UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended March 31, 2010
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the Transition Period From
to
000-50511
Commission File Number
UNITED AMERICA INDEMNITY, LTD.
(Exact name of registrant as specified in its charter)
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Cayman Islands
(State or other jurisdiction
of incorporation or organization)
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98-0417107
(I.R.S. Employer Identification No.)
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WALKER HOUSE, 87 MARY STREET
KYI 9005
GEORGE TOWN, GRAND CAYMAN
CAYMAN ISLANDS
(Address of principal executive office including zip code)
(345) 949-0100
(Registrants 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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically 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 registrant was required to submit and post such files.).
Yes
o
No
o
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 definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.:
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Large accelerated filer
o
;
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Accelerated filer
þ
;
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Non-accelerated filer
o
;
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o
No
þ
As of
May 4, 2010, the registrant had outstanding 36,544,608 Class A Common Shares and 24,122,744
Class B Common Shares.
TABLE OF CONTENTS
As used in this quarterly report, unless the context requires otherwise:
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1)
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United America Indemnity, we, us, and our refer to United America Indemnity, Ltd., an
exempted company incorporated with limited liability under the laws of the Cayman Islands, and
its U.S. and Non-U.S. Subsidiaries;
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2)
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our U.S. Subsidiaries refers to United America Indemnity Group, Inc., AIS, Penn-America
Group, Inc., and our Insurance Operations;
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3)
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our U.S. Insurance Operations refers to the insurance and related operations conducted by
AIS subsidiaries, including American Insurance Adjustment Agency, Inc., U. A. I. Services,
LLC, J.H. Ferguson & Associates, LLC, and the U.S. Insurance Companies;
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4)
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our U.S. Insurance Companies refers to the insurance and related operations conducted by
United National Insurance Company, Diamond State Insurance Company, United National Casualty
Insurance Company, United National Specialty Insurance Company, Penn-America Insurance
Company, Penn-Star Insurance Company and Penn-Patriot Insurance Company;
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5)
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our Predecessor Insurance Operations refers to Wind River Investment Corporation, which was
dissolved on May 31, 2006, AIS, American Insurance Adjustment Agency, Inc., Emerald Insurance
Company, which was dissolved on March 24, 2008, the United National Insurance Company, Diamond
State Insurance Company, United National Casualty Insurance Company, United National Specialty
Insurance Company, and J.H. Ferguson & Associates, LLC;
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6)
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our Insurance Operations refers to the U.S. Insurance Operations;
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7)
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Wind River Reinsurance refers to Wind River Reinsurance Company, Ltd.;
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8)
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our Non-U.S. Subsidiaries refers to Wind River Reinsurance, the Luxembourg Companies, and
U.A.I. (Ireland) Limited;
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9)
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our Reinsurance Operations refers to the reinsurance and related operations of Wind River
Reinsurance;
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10)
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the Luxembourg Companies refers to U.A.I. (Luxembourg) I S.à r.l., U.A.I. (Luxembourg) II
S.à r.l., U.A.I. (Luxembourg) III S.à r.l., U.A.I. (Luxembourg) IV S.à r.l., U.A.I.
(Luxembourg) Investment S.à r.l., and Wind River (Luxembourg) S.à r.l.;
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11)
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United America Indemnity Group refers to United America Indemnity Group, Inc.;
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12)
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AIS refers to American Insurance Service, Inc.;
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13)
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Penn-America refers to our product classification that includes property and general
liability products for small commercial businesses distributed through a select network of
wholesale general agents with specific binding authority;
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14)
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United National refers to our product classification that includes property, general
liability, and professional lines products distributed through program administrators with
specific binding authority;
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15)
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Diamond State refers to our product classification that includes property, casualty, and
professional lines products distributed through wholesale brokers and program administrators
with specific binding authority;
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16)
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the Statutory Trusts refers to United National Group Capital Trust I, United National Group
Capital Statutory Trust II, Penn-America Statutory Trust I, whose registration was cancelled
effective January 15, 2008, and Penn-America Statutory Trust II, whose registration was
cancelled effective February 2, 2009;
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17)
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Fox Paine & Company refers to Fox Paine & Company, LLC and affiliated investment funds;
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18)
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GAAP refers to accounting principles generally accepted in the United States of America;
and
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19)
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$ or dollars refers to U.S. dollars.
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PART I FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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UNITED AMERICA INDEMNITY, LTD.
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
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(Unaudited)
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March 31, 2010
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December 31, 2009
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ASSETS
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Fixed maturities:
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Available for sale, at fair value (amortized cost: $1,495,858 and $1,423,052)
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$
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1,542,805
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$
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1,471,572
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Equity securities:
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Preferred stocks:
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Available for sale, at fair value (cost: $930 and $1,509)
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2,230
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2,599
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Common stocks:
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Available for sale, at fair value (cost: $54,420 and $50,709)
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68,332
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63,057
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Other invested assets
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Available for sale, at fair value (cost: $4,255 and $4,323)
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5,448
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6,854
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Securities classified as trading, at fair value (cost: $1,100 and $1,145)
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1,100
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1,145
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Total investments
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1,619,915
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1,545,227
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|
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Cash and cash equivalents
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111,146
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186,087
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Accounts receivable, net
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68,758
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69,711
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Reinsurance receivables
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520,708
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543,351
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Federal income taxes receivable
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|
397
|
|
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3,521
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Deferred federal income taxes
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14,822
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13,819
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Deferred acquisition costs
|
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33,658
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33,184
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Intangible assets
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9,218
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9,236
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Prepaid reinsurance premiums
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12,743
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16,546
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Other assets
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25,276
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25,098
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|
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Total assets
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$
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2,416,641
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$
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2,445,780
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|
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LIABILITIES AND SHAREHOLDERS EQUITY
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Liabilities:
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Unpaid losses and loss adjustment expenses
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$
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1,232,641
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$
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1,257,741
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Unearned premiums
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138,472
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131,582
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Ceded balances payable
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2,026
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16,009
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Contingent commissions
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5,477
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11,169
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Payable for securities purchased
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35,975
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37,258
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|
Notes and debentures payable
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121,498
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121,569
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Other liabilities
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29,949
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38,476
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Total liabilities
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1,566,038
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1,613,804
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Commitments and contingencies (Note 8)
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Shareholders equity:
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Common shares, $0.0001 par value, 900,000,000 common shares authorized; Class A common
shares issued: 42,581,491 and 42,486,690, respectively; Class A common shares
outstanding: 36,508,960 and 36,430,477, respectively; Class B common shares issued and
outstanding: 24,122,744 and 24,122,744, respectively
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7
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7
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Additional paid-in capital
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|
620,444
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619,469
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|
Accumulated other comprehensive income
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47,352
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48,481
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|
Retained earnings
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283,640
|
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264,739
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Class A common shares in treasury, at cost: 6,072,531 and 6,056,213 shares, respectively
|
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(100,840
|
)
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(100,720
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)
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Total shareholders equity
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|
850,603
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|
|
|
831,976
|
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|
|
|
|
|
|
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|
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Total liabilities and shareholders equity
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|
$
|
2,416,641
|
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|
$
|
2,445,780
|
|
|
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|
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See accompanying notes to consolidated financial statements.
1
UNITED AMERICA INDEMNITY, LTD.
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
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(Unaudited)
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Quarters Ended March 31,
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|
2010
|
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|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Gross premiums written
|
|
$
|
92,853
|
|
|
$
|
99,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net premiums written
|
|
$
|
81,481
|
|
|
$
|
86,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
70,788
|
|
|
$
|
78,540
|
|
Net investment income
|
|
|
14,579
|
|
|
|
22,177
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment losses on investments
|
|
|
(89
|
)
|
|
|
(3,121
|
)
|
Other-than-temporary impairment losses on investments
recognized in other comprehensive income
|
|
|
47
|
|
|
|
|
|
Other net realized investment gains (losses)
|
|
|
14,246
|
|
|
|
(5,475
|
)
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
14,204
|
|
|
|
(8,596
|
)
|
|
|
|
|
|
|
|
Total revenues
|
|
|
99,571
|
|
|
|
92,121
|
|
|
|
|
|
|
|
|
|
|
Losses and Expenses:
|
|
|
|
|
|
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|
|
Net losses and loss adjustment expenses
|
|
|
41,789
|
|
|
|
47,740
|
|
Acquisition costs and other underwriting expenses
|
|
|
30,148
|
|
|
|
30,814
|
|
Corporate and other operating expenses
|
|
|
4,896
|
|
|
|
3,975
|
|
Interest expense
|
|
|
1,739
|
|
|
|
1,854
|
|
|
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|
|
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Income before income taxes
|
|
|
20,999
|
|
|
|
7,738
|
|
Income tax expense
|
|
|
2,069
|
|
|
|
723
|
|
|
|
|
|
|
|
|
Income before equity in net income (loss) of partnerships
|
|
|
18,930
|
|
|
|
7,015
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|
Equity in net income (loss) of partnerships, net of taxes
|
|
|
(29
|
)
|
|
|
135
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,901
|
|
|
$
|
7,150
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
Per share data:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
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|
Basic
|
|
$
|
0.31
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
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|
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Diluted
|
|
$
|
0.31
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
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|
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|
|
|
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|
Weighted-average number of shares outstanding
|
|
|
|
|
|
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|
Basic
|
|
|
60,369,087
|
|
|
|
35,036,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Diluted
|
|
|
60,409,839
|
|
|
|
35,081,845
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
2
UNITED AMERICA INDEMNITY, LTD.
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Quarters Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,901
|
|
|
$
|
7,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during period
|
|
|
9,978
|
|
|
|
(7,455)
|
|
Portion of other-than-temporary impairment losses recognized in other comprehensive loss, net of taxes
|
|
|
(1)
|
|
|
|
|
|
Recognition of previously unrealized holding (gains) losses
|
|
|
(10,993)
|
|
|
|
6,321
|
|
Unrealized foreign currency translation losses
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of taxes
|
|
|
(1,129
|
)
|
|
|
(1,134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of taxes
|
|
$
|
17,772
|
|
|
$
|
6,016
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
3
UNITED AMERICA INDEMNITY, LTD.
Consolidated Statements of Changes in Shareholders Equity
(Dollars in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Year Ended
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Number of Class A common shares issued:
|
|
|
|
|
|
|
|
|
Number at beginning of period
|
|
|
42,486,690
|
|
|
|
25,032,618
|
|
Common shares issued under share incentive plans
|
|
|
58,923
|
|
|
|
72,127
|
|
Common shares issued to directors
|
|
|
35,878
|
|
|
|
203,524
|
|
Common shares issued under Rights Offering
|
|
|
|
|
|
|
17,178,421
|
|
|
|
|
|
|
|
|
Number at end of period
|
|
|
42,581,491
|
|
|
|
42,486,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Class B common shares issued:
|
|
|
|
|
|
|
|
|
Number at beginning of period
|
|
|
24,122,744
|
|
|
|
12,687,500
|
|
Common shares issued under Rights Offering
|
|
|
|
|
|
|
11,435,244
|
|
|
|
|
|
|
|
|
Number at end of period
|
|
|
24,122,744
|
|
|
|
24,122,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par value of Class A common shares:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
4
|
|
|
$
|
3
|
|
Common shares issued under Rights Offering
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
4
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par value of Class B common shares:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
3
|
|
|
$
|
1
|
|
Common shares issued under Rights Offering
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
619,469
|
|
|
$
|
524,345
|
|
Share compensation plans
|
|
|
975
|
|
|
|
3,294
|
|
Common shares issued under Rights Offering
|
|
|
|
|
|
|
91,830
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
620,444
|
|
|
$
|
619,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net of deferred income tax:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
48,481
|
|
|
$
|
25,108
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during the period
|
|
|
(1,015
|
)
|
|
|
29,554
|
|
Unrealized foreign currency translation gains (losses)
|
|
|
(113
|
)
|
|
|
140
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
(1,128
|
)
|
|
|
29,694
|
|
Change in other-than-temporary impairment losses recognized in other comprehensive income, net of taxes
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Cumulative effect adjustment per new impairment accounting guidance
|
|
|
|
|
|
|
(6,320
|
)
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
47,352
|
|
|
$
|
48,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
264,739
|
|
|
$
|
182,982
|
|
Net income
|
|
|
18,901
|
|
|
|
75,437
|
|
Cumulative effect adjustment per new impairment accounting guidance
|
|
|
|
|
|
|
6,320
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
283,640
|
|
|
$
|
264,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Treasury Shares:
|
|
|
|
|
|
|
|
|
Number at beginning of period
|
|
|
6,056,213
|
|
|
|
6,019,156
|
|
Class A common shares purchased
|
|
|
16,318
|
|
|
|
37,057
|
|
|
|
|
|
|
|
|
Number at end of period
|
|
|
6,072,531
|
|
|
|
6,056,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Shares, at cost:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(100,720
|
)
|
|
$
|
(100,446
|
)
|
Class A common shares purchased, at cost
|
|
|
(120
|
)
|
|
|
(274
|
)
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(100,840
|
)
|
|
$
|
(100,720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
850,603
|
|
|
$
|
831,976
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
UNITED AMERICA INDEMNITY, LTD.
Consolidated Statements of Cash Flows
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Quarters Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,901
|
|
|
$
|
7,150
|
|
Adjustments to reconcile net income to net cash used for operating activities:
|
|
|
|
|
|
|
|
|
Amortization of trust preferred securities issuance costs
|
|
|
20
|
|
|
|
20
|
|
Amortization and depreciation
|
|
|
528
|
|
|
|
434
|
|
Restricted stock expense
|
|
|
1,167
|
|
|
|
1,084
|
|
Deferred federal income taxes
|
|
|
(865
|
)
|
|
|
5,944
|
|
Amortization of bond premium and discount, net
|
|
|
657
|
|
|
|
1,048
|
|
Net realized investment (gains) losses
|
|
|
(14,204
|
)
|
|
|
8,596
|
|
Equity in net (income) loss of partnerships
|
|
|
29
|
|
|
|
(135
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
Agents balances
|
|
|
953
|
|
|
|
(10,700
|
)
|
Reinsurance receivables
|
|
|
22,643
|
|
|
|
36,723
|
|
Unpaid losses and loss adjustment expenses
|
|
|
(25,100
|
)
|
|
|
(59,455
|
)
|
Unearned premiums
|
|
|
6,890
|
|
|
|
4,391
|
|
Ceded balances payable
|
|
|
(13,983
|
)
|
|
|
(9,642
|
)
|
Other assets and liabilities, net
|
|
|
(9,236
|
)
|
|
|
(3,732
|
)
|
Contingent commissions
|
|
|
(5,692
|
)
|
|
|
(678
|
)
|
Federal income taxes receivable
|
|
|
3,124
|
|
|
|
2,747
|
|
Deferred acquisition costs
|
|
|
(474
|
)
|
|
|
(145
|
)
|
Prepaid reinsurance premiums
|
|
|
3,803
|
|
|
|
3,683
|
|
|
|
|
|
|
|
|
Net cash used for operating activities
|
|
|
(10,839
|
)
|
|
|
(12,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of fixed maturities
|
|
|
275,773
|
|
|
|
68,403
|
|
Proceeds from sale of stocks
|
|
|
10,324
|
|
|
|
37,397
|
|
Proceeds from maturity of fixed maturities
|
|
|
17,925
|
|
|
|
9,735
|
|
Proceeds from sale of other invested assets
|
|
|
68
|
|
|
|
16,699
|
|
Purchases of fixed maturities
|
|
|
(356,759
|
)
|
|
|
(156,660
|
)
|
Purchases of stocks
|
|
|
(10,937
|
)
|
|
|
(36,859
|
)
|
Purchases of other invested assets
|
|
|
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(63,606
|
)
|
|
|
(61,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Tax expense associated with share-based compensation plans
|
|
|
(192
|
)
|
|
|
(159
|
)
|
Purchases of Class A common shares
|
|
|
(120
|
)
|
|
|
(157
|
)
|
Principal payments of term debt
|
|
|
(71
|
)
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
Net cash used for financing activities
|
|
|
(383
|
)
|
|
|
(378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(74,941
|
)
|
|
|
(74,382
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
186,087
|
|
|
|
292,604
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
111,146
|
|
|
$
|
218,222
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Principles of Consolidation and Basis of Presentation
United America Indemnity, Ltd. (United America Indemnity or the Company), was incorporated
on August 26, 2003, and is domiciled in the Cayman Islands. The Companys Class A common stock is
publicly traded on the NASDAQ Global Market under the trading symbol INDM.
The interim consolidated financial statements are unaudited, but have been prepared in conformity
with accounting principles generally accepted in the United States of America (GAAP), which
differ in certain respects from those followed in reports to insurance regulatory authorities. The
preparation of financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
The unaudited consolidated financial statements include all adjustments that are, in the opinion of
management, of a normal recurring nature and are necessary for a fair statement of results for the
interim periods. Results of operations for the quarters ended March 31, 2010 and 2009 are not
necessarily indicative of the results of a full year. The accompanying notes to the unaudited
consolidated financial statements should be read in conjunction with the notes to the consolidated
financial statements contained in the Companys 2009 Annual Report on Form 10-K.
The unaudited consolidated financial statements include the accounts of United America Indemnity
and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated
in consolidation.
The Companys wholly-owned business trust subsidiaries, United National Group Capital Trust I (UNG
Trust I) and United National Group Capital Statutory Trust II (UNG Trust II), are not
consolidated pursuant to the Financial Accounting Standards Board (FASB) Accounting Standards
Codification (the Codification). The Companys business trust subsidiaries have issued $30.0
million in floating rate capital securities (Trust Preferred Securities) and $0.9 million of
floating rate common securities. The sole assets of the Companys business trust subsidiaries are
$30.9 million of junior subordinated debentures issued by the Company, which have the same terms
with respect to maturity, payments, and distributions as the Trust Preferred Securities and the
floating rate common securities.
Certain prior period amounts have been reclassified to conform to the current period presentation.
2. Investments
The Companys investments in fixed maturities, preferred stock, and common stock are classified as
available for sale and are carried at their fair value. Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The fair values of the Companys available
for sale portfolio, excluding the limited partnership interest, are determined on the basis of
quoted market prices where available. If quoted market prices are not available, the Company uses
third party pricing services to assist in determining fair value. In many instances, these
services examine the pricing of similar instruments to estimate fair value. The Company purchases
bonds with the expectation of holding them to their maturity; however, changes to the portfolio are
sometimes required to assure it is appropriately matched to liabilities. In addition, changes in
financial market conditions and tax considerations may cause the Company to sell an investment
before it matures. Corporate loans have stated maturities; however, they generally do not reach
their final maturity due to borrowers refinancing. The difference between amortized cost and fair
value of the Companys available for sale investments, excluding the Companys convertible bond and
convertible preferred stock portfolios, net of the effect of deferred income taxes, is reflected in
accumulated other comprehensive income in shareholders equity and, accordingly, has no effect on
net income other than for the credit loss component of impairments deemed to be
other-than-temporary. The difference between amortized cost and fair value of the convertible
bonds and convertible preferred stocks is included in income.
6
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
The amortized cost and estimated fair value of investments were as follows as of March 31, 2010 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
temporary
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
impairments
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
recognized in
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
AOCI (1)
|
|
As of March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency obligations
|
|
$
|
292,522
|
|
|
$
|
8,782
|
|
|
$
|
(195
|
)
|
|
$
|
301,109
|
|
|
$
|
|
|
Obligations of states and political subdivisions
|
|
|
194,491
|
|
|
|
6,047
|
|
|
|
(195
|
)
|
|
|
200,343
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
304,874
|
|
|
|
9,876
|
|
|
|
(833
|
)
|
|
|
313,917
|
|
|
|
(62
|
)
|
Asset-backed securities
|
|
|
128,847
|
|
|
|
2,517
|
|
|
|
(155
|
)
|
|
|
131,209
|
|
|
|
(51
|
)
|
Corporate notes and loans
|
|
|
512,756
|
|
|
|
19,415
|
|
|
|
(333
|
)
|
|
|
531,838
|
|
|
|
(134
|
)
|
Foreign corporate bonds
|
|
|
62,368
|
|
|
|
2,118
|
|
|
|
(97
|
)
|
|
|
64,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed
maturities
|
|
|
1,495,858
|
|
|
|
48,755
|
|
|
|
(1,808
|
)
|
|
|
1,542,805
|
|
|
|
(247
|
)
|
Common stock
|
|
|
54,420
|
|
|
|
14,286
|
|
|
|
(374
|
)
|
|
|
68,332
|
|
|
|
|
|
Preferred stock
|
|
|
930
|
|
|
|
1,300
|
|
|
|
|
|
|
|
2,230
|
|
|
|
|
|
Other invested assets
|
|
|
5,355
|
|
|
|
1,193
|
|
|
|
|
|
|
|
6,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,556,563
|
|
|
$
|
65,534
|
|
|
$
|
(2,182
|
)
|
|
$
|
1,619,915
|
|
|
$
|
(247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents the total amount of other-than-temporary impairment losses recognized in
accumulated other comprehensive income (AOCI) since the date of adoption of the recent
guidance on other-than-temporary investments. Per the accounting guidance, these items were
not included in earnings as of March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
temporary
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
impairments
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
recognized in
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
AOCI (1)
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency obligations
|
|
$
|
228,386
|
|
|
$
|
7,936
|
|
|
$
|
(234
|
)
|
|
$
|
236,088
|
|
|
$
|
|
|
Obligations of states and political subdivisions
|
|
|
217,713
|
|
|
|
8,255
|
|
|
|
(370
|
)
|
|
|
225,598
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
349,287
|
|
|
|
15,219
|
|
|
|
(506
|
)
|
|
|
364,000
|
|
|
|
(72
|
)
|
Asset-backed securities
|
|
|
112,287
|
|
|
|
2,322
|
|
|
|
(446
|
)
|
|
|
114,163
|
|
|
|
(10
|
)
|
Corporate notes and loans
|
|
|
446,570
|
|
|
|
15,419
|
|
|
|
(1,259
|
)
|
|
|
460,730
|
|
|
|
(698
|
)
|
Foreign corporate bonds
|
|
|
68,809
|
|
|
|
2,354
|
|
|
|
(170
|
)
|
|
|
70,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
1,423,052
|
|
|
|
51,505
|
|
|
|
(2,985
|
)
|
|
|
1,471,572
|
|
|
|
(780
|
)
|
Common stock
|
|
|
50,709
|
|
|
|
12,473
|
|
|
|
(125
|
)
|
|
|
63,057
|
|
|
|
|
|
Preferred stock
|
|
|
1,509
|
|
|
|
1,090
|
|
|
|
|
|
|
|
2,599
|
|
|
|
|
|
Other invested assets
|
|
|
5,468
|
|
|
|
2,531
|
|
|
|
|
|
|
|
7,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,480,738
|
|
|
$
|
67,599
|
|
|
$
|
(3,110
|
)
|
|
$
|
1,545,227
|
|
|
$
|
(780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents the amount of other-than-temporary impairment losses recognized in accumulated
other comprehensive income (AOCI). Per the accounting guidance, these items were not
included in earnings as of December 31, 2009.
|
Excluding U.S. treasury and agency bonds, the Company did not hold any debt or equity
investments in a single issuer that was in excess
of 10.0% of shareholders equity at March
31, 2010 or December 31, 2009.
7
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
The
amortized cost and estimated fair value of the Companys fixed
maturities portfolio classified as available for sale at March 31,
2010, by contractual maturity, are shown below. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Estimated
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
68,928
|
|
|
$
|
70,452
|
|
Due after one year through five years
|
|
|
732,665
|
|
|
|
754,879
|
|
Due after five years through ten years
|
|
|
194,092
|
|
|
|
202,978
|
|
Due after ten years through fifteen years
|
|
|
31,913
|
|
|
|
33,819
|
|
Due after fifteen years
|
|
|
34,539
|
|
|
|
35,551
|
|
Mortgaged-backed securities
|
|
|
304,874
|
|
|
|
313,917
|
|
Asset-backed securities
|
|
|
128,847
|
|
|
|
131,209
|
|
|
|
|
|
|
|
|
|
|
$
|
1,495,858
|
|
|
$
|
1,542,805
|
|
|
|
|
|
|
|
|
The following table contains an analysis of the Companys securities with gross unrealized
losses, categorized by the period that the securities were in a continuous loss position as of
March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or longer (1)
|
|
|
Total
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
(Dollars in thousands)
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency obligations
|
|
$
|
74,293
|
|
|
$
|
(195
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
74,293
|
|
|
$
|
(195
|
)
|
Obligations of states and political subdivisions
|
|
|
19,981
|
|
|
|
(101
|
)
|
|
|
6,432
|
|
|
|
(94
|
)
|
|
|
26,413
|
|
|
|
(195
|
)
|
Mortgage-backed securities
|
|
|
119,285
|
|
|
|
(708
|
)
|
|
|
3,328
|
|
|
|
(125
|
)
|
|
|
122,613
|
|
|
|
(833
|
)
|
Asset-backed securities
|
|
|
6,152
|
|
|
|
(35
|
)
|
|
|
1,581
|
|
|
|
(120
|
)
|
|
|
7,733
|
|
|
|
(155
|
)
|
Corporate notes and loans
|
|
|
48,176
|
|
|
|
(329
|
)
|
|
|
1,994
|
|
|
|
(4
|
)
|
|
|
50,170
|
|
|
|
(333
|
)
|
Foreign corporate bonds
|
|
|
6,901
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
6,901
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed
maturities
|
|
|
274,788
|
|
|
|
(1,465
|
)
|
|
|
13,335
|
|
|
|
(343
|
)
|
|
|
288,123
|
|
|
|
(1,808
|
)
|
Common stock
|
|
|
9,990
|
|
|
|
(374
|
)
|
|
|
|
|
|
|
|
|
|
|
9,990
|
|
|
|
(374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
284,778
|
|
|
$
|
(1,839
|
)
|
|
$
|
13,335
|
|
|
$
|
(343
|
)
|
|
$
|
298,113
|
|
|
$
|
(2,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Fixed maturities in a gross unrealized loss position for twelve months or longer is
primarily comprised of non-credit losses on investment grade securities where management does
not intend to sell, and it is more likely than not that the Company will not be forced to sell
the security before recovery. The Company has analyzed these securities and has determined
that they are not impaired.
|
The following table contains an analysis of the Companys securities with gross unrealized
losses, categorized by the period that the securities were in a continuous loss position as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or longer (1)
|
|
|
Total
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
(Dollars in thousands)
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency obligations
|
|
$
|
56,445
|
|
|
$
|
(234
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
56,445
|
|
|
$
|
(234
|
)
|
Obligations of states and political subdivisions
|
|
|
26,488
|
|
|
|
(239
|
)
|
|
|
6,403
|
|
|
|
(131
|
)
|
|
|
32,891
|
|
|
|
(370
|
)
|
Mortgage-backed securities
|
|
|
23,612
|
|
|
|
(217
|
)
|
|
|
5,020
|
|
|
|
(289
|
)
|
|
|
28,632
|
|
|
|
(506
|
)
|
Asset-backed securities
|
|
|
31,255
|
|
|
|
(246
|
)
|
|
|
1,625
|
|
|
|
(200
|
)
|
|
|
32,880
|
|
|
|
(446
|
)
|
Corporate notes and loans
|
|
|
87,286
|
|
|
|
(1,166
|
)
|
|
|
3,556
|
|
|
|
(93
|
)
|
|
|
90,842
|
|
|
|
(1,259
|
)
|
Foreign corporate bonds
|
|
|
11,835
|
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
|
|
11,835
|
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
236,921
|
|
|
|
(2,272
|
)
|
|
|
16,604
|
|
|
|
(713
|
)
|
|
|
253,525
|
|
|
|
(2,985
|
)
|
Common stock
|
|
|
3,184
|
|
|
|
(73
|
)
|
|
|
1,107
|
|
|
|
(52
|
)
|
|
|
4,291
|
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
240,105
|
|
|
$
|
(2,345
|
)
|
|
$
|
17,711
|
|
|
$
|
(765
|
)
|
|
$
|
257,816
|
|
|
$
|
(3,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Fixed maturities in a gross unrealized loss position for twelve months or longer is
primarily comprised of non-credit losses on investment grade securities where management does
not intend to sell, and it is more likely than not that the Company will not be forced to sell
the security before recovery. The Company has analyzed these securities and has determined
that they are not impaired.
|
8
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
The Company regularly performs various analytical valuation procedures with respect to its
investments, including reviewing each fixed maturity security in an unrealized loss position to
assess whether the security is a candidate for credit loss. Specifically, the Company considers
credit rating, market price, and issuer specific financial information, among other factors, to
assess the likelihood of collection of all principal and interest as contractually due. Securities
for which the Company determines that a credit loss is likely are subjected to further analysis
through discounted cash flow testing to estimate the credit loss to be recognized in earnings, if
any. The specific methodologies and significant assumptions used by asset class are discussed
below. Upon identification of such securities and periodically thereafter, a detailed review is
performed to determine whether the decline is considered other-than-temporary. This review
includes an analysis of several factors, including but not limited to, the credit ratings and cash
flows of the securities, and the magnitude and length of time that the fair value of such
securities is below cost.
For fixed maturities, the factors considered in reaching the conclusion that a decline below cost
is other-than-temporary include, among others, whether:
|
(1)
|
|
the issuer is in financial distress;
|
|
|
(2)
|
|
the investment is secured;
|
|
|
(3)
|
|
a significant credit rating action occurred;
|
|
|
(4)
|
|
scheduled interest payments were delayed or missed;
|
|
|
(5)
|
|
changes in laws or regulations have affected an issuer or industry;
|
|
|
(6)
|
|
the investment has an unrealized loss and was identified by the Companys
Investment Manager as an investment to be sold before recovery or maturity; and
|
|
|
(7)
|
|
the investment failed cash flow projection testing to determine if anticipated
principal and interest payments will be realized.
|
According to the most recent accounting guidance, for debt securities in an unrealized loss
position, the Company is required to assess whether the Company has the intent to sell the debt
security or more likely than not will be required to sell the debt security before the anticipated
recovery. If either of these conditions is met, the Company must recognize an other-than-temporary
impairment with the entire unrealized loss being recorded through earnings. For debt securities in
an unrealized loss position not meeting these conditions, the Company assesses whether the
impairment of a security is other-than-temporary. If the impairment is deemed to be
other-than-temporary, the Company must separate the other-than-temporary impairment into two
components: the amount representing the credit loss and the amount related to all other factors,
such as changes in interest rates. The credit loss represents the portion of the amortized book
value in excess of the net present value of the projected future cash flows discounted at the
effective interest rate implicit in the debt security prior to impairment. The credit loss
component of the other-than-temporary impairment is recorded through earnings, whereas the amount
relating to factors other than credit losses are recorded in other comprehensive income, net of
taxes.
For equity securities, management carefully reviews all securities with unrealized losses and
further focuses on securities that have either:
|
(1)
|
|
persisted for more than twelve consecutive months or
|
|
|
(2)
|
|
the value of the investment has been 20% or more below cost for six continuous
months or more to determine if the security should be impaired.
|
The amount of any write-down is included in earnings as a realized loss in the period in which the
impairment arose.
The following is a description, by asset type, of the methodology and significant inputs that the
Company used to measure the amount of credit loss recognized in earnings, if any:
U.S. treasury and agency obligations
As of March 31, 2010, gross unrealized losses related to
U.S. treasury and agency obligations were $0.2 million. All unrealized losses have been in an
unrealized loss position for less than twelve months and are rated AAA. The Companys investment
managers analysis for this sector includes on-site visits and meetings with officials in addition
to the standard rigorous analysis that determines the financial condition of the issuer.
9
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Obligations of states and political subdivisions
As of March 31, 2010, gross unrealized losses
related to obligations of states and political subdivision
s
were $0.2 million. Of this amount,
$0.1 million has been in an unrealized loss position for twelve months or greater. Of these
securities, 97.2% are rated investment grade with the remaining securities being non-rated. The
Companys investment managers analysis for this sector includes on-site visits and meetings with
officials in addition to the standard rigorous analysis that determines the financial condition of
the issuer.
Mortgage-backed securities non-agency
As of March 31, 2010, gross unrealized losses related to
mortgage-backed securities non-agency were $0.1 million. All unrealized losses have been in an
unrealized loss position for twelve months or greater. Of these securities, 64.5% are rated AAA
with the remaining securities being rated between AA and A. The Companys investment manager
models each residential mortgage-backed security to project principal losses under downside, base,
and upside scenarios for the economy and home prices. The primary assumption that drives the
security and loan level modeling is the Home Price Index (HPI) projection. The Companys
investment manager first projects HPI at the national level, then at the Metropolitan Statistical
Area (MSA) level based on the historical relationship between the individual MSA HPI and the
national HPI, using inputs from its macroeconomic team, mortgage portfolio management team, and
structured analyst team. The model utilizes loan level data and borrower characteristics including
FICO score, geographic location, original and content
loan size, loan age, mortgage rate and type (e.g. fixed rate / interest-only / adjustable rate
mortgage), issuer / originator, residential type (e.g. owner occupied / investor property),
dwelling type (e.g. single family / multi-family), loan purpose, level of documentation, and
delinquency status as inputs.
Mortgage-backed securities agency
As of March 31, 2010, gross unrealized losses related to
mortgage-backed securities agency were $0.7 million. All unrealized losses have been in an
unrealized loss position for less than twelve months and are rated AAA. The Companys investment
manager utilized a proprietary mortgage model that incorporates a number of economic variables to
select agency mortgage-backed securities and to monitor the risk of pre-payments. Agency
mortgage-backed securities undergo rigorous stress testing as part of this process.
Asset backed securities (ABS)
As of March 31, 2010, gross unrealized losses related to asset
backed securities were $0.2 million. Of this amount, $0.1 million has been in an unrealized loss
position for twelve months or greater. These securities are rated investment grade. The weighted
average credit enhancement for the Companys asset backed portfolio is 24.6. The Companys
investment manager analyzes every ABS transaction on a stand-alone basis. This analysis involves a
thorough review of the collateral, prepayment, and structural risk in each transaction.
Additionally, their analysis includes an in-depth credit analysis of the originator and servicer of
the collateral. The Companys investment manager projects an expected loss for a deal given a set
of assumptions specific to the asset type. These assumptions are used to calculate at what level
of losses that the deal will incur a dollar of loss. The major assumptions used to calculate this
ratio are loss severities, recovery lags, and no advances on principal and interest.
Corporate notes and loans
As of March 31, 2010, gross unrealized losses related to corporate
notes and loans were $0.3 million. Of this amount, $0.004 million has been in an unrealized loss
position for twelve months or greater. These securities are rated investment grade. The Companys
investment managers analysis for this sector includes maintaining detailed financial models that
include a projection of each issuers future financial performance, including prospective debt
servicing capabilities, capital structure composition, and the value of the collateral. The
analysis incorporates macroeconomics environment, industry conditions in which the issuer operates,
issuers current competitive position, vulnerability to changes in the competitive environment,
regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer
creditworthiness, and asset protection. Part of the process also includes running downside
scenarios to evaluate the expected likelihood of default as well as potential losses in the event
of default.
Foreign bonds
As of March 31, 2010, gross unrealized losses related to foreign bonds were $0.1
million. All unrealized losses have been in an unrealized loss position for less than twelve
months. These securities are rated AAA. The Companys investment manager maintains financial
models for the Companys bond issuers. These models include a projection of each issuers future
financial performance including prospective debt servicing capabilities and capital structure
composition. The analysis incorporates macroeconomics environment, industry conditions in which
the issuer operates, issuers current competitive position, vulnerability to changes in the
competitive environment, regulatory environment, issuer liquidity, issuer commitment to
bondholders, issuer creditworthiness, and asset protection.
10
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
The Company recorded the following other-than-temporary impairments (OTTI) on its investment
portfolio for the quarters ended March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
OTTI losses, gross
|
|
$
|
89
|
|
|
$
|
1,882
|
|
Portion of loss recognized in other comprehensive income (pre-tax)
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses on fixed
maturities recognized in earnings
|
|
|
42
|
|
|
|
1,882
|
|
Common stock
|
|
|
|
|
|
|
592
|
|
Preferred stock
|
|
|
|
|
|
|
647
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42
|
|
|
$
|
3,121
|
|
|
|
|
|
|
|
|
The following table is an analysis of the credit losses recognized in earnings on debt
securities held by the Company as of March 31, 2010 for which a portion of the OTTI loss was
recognized in other comprehensive income (loss).
|
|
|
|
|
Quarter-to-Date
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Balance of credit losses related to securities still being held as of January 1, 2010
|
|
$
|
50
|
|
Additions where no OTTI was previously recorded
|
|
|
31
|
|
Additions where an OTTI was previously recorded
|
|
|
11
|
|
Reductions for securities for which the company intends to sell or more likely than not will be required to sell before recovery
|
|
|
|
|
Reductions reflecting increases in expected cash flows to be collected
|
|
|
|
|
Reductions for securities sold during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of credit losses related to securities still being held as of March 31, 2010
|
|
$
|
92
|
|
|
|
|
|
|
|
|
NOTE:
|
|
The accounting guidance that requires this disclosure was
not adopted until April 1, 2009, so there is no table presented
for the quarter ended March 31, 2009.
|
Accumulated Other Comprehensive Income
Accumulated other comprehensive income as of March 31, 2010 and December 31, 2009 was as follows:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) from:
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
46,947
|
|
|
$
|
48,521
|
|
Preferred stocks
|
|
|
1,300
|
|
|
|
1,090
|
|
Common stocks
|
|
|
13,912
|
|
|
|
12,348
|
|
Partnerships < 3% owned
|
|
|
1,193
|
|
|
|
2,531
|
|
Foreign currency fluctuations
|
|
|
(69
|
)
|
|
|
44
|
|
Deferred taxes
|
|
|
(15,931
|
)
|
|
|
(16,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
47,352
|
|
|
$
|
48,481
|
|
|
|
|
|
|
|
|
11
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Net Realized Investment Gains (Losses)
The components of net realized investment gains (losses) for the quarters ended March 31, 2010 and
2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
11,691
|
|
|
$
|
(5,673
|
)
|
Convertibles
|
|
|
3
|
|
|
|
367
|
|
Common stock
|
|
|
2,510
|
|
|
|
(2,643
|
)
|
Preferred stock
|
|
|
|
|
|
|
(647
|
)
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,204
|
|
|
$
|
(8,596
|
)
|
|
|
|
|
|
|
|
The proceeds from sales of available-for-sale securities resulting in net realized investment gains (losses) for the quarters ended March 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
275,773
|
|
|
$
|
68,403
|
|
Equity securities
|
|
|
10,324
|
|
|
|
37,397
|
|
Net Investment Income
The sources of net investment income for the quarters ended March 31, 2010 and 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
15,580
|
|
|
$
|
14,814
|
|
Preferred and common stocks
|
|
|
361
|
|
|
|
476
|
|
Cash and cash equivalents
|
|
|
77
|
|
|
|
586
|
|
Other invested assets
|
|
|
|
|
|
|
7,434
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
16,018
|
|
|
|
23,310
|
|
Investment expense
|
|
|
(1,439
|
)
|
|
|
(1,133
|
)
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
14,579
|
|
|
$
|
22,177
|
|
|
|
|
|
|
|
|
The Companys total investment return on an after-tax basis for the quarters ended March 31,
2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
12,283
|
|
|
$
|
17,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
Invested assets excluding partnerships
|
|
|
10,993
|
|
|
|
(6,321
|
)
|
Partnerships
|
|
|
(29
|
)
|
|
|
135
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
10,964
|
|
|
|
(6,186
|
)
|
Net unrealized investment losses
|
|
|
(1,017
|
)
|
|
|
(1,134
|
)
|
|
|
|
|
|
|
|
Net investment gains (losses)
|
|
|
9,947
|
|
|
|
(7,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment return
|
|
$
|
22,230
|
|
|
$
|
9,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment return %
(1)
|
|
|
1.3
|
%
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average investment portfolio
(2)
|
|
$
|
1,694,571
|
|
|
$
|
1,587,100
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Not annualized.
|
|
(2)
|
|
Average of total cash and
invested assets, net of payable for securities
purchased, as of the beginning and ending of the
period.
|
12
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Subprime and Alt-A Investments
The Company had approximately $2.7 million and $2.5 million worth of investment exposure through
subprime and Alt-A investments as of March 31, 2010 and December 31, 2009, respectively. An Alt-A
investment is one which is backed by a loan that contains limited documentation. As of March 31,
2010, approximately $0.9 million of those investments were rated AAA, $1.1 million were rated BBB+
to AA, $0.5 million were rated B, and $0.2 million were rated D to CCC. As of December 31, 2009,
approximately $0.8 million of those investments were rated AAA, $1.6 million were rated BBB- to AA,
and $0.1 million were rated CCC. Impairments on these investments were $0.01 million during the
quarter ended March 31, 2010 and $0.9 million during the year ended December 31, 2009.
Insurance Enhanced Municipal Bonds
As of March 31, 2010, the Company held insurance enhanced municipal bonds of approximately $128.0
million, which represented approximately 7.4% of the Companys total cash and invested assets.
These securities had an average rating of AA. Approximately $55.5 million of these bonds are
pre-refunded with U.S. treasury securities, of which $41.8 million are backed by financial
guarantors, meaning that funds have been set aside in escrow to satisfy the future interest and
principal obligations of the bond. Of the remaining $72.5 million of insurance enhanced municipal
bonds, $9.3 million would have carried a lower credit rating had they not been insured. The
following table provides a breakdown of the ratings for these municipal bonds with and without
insurance.
|
|
|
|
|
|
|
|
|
|
|
Ratings
|
|
|
Ratings
|
|
(Dollars in thousands)
|
|
with
|
|
|
without
|
|
Rating
|
|
Insurance
|
|
|
Insurance
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
$
|
500
|
|
|
$
|
|
|
AA
|
|
|
8,840
|
|
|
|
148
|
|
A
|
|
|
|
|
|
|
8,191
|
|
BBB
|
|
|
|
|
|
|
1,001
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,340
|
|
|
$
|
9,340
|
|
|
|
|
|
|
|
|
A summary of the Companys insurance enhanced municipal bonds that are backed by financial
guarantors, including the pre-refunded bonds that are escrowed in U.S. government obligations, is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exposure Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Pre-refunded
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
& Government
|
|
(Dollars in thousands)
|
|
|
|
|
|
Pre-refunded
|
|
|
Guaranteed
|
|
|
Guaranteed
|
|
Financial Guarantor
|
|
Total
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ambac Financial Group
|
|
$
|
13,601
|
|
|
$
|
5,909
|
|
|
$
|
|
|
|
$
|
7,692
|
|
Assured Guaranty Corporation
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
401
|
|
Financial Guaranty Insurance Company
|
|
|
2,535
|
|
|
|
2,535
|
|
|
|
|
|
|
|
|
|
Financial Security Assurance, Inc.
|
|
|
38,951
|
|
|
|
16,745
|
|
|
|
|
|
|
|
22,206
|
|
Municipal Bond Insurance Association
|
|
|
51,213
|
|
|
|
13,915
|
|
|
|
|
|
|
|
37,298
|
|
Federal Housing Association
|
|
|
2,336
|
|
|
|
|
|
|
|
2,336
|
|
|
|
|
|
Federal National Housing Association
|
|
|
780
|
|
|
|
|
|
|
|
780
|
|
|
|
|
|
Govt National Housing Association
|
|
|
1,188
|
|
|
|
1,009
|
|
|
|
179
|
|
|
|
|
|
Permanent School Fund Guaranty
|
|
|
3,350
|
|
|
|
1,670
|
|
|
|
1,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total backed by financial guarantors
|
|
|
114,355
|
|
|
|
41,783
|
|
|
|
4,975
|
|
|
|
67,597
|
|
Other credit enhanced municipal bonds
|
|
|
13,688
|
|
|
|
13,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
128,043
|
|
|
$
|
55,471
|
|
|
$
|
4,975
|
|
|
$
|
67,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the $128.0 million of insurance enhanced municipal bonds, the Company also held
unrated insurance enhanced asset-backed and credit securities with a market value of approximately
$36.0 million, which represented approximately 2.1% of the Companys total invested assets. The
financial guarantors of the Companys $36.0 million of insurance enhanced asset-backed and credit
securities include Financial Guaranty Insurance Company ($1.1 million), Municipal Bond Insurance
Association ($6.3 million), Ambac ($6.1 million), Financial Security Assurance, Inc ($6.3 million),
Assured Guaranty Insurance Group ($5.6 million), and National Public Finance Guarantee ($10.6
million).
13
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
The Company had no direct investments in the entities that have provided financial guarantees or
other credit support to any security held by the Company at March 31, 2010.
Bonds Held on Deposit
Certain cash balances, cash equivalents, and bonds available for sale were deposited with various
governmental authorities in accordance with statutory requirements or were held in trust pursuant
to intercompany reinsurance agreements. The estimated fair values of bonds available for sale and
on deposit or held in trust were as follows as of March 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
(Dollars in thousands)
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
On deposit with governmental authorities
|
|
$
|
42,010
|
|
|
$
|
41,336
|
|
Intercompany trusts held for the benefit of U.S. policyholders
|
|
|
668,166
|
|
|
|
653,500
|
|
Held in trust pursuant to third party requirements
|
|
|
34,420
|
|
|
|
29,884
|
|
Held in trust pursuant to U.S. regulatory requirements for the benefit of U.S. policyholders
|
|
|
5,834
|
|
|
|
6,169
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
750,430
|
|
|
$
|
730,889
|
|
|
|
|
|
|
|
|
3. Fair Value Measurements
The Company elected to apply the fair value option within its limited partnership investment
portfolio to the investment where the Company owns more than a 3% interest. The fair value of this
investment was $1.1 million as of March 31, 2010 and December 31, 2009. Effective December 31,
2009, the Company redeemed the majority of its ownership interest in this limited partnership,
resulting in its ownership interest falling below 3%. This limited partnership invested primarily
in securities that were publicly traded during the time that the Company held this investment. As
of March 31, 2010, the fair value of the Companys remaining interest in this limited partnership
was $1.1 million and was comprised of convertible preferred securities of a privately held company.
Securities that are held by this partnership are valued by obtaining values from Bloomberg, other
external pricing sources, and managers that make markets for these securities. The Company obtains
the value of this partnership at the end of each reporting period; however, the Company is only
periodically provided with a detailed listing of the investments held by the partnership.
Accordingly, this investment is classified as Level 3 within the fair value hierarchy.
During the quarters ended March 31, 2010 and 2009, the Company recognized gains (losses), net of
taxes, of $(0.03) million and $0.1 million, respectively, due to changes in the value of these
investments. These gains (losses) are reflected on the consolidated statement of operations as
equity in net income (loss) of partnerships, net of taxes.
The fair value option was not elected for the Companys investments in limited partnerships with
less than a 3% ownership interest.
The accounting standards related to fair value measurements define fair value, establish a
framework for measuring fair value, outline a fair value hierarchy based on inputs used to measure
fair value, and enhance disclosure requirements for fair value measurements. These standards do
not change existing guidance as to whether or not an instrument is carried at fair value. The
Company has determined that its fair value measurements are in accordance with the requirements of
these accounting standards.
14
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
The Companys invested assets are carried at their fair value and are categorized based upon a fair
value hierarchy:
|
|
|
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical
assets that the Company has the ability to access at the measurement date.
|
|
|
|
|
Level 2 inputs utilize other than quoted prices included in Level 1 that are
observable for the similar assets, either directly or indirectly.
|
|
|
|
|
Level 3 inputs are unobservable for the asset, and include situations where there is
little, if any, market activity for the asset.
|
In certain cases, the inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value
measurement falls has been determined based on the lowest level input that is significant to the
fair value measurement in its entirety. The Companys assessment of the significance of a
particular input to the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset.
Both observable and unobservable inputs may be used to determine the fair value of positions that
the Company has classified within the Level 3 category. As a result, the unrealized gains and
losses for invested assets within the Level 3 category presented in the tables below may include
changes in fair value that are attributed to both observable (e.g., changes in market interest
rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.
The following tables present information about the Companys invested assets measured at fair value
on a recurring basis as of March 31, 2010 and December 31, 2009, and indicate the fair value
hierarchy of the valuation techniques utilized by the Company to determine such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010
|
|
Fair Value Measurements
|
|
(Dollars in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency obligations
|
|
$
|
121,554
|
|
|
$
|
179,555
|
|
|
$
|
|
|
|
$
|
301,109
|
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
200,343
|
|
|
|
|
|
|
|
200,343
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
313,917
|
|
|
|
|
|
|
|
313,917
|
|
Asset-backed securities
|
|
|
|
|
|
|
131,209
|
|
|
|
|
|
|
|
131,209
|
|
Corporate notes and loans
|
|
|
|
|
|
|
531,838
|
|
|
|
|
|
|
|
531,838
|
|
Foreign corporate bonds
|
|
|
|
|
|
|
64,389
|
|
|
|
|
|
|
|
64,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed
maturities
|
|
|
121,554
|
|
|
|
1,421,251
|
|
|
|
|
|
|
|
1,542,805
|
|
Preferred shares
|
|
|
|
|
|
|
2,230
|
|
|
|
|
|
|
|
2,230
|
|
Common shares
|
|
|
68,332
|
|
|
|
|
|
|
|
|
|
|
|
68,332
|
|
Other invested assets
|
|
|
|
|
|
|
|
|
|
|
6,548
|
|
|
|
6,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total invested assets
|
|
$
|
189,886
|
|
|
$
|
1,423,481
|
|
|
$
|
6,548
|
|
|
$
|
1,619,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
Fair Value Measurements
|
|
(Dollars in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency obligations
|
|
$
|
82,021
|
|
|
$
|
154,067
|
|
|
$
|
|
|
|
$
|
236,088
|
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
225,598
|
|
|
|
|
|
|
|
225,598
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
364,000
|
|
|
|
|
|
|
|
364,000
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
|
|
|
|
114,163
|
|
|
|
|
|
|
|
114,163
|
|
Corporate notes and loans
|
|
|
|
|
|
|
460,730
|
|
|
|
|
|
|
|
460,730
|
|
Foreign corporate bonds
|
|
|
|
|
|
|
70,993
|
|
|
|
|
|
|
|
70,993
|
|
Other bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
82,021
|
|
|
|
1,389,551
|
|
|
|
|
|
|
|
1,471,572
|
|
Preferred shares
|
|
|
579
|
|
|
|
2,020
|
|
|
|
|
|
|
|
2,599
|
|
Common shares
|
|
|
63,057
|
|
|
|
|
|
|
|
|
|
|
|
63,057
|
|
Other invested assets
|
|
|
|
|
|
|
|
|
|
|
7,999
|
|
|
|
7,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total invested assets
|
|
$
|
145,657
|
|
|
$
|
1,391,571
|
|
|
$
|
7,999
|
|
|
$
|
1,545,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The securities classified as Level 1 in the above table consist of U.S. Treasuries and equity
securities actively traded on an exchange.
15
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
The securities classified as Level 2 in the above table consist primarily of fixed maturity
securities. Based on the typical trading volumes and the lack of quoted market prices for fixed
maturities, security prices are derived through recent reported trades for identical or similar
securities making adjustments through the reporting date based upon available market observable
information. If there are no recent reported trades, matrix or model processes are used to develop
a security price where future cash flow expectations are developed based upon collateral
performance and discounted at an estimated market rate. Included in the pricing of asset-backed
securities, collateralized mortgage obligations, and mortgage-backed securities are estimates of
the rate of future prepayments of principal over the remaining life of the securities. Such
estimates are derived based on the characteristics of the underlying structure and prepayment
speeds previously experienced at the interest rate levels projected for the underlying collateral.
For corporate loans, price quotes from multiple dealers along with recent reported trades for
identical or similar securities are used to develop prices.
The following table presents changes in Level 3 investments measured at fair value on a recurring
basis for the quarter ended March 31, 2010:
|
|
|
|
|
|
|
Other
|
|
|
|
Invested
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
Beginning balance at January 1, 2010
|
|
$
|
7,999
|
|
Total losses (realized / unrealized):
|
|
|
|
|
Included in equity in net loss of partnership
|
|
|
(44
|
)
|
Included in accumulated other comprehensive income
|
|
|
(1,339
|
)
|
Distribution
|
|
|
(68
|
)
|
|
|
|
|
Ending balance at March 31, 2010
|
|
$
|
6,548
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses included in net income for the period related to assets still held at March 31, 2010
|
|
$
|
(44
|
)
|
|
|
|
|
The securities classified as Level 3 in the above table consist of $6.5 million related to
investments in limited partnerships. Of the investments in limited partnerships, $5.4 million was
comprised of securities for which there is no readily available independent market price, and the
remaining $1.1 million was related to a limited partnership which holds convertible preferred
securities of a privately held company. These securities are subject to an appraisal action in
Delaware State Court. Until the appraisal action is resolved, the Companys ownership interest in
this limited partnership is wholly illiquid. The estimated fair value of these limited
partnerships is determined by the general partner of each limited partnership based on comparisons
to transactions involving similar investments. Material assumptions and factors utilized in
pricing these securities include future cash flows, constant default rates, recovery rates, and any
market clearing activity that may have occurred since the prior month-end pricing period. However,
since the Company does not have the ability to see the invested asset composition of this limited
partnership on a daily basis, it has classified this investment within the Level 3 category.
16
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
The following tables present changes in Level 3 investments measured at fair value on a recurring
basis for the quarter ended March 31, 2009:
|
|
|
|
|
|
|
Other
|
|
|
|
Invested
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
Beginning balance at January 1, 2009
|
|
$
|
46,672
|
|
Total gains (losses) (realized / unrealized):
|
|
|
|
|
Included in equity in net income of partnership
|
|
|
207
|
|
Included in accumulated other comprehensive income
|
|
|
(10,501
|
)
|
Purchases
|
|
|
52
|
|
Sales
|
|
|
(16,699
|
)
|
|
|
|
|
Ending balance at March 31, 2009
|
|
$
|
19,731
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains included in net income for the period related to assets still held at March 31, 2009
|
|
$
|
207
|
|
|
|
|
|
The securities classified as Level 3 in the above table consist of $19.7 million related to
the Companys limited partnership investments. Of this amount, $10.8 million was comprised of
securities for which there is no readily available independent market price. Material assumptions
and factors utilized in pricing these securities include future cash flows, constant default rates,
recovery rates, and any market clearing activity that may have occurred since the prior month-end
pricing period. The remaining $8.9 million was related to limited partnerships that invest mainly
in securities that are publicly traded. However, since the Company does not have the ability to
see the invested asset composition of these limited partnerships on a daily basis, these
investments have been classified within the Level 3 category.
Fair Value of Alternative Investments
Included in Other invested assets in the fair value hierarchy at March 31, 2010 are limited
liability partnerships measured at fair value. The following table provides the fair value and
future funding commitments related to these investments at March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future
|
|
|
|
|
|
|
|
Funding
|
|
(Dollars in thousands)
|
|
Fair Value
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
Equity Fund, LP (
1)
|
|
$
|
4,219
|
|
|
$
|
2,569
|
|
Real Estate Fund, LP (
2)
|
|
|
1,229
|
|
|
|
|
|
High Yield Convertible Securities Fund, LP (
3)
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,548
|
|
|
$
|
2,569
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
This limited partnership invests in companies, from various business sectors, whereby
the partnership has acquired control of the operating business as a lead or organizing
investor. The Company does not have the contractual option to redeem its limited
partnership interest but receives distributions based on the liquidation of the
underlying assets. The Company does not have the ability to sell or transfer its
limited partnership interest without consent from the general partner.
|
|
(2)
|
|
This limited partnership invests in real estate assets through a combination of direct
or indirect investments in partnerships, limited liability companies, mortgage loans,
and lines of credit. The Company does not have the contractual option to redeem its
limited partnership interest but receives distributions based on the liquidation of the
underlying assets. The Company does not have the ability to sell or transfer its
limited partnership interest without consent from the general partner.
|
|
(3)
|
|
This limited partnership is a registered mutual fund which invests in a portfolio of
high yield convertible securities issued by companies with small to medium market
capitalizations and lower credit ratings (generally below investment grade). In
accordance with the partnership agreement, the Company has exercised its right to submit
a capital withdrawal request effective December 31, 2009. As of December 31, 2009, the
Company was unable to redeem a portion of its ownership interest in this limited
partnership with a fair market value of $1.1 million. This is related to convertible
preferred securities of one company which are subject to an Appraisal Action in Delaware
Court. The partnership decided to participate in the Appraisal Action to maximize the
value of its preferred share. Until the appraisal action is resolved, the claim
relating to the preferred share is wholly illiquid.
|
17
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Pricing
Effective January 1, 2009, the Company changed its primary investment manager and investment
accountants. The former investment manager provided the Company with one non-binding price for
each of its fixed maturity and equity securities valued as Level 1 or Level 2 in the fair value
hierarchy. The new investment manager does not provide any pricing to the Companys investment
accountants. As a result, the Company entered into third party agreements with pricing vendors to
obtain single non-binding prices for its securities. The third party pricing vendors, and the
respective securities they price, were selected based on the requisite experience of each asset
manager by asset class. The investment manager provided advice as to which pricing source would
provide the best estimate of fair value for each asset class.
The Companys pricing vendors provide prices for all investment categories except for investments
in limited partnerships. One vendor provides prices for equity securities and select fixed
maturity categories including: corporate loans, commercial mortgage backed securities, high yield,
investment grade, short term securities, and international fixed income securities, if any. A
second vendor provides prices for other fixed maturity categories including: asset backed
securities (ABS), collateralized mortgage obligations (CMO), and municipals. A third vendor
provides prices for the remaining fixed maturity categories including mortgage backed securities
(MBS) and treasuries.
The following is a description of the valuation methodologies used by the Companys pricing vendors
for investment securities carried at fair value:
|
|
|
Equity prices are received from all primary and secondary exchanges.
|
|
|
|
|
Corporate notes are individually evaluated on a nominal spread or an option adjusted
spread basis depending on how the market trades a security or sector. Spreads are updated
each day and compared with those from the broker/dealer community and contributing firms.
Issues are generally benchmarked off of the U.S. treasuries or LIBOR.
|
|
|
|
|
For CMOs, which are categorized with mortgage-backed securities in the tables listed
above, a volatility-driven, multi-dimensional single cash flow stream model or
option-adjusted spread model is used. For ABSs, a single expected cash flow stream model
is utilized. For both asset classes, evaluations utilize standard inputs plus new issue
data, monthly payment information, and collateral performance. The evaluated pricing
models incorporate security set-up, prepayment speeds, cash flows, treasury, swap curves
and spread adjustments.
|
|
|
|
|
For municipals, a series of matrices are used to evaluate securities within this asset
class. The evaluated pricing models for this asset class incorporate security set-up,
sector curves, yield to worst, ratings updates, and adjustments for material events
notices.
|
|
|
|
|
U.S. Treasuries are priced on the bid side by a market maker.
|
|
|
|
|
For MBSs, the pricing vendor utilizes a matrix model correlation to TBA (a forward MBS
trade) or benchmarking to value a security.
|
|
|
|
|
Corporate loans are priced using averages of bids and offers obtained from the
broker/dealer community involved in trading such loans.
|
18
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
The Company performs certain procedures to validate whether the pricing information received from
the pricing vendors is reasonable, to ensure that the fair value determination is consistent with
the most recent accounting guidance, and to ensure that its assets are properly classified in the
fair value hierarchy. The Companys procedures include, but are not limited to:
|
|
|
Examining market value changes on an overall portfolio basis to determine if the market
value reported by the pricing vendors appears reasonable. Duration of the portfolio and
changes to benchmark yields are compared to the market value change reported by the
Investment Manager to make this determination. The fair values reported are reviewed by
management.
|
|
|
|
|
Reviewing periodic reports provided by the Investment Manager that provides information
regarding rating changes and securities placed on watch. This procedure allows the Company
to understand why a particular securitys market value may have changed.
|
|
|
|
|
Understanding and periodically evaluating the various pricing methods and procedures
used by the Companys pricing vendors to ensure that investments are properly classified
within the fair value hierarchy.
|
During the quarter ended March 31, 2010, the Company has not needed to adjust quotes or prices
obtained from the pricing vendors.
4. Reinsurance
The Company cedes insurance to unrelated reinsurers on a pro rata (quota share) and excess of
loss basis in the ordinary course of business to limit its net loss exposure on insurance
contracts. Reinsurance ceded arrangements do not discharge the Company of primary liability as the
originating insurer. Moreover, reinsurers may fail to pay the Company due to a lack of reinsurer
liquidity, perceived improper underwriting, losses for risks that are excluded from reinsurance
coverage, and other similar factors, all of which could adversely affect the Companys financial
results.
The Company had the following reinsurance balances as of March 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
Reinsurance receivables
|
|
$
|
520,708
|
|
|
$
|
543,351
|
|
Collateral securing reinsurance receivables
|
|
|
(356,658
|
)
|
|
|
(378,056
|
)
|
|
|
|
|
|
|
|
Reinsurance receivables, net of collateral
|
|
$
|
164,050
|
|
|
$
|
165,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible reinsurance receivables
|
|
$
|
12,947
|
|
|
$
|
12,947
|
|
Prepaid reinsurance premiums
|
|
|
12,743
|
|
|
|
16,546
|
|
The Company regularly evaluates retention levels to ensure that the ultimate reinsurance
cessions are aligned with corporate risk tolerance and capital levels, as follows:
Property Catastrophe Excess of Loss
The Companys current property writings create exposure to
catastrophic events. To protect against these exposures, the Company purchases a property
catastrophe treaty. Effective June 1, 2009, the Company renewed its property catastrophe excess of
loss treaty which provides occurrence coverage for losses of $75.0 million in excess of $15.0
million. This treaty provides for one full reinstatement of coverage at 100% additional premium as
to time and pro rata as to amount of limit reinstated. This replaces the treaty that expired on
May 31, 2009, which provided occurrence coverage for losses of $70.0 million in excess of $10.0
million, also with one full reinstatement. The additional limit purchased is a result of an
increase in aggregate loss exposure to catastrophic events.
Property Per Risk Excess of Loss
Effective January 1, 2010, the Company renewed its property per
risk excess of loss treaty which provides coverage of $14.0 million per risk in excess of $1.0
million per risk. This replaces the treaty that expired December 31, 2009, which also covered
$14.0 million per risk in excess of $1.0 million per risk. This treaty provides coverage in two
layers: $4.0 million per risk in excess of $1.0 million per risk, and $10.0 million per risk in
excess of $5.0 million per risk. Similar to expiring terms, the first layer is subject to a $4.0
million limit of liability for all risks involved in one loss occurrence, and the second layer is
subject to a $10.0 million limit for all risks involved in one loss occurrence.
19
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Professional Liability Excess of Loss
Effective January 1, 2010, the Company renewed its
professional liability excess of loss treaty which provides coverage of $4.0 million per policy /
occurrence in excess of $1.0 million per policy / occurrence. This replaces the treaty that
expired December 31, 2009, which provided identical limits of coverage.
Casualty Excess of Loss
Effective May 1, 2009, the Company renewed its casualty excess of loss
treaty which provides coverage for $2.25 million in excess of $0.75 million per occurrence for
general liability and auto liability. Allocated loss adjustment expenses are shared in proportion
to losses retained and ceded. This replaces the treaty that expired April 30, 2009, which provided
identical limits of coverage for general liability only.
Casualty Clash Excess of Loss
Effective January 1, 2010, the Company renewed its casualty clash
excess of loss treaty which provides coverage of $10.0 million per occurrence in excess of $3.0
million per occurrence, subject to a $20.0 million limit for all loss occurrences. This replaces
the treaty that expired December 31, 2009, which provided identical coverage.
Property Quota Share
Effective January 1, 2010, the Company renewed its quota share treaty
related to the Penn-
America property line of business. The expiring quota share program was terminated on a cut-off
basis. The renewal quota share program covers premiums earned in 2010 on policies written in 2009
and 2010. The quota share percentage was increased from 30% to 40%. During the quarter ended
March 31, 2010, the Company ceded $3.8 million of earned premium.
There were no other significant changes to any of the Companys other reinsurance treaties during
the quarter ended March 31, 2010.
20
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
5. Income Taxes
The statutory income tax rates of the countries where the Company does business are 35.0% in the
United States, 0.0% in Bermuda, 0.0% in the Cayman Islands, 28.59% in the Duchy of Luxembourg, and
25.0% on non-trading income and 12.5% on trading income in the Republic of Ireland. The statutory
income tax rate of each country is applied against the expected annual taxable income of the
Company in each country to estimate the annual income tax expense. Total estimated annual income
tax expense is divided by total estimated annual pre-tax income to determine the expected annual
income tax rate used to compute the income tax provision. On an interim basis, the expected annual
income tax rate is applied against interim pre-tax income, excluding net realized gains and losses
and limited partnership distributions, and then adding that amount to income taxes on net realized
gains and losses and limited partnership distributions. The Companys income before income taxes
from the Non-U.S. Subsidiaries
and U.S. Subsidiaries, including the results of the quota share agreement between Wind River
Reinsurance and the U.S. Insurance Operations, for the quarters ended March 31, 2010 and 2009 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, 2010:
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
61,646
|
|
|
$
|
54,071
|
|
|
$
|
(22,864
|
)
|
|
$
|
92,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
60,867
|
|
|
$
|
20,614
|
|
|
$
|
|
|
|
$
|
81,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
47,041
|
|
|
$
|
23,747
|
|
|
$
|
|
|
|
$
|
70,788
|
|
Net investment income
|
|
|
10,861
|
|
|
|
8,265
|
|
|
|
(4,547
|
)
|
|
|
14,579
|
|
Net realized investment gains
|
|
|
5,031
|
|
|
|
9,173
|
|
|
|
|
|
|
|
14,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
62,933
|
|
|
|
41,185
|
|
|
|
(4,547
|
)
|
|
|
99,571
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
25,954
|
|
|
|
15,835
|
|
|
|
|
|
|
|
41,789
|
|
Acquisition costs and other underwriting expenses
|
|
|
20,375
|
|
|
|
9,773
|
|
|
|
|
|
|
|
30,148
|
|
Corporate and other operating expenses
|
|
|
2,168
|
|
|
|
2,728
|
|
|
|
|
|
|
|
4,896
|
|
Interest expense
|
|
|
|
|
|
|
6,286
|
|
|
|
(4,547
|
)
|
|
|
1,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
14,436
|
|
|
$
|
6,563
|
|
|
$
|
|
|
|
$
|
20,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, 2009:
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
60,894
|
|
|
$
|
67,620
|
|
|
$
|
(29,326
|
)
|
|
$
|
99,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
60,470
|
|
|
$
|
26,143
|
|
|
$
|
|
|
|
$
|
86,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
44,771
|
|
|
$
|
33,769
|
|
|
$
|
|
|
|
$
|
78,540
|
|
Net investment income
|
|
|
10,226
|
|
|
|
16,498
|
|
|
|
(4,547
|
)
|
|
|
22,177
|
|
Net realized investment losses
|
|
|
(2,098
|
)
|
|
|
(6,498
|
)
|
|
|
|
|
|
|
(8,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
52,899
|
|
|
|
43,769
|
|
|
|
(4,547
|
)
|
|
|
92,121
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
26,196
|
|
|
|
21,544
|
|
|
|
|
|
|
|
47,740
|
|
Acquisition costs and other underwriting expenses
|
|
|
18,200
|
|
|
|
12,614
|
|
|
|
|
|
|
|
30,814
|
|
Corporate and other operating expenses
|
|
|
2,871
|
|
|
|
1,104
|
|
|
|
|
|
|
|
3,975
|
|
Interest expense
|
|
|
|
|
|
|
6,401
|
|
|
|
(4,547
|
)
|
|
|
1,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
5,632
|
|
|
$
|
2,106
|
|
|
$
|
|
|
|
$
|
7,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables summarize the differences between the tax provisions under accounting
guidance applicable to interim financial statement periods and the expected tax provision at the
weighted average tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
% of Pre-
|
|
|
|
|
|
|
% of Pre-
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Tax Income
|
|
|
Amount
|
|
|
Tax Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected tax provision at
weighted average rate
|
|
$
|
2,374
|
|
|
|
11.3
|
%
|
|
$
|
757
|
|
|
|
9.8
|
%
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt interest
|
|
|
(519
|
)
|
|
|
(2.5
|
)
|
|
|
(712
|
)
|
|
|
(9.2
|
)
|
Dividend exclusion
|
|
|
(79
|
)
|
|
|
(0.4
|
)
|
|
|
(111
|
)
|
|
|
(1.4
|
)
|
Effective tax rate adjustment
|
|
|
278
|
|
|
|
1.3
|
|
|
|
755
|
|
|
|
9.8
|
|
Other
|
|
|
15
|
|
|
|
0.2
|
|
|
|
34
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
2,069
|
|
|
|
9.9
|
%
|
|
$
|
723
|
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
The effective income tax expense rate for the quarter ended March 31, 2010 was 9.9%, compared
to 9.3% for the quarter ended March 31, 2009. The increase in the effective tax rate is primarily
due to capital gains in 2010 compared to capital losses in 2009. The effective rates differed from
the weighted average expected income tax expense rates of 11.3% and 9.8% for the quarters ended
March 31, 2010 and 2009, respectively, primarily due to the fact that the Company records tax based
on the annualized effective tax rate, net of tax-exempt interest and dividends.
The Company and some of its subsidiaries file income tax returns in the U.S. federal jurisdiction,
and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal tax
examinations by tax authorities for tax years before 2006. The Internal Revenue Service initiated
a review of the 2008 net operating loss and capital loss carrybacks during the first quarter of
2010. There was an adjustment made to the 2006 and 2007 alternative minimum tax credits as a
result of the carryback. The alternative minimum tax credit carryover increased by $1.6 million.
The Company applies a more-likely-than-not recognition threshold for all tax uncertainties whereby
it only recognizes those tax benefits that have a greater than 50% likelihood of being sustained
upon examination by the taxing authorities. The Companys unrecognized tax benefit was $1.1
million as of March 31, 2010 and December 31, 2009. If recognized, the gross unrecognized tax
benefits could lower the effective income tax rate in any future period.
The Company classifies all interest and penalties related to uncertain tax positions as income tax
expense. As of March 31, 2010, the Company has recorded $0.1 million in liabilities for
tax-related interest and penalties on its consolidated balance sheet.
6. Liability for Unpaid Losses and Loss Adjustment Expenses
The liability for unpaid losses and loss adjustment expenses reflects the Companys best estimate
for future amounts needed to pay claims and related settlement expenses and the impact of the
Companys reinsurance coverages with respect to insured events. Estimating the ultimate claims
liability of the Company is a complex and judgmental process, because the amounts are based on
managements informed estimates and judgments using data currently available. In some cases,
significant periods of time, up to several years or more, may elapse between the occurrence of an
insured loss and the reporting of such to the Company. The method for determining the Companys
liability for unpaid losses and loss adjustment expenses includes, but is not limited to, reviewing
past loss experience and considering other factors such as industry data and legal, social, and
economic developments. As additional experience and data become available, the Companys estimate
for the liability for unpaid losses and loss adjustment expenses is revised accordingly. If the
Companys ultimate losses, net of reinsurance, prove to differ substantially from the amounts
recorded with respect to unpaid losses and loss adjustment expenses at March 31, 2010, the related
adjustments could have a material impact on the Companys future results of operations.
22
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Activity in the liability for unpaid losses and loss adjustment expenses is summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
Unpaid losses and loss adjustment expenses at beginning of
period
|
|
$
|
1,257,741
|
|
|
$
|
1,506,429
|
|
Less: Ceded reinsurance receivables on unpaid losses and
loss adjustment expenses
|
|
|
527,413
|
|
|
|
670,591
|
|
|
|
|
|
|
|
|
Net balance at beginning of period
|
|
|
730,328
|
|
|
|
835,838
|
|
|
|
|
|
|
|
|
|
|
Incurred losses and loss adjustment expenses related to:
|
|
|
|
|
|
|
|
|
Current year
|
|
|
44,627
|
|
|
|
48,497
|
|
Prior years
(1)
|
|
|
(2,838
|
)(2)
|
|
|
(757
|
)(3)
|
|
|
|
|
|
|
|
Total incurred losses and loss adjustment expenses
|
|
|
41,789
|
|
|
|
47,740
|
|
|
|
|
|
|
|
|
|
Paid losses and loss adjustment expenses related to:
|
|
|
|
|
|
|
|
|
Current year
|
|
|
2,660
|
|
|
|
3,197
|
|
Prior years
|
|
|
56,364
|
|
|
|
71,093
|
|
|
|
|
|
|
|
|
Total paid losses and loss adjustment expenses
|
|
|
59,024
|
|
|
|
74,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance at end of period
|
|
|
713,093
|
|
|
|
809,288
|
|
Plus: Ceded reinsurance receivables on unpaid losses and
loss adjustment expenses
|
|
|
519,548
|
|
|
|
637,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses at end of period
|
|
$
|
1,232,641
|
|
|
$
|
1,446,974
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
When analyzing loss reserves and prior year development, the
Company considers many factors, including the frequency and severity of
claims, loss credit trends, case reserve settlements that may have resulted
in significant development, and any other additional or pertinent factors
that may impact reserve estimates.
|
|
(2)
|
|
In the first quarter of 2010, the Company reduced its prior
accident year loss reserves by $2.8 million, which consisted of a $2.0
million reduction in general liability lines, a $0.6 million reduction in
professional liability lines, and a $0.2 million reduction in property
lines. The reduction in the general liability lines primarily related to
accident years 2006 and prior and was due to continued favorable emergence
on Penn America business.
The reduction to the professional liability lines primarily
consisted of net reductions of $1.0 million related to accident years 2007
and prior for our lawyers and real estate programs due to lower severity than
originally anticipated. This reduction was partially offset by an increase of $0.4
million related to accident years 2008 and 2009 for our real estate program, where loss
development was higher than expected during the quarter. The reduction in the property lines
primarily consisted of net reductions of $1.9 million primarily related to
accident years 2002 and 2006 through 2008 due to a recent large subrogation
recovery on a disputed claim, offset by an increase of $1.7 million
primarily related to accident year 2009 due to higher than expected claim
development.
|
|
(3)
|
|
In the first quarter of 2009, the Company reduced its net losses
and loss adjustment expenses related to prior accident years by $0.8
million, which was due to a reduction in its allowance for uncollectible
reinsurance.
|
7. Related Party Transactions
Fox Paine & Company
As of March 31, 2010, Fox Paine & Company beneficially owned shares having approximately 89.6% of
the Companys total outstanding voting power. Fox Paine & Company can nominate a majority of the
members of the Companys Board of Directors. The Companys Board of Directors currently consists
of seven directors, five of which were nominated by Fox Paine & Company. The Companys Chairman is
a member of Fox Paine & Company. The Company relies on Fox Paine & Company to provide management
services and other services related to the operations of the Company. The Company incurred
management fees of $0.4 million in each of the quarters ended March 31, 2010 and 2009 as part of
the annual management fee that is paid to Fox Paine & Company. The Company reimbursed Fox Paine &
Company $0.2 million and $0.02 million during the quarters ended March 31, 2010 and 2009,
respectively, for expenses incurred in providing management services.
At March 31, 2010 and December 31, 2009, Wind River Reinsurance was a limited partner in investment
funds managed by Fox Paine & Company. This investment was originally made by United National
Insurance Company
in June 2000 and pre-dates the September 5, 2003 acquisition by Fox Paine & Company of Wind River
Investment Corporation, the holding company for the Companys Predecessor Insurance Operations.
The Companys investment in this limited partnership was valued at $4.2 million and $5.6 million at
March 31, 2010 and December 31, 2009, respectively. At March 31, 2010, the Company had an unfunded
capital commitment of $2.6 million to the partnership. A distribution of $0.07 million was
received from the limited partnership during the quarter.
23
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
As part of the Companys intended redomestication from the Cayman Islands to Ireland, the Company
has agreed to indemnify Fox Paine & Company against any Irish stamp duty that it may incur. See
Item 1A in Part I of the Companys 2009 Annual Report on Form 10-K for details concerning the Irish
stamp duty.
Cozen OConnor
During the quarters ended March 31, 2010 and 2009, the Company incurred $0.04 million and $0.07
million respectively, for legal services rendered by Cozen OConnor. Stephen A. Cozen, the
chairman of Cozen OConnor, is a member of the Companys Board of Directors.
Validus Reinsurance, Ltd.
Validus Reinsurance, Ltd. (Validus) was a participant on the Companys following catastrophe
reinsurance treaties:
|
|
|
$30.0 million in excess of $30.0 million, which expired on May 31, 2007;
|
|
|
|
$25.0 million in excess of $5.0 million, which expired on May 31, 2007;
|
|
|
|
$100.0 million in excess of $10.0 million, which expired on May 31, 2008; and
|
|
|
|
$70.0 million in excess of $10.0 million, which expired on May 31, 2009.
|
There was no premium paid to Validus as a result these treaties in the quarters ended March 31,
2010 and 2009.
Validus is also a participant in a quota share retrocession agreement with Wind River Reinsurance.
The Company estimated that the following written premium and losses related to the quota share
retrocession agreement have been assumed by Validus from Wind River Reinsurance:
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Ceded written premium
|
|
$
|
(2,401
|
)(1)
|
|
$
|
408
|
|
Ceded losses
|
|
|
644
|
|
|
|
6,400
|
|
|
|
|
(1)
|
|
Represents an adjustment to
true up the Companys estimated amount of ceded
premium to actual.
|
Edward J. Noonan, the chairman and chief executive officer of Validus, was a member of the
Companys Board of Directors until June 1, 2007, when he resigned from the Companys Board.
Validus remains a related party since the current quota share retrocession agreement between
Validus and Wind River Reinsurance was put in place during the period when Mr. Noonan was a member
of the Companys Board of Directors.
8. Commitments and Contingencies
Legal Proceedings
The Company is, from time to time, involved in various legal proceedings in the ordinary course of
business. The Company purchases insurance and reinsurance policies covering such risks in amounts
that it considers adequate. However, there can be no assurance that the insurance and reinsurance
coverage that the Company maintains is sufficient or will be available in adequate amounts or at a
reasonable cost. The Company does not believe that the
resolution of any currently pending legal proceedings, either individually or taken as a whole,
will have a material adverse effect on the Companys business, results of operations, or financial
condition.
24
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
There is a greater potential for disputes with reinsurers who are in a runoff of their reinsurance
operations. Some of the Companys reinsurers reinsurance operations are in runoff, and therefore,
the Company closely monitors those relationships. The Company anticipates that, similar to the
rest of the insurance and reinsurance industry, it will continue to be subject to litigation and
arbitration proceedings in the ordinary course of business.
On December 4, 2008, a federal jury in the U.S. District Court for the Eastern District of
Pennsylvania (Philadelphia) returned a $24.0 million verdict in favor of United National Insurance
Company (United National), an indirect wholly owned subsidiary of the Company, against AON Corp.,
an insurance and reinsurance broker. On July 24, 2009, a federal judge from the U.S. District
Court for the Eastern District of Pennsylvania (Philadelphia) upheld that jury verdict. In doing
so, the U.S. District Judge increased the verdict to $32.2 million by adding more than $8.2 million
in prejudgment interest. AON has filed its Notice of Appeal and a Bond in the amount of $33.0
million. A court ordered mediation took place on December 10, 2009, which did not result in a
settlement. The Company has received a briefing schedule from the Appellate Court. Once all
briefs have been filed and reviewed by the Court, the Court will likely order oral arguments. It
is estimated that it will take another eight to ten months for a decision following oral arguments.
United National does not intend to recognize the gain contingency until the matter has been
resolved through the appellate process.
9. Share-Based Compensation Plans
During the quarter ended March 31, 2010, the Company granted 75,231 Class A common shares, subject
to certain restrictions, at a weighted average grant date value of $6.84 per share, to key
employees of the Company under the United America Indemnity, Ltd. Share Incentive Plan (the
Plan). In addition, during the same period, the Company granted an aggregate of 35,878 fully
vested Class A common shares, subject to certain restrictions, at a weighted average grant date
value of $7.49 per share, to non-employee directors of the Company under the Plan.
10. Earnings Per Share
Earnings per share have been computed using the weighted average number of common shares and common
share equivalents outstanding during the period. As detailed below, share counts for the prior
year have been restated as a result of the Rights Offering.
The Company issued non-transferable rights to stockholders of record on March 16, 2009. The rights
entitled the holders to purchase 0.9013 shares of common stock for every right held. The Rights
Offering expired on April 6, 2009. On May 5, 2009, the Company issued 17.2 million Class A common
shares and 11.4 million Class B common shares at a subscription price of $3.50 per share in
conjunction with the Rights Offering.
The market price of the Companys Class A common shares was $4.89 per share on March 12, 2009,
which was the ex-rights date related to the Rights Offering. Since the $3.50 per share
subscription price of the shares issued under the Rights Offering was lower than the $4.89 per
share market price on March 12, 2009, the Rights Offering contained a bonus element. In computing
the basic and diluted weighted share counts, the number of shares outstanding prior to May 5, 2009
(the date that the common shares were issued in conjunction with the Rights Offering) was adjusted
by a factor of 1.114 to reflect the impact of a bonus element associated with the Rights Offering.
25
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
The following table sets forth the computation of basic and diluted earnings (loss) per share.
|
|
|
|
|
|
|
|
|
(Dollars in thousands,
|
|
Quarters Ended March 31,
|
|
except per share data)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,901
|
|
|
$
|
7,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
60,369,087
|
|
|
|
31,461,439
|
|
Adjustment for bonus element of Rights Offering
|
|
|
|
|
|
|
3,574,722
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares outstanding basic
|
|
|
60,369,087
|
|
|
|
35,036,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic share
|
|
$
|
0.31
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted
|
|
|
60,408,839
|
|
|
|
31,507,123
|
|
Adjustment for bonus element of Rights Offering
|
|
|
|
|
|
|
3,574,722
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares outstanding diluted
|
|
|
60,408,839
|
|
|
|
35,081,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share
|
|
$
|
0.31
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
A reconciliation of weighted average shares for basic earnings per share to weighted average
shares for diluted earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares for basic earnings per share
|
|
|
60,369,087
|
|
|
|
35,036,161
|
|
Non-vested restricted stock
|
|
|
39,752
|
|
|
|
27,886
|
|
Options
|
|
|
|
|
|
|
17,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares for diluted earnings per share
|
|
|
60,408,839
|
|
|
|
35,081,845
|
|
|
|
|
|
|
|
|
The weighted average shares outstanding used to determine dilutive earnings per shares as of
March 31, 2010 and 2009 does not include 668,040 and 835,025 shares, respectively, that were deemed
to be anti-dilutive.
11. Segment Information
The Company manages its business through two business segments: Insurance Operations, which
includes the operations of the U.S. Insurance Companies, and Reinsurance Operations, which includes
the operations of Wind River Reinsurance.
The Insurance Operations segment and the Reinsurance Operations segment follow the same accounting
policies used for the Companys consolidated financial statements. For further disclosure
regarding the Companys accounting policies, please see Note 2 of the notes to the consolidated
financial statements in Item 8 of Part II of the Companys 2009 Annual Report on Form 10-K.
26
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Following is a tabulation of business segment information.
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, 2010:
|
|
Insurance
|
|
|
Reinsurance
|
|
|
|
|
(Dollars in thousands)
|
|
Operations (1)
|
|
|
Operations (2)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
54,071
|
|
|
$
|
38,782
|
|
|
$
|
92,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
43,478
|
|
|
$
|
38,003
|
|
|
$
|
81,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
49,744
|
|
|
$
|
21,044
|
|
|
$
|
70,788
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
29,714
|
|
|
|
12,075
|
|
|
|
41,789
|
|
Acquisition costs and other underwriting expenses
|
|
|
22,700
|
(3)
|
|
|
7,448
|
(4)
|
|
|
30,148
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from segments
|
|
$
|
(2,670
|
)
|
|
$
|
1,521
|
|
|
|
(1,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
14,579
|
|
Net realized investment gains
|
|
|
|
|
|
|
|
|
|
|
14,204
|
|
Corporate and other operating expenses
|
|
|
|
|
|
|
|
|
|
|
(4,896
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(1,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
20,999
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
2,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in net loss of partnership
|
|
|
|
|
|
|
|
|
|
|
18,930
|
|
Equity in net loss of partnership, net of tax
|
|
|
|
|
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
18,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,775,927
|
|
|
$
|
640,714
|
(5)
|
|
$
|
2,416,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes business ceded to Reinsurance Operations.
|
|
(2)
|
|
External business only, excluding business assumed from Insurance Operations.
|
|
(3)
|
|
Includes federal excise tax of $260 relating to premiums ceded from Insurance
Operations to Reinsurance Operations.
|
|
(4)
|
|
Includes all Wind River Reinsurance expenses other than federal excise tax.
|
|
(5)
|
|
Comprised of Wind River Reinsurances total assets less its investment in subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, 2009:
|
|
Insurance
|
|
|
Reinsurance
|
|
|
|
|
(Dollars in thousands)
|
|
Operations (1)
|
|
|
Operations (2)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
67,620
|
|
|
$
|
31,568
|
|
|
$
|
99,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
55,469
|
|
|
$
|
31,144
|
|
|
$
|
86,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
70,720
|
|
|
$
|
7,820
|
|
|
$
|
78,540
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
42,744
|
|
|
|
4,996
|
|
|
|
47,740
|
|
Acquisition costs and other underwriting expenses
|
|
|
29,142
|
(3)
|
|
|
1,672
|
(4)
|
|
|
30,814
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from segments
|
|
$
|
(1,166
|
)
|
|
$
|
1,152
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
22,177
|
|
Net realized investment losses
|
|
|
|
|
|
|
|
|
|
|
(8,596
|
)
|
Corporate and other operating expenses
|
|
|
|
|
|
|
|
|
|
|
(3,975
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(1,854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
7,738
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in net income of partnership
|
|
|
|
|
|
|
|
|
|
|
7,015
|
|
Equity in net income of partnership, net of tax
|
|
|
|
|
|
|
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
7,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,809,108
|
|
|
$
|
606,328
|
(5)
|
|
$
|
2,415,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes business ceded to the Companys Reinsurance Operations.
|
|
(2)
|
|
External business only, excluding business assumed from the Companys Insurance Operations.
|
|
(3)
|
|
Includes federal excise tax of $370 relating to the quota share agreement.
|
|
(4)
|
|
Includes all Wind River Reinsurance expenses other than federal excise tax.
|
|
(5)
|
|
Comprised of Wind River Reinsurances total assets less its investment in subsidiaries.
|
27
UNITED AMERICA INDEMNITY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
12. Supplemental Cash Flow Information
The Company paid the following amounts in cash for net U.S. federal income taxes and interest
during the quarters ended March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Net U.S. federal income taxes paid
(recovered)
|
|
$
|
|
|
|
$
|
(7,812
|
)
|
Interest paid
|
|
|
3,124
|
|
|
|
3,326
|
|
13. Subsequent Events
In late April 2010, the Company filed with the Securities Exchange Commission and mailed to its
shareholders a proxy statement concerning its previously announced plan for the Company to
re-domicile from the Cayman Islands to Ireland. The Companys shareholders will be asked to vote
in favor of completing the reorganization proposal at a special shareholders meeting to be held on
May 27, 2010. In addition to shareholder approval, the move to Ireland is subject to an order from
the Grand Court of the Cayman Islands sanctioning the transaction. If the proposal is accepted,
the Company will become a wholly-owned subsidiary of Global Indemnity plc, an Irish company. See
Items 1 and 1A of Part I in the Companys 2009 Annual Report on Form 10-K for more information
regarding the proposed move to Ireland.
There were no subsequent events requiring adjustment to the financial statements or disclosure.
28
UNITED AMERICA INDEMNITY, LTD.
|
|
|
Item 2.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with the consolidated financial statements and accompanying notes of United
America Indemnity included elsewhere in this report. Some of the information contained in this
discussion and analysis or set forth elsewhere in this report, including information with respect
to our plans and strategy, constitutes forward-looking statements that involve risks and
uncertainties. Please see Cautionary Note Regarding Forward-Looking Statements at the end of
this Item 2 for a discussion of important factors that could cause actual results to differ
materially from the results described in or implied by the forward-looking statements contained
herein. For more information regarding our business and operations, please see our Annual Report
on Form 10-K for the year ended December 31, 2009.
Recent Developments
On April 22, 2010, we filed a proxy statement with the Securities Exchange Commission concerning
our previously announced plan for us to re-domicile from the Cayman Islands to Ireland. Our
shareholders will be asked to vote in favor of completing the reorganization proposal at a special
shareholders meeting to be held on May 27, 2010. In addition to shareholder approval, the move to
Ireland is subject to an order from the Grand Court of the Cayman Islands sanctioning the
transaction. If the proposal is accepted, we will become a wholly-owned subsidiary of Global
Indemnity plc, an Irish company. Please see Items 1 and 1A of Part I in our 2009 Annual Report on
Form 10-K for more information regarding our proposed move to Ireland.
Overview
Our Insurance Operations distribute property and casualty insurance products through a group of
approximately 110 professional general agencies that have limited quoting and binding authority, as
well as a number of wholesale insurance brokers who in turn sell our insurance products to insureds
through retail insurance brokers. We operate predominantly in the excess and surplus lines
marketplace. To manage our operations, we differentiate them by product classification. These
product classifications are: 1) Penn-America, which includes property and general liability
products for small commercial businesses distributed through a select network of wholesale general
agents with specific binding authority; 2) United National, which includes property, general
liability, and professional lines products distributed through program administrators with specific
binding authority; and 3) Diamond State, which includes property, casualty, and professional lines
products distributed through wholesale brokers and program administrators with specific binding
authority.
Our Reinsurance Operations are comprised of the operations of Wind River Reinsurance, a Bermuda
based third party treaty and facultative reinsurer of excess and surplus and specialty lines of
property and casualty insurance.
We derive our revenues primarily from premiums paid on insurance policies that we write and from
income generated by our investment portfolio, net of fees paid for investment management services.
The amount of insurance premiums that we receive is a function of the amount and type of policies
we write, as well as of prevailing market prices.
Our expenses include losses and loss adjustment expenses, acquisition costs and other underwriting
expenses, corporate and other operating expenses, interest, other investment expenses, and income
taxes. Losses and loss adjustment expenses are estimated by management and reflect our best
estimate of ultimate losses and costs arising during the reporting period and revisions of prior
period estimates. We record losses and loss adjustment expenses based on an actuarial analysis of
the estimated losses we expect to incur on the insurance policies we write. The ultimate losses
and loss adjustment expenses will depend on the actual costs to resolve claims. Acquisition costs
consist principally of commissions that are typically a percentage of the premiums on the insurance
policies we write, net of ceding commissions earned from reinsurers and allocated internal costs.
Other underwriting expenses consist primarily of personnel expenses and general operating expenses.
Corporate and other operating expenses are comprised primarily of outside legal fees, other
professional fees, including accounting fees, directors fees, management fees, salaries and
benefits for company personnel whose services relate to the support of corporate activities, and
taxes incurred. Interest expense consists primarily of interest on senior notes payable, junior
subordinated debentures, and funds held on behalf of others.
29
UNITED AMERICA INDEMNITY, LTD.
Critical Accounting Estimates and Policies
Our consolidated financial statements are prepared in conformity with GAAP, which requires us to
make estimates and assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates and assumptions. We believe
that of our significant accounting policies, the following may involve a higher degree of judgment
and estimation.
Liability for Unpaid Losses and Loss Adjustment Expenses
Although variability is inherent in estimates, we believe that the liability for unpaid losses and
loss adjustment expenses reflects our best estimate for future amounts needed to pay losses and
related loss adjustment expenses and the impact of our reinsurance coverages with respect to
insured events.
In developing loss and loss adjustment expense (loss or losses) reserve estimates, our
actuaries perform detailed reserve analyses each quarter. To perform the analysis, the data is
organized at a reserve category level. A reserve category can be a line of business such as
commercial automobile liability, or it can be a particular type of claim such as construction
defect. The reserves within a reserve category level are characterized as either short-tail or
long-tail. Most of our business can be characterized as medium to long-tail. For long-tail
business, it will generally be several years between the time the business is written and the time
when all claims are settled. Our long-tail exposures include general liability, professional
liability, products liability, commercial automobile liability, excess and umbrella, and workers
compensation (for our Reinsurance Operations only). Short-tail exposures include property,
commercial automobile physical damage, and equine mortality. To manage our insurance operations,
we differentiate them by product classifications, which are Penn-America, United National, and
Diamond State. For further discussion about our product classifications, see General Our
Insurance Operations in Item 1 of Part I of our 2009 Annual Report on Form 10-K. Each of our
product classifications contain both long-tail and short-tail exposures. Every reserve category is
analyzed by our actuaries each quarter. The analyses generally include reviews of losses gross of
reinsurance and net of reinsurance.
A full review of the loss reserves of our Reinsurance Operations was performed by an independent
actuary in the first quarter of 2010. For our Insurance Operations, a first quarter review of loss
reserves was performed by our internal actuaries. A full review of the loss reserves for our US
Insurance Operations will be performed by an independent actuary during the second quarter.
The methods that we use to project ultimate losses for both long-tail and short-tail exposures
include, but are not limited to, the following:
|
|
|
Paid Development method;
|
|
|
|
Incurred Development method;
|
|
|
|
Expected Loss Ratio method;
|
|
|
|
Bornhuetter-Ferguson method using premiums and paid loss;
|
|
|
|
Bornhuetter-Ferguson method using premiums and incurred loss; and
|
The Paid Development method estimates ultimate losses by reviewing paid loss patterns and applying
them to accident years with further expected changes in paid loss. Selection of the paid loss
pattern requires analysis of several factors including the impact of inflation on claims costs, the
rate at which claims professionals make claim payments and close claims, the impact of judicial
decisions, the impact of underwriting changes, the impact of large claim payments and other
factors. Claim cost inflation itself requires evaluation of changes in the cost of repairing or
replacing property, changes in the cost of medical care, changes in the cost of wage replacement,
judicial decisions, legislative changes and other factors. Because this method assumes that losses
are paid at a consistent
rate, changes in any of these factors can impact the results. Since the method does not rely on
case reserves, it is not directly influenced by changes in the adequacy of case reserves.
30
UNITED AMERICA INDEMNITY, LTD.
For many reserve categories, paid loss data for recent periods may be too immature or erratic for
accurate predictions. This situation often exists for long-tail exposures. In addition, changes
in the factors described above may result in inconsistent payment patterns. Finally, estimating
the paid loss pattern subsequent to the most mature point available in the data analyzed often
involves considerable uncertainty for long-tail reserve categories.
The Incurred Development method is similar to the Paid Development method, but it uses case
incurred losses instead of paid losses. Since this method uses more data (case reserves in
addition to paid losses) than the Paid Development method, the incurred development patterns may be
less variable than paid development patterns. However, selection of the incurred loss pattern
requires analysis of all of the factors listed in the description of the Paid Development method.
In addition, the inclusion of case reserves can lead to distortions if changes in case reserving
practices have taken place and the use of case incurred losses may not eliminate the issues
associated with estimating the incurred loss pattern subsequent to the most mature point available.
The Expected Loss Ratio method multiplies premiums by an expected loss ratio to produce ultimate
loss estimates for each accident year. This method may be useful if loss development patterns are
inconsistent, losses emerge very slowly, or there is relatively little loss history from which to
estimate future losses. The selection of the expected loss ratio requires analysis of loss ratios
from earlier accident years or pricing studies and analysis of inflationary trends, frequency
trends, rate changes, underwriting changes, and other applicable factors.
The Bornhuetter-Ferguson method using premiums and paid losses is a combination of the Paid
Development method and the Expected Loss Ratio method. This method normally determines expected
loss ratios similar to the method used for the Expected Loss Ratio method and requires analysis of
the same factors described above. The method assumes that only future losses will develop at the
expected loss ratio level. The percent of paid loss to ultimate loss implied from the Paid
Development method is used to determine what percentage of ultimate loss is yet to be paid. The
use of the pattern from the Paid Development method requires consideration of all factors listed in
the description of the Paid Development method. The estimate of losses yet to be paid is added to
current paid losses to estimate the ultimate loss for each year. This method will react very
slowly if actual ultimate loss ratios are different from expectations due to changes not accounted
for by the expected loss ratio calculation.
The Bornhuetter-Ferguson method using premiums and incurred losses is similar to the
Bornhuetter-Ferguson method using premiums and paid losses except that it uses case incurred
losses. The use of case incurred losses instead of paid losses can result in development patterns
that are less variable than paid development patterns. However, the inclusion of case reserves can
lead to distortions if changes in case reserving practices have taken place, and the method
requires analysis of all the factors that need to be reviewed for the Expected Loss Ratio and
Incurred Development methods.
The Average Loss method multiplies a projected number of ultimate claims by an estimated ultimate
average loss for each accident year to produce ultimate loss estimates. Since projections of the
ultimate number of claims are often less variable than projections of ultimate loss, this method
can provide more reliable results for reserve categories where loss development patterns are
inconsistent or too variable to be relied on exclusively. In addition, this method can more
directly account for changes in coverage that impact the number and size of claims. However, this
method can be difficult to apply to situations where very large claims or a substantial number of
unusual claims result in volatile average claim sizes. Projecting the ultimate number of claims
requires analysis of several factors including the rate at which policyholders report claims to us,
the impact of judicial decisions, the impact of underwriting changes and other factors. Estimating
the ultimate average loss requires analysis of the impact of large losses and claim cost trends
based on changes in the cost of repairing or replacing property, changes in the cost of medical
care, changes in the cost of wage replacement, judicial decisions, legislative changes and other
factors.
31
UNITED AMERICA INDEMNITY, LTD.
For many exposures, especially those that can be considered long-tail, a particular accident year
may not have a sufficient volume of paid losses to produce a statistically reliable estimate of
ultimate losses. In such a case, our actuaries typically assign more weight to the Incurred
Development method than to the Paid Development method. As claims continue to settle and the
volume of paid losses increases, the actuaries may assign additional weight to the Paid Development
method. For most of our reserve categories, even the incurred losses for accident years that
are early in the claim settlement process will not be of sufficient volume to produce a reliable
estimate of ultimate losses. In these cases, we will not assign any weight to the Paid and
Incurred Development methods and will use the Bornhuetter-Ferguson and Expected Loss Ratio methods.
For short-tail exposures, the Paid and Incurred Development methods can often be relied on sooner
primarily because our history includes a sufficient number of years to cover the entire period over
which paid and incurred losses are expected to change. However, we may also use the Expected Loss
Ratio, Bornhuetter-Ferguson and Average Loss methods for short-tail exposures.
Generally, reserves for long-tail lines use the Expected Loss Ratio method for the most recent
accident year, shift to the Bornhuetter-Ferguson methods for the next two years, and then shift to
the Incurred and/or Paid Development method. Claims related to umbrella business are usually
reported later than claims for other long-tail lines. For umbrella business, the Expected Loss
Ratio and Bornhuetter-Ferguson methods are used for as many as six years before shifting to the
Incurred Development method. Reserves for short-tail lines use the Bornhuetter-Ferguson methods
for the most recent accident year and shift to the Incurred and/or Paid Development method in
subsequent years.
For other more complex reserve categories where the above methods may not produce reliable
indications, we use additional methods tailored to the characteristics of the specific situation.
Such reserve categories include losses from construction defects and A&E.
For construction defect losses, our actuaries organize losses by the year in which they were
reported. To estimate losses from claims that have not been reported, various extrapolation
techniques are applied to the pattern of claims that have been reported to estimate the number of
claims yet to be reported. This process requires analysis of several factors including the rate at
which policyholders report claims to us, the impact of judicial decisions, the impact of
underwriting changes and other factors. An average claim size is determined from past experience
and applied to the number of unreported claims to estimate reserves for these claims.
Establishing reserves for A&E and other mass tort claims involves considerably more judgment than
other types of claims due to, among other things, inconsistent court decisions, an increase in
bankruptcy filings as a result of asbestos-related liabilities, and judicial interpretations that
often expand theories of recovery and broaden the scope of coverage. The insurance industry
continues to receive a substantial number of asbestos-related bodily injury claims, with an
increasing focus being directed toward other parties, including installers of products containing
asbestos rather than against asbestos manufacturers. This shift has resulted in significant
insurance coverage litigation implicating applicable coverage defenses or determinations, if any,
including but not limited to, determinations as to whether or not an asbestos related bodily injury
claim is subject to aggregate limits of liability found in most comprehensive general liability
policies. In response to these continuing developments, management increased gross and net A&E
reserves during the second quarter of 2008 to reflect its best estimate of A&E exposures. In 2009,
one of our insurance companies was dismissed from a lawsuit seeking coverage from it and other
unrelated insurance companies. The suit involved issues related to approximately 3,900 existing
asbestos related bodily injury claims and future claims. The dismissal was the result of a
settlement of a disputed claim related to accident year 1984. The settlement is conditioned upon
certain legal events occurring which will trigger financial obligations by the insurance company.
Management will continue to monitor the developments of the litigation to determine if any
additional financial exposure is present.
Reserve analyses performed by our actuaries result in actuarial point estimates. The results of
the detailed reserve reviews were summarized and discussed with our senior management to determine
the best estimate of reserves. This group considered many factors in making this decision. The
factors included, but were not limited to, the historical pattern and volatility of the actuarial
indications, the sensitivity of the actuarial indications to changes in paid and incurred loss
patterns, the consistency of claims handling processes, the consistency of case reserving
practices, changes in our pricing and underwriting, and overall pricing and underwriting trends in
the insurance market.
32
UNITED AMERICA INDEMNITY, LTD.
Managements best estimate at March 31, 2010 was recorded as the loss reserve. Managements best
estimate is as of a particular point in time and is based upon known facts, our actuarial analyses,
current law, and our judgment. This resulted in carried gross and net reserves of $1,232.6 million
and $713.1 million, respectively, as of March 31, 2010. A breakout of our gross and net reserves,
excluding the effects of our intercompany pooling arrangements and intercompany quota share
reinsurance agreement, as of March 31, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Reserves
|
|
(Dollars in thousands)
|
|
Case
|
|
|
IBNR (1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
$
|
396,162
|
|
|
$
|
791,504
|
|
|
$
|
1,187,666
|
|
Reinsurance Operations
|
|
|
11,974
|
|
|
|
33,001
|
|
|
|
44,975
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
408,136
|
|
|
$
|
824,505
|
|
|
$
|
1,232,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Reserves (2)
|
|
(Dollars in thousands)
|
|
Case
|
|
|
IBNR (1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
$
|
230,361
|
|
|
$
|
438,439
|
|
|
$
|
668,800
|
|
Reinsurance Operations
|
|
|
11,850
|
|
|
|
32,443
|
|
|
|
44,293
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
242,211
|
|
|
$
|
470,882
|
|
|
$
|
713,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Losses incurred but not reported, including the
expected future emergence of case reserves.
|
|
(2)
|
|
Does not include reinsurance receivable on paid
losses or reserve for uncollectible reinsurance.
|
We continually review these estimates and, based on new developments and information, we
include adjustments of the estimated ultimate liability in the operating results for the periods in
which the adjustments are made. The establishment of loss and loss adjustment expense reserves
makes no provision for the possible broadening of coverage by legislative action or judicial
interpretation, or the emergence of new types of losses not sufficiently represented in our
historical experience or that cannot yet be quantified or estimated. We regularly analyze our
reserves and review pricing and reserving methodologies so that future adjustments to prior year
reserves can be minimized. However, given the complexity of this process, reserves require
continual updates and the ultimate liability may be higher or lower than previously indicated.
Changes in estimates for loss and loss adjustment expense reserves are recorded in the period that
the change in these estimates is made. See Note 6 of the notes to the consolidated financial
statements in Item 1 of Part I of this report for details concerning the changes in the estimate
for incurred loss and loss adjustment expenses related to prior accident years.
The detailed reserve analyses that our actuaries complete use a variety of generally accepted
actuarial methods and techniques to produce a number of estimates of ultimate loss. We determine
our best estimate of ultimate loss by reviewing the various estimates and assigning weight to each
estimate given the characteristics of the reserve category being reviewed. The reserve estimate is
the difference between the estimated ultimate loss and the losses paid to date. The difference
between the estimated ultimate loss and the case incurred loss (paid loss plus case reserve) is
considered to be IBNR. IBNR calculated as such includes a provision for development on known cases
(supplemental development) as well as a provision for claims that have occurred but have not yet
been reported (pure IBNR).
In light of the many uncertainties associated with establishing the estimates and making the
assumptions necessary to establish reserve levels, we review our reserve estimates on a regular
basis and make adjustments in the period that the need for such adjustments is determined. The
anticipated future loss emergence continues to be reflective of historical patterns, and the
selected development patterns have not changed significantly from those underlying our most recent
analyses.
The key assumptions fundamental to the reserving process are often different for various reserve
categories and accident years. Some of these assumptions are explicit assumptions that are
required of a particular method, but most of the assumptions are implicit and cannot be precisely
quantified. An example of an explicit assumption is the pattern employed in the Paid Development
method. However, the assumed pattern is itself based on several implicit assumptions such as the
impact of inflation on medical costs and the rate at which claim professionals close claims. Loss
frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a
measure of the average size of claims. Each reserve segment has an implicit frequency and severity
for each accident year as a result of the various assumptions made.
33
UNITED AMERICA INDEMNITY, LTD.
Previous reserve analyses have resulted in our identification of information and trends that have
caused us to increase or decrease our frequency and severity assumptions in prior periods and could
lead to the identification of a need for additional material changes in loss and loss adjustment
expense reserves, which could materially affect our results of operations, equity, business and
insurer financial strength and debt ratings. Factors affecting loss
frequency include, among other things, the effectiveness of loss controls and safety programs and
changes in economic activity or weather patterns. Factors affecting loss severity include, among
other things, changes in policy limits and deductibles, rate of inflation and judicial
interpretations. Another factor affecting estimates of loss frequency and severity is the loss
reporting lag, which is the period of time between the occurrence of a loss and the date the loss
is reported to us. The length of the loss reporting lag affects our ability to accurately predict
loss frequency (loss frequencies are more predictable for short-tail lines) as well as the amount
of reserves needed for IBNR.
If the actual levels of loss frequency and severity are higher or lower than expected, the ultimate
losses will be different than managements best estimate. For most of our reserving classes, we
believe that frequency can be predicted with greater accuracy than severity. Therefore, we believe
managements best estimate is more sensitive to changes in severity than frequency. The following
table, which we believe reflects a reasonable range of variability around our best estimate based
on our historical loss experience and managements judgment, reflects the
impact of changes (which could be favorable or unfavorable) in frequency and severity on our
current accident year gross loss estimate of $44.6 million for claims occurring during the quarter
ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severity Change
|
|
(Dollars in thousands)
|
|
|
|
|
|
-10%
|
|
|
-5%
|
|
|
0%
|
|
|
5%
|
|
|
10%
|
|
Frequency Change
|
|
|
-5
|
%
|
|
$
|
(6,471
|
)
|
|
$
|
(4,351
|
)
|
|
$
|
(2,231
|
)
|
|
$
|
(112
|
)
|
|
$
|
2,008
|
|
|
|
|
-3
|
%
|
|
|
(5,668
|
)
|
|
|
(3,503
|
)
|
|
|
(1,339
|
)
|
|
|
826
|
|
|
|
2,990
|
|
|
|
|
-2
|
%
|
|
|
(5,266
|
)
|
|
|
(3,079
|
)
|
|
|
(893
|
)
|
|
|
1,294
|
|
|
|
3,481
|
|
|
|
|
-1
|
%
|
|
|
(4,864
|
)
|
|
|
(2,655
|
)
|
|
|
(446
|
)
|
|
|
1,763
|
|
|
|
3,972
|
|
|
|
|
0
|
%
|
|
|
(4,463
|
)
|
|
|
(2,231
|
)
|
|
|
|
|
|
|
2,231
|
|
|
|
4,463
|
|
|
|
|
1
|
%
|
|
|
(4,061
|
)
|
|
|
(1,807
|
)
|
|
|
446
|
|
|
|
2,700
|
|
|
|
4,954
|
|
|
|
|
2
|
%
|
|
|
(3,659
|
)
|
|
|
(1,383
|
)
|
|
|
893
|
|
|
|
3,169
|
|
|
|
5,444
|
|
|
|
|
3
|
%
|
|
|
(3,258
|
)
|
|
|
(959
|
)
|
|
|
1,339
|
|
|
|
3,637
|
|
|
|
5,935
|
|
|
|
|
5
|
%
|
|
|
(2,454
|
)
|
|
|
(112
|
)
|
|
|
2,231
|
|
|
|
4,574
|
|
|
|
6,917
|
|
Our net reserves for losses and loss expenses of $713.1 million as of March 31, 2010 relate to
multiple accident years. Therefore, the impact of changes in frequency and severity for more than
one accident year could be higher or lower than the amounts reflected above.
Recoverability of Reinsurance Receivables
We regularly review the collectibility of our reinsurance receivables, and we include adjustments
resulting from this review in earnings in the period in which the adjustment arises. A.M. Best
ratings, financial history, available collateral, and payment history with the reinsurers are
several of the factors that we consider when judging collectibility. Changes in loss reserves can
also affect the valuation of reinsurance receivables if the change is related to loss reserves that
are ceded to reinsurers. Certain amounts may be uncollectible if our reinsurers dispute a loss or
if the reinsurer is unable to pay. If our reinsurers do not pay, we are still legally obligated to
pay the loss. At March 31, 2010, our reinsurance receivables were $520.7 million, net of an
allowance for uncollectible reinsurance receivables of $12.9 million. See Note 4 of the notes to
the consolidated financial statements in Item 1 of Part I of this report for more details
concerning the collectibility of our reinsurance receivables.
Investments
The carrying amount of our investments approximates their estimated fair value. We regularly
perform various analytical valuation procedures with respect to investments, including reviewing
each fixed maturity security in an unrealized loss position to determine the amount of unrealized
loss related to credit loss and the amount related to all other factors, such as changes in
interest rates. The credit loss represents the portion of the amortized book value in excess of
the net present value of the projected future cash flows discounted at the effective interest rate
implicit in the debt security prior to impairment. The credit loss component of the
other-than-temporary impairment is recorded through earnings, whereas the amount relating to
factors other than credit losses are recorded in other comprehensive income, net of taxes. During
our review, we consider credit rating, market price, and issuer specific financial information,
among other factors, to assess the likelihood of collection of all principal and interest as
contractually due. Securities for which we determine that a credit loss is likely are subjected to
further analysis to estimate the credit loss to be recognized in earnings, if any. See Note 2 of
the notes to consolidated financial statements in Item 1 of Part I of this report for the specific
methodologies and significant assumptions used by asset
class. Upon identification of such securities and periodically thereafter, a detailed review is
performed to determine whether the decline is considered other-than-temporary. This review
includes an analysis of several factors, including but not limited to, the credit ratings and cash
flows of the securities, and the magnitude and length of time that the fair value of such
securities is below cost.
34
UNITED AMERICA INDEMNITY, LTD.
For an analysis of our securities with gross unrealized losses as of March 31, 2010 and December
31, 2009, and for other-than-temporary losses that we recorded for the quarters ended March 31,
2010 and 2009, please see Note 2 of the notes to the consolidated financial statements in Item 1 of
Part I of this report.
Fair Value Measurements
We categorize our assets that are accounted for at fair value in the consolidated statements into a
fair value hierarchy. The fair value hierarchy is directly related to the amount of subjectivity
associated with the inputs utilized to determine the fair value of these assets. See Note 3 of the
notes to the consolidated financial statements in Item 1 of Part I of this report for further
information about the fair value hierarchy and our assets that are accounted for at fair value.
Intangible Assets
We use several techniques to value the recoverability of intangible assets. State licenses were
valued by comparing our licenses to comparable companies. Software was evaluated based on the cost
to build and the cost to replace existing software. Other intangible assets that are not deemed to
have indefinite useful lives are amortized over their useful lives. State licenses and trade names
are not amortized. Reviews of recoverability and useful lives are performed at least annually.
Our intangible assets that are deemed to have an indefinite useful life, which include trade names
and state insurance licenses, are not amortized. Our intangible assets that are not deemed to have
an indefinite useful life, which includes software technology, are amortized over their useful
lives. Due to the results of our 2008 impairment testing, we determined that our remaining
intangible assets that are not deemed to have an indefinite useful life would be fully amortized by
2010. As a result, we anticipate that amortization expense will be $0.04 million in 2010. This
amount is subject to change, however, based upon subsequent reviews of recoverability and useful
lives that are performed at least annually.
Taxation
Our deferred tax assets and liabilities primarily result from temporary differences between the
amounts recorded in our consolidated financial statements and the tax basis of our assets and
liabilities.
At each balance sheet date, management assesses the need to establish a valuation allowance that
reduces deferred tax assets when it is more likely than not that all, or some portion, of the
deferred tax assets will not be realized. A valuation allowance would be based on all available
information including our assessment of uncertain tax positions and projections of future taxable
income from each tax-paying component in each jurisdiction, principally derived from business plans
and available tax planning strategies. There are no valuation allowances as of March 31, 2010.
The deferred tax asset balance is analyzed regularly by management. Based on these analyses, we
have determined that our deferred tax asset is recoverable. Projections of future taxable income
incorporate several assumptions of future business and operations that are apt to differ from
actual experience. If, in the future, our assumptions and estimates that resulted in our forecast
of future taxable income for each tax-paying component prove to be incorrect, a valuation allowance
may be required. This could have a material adverse effect on our financial condition, results of
operations, and liquidity.
35
UNITED AMERICA INDEMNITY, LTD.
On an interim basis, we book our tax provision using the expected full year effective tax rate.
Forecasts which compute taxable income and taxes expected to be incurred in the jurisdictions where
we do business are prepared several times per year. The effective tax rate is computed by dividing
forecasted income tax expense not including net realized investment gains (losses) by forecasted
pre-tax income not including net realized investment gains (losses). Changes in pre-tax and
taxable income in the jurisdictions where we do business can change the effective tax rate. To
compute our income tax expense on an interim basis, we apply our expected full year effective tax
rate
against our pre-tax income excluding net realized investment gains (losses) and then add actual tax
on net realized investment gains (losses) to that result.
We apply a more likely than not recognition threshold for all tax uncertainties, only allowing the
recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon
examination by the taxing authorities. Please see Note 5 of the notes to the consolidated
financial statements in Item 1 of Part I of this report for a discussion of our tax uncertainties.
Our Business Segments
We manage our business through two business segments: Insurance Operations, which includes the
operations of the U.S. Insurance Companies, and Reinsurance Operations, which are the operations of
Wind River Reinsurance.
We evaluate the performance of our Insurance Operations and Reinsurance Operations segments based
on gross and net premiums written, revenues in the form of net premiums earned, and expenses in the
form of (1) net losses and loss adjustment expenses, (2) acquisition costs, and (3) other
underwriting expenses.
For a description of our segments, see Business Segments in Item 1 of Part I in our 2009 Annual
Report on Form 10-K.
36
UNITED AMERICA INDEMNITY, LTD.
The following table sets forth an analysis of financial data for our segments during the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
Insurance Operations premiums written:
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
54,071
|
|
|
$
|
67,620
|
|
Ceded premiums written
|
|
|
10,593
|
|
|
|
12,151
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
43,478
|
|
|
$
|
55,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Operations premiums written:
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
38,782
|
|
|
$
|
31,568
|
|
Ceded premiums written
|
|
|
779
|
|
|
|
424
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
38,003
|
|
|
$
|
31,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
(1)
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
$
|
49,744
|
|
|
$
|
70,720
|
|
Reinsurance Operations
|
|
|
21,044
|
|
|
|
7,820
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
70,788
|
|
|
$
|
78,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
(2)
|
|
|
|
|
|
|
|
|
Insurance Operations
(3)
|
|
$
|
52,414
|
|
|
$
|
71,886
|
|
Reinsurance Operations
(4)
|
|
|
19,523
|
|
|
|
6,668
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
71,937
|
|
|
$
|
78,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from segments:
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
$
|
(2,670
|
)
|
|
$
|
(1,166
|
)
|
Reinsurance Operations
|
|
|
1,521
|
|
|
|
1,152
|
|
|
|
|
|
|
|
|
Total income (loss) from segments
|
|
$
|
(1,149
|
)
|
|
$
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance combined ratio analysis:
(5)
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
59.7
|
|
|
|
60.4
|
|
Expense ratio
|
|
|
45.6
|
|
|
|
41.2
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
105.3
|
|
|
|
101.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Operations
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
57.4
|
|
|
|
63.9
|
|
Expense ratio
|
|
|
35.4
|
|
|
|
21.4
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
92.8
|
|
|
|
85.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
59.0
|
|
|
|
60.8
|
|
Expense ratio
|
|
|
42.6
|
|
|
|
39.2
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
101.6
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Excludes net investment income and net realized investment gains (losses), which are not
allocated to our segments.
|
|
(2)
|
|
Excludes corporate and other operating expenses and interest expense, which are not allocated
to our segments.
|
|
(3)
|
|
Includes excise tax of $260 and $370 related to cessions from our U.S. Insurance Companies to
Wind River Reinsurance for the quarters ended March 31, 2010 and 2009, respectively.
|
|
(4)
|
|
Includes all Wind River Reinsurance expenses other than excise tax related to cessions from
our U.S. Insurance Companies to Wind River Reinsurance.
|
|
(5)
|
|
Our insurance combined ratios are non-GAAP financial measures that are generally viewed in
the insurance industry as indicators of underwriting profitability. The loss ratio is the
ratio of net losses and loss adjustment expenses to net premiums earned. The expense ratio is
the ratio of acquisition costs and other underwriting expenses to net premiums earned. The
combined ratio is the sum of the loss and expense ratios.
|
37
UNITED AMERICA INDEMNITY, LTD.
Results of Operations
All percentage changes included in the text below have been calculated using the corresponding
amounts from the applicable tables.
Quarter Ended March 31, 2010 Compared with the Quarter Ended March 31, 2009
Insurance Operations
The components of income (loss) from underwriting and underwriting ratios of our Insurance
Operations segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
|
Increase / (Decrease)
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
54,071
|
|
|
$
|
67,620
|
|
|
$
|
(13,549
|
)
|
|
|
-20.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
43,478
|
|
|
$
|
55,469
|
|
|
$
|
(11,991
|
)
|
|
|
-21.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
49,744
|
|
|
$
|
70,720
|
|
|
$
|
(20,976
|
)
|
|
|
-29.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
29,714
|
|
|
|
42,744
|
|
|
|
(13,030
|
)
|
|
|
-30.5
|
%
|
Acquisition costs and other
underwriting expenses
(1)
|
|
|
22,700
|
|
|
|
29,142
|
|
|
|
(6,442
|
)
|
|
|
-22.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from underwriting
|
|
$
|
(2,670
|
)
|
|
$
|
(1,166
|
)
|
|
$
|
(1,504
|
)
|
|
|
129.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
|
|
63.9
|
|
|
|
61.6
|
|
|
|
2.3
|
|
|
|
|
|
Prior accident year
|
|
|
(4.2
|
)
|
|
|
(1.2
|
)
|
|
|
(3.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar year
|
|
|
59.7
|
|
|
|
60.4
|
|
|
|
(0.7
|
)
|
|
|
|
|
Expense ratio
|
|
|
45.6
|
|
|
|
41.2
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
105.3
|
|
|
|
101.6
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes excise tax of $260 and $370 related to cessions from our U.S. Insurance
Companies to Wind River Reinsurance for the quarters ended March 31, 2010 and 2009,
respectively.
|
Premiums
Gross premiums written, which represent the amount received or to be received for insurance
policies written without reduction for reinsurance costs or other deductions, were $54.1 million
for the quarter ended March 31, 2010, compared with $67.6 million for the quarter ended March 31,
2009, a decrease of $13.5 million or 20.0%. The decrease was primarily due to a reduction of $3.4
million due to terminations of business that did not meet our profitability requirements, a
reduction of $1.6 million due to aggregate price decreases, and a reduction of $8.5 million from
other market factors.
Net premiums written, which equal gross premiums written less ceded premiums written, were $43.5
million for the quarter ended March 31, 2010, compared with $55.5 million for the quarter ended
March 31, 2009, a decrease of $12.0 million or 21.6%. The decrease was primarily due to the
reduction of gross premiums written noted above, offset by the return of unearned premium related
to the Penn-America quota share reinsurance treaty.
The ratio of net premiums written to gross premiums written was 80.4% for the quarter ended March
31, 2010 and 82.0% for the quarter ended March 31, 2009, a decline of 1.6 points, which was
primarily due to changes in our reinsurance structure and mix of business.
Net premiums earned were $49.7 million for the quarter ended March 31, 2010, compared with $70.7
million for the quarter ended March 31, 2009, a decrease of $21.0 million or 29.7%. The decrease
was primarily due to the reduction of gross premiums written noted above. Property net premiums
earned for the quarters ended March 31, 2010 and 2009 were $19.2 million and $28.7 million,
respectively. Casualty net premiums earned for the quarters ended March 31, 2010 and 2009 were
$30.5 million and $42.0 million, respectively.
38
UNITED AMERICA INDEMNITY, LTD.
Net Losses and Loss Adjustment Expenses
The loss ratio for our Insurance Operations was 59.7% for the quarter ended March 31, 2010 compared
with 60.4%
for the quarter ended March 31, 2009. The loss ratio is a non-GAAP financial measure that is
generally viewed in the insurance industry as an indicator of underwriting profitability and is
calculated by dividing net losses and loss adjustment expenses by net premiums earned.
The impact of changes to prior accident years is 3.0 points resulting from a reduction of net
losses and loss adjustment expenses for prior accident years of $2.1 million in the quarter ended
March 31, 2010 compared to reduction of net losses and loss adjustment expenses for prior accident
years of $0.8 million in the quarter ended March 31, 2009. When analyzing loss reserves and prior
year development, we consider many factors, including the frequency and severity of claims, loss
credit trends, case reserve settlements that may have resulted in significant development, and any
other additional or pertinent factors that may impact reserve estimates.
|
|
|
In 2010, we reduced our prior accident year loss reserves by $2.1 million, which reduced
our loss ratio by 4.2 points. The reduction of our prior accident year loss reserves
primarily consisted of a $2.0 million reduction in our general liability lines and a $0.6
million reduction in our professional liability lines, offset by a $0.5 million increase in
our property lines:
|
|
1.
|
|
The reduction in the general liability lines primarily consisted of net
reductions related to accident years 2006 and prior primarily due to continued
favorable emergence on Penn America business.
|
|
|
2.
|
|
The reduction to the professional liability lines primarily consisted
of net reductions of $1.0 million related to accident years 2007 and prior for our
lawyers and real estate programs due to lower severity than originally anticipated.
This reduction was partially offset by an increase of $0.4 million related to
accident year 2009 for our real estate program, where loss development was higher
than expected during the quarter.
|
|
|
3.
|
|
The increase in the property lines primarily consisted of an increase
of $2.4 million related to accident year 2009 that was due to higher than expected
claim development, partially offset by net reductions of
$1.9 million primarily related to
accident years 2002 and 2006 through 2008 that were due to a recent large
subrogation recovery on a disputed claim.
|
|
|
|
In 2009, we reduced our allowance for uncollectible reinsurance by $0.8 million due to
the decrease in the amount of our carried reinsurance receivables.
|
The current accident year loss ratio for the quarter ended March 31, 2010 increased 2.3 points from
the quarter ended March 31, 2009:
|
|
|
The current accident year property loss ratio increased 7.1 points from 54.1% in the
quarter ended March 31, 2009 to 61.2% in the quarter ended March 31, 2010, which consists
of a 8.0 point increase in the non-catastrophe loss ratio from 51.4% in the quarter ended
March 31, 2009 to 59.4% in the quarter ended March 31, 2010 and a 0.9 point decrease in the
catastrophe loss ratio from 2.7% in the quarter ended March 31, 2009 to 1.8% in the quarter
ended March 31, 2010. The increase in the non-catastrophe loss ratio is primarily due to
higher reinsurance costs. Non-catastrophe losses were $11.4 million and $14.7 million for
the quarters ended March 31, 2010 and 2009, respectively. Property net premiums earned for
the quarters ended March 31, 2010 and 2009 were $19.2 million and $28.7 million,
respectively.
|
|
|
|
The current accident year casualty loss ratio decreased 1.0 points from 66.6% in the
quarter ended March 31, 2009 to 65.6% in the quarter ended March 31, 2010 primarily due to
changes in our mix of business. Casualty net premiums earned for the quarters ended March
31, 2010 and 2009 were $30.5 million and $42.0 million, respectively.
|
Net losses and loss adjustment expenses were $29.7 million for the quarter ended March 31, 2010,
compared with $42.7 million for the quarter ended March 31, 2009, a decrease of $13.0 million or
30.5%. Excluding the $2.1 million reduction of net losses and loss adjustment expenses for prior
accident years in the quarter ended March 31, 2010 and the $0.8 million reduction of net losses and
loss adjustment expenses for prior accident years in the quarter ended March 31, 2009, the current
accident year net losses and loss adjustment expenses were $31.8 million and $43.5 million for the
quarters ended March 31, 2010 and 2009, respectively. This decrease is primarily attributable to a
decrease in net premiums earned, and the factors described above.
39
UNITED AMERICA INDEMNITY, LTD.
Acquisition Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses were $22.7 million for the quarter ended March
31, 2010, compared with $29.1 million for the quarter ended March 31, 2009, a decrease of $6.4
million or 22.1%. The decrease is comprised of a $5.7 million decrease in acquisition costs and a
$0.7 million decrease in other underwriting expenses:
|
|
|
The decrease in acquisition costs is primarily due to a decrease in commissions
resulting from a decrease in net premiums earned.
|
|
|
|
The decrease in other underwriting expenses is primarily due to a decrease in total
compensation expenses and professional services expenses, offset by an increase in
infrastructure costs related to new product development, information technology upgrades,
and additional office locations.
|
Expense and Combined Ratios
The expense ratio for our Insurance Operations was 45.6% for the quarter ended March 31, 2010,
compared with 41.2% for the quarter ended March 31, 2009. The expense ratio is a non-GAAP
financial measure that is calculated by dividing the sum of acquisition costs and other
underwriting expenses by net premiums earned. The increase in the expense ratio is primarily due
to the decrease in net premiums earned noted above and the incurrence of infrastructure costs noted
above.
The combined ratio for our Insurance Operations was 105.3% for the quarter ended March 31, 2010,
compared with 101.6% for the quarter ended March 31, 2009. The combined ratio is a non-GAAP
financial measure and is the sum of our loss and expense ratios. Excluding the $2.1 million
reduction of net losses and loss adjustment expenses for prior accident years in the quarter ended
March 31, 2010 and the $0.8 million reduction of net losses and loss adjustment expenses for prior
accident years in the quarter ended March 31, 2009, the combined ratio increased from 102.8% for
the quarter ended March 31, 2009 to 109.5% for the quarter ended March 31, 2010. See discussion of
loss ratio included in Net Losses and Loss Adjustment Expenses above and discussion of expense
ratio in preceding paragraph above for an explanation of this increase.
Loss from underwriting
The factors described above resulted in a loss from underwriting for our Insurance Operations of
$2.7 million and $1.2 million for the quarters ended March 31, 2010 and 2009, respectively.
40
UNITED AMERICA INDEMNITY, LTD.
Reinsurance Operations
The components of income (loss) from underwriting and underwriting ratios of our Reinsurance
Operations segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
|
Increase / (Decrease)
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
38,782
|
|
|
$
|
31,568
|
|
|
$
|
7,214
|
|
|
|
22.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
38,003
|
|
|
$
|
31,144
|
|
|
$
|
6,859
|
|
|
|
22.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
21,044
|
|
|
$
|
7,820
|
|
|
$
|
13,224
|
|
|
|
169.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
12,075
|
|
|
|
4,996
|
|
|
|
7,079
|
|
|
|
141.7
|
%
|
Acquisition costs and other
underwriting expenses
|
|
|
7,448
|
|
|
|
1,672
|
|
|
|
5,776
|
|
|
|
345.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from underwriting
|
|
$
|
1,521
|
|
|
$
|
1,152
|
|
|
$
|
369
|
|
|
|
32.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
|
|
61.0
|
|
|
|
63.5
|
|
|
|
(2.5
|
)
|
|
|
|
|
Prior accident year
|
|
|
(3.6
|
)
|
|
|
0.4
|
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar year loss ratio
|
|
|
57.4
|
|
|
|
63.9
|
|
|
|
(6.5
|
)
|
|
|
|
|
Expense ratio
|
|
|
35.4
|
|
|
|
21.4
|
|
|
|
14.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
92.8
|
|
|
|
85.3
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
Gross premiums written, which represent the amount received or to be received for reinsurance
agreements written without reduction for reinsurance costs or other deductions, were $38.8 million
for the quarter ended March 31, 2010, compared with $31.6 million for the quarter ended March 31,
2009, an increase of $7.2 million or 22.9%. The increase was primarily due to several new
reinsurance treaties that commenced during 2009.
Net premiums written, which equal gross premiums written less ceded premiums written, were $38.0
million for the quarter ended March 31, 2010, compared with $31.1 million for the quarter ended
March 31, 2009, an increase of $6.9 million or 22.0%. The increase was primarily due to the
increase of gross premiums written noted above.
The ratio of net premiums written to gross premiums written was 98.0% for the quarter ended March
31, 2010 and 98.7% for the quarter ended March 31, 2009, a decrease of 0.7 points.
Net premiums earned were $21.0 million for the quarter ended March 31, 2010, compared with $7.8
million for the quarter ended March 31, 2009, an increase of $13.2 million or 169.1%. The increase
was primarily due to the increase of gross premiums written noted above in addition to increased
writings from 2008 and 2009. Property net premiums earned for the quarters ended March 31, 2010 and 2009
were $10.5 million and $3.2 million, respectively. Casualty net premiums earned for the quarters
ended March 31, 2010 and 2009 were $10.5 million and $4.6 million, respectively.
Net Losses and Loss Adjustment Expenses
The loss ratio for our Reinsurance Operations was 57.4% for the quarter ended March 31, 2010
compared with 63.9% for the quarter ended March 31, 2009. The loss ratio is a non-GAAP financial
measure that is generally viewed in the insurance industry as an indicator of underwriting
profitability and is calculated by dividing net losses and loss adjustment expenses by net premiums
earned.
41
UNITED AMERICA INDEMNITY, LTD.
The impact of changes to prior accident years is a reduction of 4.0 points resulting from a
reduction of net losses and loss adjustment expenses for prior accident years of $0.7 million in
the quarter ended March 31, 2010 and an increase of net losses and loss adjustment expenses for
prior accident years of $0.03 million in the quarter ended March 31, 2009. When analyzing loss
reserves and prior year development, we consider many factors, including the frequency and severity
of claims, loss credit trends, case reserve settlements that may have resulted in significant
development, and any other additional or pertinent factors that may impact reserve estimates.
|
|
|
In 2010, we reduced our prior accident year loss reserves by
$0.7 million, which reduced our loss ratio by 3.6 points. This reduction is primarily due to a reduction of $0.7
million in our property lines that is primarily due to a 2009 reinsurance treaty. There were also
offsetting adjustments made to our general liability and professional liability lines for
accident years 2007 through 2009 that resulted in no net change.
|
|
|
|
In 2009, we increased our prior accident year loss reserves by $0.03 million, which
primarily consisted of
increases of $0.02 million in our property lines and $0.01 million in our general liability
lines. The increases to the property and general liability lines were related to accident
year 2008.
|
The current accident year loss ratio decreased 2.5 points from 63.5% in 2009 to 61.0% in 2010
primarily due to a change in the mix of business due to signing several new treaties that became
effective in 2009. Our book is comprised of approximately 50% casualty and 50% property business,
based on net premiums earned.
Net losses and loss adjustment expenses were $12.1 million for the quarter ended March 31, 2010,
compared with $5.0 million for the quarter ended March 31, 2009, an increase of $7.1 million or
141.7%. Excluding the $0.7 million reduction of net losses and loss adjustment expenses for prior
accident years in the quarter ended March 31, 2010 and the $0.03 million increase of net losses and
loss adjustment expenses for prior accident years in the quarter ended March 31, 2009, the current
accident year net losses and loss adjustment expenses increased from $5.0 million for the quarter
ended March 31, 2009 to $12.8 million for the quarter ended March 31, 2010. This increase is
primarily attributable to an increase in net premiums earned, which increased from $7.8 million in
2009 to $21.0 million in 2010.
Acquisition Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses were $7.4 million for the quarter ended March 31,
2010, compared with $1.7 million for the quarter ended March 31, 2009, an increase of $5.7 million
or 345.5%. The increase is due to a $5.7 million increase in acquisition costs, which is primarily
due to an increase in commissions resulting from an increase in net premiums earned. There was not
a significant change in other underwriting expenses from the prior year.
Expense and Combined Ratios
The expense ratio for our Reinsurance Operations was 35.4% for the quarter ended March 31, 2010,
compared with 21.4% for the quarter ended March 31, 2009. The expense ratio is a non-GAAP
financial measure that is calculated by dividing the sum of acquisition costs and other
underwriting expenses by net premiums earned. The increase in the expense ratio is primarily due
to the increase in commissions noted above, partially offset by the increase in net premiums
earned.
The combined ratio for our Reinsurance Operations was 92.8% for the quarter ended March 31, 2010,
compared with 85.3% for the quarter ended March 31, 2009. The combined ratio is a non-GAAP
financial measure and is the sum of our loss and expense ratios. Excluding the impact of a $0.7
million reduction of net losses and loss adjustment expenses for prior accident years in the
quarter ended March 31, 2010 and a $0.03 million increase of prior accident year loss reserves in
the quarter ended March 31, 2009, the combined ratio increased from 84.9% for the quarter ended
March 31, 2009 to 96.4% for the quarter ended March 31, 2010. See discussion of loss ratio
included in Net Losses and Loss Adjustment Expenses above and discussion of expense ratio in the
preceding paragraph above for an explanation of this increase.
Income from underwriting
The factors described above resulted in income from underwriting for our Reinsurance Operations of
$1.5 million and $1.2 million for the quarters ended March 31, 2010 and 2009, respectively.
42
UNITED AMERICA INDEMNITY, LTD.
Unallocated Corporate Items
The following items are not allocated to our Insurance Operations or Reinsurance Operations
segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
|
Increase / (Decrease)
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
14,579
|
|
|
$
|
22,177
|
|
|
$
|
(7,598
|
)
|
|
|
-34.3
|
%
|
Net realized investment gains (losses)
|
|
|
14,204
|
|
|
|
(8,596
|
)
|
|
|
22,800
|
|
|
NM
|
|
Corporate and other operating expenses
|
|
|
(4,896
|
)
|
|
|
(3,975
|
)
|
|
|
(921
|
)
|
|
|
23.2
|
%
|
Interest expense
|
|
|
(1,739
|
)
|
|
|
(1,854
|
)
|
|
|
115
|
|
|
|
-6.2
|
%
|
Income tax expense
|
|
|
(2,069
|
)
|
|
|
(723
|
)
|
|
|
(1,346
|
)
|
|
|
186.2
|
%
|
Equity in net income (loss) of
partnership, net of tax
|
|
|
(29
|
)
|
|
|
135
|
|
|
|
(164
|
)
|
|
NM
|
|
Net Investment Income
Net investment income, which is gross investment income less investment expenses, was $14.6 million
for the quarter ended March 31, 2010, compared with $22.2 million for the quarter ended March 31,
2009, a decrease of $7.6 million or 34.3%.
|
|
|
Gross investment income, excluding realized gains and losses, was $16.0 million for the
quarter ended March 31, 2010, compared with $23.3 million for the quarter ended March 31,
2009, a decrease of $7.3 million or 31.3%. The decrease was primarily due to less income
from our limited partnership investments which had generated gross investment income of
$7.4 million for the quarter ended March 31, 2009 due to liquidations of some of those
investments. There was no investment income generated by our limited partnership
investments for the quarter ended March 31, 2010. Excluding limited partnership
distributions, gross investment income for the quarter ended March 31, 2010 increased 0.9%
compared to the quarter ended March 31, 2009. Cash and invested assets, net of payable for
securities purchased of $36.0 million, increased to $1,695.1 million as of March 31, 2010,
from $1,574.7 million as of March 31, 2009, an increase of $120.4 million or 7.6% primarily
due to the Rights Offering, which was completed in the second quarter of 2009. While our
cash and invested assets, net of payable for securities purchased, increased, the yields on
fixed maturities significantly decreased from March 31, 2009.
|
|
|
|
Investment expenses were $1.4 million for the quarter ended March 31, 2010, compared
with $1.1 million for the quarter ended March 31, 2009, an increase of $0.3 million or
27.0%. The increase was primarily due to additional fees related to our investment in
corporate loans.
|
The
average duration of our fixed maturities portfolios was 2.7 years as of March 31, 2010, compared with 2.9 years as of
March 31, 2009. Including cash and short-term investments, the average duration of our investments
as of March 31, 2010 and 2009 was 2.5 years and 2.7 years, respectively. At March 31, 2010, our
embedded book yield on our fixed maturities, not including cash, was 3.86% compared with 5.41% at March 31,
2009. The embedded book yield on the $200.3 million of municipal bonds in our portfolio was 3.81%
at March 31, 2010, compared to an embedded book yield of 3.95%
on our municipal bond portfolio of $224.1 million at March 31, 2009.
Net Realized Investment Gains (Losses)
Net realized investment gains were $14.2 million for the quarter ended March 31, 2010, compared
with net realized investment losses of $8.6 million for the quarter ended March 31, 2009. The net
realized investment gains for the quarter ended March 31, 2010 consist primarily of net gains of
$14.2 million relative to our fixed maturities and equity portfolios offset by other-than-temporary
impairments of $0.04 million relative to our fixed maturities portfolio. The net realized
investment losses for the quarter ended March 31, 2009 consist primarily of net losses of $6.2
million relative to our bond and equity portfolios, net gains of $0.7 million relative to market
value changes in our convertible portfolio, and other-than-temporary impairment losses of $3.1
million. The losses that were realized date back to 2006. Proceeds from the sales were
reinvested in securities with lower volatility characteristics that should enable the portfolio to
perform better in a rising interest rate environment.
43
UNITED AMERICA INDEMNITY, LTD.
See Note 2 of the notes to the consolidated financial statements in Item 1 of Part I of this report
for an analysis of total investment return on an after-tax basis for the quarters ended March 31,
2010 and 2009.
Corporate and Other Operating Expenses
Corporate and other operating expenses consist of outside legal fees, other professional fees,
directors fees, management fees, salaries and benefits for holding company personnel, and taxes
incurred which are not directly related to operations. Corporate and other operating expenses were
$4.9 million for the quarter ended March 31, 2010, compared with $4.0 million for the quarter ended
March 31, 2009, an increase of $0.9 million or 23.2%. The increase was primarily due to an
increase in compensation and related benefits costs, and the incurrence of infrastructure costs
related to information technology upgrades, additional office locations, and redomestication.
Interest Expense
Interest expense was $1.7 million and $1.8 million for the quarter ended March 31, 2010 and 2009,
respectively, a decrease of $0.1 million or 6.2%. The reduction is primarily due to a decrease in
the LIBOR rate. Interest on our Trust Preferred Securities and floating rate common securities is
based on the LIBOR rate. See Note 9 of the notes to the consolidated financial statements in Item
8 of Part II of our 2009 Annual Report on Form 10-K for details on our debt.
Income Tax Expense
Income tax expense was $2.1 million and $0.7 million for the quarters ended March 31, 2010 and
2009, respectively, an increase of $1.4 million or 186.2%. See Note 5 of the notes to the
consolidated financial statements in Item 1 of Part I of this report for a comparison of income tax
expense between periods.
Our alternative minimum tax (AMT) credit carryforward as of March 31, 2010 and December 31, 2009
was $4.8 million and $3.2 million, respectively, an increase of $1.6 million or 50.0%. See Note 5
of the notes to the consolidated financial statements in Item 1 of Part I of this report for an
explanation of the increase.
Equity in Net Income (Loss) of Partnerships
Equity in net loss of partnerships, net of tax was $0.03 million for the quarter ended March 31,
2010, compared with equity in net income of partnerships of $0.1 million for the quarter ended
March 31, 2009. The change from income in 2009 to a loss in 2010 was due to the performances of
limited partnership investments which invest mainly in high yield bonds.
Net Income
The factors described above resulted in net income of $18.9 million for the quarter ended March 31,
2010, compared to net income of $7.2 million for the quarter ended March 31, 2009, an increase of
$11.7 million.
Liquidity and Capital Resources
Sources and Uses of Funds
United America Indemnity is a holding company. Its principal asset is its ownership of the shares
of its direct and indirect subsidiaries, including United National Insurance Company, Diamond State
Insurance Company, United National Specialty Insurance Company, United National Casualty Insurance
Company, Wind River Reinsurance, Penn-America Insurance Company, Penn-Star Insurance Company, and
Penn-Patriot Insurance Company.
44
UNITED AMERICA INDEMNITY, LTD.
United America Indemnitys principal source of cash to meet short-term and long-term liquidity
needs, including the payment of corporate expenses, includes dividends and other permitted
disbursements from Wind River Reinsurance, the Luxembourg Companies, and the U.S. Insurance
Companies. The principal sources of funds at these direct and indirect subsidiaries include
underwriting operations, investment income, and proceeds from sales and redemptions of investments.
Funds are used principally by these operating subsidiaries to pay claims and operating expenses,
to make debt payments, to purchase investments and to make dividend payments. United America
Indemnitys future liquidity is dependent on the ability of its subsidiaries to pay dividends.
United America
Indemnity has no planned capital expenditures that could have a material impact on its long-term
liquidity needs.
In May 2009, United America Indemnity received gross proceeds of $100.1 million from the issuance
of 17.2 million and 11.4 million of its Class A and Class B common shares, respectively, in
conjunction with the Rights Offering that was announced on March 4, 2009. The net proceeds of
$91.8 million were used to support strategic initiatives, enhance liquidity and financial
flexibility, and for other general corporate purposes. See Note 10 of the notes to the
consolidated financial statements in Item 8 of Part II of our 2009 Annual Report on Form 10-K for
details concerning the Rights Offering.
At March 31, 2010, United America Indemnity owed $53.0 million in principal and related interest
to Wind River Reinsurance and $6.0 million in principal to U.A.I. (Luxembourg) Investment S.à r.l.
The U.S. Insurance Companies are restricted by statute as to the amount of dividends that they may
pay without the prior approval of regulatory authorities. The U.S. Insurance Companies may pay
dividends without advance regulatory approval only out of unassigned surplus. For 2010, the
maximum amount of distributions that could be paid by the U.S. Insurance Companies as dividends
under applicable laws and regulations without regulatory approval is approximately $50.3 million
and $19.1 million, respectively. The limitation includes $6.3 million that would be distributed by
Penn-America Insurance Company to United National Insurance Company or its subsidiary Penn
Independent Corporation based on the December 31, 2009 ownership percentages. The U.S. Insurance
Companies did not declare or pay any dividends during the quarter ended March 31, 2010.
For 2010, we believe that Wind River Reinsurance should have sufficient liquidity and solvency to
pay dividends. Wind River Reinsurance is prohibited, without the approval of the Bermuda Monetary
Authority (BMA), from reducing by 15% or more its total statutory capital as set out in its
previous years financial statements, and any application for such approval must include such
information as the BMA may require. Based upon the total statutory capital plus the statutory
surplus as set out in its 2009 statutory financial statements that will be filed with the BMA in
2010, Wind River Reinsurance could pay a dividend in 2009 of up to $175.8 million without
requesting BMA approval.
Cash Flows
Sources of funds consist primarily of net premiums written, investment income, and maturing
investments. Funds are used primarily to pay claims and operating expenses and to purchase
investments.
Our reconciliation of net income to cash provided from operations is generally influenced by the
following:
|
|
|
the fact that we collect premiums in advance of losses paid;
|
|
|
|
the timing of our settlements with our reinsurers; and
|
|
|
|
the timing of our loss payments.
|
45
UNITED AMERICA INDEMNITY, LTD.
Net cash used for operating activities was $10.8 million and $12.7 million for the quarters ended
March 31, 2010 and 2009, respectively. The increase in operating cash flows of approximately $1.8
million from the prior year was primarily a net result of the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Net premiums collected
|
|
$
|
65,078
|
|
|
$
|
65,553
|
(1)
|
|
$
|
(475
|
)
|
Net losses paid
|
|
|
(44,246
|
)
|
|
|
(70,472
|
)(2)
|
|
|
26,226
|
|
Acquisition costs and other underwriting
expenses
|
|
|
(45,044
|
)
|
|
|
(36,973
|
)
|
|
|
(8,071
|
)
|
Net investment income
|
|
|
16,312
|
|
|
|
24,606
|
|
|
|
(8,294
|
)
|
Net federal income taxes recovered
|
|
|
190
|
|
|
|
7,968
|
|
|
|
(7,778
|
)
|
Interest paid
|
|
|
(3,123
|
)
|
|
|
(3,326
|
)
|
|
|
203
|
|
Other
|
|
|
(6
|
)
|
|
|
(23
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for operating activities
|
|
$
|
(10,839
|
)
|
|
$
|
(12,667
|
)
|
|
$
|
1,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
During the first quarter of 2009, Wind River Reinsurance entered into
multiple new reinsurance treaties with third parties; however, the premium
associated with these new treaties did not begin to be collected until the
second quarter of 2009.
|
|
(2)
|
|
Includes losses resulting from Hurricane Ike, which made landfall in
August 2008.
|
See the consolidated statement of cash flows in the consolidated financial statements in Item
1 of Part I of this report for details concerning our investing and financing activities.
Liquidity
There have been no significant changes to our liquidity during the quarter ended March 31, 2010.
Please see Item 7 of Part II in our 2009 Annual Report on Form 10-K for information regarding our
liquidity.
Capital Resources
There have been no significant changes to our capital resources during the quarter ended March 31,
2010. Please see Item 7 of Part II in our 2009 Annual Report on Form 10-K for information
regarding our capital resources.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements other than the Trust Preferred Securities and floating
rate common securities discussed in the Liquidity and Capital Resources sections in Item 7 of
Part II of our 2009 Annual Report on Form 10-K.
Cautionary Note Regarding Forward-Looking Statements
Some of the statements under Business, Managements Discussion and Analysis of Financial
Condition and Results of Operations, and elsewhere in this report may include forward-looking
statements that reflect our current views with respect to future events and financial performance
that are intended to be covered by the safe harbor for forward-looking statements provided by the
Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that
are not historical facts. These statements can be identified by the use of forward-looking
terminology such as believe, expect, may, will, should, project, plan, seek,
intend, or anticipate or the negative thereof or comparable terminology, and include
discussions of strategy, financial projections and estimates and their underlying assumptions,
statements regarding plans, objectives, expectations or consequences of identified transactions,
and statements about the future performance, operations, products and services of the companies.
46
UNITED AMERICA INDEMNITY, LTD.
Our business and operations are and will be subject to a variety of risks, uncertainties and other
factors. Consequently, actual results and experience may materially differ from those contained in
any forward-looking statements. Such risks, uncertainties and other factors that could cause
actual results and experience to differ from those projected include, but are not limited to, the
following: (1) the ineffectiveness of our business strategy due to changes in current or future
market conditions; (2) the effects of competitors pricing policies, and of changes in laws and
regulations on competition, including industry consolidation and development of competing financial
products; (3) greater frequency or severity of claims and loss activity than our underwriting,
reserving or investment
practices have anticipated; (4) decreased level of demand for our insurance products or increased
competition due to an increase in capacity of property and casualty insurers; (5) risks inherent in
establishing loss and loss adjustment expense reserves; (6) uncertainties relating to the financial
ratings of our insurance subsidiaries; (7) uncertainties arising from the cyclical nature of our
business; (8) changes in our relationships with, and the capacity of, our general agents; (9) the
risk that our reinsurers may not be able to fulfill obligations; (10) investment performance and
credit risk; (11) risks associated with our proposed re-domestication to Ireland; (12) new tax
legislation or interpretations that could lead to an increase in our tax burden; and (13)
uncertainties relating to governmental and regulatory policies.
The foregoing review of important factors should not be construed as exhaustive and should be read
in conjunction with the other cautionary statements that are set forth in Risk Factors in Item 1A
and elsewhere in our 2009 Annual Report on Form 10-K. We undertake no obligation to publicly
update or review any forward-looking statement, whether as a result of new information, future
developments or otherwise.
|
|
|
Item 3.
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
During the first quarter of 2010, portfolio strategy continued to focus on investing in highly
liquid, high quality assets and a defensive interest rate posture. Treasury yields were unchanged
during the period as they fell in the early part of the year and rose in March with the release of
improved economic data. Credit risk sectors continued to perform well and credit spreads continued
to contract from the historically wide levels of late 2008 and early 2009.
The investment grade fixed income portfolio continues to maintain high quality at a AA average
rating, and a low duration of 2.7 years. Portfolio purchases were focused on U.S. Treasuries, high
quality Corporates, taxable Municipals and 15 year Agency mortgage backed securities. 15 year
Agency mortgage-backed securities have lower volatility characteristics as compared to traditional
30 year Agency mortgage-backed securities and should enable the portfolio to perform better in a
rising interest rate environment. Fixed income portfolio sales
consisted primarily of 30 year Agency
mortgage-backed securities and tax-exempt Municipals.
During the quarter, the portfolio allocation to corporate loans was increased. Corporate loans are
primarily below investment grade, senior, floating rate corporate obligations. This asset class is
expected to perform well as the economy recovers and short term rates rise. The equity allocation
remains invested in a U.S. large cap, value oriented style with an emphasis on dividends.
There have been no other significant changes to our market risk since December 31, 2009. Please
see Item 7A of Part II in our 2009 Annual Report on Form 10-K for information regarding our market
risk.
|
|
|
Item 4.
|
|
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and Procedures
Based on their evaluation of the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)), our principal executive officer and principal financial officer have concluded that as of
March 31, 2010, our disclosure controls and procedures are effective in that they are designed to
ensure that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms and information that we are required to
disclose in our Exchange Act reports is accumulated and communicated to management as appropriate
to allow timely decisions regarding required disclosure.
Changes in Internal Controls
During the quarter ended March 31, 2010 there have been no changes in our internal
controls over financial reporting that occurred that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
47
UNITED AMERICA INDEMNITY, LTD.
PART II-OTHER INFORMATION
|
|
|
Item 1.
|
|
Legal Proceedings
|
We are, from time to time, involved in various legal proceedings in the ordinary course of
business, including litigation regarding claims. There is a greater potential for disputes with
reinsurers who are in a runoff of their reinsurance operations. Some of our reinsurers are in a
runoff of their reinsurance operations, and therefore, we closely monitor those relationships. We
do not believe that the resolution of any currently pending legal proceedings, either individually
or taken as a whole, will have a material adverse effect on our business, consolidated financial
position or results of operations. We anticipate that, similar to the rest of the insurance and
reinsurance industry, we will continue to be subject to litigation and arbitration proceedings in
the ordinary course of business.
Our results of operations and financial condition are subject to numerous risks and uncertainties
described in Item 1A of Part I in our 2009 Annual Report on Form 10-K, filed with the SEC on March
16, 2010. The risk factors identified therein have not materially changed, except for the
following:
Our Operating Results and Shareholders Equity May Be Adversely Affected by Currency Fluctuations.
Our functional currency is the U.S. Dollar. Our Reinsurance Operations conduct business with some
customers in foreign currencies, and some of our Non-U.S. Subsidiaries have foreign currency
denominated cash accounts. Therefore, foreign exchange risk is generally limited to net assets
denominated in foreign currencies. Monetary assets and liabilities that are denominated in foreign
currencies are revalued at the current exchange rates at the time that cash is paid or received
with the resulting gains or losses, which are due to differences between the original exchange
rates and the current exchange rates, reflected in net income. In the case of our foreign currency
denominated cash accounts, the change in exchange rates between the local currency and our
functional currency at each balance sheet date represents an unrealized gain or loss that is
included as a component of accumulated other comprehensive income on the consolidated balance
sheet. Foreign exchange risk is reviewed as part of our risk management process. The principal
currency creating foreign exchange risk is the Euro. We may experience losses resulting from
fluctuations in the values of non-U.S. currencies, which could adversely impact our results of
operations and financial condition.
|
|
|
Item 2.
|
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
We allow employees to surrender our Class A common shares as payment for the tax liability incurred
upon the vesting of restricted stock that was issued under our Share Incentive Plan. During the
quarter ended March 31, 2010, we purchased 16,199 surrendered Class A common shares from our
employees for $0.1 million. All Class A common shares purchased from employees by us are held as
treasury stock and recorded at cost.
As part of the Rights Offering that took place in May 2009, we purchased 119 Class A common shares
for $3.50 per share that had been purchased by a former employee with the non-transferable Class A
Rights that were distributed to that former employee for Class A common shares held of non-vested
restricted stock. Since the restricted stock was not vested, the former employee, upon leaving the
Company, had to forfeit those Class A common shares that had been purchased with the
non-transferable Class A Rights that were distributed on that unvested restricted stock. See Note
10 of the notes to consolidated financial statements in Item 8 of Part II in our 2009 Annual Report
on Form 10-K for information concerning the Rights Offering.
48
UNITED AMERICA INDEMNITY, LTD.
The following table provides information with respect to the Class A common shares that were
surrendered or repurchased during the quarter ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Dollar Value
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
of Shares That
|
|
|
|
Total Number
|
|
|
Average
|
|
|
as Part of Publicly
|
|
|
May Yet Be
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced Plan
|
|
|
Purchased Under the
|
|
Period (1)
|
|
Purchased
|
|
|
Per Share
|
|
|
or Program
|
|
|
Plan or Program (2)
|
|
|
January 1-31, 2010
|
|
|
10,119
|
(3)
|
|
$
|
7.99
|
|
|
|
|
|
|
$
|
|
|
February 1-28, 2010
|
|
|
6,080
|
(3)
|
|
$
|
6.98
|
|
|
|
|
|
|
$
|
|
|
March 1-31, 2010
|
|
|
119
|
(4)
|
|
$
|
3.50
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16,318
|
|
|
$
|
7.58
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Based on settlement date.
|
|
(2)
|
|
Approximate dollar value of shares is as of the last date of the applicable month.
|
|
(3)
|
|
Surrendered by employees as payment of taxes withheld on the vesting of restricted
stock.
|
|
(4)
|
|
Repurchased as a result of the Rights Offering.
|
|
|
|
31.1+
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the Securities Exchange of 1934,
as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2+
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the Securities Exchange of 1934,
as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1+
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2+
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
49
UNITED AMERICA INDEMNITY, LTD.
SIGNATURE
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 thereunto duly authorized.
|
|
|
|
|
|
|
|
|
UNITED AMERICA INDEMNITY, LTD.
Registrant
|
|
|
|
|
|
|
|
|
|
May 10 2010
|
|
By:
|
|
/s/ Thomas M. McGeehan
|
|
|
|
|
|
|
Thomas M. McGeehan
|
|
|
|
|
|
|
Chief Financial Officer
|
|
|
|
|
|
|
(Authorized Signatory and
|
|
|
|
|
|
|
Principal Financial and Accounting Officer)
|
|
|
50
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