General and Administrative Expenses. General and administrative expenses consist primarily of personnel expenses, professional fees and other public company general and administrative expenses.
For all other accident years, the estimated ultimate losses are developed using a variety of actuarial techniques. In reviewing this information, we consider certain factors to be especially important because they increase the variability risk factors in our loss reserve estimates. Majestic’s written premiums grew consistently since our acquisition in November 2006 through 2008. Part of this growth results from our geographic diversification of Majestic’s product offerings to new states (New Jersey and New York) that were not included in Majestic’s historical data. In addition, a significant portion of Majestic’s loss reserves are related to business written in California, which is based largely on Majestic’s book of business prior to our acquisition. Over the last several years, three significant comprehensive legislative reforms were enacted in California which resulted in uncertainty regarding the impact of the reforms on loss payments, loss development and, ultimately, loss reserves. Therefore, Majestic’s historical data is less reliable as an indicator of future loss. In response to the reform legislation and a continuing drop in the frequency of workers’ compensation claims, the pure premium rates approved by the California Insurance Commissioner effective January 1, 2008 were 65.1% lower than the pure premium rates in effect as of July 1, 2003. We consider all of these factors to be important in our review of the data because they increase the variability risk factors in our loss reserve estimates.
As discussed above, there are a number of variables that can impact, individually or in combination, the adequacy of our loss and loss adjustment expense liabilities. While the actuarial methods employed factor in amounts for these circumstances, the loss reserves may prove to be inadequate despite the actuarial methods used. An example is provided below to highlight the potential variability present in our loss reserves
Policy acquisition costs are comprised of ceding commissions, broker commissions, premium taxes and certain underwriting and other policy issuance costs and are primarily related to the production of new and renewal business. These costs are deferred and amortized as the related insurance and reinsurance premiums are earned. We evaluate deferred policy acquisition costs to determine if recorded amounts exceed estimated recoverable amounts after allowing for anticipated investment income. Premium deficiency, if any, is recorded as amortization of deferred policy acquisition costs.
Net Premiums Earned. Net premiums earned decreased $29.3 million, or 36%, to $51.2 million in 2010 from $80.5 million in 2009. Of this decrease, $26.4 million was attributable to primary insurance policy business and $2.9 million was attributable to excess policy business. In addition to the items that reduced our direct premiums written, our net premiums earned were lower in 2010 due to the continuing impact of premium refunds on expiring policies following the completion of payroll audits. These decreases were offset by lower ceded earned premiums due to the non-renewal of our ceded quota share agreements in the second half of 2010.
Our overall loss and loss adjustment expense ratio in 2010 was 100% compared to 101% in 2009. While the current year loss and loss adjustment expense ratio was adversely impacted by the decrease in our net earned premiums year over year, the current accident year loss and loss adjustment expense ratio in 2010 of 79% is 7 percentage points better than the same period last year. The improvement is primarily due to (1) a 10% increase in the average premium rate level in California; and (2) a reduction in our exposure in the higher loss ratio states of New York and New Jersey.
These decreases were offset by a $2.7 million goodwill impairment charge, an increase of $1.0 million in uncollectible premiums, an increase in regulatory expenses on policies underwritten in New York and New Jersey and increases in expenses related to the development of our integrated policy administration system.
General and Administrative Expenses. General and administrative expenses decreased $4.8 million, or 44%, to $6.3 million in 2010 from $11.1 million in 2009. The factors contributing to this decrease were:
The 2009 income tax provision included a current tax benefit of $5.3 million; a $7.5 million deferred tax benefit, and a $16.3 million non-cash valuation allowance with respect to our net deferred tax asset. Our 2009 income tax provision includes the establishment of our non-cash full valuation allowance with respect to our net deferred tax asset, somewhat offset by net income tax benefits on taxable losses of our U.S. domiciled subsidiaries that are included in continuing operations.
insurance regulations which limit the ability of Majestic Insurance and Twin Bridges to distribute dividends/distribute excess capital as discussed in greater detail in Item 1 under the heading “Regulation;”
Our gross loss reserves exclude $3.3 million of GAAP fair value purchase accounting adjustments and do not have contractual maturity dates and the exact timing of the payment of claims cannot be predicted with certainty. However, based upon historical payment patterns, we have included an estimate of when we expect our loss reserves (without the benefit of any reinsurance recoveries) to be paid. As more fully discussed in Item 1 above under the headings “Business - Reserves for Losses and Loss Adjustment Expenses,” the estimation of losses reserves is based on various complex and subjective judgments. Actual losses paid may differ, perhaps significantly, from the reserve estimates reflected in our financial statements. Similarly, the timing of payment of our estimated losses and benefits is not fixed and there may be significant changes in the timing of actual payment. The assumptions used in estimating the likely payments due by period are based on our historical claims payment experience and industry payment patterns, but due to the inherent uncertainty in the process of estimating the timing of such payments, there is a risk that the amounts paid in any such period can be significantly different than the amounts estimated above for any particular period. Retrospective premiums are an estimate of the amounts that would be paid to policyholders if losses incurred under their policies perform as currently anticipated.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our report.
The restrictions of the Bermuda Monetary Authority (BMA) on Twin Bridges’ ability to write new business or pay dividends/distribute surplus to its parent Majestic Capital described under the heading Restrictions on Twin Bridges License by the Bermuda Monetary Authority in Note 24; and
Information Technology Services Agreement (IT Services Agreement) - while the commencement of bankruptcy, insolvency or liquidation proceedings of Majestic USA, Majestic Insurance, CRM or CRM CA (Parties to the IT Services Agreement) would not result in an immediate termination of the IT Services Agreement, a breach of terms, including non-payment of monthly service fees could result in termination of the agreement by either the service provider or the Parties to the IT Services Agreement. Upon early termination, all unpaid amounts due under the IT Services Agreement, which terminates September 2012, become immediately due and payable. Remaining amounts due under the IT Services Agreement are approximately $1.8 million at December 31, 2010.
On September 21, 2010, Majestic Capital entered into an Agreement and Plan of Merger and Amalgamation with Bayside Equity Holdings LLC, a Delaware limited liability company (Bayside), and Majestic Acquisition Corp., a Delaware company and a wholly-owned subsidiary of Bayside (Amalgamation Sub) and a related Bermuda Amalgamation Agreement, dated as of September 21, 2010, among Majestic Capital, Bayside and Amalgamation Sub (together referred to as the amalgamation agreement). Bayside is a holding company, the principal member of which is Lancer Financial Group, Inc. (Lancer).
The amalgation agreement was terminated by Bayside on March 21, 2011 as described in Note 24 Termination of the Bayside Amalgamation Agreement.
Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets as follows:
The Company determines whether it is more-likely-than-not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the consolidated financial statements. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the (benefit) provision for income taxes.
Losses from discontinued operations before income taxes related to CRM and Eimar were $4.7 million, $1.8 million and $5.4 million for 2010, 2009 and 2008, respectively. Included in our 2010 loss from discontinued operations related to CRM and Eimar is $4.6 million related to the proposed settlement of litigation involving the New York self-insured groups. All years presented include legal defense costs related to our proposed settlement and other regulatory proceedings and pending litigation described in Note 21.
the degree and duration of the security’s fair value being below cost;
Depreciation and amortization expense in continuing operations for the years ended December 31, 2010, 2009 and 2008 was $0.7 million, $0.5 million and $0.5 million, respectively, of which $0.1 million, $0.2 million and $0.3 million, respectively, was attributable to amortization of capitalized computer software. Unamortized computer software was $0.0 million and $0.1 million at December 31, 2010 and 2009, respectively.
The Company’s direct earned premiums consist of the expired portion of annual premiums accepted for primary policies issued to individual insured businesses and excess policies issued to self-insured groups or self-insured individual enterprises. Primary insurance policies comprise over 99%, 97%, and 91% of net earned premiums for the years ended December 31, 2010, 2009 and 2008.
The Comerica Credit Facility has various financial covenants which require Majestic Insurance to maintain a minimum statutory net surplus of no less than $21.0 million and maintain an A.M. Best rating of at least B++. Failure to meet one or more of these covenants could result in an event of default, which ultimately could terminate the facility. Majestic Insurance believes it was in compliance with its Comerica Credit Facility covenants at December 31, 2010, however, due to the A.M. Best downgrade described under the heading A.M. Best Downgrade in Note 24, Majestic Insurance is in violation of certain of these covenants in the first quarter of 2011 as described under the heading Violation of Letter of Credit Covenant in Note 24.
The terms of the Junior Debt allow Majestic USA to elect to defer payment of its regularly scheduled quarterly interest for up to twenty consecutive quarterly periods. The deferred interest payments bear interest at the same interest rate as the related Junior Debt, which was 8.65% during 2010 and 2009. Beginning on December 15, 2009, Majestic USA elected to defer its interest payments on its Junior Debt, but continues to accrue expense for interest owed at a compounded rate. Deferred interest payable, together with accrued interest thereon is $4.2 million and $0.9 million, respectively, and is included in other liabilities in the consolidated balance sheets at December 31, 2010 and 2009.
In September 2009, CRM filed a motion to dismiss the plaintiffs’ amended complaint. CRM’s motion to dismiss was denied by the court on March 11, 2010. Following the court’s decision, in April 2010, CRM submitted an application to the Panel seeking to coordinate pretrial proceedings and on February 23, 2011, the Panel issued an order that this action would be one of the Coordinated Lawsuits. An initial conference was held on April 18, 2011. Pursuant to that conference, an order will be circulated whereby within thirty days of the order, HITNY plaintiff will circulate its proposed third amended complaint and the parties will then either consent to the service of same or require motion practice which will be scheduled at a later date. In the interim, all discovery proceedings and pending motions are presently stayed. For information regarding the proposed settlement of this lawsuit, please see above under the heading “- Proposed Settlement of Litigation Involving New York Self-Insured Groups.” Armstrong Brands, Inc., et al. v. Compensation Risk Managers, LLC. On March 6, 2009, Armstrong Brands, Inc., Metal Cladding, Inc., TREK, Inc., Petri Baking Products, Inc., Time Cap Laboratories, Inc., Custom Coatings, Inc., GPM Associates, LLC, d/b/a Forbes Products, PJR Industries, Inc., d/b/a Southside Precast Products, Lakeshore Metals, Inc. Duro-Shed, Inc., Tooling Enterprises, Inc. Northeast Concrete Products, Inc., d/b/a Concrete Building Supply and Superior Steel Studs, Inc., all of which were former members of Trade Industry Trust Workers’ Compensation Trust for Manufacturers (the Trade Trust), on their own behalf and on behalf of all others similarly situated, sued CRM in New York State Supreme Court, Erie County. The lawsuit seeks class action certification and alleges that CRM: (1) breached its contract with the Trade Trust; (2) breached its duty of good faith and fair dealing owed to the Trade Trust; (3) breached its fiduciary duties owed to Trade Trust; (4) was negligent in administering the Trade Trust; (5) engaged in deceptive business practices; (6) was unjustly enriched; and (7) should indemnify the plaintiffs for any assessments that they may incur. The plaintiffs are seeking damages (a) arising from the plaintiffs’ joint and several liability for the deficit of the Trade Trust, (b) from any unpaid claims of the plaintiffs’ injured employees, (c) from potentially being liable for the costs of liquidation charged or to be charged by the WCB, and (d) from fees paid by the plaintiffs and the Trade Trust to CRM pursuant the service agreement between CRM and the Trade Trust. On August 17, 2009, CRM filed a motion to dismiss the plaintiffs’ complaint, and in response to CRM’s motion, on November 10, 2009, the plaintiffs filed an amended complaint alleging substantially the same claims and damages as contained in their original complaint. In April 2010, CRM submitted an application to the Panel seeking to coordinate pretrial proceedings and on February 23, 2011, the Panel issued an order that this action would be one of the Coordinated Lawsuits. An initial conference was held on April 18, 2011. Pursuant to that conference, an order will be circulated whereby within thirty days of the order, HITNY plaintiff will circulate its proposed third amended complaint and the parties will then either consent to the service of same or require motion practice which will be scheduled at a later date. In the interim, all discovery proceedings and pending motions are presently stayed. For information regarding the proposed settlement of this lawsuit, please see above under the heading “- Proposed Settlement of Litigation Involving New York Self-Insured Groups.”
Potential Litigation Involving the Plastic Manufacturers Self Insurance Program. In January 2010, CRM CA was contacted by an attorney representing the Plastic Manufacturers Self Insurance Program of California (PMSIP) threatening litigation against CRM CA should members of PMSIP commence an action against PMSIP or its Board of Trustees. PMSIP’s attorney advised CRM CA that certain members of PMSIP were questioning PMSIP’s administration as a result of a deficit and corresponding assessment and that PMSIP’s members were alleging “gross negligence” and negligent administration by CRM CA in the administration of PMSIP. Accordingly, to the extent any litigation or formal legal claim was commenced, PMSIP threatened to tender the defense and indemnification of any claim or action filed by any past or current PMSIP member arising out of CRM CA’s administration of PMSIP. PMSIP alleges that the service agreement between PMSIP and CRM CA contained a contractual indemnity clause; however, CRM CA disagrees and intends to contest vigorously PMSIP’s claim and any subsequent litigation that may be brought by PMSIP or any of its members.
In March 2009, CRM and the current and former officers and directors of CRM named in the complaint filed a motion to dismiss or, in the alternative, to consolidate the action in New York State Supreme Court, Dutchess County, with the declaratory judgment action described above. The court granted CRM’s motion to dismiss in August 2009, and dismissed the plaintiffs’ complaint against CRM and the current or former officers and directors named in the complaint, with leave to the plaintiffs to file an amended complaint within 30 days.
In June 2008, Majestic Insurance Company received a “Call for Special Report and Documents Pursuant to Section 308 of the Insurance Law” from the New York State Insurance Department. Among other items, the New York State Insurance Department requested information related to Majestic Insurance Company’s loss reserving practices and Majestic Insurance Company’s providing insurance to former members of the group self-insured trusts previously managed by CRM as insureds of Majestic Insurance Company. In September 2009, Majestic Insurance Company received a further request from the New York State Insurance Department requesting information related to CRM’s acquisition of Majestic Insurance Company and additional information related to Majestic Insurance Company’s issuance of workers’ compensation policies in New York, including policies issued to previous members of the group self-insured trusts managed by CRM. Majestic Insurance Company is cooperating fully with the New York State Insurance Department. To the Company’s knowledge, the New York State Insurance Department has not initiated any proceedings against Majestic Insurance Company. The Company cannot currently predict when the New York State Insurance Department will conclude its review, what, if any, actions may be taken by the New York State Insurance Department, or the effect any such action may have on the Company’s results of operations, reputation, financial condition, or cash flows.
Includes $4.6 million related to the proposed settlement of litigation involving the New York self-insured groups in the quarter ended September 30, 2010.