Selected Financial Data The following tables set forth our selected historical consolidated financial and operating information for the periods ended and as of the dates indicated. The selected consolidated income statement data for the years ended December 31, 2008, 2007 and 2006 and the balance sheet data as of December 31, 2008 and 2007 are derived from our audited financial statements included elsewhere in this report, which have been audited by BDO Seidman LLP, our independent auditors. These historical results are not necessarily indicative of results to be expected from any future period. You should read the following selected consolidated financial information together with the other information contained in this report, including the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this report.
(1) Results for a number of periods were affected by our various acquisitions from 2004 to 2008.
(5) Other operating expenses are those expenses including amortization of tangible and intangible assets, and commission and fee revenue generating activities in which the Company engages.
(9) Net expense ratio is calculated by dividing the total of the acquisition expenses, salaries and benefits as well as other insurance general and administrative expenses less ceding commission earned by net premiums earned.
• Specialty risk and extended warranty coverage for consumer and commercial goods and custom designed coverages, such as accidental damage plans and payment protection plans offered in connection with the sale of consumer and commercial goods, in the United Kingdom, certain other European Union countries and the United States; and
The Company transacts business through eleven insurance company subsidiaries (the “Insurance Subsidiaries”):
• TIC, RIC and WIC which underwrite workers’ compensation insurance, specialty risk insurance and extended warranty coverage, and specialty middle-market property and casualty coverages in the United States;
• AII, which reinsures the underwriting activities of TIC, RIC, AIIC, MCIC, SNIC, TUIC, TLIC, IGI and AIU.
Recent Developments In September 2008, the Company entered into a managing general agency agreement with CardinalComp, LLC (“CardinalComp”), a workers’ compensation managing general agent for the purpose of producing workers compensation premium. The agency operates primarily in the state of New York. The Company wrote approximately $63 million of premiums in 2008 related to this relationship.
During February and March 2009, a subsidiary of the Company purchased 701,728 of the Company’s shares as part of the Company’s share repurchase plan.
Maiden is a Bermuda insurance holding company formed by Michael Karfunkel, George Karfunkel and Barry Zyskind, the principal shareholders, and, respectively, the Chairman of the Board of Directors, a Director, and the Chief Executive Officer and Director of AmTrust. Messrs. Karfunkel and Mr. Zyskind contributed $50 million to Maiden Insurance and have a 26.1% ownership interest, inclusive of warrant exercise, in Maiden. In July 2007, Maiden raised approximately $480.6 million in a private placement. Maiden Insurance Company, Ltd. (“Maiden Insurance”), a wholly-owned subsidiary of Maiden, is a Bermuda reinsurer.
Acquisitions UBI In June 2008, we completed a stock and asset purchase agreement with a subsidiary of Unitrin, Inc. whereby the Company acquired its commercial package business (“UBI”) including its distribution networks, renewal rights and four insurance companies through which Unitrin wrote its UBI business. The acquired insurance companies are located in Kansas, Texas and Wisconsin and are collectively licensed in 32 states. We paid approximately $88.5 million in consideration for UBI. From the date of acquisition, UBI wrote approximately $92.8 million of premiums in 2008. As part of this transaction, the Company assumed $78.2 million of
Associated In September 2007, we acquired 100% of the issued and outstanding stock of Associated Industries Insurance Services, Inc. (“AIIS”) a Florida-based workers’ compensation managing general agency, and its wholly-owned subsidiary, Associated Industries Insurance Company (“AIIC”), (collectively, “Associated”). Associated is a Florida workers’ compensation insurer, also licensed in Alabama, Georgia and Mississippi. We paid approximately $38.9 million for AIIS. Associated wrote approximately $26.0 million and $17.7 million of premiums in 2008 and 2007, respectively.
IGI Group In April 2007, we acquired, through a subsidiary, 100% the issued and outstanding stock of IGI Group, Ltd. (“IGI”), a United Kingdom specialty issuer. The acquisition has enabled the Company to expand its presence in the United Kingdom through IGI’s distribution network and to leverage IGI’s experienced administration and claims handling capabilities. We paid approximately $15.2 million for IGI. IGI wrote approximately $66.2 million and $58.2 million of premiums in 2008 and 2007, respectively. In addition, AIIS wrote $58.9 million and $65.7 million of premiums in 2008 and 2007, respectively, on TIC.
The Company recorded an investment loss of approximately $1.0 and $0.7 million for its equity investment in 2008 and 2007, respectively. Additionally in 2007, the Company provided Warrantech with a $20 million senior secured note due January 31, 2012 (note receivable - related party). Interest on the notes is payable monthly at a rate of 15% per annum and consisted of a cash component at 11% per annum and 4% per annum for the issuance of additional notes (“PIK Notes”) in a principle amount equal to the interest not paid in cash on such date. As of December 31, 2008 the carrying value of the note receivable was $21.6 million (note receivable - related party).
• Salaries and benefits expenses are those salaries and benefits expenses for employees that are directly involved in the origination, issuance and maintenance of policies, claims adjustment and accounting for insurance transactions. Salaries and benefits associated with employees that are involved in fee generating activities are classified as other expenses.
Other. Other expenses include those charges that are related to the non-insurance fee generating activities in which the Company engages, including salaries and benefits expenses and other charges directly attributable to non-insurance fee generating activities as well amortization of tangible and intangible assets.
In the event of a 5% increase in claims frequency as measured by payroll, which we believe is the most important assumption regarding our business, the Company’s loss reserves as of December 31, 2008 would be understated by $10.4 million and would result in an after tax reduction in shareholders’ equity of $6.7 million.
In the event of a 5% increase in claim severity, which is the average incurred loss per claim, the Company’s loss and loss adjustment expense reserves would be understated by $4.4 million and would result in an after tax reduction in shareholders’ equity of $2.9 million.
than the historical results used in calculating EBUB, the result would be an increase in EBUB, and net earned premium of $2.0 million or $1.2 million after tax.
Cash and Cash Equivalents. Cash and cash equivalents are presented at cost, which approximates fair value. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains its cash balances at several financial institutions. The Federal Deposit Insurance Corporation (“FDIC”) secures accounts up to $250,000 at these institutions. Management monitors balances in excess of insured limits and believes they do not represent a significant credit risk to the Company.
Impairment of investment securities results in a charge to operations when a market decline below cost is deemed to be other-than-temporary. In accordance with FSP FAS 115-1, “Other-Than-Temporary Impairment and Its Application to Certain Investments”, the Company’s Investment Committee (“Committee”) evaluates each security which has an unrealized loss as of the end of the subject reporting period for other-than-temporary-impairment. The Committee uses a set of quantitative and qualitative criteria to review our investment portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of our investments. Some of the criteria we consider include:
• our intent and ability to keep the security for a sufficient time period for it to recover its value;
• The occurrence of discrete credit event resulting in (i) the issuer defaulting on material outstanding obligation (ii) the issuer seeking protection under bankruptcy law.
Other-than-temporary impairment (“OTTI”) losses result in a permanent reduction of the cost basis of the underlying investment. During 2008 and 2007, the Company recorded impairment write-downs of $52.8 million and $8.4 million, respectively after determining that certain of its investments were OTTI. During 2006, the Company did not record any OTTI.
Consolidated Results of Operations 2008 Compared to 2007 Gross Premium Written. Gross premium written increased $271.2 million or 32.3% from $839.4 million for the year ended December 31, 2007 to $1,110.6 million for the year ended December 31, 2008. The increase was attributable to a $150.0 million increase in our small commercial business, a $109.6 million increase in our specialty risk and extended warranty business and a $11.6 million increase in our specialty middle-market property and casualty business. The increase in the Small Commercial Business segment related primarily to $92.8 million of additional premiums resulting from the acquisition of UBI in the second quarter of 2008 and $63.0 million of additional premium from a new managing general agency agreement with CardinalComp. The increase in premiums for the specialty risk and extended warranty segment resulted, primarily, from the underwriting of new coverage plans and expansion of certain coverage plans in the United States and a full years’ results of operations for IGI, which the Company acquired in 2007. The increase in the specialty middle-market gross premiums written resulted from, primarily, from the underwriting of new programs and the growth of existing programs.
Net Premium Written. Net premiums written increased $135.0 million or 32.2% from $419.9 million to $554.9 million for the year ended December 31, 2007 and 2008, respectively. Net written premium reflected
Commission and Fee Income. Commission and fee income increased $8.6 million or 42.2% from $20.4 million to $29.0 million for the years ended December 31, 2007 and 2008, respectively. The increase resulted from the Company entering into a Reinsurance Agreement and asset management agreement with Maiden Insurance during the third quarter of 2007, whereby the Company earned reinsurance brokerage fees and administration fees. Additionally, the Company earned fees as a servicing carrier for workers’ compensation assigned risk plans in three additional states in 2008 as well as increased fees for warranty administration from specialty risk and extended warranty customers for which a subsidiary of the Company acts as warranty administrator.
Net Investment Income. Net investment income increased $6.7 million or 13.2% from $50.9 million to $57.6 million for the year ended December 31, 2007 and 2008, respectively. The increase resulted from an increase of average invested assets. Average invested assets (excluding equity securities) were approximately $1.3 billion for the year ended December 31, 2008 compared to approximately $1.0 billion for the year ended December 31, 2007, an increase of $0.3 billion or 30.0%. In addition, yields on the Company’s fixed maturities have decreased from 5.3% in 2007 to 4.8% in 2008.
Net Realized Gains (Losses) on Investments. Net realized losses on investments for the year ended December 31, 2008 were $64.6 million, compared to $4.6 million of realized gains for the same period in 2007. The decrease relates primarily to the write-down of $37.1 million related to fixed income securities issued by Lehman Brothers Holdings and Washington Mutual and the write down of equity securities of $21.4 million that were other-than-temporarily-impaired.
Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses decreased $38.7 million or 14.0% from $277.0 million to $238.3 million for the year ended December 31, 2007 and 2008, respectively. The Company’s loss ratio for the year ended December 31, 2008 decreased to 54.3% from 62.4% for the year ended December 31, 2007. The improvement of the loss and loss adjustment ratio resulted from a reduction of prior year’s reserves of approximately $15.0 million as well as the continued improvement in the Company’s actual loss experience, which has continued to develop more favorably than projected.
Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other underwriting expenses increased $48.3 million or 31.1% from $155.4 million to $203.7 million for the years ended December 31, 2007 and 2008, respectively. The increase related primarily to higher policy and acquisition expenses resulting from growth in premium writings and additional incremental salary expense from the acquisitions of UBI and AIIC.
Consolidated Results of Operations 2007 Compared to 2006 Gross Premium Written. Gross premium written increased $313.3 million or 59.6% from $526.1 million for the year ended December 31, 2006 to $839.4 million for the year ended December 31, 2007. The increase was attributable to a $49.9 million increase in our small commercial business, a $173.5 million increase in our specialty risk and extended warranty business and a $89.9 million increase in our specialty middle-market property and casualty business. The increase in the Small Commercial Business segment related primarily to $17.1 million of additional premiums resulting from the acquisition from Muirfield Underwriters, Ltd. of its distribution network and the renewal rights to its existing business during the second quarter of 2006, additional premiums of $17.7 million related to the acquisition of AIIC in the third quarter of 2007 and $15.1 million from organic growth. The increase in premiums for the specialty risk and extended warranty segment resulted, primarily, from the underwriting of new coverage plans in the United States and the acquisition of IGI in the second quarter of 2007, which contributed $58.2 million of premiums. The increase in the specialty middle-market gross premiums written resulted from, primarily, from the underwriting of new programs and the growth of existing programs.
Net Premium Written. Net premiums written decreased $16.4 million or 3.8% from $436.3 million to $419.9 million for the year ended December 31, 2006 and 2007, respectively. The decrease of $16.4 million was net of $247.3 million of written premium ceded to Maiden Insurance during the second half of 2007 under the terms of a reinsurance agreement entered into during the third quarter of 2007. Before cessions to Maiden Insurance, net written premium increased $230.9 million for 2007 compared 2006. The increase before cessions by segment was: small commercial business - $40.5 million; specialty risk and extended warranty - $125.2 million; and specialty middle market property and casualty - $65.2 million.
Commission and Fee Income. Commission and Fee income increased $8.0 million or 64.2% from $12.4 million for the year ended December 31, 2006 to $20.4 million for the year ended December 31, 2007. The increase resulted from brokerage and asset management fees earned from Maiden Insurance during the last six months of 2007, a contract awarded to the Company’s subsidiary TIC, effective January 1, 2007, to administer
a portion of the Virginia Workers’ Compensation Assigned Risk Plan and fees for warranty administration from specialty risk and extended warranty customers for which a subsidiary of the Company acts as warranty administrator.
Net Realized Gains on Investments. Net realized gains on investments for the year ended December 31, 2007 were $4.6 million, compared to $14.8 million for the same period in 2006. The decrease relates primarily to the write-down of four equity securities by approximately $8.4 million that were other-than- temporarily-impaired during 2007.
Small Commercial Business Segment Results of Operation 2008 Compared to 2007 Gross Premium Written. Gross premium written increased $150.0 or 48.6% from $308.8 million to $458.8 million for the years ended December 31, 2007 and 2008, respectively. The increase in the small commercial business segment related primarily to $92.8 million of additional premiums resulting from the acquisition of UBI during the second quarter of 2008 and $63.0 million of additional premium from our relationship with CardinalComp, offset by declines attributable to mandated rate reductions in New York and Florida.
Net Premium Earned. Net premium earned decreased $64.7 million or 27.2% from $237.7 million to $173.0 million for the years ended December 31, 2007 and 2008, respectively. Net earned premium for the years ended 2007 and 2008, respectively, reflected cessions of $47.4 million and $136.0 million to Maiden Insurance under the terms of the Reinsurance Agreement, which was entered into during the third quarter of 2007. Before cessions to Maiden Insurance, earned premium increased $23.9 million for 2008 compared to 2007. This increase resulted from an increase in gross premium written.
Acquisition Costs and Other Underwriting Expenses. Acquisition Costs and Other Underwriting Expenses increased $6.4 million or 7.0% from $91.5 million to $97.9 million for the year ended December 31, 2007 and 2008, respectively. The increase relates primarily to higher salary expense related to the acquisitions of UBI and AIIC.
Acquisition Costs and Other Underwriting Expenses. Acquisition Costs and Other Underwriting Expenses increased $19.8 million or 27.6% from $71.7 million to $91.5 million for the year ended December 31, 2006 and 2007, respectively. The increase relates to increased policy acquisition expenses resulting from higher premiums written as well as additional salary and benefits primarily from the acquisition of AIIS.
Net Premiums Earned Less Expenses Included in Combined Ratio (Underwriting Income). Underwriting income increased to $43.5 million for the year ended December 31, 2007, from $19.5 million for the year ended December 31, 2006, an increase of $24.0 million or 123.4%. This increase is attributable to strong growth in revenue combined with an improvement in the loss ratio and a consistent expense ratio.
Specialty Risk and Extended Warranty Segment Results of Operation 2008 Compared to 2007 Gross Premium Written. Gross premium written increased $109.6 or 35.8% from $306.4 million to $415.9 million for the years ended December 31, 2007 and 2008, respectively. The increase in premium resulted, primarily, from the underwriting of new coverage plans, which included the benefit of an initial unearned premium assumptions and expansion of certain existing coverage plans, offset by the impact of the strengthening U.S. dollar on the Company’s European operations.
Net Premium Earned. Net premium earned increased $37.8 or 32.6% from $116.1 million to $153.9 million for the year ended December 31, 2007 and 2008, respectively. Net earned premium for the years ended 2007 and 2008, respectively, reflected cessions of $33.6 million and $91.2 million to Maiden Insurance under the terms of the Reinsurance Agreement, which was entered into during the third quarter of 2007. Before cessions to Maiden Insurance, earned premium increased $95.4 million for 2008 compared to 2007. This increase resulted from an increase in gross premium written during the last 12 months.
Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses decreased $3.1 million or 3.9% from $81.9 million to $78.8 million for the years ended December 31, 2007 and 2008, respectively. The loss ratio for the segment decreased to 51.2% for 2008 from 70.5% for 2007. The improvement of the loss ratio
Acquisition Costs and Other Underwriting Expenses. Acquisition Costs and Other Underwriting Expenses increased $24.1 million or 103% from $23.5 million to $47.6 million for the years ended December 31, 2007 and 2008, respectively. The increase related, primarily, to higher policy acquisition costs and salaries and benefits in 2008 attributable to the acquisition of IGI during the second quarter of 2007.
Net Premium Earned Less Expenses Included in Combined Ratio (Underwriting Income). Underwriting income increased to $54.5 million for the year ended December 31, 2008 from $22.3 million for the year ended December 31, 2007, an increase of $32.2 million or 144%. This increase was primarily attributable to growth in premium written combined with an improvement in the loss ratio.
Net Premium Written. Net premium written increased $24.1 million or 21.2% from $113.5 million to $137.6 million for the years ended December 31, 2006 and 2007, respectively. The increase of $24.1 million was net of $101.1 million of written premium ceded to Maiden Insurance during the second half of 2007 under the terms of a reinsurance agreement entered into during the third quarter of 2007. Before cessions to Maiden Insurance, net written premium increased $125.2 million for 2007 compared to 2006. The increase of $125.2 million resulted from an increase in gross premiums written in 2007.
Net Premiums Earned. Net premium earned increased $52.9 or 83.7% from $63.2 million to $116.1 million for the year ended December 31, 2006 and 2007, respectively. The $52.9 million increase was net of earned premium ceded to Maiden Insurance during the second half of 2007. Before cessions to Maiden Insurance, earned premium increased $86.5 million for 2007 compared to 2006. This increase was a result of an increase in gross premium written.
Net Premiums Earned Less Expenses Included in Combined Ratio (Underwriting Income). Underwriting income increased to $22.3 million for the year ended December 31, 2007 from $4.3 million for the year ended December 31, 2006, an increase of $18.0 million or 421%. This increase is attributable to growth in revenue and an improvement in the loss ratio and expense ratio.
Net Premium Written. Net premium written increased $30.4 million or 34.3% from $88.7 million to $119.1 million for the years ended 2007 and 2008, respectively. Net written premium reflected cessions of $59.8 million and $71.7 million to Maiden Insurance for the years ended 2007 and 2008, respectively, under the terms of the Reinsurance Agreement, which was entered into during the third quarter of 2007. Before cessions to Maiden Insurance, net premium written increased $42.3 million to 2008 compared 2007 and was the result of an increased writings over the last calendar year.
Net Premium Earned. Net premium earned increased $21.6 million or 23.9% from $90.5 million to $112.1 million for the year ended 2007 and 2008, respectively. Net premium earned for the years ended 2007 and 2008, respectively, reflected cessions of $29.1 million and $57.9 million to Maiden Insurance under the terms of the Reinsurance Agreement, which was entered into during the third quarter of 2007. Before cessions to Maiden Insurance, earned premium increased $50.4 million for 2008 compared to 2007. The increase resulted from the change in net premium written.
Specialty Middle Market Segment Result of Operations 2007 Compared to 2006 Gross Premium Written. Gross premium written increased $89.9 million or 66.9% from $134.3 million to $224.2 million for the years ended 2006 and 2007, respectively. Premium increased for all lines of business in 2007. The increase resulted primarily from new general liability and worker’s compensation programs and growth of existing facilities. In addition, the increase includes $6.4 million in gross premium written which is fully reinsured by HSBC Insurance Company of Delaware pursuant to an agreement entered into in connection with the Company’s acquisition of Wesco Insurance Company in June 2006.
Net Premium Earned. Net premium earned increased $45.8 million or 102.4% from $44.7 million to $90.5 million for the year ended 2006 and 2007, respectively. The increase of $45.8 million was net of earned premium ceded to Maiden Insurance during the second half of 2007. Before cessions to Maiden Insurance, earned premium was $119.6 million for the year ended December 31, 2007. This increase was a result of an increase in gross premium written.
Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other underwriting expenses increased $26.5 million from $13.9 million for the year ended December 31, 2006 to $40.4 million for the year ended December 31, 2007. The increase resulted primarily from higher policy acquisition expense which occurred from increased written premiums.
Net Premiums Earned Less Expenses Included in Combined Ratio (Underwriting Income). Underwriting income increased $6.1 million to $8.9 million for the year ended December 31, 2007 from $2.8 million for the year ended December 31, 2006. This increase is attributable to growth in revenue and an improvement in the expense ratio.
Investment Portfolio The first priority of our investment strategy is preservation of capital, with a secondary focus on maximizing an appropriate risk adjusted return. We expect to maintain sufficient liquidity from funds generated from operations to meet our anticipated insurance obligations and operating and capital expenditure needs, including debt service and additional payments in connection with our past producer network and renewal
rights acquisitions. The excess funds will be invested in accordance with both the overall corporate investment guidelines as well as an individual subsidiary’s investment guidelines. Our investment guidelines are designed to maximize investment returns through a prudent distribution of cash and cash equivalents, fixed maturities and equity positions. Cash and cash equivalents include cash on deposit, commercial paper, pooled short-term money market funds and certificates of deposit with an original maturity of 90 days or less. Our fixed maturity securities include obligations of the U.S. Treasury or U.S. government agencies, obligations of U.S. and Canadian corporations, mortgages guaranteed by the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, Federal Farm Credit entities, and asset-backed securities and commercial mortgage obligations. Our equity securities include common stocks of U.S. and Canadian corporations.
As of December 31, 2008 and 2007, our fixed maturity portfolio (excluding time and short-term deposits) had a carrying value of $959.2 million and $888.7 million, respectively, which represented approximately 71.2% and 70.4%, respectively, of the carrying value of our investments, including cash and cash equivalents.
The Company’s Investment Committee (“Committee”) evaluates each security which has an unrealized loss as of the end of the subject reporting period for other-than-temporary-impairment. The Committee uses a set of quantitative and qualitative criteria to review our investment portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of our investments. Some of the criteria we consider include:
• any downgrades of the security by a rating agency as well as an entire industry sector or sub-sector;
In addition to non-cash write-downs of $31.4 million the Company took for impaired fixed income securities during 2008, the Company had $92.5 million of gross unrealized losses related to available-for-sale fixed income securities as of December 31, 2008. Corporate bonds represent 38.9% of the fair value of our fixed maturities and 89.4% of the total unrealized losses of our fixed maturities. The Company owns 211 corporate bonds in the industrial, bank and financial and other sectors, which have a fair value of approximately 7.1%, 30.9% and 0.9%, respectively, and 18.9%, 70.1% and 0.5% of total unrealized losses, respectively, of our fixed maturities. The Company believes that the unrealized losses in these securities are the result, primarily, of general economic conditions and not the condition of the issuers, which we believe are solvent and have the ability to meet their obligations. Therefore, the Company expects that the market price for these securities should recover within a reasonable time.
Based on the Company’s ability and intent to hold these investments for a sufficient time for recovery of fair value, the Company does not consider these investments to be other-than-temporarily-impaired at December 31, 2008. The table below summarizes the gross unrealized losses of our fixed maturity and equity securities as of December 31, 2008:
Liquidity and Capital Resources AmTrust is organized as a holding company with eleven insurance subsidiaries as well as various other non-insurance subsidiaries. AmTrust’s primary liquidity needs include debt payments, interest on debt, taxes and shareholder dividends. AmTrust’s income is generated primarily from our insurance subsidiaries. Additionally, AmTrust may generate liquidity through investment income, debt as well as financing through borrowing and sales of securities. In 2008, AmTrust entered into a $40 million term loan. AmTrust also issued a $30 million note in conjunction with the UBI acquisition. In 2007, AmTrust issued $40 million of junior subordinated debentures.
The laws of the jurisdictions in which our Insurance Subsidiaries are organized regulate and restrict, under certain circumstances, their ability to pay dividends to AmTrust. As of December 31, 2008 and 2007, respectively, the Insurance Subsidaries would have been permitted to pay dividends in the aggregate of approximately $129.4 million and $187.2 million. The Company’s Insurance Subsidiaries did not pay any dividends in 2008 and 2007. In addition, the terms of AmTrust’s debt arrangements limit AmTrust’s ability to pay dividends on its common stock, and future borrowings may include prohibitions and restrictions on dividends. See “Dividend Policy,” “Regulation” and “Risk Factors.”
We forecast claim payments based on our historical trends. We seek to manage the funding of claim payments by actively managing available cash and forecasting cash flows on a short- and long-term basis. Cash payments for claims were $108.8 million, $180.1 million and $257.9 million in 2006, 2007 and 2008, respectively. Since December 31, 2001, we have funded claim payments from cash flow from operations (principally premiums) net of amounts ceded to our third party reinsurers. We presently expect to maintain sufficient cash flow from operations to meet our anticipated claim obligations and operating and capital expenditure needs. Our cash and investment portfolio has increased from $1,261.6 million (excluding $28.0 million of other investments) at December 31, 2007 to $1,348.0 million (excluding $13.5 million of other investments) at December 31, 2008. We do not anticipate selling securities in our investment portfolio to pay claims or to fund operating expenses. Should circumstances arise that would require us to do so, we may incur losses on such sales, which would adversely affect our results of operations and could reduce investment income in future periods. If as the result of such sales we could no longer classify any portion of our fixed maturity portfolio as held-to-maturity we would be required to carry all of our fixed maturity securities at the market value. If the aggregate market value at the given balance sheet is below the aggregate amortized cost we would have a reduction to stockholders’ equity. At December 31, 2008 our held-to-maturity fixed maturity portfolio had an aggregate unrealized gain of $1.4 million. If at December 31, 2008 we could not classify our fixed maturity portfolio as held-to-maturity our stockholders’ equity would be increased on an after tax basis by approximately $0.9 million.
We purchase excess of loss workers’ compensation reinsurance to protect us from the impact of large losses. Under this reinsurance program, we pay our reinsurers a percentage of our net or gross earned insurance premiums, subject to certain minimum reinsurance premium requirements. Our workers’ compensation reinsurance programs for 2007 and 2008 includes multiple reinsurers in five layers of reinsurance that provide
us with coverage in excess of a certain specified amount per loss occurrence, or retention level. Our workers’ compensation reinsurance program for 2007 and 2008 provides coverage for claims in excess of $1.0 million per occurrence with coverage up to $130.0 million per occurrence, subject to certain exclusions and restrictions, including a $1.25 million aggregate deductible applicable to the first layer of this reinsurance coverage. Our reinsurance for workers’ compensation losses caused by acts of terrorism is more limited than our reinsurance for other types of workers’ compensation losses. We have obtained reinsurance for this line of business with higher limits as our exposures have increased. As the scale of our workers’ compensation business has increased, we have also increased the amount of risk we retain.
The Company has coverage for its property lines of business under excess of loss reinsurance agreements. The agreement covers losses in excess of $2 million per property up to a maximum $15 million. In addition the Company has a property catastrophe excess of loss agreement. The agreement covers losses in excess of $4 million per occurrence up to a maximum $65 million.
The following table summarizes the ten reinsurers that account for approximately 85% of our reinsurance recoverables on paid and unpaid losses and loss adjustment expenses as of December 31, 2008:
(2) As per the NWCRP Articles of Agreement reinsurance is provided through a 100% Quota Share Reinsurance Agreement entered into among the Servicing Carrier (TIC) and the participating companies (all carriers writing in the state) pursuant to the Articles of Agreement.
(4) The Company has letter of credit in place of approximately $9 million.
Net cash provided by financing activities was $162.2 million for the year ended December 31, 2008 compared to net cash provided in 2007 of $180.2 million. In 2008 cash provided from financing included primarily of $138.1 million received from entering into repurchase agreements as well as the issuance of a $40 million note offset by dividend payments of $10.2 million. In 2007 cash provided from financing included primarily $146.4 million received from entering into repurchase agreements and the issuance of the $40.0 million of junior subordinated debentures, offset by dividend payments of $5.4 million.
Term Loan On June 3, 2008, the Company entered into a term loan with JP Morgan Chase Bank, N.A. in the aggregate amount of $40 million. The term of the loan is for a period of three years and requires quarterly principal
Promissory Note In connection with the stock and asset purchase agreement with a subsidiary of Unitrin, Inc., the Company entered into a promissory note with Unitrin in the amount of $30 million. The note bears no interest rate and requires four annual principal payments of $7.5 million beginning on June 1, 2009 through June 1, 2012. The Company calculated imputed interest of $3.2 million based on interest rates available to the Company at the date of the acquisition, which was 4.5%. Accordingly, the note’s carrying balance was adjusted to $26.8 million at inception. The note is required to be paid in full immediately, under certain circumstances involving default of payment or change of control of the Company. The Company recorded $0.8 million of interest expense during the year ended December 31, 2008 and the note’s carrying value at December 31, 2008 was $27.6 million.
Securities Sold Under Agreements to Repurchase, at Contract Value The Company enters into repurchase agreements. The agreements are accounted for as collateralized borrowing transactions and are recorded at contract amounts. The Company receives cash or securities that it invests or holds in short-term or fixed-income securities. As of December 31, 2008, there were approximately $284.5 million principal amount outstanding at interest rates between 2.5% and 3.0%. Interest expense associated with these repurchase agreements for the year ended December 31, 2008 was $8.8 million of which $0.7 million was accrued as of December 31, 2008. The Company has approximately $293.4 million of collateral pledged in support of these agreements.
Junior Subordinated Debt On March 22, 2007, the Company issued $40 million in principal amount of junior subordinated debentures (the “Debentures”) in connection with the issuance of trust preferred securities by a trust pursuant to an indenture with Wilmington Trust Company, as trustee. The Debentures mature on March 15, 2037 and bear interest at a rate per annum of 7.93% until March 15, 2012 and, thereafter, at a floating rate per annum equal to the sum of the three-month London Interbank Offered Rate for U.S. dollars (LIBOR) determined each quarter plus three percent. The Debentures are redeemable at the Company’s election after March 15, 2012. The Company incurred placement fees in the amount of $0.8 million in connection with the financing which will be amortized over 30 years.
(2) We are subject to various annual assessments imposed by certain of the states in which we write insurance policies. These assessments are generally based upon the amount of premiums written or losses paid during the applicable year. Assessments based on premiums are generally paid within one year after the calendar year in which the policies are written, while assessments based on losses are generally paid within one year after the loss is paid. When we establish a reserve for loss and loss adjustment expenses for a reported claim, we accrue our obligation to pay any applicable assessments. If settlement of the claim is to be paid out over more than one year, our obligation to pay any related loss-based assessments extends for the same period of time. Because our reserves for loss and loss adjustment expenses are based on estimates, our accruals for loss-based insurance assessments are also based on estimates. Actual payments of loss and loss adjustment expenses may differ, perhaps materially, from our reserves. Accordingly, our actual loss-based insurance assessments may vary, perhaps materially, from our accruals.
Financial Statements and Supplementary Data The financial statements and financial statement schedules listed in the accompanying Index to Consolidated Financial Statements and Schedules are filed as part of this report.