Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM
10-Q
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED September 30, 2009
OR
¨ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
FOR
THE TRANSITION PERIOD FROM ___________________TO
_______________________
Commission
File number 0-2500111
21st Century Holding
Company
(Exact
name of registrant as specified in its charter)
Florida
|
65-0248866
|
(State
or Other Jurisdiction of
|
(IRS
Employer
|
Incorporation
or Organization)
|
Identification
Number)
|
3661 West Oakland Park
Boulevard, Suite 300, Lauderdale Lakes, Florida 33311
(Address
of principal executive offices) (Zip Code)
954-581-9993
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No ¨
Indicate
by check mark whether the registrant has electronically submitted and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
Registrant was required to submit and post such files).
Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ Accelerated
filer x Non-accelerated
filer ¨ Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Common
Stock, $.01 par value – 8,013,894
outstanding as of September 30, 2009
21ST CENTURY
HOLDING COMPANY
INDEX
|
|
PAGE
|
PART
I: FINANCIAL INFORMATION
|
|
|
|
|
ITEM
1
|
Financial
Statements and Supplementary Data
|
3
|
|
|
|
ITEM
2
|
Management’s
Discussion and Analysis of Financial Condition & Results of
Operations
|
24
|
|
|
|
ITEM
3
|
Quantitative
and Qualitative Disclosures about Market Risk
|
45
|
|
|
|
ITEM
4
|
Controls
and Procedures
|
46
|
|
|
|
PART
II: OTHER INFORMATION
|
|
|
|
|
ITEM
1
|
Legal
Proceedings
|
47
|
|
|
|
ITEM
1A
|
Risk
Factors
|
47
|
|
|
|
ITEM
2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
47
|
|
|
|
ITEM
3
|
Defaults
upon Senior Securities
|
47
|
|
|
|
ITEM
4
|
Submission
of Matters to a Vote of Security Holders
|
47
|
|
|
|
ITEM
5
|
Other
Information
|
47
|
|
|
|
ITEM
6
|
Exhibits
|
48
|
|
|
|
SIGNATURES
|
|
49
|
PART
I: FINANCIAL INFORMATION
Item
1
21st CENTURY
HOLDING COMPANY
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
|
|
Period Ending
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(Dollars
in Thousands)
|
|
ASSETS
|
|
|
|
Investments
|
|
|
|
|
|
|
Debt
maturities, available for sale, at fair value
|
|
$ |
91,104 |
|
|
$ |
9,429 |
|
Debt
maturities, held to maturity, at amortized cost
|
|
|
2,645 |
|
|
|
13,496 |
|
Equity
securities, available for sale, at fair value
|
|
|
11,853 |
|
|
|
3,140 |
|
|
|
|
|
|
|
|
|
|
Total
investments
|
|
|
105,602 |
|
|
|
26,065 |
|
|
|
|
|
|
|
|
|
|
Cash
and short term investments
|
|
|
48,097 |
|
|
|
124,577 |
|
Prepaid
reinsurance premiums
|
|
|
13,623 |
|
|
|
5,537 |
|
Premiums
receivable, net of allowance for credit losses of $29 and $122,
respectively
|
|
|
4,156 |
|
|
|
3,353 |
|
Reinsurance
recoverable, net of allowance for credit losses of $0 and $226,
respectively
|
|
|
11,506 |
|
|
|
16,880 |
|
Deferred
policy acquisition costs
|
|
|
8,038 |
|
|
|
6,558 |
|
Deferred
income taxes, net
|
|
|
2,433 |
|
|
|
8,530 |
|
Income
taxes receivable
|
|
|
7,076 |
|
|
|
2,275 |
|
Property,
plant and equipment, net
|
|
|
731 |
|
|
|
855 |
|
Other
assets
|
|
|
2,839 |
|
|
|
2,472 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
204,101 |
|
|
$ |
197,102 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Unpaid
losses and LAE
|
|
$ |
66,285 |
|
|
$ |
64,775 |
|
Unearned
premiums
|
|
|
45,592 |
|
|
|
40,508 |
|
Premiums
deposits and customer credit balances
|
|
|
2,048 |
|
|
|
1,700 |
|
Bank
overdraft
|
|
|
11,469 |
|
|
|
8,694 |
|
Deferred
gain from sale of property
|
|
|
1,129 |
|
|
|
1,495 |
|
Accounts
payable and accrued expenses
|
|
|
2,465 |
|
|
|
3,699 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
128,988 |
|
|
|
120,871 |
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value. Authorized 25,000,000 shares; issued and
outstanding 8,013,894 and 8,013,894, respectively.
|
|
|
80 |
|
|
|
80 |
|
Preferred
stock, $0.01 par value. Authorized 1,000,000 shares; none issued or
outstanding
|
|
|
- |
|
|
|
- |
|
Additional
paid-in capital
|
|
|
50,356 |
|
|
|
49,979 |
|
Accumulated
other comprehensive income (deficit)
|
|
|
1,667 |
|
|
|
(1,187 |
) |
Retained
earnings
|
|
|
23,010 |
|
|
|
27,359 |
|
Total
shareholders' equity
|
|
|
75,113 |
|
|
|
76,231 |
|
Total
liabilities and shareholders' equity
|
|
$ |
204,101 |
|
|
$ |
197,102 |
|
SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21ST CENTURY
HOLDING COMPANY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in Thousands except EPS and dividend data)
|
|
|
(Dollars in Thousands except EPS and dividend data)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums written
|
|
$ |
12,917 |
|
|
$ |
15,851 |
|
|
$ |
74,949 |
|
|
$ |
70,695 |
|
Gross
premiums ceded
|
|
|
(36,804 |
) |
|
|
(25,699 |
) |
|
|
(56,720 |
) |
|
|
(33,931 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
premiums written
|
|
|
(23,887 |
) |
|
|
(9,848 |
) |
|
|
18,229 |
|
|
|
36,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in prepaid reinsurance premiums
|
|
|
22,300 |
|
|
|
15,351 |
|
|
|
24,535 |
|
|
|
1,831 |
|
Decrease
(Increase) in unearned premiums
|
|
|
11,098 |
|
|
|
10,746 |
|
|
|
(5,084 |
) |
|
|
11,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in prepaid reinsurance premiums and unearned
premiums
|
|
|
33,398 |
|
|
|
26,097 |
|
|
|
19,451 |
|
|
|
13,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
premiums earned
|
|
|
9,511 |
|
|
|
16,249 |
|
|
|
37,680 |
|
|
|
50,314 |
|
Commission
income
|
|
|
117 |
|
|
|
271 |
|
|
|
738 |
|
|
|
1,353 |
|
Finance
revenue
|
|
|
62 |
|
|
|
91 |
|
|
|
236 |
|
|
|
268 |
|
Managing
general agent fees
|
|
|
308 |
|
|
|
346 |
|
|
|
1,216 |
|
|
|
1,376 |
|
Net
investment income
|
|
|
805 |
|
|
|
1,541 |
|
|
|
2,034 |
|
|
|
5,317 |
|
Net
realized investment gains (losses)
|
|
|
1,550 |
|
|
|
(2,995 |
) |
|
|
1,082 |
|
|
|
(9,309 |
) |
Regulatory
assessments recovered
|
|
|
294 |
|
|
|
384 |
|
|
|
2,029 |
|
|
|
1,619 |
|
Other
income
|
|
|
232 |
|
|
|
78 |
|
|
|
614 |
|
|
|
497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
12,879 |
|
|
|
15,965 |
|
|
|
45,629 |
|
|
|
51,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
and LAE
|
|
|
11,119 |
|
|
|
9,887 |
|
|
|
28,965 |
|
|
|
30,255 |
|
Operating
and underwriting expenses
|
|
|
2,379 |
|
|
|
1,671 |
|
|
|
6,604 |
|
|
|
4,699 |
|
Salaries
and wages
|
|
|
1,961 |
|
|
|
2,086 |
|
|
|
5,766 |
|
|
|
5,608 |
|
Policy
acquisition costs, net of amortization
|
|
|
3,818 |
|
|
|
4,170 |
|
|
|
9,477 |
|
|
|
11,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
19,277 |
|
|
|
17,814 |
|
|
|
50,812 |
|
|
|
52,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
Income before provision for income tax (benefit) expense
|
|
|
(6,398 |
) |
|
|
(1,849 |
) |
|
|
(5,182 |
) |
|
|
(921 |
) |
Provision
for income tax (benefit) expense
|
|
|
(2,404 |
) |
|
|
(336 |
) |
|
|
(2,276 |
) |
|
|
(1,216 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(3,994 |
) |
|
$ |
(1,513 |
) |
|
$ |
(2,906 |
) |
|
$ |
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net (loss) income per share
|
|
$ |
(0.50 |
) |
|
$ |
(0.19 |
) |
|
$ |
(0.36 |
) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully
diluted net (loss) income per share
|
|
$ |
(0.50 |
) |
|
$ |
(0.19 |
) |
|
$ |
(0.36 |
) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
8,013,894 |
|
|
|
8,013,894 |
|
|
|
8,013,894 |
|
|
|
7,967,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding (assuming
dilution)
|
|
|
8,013,894 |
|
|
|
8,013,894 |
|
|
|
8,013,894 |
|
|
|
7,978,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid per share
|
|
$ |
0.06 |
|
|
$ |
0.18 |
|
|
$ |
0.30 |
|
|
$ |
0.54 |
|
SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21ST CENTURY
HOLDING COMPANY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars
in Thousands)
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(2,906 |
) |
|
$ |
295 |
|
Adjustments
to reconcile net (loss) income to net cash provided (used) by operating
activities:
|
|
|
|
|
|
|
|
|
Amortization
of investment discount, net
|
|
|
(433 |
) |
|
|
(177 |
) |
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of property plant and equipment, net
|
|
|
137 |
|
|
|
235 |
|
Net
realized investment gains (losses)
|
|
|
1,082 |
|
|
|
(9,309 |
) |
Provision for
credit losses, net
|
|
|
34 |
|
|
|
2 |
|
Provision
for uncollectible premiums receivable
|
|
|
92 |
|
|
|
95 |
|
Non-cash
compensation
|
|
|
255 |
|
|
|
292 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Premiums
receivable
|
|
|
(895 |
) |
|
|
235 |
|
Prepaid
reinsurance premiums
|
|
|
(8,087 |
) |
|
|
7,189 |
|
Reinsurance
recoverable, net
|
|
|
5,374 |
|
|
|
8,611 |
|
Income
taxes recoverable
|
|
|
(4,802 |
) |
|
|
(3,144 |
) |
Deferred
income tax expense
|
|
|
6,097 |
|
|
|
(1,948 |
) |
Policy
acquisition costs, net of amortization
|
|
|
(1,480 |
) |
|
|
2,133 |
|
Premium
finance contracts receivable
|
|
|
- |
|
|
|
219 |
|
Other
assets
|
|
|
(766 |
) |
|
|
360 |
|
Unpaid
losses and LAE
|
|
|
1,510 |
|
|
|
(482 |
) |
Unearned
premiums
|
|
|
5,084 |
|
|
|
(11,718 |
) |
Premium
deposits and customer credit balances
|
|
|
348 |
|
|
|
(1,154 |
) |
Income
taxes payable
|
|
|
- |
|
|
|
(4,226 |
) |
Bank
overdraft
|
|
|
2,776 |
|
|
|
217 |
|
Accounts
payable and accrued expenses
|
|
|
(1,235 |
) |
|
|
(1,646 |
) |
Net
cash provided (used) by operating activities
|
|
|
2,185 |
|
|
|
(13,921 |
) |
Cash
flow (used) provided by investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of investment securities
|
|
|
51,476 |
|
|
|
99,453 |
|
Purchases
of investment securities available for sale
|
|
|
(128,808 |
) |
|
|
(35,562 |
) |
Purchases
of property and equipment
|
|
|
(13 |
) |
|
|
(83 |
) |
Net
cash (used) provided by investing activities
|
|
|
(77,345 |
) |
|
|
63,808 |
|
Cash
flow used by financing activities:
|
|
|
|
|
|
|
|
|
Exercised
stock options
|
|
|
- |
|
|
|
1,337 |
|
Dividends
paid
|
|
|
(1,443 |
) |
|
|
(4,254 |
) |
Acquisition
of Common Stock
|
|
|
- |
|
|
|
(144 |
) |
Tax
benefit provision related to non-cash compensation
|
|
|
123 |
|
|
|
115 |
|
Net
cash used by financing activities
|
|
|
(1,320 |
) |
|
|
(2,946 |
) |
Net
(decrease) increase in cash and short term investments
|
|
|
(76,480 |
) |
|
|
46,941 |
|
Cash
and short term investments at beginning of period
|
|
|
124,577 |
|
|
|
22,524 |
|
Cash
and short term investments at end of period
|
|
$ |
48,097 |
|
|
$ |
69,465 |
|
SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21ST CENTURY
HOLDING COMPANY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine Months Ended September 30,
|
|
(continued)
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars
in Thousands)
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
178 |
|
|
$ |
8,500 |
|
Non-cash
investing and finance activities:
|
|
|
|
|
|
|
|
|
Accrued
dividends payable
|
|
$ |
481 |
|
|
$ |
1,443 |
|
SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21st Century
Holding Company
Notes
to Consolidated Financial Statements
(1)
Organization
and Business
In this
Quarterly Report on Form 10-Q, “21st
Century” and the terms “Company”, “we”, “us” and “our” refer to 21st Century
Holding Company and its subsidiaries, unless the context indicates
otherwise.
21st Century
is an insurance holding company. Through our subsidiaries and contractual
relationships, we control substantially all aspects of the insurance
underwriting, distribution and claims processes for most products offered. We
are authorized to underwrite homeowners’ multiple peril, commercial general
liability, personal and commercial automobile, fire, allied lines, surety,
commercial multi-peril and inland marine in various states on behalf of our
wholly owned subsidiaries, Federated National Insurance Company (“Federated
National”) and American Vehicle Insurance Company (“American
Vehicle”).
Federated
National is licensed as an admitted carrier in Florida. Through contractual
relationships with a network of approximately 4,200 independent agents, of which
300 actively sell and service our products, Federated National is authorized to
underwrite homeowners’ multi-peril, fire, allied lines and personal automobile
insurance in Florida.
American
Vehicle is licensed as an admitted carrier in Florida, and underwrites
commercial general liability, and personal and commercial automobile insurance.
American Vehicle is also licensed as an admitted carrier in Alabama, Louisiana
and Texas, and underwrites commercial general liability insurance. American
Vehicle is licensed as a non-admitted carrier in Arkansas, California, Georgia,
Kentucky, Maryland, Missouri, Nevada, Oklahoma, South Carolina, Tennessee, and
Virginia, and can underwrite commercial general liability insurance in all of
these states.
An admitted carrier is an
insurance company that has received a license from the state department of
insurance giving the company the authority to write specific lines of insurance
in that state. These companies are also bound by rate and form regulations, and
are strictly regulated to protect policyholders from a variety of illegal and
unethical practices, including fraud. Admitted carriers are also required to
financially contribute to the state guarantee fund, which is used to pay for
losses if an insurance carrier becomes insolvent or unable to pay the losses due
their policyholders.
A non-admitted carrier is not
licensed by the state, but is allowed to do business in that state and is
strictly regulated to protect policyholders from a variety of illegal and
unethical practices, including fraud. Sometimes, non-admitted carriers are
referred to as “excess and surplus” lines carriers. Non-admitted
carriers are subject to considerably less regulation with respect to policy
rates and forms. Non-admitted carriers are not required to financially
contribute to and benefit from the state guarantee fund, which is used to pay
for losses if an insurance carrier becomes insolvent or unable to pay the losses
due their policyholders.
During
the nine months ended September 30, 2009, 79.3%, 16.7%, 3.7% and 0.3% of the
premiums we underwrote were for homeowners’ property and casualty insurance,
commercial general liability insurance, federal flood, and personal automobile
insurance, respectively. During the nine months ended September 30, 2008, 68.4%,
27.4%, 3.7% and 0.5% of the premiums we underwrote were for homeowners’ property
and casualty insurance, commercial general liability insurance, federal flood
and personal automobile insurance, respectively.
Our
business, results of operations and financial condition are subject to
fluctuations due to a variety of factors. Abnormally high severity or frequency
of claims in any period could have a material adverse effect on our business,
results of operations and financial condition. When our estimated liabilities
for unpaid losses and loss adjustment expenses (“LAE”) are less than actual
losses and LAE, we increase reserves with a corresponding reduction in our net
income in the period in which the deficiency is identified. Conversely, when our
estimated liabilities for unpaid losses and LAE are greater than actual losses
and LAE, we decrease reserves with a corresponding increase in our net income in
the period in which the deficiency is identified.
We
internally process claims made by our insureds through our wholly owned claims
adjusting company, Superior Adjusting, Inc. (“Superior”). We also offer premium
financing to our own and third-party insureds through our wholly owned
subsidiary, Federated Premium Finance, Inc. (“Federated
Premium”).
21st Century
Holding Company
Notes
to Consolidated Financial Statements
Assurance
Managing General Agents, Inc. (“Assurance MGA”), a wholly owned subsidiary, acts
as Federated National’s and American Vehicle’s exclusive managing general agent
in the state of Florida and is also licensed as a managing general agent in the
states of Alabama, Arkansas, Georgia, Illinois, Louisiana, Mississippi,
Missouri, New York, Nevada, Texas and Virginia. During the first nine months of
2009, Assurance MGA contracted with several third party insurance companies to
sell commercial general liability, workers compensation and inland marine
through Assurance MGA’s existing network of distributors. This process will
continue throughout 2009 as Assurance MGA benefits from the arrangement by
receiving commission revenue from policies sold by its insurance partners, while
minimizing its risks.
Assurance
MGA earns commissions and fees for providing policy administration, marketing,
accounting and analytical services, and for participating in the negotiation of
reinsurance contracts. Assurance MGA generates approximately a 6% commission fee
and a $25 per policy fee from its affiliates Federated National and American
Vehicle.
Insure-Link,
Inc. (“Insure-Link”) was formed in March 2008 to serve as an independent
insurance agency. The insurance agency markets direct to the public to provide a
variety of insurance products and services to individual clients as well as
business clients by offering a full line of insurance products including, but
not limited to, homeowners’, personal and commercial automobile,
commercial general liability and workers compensation insurance through their
agency appointments with over fifty different carriers. Insure-Link will
expand its’ business through marketing and by acquiring other insurance
agencies.
Basis
of Presentation
The accompanying unaudited, condensed
consolidated financial statements for the Company and its subsidiaries have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) for interim financial information, and the
Securities and Exchange Commission (“SEC”) rules for interim financial
reporting. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been condensed or
omitted pursuant to such rules and regulations. However, in the opinion of
management, the accompanying financial statements reflect all normal recurring
adjustments necessary to present fairly the Company’s financial position as of
September 30, 2009 and the results of operations and cash flows for the periods
presented. The results of operations for the interim periods presented are not
necessarily indicative of the results of operations to be expected for any
subsequent interim period or for the fiscal year ending December 31, 2009. The
accompanying unaudited condensed consolidated financial statements and notes
thereto should be read in conjunction with the audited consolidated financial
statements for the year ended December 31, 2008 included in the Company’s Form
10-K, which was filed with the SEC on March 16, 2009.
In
preparing the interim unaudited condensed consolidated financial statements,
management was required to make certain estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues, expenses and related
disclosures at the financial reporting date and throughout the periods being
reported upon. Certain of the estimates result from judgments that can be
subjective and complex and consequently actual results may differ from these
estimates.
Material
estimates that are particularly susceptible to significant change in the
near-term relate to the determination of loss and LAE, ceded reinsurance
balances payable, the recoverability of deferred policy acquisition costs, the
determination of federal income taxes, and the net realizable value of
reinsurance recoverables. Although considerable variability is inherent in these
estimates, management believes that the amounts provided are reasonable. These
estimates are continually reviewed and adjusted as necessary. Such adjustments
are reflected in current operations.
All
significant intercompany balances and transactions have been eliminated. Certain
reclassifications have been made to the prior-period balances to conform to the
current-period presentation.
21st Century
Holding Company
Notes
to Consolidated Financial Statements
(3)
Summary of Significant Accounting Policies and Practices
(A) Critical Accounting
Policies
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions about future events that affect the amounts
reported in the financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from those estimates, and such differences may be
material to the financial statements.
The most
significant accounting estimates inherent in the preparation of our financial
statements include estimates associated with management’s evaluation of the
determination of (i) liability for unpaid losses and LAE, (ii) the amount and
recoverability of amortization of deferred policy acquisition costs (“DPAC”),
and (iii) estimates for our reserves with respect to finance contracts, premiums
receivable and deferred income taxes. Various assumptions and other factors
underlie the determination of these significant estimates, which are described
in greater detail at Footnote 2 of the Company’s audited financial statements
for the fiscal year ended December 31, 2008, which we included in the Company’s
Annual Report on Form 10-K which was filed with the SEC on March 16,
2009.
We
believe that during the first nine months of fiscal 2009 there were no
significant changes in those critical accounting policies and estimates. Senior
management has reviewed the development and selection of our critical accounting
policies and estimates and their disclosure in this Form 10-Q with the Audit
Committee of our Board of Directors.
The
process of determining significant estimates is fact-specific and takes into
account factors such as historical experience, current and expected economic
conditions, and in the case of unpaid losses and LAE, an actuarial valuation.
Management regularly reevaluates these significant factors and makes adjustments
where facts and circumstances dictate. In selecting the best estimate, we
utilize various actuarial methodologies. Each of these methodologies is designed
to forecast the number of claims we will be called upon to pay and the amounts
we will pay on average to settle those claims. In arriving at our best estimate,
our actuaries consider the likely predictive value of the various loss
development methodologies employed in light of underwriting practices, premium
rate changes and claim settlement practices that may have occurred, and weight
the credibility of each methodology. Our actuarial methodologies take into
account various factors, including, but not limited to, paid losses, liability
estimates for reported losses, paid allocated LAE, salvage and other recoveries
received, reported claim counts, open claim counts and counts for claims closed
with and without payment for loss.
Accounting
for loss contingencies pursuant to Financial Accounting Standards Board (“FASB”)
issued guidance involves the existence of a condition, situation or set of
circumstances involving uncertainty as to possible loss that will ultimately be
resolved when one or more future event(s) occur or fail to occur. Additionally,
accounting for a loss contingency requires management to assess each event as
probable, reasonably possible or remote. Probable is defined as the future event
or events are likely to occur. Reasonably possible is defined as the chance of
the future event or events occurring is more than remote but less than probable,
while remote is defined as the chance of the future event or events occurring is
slight. An estimated loss in connection with a loss contingency shall be
recorded by a charge to current operations if both of the following conditions
are met: First, the amount can be reasonably estimated, and second, the
information available prior to issuance of the financial statements indicates
that it is probable that a liability has been incurred at the date of the
financial statements. It is implicit in this condition that it is probable that
one or more future events will occur confirming the fact of the loss or
incurrence of a liability.
FASB
issued guidance addresses accounting and reporting for (a) investments in equity
securities that have readily determinable fair values and (b) all investments in
debt securities. The guidance requires that these securities be classified into
one of three categories, Held-to-maturity, Trading, or Available-for-sale
securities.
21st Century
Holding Company
Notes
to Consolidated Financial Statements
Investments
classified as held-to-maturity include debt securities wherein the Company’s
intent and ability are to hold the investment until maturity. The accounting
treatment for held-to-maturity investments is to carry them at amortized cost
without consideration to unrealized gains or losses. Investments classified as
trading securities include debt and equity securities bought and held primarily
for the sale in the near term. The accounting treatment for trading securities
is to carry them at fair value with unrealized holding gains and losses included
in current period operations. Investments classified as available-for-sale
include debt and equity securities that are not classified as held-to-maturity
or as trading security investments. The accounting treatment for
available-for-sale securities is to carry them at fair value with unrealized
holding gains and losses excluded from earnings and reported as a separate
component of shareholders’ equity, namely “Other Comprehensive
Income”.
We are
required to review the contractual terms of all our reinsurance purchases to
ensure compliance with FASB issued guidance. The guidance establishes
the conditions required for a contract with a reinsurer to be accounted for as
reinsurance and prescribes accounting and reporting standards for those
contracts. Contracts that do not result in the reasonable possibility that the
reinsurer may realize a significant loss from the insurance risk assumed
generally do not meet the conditions for reinsurance accounting and must be
accounted for as deposits. The guidance also requires us to disclose the nature,
purpose and effect of reinsurance transactions, including the premium amounts
associated with reinsurance assumed and ceded. It also requires disclosure of
concentrations of credit risk associated with reinsurance receivables and
prepaid reinsurance premiums.
(B)
Impact of New Accounting Pronouncements
In June
2009, the FASB issued new accounting guidance related to accounting standards
codification and the hierarchy of GAAP. This guidance provides for the FASB
Accounting Standards Codification (the “Codification”) to become the single
official source of authoritative, nongovernmental U.S. GAAP. The
Codification did not change GAAP but reorganized the literature. The
guidance is effective for interim and annual periods ending after
September 15, 2009.
In May
2009, FASB issued guidance related to subsequent events. The objective of
the guidance is to establish general standards of accounting for disclosure of
events that occur after the balance sheet date but before financial statements
are issued or available to be issued. In particular, the guidance sets
forth:
|
1.
|
the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial
statements,
|
|
2.
|
the
circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial
statements, and,
|
|
3.
|
the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet
date.
|
In
accordance with this guidance, an entity should apply the requirements to
interim or annual financial periods ending after June 15, 2009. The
adoption of this guidance did not have a material impact on the Company’s
financial statements or condition.
In April
2009, the FASB issued new accounting guidance related to the recognition and
presentation of other-than-temporary impairments. In April 2009, the SEC
also adopted similar guidance with Staff Accounting Bulletin (“SAB”) No. 111
(“SAB 111) on Other-Than Temporary Impairment. This new accounting
guidance establishes a new method of recognizing and reporting
other-than-temporary impairments of debt securities and contains additional
disclosure requirements related to debt and equity securities. For debt
securities, the “ability and intent to hold” provision is eliminated, and
impairment is considered to be other-than-temporary if an entity
(i) intends to sell the security, (ii) more likely than not will be
required to sell the security before recovering its cost, or (iii) does not
expect to recover the security’s entire amortized cost basis (even if the entity
does not intend to sell). This new framework does not apply to equity
securities (i.e., impaired equity securities will continue to be evaluated under
previously existing guidance). The “probability” standard relating to the
collectability of cash flows is eliminated, and impairment is now considered to
be other-than-temporary if the present value of cash flows expected to be
collected from the debt security is less than the amortized cost basis of the
security. The accounting guidance provides that for debt securities which
(i) an entity does not intend to sell and (ii) it is not more likely
than not that the entity will be required to sell before the anticipated
recovery of its remaining amortized cost basis, the impairment is separated into
the amount related to estimated credit losses and the amount related to all
other factors. The amount of the total impairment related to all other factors
is recorded in other comprehensive loss and the amount related to estimated
credit loss is recognized as a charge against current period earnings. The
accounting guidance is effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted. The adoption of this
guidance did not have a material impact on the Company’s consolidated financial
statements.
21st Century
Holding Company
Notes
to Consolidated Financial Statements
In April
2009, the FASB issued new accounting guidance related to interim disclosures
about fair value of certain financial instruments. This guidance
relates to fair value disclosures in public entity financial statements for
financial instruments and increases the frequency of those disclosures,
requiring public entities to provide the disclosures on a quarterly basis,
rather than annually. This guidance is effective for interim and
annual periods ending after June 15, 2009. The adoption of this
guidance did not have a material impact on the Company’s consolidated financial
statements.
In
September 2006, FASB issued new accounting guidance that enhances existing
guidance for measuring assets and liabilities using fair value and requires
additional disclosure about the use of fair value for measurement. The
adoption of this guidance did not have a material impact on the Company’s
financial statements or condition.
In
October 2008, the FASB issued new accounting guidance related to determining the
fair value of a financial asset when the market for that asset is not
active. The purpose of the guidance was to clarify the application of
previous accounting guidance. The guidance allows for the use of
management’s internal assumptions about future cash flows with appropriately
risk-adjusted discount rates when relevant observable market data does not
exist. The guidance was effective upon issuance, including prior
periods for which financial statements had not been issued. The
adoption of this guidance did not have a material impact on the Company’s
financial statements or condition.
In April
2009, the FASB issued further accounting guidance related to determining fair
value when the volume and level of activity for the asset or liability have
significantly decreased and identifying transactions that are not orderly.
The guidance indicates that if an entity determines that either the volume
and/or level of activity for an asset or liability has significantly decreased
(from normal conditions for that asset or liability) or price quotations or
observable inputs are not associated with orderly transactions, increased
analysis and management judgment will be required to estimate fair value. The
guidance is effective for interim and annual periods ending after June 15,
2009, with early adoption permitted and must be applied prospectively. The
adoption of this guidance did not have a material impact on the Company’s
financial statements or condition.
In
March 2008, the FASB issued new accounting guidance related to disclosures
about derivative instruments and hedging activities. This guidance
requires companies with derivative instruments to disclose information that
should enable financial-statement users to understand how and why a company uses
derivative instruments, how derivative instruments and related hedged items are
accounted for and how derivative instruments and related hedged items affect a
company’s financial position, financial performance and cash flows. This
guidance is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The Company
does not utilize derivative instruments, and, accordingly the adoption of this
guidance did not have an impact on the Company’s consolidated financial
statements.
In
February 2007, FASB issued new accounting guidance related to the fair value
option for financial assets and financial liabilities. This guidance
permits an entity to measure many financial assets and financial liabilities at
fair value that are not currently required to be measured at fair value.
Entities that elect the fair value option will report unrealized gains and
losses in earnings at each subsequent reporting date. The fair value option may
be elected on an instrument-by-instrument basis, with a few exceptions. This
guidance amends previous guidance to extend the use of the fair value option to
available-for-sale and held-to-maturity securities. The guidance also
establishes presentation and disclosure requirements to help financial statement
users understand the effect of the election. We adopted this guidance on its
effective date, January 1, 2008. The Company did not elect to measure
any financial assets and liabilities, and accordingly, to date, there is no
impact on our consolidated financial statements.
21st Century
Holding Company
Notes
to Consolidated Financial Statements
Other
recent accounting pronouncements issued by the FASB, the American Institute of
Certified Public Accountants (“AICPA”), and the SEC did not or are not believed
by management to have a material impact on the Company’s present or future
financial statements.
(C) Stock Options
Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
FASB issued guidance using the modified-prospective-transition method. Under
that transition method, compensation cost recognized during the nine months
ended September 30, 2009 includes compensation cost for all share-based payments
granted subsequent to January 1, 2006, based on the grant date fair-value
estimated in accordance with the guidance.
(D)
Earnings per Share
Basic
earnings per share (“Basic EPS”) is computed by dividing net income by the
weighted average number of common shares outstanding during the period
presented. Diluted earnings per share (“Diluted EPS”) is computed by
dividing net income by the weighted average number of shares of common stock and
common stock equivalents outstanding during the period presented; outstanding
warrants and stock options are considered common stock equivalents and are
included in the calculation using the treasury stock method.
(E)
Reclassifications
No
reclassification of the 2008 financial statements was necessary to conform to
the 2009 presentation.
(4)
Commitments and Contingencies
Management has a responsibility to
continually measure and monitor its commitments and its contingencies. The
nature of the Company’s commitments and contingencies can be grouped into three
major categories; insured claim activity, assessment related activities and
operational matters.
(A)
Insured Claim Activity
We are
involved in claims and legal actions arising in the ordinary course of business.
Revisions to our estimates are based on our analysis of subsequent information
that we receive regarding various factors, including: (i) per claim information;
(ii) company and industry historical loss experience; (iii) legislative
enactments, judicial decisions, legal developments in the awarding of damages,
and (iv) trends in general economic conditions, including the effects of
inflation. Management revises its estimates based on the results of its
analysis. This process assumes that experience, adjusted for the effects of
current developments and anticipated trends, is an appropriate basis for
estimating the ultimate settlement of all claims. There is no precise method for
subsequently evaluating the impact of any specific factor on the adequacy of the
reserves, because the eventual redundancy or deficiency is affected by multiple
factors. In the opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on our consolidated financial position,
results of operations, or liquidity.
The
Company's subsidiaries are, from time to time, named as defendants in various
lawsuits incidental to their insurance operations. Legal actions relating to
claims made in the ordinary course of seeking indemnification for a loss covered
by the insurance policy are considered by the Company in establishing loss and
LAE reserves.
The
Company also faces in the ordinary course of business lawsuits that seek damages
beyond policy limits, commonly known as bad faith claims. The Company
continually evaluates potential liabilities and reserves for litigation of these
types using the criteria established by FASB issued guidance. Under this
guidance, reserves for a loss are recorded if the likelihood of occurrence is
probable and the amount can be reasonably estimated. If a loss, while not
probable, is judged to be reasonably possible, management will disclose, if it
can be estimated, a possible range of loss or state that an estimate cannot be
made. Management considers each legal action using this guidance and records
reserves for losses as warranted. Certain claims and legal actions have been
brought against the Company for which no loss has been accrued, and for which an
estimate of a possible range of loss cannot be made under the rules described
above.
21st Century
Holding Company
Notes
to Consolidated Financial Statements
B)
Assessment Related Activity
We
operate in a regulatory environment where certain entities and organizations
have the authority to require us to participate in assessments. Currently these
entities and organizations include, but are not limited to, the Florida
Insurance Guarantee Association (“FIGA”), Citizens Property Insurance
Corporation (“Citizens”), the Florida Hurricane Catastrophe Fund (“FHCF”) and
the Florida Joint Underwriters Association (“JUA”).
As a
direct premium writer in the state of Florida, we are required to participate in
certain insurer solvency associations under Florida Statutes Section 631.57(3)
(a), administered by FIGA. Participation in these pools is based on our written
premium by line of business to total premiums written statewide by all insurers.
Participation may result in assessments against us, as it did in 2006 and 2007.
Through 2007, we have been assessed $6.7 million in connection with the
association. For statutory accounting these assessments are not charged to
operations, in contrast, GAAP treatment is to charge current operations for the
assessments. Through policyholder surcharges, as approved by the Florida Office
of Insurance Regulation (“Florida OIR”), we have since recouped $5.9 million in
connection with these assessments. There were no assessments made for the year
ended December 31, 2008 or the nine months ended September 30, 2009. However, on
October 30, 2009, FIGA’s board met and agreed that a new assessment was prudent
in connection with recent Florida domestic insurance company insolvencies.
FIGA’s Board of Directors has recommended a 0.8% assessment on all property
lines, excluding automobile physical damage and liability accounts. The
certification process between FIGA and Florida’s OIR to affect this assessment
is in its initial stages. We have not recorded any liability in connection with
this recommendation.
During
its regularly scheduled meeting on August 17, 2005, the Board of Governors of
Citizens determined a 2004 plan year deficit existed in the High Risk Account.
Citizens decided that a $515 million Regular Assessment was in the best interest
of Citizens and consistent with Florida Statutes. On this basis, Citizens
certified for a Regular Assessment. Federated National’s
participation in this assessment totaled $2.0 million.
During a
subsequent regularly scheduled meeting on or about December 18, 2006, Citizens
Board determined an additional 2004 plan year deficit existed in the High Risk
Account. Citizens decided that a $515 million Regular Assessment was in the best
interest of Citizens and consistent with Florida Statutes. On this basis,
Citizens certified for a Regular Assessment. Federated National’s participation
in this assessment totaled $0.3 million. Provisions contained in our excess of
loss reinsurance policies provided for participation of our reinsurers totaling
$1.8 million of the $2.3 million in assessments. There was no assessment made
for the year ended December 31, 2008 or the nine months ended September 30,
2009.
Pursuant
to Florida Statutes Section 627.3512, insurers are permitted to recoup the
assessment by adding a surcharge to policies in an amount not to exceed the
amount paid by the insurer to Citizens. Federated National is currently
underwriting the recoupment in connection with the Citizens assessments and has
since recouped approximately $2.2 million. Federated National subrogated
approximately $1.8 million to the reinsurers.
The Florida OIR issued Information
Memorandum OIR-06-008M, titled Notice of Anticipated Florida
Hurricane Catastrophe Fund Assessment, and dated May 4, 2006, to
all property and casualty insurers, surplus lines insurers, and surplus lines
agents in the state of Florida placing them on notice of an anticipated FHCF
assessment. Sighting the unprecedented hurricane seasons of 2004 and 2005, the
FHCF exhausted nearly all of the $6 billion in reserves it had accumulated since
its inception in 1993. The Florida State Board of Administration, the body that
oversees the FHCF, issued its directive to levy an emergency assessment upon all
property and casualty business in the state of Florida. There is no statutory
requirement that policyholders be notified of the FHCF assessment. The FHCF and
Florida OIR are, however, recommending that insurers include the FHCF assessment
in a line item on the declaration page for two reasons: (1) this is a multi-year
assessment and (2) there may be concurrent assessments and the insureds should
know what amount is for which assessment. The assessment became effective on all
policies effective after January 1, 2007 and will be remitted to the
administrator of the assessment as collected.
In addition to the assessments noted
above, the Florida OIR has also issued Information Memorandum OIR -07-02M,
titled Information Regarding
Emergency Assessment by Citizens Property Insurance Corporation, dated
January 11, 2007, to all property and casualty insurers in the state of Florida
placing them on notice that an order had been approved for an emergency
assessment by Citizens for its High Risk Account. This order requires insurers
to begin collecting the emergency assessment for policies issued or renewed on
or after July 1, 2007. Similar to the FHCF assessment discussed above, the
Citizens emergency assessment will be remitted to the administrator of the
assessment as collected and therefore accounted for in a manner such that
amounts collected or receivable are not recorded as revenues and amounts due or
paid are not expensed.
21st Century
Holding Company
Notes
to Consolidated Financial Statements
Federated National and American Vehicle
are also required to participate in an insurance apportionment plan under
Florida Statutes Section 627.351, which is referred to as a JUA Plan. The JUA
Plan provides for the equitable apportionment of any profits realized, or losses
and expenses incurred, among participating automobile insurers. In the event of
an underwriting deficit incurred by the JUA Plan which is not recovered through
the policyholders in the JUA Plan, such deficit shall be recovered from the
companies participating in the JUA Plan in the proportion that the net direct
written premiums of each such member during the preceding calendar year bear to
the aggregate net direct premiums written in this state by all members of the
JUA Plan. Neither Federated National nor American Vehicle was assessed by the
JUA Plan during either 2009 or 2008. Future assessments by this
association are undeterminable at this time.
(C)
Operational Matters
The
Company’s consolidated federal income tax returns for 2004, 2003 and 2002 have
been examined by the Internal Revenue Service (“IRS”). The IRS
concluded its’ examination for 2003 and 2002 and there were no material changes
in the tax liability for those years. The 2004 income tax return remains under
examination.
The
Company records valuation allowances to reduce deferred tax assets to the amount
that is more likely than not to be realized. When assessing the need for
valuation allowances, the Company considers future taxable income and ongoing
prudent and feasible tax planning strategies. Should a change in circumstances
lead to a change in judgment about the realizability of deferred tax assets in
future years, the Company would adjust related valuation allowances in the
period that the change in circumstances occurs, along with a corresponding
increase or charge to net income. The resolution of tax reserves and changes in
valuation allowances could be material to the Company’s results of operations
for any period, but is not expected to be material to the Company’s financial
position.
Relative
to the Company’s commitments stemming from operational matters, effective on or
about March 1, 2006, 21st Century
sold its interest in the Lauderdale Lakes property to an unrelated party. As
part of this transaction, 21st Century
has agreed to lease the same facilities for a five-year term. Our lease for this
office space expires in December 2011.
The expected future lease payouts in
connection with this lease are as follows.
Fiscal Year
|
|
Lease payments
|
|
|
|
(Dollars in Thousands)
|
|
2009
|
|
$ |
157 |
|
2010
|
|
|
638 |
|
2011
|
|
|
650 |
|
Total
|
|
$ |
1,445 |
|
The
Company is also involved in various legal actions arising in the ordinary course
of business and not related to the insured claims activity.
From July
27, 2007, to August 7, 2007, several securities class action lawsuits were filed
against the Company and certain of its executive officers in the United States
District Court for the Southern District of Florida (“District Court”) on behalf
of all persons and entities (the “plaintiff’s”) who purchased the Company's
securities during the various class periods specified in the complaints. A
consolidated amended complaint was filed on behalf of the class on January 22,
2008. The complaint alleges that the defendants made false and misleading
statements and failed to accurately project the Company's business and financial
performance during the putative class period. The plaintiffs seek an unspecified
amount of damages and claim violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5. On March 18, 2008, a
verified shareholder derivative complaint was filed against certain current or
former officers and directors of the Company in the District
Court.
21st Century
Holding Company
Notes
to Consolidated Financial Statements
On November
7, 2008, the District Court granted in part and denied in part the
Company's motion to dismiss the consolidated class complaint with leave to amend
by December 8, 2009 or the allegations dismissed would be deemed dismissed
with prejudice without further order of the Court. Lead plaintiffs did not
seek to amend the consolidated complaint and the defendants have answered.
On July 29, 2008, the District Court granted the defendant’s motion to dismiss
the plaintiff’s shareholder derivative complaint without prejudice. On
August 27, 2009, the derivative plaintiff filed an amended shareholder
derivative complaint. On March 30, 2009, following various motions by the
parties, the Court entered an order granting defendant’s renewed motion to stay
the shareholder derivative action pending resolution of the class
action.
On
September 4, 2009,
a stipulation of settlement
("Stipulation of Settlement") was submitted to the Court
by lead plaintiffs,
the derivative plaintiff and the Defendants,
setting forth the terms of a settlement of the Class Litigation and
Derivative Litigation ("Settlement Agreement") which proposes that a
payment of $2.4 million be made to the lead plaintiffs and the derivative
plaintiff. The Stipulation of Settlement was preliminarily
approved by the Court on October 19, 2009. The Company expects that this
settlement amount will be funded by its directors and officers
insurance.
A settlement hearing
will be held before the Court on January 29, 2010, to determine whether the
proposed settlement on the terms and conditions provided for in the
Stipulation of Settlement is fair, just, reasonable and
adequate to the class, the lead plaintiffs,
the derivative plaintiff, and Defendants and should be
approved by the Court. There can be no assurance that the Court will
approve the Stipulation of Settlement on the terms contained in the
Settlement Agreement and if not approved, the Company may incur
additional costs to defend the lawsuits.
While the
Company believes that the allegations in the complaints are without merit, an
unfavorable resolution of the pending litigation could have a material adverse
effect on our financial condition. There can be no assurance that the Company
will be able to achieve a favorable settlement of the pending litigation or
obtain a favorable resolution of this litigation if it is not settled. In
addition, the current litigation could lead to increased costs or interruptions
of normal business operations of the Company.
(5)
Fair Value Disclosure
In April
2009, the FASB issued accounting guidance that if an entity determines that
either the volume and/or level of activity for an asset or liability has
significantly decreased (from normal conditions for that asset or liability) or
price quotations or observable inputs are not associated with orderly
transactions, increased analysis and management judgment will be required to
estimate fair value. This guidance is effective for interim and annual periods
ending after June 15, 2009, with early adoption permitted. This guidance
must be applied prospectively. The adoption of this guidance did not
have an impact on the Company’s financial statements or condition.
In
October 2008, the FASB issued accounting guidance to clarify the application of
GAAP in determining fair value of financial instruments in a market that is not
active. The guidance was effective upon issuance, including prior
periods for which financial statements had not been issued. Our
adoption of this guidance does not have a material effect on our financial
position, results of operations, cash flows or disclosures.
In
September 2006, FASB issued accounting guidance that defines fair value as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. This guidance also establishes a fair value hierarchy
that requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. The guidance
also categorizes assets and liabilities at fair value into one of three
different levels depending on the observation of the inputs employed in the
measurement, as follows:
Level 1 —
inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets. A quoted price for an
identical asset or liability in an active market provides the most reliable fair
value measurement because it is directly observable to the
market.
21st Century
Holding Company
Notes
to Consolidated Financial Statements
Level 2 —
inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the
financial instrument.
Level 3 —
inputs to the valuation methodology are unobservable and significant to the fair
value measurement.
Securities available for
sale: The fair value of securities available for sale is determined
by obtaining quoted prices on nationally recognized security
exchanges.
Assets
measured at fair value on a recurring basis are presented in accordance with
this guidance are as follows:
|
|
As of September 30, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(Dollars
in Thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
US
government obligations
|
|
$ |
- |
|
|
$ |
48,717 |
|
|
$ |
- |
|
|
$ |
48,717 |
|
Corporate
|
|
|
42,387 |
|
|
|
- |
|
|
|
- |
|
|
|
42,387 |
|
|
|
|
42,387 |
|
|
|
48,717 |
|
|
|
- |
|
|
|
91,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stocks
|
|
|
11,853 |
|
|
|
- |
|
|
|
- |
|
|
|
11,853 |
|
|
|
|
11,853 |
|
|
|
- |
|
|
|
- |
|
|
|
11,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt and equity securities
|
|
$ |
54,240 |
|
|
$ |
48,717 |
|
|
$ |
- |
|
|
$ |
102,957 |
|
(6)
Comprehensive Income
For the three and nine months ended
September 30, 2009 and 2008, comprehensive income consisted of the
following.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars
in Thousands)
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
income
|
|
$ |
(3,993 |
) |
|
$ |
(1,513 |
) |
|
$ |
(2,906 |
) |
|
$ |
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in net unrealized gains on investments available for sale
|
|
|
3,106 |
|
|
|
(407 |
) |
|
|
4,655 |
|
|
|
1,268 |
|
Comprehensive
(loss) income, before tax
|
|
|
(887 |
) |
|
|
(1,920 |
) |
|
|
1,749 |
|
|
|
1,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (expense) benefit related to items of other comprehensive
income
|
|
|
(1,218 |
) |
|
|
146 |
|
|
|
(1,801 |
) |
|
|
(442 |
) |
Comprehensive
(loss) income
|
|
$ |
(2,105 |
) |
|
$ |
(1,774 |
) |
|
$ |
(52 |
) |
|
$ |
1,121 |
|
21st Century
Holding Company
Notes
to Consolidated Financial Statements
(7)
Reinsurance Agreements
As is
common practice within the insurance industry, we transfer a portion of the
risks insured under our policies to other companies through the purchase of
reinsurance. We utilize reinsurance to reduce exposure to catastrophic risk and
to help manage capital, while lessening earnings volatility and improving
shareholder return, and to support the required statutory surplus requirements.
Our catastrophe reinsurance program has been designed to coordinate coverage
provided under various treaties with various retentions and limits.
Additionally, the reinsurance is maintained to protect our insurance subsidiary
against the severity of losses on individual claims or unusually serious
occurrences in which a number of claims produce an aggregate extraordinary loss
and catastrophic events. Although reinsurance does not discharge our insurance
subsidiary from its primary obligation to pay for losses insured under the
policies it issues, reinsurance does make the assuming reinsurer liable to the
insurance subsidiary for the reinsured portion of the risk. A credit exposure
exists with respect to ceded losses to the extent that any reinsurer is unable
or unwilling to meet the obligations assumed under the reinsurance contracts.
The collectability of reinsurance is subject to the solvency of the reinsurers,
interpretation of contract language and other factors. A reinsurer's insolvency
or inability to make payments under the terms of a reinsurance contract could
have a material adverse effect on our results of operations and financial
condition.
Our
reinsurance structure has significant risks, including the fact that the FHCF
may not be able to raise sufficient money to pay its claims or impair its
ability to pay its claims in a timely manner. This could result in significant
financial, legal and operational challenges to all companies, including
ours.
Therefore,
in the event of a catastrophic loss, we may become dependent upon the FHCF's
ability to pay, which may in turn, be dependent upon the FHCF's ability to issue
bonds in amounts that would be required to meet its reinsurance obligations in
the event of such a catastrophic loss. There is no assurance that the FHCF will
be able to do this. On October 20, 2009, the FHCF Advisory Council met to
discuss the improved financial markets and the positive effects on FHCF’s
financial condition. Currently, the FHCF has approximately $7.9 billion in
liquid resources, which includes $4.5 billion in on-hand cash and approximately
$3.4 billion in pre-event bond proceeds. It was also noted that the FHCF
may be able to issue approximately $11.0 billion in post-event bonds, although
this is an estimate based on a range of $5.0 billion to $20.0 billion. The
Advisory Council approved the bonding estimates. Additionally, the FHCF's
portfolio and investment results reflect that the FHCF operating fund has
increased by $500.0 million since May 2009.
FHCF
Senior Officer Jack Nicholson discussed the impact of legislative changes on the
FHCF capacity. The passage of House Bill 1495 (“HB 1495”) in
2009 paved the way for the eventual elimination of the FHCF Temporary Increase
in Coverage Limits layer authorized in 2007. HB 1495 also requires an
initial cash build-up factor of five percent, with an increase every year until
it reaches twenty-five percent. Dr. Nicholson reported that the FHCF
contract year will change in January of 2011.
The total
selected capacity of the FHCF is $23.2 billion, which Dr. Nicholson said could
require up to $18.7 billion in cash resources and bonds. Based upon these
projections, the FHCF estimates that it has a shortfall of approximately $4.2
billion, which is an improvement to the May 12, 2009 estimate that ranged from
$4.5 billion to $10.0 billion.
Dr.
Nicholson further informed the Council that it has approximately $654.0 million
in outstanding obligations from the 2004 and 2005 hurricane seasons. The
FHCF has approximately $292.0 million in resources to pay these claims, so a
projected shortfall of $362.0 million exists. Of note, new and reopened
claims have contributed to the increased losses, as well as to commercial
liability lawsuits.
Finally,
the FHCF treaty contains an exclusion that specifically states “Losses in excess
of the sum of the Balance of the Fund as of December 31 of the Contract Year and
the amount the SBA is able to raise through the issuance of revenue bonds or by
the use of other financing mechanisms, up to the limit pursuant to Section
215.555(4) (c), Florida Statutes.”
The
availability and costs associated with the acquisition of reinsurance will vary
year to year. These fluctuations, which can be significant, are not subject to
our control and may limit our ability to purchase adequate coverage. For
example, FHCF has restricted its very affordable reinsurance capacity for the
2009–2010 hurricane season, thus requiring us to replace that capacity with more
expensive private market reinsurance. The recovery of increased reinsurance
costs through rate action is not immediate and cannot be presumed, as it is
subject to Florida OIR approval.
21st Century
Holding Company
Notes
to Consolidated Financial Statements
For the
2009-2010 hurricane season, the excess of loss and FHCF treaties will insure us
for approximately $456.6 million of aggregate catastrophic losses and LAE with a
maximum single event coverage totaling approximately $349.7 million, with the
Company retaining the first $5.0 million of losses and LAE for each event. Our
reinsurance program includes coverage purchased from the private market, which
afforded optional Reinstatement Premium Protection that provides coverage beyond
the first event, along with coverage from the FHCF. Coverage afforded by the
FHCF totals approximately $259.0 million or 56.7% of the $456.6 million of
aggregate catastrophic losses and LAE. The FHCF affords coverage for the entire
season, subject to maximum payouts, without regard to any particular insurable
event.
The estimated cost to the Company for
these reinsurance products for the 2009 - 2010 hurricane season, inclusive of
approximately $18.6 million payable to the FHCF and the prepaid automatic
premium reinstatement protection will be approximately $54.4 million. The
combination of private and FHCF reinsurance treaties will afford approximately
$456.6 million of aggregate coverage with maximum first event coverage totaling
approximately $349.7 million. Our retention in connection with the first two
covered events is $5.0 million for each event.
The cost
to the Company for these reinsurance products for the 2008 - 2009 hurricane
season, inclusive of approximately $8 million payable to the FHCF and the
prepaid automatic premium reinstatement protection was approximately $31
million. These reinsurance treaties afforded approximately $298 million of
aggregate coverage with maximum single event coverage totaling approximately
$232 million. Our retention in connection with the first two covered events was
$3 million.
The cost
and amounts of reinsurance were based on management's analysis of Federated
National's exposure to catastrophic risk as of June 30, 2009. Our data was
subjected to exposure level analysis as of September 30, 2009. This analysis of
our exposure level in relation to the total exposures to the FHCF and excess of
loss treaties produced changes in limits and reinsurance premiums because of
increase in our exposure level. The September 30, 2008 change to limits total
limits was an increase of $10.3 million or 2.9% and the change to reinsurance
premiums was an increase of $1.2 million or 2.3 %. The change to management’s
June 30, 2009 analysis will be amortized over the remaining balance of the
underlying policy term. The Company’s retention did not change.
For the
2008-2009 hurricane season, the excess of loss and FHCF treaties insured us for
approximately $310.0 million of aggregate catastrophic losses and LAE with a
maximum single event coverage total of approximately $245.0 million, with the
Company retaining the first $3.0 million of losses and LAE. Our reinsurance
program included coverage purchased from the private market, which afforded
optional Reinstatement Premium Protection that provides coverage beyond the
first event, along with coverage from the FHCF. Coverage afforded by the FHCF
totals approximately $167.0 million or 54% of the $310.0 million of aggregate
catastrophic losses and LAE. The FHCF afforded coverage for the entire season,
subject to maximum payouts, without regard to any particular insurable event.
There were no claims made in connection with these treaties.
The FHCF
Reimbursement Contract and Addendums are all effective June 1, 2009 and the
private excess of loss type treaties are all effective July 1, 2009; all
treaties have a term of one year. Effective January 1, 2012 the FHCF
Reimbursement Contract and addendums are scheduled to change to a calendar
year-end basis for Federated National as a limited apportionment
company.
21st Century
Holding Company
Notes
to Consolidated Financial Statements
The
2009-2010 private reinsurance companies and their respective A. M. Best rating
are listed in the table as follows.
Reinsurer
|
|
A.M. Best Rating
|
|
|
|
|
|
|
|
|
|
|
UNITED
STATES
|
|
|
|
|
|
|
Everest
Reinsurance Company
|
|
|
A+
|
|
|
**
|
Munich
Reinsurance America, Inc.
|
|
|
A+
|
|
|
**
|
QBE
Reinsurance Corporation
|
|
|
A
|
|
|
**
|
|
|
|
|
|
|
|
BERMUDA
|
|
|
|
|
|
|
ACE
Tempest Reinsurance Limited
|
|
|
A+
|
*
|
|
|
Amlin
Bermuda Limited
|
|
|
A
|
|
|
|
Ariel
Reinsurance Company Limited
|
|
|
A-
|
*
|
|
|
DaVinci
Reinsurance Limited
|
|
|
A
|
*
|
|
|
Flagstone
Reinsurance Limited
|
|
|
A-
|
|
|
|
Hiscox
Insurance Company Limited
|
|
|
A
|
*
|
|
|
Montpelier
Reinsurance Limited
|
|
|
A-
|
|
|
|
Platinum
Underwriters Bermuda Limited
|
|
|
A
|
*
|
|
|
Renaissance
Reinsurance Limited
|
|
|
A+
|
*
|
|
|
Torus
Insurance (Bermuda) Limited
|
|
|
A-
|
*
|
|
|
|
|
|
|
|
|
|
LONDON
& EUROPE
|
|
|
|
|
|
|
Amlin
Syndicate No. 2001 (AML)
|
|
|
A+
|
|
|
**
|
Antares
Syndicate No. 1274 (AUL)
|
|
|
A
|
|
|
**
|
Arrow
Syndicate No. 1910 (ARW)
|
|
|
A
|
*
|
|
**
|
Broadgate
Syndicate No. 1301 (BGT)
|
|
|
A
|
|
|
**
|
Liberty
Syndicates Services Limited, Paris
for
and on behalf of Lloyd's Syndicate No. 4472 (LIB)
|
|
|
A
|
|
|
**
|
Novae
Syndicate No. 2007 (NVA)
|
|
|
A
|
|
|
**
|
SCOR
Switzerland AG
|
|
|
A-
|
|
|
|
|
|
|
|
|
|
|
HEDGE
FUNDS / COLLATERALIZED
|
|
|
|
|
|
|
Actua
Re Limited
|
|
|
NR
|
*
|
|
(1)
|
Allianz
Risk Transfer AG (Bermuda Branch)
|
|
|
NR-5
|
*
|
|
(2)
|
* 2009
Reinstatement Premium Protection Program Participants
**
Admitted in Florida as a reinsurer, whether through licensing, accreditation or
other means.
(Blank)
Non admitted reinsurer in Florida.
(1)
Participant has funded a trust agreement for their partcipation with
approximately $6.4 million of cash and U.S. Government obligations of American
institutions at fair market value.
(2)
Standard & Poor's rated "AA" (Obligor's capacity to meet its financial
commitment on the obligation is very strong)
We are
selective in choosing reinsurers and consider numerous factors, the most
important of which are the financial stability of the reinsurer, their history
of responding to claims and their overall reputation. In an effort to minimize
our exposure to the insolvency of a reinsurer, we evaluate the acceptability and
review the financial condition of the reinsurer at least
annually.
21st Century
Holding Company
Notes
to Consolidated Financial Statements
In order
to expand our commercial general liability business, American Vehicle has
entered into various quota-share reinsurance agreements wherein American Vehicle
is the cedant. These quota-share reinsurance treaties require American Vehicle
to securitize its credit risk by posting irrevocable letters of credit. The
irrevocable letters of credit are fully collateralized by American Vehicle and
are further guaranteed by the parent company, 21st
Century. Outstanding irrevocable letters of credit total $2.8 million and $3.0
million for the period ended September 30, 2009 and December 31, 2008,
respectively.
On March
26, 2009, we announced that American Vehicle received approval from the Florida
OIR to enter into a reinsurance relationship allowing American Vehicle the
opportunity to market and underwrite commercial general liability insurance
through a company that has an "A" rating with A.M. Best Company, Inc. ("A.M.
Best"). This agreement will enable American Vehicle to deploy an artisan
commercial general liability program in the Southeastern states to policyholders
who require their commercial general liability insurance policy to come from an
insurance company with a satisfactory A.M. Best rating. Operations began during
the quarter ended June 30, 2009.
(8) Stock Compensation
Plans
We implemented a stock option plan in
September 1998, which expired in September 2008, and provided for the granting
of stock options to officers, key employees and consultants. The
objectives of this plan included attracting and retaining the best personnel,
providing for additional performance incentives, and promoting our success by
providing employees the opportunity to acquire common stock. Options outstanding
under this plan were granted at prices either equal to or above the market value
of the stock on the date of grant, typically vest over a four-year or five-year
period and expire six or ten years after the grant date. Under this plan, we
were authorized to grant options to purchase up to 900,000 common shares, and,
as of September 30, 2009 and December 31, 2008, we had outstanding exercisable
options to purchase 124,599 and 130,099 shares, respectively.
In 2001,
we implemented a franchisee stock option plan that was terminated during
September 2008, and provided for the granting of stock options to individuals
purchasing Company owned agencies that were then converted to franchised
agencies. The purpose of the plan was to advance our interests by
providing an additional incentive to encourage managers of Company owned
agencies to purchase the agencies and convert them to franchises. Options
outstanding under the plan were granted at prices, which were above the market
value of the stock on the date of grant, vested over a ten-year period, and
expired ten years after the grant date. Under this plan, we were authorized to
grant options to purchase up to 988,500 common shares, and, as of September 30,
2009, we had no outstanding exercisable options to purchase shares.
In 2002,
we implemented the 2002 Stock Option Plan. The purpose of this plan
is to advance our interests by providing an additional incentive to attract,
retain and motivate highly qualified and competent persons who are key to the
Company, including employees, consultants, independent contractors, officers and
directors. Our success is largely dependent upon their efforts and judgment;
therefore, by authorizing the grant of options to purchase common stock, we
encourage stock ownership. Options outstanding under the plan were granted at
prices either equal to or above the market value of the stock on the date of
grant, typically vest over a five-year period, and expire six years after the
grant date. Under this plan, we are authorized to grant options to purchase up
to 1,800,000 common shares, and, as of September 30, 2009 and December 31, 2008,
we had outstanding exercisable options to purchase 744,951 and 658,151 shares,
respectively.
During
the nine months ended September 30, 2009, we granted 40,071 qualified stock
options and 106,929 non-qualified stock options under our 2002 Stock Option Plan
to employees, executive officers and directors with an average option price of
$4.37 per share. Like all other outstanding stock options, these stock options
contain service conditions and do not contain any performance conditions. For a
further discussion regarding the provisions of FASB issued guidance and its
effect on our operations, please refer to the foregoing section within this
footnote.
21st Century
Holding Company
Notes
to Consolidated Financial Statements
Summary activity in the Company’s stock
option plans for the period from December 31, 2006 to September 30, 2009 is as
follows.
|
|
1998 Plan
|
|
|
2002 Plan
|
|
|
|
Number of Shares
|
|
|
Weighted
Average
Option
Exercise Price
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Option
Exercise Price
|
|
Outstanding
at December 31, 2006
|
|
|
44,750 |
|
|
$ |
18.47 |
|
|
|
637,358 |
|
|
$ |
13.80 |
|
Granted
|
|
|
109,849 |
|
|
$ |
13.32 |
|
|
|
57,151 |
|
|
$ |
13.18 |
|
Exercised
|
|
|
(2,000 |
) |
|
$ |
6.67 |
|
|
|
(16,300 |
) |
|
$ |
10.02 |
|
Cancelled
|
|
|
- |
|
|
$ |
- |
|
|
|
(17,900 |
) |
|
$ |
15.82 |
|
Outstanding
at December 31, 2007
|
|
|
152,599 |
|
|
$ |
14.92 |
|
|
|
660,309 |
|
|
$ |
13.78 |
|
Granted
|
|
|
4,500 |
|
|
$ |
8.67 |
|
|
|
162,500 |
|
|
$ |
8.92 |
|
Exercised
|
|
|
(13,500 |
) |
|
$ |
6.67 |
|
|
|
(141,458 |
) |
|
$ |
8.81 |
|
Cancelled
|
|
|
(13,500 |
) |
|
$ |
10.03 |
|
|
|
(23,200 |
) |
|
$ |
12.60 |
|
Outstanding
at December 31, 2008
|
|
|
130,099 |
|
|
$ |
16.07 |
|
|
|
658,151 |
|
|
$ |
13.69 |
|
Granted
|
|
|
- |
|
|
$ |
- |
|
|
|
147,000 |
|
|
$ |
4.37 |
|
Exercised
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
Cancelled
|
|
|
(5,500 |
) |
|
$ |
20.23 |
|
|
|
(60,200 |
) |
|
$ |
11.25 |
|
Outstanding
at September 30, 2009
|
|
|
124,599 |
|
|
$ |
15.88 |
|
|
|
744,951 |
|
|
$ |
12.05 |
|
Options outstanding as of September 30,
2009 are exercisable as follows.
|
|
1998 Plan
|
|
|
2002 Plan
|
|
Options Exercisable at:
|
|
Number of Shares
|
|
|
Weighted
Average
Option
Exercise Price
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Option
Exercise Price
|
|
September
30, 2009
|
|
|
54,919 |
|
|
$ |
15.88 |
|
|
|
323,253 |
|
|
$ |
12.05 |
|
December
31, 2009
|
|
|
9,970 |
|
|
$ |
15.88 |
|
|
|
64,226 |
|
|
$ |
12.05 |
|
December
31, 2010
|
|
|
19,670 |
|
|
$ |
15.88 |
|
|
|
138,098 |
|
|
$ |
12.05 |
|
December
31, 2011
|
|
|
19,670 |
|
|
$ |
15.88 |
|
|
|
97,285 |
|
|
$ |
12.05 |
|
December
31, 2012
|
|
|
19,670 |
|
|
$ |
15.88 |
|
|
|
70,389 |
|
|
$ |
12.05 |
|
December
31, 2013
|
|
|
700 |
|
|
$ |
15.88 |
|
|
|
36,300 |
|
|
$ |
12.05 |
|
Thereafter
|
|
|
- |
|
|
$ |
15.88 |
|
|
|
15,400 |
|
|
$ |
12.05 |
|
Total
options exercisable
|
|
|
124,599 |
|
|
|
|
|
|
|
744,951 |
|
|
|
|
|
Prior to
January 1, 2006, we accounted for the plans under the recognition and
measurement provisions of stock-based compensation using the intrinsic value
method prescribed by the Accounting Principles Board (“APB”) and related
Interpretation , as permitted by FASB issued guidance. Under these provisions,
no stock-based employee compensation cost was recognized in the Statement of
Operations as all options granted under those plans had an exercise price equal
to or less than the market value of the underlying common stock on the date of
grant.
Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
FASB issued guidance using the modified-prospective-transition method. Under
that transition method, compensation costs recognized during the nine months
ended September 30, 2009 and 2008 include:
|
·
|
Compensation
cost for all share-based payments granted prior to, but not yet vested as
of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of FASB issued guidance,
and
|
21st Century
Holding Company
Notes
to Consolidated Financial Statements
|
·
|
Compensation
cost for all share-based payments granted subsequent to January 1, 2006,
based on the grant-date fair-value estimated in accordance with the
provisions of FASB issued guidance. Results for prior periods have not
been restated, as not required to be by the
pronouncement.
|
As a
result of adopting FASB issued guidance on January 1, 2006, the Company’s income
from continuing operations before provision for income taxes and net income for
the nine months ended September 30, 2009 are lower by approximately $326,000 and
$206,000, respectively, than if it had continued to account for share-based
compensation under ABP guidance.
As a
result of adopting FASB issued guidance on January 1, 2006, the Company’s income
from continuing operations before provision for income taxes and net income for
the nine months ended September 30, 2008, are lower by approximately $361,000
and $246,000, respectively, than if it had continued to account for share-based
compensation under ABP guidance.
Basic and
diluted earnings per share for the nine months ended September 30, 2009 would
have been ($0.34), if the Company had not adopted FASB issued guidance, compared
with reported basic and diluted earnings per share of ($0.36). Basic and diluted
earnings per share for the nine months ended September 30, 2008 would have been
$.07 if the Company had not adopted FASB issued guidance, compared with reported
basic and diluted earnings per share of $0.04.
Basic and
diluted earnings per share for the three months ended September 30, 2009 would
have been ($0.49), if the Company had not adopted FASB issued guidance, compared
with reported basic and diluted earnings per share of ($0.50). Basic and diluted
earnings per share for the three months ended September 30, 2008 would have been
($0.18) if the Company had not adopted FASB issued guidance, compared with
reported basic and diluted earnings per share of ($0.19).
Because
the change in income taxes payable includes the effect of excess tax benefits,
those excess tax benefits also must be shown as a separate operating cash
outflow so that operating cash flows exclude the effect of excess tax benefits.
FASB issued guidance requires the cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost recognized for
those options (excess tax benefits) to be classified as financing cash
flows.
The
weighted average fair value of options granted during the three months ended
September 30, 2009 and 2008 estimated on the date of grant using the
Black-Scholes option-pricing model was $1.29 and $1.95,
respectively.
The estimated fair value of options
granted is determined on the date of grant using the following
assumptions.
|
|
September 30, 2009
|
|
September 30, 2008
|
Dividend yield
|
|
5.90% - 17.30%
|
|
5.50% - 13.00%
|
Expected volatility
|
|
57.54% - 82.65%
|
|
54.65% - 58.20%
|
Risk-free interest rate
|
|
1.22% - 1.50%
|
|
1.60% - 2.95%
|
Expected life (in years)
|
|
3.45 - 4.16
|
|
2.69 - 3.19
|
Volatility
of a share price is the standard deviation of the continuously compounded rates
of return on the share over a specified period. The higher the volatility, the
more returns on the shares can be expected to vary up or down. The expected
volatility is a measure of the amount by which a financial variable such as a
share price has fluctuated (historical volatility) or is expected to fluctuate
(expected volatility) during a period. Our volatility as reflected above
contemplates only historical volatility.
21st Century
Holding Company
Notes
to Consolidated Financial Statements
Summary
information about the Company’s stock options outstanding as of September 30,
2009 is as follows.
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted
|
|
|
|
|
|
|
Range of
|
|
|
Outstanding at
|
|
|
Contractual
|
|
|
Average
|
|
|
Exercisable at
|
|
|
|
Exercise Price
|
|
|
September 30, 2009
|
|
|
Periods in Years
|
|
|
Exercise Price
|
|
|
September 30, 2009
|
|
1998
Plan
|
|
$ |
6.67 - $27.79 |
|
|
|
124,599 |
|
|
|
3.61 |
|
|
$ |
15.88 |
|
|
|
54,919 |
|
2002
Plan
|
|
$ |
3.03 - $18.21 |
|
|
|
744,951 |
|
|
|
3.22 |
|
|
$ |
12.05 |
|
|
|
323,253 |
|
(9)
Stockholders’ Equity
Capital Stock
The Company’s authorized capital
consists of 1,000,000 shares of preferred stock, par value $0.01 per share, and
25,000,000 shares of common stock, par value $0.01 per share. As of September
30, 2009, there were no preferred shares issued or outstanding and there were
8,013,894 shares of common stock outstanding.
(10)
Subsequent Events
None
21st Century
Holding Company
General
information about 21st Century
Holding Company can be found at www.21stcenturyholding.com; however,
the information that can be accessed through our web site is not part of our
report. We make our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to these reports filed or furnished
pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
available free of charge on our web site, as soon as reasonably practicable
after they are electronically filed with the SEC.
Item
2
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
You
should read the following discussion in conjunction with our condensed
consolidated financial statements and related notes and information included
under this Item 2 and elsewhere in this Quarterly Report on Form 10-Q and in our
Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 16,
2009. Unless the context requires otherwise, as used in this Form 10-Q, the
terms “Company,” “we,” “us” and “our,” refers to 21st Century
Holding Company and its subsidiaries, unless the context indicates
otherwise.
Forward-Looking
Statements
Statements
in this Quarterly Report on Form 10-Q for the nine months ended September 30,
2009 (“Form 10-Q”) or in documents that are incorporated by reference
that are not historical fact are forward-looking statements that are subject to
certain risks and uncertainties that could cause actual events and results to
differ materially from those discussed herein. Without limiting the
generality of the foregoing, words such as “may,” “will,” “expect,” “believe,”
“anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the
negative other variations thereof or comparable terminology are intended to
identify forward-looking statements. The risks and uncertainties
include, without limitation, uncertainties related to estimates, assumptions and
projections relating to unpaid losses and loss adjustment expenses and other
accounting policies, losses from the nine hurricanes that occurred in fiscal
years 2005 and 2004 and in other estimates, assumptions and projections
contained in this Form 10-Q; inflation and other changes in economic conditions
(including changes in interest rates and financial markets); the impact of new
regulations adopted in Florida which affect the property and casualty insurance
market; the costs of reinsurance, assessments charged by various governmental
agencies; pricing competition and other initiatives by competitors; our ability
to obtain regulatory approval for requested rate changes and the timing thereof;
legislative and regulatory developments; the outcome of various litigation
matters pending against us, including the terms of any settlements; risks
related to the nature of our business; dependence on investment income and the
composition of our investment portfolio; the adequacy of our liability for loss
and loss adjustment expense; insurance agents; claims experience; ratings by
industry services; catastrophe losses; reliance on key personnel; weather
conditions (including the severity and frequency of storms, hurricanes,
tornadoes and hail); changes in driving patterns and loss trends; acts of war
and terrorist activities; court decisions and trends in litigation and health
care and auto repair costs; and other matters described from time to time by us
in this report, and our other filings with the SEC, including the
Company’s 2008 Form 10-K.
You are
cautioned not to place reliance on these forward-looking statements, which are
valid only as of the date they were made. The Company undertakes no
obligation to update or revise any forward-looking statements to reflect new
information or the occurrence of unanticipated events or
otherwise. In addition, readers should be aware that generally
accepted accounting principles (“GAAP”) prescribes when a company may reserve
for particular risks, including litigation exposures. Accordingly,
results for a given reporting period could be significantly affected when a
reserve is established for a major contingency. Reported results may
therefore appear to be volatile in certain accounting periods.
21st Century
Holding Company
Overview
21st Century
is an insurance holding company. Through our subsidiaries and contractual
relationships, we control substantially all aspects of the insurance
underwriting, distribution and claims processes for most products offered. We
are authorized to underwrite homeowners’ multiple peril, commercial general
liability, personal and commercial automobile, fire, allied lines, surety,
commercial multi-peril and inland marine in various states on behalf of our
wholly owned subsidiaries, Federated National Insurance Company (“Federated
National”) and American Vehicle Insurance Company (“American
Vehicle”).
Federated
National is licensed as an admitted carrier in Florida. Through contractual
relationships with a network of approximately 4,200 independent agents, of which
300 actively sell and service our products, Federated National is authorized to
underwrite homeowners’ multi-peril, fire, allied lines and personal automobile
insurance in Florida.
American
Vehicle is licensed as an admitted carrier in Florida, and underwrites
commercial general liability, and personal and commercial automobile insurance.
American Vehicle is also licensed as an admitted carrier in Alabama, Louisiana
and Texas, and underwrites commercial general liability insurance. American
Vehicle is licensed as a non-admitted carrier in Arkansas, California, Georgia,
Kentucky, Maryland, Missouri, Nevada, Oklahoma, South Carolina, Tennessee, and
Virginia, and can underwrite commercial general liability insurance in all of
these states. We will continue to deploy commercial general liability and other
commercial insurance products into new states. This expansion will be achieved
primarily through partnerships with other insurance companies that hold
appropriate licensing and product offerings.
An admitted carrier is an
insurance company that has received a license from the state department of
insurance giving the company the authority to write specific lines of insurance
in that state. These companies are also bound by rate and form regulations, and
are strictly regulated to protect policyholders from a variety of illegal and
unethical practices, including fraud. Admitted carriers are also required to
financially contribute to the state guarantee fund, which is used to pay for
losses if an insurance carrier becomes insolvent or unable to pay the losses due
their policyholders.
A non-admitted carrier is not
licensed by the state, but is allowed to do business in that state and is
strictly regulated to protect policyholders from a variety of illegal and
unethical practices, including fraud. Sometimes, non-admitted carriers are
referred to as “excess and surplus” lines carriers. Non-admitted
carriers are subject to considerably less regulation with respect to policy
rates and forms. Non-admitted carriers are not required to financially
contribute to and benefit from the state guarantee fund, which is used to pay
for losses if an insurance carrier becomes insolvent or unable to pay the losses
due their policyholders.
During
the nine months ended September 30, 2009, 79.3%, 16.7%, 3.7% and 0.3% of the
premiums we underwrote were for homeowners’ property and casualty insurance,
commercial general liability insurance, federal flood, and personal automobile
insurance, respectively. During the nine months ended September 30, 2008, 68.4%,
27.4%, 3.7% and 0.5% of the premiums we underwrote were for homeowners’ property
and casualty insurance, commercial general liability insurance, federal flood
and personal automobile insurance, respectively.
Our
business, results of operations and financial condition are subject to
fluctuations due to a variety of factors. Abnormally high severity or frequency
of claims in any period could have a material adverse effect on our business,
results of operations and financial condition. When our estimated liabilities
for unpaid losses and loss adjustment expenses (“LAE”) are less than actual
losses and LAE, we increase reserves with a corresponding reduction in our net
income in the period in which the deficiency is identified. Conversely, when our
estimated liabilities for unpaid losses and LAE are greater than actual losses
and LAE, we decrease reserves with a corresponding increase in our net income in
the period in which the deficiency is identified.
We
internally process claims made by our insureds through our wholly owned claims
adjusting company, Superior Adjusting, Inc. (“Superior”). We also offer premium
financing to our own and third-party insureds through our wholly owned
subsidiary, Federated Premium Finance, Inc. (“Federated Premium”).
Assurance
Managing General Agents, Inc. (“Assurance MGA”), a wholly owned subsidiary, acts
as Federated National’s and American Vehicle’s exclusive managing general agent
in the state of Florida and is also licensed as a managing general agent in the
states of Alabama, Arkansas, Georgia, Illinois, Louisiana, Mississippi,
Missouri, New York, Nevada, Texas and Virginia. During the first nine months of
2009, Assurance MGA contracted with several third party insurance companies to
sell commercial general liability, workers compensation and inland marine
through Assurance MGA’s existing network of distributors. This process will
continue throughout 2009 as Assurance MGA benefits from the arrangement by
receiving commission revenue from policies sold by its insurance partners, while
minimizing its risks.
21st Century
Holding Company
Assurance
MGA earns commissions and fees for providing policy administration, marketing,
accounting and analytical services, and for participating in the negotiation of
reinsurance contracts. Assurance MGA generates approximately a 6% commission fee
and a $25 per policy fee from its affiliates Federated National and American
Vehicle.
Insure-Link,
Inc. (“Insure-Link”) was formed in March 2008 to serve as an independent
insurance agency. The insurance agency markets direct to the public to provide a
variety of insurance products and services to individual clients as well as
business clients by offering a full line of insurance products including, but
not limited to, homeowners’, personal and commercial automobile,
commercial general liability and workers compensation insurance through their
agency appointments with over fifty different carriers. Insure-Link
intends on expanding its’ business through marketing and by acquiring other
insurance agencies.
We
operate in highly competitive markets and face competition from national,
regional and residual market insurance companies in the homeowners’, commercial
general liability and automobile markets, many of whom are larger, have greater
financial and other resources, have better ratings, and offer more diversified
insurance coverage. Our competitors include companies that market their products
through agents, as well as companies that sell insurance directly to their
customers. Large national writers may have certain competitive advantages over
agency writers, including increased name recognition, increased loyalty of their
customer base and reduced policy acquisition costs. Competition is having a
material adverse effect on our business, results of operations and financial
condition.
Significant
competition has emerged because of the January 2007 emergency Florida
legislation session wherein it passed, and the Governor signed into law, a bill
known as “CS/HB-1A”. This law made fundamental changes to the property and
casualty insurance business in Florida and undertook a multi-pronged approach to
address the cost of residential property insurance in Florida. First, the law
increased the capacity of reinsurance that stabilized the reinsurance market to
the benefit of the insurance companies writing properties lines in the state of
Florida. Secondly, the law provided for rate relief to all
policyholders.
The law
also authorized the state-owned insurance company, Citizens Property Insurance
Corporation (“Citizens”), which is free of many of the restraints on private
carriers such as surplus, ratios, income taxes and reinsurance expense, to
reduce its premium rates and begin competing against private insurers in the
residential property insurance market and expands the authority of Citizens to
write commercial insurance.
Additionally,
in an effort to foster competition in the Florida homeowners’ property insurance
market, the State of Florida created a Capital Build-Up incentive program in
response to the catastrophic events that occurred during 2004 and 2005. This
program provides matching statutory capital to any new or existing carrier
licensed to write homeowners insurance in the state of Florida. This Capital
Build-Up incentive program has certain default covenants that require
participating carriers to maintain minimum net written premium ratios. This
program was not legislatively funded for either 2009 or 2008.
Finally,
during 2007 and during 2008, approximately two dozen new homeowner insurance
companies have received authority by the Florida Office of Insurance Regulation
(“Florida OIR”) to commence business as admitted carriers in the state of
Florida. At least one new carrier has been licensed to enter the Florida
homeowners’ market during the nine months ended September 30, 2009.
We
believe that these aggressive marketplace changes have forced some carriers to
pursue market share based on “best case” pricing models that may ultimately
prove unprofitable from an underwriting perspective.
We did
not participate in the Capital Build-Up incentive program and therefore have
been able to remain committed to the discipline of writing business that is
profitable from an underwriting perspective. This commitment resulted in a
significant erosion of our homeowners’ property insurance market share in 2008
as compared with 2007. Although our pricing is inevitably influenced to some
degree by that of our competitors, we believe that it is generally not in our
shareholders’ best interest to compete solely on price. We compete based on
underwriting criteria, our distribution network and superior service to our
agents and insureds.
21st Century
Holding Company
In
Florida, more than 200 companies are authorized to underwrite homeowners’
insurance. National and regional companies that compete with us in the
homeowners’ market include Allstate Insurance Company and First Floridian
Insurance Company. In addition to these nationally recognized names, we also
compete with several Florida domestic property and casualty companies such as
Universal Insurance Company of North America, Universal Property and Casualty
Insurance Company, United Property and Casualty, Royal Palm Insurance Company,
Edison Insurance Company, Olympus Insurance Company, St. Johns Insurance
Company, Cypress Property and Casualty Insurance Company, Tower Hill Insurance
Company, Florida Family Insurance Company, Homeowners Choice Property and
Casualty Insurance Company and American Strategic Insurance
Company.
Comparable
companies that compete with us in the commercial general liability insurance
market include Century Surety Insurance Company, Atlantic Casualty Insurance
Company, Colony Insurance Company and Burlington/First Financial Insurance
Companies.
Comparable
companies in the personal automobile insurance market include U.S. Security
Insurance Company, United Automobile Insurance Company, Direct General Insurance
Company and Ocean Harbor Insurance Company, as well as major insurers such as
Progressive Casualty Insurance Company and GEICO.
Although
we reported increased gross written premium for the nine months ended September
30, 2009, we continue to face difficult economic conditions that affected our
earnings for the three months ended September 30, 2009. Performance during the
three months ended September 30, 2009 was affected by our increased reinsurance
costs, reduced earned premium due to mitigation credits and lower total revenues
as a result of the Company’s decision to severely restrict new property business
until its recent approval for a nineteen percent statewide rate increase and the
passing of the peak wind season.
Our
executive offices are located at 3661 West Oakland Park Boulevard, Suite 300,
Lauderdale Lakes, Florida, 33311 and our telephone number is (954)
581-9993.
Critical
Accounting Policies
See Note 3, “Summary of
Significant Accounting Policies” in the Notes to the Company’s consolidated
financial statements for the quarter ended September 30, 2009 included in Item I
of this Report on Form 10-Q for a discussion of the Company’s critical
accounting policies.
New
Accounting Pronouncements
See Note
3, “Summary of Significant Accounting Policies” in the Notes to the Company’s
consolidated financial statements for the quarter ended September 30, 2009
included in Item I of this Report on Form 10-Q for a discussion of recent
accounting pronouncements and their effect, if any, on the Company.
Analysis
of Financial Condition
As
of September 30, 2009 Compared with December 31, 2008
Total Investments
FASB
issued guidance addresses accounting and reporting for (a) investments in equity
securities that have readily determinable fair values and (b) all investments in
debt securities. FASB issued guidance requires that these securities be
classified into one of three categories: (i) held-to-maturity, (ii) trading
securities or (iii) available-for-sale.
Investments
classified as held-to-maturity include debt securities wherein the Company’s
intent and ability are to hold the investment until maturity. The accounting
treatment for held-to-maturity investments is to carry them at amortized cost
without consideration to unrealized gains or losses. Investments classified as
trading securities include debt and equity securities bought and held primarily
for sale in the near term. The accounting treatment for trading securities is to
carry them at fair value with unrealized holding gains and losses included in
current period operations. Investments classified as available-for-sale include
debt and equity securities that are not classified as held-to-maturity or as
trading security investments. The accounting treatment for available-for-sale
securities is to carry them at fair value with unrealized holding gains and
losses excluded from earnings and reported as a separate component of
shareholders’ equity, namely “Other Comprehensive Income”.
21st Century
Holding Company
Total
Investments increased $79.5 million, or 305.1%, to $105.6 million as of
September 30, 2009, compared with $26.1 million as of December 31, 2008. Our
fixed income portfolio contained callable features exercised in 2008. The
proceeds from our called securities were in cash and short-term investments as
of December 31, 2008. During the nine months ended September 30, 2009, we
invested $78.2 million in longer-term investments. We are currently
evaluating long and short-term investment options for the best yields that match
our liquidity needs.
The fixed
maturities and the equity securities that are available for sale and carried at
fair value represent 98% of total investments as of September 30, 2009, compared
with 48% as of December 31, 2008.
We did
not hold any trading investment securities during the nine months ended
September 30, 2009.
Below is
a summary of net unrealized gains and (losses) at September 30, 2009 and
December 31, 2008 by category. The $0.3 million unrealized losses for
equity securities is mostly related to Western Asset / Claymore Inflation Linked
Securities and Income Fund (“WIA”). The fund invests at least 80% of its
total assets in inflation- linked securities and at least 60% of its total
managed assets in U.S. Treasury Inflation-Protected Securities.
|
|
Unrealized Gains and (Losses)
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(Dollars in Thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
U.S.
government obligations
|
|
$ |
986 |
|
|
$ |
(148 |
) |
Corporate
|
|
|
2,028 |
|
|
|
(936 |
) |
|
|
|
3,014 |
|
|
|
(1,084 |
) |
|
|
|
|
|
|
|
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
Common
stocks
|
|
|
(262 |
) |
|
|
(819 |
) |
|
|
|
|
|
|
|
|
|
Total
debt and equity securities
|
|
$ |
2,752 |
|
|
$ |
(1,903 |
) |
Pursuant
to FASB issued guidance, the Company records the unrealized losses, net of
estimated income taxes that are associated with that part of our portfolio
classified as available for sale through the shareholders' equity account titled
“Other Comprehensive Income”. Management periodically reviews the individual
investments that comprise our portfolio in order to determine whether a decline
in fair value below our cost either is other than temporary or permanently
impaired. Factors used in such consideration include, but are not limited to,
the extent and length of time over which the market value has been less than
cost, the financial condition and near-term prospects of the issuer and our
ability and intent to keep the investment for a period sufficient to allow for
an anticipated recovery in market value.
In
reaching a conclusion that a security is either other than temporary or
permanently impaired we consider such factors as the timeliness and completeness
of expected dividends, principal and interest payments, ratings from nationally
recognized statistical rating organizations such as Standard and Poor’s and
Moody’s Investors Service, Inc. (“Moody’s”), as well as information released via
the general media channels. During the nine months ended September 30, 2009, in
connection with this process, we have not charged any net realized investment
loss to operations.
The
investments held as of September 30, 2009 and December 31, 2008, were comprised
mainly of United States Government and agency bonds, as well as municipal bonds
and corporate bonds held in the financial and conglomerate industries. As of
September 30, 2009 13% of the fixed income portfolio is in United States
Government bonds and 87% is in diverse industries. As of September 30, 2009,
approximately 22% of the equity holdings are in mutual funds and 78% are in
equities related to diverse industries.
As of
September 30, 2009, all of our securities are in good standing and not impaired
as defined by FASB issued guidance, except for our holdings in Blackrock Pfd,
Inc., which continues to be impaired by $0.4 million as of September 30, 2009
compared to the total $2.1 million as of December 31, 2008.
21st Century
Holding Company
The
portion of our bond portfolio classified as held to maturity is $2.7
million. We only classify bonds as held to maturity to support
collateralized letters of credit. Outstanding irrevocable letters of credit,
used for such purposes, total $2.8 million and $3.0 million for the period ended
September 30, 2009 and December 31, 2008, respectively.
Cash and Short Term
Investments
Cash and
short-term investments, which include cash, certificates of deposits, and money
market accounts, decreased $76.5 million, or 61.4%, to $48.1 million as of
September 30, 2009, compared with $124.6 million as of December 31,
2008.
Our fixed
income portfolio contained callable features exercised in 2008. The
proceeds from our called securities were in cash and short-term investments as
of December 31, 2008. During the nine months ended September 30, 2009, we
invested $78.2 million in longer-term investments. We are currently
evaluating long and short-term investment options for the best yields that match
our liquidity needs.
Our
excess cash and cash equivalents are invested in accordance with our long-term
liquidity requirements. Our daily closing cash balance of approximately $2.0
million is swept into an overnight repurchase agreement account backed by U.S.
Government securities.
Prepaid Reinsurance
Premiums
Prepaid
reinsurance premiums increased $8.1 million, or 146.1%, to $13.6 million as of
September 30, 2009, compared with $5.5 million as of December 31,
2008. The change is due to our payments and amortization of prepaid
reinsurance premiums associated with our homeowners’ book of business. We
believe concentrations of credit risk associated with our prepaid reinsurance
premiums are not significant.
Premiums Receivable, Net of Allowance
for Credit Losses
Premiums
receivable, net of allowance for credit losses, increased $0.8 million, or
24.0%, to $4.2 million as of September 30, 2009, compared with $3.4 million as
of December 31, 2008.
Our
homeowners’ insurance premiums receivable increased $0.9 million, or 54.1%, to
$2.6 million as of September 30, 2009, compared with $1.7 million as of December
31, 2008. The increased homeowners’ insurance premiums receivable is due to our
direct billing program. Our commercial general liability insurance premiums
receivable decreased $0.3 million, or 19.1%, to $1.4 million as of September 30,
2009, compared with $1.7 million as of December 31, 2008. Premiums receivable in
connection with our automobile line of business increased $0.1 million, or
107.8%, to $0.2 million as of September 30, 2009, compared with $0.1 million as
of December 31, 2008.
Reinsurance Recoverable,
net
Reinsurance
recoverable, net, decreased $5.4 million, or 31.8%, to $11.5 million as of
September 30, 2009, compared with $16.9 million as of December 31, 2008. The
change is due to payment patterns by our reinsurers. All amounts are current and
deemed collectable. We believe concentrations of credit risk associated with our
reinsurance recoverables, net are not significant.
Deferred Policy Acquisition
Costs
Deferred
policy acquisition costs increased $1.4 million, or 22.6%, to $8.0 million as of
September 30, 2009, compared with $6.6 million as of December 31, 2008. The
change is due to increased homeowner’s written and unearned premium, net of
decreased commercial general liability premium.
Deferred Income Taxes, net
Deferred
income taxes, net, decreased $6.1 million, or 71.5%, to $2.4 million as of
September 30, 2009, compared with $8.5 million as of December 31, 2008. Deferred
income taxes, net is comprised of approximately $5.3 million and $10.8 million
of deferred tax assets, net of approximately $2.9 million and $2.3 million of
deferred tax liabilities as of September 30, 2009 and December 31, 2008,
respectively.
21st Century
Holding Company
Income Taxes Receivable
Income
taxes receivable increased $4.8 million, or 211.1%, to $7.1 million as of
September 30, 2009, compared with $2.3 million as of December 31, 2008. The
change is due to tax payment patterns in connection with our tax
liabilities.
Property, Plant and Equipment,
net
Property,
plant and equipment, net, decreased $0.2 million, or 14.5%, to $0.7 million as
of September 30, 2009 compared with $0.9 million as of December 31, 2008. The
change is primarily due to depreciation and amortization of our existing
property, plant and equipment.
Other Assets
Other
assets increased $0.3 million, or 14.8%, to $2.8 million as of September 30,
2009, compared with $2.5 million as of December 31, 2008. Major components of
other assets are shown in the following table; the accrued interest income
receivable is primarily investments related.
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
Accrued
interest income receivable
|
|
$ |
1,055 |
|
|
$ |
243 |
|
Notes
receivable
|
|
|
592 |
|
|
|
703 |
|
Deposits
|
|
|
412 |
|
|
|
71 |
|
Prepaid
expenses
|
|
|
386 |
|
|
|
748 |
|
Revenue
sharing due from reinsurer
|
|
|
- |
|
|
|
282 |
|
Other
|
|
|
394 |
|
|
|
425 |
|
Total
|
|
$ |
2,839 |
|
|
$ |
2,472 |
|
Unpaid Losses and LAE
Unpaid
losses and LAE increased $1.5 million, or 2.3%, to $66.3 million as of September
30, 2009, compared with $64.8 million as of December 31, 2008. The composition
of unpaid losses and LAE by product line is as follows.
|
|
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Case
|
|
|
Bulk
|
|
|
Total
|
|
|
Case
|
|
|
Bulk
|
|
|
Total
|
|
|
|
(Dollars in Thousands)
|
|
|
(Dollars in Thousands)
|
|
Homeowners'
|
|
$ |
8,490 |
|
|
$ |
20,406 |
|
|
$ |
28,896 |
|
|
$ |
8,048 |
|
|
$ |
19,678 |
|
|
$ |
27,726 |
|
Commercial
General Liability
|
|
|
7,604 |
|
|
|
28,129 |
|
|
|
35,733 |
|
|
|
7,531 |
|
|
|
26,998 |
|
|
|
34,529 |
|
Automobile
|
|
|
443 |
|
|
|
1,213 |
|
|
|
1,656 |
|
|
|
657 |
|
|
|
1,863 |
|
|
|
2,520 |
|
Total
|
|
$ |
16,537 |
|
|
$ |
49,748 |
|
|
$ |
66,285 |
|
|
$ |
16,236 |
|
|
$ |
48,539 |
|
|
$ |
64,775 |
|
Factors
that affect unpaid losses and LAE include the estimates made on a claim-by-claim
basis known as “case reserves” coupled with bulk estimates known as incurred but
not yet reported (“IBNR”). Periodic estimates by management of the ultimate
costs required to settle all claim files are based on the Company’s analysis of
historical data and estimations of the impact of numerous factors such as (i)
per claim information; (ii) company and industry historical loss experience;
(iii) legislative enactments, judicial decisions, legal developments in the
awarding of damages, and changes in political attitudes; and (iv) trends in
general economic conditions, including the effects of inflation.
Management
revises its estimates based on the results of its analysis. This process assumes
that experience, adjusted for the effects of current developments and
anticipated trends, is an appropriate basis for estimating the ultimate
settlement of all claims. There is no precise method for subsequently evaluating
the impact of any specific factor on the adequacy of the reserves, because the
eventual redundancy or deficiency is affected by multiple
factors.
21st Century
Holding Company
Unearned Premium
Unearned
premiums increased $5.1 million, or 12.5%, to $45.6 million as of September 30,
2009, compared with $40.5 million as of December 31, 2008. The change was due to
a $7.4 million increase in unearned homeowners’ insurance premiums of which $3.9
million is associated with our assumption of policies from Citizens, a $2.5
million decrease in unearned commercial general liability premiums, a $0.3
million increase in unearned flood insurance premiums, and less than a $0.1
million decrease in unearned automobile premiums. Generally, as is in this case,
an increase in unearned premium directly relates to an increase in written
premium on a rolling twelve-month basis. Competition could negatively affect our
unearned premium.
Premium Deposits and Customer Credit
Balances
Premium
deposits and customer credit balances increased $0.3 million, or 20.5%, to $2.0
million as of September 30, 2009, compared with $1.7 million as of December 31,
2008. Premium deposits are monies received on policies not yet in force as of
September 30, 2009.
Bank Overdraft
Bank
overdraft increased $2.8 million, or 31.9%, to $11.5 million as of September 30,
2009, compared with $8.7 million as of December 31, 2008. The bank overdraft
relates primarily to losses and LAE disbursements paid but not presented for
payment by the policyholder or vendor. The change relates to our payment
patterns in relationship to the rate at which those cash disbursements are
presented to the bank for payment.
Deferred Gain from Sale of
Property
Deferred
gain from sale of property decreased $0.4 million, or 24.5%, to $1.1 million as
of September 30, 2009, compared with $1.5 million as of December 31, 2008. In
accordance with the provisions of FASB issued guidance, we are amortizing the
deferred gain over the term of the leaseback, which is scheduled to end in
December 2011.
Accounts Payable and Accrued
Expenses
Accounts
payable and accrued expenses decreased $1.2 million, or 20.1%, to $2.5million as
of September 30, 2009, compared with $3.7 million as of December 31,
2008. This change is due to the timing of payments with our trade
vendors.
21st Century
Holding Company
Results
of Operations
Three
Months Ended September 30, 2009 Compared with Three Months Ended September 30,
2008
Gross
Premiums Written
Gross
premiums written decreased $3.0 million, or 18.5%, to $12.9 million for the
three months ended September 30, 2009, compared with $15.9 million for the three
months ended September 30, 2008. The following table denotes gross
premiums written by major product line.
|
|
Three Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
Homeowners'
|
|
$ |
7,815 |
|
|
|
60.51 |
% |
|
$ |
8,400 |
|
|
|
52.99 |
% |
Commercial
General Liability
|
|
|
4,072 |
|
|
|
31.52 |
% |
|
|
4,795 |
|
|
|
30.25 |
% |
Federal
Flood
|
|
|
983 |
|
|
|
7.61 |
% |
|
|
2,615 |
|
|
|
16.50 |
% |
Automobile
|
|
|
47 |
|
|
|
0.36 |
% |
|
|
41 |
|
|
|
0.26 |
% |
Gross
written premiums
|
|
$ |
12,917 |
|
|
|
100.00 |
% |
|
$ |
15,851 |
|
|
|
100.00 |
% |
The
Florida Legislature required a rate decrease that resulted in an average 15.2%
decrease statewide on homeowners' policies that was integrated into our rates on
June 1, 2007. The effect of this rate decrease on existing policies and the
corresponding premium decrease in direct written premium was fully recognized in
policies by May 31, 2008. In addition, a rate decrease of 11.3% statewide for
homeowners' policies was approved by the Florida OIR and implemented with an
effective date of May 1, 2008 for new business and June 1, 2008 for renewal
business for the homeowners' program. The effect of this rate decrease is
flowing through the Company’s homeowners’ book of business such that a full
impact of the premium decreases on direct written premium was realized by April
2009 for the homeowners' program. These rate decreases have had an adverse
effect on gross and earned premium.
We
continue to afford premium discounts in response to wind mitigation efforts by
policyholders. Such discounts, which were required by the Florida Legislature
and became effective on December 15, 2007 for new business and renewal business,
have also had a significant effect on both written and earned premium. During
the three months ended September 30, 2009 and 2008 wind mitigation credits
totaling $0.3 million and $3.0 million were afforded our policyholders,
respectively. As of September 30, 2009, 62.2% of our in-force homeowners’
policyholders were receiving wind mitigation credits totaling approximately
$23.6 million, (a 27.7% reduction of in-force premium), while 46.2% of our
in-force homeowners’ policyholders were receiving wind mitigation credits
totaling approximately $14.4 million, (a 17.7% reduction of in-force premium),
as of September 30, 2008.
Due in
part to the effects of Florida’s mandated homeowners’ rates reduction and wind
mitigation discounts the Company’s sale of homeowners’ policies decreased $.06
million, or 7.0%, to $7.8 million for the three months ended September 30, 2009,
compared with $8.4 million for the three months ended September 30, 2008.
Included in our sale of homeowners’ policies during the three months ended
September 30, 2009, is $2.8 million from policies we assumed from
Citizens.
On
September 30, 2009, Federated National announced it received approval for a
premium rate increase for its homeowner's program within the state of Florida,
by Florida's OIR. The premium rate increase, which will average approximately
nineteen percent (19%) statewide, will be deployed on policies with effective
dates of November 1, 2009 and December 1, 2009 for new and renewals,
respectively.
We are
required to report write-your-own flood premiums on a direct and 100% ceded
basis for the twelve months ended December 31, 2008 and subsequent periods.
Prior to 2008, we reported only the commissions income associated with this
program.
Federated
National and American Vehicle are currently rated by Demotech as "A"
("Exceptional"), which is the third of seven ratings, and defined as “Regardless
of the severity of a general economic downturn or deterioration in the insurance
cycle, insurers earning a Financial Stability Rating (“FSR”) of “A”
possess “Exceptional” financial stability related to maintaining surplus as
regards to policyholders”. Demotech’s ratings are based upon factors of concern
to agents, reinsurers and policyholders and are not primarily directed toward
the protection of investors. However, our Demotech rating could be jeopardized
by such other factors including adverse development and various surplus related
ratio exceptions. On June 11, 2009, Demotech reaffirmed Federated National’s FSR
of “A” (“Exceptional”).
21st Century
Holding Company
The
withdrawal of our ratings could limit or prevent us from writing or renewing
desirable insurance policies, from competing with insurers who have higher
ratings, from obtaining adequate reinsurance, or from borrowing on a line of
credit. Furthermore, a withdrawal of the rating could cause the Company’s
insurance policies to no longer be acceptable to the secondary marketplace and
mortgage lenders, which could cause a material adverse effect of the Company’s
results of operations and financial position.
The
Company’s sale of commercial general liability policies decreased by $0.7
million to $4.1 million for the three months ended September 30, 2009, compared
with $4.8 million for the three months ended September 30, 2008. The primary
factor for the decrease is a slowdown in the economy which has a dramatic impact
on the artisan contractor portfolio written by American Vehicle. An additional
factor is our decision to restrict underwriting authority within specific
commercial general liability classes and geographic areas. The following table
sets forth the amounts and percentages of our gross premiums written in
connection with our commercial general liability program by state.
|
|
Three Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
(Dollars
in Thousands)
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Alabama
|
|
$ |
11 |
|
|
|
0.27 |
% |
|
$ |
27 |
|
|
|
0.55 |
% |
Arkansas
|
|
|
1 |
|
|
|
0.03 |
% |
|
|
- |
|
|
|
- |
|
California
|
|
|
- |
|
|
|
- |
|
|
|
51 |
|
|
|
1.06 |
% |
Florida
|
|
|
3,584 |
|
|
|
88.02 |
% |
|
|
3,497 |
|
|
|
72.93 |
% |
Georgia
|
|
|
76 |
|
|
|
1.87 |
% |
|
|
141 |
|
|
|
2.94 |
% |
Louisiana
|
|
|
199 |
|
|
|
4.89 |
% |
|
|
986 |
|
|
|
20.57 |
% |
Maryland
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
0.05 |
% |
South
Carolina
|
|
|
- |
|
|
|
- |
|
|
|
7 |
|
|
|
0.14 |
% |
Texas
|
|
|
201 |
|
|
|
4.92 |
% |
|
|
84 |
|
|
|
1.76 |
% |
Total
|
|
$ |
4,072 |
|
|
|
100.00 |
% |
|
$ |
4,795 |
|
|
|
100.00 |
% |
The
Company’s sale of auto insurance policies remained relatively unchanged at less
than $0.1 million for the three month ended September 30, 2009 and September 30,
2008.
Gross
Premiums Ceded
Gross
premiums ceded increased to $36.8 million for the three months ended September
30, 2009, compared with $25.7 million for the three months ended September 30,
2008. Gross premiums ceded under our catastrophe reinsurance program totaled
$35.8 million and gross premiums ceded to the write-your-own flood program
totaled $1.0 million for the three months ended September 30, 2009.
Increase in Prepaid Reinsurance
Premiums
The
increase in prepaid reinsurance premiums was $22.3 million for the three months
ended September 30, 2009, compared with a $15.4 million increase for the three
months ended September 30, 2008. This change is primarily associated with the
timing of our reinsurance payments measured against the term of the underlying
reinsurance policies.
Decrease
in Unearned Premiums
The
decrease in unearned premiums was $11.1 million for the three months ended
September 30, 2009, compared with $10.7 million for the three months
ended September 30, 2008. The change was due to a $10.7 million decrease in
unearned homeowners’ insurance premiums of which $6.2 million is associated with
our assumption of policies from Citizens, a $0.5 million decrease in unearned
commercial general liability premiums, a less than $0.1 million decrease in
unearned automobile premiums, net of a $0.1 million increase in unearned flood
premiums during the three months ended September 30, 2009. These changes are a
result of differences in written premium volume during this period as compared
with the same period last year. See Gross Premiums
Written.
21st Century
Holding Company
Net
Premiums Earned
Net
premiums earned decreased $6.7 million, or 41.5%, to $9.5 million for the three
months ended September 30, 2009, compared with $16.2 million for the three
months ended September 30, 2008. The following table denotes net premiums earned
by product line.
|
|
Three Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
Homeowners'
|
|
$ |
4,861 |
|
|
|
51.11 |
% |
|
$ |
9,116 |
|
|
|
56.11 |
% |
Commercial
General Liability
|
|
|
4,587 |
|
|
|
48.23 |
% |
|
|
7,064 |
|
|
|
43.47 |
% |
Automobile
|
|
|
63 |
|
|
|
0.66 |
% |
|
|
69 |
|
|
|
0.42 |
% |
Net
premiums earned
|
|
$ |
9,511 |
|
|
|
100.00 |
% |
|
$ |
16,249 |
|
|
|
100.00 |
% |
The
change in homeowners’ net premiums earned is partially due to a $10.7 million
decrease in unearned premiums, of which $6.2 million is associated with our
assumption of policies from Citizens, and a $0.6 million decrease in premium
volume. Please see above Gross Premiums Ceded discussion.
The
change in commercial general liability net premiums earned is a result of
decreased premium volume. The primary factor for the decrease in premium volume
is a slowdown in the economy which has a dramatic impact on the artisan
contractor portfolio written by American Vehicle. An additional factor is our
decision to restrict underwriting authority within specific commercial general
liability classes and geographic areas.
Commission
Income
Commission
income decreased $0.2 million, or 56.7%, to $0.1 million for the three months
ended September 30, 2009, compared with $0.3 million for the three months ended
September 30, 2008. The primary component of our commission income is in
connection with our write-your-own flood premiums.
Finance Revenue
Finance
revenue remained unchanged at $0.1 million for the three months ended September
30, 2009, compared with $0.1 million for the three months ended September 30,
2008. This is primarily due to the Company’s decreased emphasis on automobile
insurance and the finance revenue derived there-from.
Managing
General Agent Fees
Managing
general agent fees remained unchanged at $0.3 million for the three months ended
September 30, 2009, compared with $0.3 million for the three months ended
September 30, 2008.
Net
Investment Income
Net
investment income decreased $0.7 million to $0.8 million for the three months
ended September 30, 2009, compared with $1.5 million for the three months ended
September 30, 2008. Our yield of interest income measured against
debt securities and cash was 2.3% for the three months ended September 30, 2009,
compared with 3.8% for the three months ended September 30, 2008. Our yield of
interest income measured against debt securities was 3.7% for the three months
ended September 30, 2009. Our net investment income and yield were adversely
affected by having an average cash balance of $55.0 million in the prime money
market account that provided less than a 1% yield during the three months ended
September 30, 2009.
Net
investment income on corporate bonds, which generally provide a higher yield
than US Government bonds, decreased $0.3 million to $0.5 million for the three
months ended September 30, 2009, compared with $0.8 million for the three months
ended September 30, 2008. The decrease in corporate bond income was
due to our selection of higher quality bonds that reduce overall portfolio risk
though offer a lower yield.
21st Century
Holding Company
Dividend
income decreased to less than $0.1 million for the three months ended September
30, 2009, compared with $0.2 million for the three months ended September 30,
2008. Short-term income decreased $0.3 million to less than $0.1
million for the three months ended September 30, 2009, compared with $0.3
million for the three months ended September 30, 2008. Municipal
income increased by $0.2 million to $0.4 million for the three months ended
September 30, 2009, compared with $0.2 million for the three months ended
September 30, 2008. Additionally, for the three months ended
September 30, 2009 asset management fees of $0.1 million are included in net
investment income compared to nearly nothing for the three months ended
September 30, 2008.
See
additional discussion within the above “Analysis of Financial Condition as of
September 30, 2009 Compared with December 31, 2008 – Investments”.
Net
Realized Investment Gains (Losses)
Net
realized investment gains were $1.6 million for the three months ended September
30, 2009, compared with net realized investment losses of $3.0 million for the
three months ended September 30, 2008.
During
the quarter ended September 30, 2008, we marked certain equity investments to
market value pursuant to guidelines prescribed in FASB issued guidance. In
reaching a conclusion that a security is either other than temporary or
permanently impaired we consider such factors as the timeliness and completeness
of expected dividends, principal and interest payments, ratings from nationally
recognized statistical rating organizations such as Standard and Poor’s and
Moody’s, as well as information released via the general media channels. The
pretax charge to operations was approximately $2.7 million in connection with
our estimates of the net realizable value of these investments.
The table
below depicts the net realized investment gains (losses) by investment
category for the three months ended September 30, 2009 as compared with the same
period during 2008.
|
|
Net Realized Gains (Losses)
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars
in Thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
U.S.
government obligations
|
|
$ |
(7 |
) |
|
$ |
- |
|
Corporate
|
|
|
(239 |
) |
|
|
(523 |
) |
|
|
|
|
|
|
|
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
Common
stocks
|
|
|
1,796 |
|
|
|
(2,472 |
) |
|
|
|
|
|
|
|
|
|
Total
net realized gains (losses)
|
|
$ |
1,550 |
|
|
$ |
(2,995 |
) |
Regulatory Assessments
Recovered
Regulatory
assessments recovered decreased $0.1 million, or 23.6%, to $0.3 million for the
three months ended September 30, 2009, compared with $0.4 million for the three
months ended September 30, 2008.
Other Income
Other
income increased $0.2 million, or 196.5%, to more than $0.2 million for the
three months ended September 30, 2009, compared with less than $0.1 million for
the three months ended September 30, 2008.
Major
components of other income for the three months ended September 30, 2009
included approximately $0.1 million in partial recognition of our gain on the
sale of our Lauderdale Lakes property.
21st Century
Holding Company
Losses
and LAE
Losses
and LAE, our most significant expense, represent actual payments made and
changes in estimated future payments to be made to or on behalf of our
policyholders, including expenses required to settle claims and losses. We
revise our estimates based on the results of analysis of estimated future
payments to be made. This process assumes that experience, adjusted for the
effects of current developments and anticipated trends, is an appropriate basis
for predicting future events.
Losses
and LAE increased by $1.2 million, or 12.5%, to $11.1 million for the three
months ended September 30, 2009, compared with $9.9 million for the three months
ended September 30, 2008. The overall change includes a $0.9 million increase in
our homeowners’ program, a $0.1 million decrease in our commercial general
liability program and a $0.4 million increase in connection with our automobile
program.
We
continue to revise our estimates of the ultimate financial impact of past
storms. The revisions to our estimates are based on our analysis of subsequent
information that we receive regarding various factors, including: (i) per claim
information; (ii) company and industry historical loss experience; (iii)
legislative enactments, judicial decisions, legal developments in the awarding
of damages, and (iv) trends in general economic conditions, including the
effects of inflation.
The
composition of unpaid losses and LAE by product line is as follows.
|
|
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Case
|
|
|
Bulk
|
|
|
Total
|
|
|
Case
|
|
|
Bulk
|
|
|
Total
|
|
|
|
(Dollars in Thousands)
|
|
|
(Dollars in Thousands)
|
|
Homeowners'
|
|
$ |
8,490 |
|
|
$ |
20,406 |
|
|
$ |
28,896 |
|
|
$ |
8,048 |
|
|
$ |
19,678 |
|
|
$ |
27,726 |
|
Commercial
General Liability
|
|
|
7,604 |
|
|
|
28,129 |
|
|
|
35,733 |
|
|
|
7,531 |
|
|
|
26,998 |
|
|
|
34,529 |
|
Automobile
|
|
|
443 |
|
|
|
1,213 |
|
|
|
1,656 |
|
|
|
657 |
|
|
|
1,863 |
|
|
|
2,520 |
|
Total
|
|
$ |
16,537 |
|
|
$ |
49,748 |
|
|
$ |
66,285 |
|
|
$ |
16,236 |
|
|
$ |
48,539 |
|
|
$ |
64,775 |
|
Factors
that affect unpaid losses and LAE include the estimates made on a claim-by-claim
basis known as “case reserves” coupled with bulk estimates known as IBNR.
Periodic estimates by management of the ultimate costs required to settle all
claim files are based on the Company’s analysis of historical data and
estimations of the impact of numerous factors such as (i) per claim information;
(ii) company and industry historical loss experience; (iii) legislative
enactments, judicial decisions, legal developments in the awarding of damages,
and changes in political attitudes; and (iv) trends in general economic
conditions, including the effects of inflation.
Management
revises its estimates based on the results of its analysis. This process assumes
that experience, adjusted for the effects of current developments and
anticipated trends, is an appropriate basis for estimating the ultimate
settlement of all claims. There is no precise method for subsequently evaluating
the impact of any specific factor on the adequacy of the reserves, because the
eventual redundancy or deficiency is affected by multiple factors. Because of
our process, reserves were decreased by approximately $1.5 million during the
three months ended September 30, 2009.
In accordance with GAAP, our loss ratio
is computed as losses and LAE divided by net premiums earned. A lower loss ratio
generally results in higher operating income. Our loss ratio for the three-month
period ended September 30, 2009 was 118.7% compared with 60.9% for the same
period in 2008. The table below reflects the loss ratios by product
line.
|
|
Three Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Homeowners'
|
|
|
156.4 |
% |
|
|
65.1 |
% |
Commercial
General Liability
|
|
|
80.8 |
% |
|
|
51.2 |
% |
Automobile
|
|
|
-68.8 |
% |
|
|
210.9 |
% |
All
lines
|
|
|
118.7 |
% |
|
|
60.9 |
% |
21st Century
Holding Company
Operating and Underwriting
Expenses
Operating
and underwriting expenses increased $0.7 million, or 42.4%, to $2.4 million for
the three months ended September 30, 2009, compared with $1.7 million for
the three months ended September 30, 2008.
The
change is partially due to the addition of Insure-Link, created to serve as an
independent insurance agency, for which operating and underwriting expenses
increased to $0.2 million for the three months ended September 30, 2009,
compared with nearly nothing for the three months ended September 30, 2008.
Additionally, actuarial fees, bad debt expense, computer maintenance fees and
licenses and fees expense increased a net total $0.5 million for the three
months ended September 30, 2009, compared with the three months ended September
30, 2008.
Salaries
and Wages
Salaries
and wages decreased $0.1 million, or 6.0%, to $2.0 million for the three months
ended September 30, 2009, compared with $2.1 million for the three months ended
September 30, 2008.
The
charge to operations for stock based compensation, in accordance with the
provisions of FASB issued guidance, was approximately $100,000 during the
three months ended September 30, 2009 compared with approximately $100,000 for
the three months ended June 30, 2008.
Policy
Acquisition Costs, Net of Amortization
Policy
acquisition costs, net of amortization, decreased $0.4 million, or 8.5%, to $3.8
million for the three months ended September 30, 2009, compared with $4.2
million for the three months ended September 30, 2008. Policy acquisition costs,
net of amortization, consists of the actual policy acquisition costs, including
commissions, payroll and premium taxes, less commissions earned on reinsurance
ceded and policy fees earned. The change is due to increased homeowner’s
written premium, net of decreased commercial general liability
premium.
Provision
for Income Tax Benefit
The
provision for income tax benefit was $2.4 million for the three months ended
September 30, 2009, compared with $0.3 million for the three months ended
September 30, 2008.
The
effective rate for income taxes was 37.6% for the three months ended September
30, 2009.
The
effective rate for income taxes was 18.2% for the three months ended September
30, 2008. The unusual provision for the three months ended September 30,
2008 is due to a $2.7 million investment impairment adjustment and the related
deferred tax asset.
Net
Loss
Because
of the foregoing, the Company’s net loss for the three months ended September
30, 2009 was $4.0 million compared with $1.5 million for the three months ended
September 30, 2008.
21st Century
Holding Company
Results
of Operations
Nine
Months Ended September 30, 2009 Compared with Nine Months Ended September 30,
2008
Gross
Premiums Written
Gross
premiums written increased $4.2 million, or 6.0%, to $74.9 million for the nine
months ended September 30, 2009, compared with $70.7 million for the nine months
ended September 30, 2008. The following table denotes gross premiums
written by major product line.
|
|
Nine Months Ended September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
Homeowners'
|
|
$ |
59,503 |
|
|
|
79.40 |
% |
|
$ |
48,320 |
|
|
|
68.35 |
% |
Commercial
General Liability
|
|
|
12,490 |
|
|
|
16.66 |
% |
|
|
19,385 |
|
|
|
27.42 |
% |
Federal
Flood
|
|
|
2,737 |
|
|
|
3.65 |
% |
|
|
2,615 |
|
|
|
3.70 |
% |
Automobile
|
|
|
219 |
|
|
|
0.29 |
% |
|
|
375 |
|
|
|
0.53 |
% |
Gross
written premiums
|
|
$ |
74,949 |
|
|
|
100.00 |
% |
|
$ |
70,695 |
|
|
|
100.00 |
% |
The
Florida Legislature required a rate decrease that resulted in an average 15.2%
decrease statewide on homeowners' policies that was integrated into our rates on
June 1, 2007. The effect of this rate decrease on existing policies and the
corresponding premium decrease in direct written premium was fully recognized in
policies by May 31, 2008. In addition, a rate decrease of 11.3% statewide for
homeowners' policies was approved by the Florida OIR and implemented with an
effective date of May 1, 2008 for new business and June 1, 2008 for renewal
business for the homeowners' program. The effect of this rate decrease is
flowing through the Company’s homeowners’ book of business such that a full
impact of the premium decreases on direct written premium was realized by April
2009 for the homeowners' program. These rate decreases have had an adverse
effect on gross and earned premium.
We
continue to afford premium discounts in response to wind mitigation efforts by
policyholders. Such discounts, which were required by the Florida Legislature
and became effective on December 15, 2007 for new business and renewal business,
have also had a significant effect on both written and earned premium. During
the nine months ended September 30, 2009 and 2008 wind mitigation credits
totaling $5.8 million and $11.9 million were afforded our policyholders,
respectively. As of September 30, 2009, 62.2 % of our in-force homeowners’
policyholders were receiving wind mitigation credits totaling approximately
$23.6 million, (a 27.7% reduction of in-force premium), while 46.2% of our
in-force homeowners’ policyholders were receiving wind mitigation credits
totaling approximately $14.4 million, (a 17.7% reduction of in-force premium),
as of September 30, 2008.
Despite
the effects of Florida’s mandated homeowners’ rates reduction and wind
mitigation discounts the Company’s sale of homeowners’ policies increased $11.2
million, or 23.1%, to $59.5 million for the nine months ended September 30,
2009, compared with $48.3 million for the nine months ended September 30, 2008.
Included in our sale of homeowners’ policies during the nine months ended
September 30, 2009, is $11.5 million we assumed from Citizens.
On
September 30, 2009, Federated National announced it received approval for a
premium rate increase for its homeowner's program within the state of Florida,
by Florida's OIR. The premium rate increase, which will average approximately
nineteen percent (19%) statewide, will be deployed on policies with effective
dates of November 1, 2009 and December 1, 2009 for new and renewals,
respectively.
We are
required to report write-your-own flood premiums on a direct and 100% ceded
basis for the twelve months ended December 31, 2008 and subsequent periods.
Prior to 2008, we reported only the commissions income associated with this
program.
Federated
National and American Vehicle are currently rated by Demotech as "A"
("Exceptional"), which is the third of seven ratings, and defined as “Regardless
of the severity of a general economic downturn or deterioration in the insurance
cycle, insurers earning a FSR of “A” possess “Exceptional” financial
stability related to maintaining surplus as regards to policyholders”.
Demotech’s ratings are based upon factors of concern to agents, reinsurers and
policyholders and are not primarily directed toward the protection of investors.
However, our Demotech rating could be jeopardized by such other factors
including adverse development and various surplus related ratio exceptions. On
June 11, 2009, Demotech reaffirmed Federated National’s FSR of A, Exceptional.
21st Century
Holding Company
The
withdrawal of our ratings could limit or prevent us from writing or renewing
desirable insurance policies, from competing with insurers who have higher
ratings, from obtaining adequate reinsurance, or from borrowing on a line of
credit. Furthermore, a withdrawal of the rating could cause the Company’s
insurance policies to no longer be acceptable to the secondary marketplace and
mortgage lenders, which could cause a material adverse effect of the Company’s
results of operations and financial position.
The
Company’s sale of commercial general liability policies decreased by $6.9
million to $12.5 million for the nine months ended September 30, 2009, compared
with $19.4 million for the nine months ended September 30, 2008. The primary
factor for the decrease is a slowdown in the economy which has a dramatic impact
on the artisan contractor portfolio written by American Vehicle. An additional
factor is our decision to restrict underwriting authority within specific
commercial general liability classes and geographic areas. The following table
sets forth the amounts and percentages of our gross premiums written in
connection with our commercial general liability program by state.
|
|
Nine Months Ended September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
(Dollars
in Thousands)
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Alabama
|
|
$ |
58 |
|
|
|
0.47 |
% |
|
$ |
98 |
|
|
|
0.51 |
% |
Arkansas
|
|
|
4 |
|
|
|
0.03 |
% |
|
|
12 |
|
|
|
0.06 |
% |
California
|
|
|
51 |
|
|
|
0.41 |
% |
|
|
251 |
|
|
|
1.29 |
% |
Florida
|
|
|
10,041 |
|
|
|
80.38 |
% |
|
|
12,891 |
|
|
|
66.51 |
% |
Georgia
|
|
|
230 |
|
|
|
1.84 |
% |
|
|
471 |
|
|
|
2.43 |
% |
Kentucky
|
|
|
1 |
|
|
|
0.01 |
% |
|
|
1 |
|
|
|
0.00 |
% |
Louisiana
|
|
|
1,426 |
|
|
|
11.42 |
% |
|
|
3,501 |
|
|
|
18.06 |
% |
Maryland
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
0.01 |
% |
South
Carolina
|
|
|
2 |
|
|
|
0.02 |
% |
|
|
66 |
|
|
|
0.34 |
% |
Texas
|
|
|
676 |
|
|
|
5.41 |
% |
|
|
2,084 |
|
|
|
10.75 |
% |
Virginia
|
|
|
1 |
|
|
|
0.01 |
% |
|
|
8 |
|
|
|
0.04 |
% |
Total
|
|
$ |
12,490 |
|
|
|
100.0 |
% |
|
$ |
19,385 |
|
|
|
100.0 |
% |
The
Company’s sale of auto insurance policies decreased less than $0.2 million,
or 41.6%, to $0.2 million for the nine months ended September 30, 2009,
compared with less than $0.4 million for the nine months ended September 30,
2008.
Gross
Premiums Ceded
Gross
premiums ceded increased $22.8 million, or 67.2%, to $56.7 million for the
nine months ended September 30, 2009, compared with $33.9 million for the
nine months ended September 30, 2008. Gross premiums ceded under our catastrophe
reinsurance program totaled $54.0 million and gross premiums ceded to the
write-your-own flood program totaled $2.7 million for the nine months
ended September 30, 2009.
Increase in Prepaid Reinsurance
Premiums
The
increase in prepaid reinsurance premiums was $24.5 million for the nine months
ended September 30, 2009, compared with a $1.8 million increase for the nine
months ended September 30, 2008. This change is primarily is primarily
associated with the timing of our reinsurance payments measured against the term
of the underlying reinsurance policies.
21st Century
Holding Company
(Increase)
Decrease in Unearned Premiums
The
increase in unearned premiums was $5.1 million for the nine months
ended September 30, 2009, compared with an $11.7 million decrease for the
nine months ended September 30, 2008. The 2009 amount was due to a $7.4 million
increase in unearned homeowners’ insurance premiums, of which $3.9 million is
associated with our assumption of policies from Citizens, a $0.3 million
increase in unearned flood premiums, net of a $2.5 million decrease in unearned
commercial general liability premiums and a less than $0.1 million decrease in
unearned automobile premiums. These changes are a result of differences in
written premium volume during this period as compared with the same period last
year. See Gross Premiums Written.
Net
Premiums Earned
Net
premiums earned decreased $12.6 million, or 25.1%, to $37.7 million for the nine
months ended September 30, 2009, compared with $50.3 million for the nine
months ended September 30, 2008. The following table denotes net premiums
earned by product line.
|
|
Nine Months Ended September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
Homeowners'
|
|
$ |
22,375 |
|
|
|
59.38 |
% |
|
$ |
28,063 |
|
|
|
55.78 |
% |
Commercial
General Liability
|
|
|
15,091 |
|
|
|
40.05 |
% |
|
|
21,796 |
|
|
|
43.32 |
% |
Automobile
|
|
|
214 |
|
|
|
0.57 |
% |
|
|
455 |
|
|
|
0.90 |
% |
Net
premiums earned
|
|
$ |
37,680 |
|
|
|
100.00 |
% |
|
$ |
50,314 |
|
|
|
100.00 |
% |
The
change in homeowners’ net premiums earned is partially due to a $7.4 million
increase in unearned premiums, of which $3.9 million is associated with our
assumption of risks from Citizens. The change is also a result of an $11.2
million increase in premium volume, which includes $11.5 million premium volume
associated with our assumption of risks from Citizens. Please see above Gross
Premiums Ceded discussion.
The
change in commercial general liability net premiums earned is a result of
decreased premium volume. The change in commercial general liability net
premiums earned is a result of decreased premium volume. The primary factor for
the decrease in premium volume is a slowdown in the economy which has a dramatic
impact on the artisan contractor portfolio written by American Vehicle. An
additional factor is our decision to restrict underwriting authority within
specific commercial general liability classes and geographic areas.
Commission
Income
Commission
income decreased $0.7 million, or 45.4%, to $0.7 million for the nine months
ended September 30, 2009, compared with $1.4 million for the nine months
ended September 30, 2008. The primary component of our commission income is in
connection with our reinsurance treaties and write-your-own flood
premiums.
Finance Revenue
Finance
revenue decreased $0.1 million, or 12.1%, to $0.2 million for the nine
months ended September 30, 2009, compared with $0.3 million for the nine
months ended September 30, 2008. This is primarily due to the Company’s
decreased emphasis on automobile insurance and the finance revenue derived
there-from.
Managing
General Agent Fees
Managing
general agent fees decreased $0.2 million, or 11.6%, to $1.2 million for the
nine months ended September 30, 2009, compared with $1.4 million for the nine
months ended September 30, 2008.
21st Century
Holding Company
Net
Investment Income
Net
investment income decreased $3.3 million to $2.0 million for the nine months
ended September 30, 2009, compared with $5.3 million for the nine months ended
September 30, 2008. Our yield of interest income measured against
debt securities and cash was 1.9% for the nine months ended September 30, 2009,
compared with 4.5% for the nine months ended September 30, 2008. Our
yield of interest income measured again debt securities was 4.7% for the nine
months ended September 30, 2009. Our net investment income and yield were
adversely affected by having an average cash balance of $55.0 million in the
prime money market account that provided less than a 1% yield during the nine
months ended September 30, 2009.
Net
investment income on corporate bonds, which generally provide a higher yield
than US Government bonds, decreased $1.4 million to $1.1 million for the nine
months ended September 30, 2009, compared with $2.5 million for the nine months
ended September 30, 2008. The decrease in corporate bond income was
due to our selection of higher quality bonds that reduce overall portfolio risk
though offer a lower yield.
Dividend
income decreased $0.6 million to $0.3 million for the nine months ended
September 30, 2009, compared with $0.9 million for the nine months ended
September 30, 2008. Short-term income decreased $0.6 million to $0.2
million for the nine months ended September 30, 2009, compared with $0.8 million
for the nine months ended September 30, 2008. Municipal income
increased by $0.3 million to $0.9 million for the nine months ended September
30, 2009, compared with $0.6 million for the nine months ended September 30,
2008. Additionally, for the nine months ended September 30, 2009
asset management fees of $0.3 million are included in net investment income
compared to nearly nothing for the nine months ended September 30,
2008.
See
additional discussion within the above “Analysis of Financial Condition as of
September 30, 2009 Compared with December 31, 2008 – Investments”.
Net
Realized Investment Gains (Losses)
Net
realized investment gains were $1.1 million for the nine months ended September
30, 2009, compared with net realized investment losses of $9.3 million for the
nine months ended September 30, 2008. Net realized investment losses for the
nine months ended September 30, 2009 were a result of the disposition of
non-performing investments.
During the nine months ended September
30, 2008, we marked certain equity investments to market value pursuant to
guidelines prescribed by FASB issued guidance. In reaching a
conclusion that a security is either other than temporary or permanently
impaired we consider such factors as the timeliness and completeness of expected
dividends, principal and interest payments, ratings from nationally recognized
statistical rating organizations such as Standard and Poor’s and Moody’s, as
well as information released via the general media channels. The
pretax charge to operations was approximately $9.2 million in connection with
our estimates of the net realizable value of these investments.
The table below depicts the net
realized investment losses by investment category for the nine months ended
September 30, 2009 as compared with the same period during 2008.
|
|
Net
Realized Gains (Losses)
|
|
|
|
Nine Months Ended September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars
in Thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
U.S.
government obligations
|
|
$ |
10 |
|
|
$ |
12 |
|
Corporate
|
|
|
(467 |
) |
|
|
(523 |
) |
|
|
|
(457 |
) |
|
|
(511 |
) |
|
|
|
|
|
|
|
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
Common
stocks
|
|
|
1,539 |
|
|
|
(8,798 |
) |
|
|
|
|
|
|
|
|
|
Total
net realized (losses)
|
|
$ |
1,082 |
|
|
$ |
(9,309 |
) |
21st Century
Holding Company
Regulatory Assessments
Recovered
Regulatory
assessments recovered increased $0.4 million, or 25.4%, to $2.0 million for the
nine months ended September 30, 2009, compared with $1.6 million for the
nine months ended September 30, 2008.
Other Income
Other
income increased $0.1 million, or 23.5%, to $0.6 million for the nine
months ended September 30, 2009, compared with $0.5 million for the nine
months ended September 30, 2008.
Major
components of other income for the nine months ended September 30, 2009 included
approximately $0.4 million in partial recognition of our gain on the sale of our
Lauderdale Lakes property and $0.2 million in connection with rental income,
interest income and miscellaneous income.
Losses
and LAE
Losses
and LAE, our most significant expense, represent actual payments made and
changes in estimated future payments to be made to or on behalf of our
policyholders, including expenses required to settle claims and losses. We
revise our estimates based on the results of analysis of estimated future
payments to be made. This process assumes that experience, adjusted for the
effects of current developments and anticipated trends, is an appropriate basis
for predicting future events.
Losses
and LAE decreased by $1.3 million, or 4.3%, to $29.0 million for the nine months
ended September 30, 2009, compared with $30.3 million for the nine months ended
September 30, 2008. The overall change includes a $1.7 million increase in our
homeowners’ program, a $3.6 million decrease in our commercial general liability
program and a $0.6 million increase in connection with our automobile
program.
We
continue to revise our estimates of the ultimate financial impact of past
storms. The revisions to our estimates are based on our analysis of subsequent
information that we receive regarding various factors, including: (i) per claim
information; (ii) company and industry historical loss experience; (iii)
legislative enactments, judicial decisions, legal developments in the awarding
of damages, and (iv) trends in general economic conditions, including the
effects of inflation.
The
composition of unpaid losses and LAE by product line is as follows.
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Case
|
|
|
Bulk
|
|
|
Total
|
|
|
Case
|
|
|
Bulk
|
|
|
Total
|
|
|
|
(Dollars
in Thousands)
|
|
|
(Dollars
in Thousands)
|
|
Homeowners'
|
|
$ |
8,490 |
|
|
$ |
20,406 |
|
|
$ |
28,896 |
|
|
$ |
8,048 |
|
|
$ |
19,678 |
|
|
$ |
27,726 |
|
Commercial
General Liability
|
|
|
7,604 |
|
|
|
28,129 |
|
|
|
35,733 |
|
|
|
7,531 |
|
|
|
26,998 |
|
|
|
34,529 |
|
Automobile
|
|
|
443 |
|
|
|
1,213 |
|
|
|
1,656 |
|
|
|
657 |
|
|
|
1,863 |
|
|
|
2,520 |
|
Total
|
|
$ |
16,537 |
|
|
$ |
49,748 |
|
|
$ |
66,285 |
|
|
$ |
16,236 |
|
|
$ |
48,539 |
|
|
$ |
64,775 |
|
Factors
that affect unpaid losses and LAE include the estimates made on a claim-by-claim
basis known as “case reserves” coupled with bulk estimates known as IBNR.
Periodic estimates by management of the ultimate costs required to settle all
claim files are based on the Company’s analysis of historical data and
estimations of the impact of numerous factors such as (i) per claim information;
(ii) company and industry historical loss experience; (iii) legislative
enactments, judicial decisions, legal developments in the awarding of damages,
and changes in political attitudes; and (iv) trends in general economic
conditions, including the effects of inflation.
Management
revises its estimates based on the results of its analysis. This process assumes
that experience, adjusted for the effects of current developments and
anticipated trends, is an appropriate basis for estimating the ultimate
settlement of all claims. There is no precise method for subsequently evaluating
the impact of any specific factor on the adequacy of the reserves, because the
eventual redundancy or deficiency is affected by multiple factors. Because of
our process, reserves were increased by approximately $1.5 million during the
nine months ended September 30, 2009.
21st Century
Holding Company
In accordance with GAAP, our loss ratio
is computed as losses and LAE divided by net premiums earned. A lower loss ratio
generally results in higher operating income. Our loss ratio for the
nine-month period ended September 30, 2009 was 77.2% compared with 60.1% for the same period in 2008. The
table below reflects the loss ratios by product line.
|
|
Nine Months Ended September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Homeowners'
|
|
|
84.0%
|
|
|
|
58.3%
|
|
Commercial
General Liability
|
|
|
68.5%
|
|
|
|
64.2%
|
|
Automobile
|
|
|
-7.3%
|
|
|
|
16.0%
|
|
All
lines
|
|
|
77.2%
|
|
|
|
60.1%
|
|
Operating and Underwriting
Expenses
Operating
and underwriting expenses increased $1.9 million, or 40.5%, to $6.6 million for
the nine months ended September 30, 2009, compared with $4.7 million for
the nine months ended September 30, 2008.
The
change is partially due to the addition of Insure-Link, created to serve as an
independent insurance agency, for which operating and underwriting expenses
increased to $0.3 million for the nine months ended September 30, 2009, compared
with nearly nothing for the nine months ended September 30, 2008. Additionally,
premium tax expense increased $0.6 million, to $0.7 million for the nine months
ended September 30, 2009, compared to $0.1 million for the nine months ended
September 30, 2008. Actuarial fees, bad debt expense, commission, insurance and
surveys & underwriting reports expense increased a net total $1.0 million
for the nine months ended September 30, 2009, compared with the nine months
ended September 30, 2008.
Salaries
and Wages
Salaries
and wages increased $0.2 million, or 2.8%, to $5.8 million for the nine months
ended September 30, 2009, compared with $5.6 million for the nine months
ended September 30, 2008.
The
charge to operations for stock based compensation, in accordance with the
provisions of FASB issued guidance, was approximately $326,000 during
the nine months ended September 30, 2009 compared with approximately
$400,000 for the nine months ended September 30, 2008.
Policy
Acquisition Costs, Net of Amortization
Policy
acquisition costs, net of amortization, decreased $2.3 million, or 19.6%, to
$9.5 million for the nine months ended September 30, 2009, compared with
$11.8 million for the nine months ended September 30, 2008. Policy acquisition
costs, net of amortization, consists of the actual policy acquisition costs,
including commissions, payroll and premium taxes, less commissions earned on
reinsurance ceded and policy fees earned. The change is due to increased
homeowners’ written premium, net of decreased commercial general liability
premium.
Provision
for Income Tax Benefit
The
provision for income tax benefit was $2.3 million for the nine months ended
September 30, 2009, compared with $1.2 million for the nine months ended
September 30, 2008.
The 43.9%
beneficial effective rate for income taxes for the nine months ended September
30, 2009 was primarily due to our tax-exempt interest and dividend received
deduction.
The
unusual provision for the nine months ended September 30, 2008 is due to a $9.2
million investment impairment adjustment and the related deferred tax asset.
Also affecting the 2008 rate was a one-time $1.0 million benefit in connection
with the estimation of the previous years’ income taxes.
Net
Loss (Income)
Because
of the foregoing, the Company’s net loss for the nine months ended September 30,
2009 was $2.9 million compared with net income of $0.3 million for the nine
months ended September 30, 2008.
21st Century
Holding Company
Liquidity
and Capital Resources
For the
nine months ended September 30, 2009, our primary sources of capital were
revenues generated from operations, including decreased deferred income tax
expense, decreased reinsurance recoverable, net, increased unearned premiums,
increased bank overdraft, increased unpaid losses and LAE and net realized
investment gains. Other sources of capital included increased premium
deposits and customer credit balances, non-cash compensation, depreciation and
amortization, an increase in the provision for uncollectible premiums receivable
and an increase in the provision for credit losses, net. Also
contributing to our liquidity were proceeds from the sale of investments and the
tax benefit related to non-cash compensation. Because we are a holding
company, we are largely dependent upon fees and commissions from our
subsidiaries for cash flow.
For the
nine months ended September 30, 2009, operations provided net operating
cash flow of $2.2 million, compared with having used $13.9 million for the nine
months ended September 30, 2008.
For the
nine months ended September 30, 2009, operations generated $22.8 million of
gross cash flow due to a $6.1 million decrease in deferred income tax expense, a
$5.4 million decrease in reinsurance recoverable, net, a $5.1 million increase
in unearned premiums and a $2.8 million increase in bank overdraft. Additional
sources of cash included a $1.5 million increase in unpaid losses and LAE, $1.1
million in net realized investment gains, a $0.3 million increase in premium
deposits and customer credit balances, $0.3 million in non-cash compensation,
$0.1 million in depreciation and amortization and a $0.1 million increase in the
provision for uncollectible premiums receivable.
For the
nine months ended September 30, 2009, operations used $20.6 million of gross
cash flow primarily due to an $8.1 million decrease in prepaid
reinsurance premiums, a $4.8 million increase in income taxes recoverable, a
$1.5 million increase in policy acquisition costs and a $1.2 million
decrease in accounts payable and accrued expenses. Additional uses of cash
included a $0.9 million increase in premiums receivable, a $0.8 million increase
in other assets and $0.4 million in amortization of investment
discount, all in conjunction with a net loss of $2.9 million.
For the
nine months ended September 30, 2009, net investing activities used
$77.3 million, compared with having provided $63.8 million for the nine
months ended September 30, 2008. Our available for sale investment portfolio is
highly liquid as it consists entirely of readily marketable
securities.
For the
nine months ended September 30, 2009, investing activities generated $51.5
million and used $128.8 million mainly from the sale and purchase activity in
our bond portfolio. Our fixed income portfolio contained callable features
exercised in 2008. The proceeds from these called securities were in cash
and short-term investments as of December 31, 2008. During the nine months
ended September 30, 2009, we invested $78.2 million in longer-term investments.
We are currently evaluating long and short-term investment options for best
yields that match our liquidity needs.
For the
nine months ended September 30, 2009, net financing activities used $1.3
million, compared with having used $2.9 million for the nine months ended
September 30, 2008. For the nine months ended September 30, 2009, the uses of
cash in connection with financing activities included $1.4 million in dividends
paid.
We offer
direct billing in connection with our homeowners’, commercial general liability
and automobile programs. Direct billing is an agreement in which the insurance
company accepts from the insured, as a receivable, a promise to pay the premium,
as opposed to requiring the full amount of the policy at policy inception,
either directly from the insured or from a premium finance company. The
advantage of direct billing a policyholder by the insurance company is that we
are not reliant on a credit facility, but remain able to charge and collect
interest from the policyholder.
We
believe that our current capital resources will be sufficient to meet currently
anticipated working capital requirements. There can be no assurances, however,
that such will be the case.
As of
September 30, 2009, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
“structured finance” or “special purpose” entities, which were established for
facilitating off-balance-sheet arrangements or other contractually narrow or
limited purposes. As such, management believes that we currently are not exposed
to any financing, liquidity, market or credit risks that could arise if we had
engaged in transactions of that type requiring disclosure herein.
21st Century
Holding Company
Impact
of Inflation and Changing Prices
The
consolidated financial statements and related data presented herein have been
prepared in accordance with GAAP, which requires the measurement of financial
position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. Our primary assets and liabilities are monetary in nature. As a
result, interest rates have a more significant impact on performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or with the same magnitude as the inflationary effect on
the cost of paying losses and LAE.
Insurance
premiums are established before we know the amount of losses and LAE and the
extent to which inflation may affect such expenses. Consequently, we attempt to
anticipate the future impact of inflation when establishing rate levels. While
we attempt to charge adequate premiums, we may be limited in raising premium
levels for competitive and regulatory reasons. Inflation also affects the market
value of our investment portfolio and the investment rate of return. Any future
economic changes that result in prolonged and increasing levels of inflation
could cause increases in the dollar amount of incurred losses and LAE and
thereby materially adversely affect future liability requirements.
Item
3
Quantitative
and Qualitative Disclosures about Market Risk
Information
related to quantitative and qualitative disclosures about market risk was
included under Item 7A, “Quantitative and Qualitative Disclosures about Market
Risk”, in our Annual Report on Form 10-K for the year ended December 31, 2008.
No material changes have occurred in market risk since this information was
disclosed except as discussed below.
Our investment portfolio is available
for sale and carried at fair value, except for that portion deemed as held to
maturity. Gains that represent securities with a fair value in excess
of amortized cost, and losses (amortized cost is in excess of fair value) that
are deemed temporary by management are recorded in shareholders’ equity in
accumulated other comprehensive income. Losses deemed other than temporary by
management are recorded as net realized losses in the consolidated statement of
operations. The amortized cost, estimated fair value of securities available for
sale and securities held to maturity, and unrealized gains and losses as of
September 30, 2009 are as follows.
|
|
Book Value / Amortized Cost
|
|
|
Fair Value
|
|
|
Unrealized
Gains
(Losses)
|
|
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government obligations, available for sale
|
|
$ |
47,731 |
|
|
|
46.41 |
% |
|
$ |
48,717 |
|
|
|
46.06 |
% |
|
$ |
986 |
|
U.S.
government obligations, held to maturity
|
|
|
2,645 |
|
|
|
2.57 |
% |
|
|
2,814 |
|
|
|
2.66 |
% |
|
|
169 |
|
Corporate,
available for sale
|
|
|
40,359 |
|
|
|
39.24 |
% |
|
|
42,387 |
|
|
|
40.07 |
% |
|
|
2,028 |
|
Corporate,
held to maturity
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
$ |
90,735 |
|
|
|
88.22 |
% |
|
$ |
93,918 |
|
|
|
88.79 |
% |
|
$ |
3,183 |
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stocks available for sale
|
|
|
12,115 |
|
|
|
11.78 |
% |
|
|
11,853 |
|
|
|
11.21 |
% |
|
|
(262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt and equity securities
|
|
$ |
102,850 |
|
|
|
100.00 |
% |
|
$ |
105,771 |
|
|
|
100.00 |
% |
|
$ |
2,921 |
|
We did
not record the approximately $169,000 unrealized gains for our held to maturity
portfolio reflected in the above table, as of September 30, 2009.
As of
September 30, 2009, there were no concentrations greater than 5% of total
investments in any single investment other than United States government and
agency obligations and obligations of states and political
subdivisions.
21st Century
Holding Company
Item
4
Controls
and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities and Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules
and forms, and that such information is accumulated and communicated to the
Company’s management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures.
Our
management, with the participation of its Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures as defined in Rules 13a-15(e) under the Securities Exchange Act
of 1934, as of September 30, 2009. Based upon their evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures, as of September 30, 2009, were effective to
provide reasonable assurance that information required to be disclosed by the
Company in the reports filed or submitted by it under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and to provide reasonable assurance that
information required to be disclosed by the Company in such reports is
accumulated and communicated to our management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. There were no changes during the
quarter that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
21st Century
Holding Company
Part
II: OTHER INFORMATION
Item
1
Legal
Proceedings
See Item 1 of Part I, “Financial
Statements – Note 4 – Commitments and Contingencies.”
Item
1A
Risk
Factors
There
have been no material changes from the risk factors previously disclosed in Item
1, Risk Factors, in the Company’s Form 10-K for the fiscal year ended December
31, 2008.
Additional
Risk Factors
The risks described in this Quarterly
Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2008 are not the only risks facing our Company. Additional
risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may materially adversely affect our business, financial
condition and/or operating results.
Item
2
(a)
Unregistered Sales of Equity Securities and Use of Proceeds
During
the three months ended September 30, 2009, we have issued an aggregate of 2,000
options to an executive of the Company under our 2002 stock option plan. The
options have an exercise price of $3.03 per share, vest over five years and
expire six years from the grant date.
(b)
None
(c)
None
Item
3
Defaults
upon Senior Securities
None
Item
4
Submission
of Matters to a Vote of Security Holders
None
Item
5
Other
Information
None
21st Century
Holding Company
Item
6
Exhibits
10.1 Excess Catastrophe
Reinsurance Contract, effective July 1, 2009, issued to Federated National
Insurance Company. *
10.2
Reinstatement Premium Protection Contract, effective July 1, 2009, issued to
Federated National Insurance Company. *
31.1 Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act. *
31.2 Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
*
32.1 Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
*
32.2 Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
*
*Filed
herewith
21st Century
Holding Company
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
21st
CENTURY HOLDING COMPANY
|
|
By:
|
/s/ Michael H. Braun
|
|
Michael
H. Braun, Chief Executive Officer
|
|
|
|
/s/ Peter J. Prygelski,
III
|
|
Peter
J. Prygelski, III, Chief Financial
Officer
|
Date:
November 9, 2009
21st Century
Holding Company
EXHIBIT
INDEX
10.1 Excess Catastrophe
Reinsurance Contract, effective July 1, 2009, issued to Federated National
Insurance Company.
10.2
Reinstatement Premium Protection Contract, effective July 1, 2009, issued to
Federated National Insurance Company.
31.1 Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act.
31.2 Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act.
32.1 Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act.
32.2 Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act.