reserves for losses and LAE at December 31, 2005. Due to the selection of weights in the table above, changes in the initial expected loss ratio do not have an effect on accident years prior to 2000.
SENSITIVITY OF NET LOSS RESERVES TO CHANGES IN ACTUARIAL ASSUMPTIONS as of December 31, 2005 (all dollar amounts in thousands)
Change in Gross Loss Change in Assumptions Reserves ---------------------------------------------------- ------------------- Improve Expected Loss Ratio by 10% $ (9,906) Deteriorate Expected Loss Ratio by 10% 9,906 Improve Paid Loss Development Pattern by 10% (13,361) Deteriorate Paid Loss Development Pattern by 10% 11,059 Improve Incurred Loss Development Pattern by 10% (4,347) Deteriorate Incurred Loss Development Pattern by 10% 3,873 Improve Expected Loss Ratio by 10% and Improve Loss Development Patterns by 10% (27,046) Improve Expected Loss Ratio by 10% and Deteriorate Loss Development Patterns by 10% 4,493 Deteriorate Expected Loss Ratio by 10% and Improve Loss Development Patterns by 10% (8,370) Deteriorate Expected Loss Ratio by 10% and Deteriorate Loss Development Patterns by 10% 25,371
We believe that loss ratios 10% above or below our expected loss ratio constitute a reasonable range of expectations for each state and accident year in which we have loss reserves. In addition, we believe the adjustments (5%) that we made to improve or deteriorate the paid and incurred loss development patterns are also reasonably likely outcomes. Assumptions about loss development patterns are made based on our entire claim history back to 1982, while assumptions about expected loss ratios are made based on our current pricing and only up to two years of aggregated industry data. As a result of the longer relevant history of loss patterns, loss development patterns are considerably more stable and warrant a smaller variation.
We require our reinsurance intermediary to perform a risk transfer analysis on every quota share reinsurance treaty we consider. In addition, prior to the inception of the policy, we and our independent actuaries independently performed this analysis. The risk transfer analysis uses actuarial methods to estimate the probability of significant loss to the reinsurer under the treaty.
Two of our reinsurance treaties, one from 2001 and one from 2002, did not transfer sufficient risk to the assuming reinsurer to be accounted for as reinsurance and were accounted for using deposit accounting. We terminated these agreements in December 2003 and received $34.1 million in cash from the reinsurer and recorded a pre-tax charge of $2.1 million for 2003.
To the extent recoverable from future policy revenues, costs that vary with and are primarily related to the production of new and renewal business, such as commissions paid to agents and our other acquisition expenses, net of reinsurance ceding allowances received, have been deferred and are amortized over the effective period of the related insurance policies. The method followed in computing deferred policy acquisition costs limits such deferred amounts to their estimated realizable value. The ultimate recoverability of deferred acquisition costs is dependent on the continued profitability of our insurance underwriting. If our insurance underwriting ceases to be profitable, we may have to write off a portion of our deferred policy acquisition costs, resulting in a further charge to income in the period in which the underwriting losses are recognized. At December 31, 2005 and 2004, our deferred acquisition costs were $19.4 million and $14.7 million, respectively.
We evaluate our operations by monitoring key measures of growth and profitability. We measure our growth by examining our gross premiums. We measure our operating results by examining our net income, return on equity, and our loss, expense, dividend and combined ratios. The following provides further explanation of the key measures that we use to evaluate our results:
NET PREMIUMS EARNED. Net premiums earned represents that portion of net premiums written equal to the expired portion of the time for which the insurance policy was in effect during the financial year and is recognized as revenue. It represents the portion of premium that belongs to us on the part of the policy period that has passed and for which coverage has been provided. Net premiums earned is used to calculate the net loss, net expense and dividend ratios, as indicated below.
While calendar year loss ratios are useful in measuring our profitability, we believe that accident year loss ratios are more useful in evaluating our underwriting performance for any particular year because an accident year loss ratio better matches premium and loss information. Furthermore, accident year loss ratios are not distorted by adjustments to reserves established for insured events that occurred in other periods, which may be influenced by factors that are not generally applicable to all years. The loss ratios provided in this report are calendar year loss ratios, except where they are expressly identified as accident year loss ratios. See "--Results of Operations," "Business--Overview" and "--Regulation."
NET EXPENSE RATIO. The net expense ratio is a measure of an insurance company's operational efficiency in producing, underwriting and administering its business. It includes policy acquisition expenses and underwriting and other expenses. Expressed as a percentage, this is the ratio of net operating expenses to net premiums earned. For net expense ratio purposes, operating expenses of an insurance company exclude investment expenses and dividends to policyholders and are reduced by other income.
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, net expense and dividend 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.
RETURN ON EQUITY. This percentage is the result of dividing net income for a period by the average stockholders' equity for that period. We use return on equity to measure our growth and profitability. We can compare our return on equity to that of other companies in our industry to see how we are performing compared to our competition.
GROSS PREMIUMS WRITTEN increased 2.3% in 2005 over 2004, and 13.2% in 2004 over 2003. Gross premiums written were relatively flat in 2005 primarily due to a decrease in assumed premiums from the NWCRP involuntary pool, which declined $4.0 million to $6.8 million in 2005 from $10.8 million in 2004. Direct written premium increased 3.9% to $ 270.3 million in 2005 from $260.1 million in 2004. This is attributable to an increase in the number of policies written. The increase in gross premiums written in 2004 was due to an increase in the number of policies written.. The average policy premium has not changed significantly from 2003 to 2005. Direct premiums written comprised approximately 29.6% of new business in 2005 and 36% in 2004.
2004 to 4.4% for 2005 as a result of an increase in our retention level. During 2004, the net premiums earned increased $16.9 million, or 10.3%, from $164.3 million in 2003. The increase is less than the increase in gross premiums earned primarily due to our use of quota share reinsurance in 2004. The table below sets forth the calculation of net premiums earned and this amount as a percentage of gross premiums earned:
We observed that a general downward trend in loss development factors in place for some time accelerated in 2003. We believe that much of this trend is due to the effects of Florida Senate Bill 50A, enacted on October 1, 2003. This law was a workers' compensation reform act that reduced attorney fees and involvement on open workers' compensation claims in Florida. In this environment, there is less uncertainty surrounding the ultimate cost of claims, and there is a greater ability to settle claims promptly. Both of these factors lower loss development. Based on the entirety of our loss development history, including the observations noted above, with each passing quarter of favorable loss development, the loss development experience becomes more credible, and the expected future development decreases. This resulted in a change in 2005 in selected loss development factors affecting all accident years. Excluding ULAE and the NWCRP Pool, Florida experienced $11.0 million in redundancy, Texas $5.3 million, Georgia $3.0 million, Virginia $2.7 million and Indiana $2.7 million. Overall, the 2005 accident year net loss ratio was 61.3% at December 31, 2005, compared to a 2004 accident year net loss ratio of 67.1 at December 31, 2004. In 2005, NWCRP pool losses of $7.3 million were allocated to us, representing 88.1% of net premiums earned from that pool during 2005.
UNDERWRITING AND OTHER EXPENSES decreased as a percentage of net premiums earned to 13.4% from 17.8%. The increase in net premiums earned in the 2005 period significantly reduced the net expense ratio. The $2.3 million increase in underwriting and other expenses was attributable to an increase in human resource expenses by $1.0 million in 2005 from 2004 attributable to additional employees and higher compensation costs. Improved collection practices in 2004 enabled us to lower the allowance for doubtful accounts by approximately $3.0 million to $6.0 million. Therefore, the bad debt expense for 2004 was under $0.2 million. The continued improvement in our collections experience as a result of our proactive approach has resulted in additional reductions in our allowance of $1.4 million in 2005.
For the Twelve Months Ended December 31, ----------------------------------------- 2005 2004 2003 --------- --------- --------- Cash and cash equivalents provided by (used in): Operating activities $ 81,530 $ 54,759 $ 864 Investing activities (108,877) (102,862) (7,260) Financing activities (1,789) 30,214 46,680 --------- --------- --------- Change in cash and cash equivalents ($ 29,136) ($ 17,889) $ 40,284 ========= ========= =========
In October 2000, we entered into a credit facility with AmSouth Bank under which we borrowed $11.3 million. In April 2003, the loan was amended and the aggregate borrowing increased to $12.5 million. The loan calls for monthly payments of principal and of interest at the 30-day LIBOR rate plus a margin. At December 31, 2005, the principal balance of the loan was $8.0 million and the annual interest rate was 6.86%. The loan contains various restrictive covenants generally pertaining to levels of indebtedness and limitations on incurrence of capital expenditures. Additionally, our insurance subsidiaries must comply with financial covenant restrictions, including ratios of leverage, debt service, current maturity coverage, net premiums written to surplus and risk based capital. The loan is collateralized by $25.5 million of internal surplus notes issued to us by our insurance subsidiaries and the stock of AmCOMP Preferred. The surplus notes bear interest, in the case of $10.0 million principal amount, at an annual rate of 100 basis points in excess of the prime rate, in the case of $10.5 million principal amount, at an annual rate of 450 basis points in excess of LIBOR and, in the case of $5.0 million principal amount, at an annual rate of 10.0%. Interest and principal payments on the surplus notes require prior approval by the Florida OIR. In 2004, AmCOMP Preferred issued surplus notes to third parties as part of three securitizations of pooled surplus notes of insurance companies. The following table summarizes the terms of these surplus notes:
Optional Redemption by Amcomp Frequency Principal Preferred of Interest Issue Date Amount Maturity Date On or After Interest Rate Payments ------------- -------------- -------------- ------------- ----------
April 30, 2004 $10.0 million April 29, 2034 April 29, 2009 Three-month Quarterly LIBOR plus 425 basis points May 26, 2004 $12.0 million May 24, 2034 May 24, 2009 Three-month Quarterly LIBOR plus 425 basis points September 14, 2004 $10.0 million September 14, 2034 September 14, 2009 Three-month Quarterly LIBOR plus 405 basis points
We have historically operated with a limited amount of capital and, as a result, have made extensive use of the reinsurance market to maintain our net exposures within our capital resources. We have ceded premiums and losses to unaffiliated insurance companies under quota share, excess of loss and catastrophe reinsurance agreements. We evaluate the financial condition of our reinsurers and monitor various credit risks to minimize our exposure to losses from reinsurer insolvencies. However, we remain obligated for amounts ceded irrespective of whether the reinsurers meet their obligations. We ceded a high percentage of our premiums and the associated losses prior to July 1, 2004. A failure of one of our reinsurers to pay could have a significant adverse effect on our capital and our financial condition and results of operations. At December 31, 2005 and December 31, 2004, reinsurance recoverables on paid and unpaid losses and LAE and ceding commissions were $83.9 million and $115.9 million, respectively. Our largest recoverable from a single reinsurer as of December 31, 2005 was $45.6 million owed to us by Continental Casualty Company, a subsidiary of CNA Financial Corporation, representing 63.6% of our total stockholders' equity as of that date. Of the $45.6 million, $3.8 million was the current recoverable on paid losses. The balance of $41.8 million is recoverable from Continental Casualty Company on losses which may be paid by us in the future and therefore is not currently due. The unpaid losses will become current as we pay the related claimants.
The amount and types of investments that may be made by our insurance subsidiaries are regulated under the Florida Insurance Code and the rules and regulations promulgated by the Florida OIR. As of December 31, 2005 and December 31, 2004, our insurance subsidiaries' combined portfolio consisted entirely of investment grade fixed-income securities. As of December 31, 2005, our investments (excluding cash and cash equivalents) had an average duration of 3.5 years, and the bond portfolio was heavily weighted toward short- to intermediate-term securities.
The table below contains information concerning the composition of our investment portfolio at December 31, 2005:
(2) Standard & Poor's highest rating is "AAA" and signifies that a company's capacity to meet its financial commitment on the obligation is extremely strong, followed by "AA" (very strong), "A" (strong) and "BBB" (adequate). Moody's Investors Service, Inc.'s highest rating is "Aaa" (best quality), followed by "Aa" (high quality), "A" (strong) and "Baa" (adequate). For investments with split ratings, the higher rating has been used.
The table below sets forth the maturity profile of our bond portfolio at amortized cost and fair market values as of December 31, 2005:
Years to Maturity(1) Amortized Cost Fair Market Value -------------------- -------------- ----------------- (Dollars in thousands)
---------- (1) Based on the stated maturities of the securities. Actual maturities may differ as obligors may have the right to call or prepay obligations.
As of December 31, 2005, the composite S&P rating of our bond portfolio was "A+" with an average duration of 3.5 years.
We continuously monitor our portfolio to preserve principal values whenever possible. An investment in a fixed maturity security is impaired if its fair value falls below its book value. All securities in an unrealized loss position are reviewed to determine whether the impairment is other-than-temporary. Factors considered in determining whether a decline is considered to be other-than-temporary include length of time and the extent to which fair value has been below book value, the financial condition and near-term prospects of the issuer, and our ability and intent to hold the security until its expected recovery. No impairment was recorded during the year ended December 31, 2005.
The following table summarizes, for all fixed maturity securities in an unrealized loss position at December 31, 2005, the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
AmCOMP and both of our insurance subsidiaries are defendants in an action commenced in Florida by the Insurance Commissioner of Pennsylvania, acting in its capacity as liquidator of Reliance Insurance Company. The complaints in those actions allege that preferential payments were made to us by Reliance under the formerly existing reinsurance agreement with the insurance subsidiaries and seeks damages in the amount of approximately $2.3 million. We have answered the complaint and we expect the matter to be scheduled for trial. We believe that we have multiple factual and legal defenses to the claim made in this action, including a right of recoupment related to the statement of claim filed by us in the Reliance liquidation proceeding for the recovery of approximately $9.9 million under the reinsurance agreement. Although the ultimate results of these legal actions and related claims cannot presently be determined, the Company accrued $1.3 million as of December 1, 2005 related to these matters ($0.8 million was accrued in the fourth quarter of 2005).
Payment Due by Period ----------------------------------------------------------------- Less Than More Than Total 1 Year 1-3 Years 4-5 Years 5 Years -------- -------- -------- -------- -------- (Dollars in thousands)
(2) Estimated pay out dates for the loss reserves are determined in the actuarial process. As a result, our calculation of loss reserve payments due by period is subject to the same uncertainties associated with determining the level of reserves and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. For a discussion of our reserving process, see "Business--Loss and Loss Adjustment Expense Reserves." Actual payments of losses and LAE by period will vary, perhaps materially, from the above table to the extent that current estimates of loss reserves vary from actual ultimate claims amounts and as a result of variations between expected and actual payout patterns. See "Risk Factors--Our loss reserves are based on estimates and may be inadequate to cover our actual losses" for a discussion of the uncertainties associated with estimating loss reserves.
In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123R), SHARE-BASED PAYMENT, which addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that
In March 2005, the SEC released Staff Accounting Bulletin No. 107, SHARE-BASED PAYMENT ("SAB 107"). SAB 107 sets forth the SEC staff's position regarding the application of SFAS No. 123R. SAB 107 contains interpretive guidance relating to the interaction between SFAS No. 123R and certain SEC rules and regulations. In addition, SAB 107 provides the SEC staff's views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also highlights the importance of disclosures made related to the accounting for share-based payment transactions. We are currently reviewing the effect of SAB 107 on our consolidated financial statements as we prepare to adopt SFAS No. 123R.
In June 2005, the FASB directed the staff to issue the proposed FASB Staff Proposal ("FSP") Emerging Issues Task Force ("EITF") Issue 03-1 as final and retitled it as FSP FAS 115-1, THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS. It replaces existing guidance in EITF 03-1, THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS, and clarifies that an impairment should be recognized as a loss no later than when the impairment is deemed other-than-temporary, even if the decision to sell the investment has not been made. FSP FAS 115-1 is effective for other-than-temporary impairment analysis conducted in periods beginning after December 15, 2005. We believe that our current policy regarding other-than-temporary impairments complies with FSP FAS 115-1, and therefore the adoption of this standard is not expected to have a significant impact on our net income or equity.
Page ---- FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND FOR THE THREE YEARS ENDED DECEMBER 31, 2005: Report of Independent Registered Public Accounting Firm.................. 64 Consolidated Balance Sheets.............................................. 65 Consolidated Statements of Operations.................................... 66 Consolidated Statements of Changes in Stockholders' Equity............... 67 Consolidated Statements of Cash Flows.................................... 68 Notes to Consolidated Financial Statements............................... 69-87
Investments: Fixed maturity securities available-for-sale at fair value (amortized cost of $300,274 in 2005 and $217,147 in 2004)........................................... $295,664 $295,664 $217,462 Fixed maturity securities held-to-maturity at amortized cost (fair value of $31,326 in 2005 and $9,763 in 2004)...................................................... 31,793 31,793 9,792 -------- -------- -------- Total investments.............................................................. 327,457 327,457 227,254 Cash and cash equivalents............................................................. 4,729 4,729 33,865 Restricted cash....................................................................... 10 10 909 Accrued investment income............................................................. 3,992 3,992 3,030 Premiums receivable--net.............................................................. 104,522 104,522 101,638 Reinsurance recoverable: On paid losses and loss adjustment expenses........................................ 5,202 5,202 5,262 On unpaid losses and loss adjustment expenses...................................... 78,659 78,659 107,155 On ceding commissions.............................................................. 19 19 3,453 Prepaid reinsurance premiums.......................................................... 5,368 5,368 14,895 Deferred policy acquisition costs..................................................... 19,413 19,413 14,695 Property and equipment--net........................................................... 2,658 2,658 3,609 Income taxes recoverable.............................................................. 1,166 1,166 3,125 Deferred income taxes--net............................................................ 20,871 20,871 17,646 Goodwill--net......................................................................... 1,260 1,260 1,260 Other assets.......................................................................... 8,001 8,001 5,986 -------- -------- -------- TOTAL................................................................................. $583,327 $583,327 $543,782 ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Policy reserves and policyholders' funds: Unpaid losses and loss adjustment expenses....................................... $309,857 $309,857 $297,698 Unearned and advance premiums.................................................... 115,574 115,574 114,235 Policyholders' deposits.......................................................... 10 10 10 Policyholder retention dividends payable......................................... 6,636 6,636 6,285 -------- -------- -------- Total policy reserves and policyholders' funds................................. 432,077 432,077 418,228 Reinsurance payable................................................................ 668 668 297 Accounts payable and accrued expenses.............................................. 38,565 38,565 25,101 Notes payable...................................................................... 40,036 40,036 41,821 -------- -------- -------- Total liabilities.............................................................. 511,346 511,346 485,447 ======== ======== ======== STOCKHOLDERS' EQUITY: Common stock (par value $.01; authorized shares 28,000; 5,502 issued; 5,367 in 2005 and 5,368 in 2004 outstanding) (Pro forma 9,694 issued; 9,558 outstanding)...... 96 54 54 Convertible preferred stock series A............................................... -- 23,098 23,098 Additional paid-in capital......................................................... 23,592 536 536 Retained earnings.................................................................. 51,428 51,428 34,643 Accumulated other comprehensive income (loss) (net of deferred taxes of $1,674 in 2005 and $115 in 2004)........................................................... (2,936) (2,936) 199 Treasury stock (135 shares in 2005 and 134 shares in 2004)......................... (199) (199) (195) -------- -------- -------- Total stockholders' equity..................................................... 71,981 71,981 58,335 -------- -------- -------- TOTAL................................................................................. $583,327 $583,327 $543,782 ======== ======== ========
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Convertible Accumulated Preferred Additional Other Total Common Stock Paid-in Treasury Retained Comprehensive Stockholders' Stock Series A Capital Stock Earnings (loss) Income Equity -------- -------- -------- -------- -------- ------------- --------
BALANCE AT DECEMBER 31, 2002 ................ $ 54 $ 23,098 $ 536 $ (182) $ 28,678 $ 3,959 $ 56,143 Net income ................................ -- -- -- -- 935 -- 935 Unrealized loss on investments (net of tax benefit of $1,419) ............... -- -- -- -- -- (2,281) (2,281) Comprehensive loss ........................ -- -- -- -- -- -- (1,346) Purchase of treasury stock ................ -- -- -- (13) -- -- (13) -------- -------- -------- -------- -------- -------- -------- BALANCE AT DECEMBER 31, 2003 ................ 54 23,098 536 (195) 29,613 1,678 54,784 Net income ................................ -- -- -- -- 5,030 -- 5,030 Unrealized loss on investments (net of tax benefit of $939) ................. -- -- -- -- -- (1,479) (1,479) Comprehensive income ...................... -- -- -- -- -- -- 3,551 -------- -------- -------- -------- -------- -------- -------- BALANCE AT DECEMBER 31, 2004 ................ 54 23,098 536 (195) 34,643 199 58,335 Net income ................................ -- -- -- -- 16,785 -- 16,487 Unrealized loss on investments (net of tax benefit of $1,789) ............... -- -- -- -- -- (3,135) (3,135) Comprehensive income ...................... -- -- -- -- -- -- 13,352 Purchase of treasury stock ................ -- -- -- (4) -- -- (4) -------- -------- -------- -------- -------- -------- -------- BALANCE AT DECEMBER 31, 2005 ................ $ 54 $ 23,098 $ 536 $ (199) $ 51,428 $ (2,936) $ 71,981 ======== ======== ======== ======== ======== ======== ========
AMCOMP INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (IN THOUSANDS)
ORGANIZATION--AmCOMP Incorporated and subsidiaries (collectively, the "Company") consist of the following entities at December 31, 2005, 2004 and 2003:
o AmCOMP Preferred Insurance Company ("AmCOMP Preferred"), a wholly owned property and casualty insurance company (formerly known as Pinnacle Assurance Corporation);
o AmCOMP Assurance Corporation ("AmCOMP Assurance"), a wholly owned property and casualty insurance company; and
BASIS OF PRESENTATION--The accompanying consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America ("GAAP") and include the accounts of AmCOMP, AmCOMP Preferred, Pinnacle Administrative, Pinnacle Benefits, AmCOMP Assurance, and AmServ. All intercompany accounts and transactions have been eliminated in consolidation.
PRO FORMA INFORMATION--The pro forma balance sheet information as of December 31, 2005 assumes the conversion of all convertible preferred stock outstanding into common stock upon completion of the initial public offering.
Single class and multiclass mortgage-backed/asset-backed securities are valued at amortized cost using the interest method including anticipated prepayments. Changes in anticipated prepayment assumptions are accounted for
DEFERRED POLICY ACQUISITION COSTS--To the extent recoverable from future policy revenues, costs that vary with and are primarily related to the production of new and renewal business, including premium tax, commissions, assessments and other general acquisition expenses, net of reinsurance ceding allowances received, have been deferred and are amortized over the effective period of the related insurance policies. The components of deferred policy acquisition costs at December 31, 2005 and 2004 are as follows (in thousands):
2005 2004 -------- -------- Gross deferred policy acquisition costs .......... $ 21,101 $ 19,627 Reduction for ceding allowances received ......... (1,688) (4,932) -------- -------- Net deferred policy acquisition costs ............ $ 19,413 $ 14,695 ======== ========
GOODWILL--Goodwill is reviewed for impairment on an annual basis, or more frequently if circumstances indicate that a possible impairment has occurred. The assessment of impairment involves a two step process whereby an initial assessment for potential impairment is performed, followed by a measurement of the amount of impairment, if any. No impairment has been recorded by AmCOMP in 2005, 2004 and 2003.
IMPAIRMENT OF LONG-LIVED ASSETS--The Company's policy is to record an impairment charge against the balance of a long-lived asset in accordance with Statement of Financial Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS ("SFAS No. 144"), in the period when it is determined that the carrying amount of the asset may not be recoverable. This determination is based on an evaluation of such factors as the occurrence
of a significant event or a significant change in the environment in which the business assets operate. The Company considers assets to be impaired when the expected future undiscounted cash flows of the assets are determined to be less than the carrying value. If impairment is deemed to exist, the related asset is written down to fair value. Management also evaluates events and circumstances to determine whether revised estimates of useful lives are warranted. As of December 31, 2005, management expects the carrying value of its remaining long-lived assets to be fully recoverable.
POLICYHOLDER DIVIDENDS--Policyholder dividends are recognized over the effective period of the related policies and are restricted in certain instances to limitations imposed by the Board of Directors (see Note 10).
UNPAID LOSSES AND LAE--Unpaid losses and LAE represent the estimated ultimate net cost of all reported and unreported losses incurred through December 31, 2005 and 2004. The reserves for unpaid losses and LAE are estimated using individual case basis valuations and statistical analyses. Those estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, management believes that the reserves for losses and LAE are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations.
RECOGNITION OF PREMIUM REVENUE--The Company's insurance premiums are billed annually or under various installment plans based on the estimated annual premium under the policy terms. At the end of the policy term, payroll-based premium audits are performed on substantially all policyholder accounts to determine earned premiums for the policy year. Earned but unbilled premiums included in premiums receivable include estimated future audit premiums and collateralized premiums. Collateralized premiums include policies where the final calculated premium is paid after the end of the policy term and the receivable balance is collateralized by letters of credit and financial guarantee bonds. Estimated future audit premiums are estimated based on a weighted average derived from the Company's historical experience as a percentage of earned premiums. All premium revenue is recognized over the period of the contract in proportion to the amount of insurance protection provided.
SPECIAL DISABILITY TRUST FUND ("SDTF") ASSESSMENTS AND RECOVERIES--The Company accrues a liability for SDTF assessments as net premiums are written or as losses are incurred based on individual state guidelines, and for premium based assessments, we defer these costs and recognizes them as an expense as the related premiums are earned. The Company has deferred approximately $1,974,000 and $1,788,000 as of December 31, 2005 and 2004, respectively, which is included in deferred policy acquisition costs. The Company recognizes recoveries from the SDTF when they are received (see Note 3).
OTHER GUARANTY FUND ASSESSMENTS--The Company accrues expenses for guaranty fund and other assessments based on information known at the time of preparation of the financial statements. The Company is continually notified of assessments from various states relating to insolvencies in that particular state; however, there are no expense accruals recorded when the Company is unable to estimate the potential future assessment.
At December 31, 2005, the Company has two primary stock option plans, which are described more fully in Note 16. No stock-based employee compensation cost is reflected in net earnings, as all options granted under these plans had exercise prices equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to stock-based employee compensation (in thousands, except per share data):
Net income ............................................................................ $ 16,785 $ 5,030 $ 935 Deduct: total stock-based employee compensation expense determined under fair value based method for all awards--net of related tax effects ............................. (35) (113) (137) Pro forma net income .................................................................. $ 16,750 $ 4,917 $ 798 Basic earnings per share--as reported ................................................. $ 3.13 $ 0.94 $ 0.17 Basic earnings per share--pro forma ................................................... 3.12 0.92 0.15 Diluted earnings per share--as reported ............................................... 1.76 0.53 0.10 Diluted earnings per share--pro forma ................................................. 1.75 0.51 0.08
The fair value for these options was estimated at the date of grant using the minimum value option pricing model, which assumes zero volatility with the following assumptions: risk-free interest rates equal to the five-year U.S. Treasury Bill rate on the grant date; expected dividend yield of 0%; expected life equal to the life of the options between four and five years; and stock price on the date of grant.
In May 2005, FASB issued SFAS No. 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS--A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO. 3 ("SFAS No. 154"). SFAS No. 154 replaces APB Opinion No. 20, ACCOUNTING CHANGES, and SFAS No. 3, REPORTING ACCOUNTING CHANGES IN INTERIM FINANCIAL STATEMENTS, and changes the requirements for the accounting for and reporting of a change in accounting principles. SFAS No. 154 also provides guidance on the accounting for and reporting of accounting changes and error corrections. It requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. It also addresses the reporting of a correction of an error by restating the previously issued financial statements. SFAS No. 154 is effective as of the beginning of the first annual reporting period that begins after December 15, 2005. We believe that SFAS No. 154 will not have a material effect on our financial condition or results of operations.
AmCOMP Preferred and AmCOMP Assurance are subject to comprehensive supervision and regulation by the FDFS. Florida statute Section 624.408 requires AmCOMP Preferred and AmCOMP Assurance to maintain minimum capital and surplus of the greater of $4.0 million or 10% of total liabilities. Florida statute Section 624.4095 requires AmCOMP Preferred and AmCOMP Assurance to maintain a ratio of written premiums times 1.25 to surplus of no greater than 10-to-1 for gross written premiums and 4-to-1 for net written premiums. During the years ended December 31, 2005 and 2004, AmCOMP Preferred and AmCOMP Assurance were in compliance with the statute.
2005 2004 2003 ------- ------- ------- AmComp Preferred .............. $ 5,922 $(5,686) $ 2,676 AmComp Assurance .............. 6,078 (1,467) 1,171
Stock insurance companies are subject to statutes related to excess profits for workers' compensation insurance companies. No amounts have been provided for excess profits in the accompanying financial statements.
The state of Florida maintains the SDTF for the purpose of providing benefits to workers who have a pre-existing condition and incur a second or subsequent injury. The SDTF is funded through annual assessments against
Available-for-sale securities at December 31, 2005: U.S. Treasury securities ......................................... $ 38,136 $ 1,094 $ 636 $ 38,594 Agency ........................................................... 29,895 9 580 29,324 Municipalities ................................................... 44,472 0 781 43,691 Corporate debt securities ........................................ 176,180 68 3,577 172,671 Mortgage-backed securities ....................................... 11,591 2 209 11,384 -------- -------- -------- -------- Total fixed maturity securities ................................ $300,274 $ 1,173 $ 5,783 $295,664 ======== ======== ======== ======== Held-to-maturity securities at December 31, 2005: Mortgage-backed securities ....................................... $ 31,793 $ 11 $ 478 $ 31,326 ======== ======== ======== ========
Available-for-sale Held-to-maturity --------------------- --------------------- Amortized Amortized Cost Fair Value Cost Fair Value --------- ---------- --------- ----------
Years to maturity: One or less $ 32,307 $ 32,028 -- -- After one through five 164,041 160,734 -- -- After five through ten 83,582 81,756 -- -- After ten 8,753 9,762 -- -- Mortgage-backed securities 11,591 11,384 31,793 31,326 --------- --------- --------- --------- Total $ 300,274 $ 295,664 31,793 31,326 ========= ========= ========= =========
Major categories of the Company's net investment income for the years ended December 31, 2005, 2004 and 2003 are summarized as follows (in thousands):
2005 2004 2003 ------- ------- ------- Income: Fixed maturity securities ............ $11,038 $ 6,484 $ 5,195 Cash and cash equivalents ............ 674 317 194 ------- ------- ------- Investment income .................... 11,712 6,801 5,389 Investment expenses .................. 914 724 586 ------- ------- ------- Net investment income ................... $10,798 $ 6,077 $ 4,803 ======= ======= =======
Proceeds from the sale of available-for-sale fixed maturity securities during the years ended December 31, 2005, 2004 and 2003 were $33,420,000, $49,222,000 and $53,182,000, respectively. Gross gains of $187,000, $1,174,000 and $2,726,000 and gross losses of $572,000, $185,000 and $78,000 were realized in the years ended December 31, 2005, 2004 and 2003, respectively, on those sales.
Unrealized Number of Fair Value Losses Issues ---------- ---------- --------- Less than 12 months: U.S. Treasury securities ............ $ 18,860 $ 209 9 Agency .............................. 9,965 84 6 Municipalities ...................... 30,461 509 19 Corporate debt securities ........... 109,539 2,199 76 Mortgage-backed securities .......... 25,359 328 16 --------- --------- --------- Total .................................. $ 194,184 $ 3,329 126 ========= ========= ========= Greater than 12 months: U.S. Treasury securities ............ $ 9,514 $ 427 14 Agency .............................. 19,095 496 15 Municipalities ...................... 13,221 272 10 Corporate debt securities ........... 52,248 1,378 57 Mortgage-backed securities .......... 11,906 359 6 --------- --------- --------- Total .................................. $ 105,984 $ 2,932 102 ========= ========= ========= Total fixed maturity securities: U.S. Treasury securities ............ $ 28,374 $ 636 23 Agency .............................. 29,060 580 21 Municipalities ...................... 43,682 781 29 Corporate debt securities ........... 161,787 3,577 133 Mortgage-backed securities .......... 37,265 687 22 --------- --------- --------- Total fixed maturity securities ........ $ 300,168 $ 6,261 228 ========= ========= =========
At December 31, 2005, there were no investments in fixed maturity securities with individual material unrealized losses, nor any impaired fixed maturity securities determined to be other than temporary.
---------- (a) For policies effective in 2002, the specific retention is $500,000. The reinsurer's limit on policies effective in 2002 was $50,000,000. The Company also retained 10% of the layer from $1,000,000 to $10,000,000 for the first half of 2002 on policies effective in 2002 and 10% of the layer from $5,000,000 to $10,000,000 for the second half of 2002 for policies effective in 2002.
(b) For inforce, new and renewal policies effective in 2004, the specific retention is $1,000,000. The Company also retained 10% of the layer from $5,000,000 to $10,000,000.
Effective January 1, 2003, the Company entered into a 35% quota share reinsurance agreement with three companies rated A- and higher by A.M. Best. Under the agreement, the Company ceded 35% of the subject written premium (defined as gross written premium less specific excess reinsurance premiums) in 2003, with a provisional ceding commission of 30%. In particular, the Company ceded 35% of its ultimate subject losses and ALAE (not to exceed 35% of $1,000,000 each occurrence) up to a loss ratio of 66%. The Company retained 100% of all losses in a loss ratio corridor between 66% and 78.25%. If the loss ratio exceeded 78.25%, the Company would resume ceding 35% of the net losses up until a loss ratio cap of 105%. In addition, a loss ratio cap existed that limited the non-Florida business to 115% of premiums written outside of Florida.
Effective January 1, 2002, the Company entered into a reinsurance agreement that had the features of both quota share and aggregate reinsurance with a company rated A- by A.M. Best. The Company determined this agreement did not transfer insurance risk and accounted for this agreement using deposit accounting. Under the agreement, the Company ceded 40% of the net written premium on Florida policies in 2002, with a ceding commission of 36%. Under this agreement, the Company retained losses and ALAE up to 35.2% of direct premiums net of excess reinsurance premiums ("subject premiums"). The reinsurer was then responsible for losses exceeding 35.2% of subject premiums up to a loss ratio of 64% of subject premiums. The Company retained losses in the corridor between 64% of subject premiums up to 67.5% of subject premiums. In the corridor between 67.5% of subject premiums and 74% of subject premiums, the Company retained 60% of the losses, and the reinsurer was responsible for 40%. The Company was responsible for all losses in excess of 74% of subject premiums.
Insurance deposits made ...................................... 2,060 Less claims paid ............................................. (7,705) Less interest expense ........................................ (691) Commutation .................................................. (36,188) -------- Insurance deposits as of December 31, 2003 ................... $ -- ========
Significant components of income tax for the years ended December 31, 2005, 2004 and 2003 are as follows (in thousands):
2005 % 2004 % 2003 % --------- -------- --------- -------- --------- --------
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and tax liabilities as of December 31, 2005 and 2004 are presented below (in thousands):
2005 2004 -------- -------- Deferred tax assets: Loss reserve adjustments ..................... $ 13,432 $ 11,492 Unearned and advance premiums ................ 8,043 7,215 Allowance for bad debt ....................... 1,774 2,165 Policyholder dividends ....................... 2,409 2,282 FAS 115 unrealized losses .................... 1,674 -- Other ........................................ 947 851 -------- -------- Total deferred tax assets .................. 28,279 24,005 Deferred tax liabilities: Deferred policy acquisition expenses ......... (7,049) (5,336) FAS 115 unrealized gains ..................... -- (115) Other ........................................ (359) (908) -------- -------- Total deferred tax liabilities ............. (7,408) (6,359) -------- -------- Total net deferred tax assets .............. $ 20,871 $ 17,646 ======== ========
The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. While anticipated changes in claim costs due to inflation are considered in estimating the ultimate claim costs, the increase in average severity of claims is caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual development and are modified if necessary. Changes in the Company's estimate of reserves for losses and loss adjustment expenses are reflected in operations in the period in which the estimates are changed.
Board-mandated dividends accrued for 2005, 2004 and 2003 policies reflect the full potential amount allowed under the respective policies.
LEASES--The Company leases office space, equipment and automobiles under noncancelable lease agreements. Rental expense was $2,628,000, $2,609,000 and $2,131,000 for 2005, 2004 and 2003, respectively. Future minimum payments under noncancelable operating leases with initial terms of one year or more as of December 31, 2005 are as follows (in thousands):
Year Ended December 31, ----------------------- 2006 ................................................. $2,302 2007 ................................................. 2,081 2008 ................................................. 1,393 2009 ................................................. 575 2010 ................................................. 127 ------ $6,478
The Company has entered into employment contracts with certain of its executives. These contracts generally provide for continuing compensation for a period of 12 to 18 months if the executives are released without cause, except that contract of the chief executive officer provides for compensation for a period equal to the greater of 18 months or the number of months then remaining in the term of the contract.
The Company is assessed amounts by state guaranty funds to cover losses to policyholders of insolvent or rehabilitated insurance companies. At December 31, 2005 and 2004, the Company has accrued $4,932,000 and $4,318,000, respectively, for guaranty fund assessments. Expenses incurred for guaranty fund assessments, were $3,722,000, $3,081,000, and $4,255,000 in 2005, 2004, and 2003, respectively. Guaranty fund assessments may be partially recovered through a reduction in future premium tax in certain states. Receivables for future premium tax deductions related to these assessments of $2,690,000 and $3,122,000 were recorded at December 31, 2005 and 2004 in other assets on the balance sheet. The assessments are expected to be paid in 2006 and the recorded premium tax offsets are expected to be realized in 2006 through 2013.
AMCOMP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
The Loan contains various restrictive covenants and certain financial covenants. At December 31, 2005, the Company was in compliance with all restrictive and financial covenants.
Any modification to the principal balance would require renegotiation of the loan.
On April 29, 2004, the Company issued a $10,000,000 surplus note in return for $10,000,000 in cash to Dekania CDO II, Ltd., as part of a pooled transaction. The note matures in 30 years and is callable by the Company after five years. The terms of the note provide for quarterly interest payments beginning on August 15, 2004. The interest rate resets quarterly at a rate of 425 basis points in excess of the then 90-day London Interbank Offered Rate. As of December 31, 2005 the rate in effect was 8.58%. Approved interest paid through December 31, 2005 totals $1,050,000 of which $737,000 was paid in 2005 and $313,000 was paid in 2004. Unpaid and unapproved interest as of December 31, 2005 and 2004 was $107,000 and $84,000, respectively. Both the payment of interest and repayment of the principal are subject to the prior approval of the FDFS.
On May 26, 2004, the Company issued a $12,000,000 surplus note, in return for $12,000,000 in cash, to ICONS, Inc., as part of a pooled transaction. The note matures in 30 years and is callable by the Company after five years. The terms of the note provide for quarterly interest payments beginning on August 24, 2004. The interest rate resets quarterly at a rate of 425 basis points in excess of the 90-day London Interbank Offered Rate. As of December 31, 2005 the rate in effect was 8.64%. Approved interest paid through December 31, 2005 totals $1,243,000 of which $893,000 was paid in 2005 and $350,000 was paid in 2004. Unpaid and unapproved interest as of December 31, 2005 and 2004 was $104,000 and $82,000, respectively. Both the payment of interest and repayment of the principal are subject to the prior approval of the FDFS.
Payments of principal due on the notes payable at December 31, 2005 are as follows (in thousands):
2006 .................................................... $ 1,786 2007 .................................................... 1,786 2008 .................................................... 1,786 2009 .................................................... 1,786 2010 and thereafter ..................................... 32,892 ------- Total ................................................... $40,036 =======
MANDATORILY REDEEMABLE PREFERRED STOCK SERIES B--The Company is authorized to issue 1,000,000 shares of $1.00 par value, voting, nonconvertible, 10% cumulative preferred stock ("RNCPS"). The RNCPS was mandatorily redeemable at January 31, 2003. No shares of the RNCPS have been issued. The RNCPS is subordinate to the CPS.
COMMON STOCK--There were 28,000,000 authorized shares of $.01 par value common stock as of December 31, 2005 and 2004. At December 31, 2005 and 2004, 5,501,936 shares were issued and 5,367,025 and 5,367,898, respectively, were outstanding. During 2005, the Company repurchased 873 shares at a purchase price of $4.24. During 2003, the Company repurchased 3,056 shares at a purchase price of $4.25. The repurchased shares are recorded as treasury stock on the consolidated balance sheets. Dividends are payable as declared by the Board and are subordinate to the CPS.
----- Convertible preferred stock ................................ 4,191 Employee stock options ..................................... 1,269 ----- Total ...................................................... 5,460 =====
Prior to 1999, the Company granted four executives options to purchase 236,608 shares of common stock under a nonqualified stock option agreement. These options vested over a three- to five-year period and are exercisable over a ten-year period after the date of grant for an exercise price of $13.74 per share. At December 31, 2005 and 2004, 229,219 of the options are currently exercisable.
As of December 31, 2005, 2004 and 2003, 588,453, 463,212 and 494,683 options were exercisable. The weighted-average remaining contractual life of the options are 1.4 years and 2.3 years as of December 31, 2005 and 2004, respectively. No options were granted in 2005. The estimated weighted-average fair value of options granted during 2004 and 2003 with an estimated stock price equal to the exercise price was $1.53 and $1.21 respectively.
The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2005, 2004 and 2003 (in thousands, except per share data):
For the years ended December 31, 2005, 2004 and 2003, outstanding employee stock options of 558,483, 585,767 and 651,797 have been excluded from the computation of diluted earnings per share since they are anti-dilutive.
Unaudited pro forma earnings per share for the year ended December 31, 2005 shown below reflects the conversion of the Company's CPS, which occurred immediately prior to the closing date of the Company's registration statement, as of the beginning of the period:
In 2001, the Florida Department of Labor and Employment Security ("FDLES") asserted a claim against AmCOMP Preferred for unpaid assessments in the aggregate amount of $3,087,000 (the "FDLES Claim"). By subsequent act of the Florida legislature, the FDLES no longer exists, and its duties and responsibilities in regard to matters of this type were transferred to the FDFS. The FDLES Claim was based upon the allegation that AmCOMP Preferred underpaid assessments due the Florida Special Disability Trust Fund and the Florida Workers' Compensation Administration Trust Fund. Although AmCOMP Preferred disputed the FDLES Claim, it paid the FDLES Claim, applied for a refund, and reported the payment as a receivable from the FDFS. AmCOMP Preferred's refund application was denied, and AmCOMP Preferred instituted a civil action against the FDLES, in which AmCOMP Preferred sought a declaratory judgment adjudicating whether the FDLES Claim violates the United States Constitution and the constitution of the state of Florida and, therefore, whether the FDLES Claim was lawfully asserted against AmCOMP Preferred (the "Pending Action"). The Pending Action further sought a judgment against the FDFS in the amount of $3,087,000, plus prejudgment interest. A March 2004 opinion in a consolidated appeal of the FDFS, as appellant, and two insurance companies, as plaintiffs, the District Court of Appeals First District, and the State of Florida found in favor of the appellant in legal issues essentially the same as those raised in the AmCOMP Preferred Action. As a result, the Company believed that it would not prevail in the Pending Action and the Company expensed the balance of $3,087,000 in 2003.
Revenues $ 41,613 $ 43,788 $ 48,475 $ 54,701 Expenses 39,744 48,389 45,786 45,353 Net income 1,125 (3,203) 2,055 5,053 Basic earnings (loss) per share 0.21 (0.60) 0.38 0.94 Diluted earnings (loss) per share 0.12 (0.60) 0.21 0.53