General information about 21st Century Holding Company can be found at
www.21stcenturyholding.com; however, the information that can be accessed
through our web site is not part of our report. We make our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to these reports filed or furnished pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934 available free of charge on our web
site, as soon as reasonably practicable after they are electronically filed with
the SEC.
Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
You should read the following discussion in conjunction with our condensed
consolidated financial statements and related notes and information included
under this Item 2 and elsewhere in this Quarterly Report on Form 10-Q and in our
Annual Report on Form 10-K filed with the Securities and Exchange Commission
("SEC") on March 30, 2012 ("Form 10-K"). Unless the context requires otherwise,
as used in this Form 10-Q, the terms "21st Century" "Company," "we," "us" and
"our," refers to 21st Century Holding Company and its subsidiaries.
Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q for the three months ended June
30, 2012 ("Form 10-Q") or in documents that are incorporated by reference that
are not historical fact are forward-looking statements that are subject to
certain risks and uncertainties that could cause actual events and results to
differ materially from those discussed herein. Without limiting the generality
of the foregoing, words such as "may," "will," "expect," "believe,"
"anticipate," "intend," "could," "would," "estimate," or "continue" or the
negative other variations thereof or comparable terminology are intended to
identify forward-looking statements. The risks and uncertainties include,
without limitation, uncertainties related to estimates, assumptions and
projections relating to unpaid losses and loss adjustment expenses and other
accounting policies, losses from the nine hurricanes that occurred in fiscal
years 2005 and 2004 and in other estimates, assumptions and projections
contained in this Form 10-Q; inflation and other changes in economic conditions
(including changes in interest rates and financial markets); the impact of new
regulations adopted in Florida which affect the property and casualty insurance
market; the costs of reinsurance, assessments charged by various governmental
agencies; pricing competition and other initiatives by competitors; our ability
to obtain regulatory approval for requested rate changes and the timing thereof;
legislative and regulatory developments; the outcome of various litigation
matters pending against us, including the terms of any settlements; risks
related to the nature of our business; dependence on investment income and the
composition of our investment portfolio; the adequacy of our liability for loss
and loss adjustment expense; insurance agents; claims experience; ratings by
industry services; catastrophe losses; reliance on key personnel; weather
conditions (including the severity and frequency of storms, hurricanes,
tornadoes and hail); changes in driving patterns and loss trends; acts of war
and terrorist activities; court decisions and trends in litigation and health
care and auto repair costs; and other matters described from time to time by us
in this report, and in our other filings with the SEC, including the Company's
Form 10-K.
You are cautioned not to place reliance on these forward-looking statements,
which are valid only as of the date they were made. The Company undertakes no
obligation to update or revise any forward-looking statements to reflect new
information or the occurrence of unanticipated events or otherwise. In addition,
readers should be aware that Generally Accepted Accounting Principles ("GAAP")
prescribes when a company may reserve for particular risks, including litigation
exposures. Accordingly, results for a given reporting period could be
significantly affected when a reserve is established for a major
contingency. Reported results may therefore appear to be volatile in certain
accounting periods.
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Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
21st Century Holding Company is an insurance holding company that controls
substantially all steps in the insurance underwriting, distribution and claims
processes through our subsidiaries and our contractual relationships with our
independent agents and general agents.
We are authorized to underwrite, and/or place through our wholly owned
subsidiaries, homeowners' multi-peril ("homeowners"), commercial general
liability, personal and commercial automobile, allied lines and various other
lines of insurance in Florida and various other states. We market and distribute
our own and third-party insurers' products and our other services through a
network of independent agents. We also utilize a select number of general agents
for the same purpose.
Our primary insurance subsidiary is Federated National Insurance Company
("Federated National"). Federated National is licensed as an admitted carrier in
Florida. An admitted carrier is an insurance company that has received a license
from the state insurance regulator for authority to write specific lines of
insurance in that state. Through contractual relationships with a network of
approximately 3,000 independent agents, of which approximately 600 actively sell
and service our products, Federated National is authorized to underwrite
homeowners', commercial general liability, fire, allied lines and personal and
commercial automobile insurance in Florida. Federated National is also licensed
as an admitted carrier in Alabama, Louisiana, Georgia and Texas, and underwrites
commercial general liability insurance in those states.
Federated National operated as a non-admitted carrier in Arkansas, California,
Kentucky, Maryland, Missouri, Nevada, Oklahoma, South Carolina, Tennessee and
Virginia, and could underwrite commercial general liability insurance in all of
these states. A non-admitted carrier, sometimes referred to as a "excess and
surplus lines" carrier, is permitted to do business in a state and, although it
is strictly regulated to protect policyholders from a variety of illegal and
unethical practices, including fraud, non-admitted carriers are subject to
considerably less regulation with respect to policy rates and forms.
Non-admitted carriers are not required to financially contribute to and benefit
from the state guarantee fund, which is used to pay for losses if an insurance
carrier becomes insolvent or unable to pay the losses due their policyholders.
Our executive offices are located at 14050 N.W. 14th Street, Suite 180, Sunrise,
Florida 33323 and our telephone number is (954) 581-9993.
Merger of Federated National and American Vehicle
In January 2011, we merged Federated National and our other wholly owned
insurance subsidiary, American Vehicle Insurance Company ("American Vehicle"),
with Federated National, continuing the operations of both entities. In
connection with this merger, the Company, Federated National and American
Vehicle entered into a consent order with the Florida Office of Insurance
Regulation ("Florida OIR") pursuant to which we agreed to certain restrictions
on our business operations. See Footnote "(1) Organization and Business".
Our Subsidiaries
The merger of Federated National and American Vehicle will be an ongoing
transition, many aspects of which will take effect over time. References to the
companies contained herein are intended to be references to the operations of
the newly formed Federated National following the January 2011 merger.
References to the historical activities of American Vehicle are appropriately
identified throughout this document.
During the three months ended June 30, 2012, 85.5%, 7.7%, 4.4% and 2.4% of the
premiums we underwrote were for homeowners', commercial general liability,
federal flood, and automobile insurance, respectively. During the three months
ended June 30, 2011, 80.5%, 10.1%, 4.6% and 4.8% of the premiums we underwrote
were for homeowners', commercial general liability, federal flood, and personal
automobile insurance, respectively.
During the six months ended June 30, 2012, 86.1%, 7.7%, 3.9% and 2.3% of the
premiums we underwrote were for homeowners', commercial general liability,
federal flood, and automobile insurance, respectively. During the six months
ended June 30, 2011, 81.5%, 10.2%, 4.1% and 4.2% of the premiums we underwrote
were for homeowners', commercial general liability, federal flood, and personal
automobile insurance, respectively.
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Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Our business, results of operations and financial condition are subject to
fluctuations due to a variety of factors. Abnormally high severity or frequency
of claims in any period could have a material adverse effect on us. When our
estimated liabilities for unpaid losses and loss adjustment expenses ("LAE") are
less than the actuarially determined amounts, we increase the expense in the
current period. Conversely, when our estimated liabilities for unpaid losses and
LAE are greater than the actuarially determined amounts, we decrease the expense
in the current period.
We are focusing our marketing efforts on expanding our distribution network. We
market our products and services throughout Florida and in other states by
establishing relationships with additional independent agents and general
agents. There can be no assurance, however, that we will be able to obtain the
required regulatory approvals to offer additional insurance products or expand
into other states.
Assurance Managing General Agents, Inc. ("Assurance MGA") a wholly owned
subsidiary of the Company, acts as Federated National's exclusive managing
general agent in Florida and is also licensed as a managing general agent in the
States of Alabama, Georgia, Illinois, Louisiana, North Carolina, Mississippi,
Missouri, New York, Nevada, South Carolina, Texas and Virginia. Assurance MGA
has contracted with several unaffiliated insurance companies to sell commercial
general liability, workers compensation, personal umbrella, inland marine and
other various lines of insurance through Assurance MGA's existing network of
agents.
Assurance MGA earns commissions and fees for providing policy administration,
marketing, accounting and analytical services, and for participating in the
negotiation of reinsurance contracts. Assurance MGA earns a $25 per policy fee,
and traditionally a 6% commission fee from its affiliate, Federated National.
During the fourth quarter of 2010, Assurance MGA, pursuant to the Consent Order
as discussed above, reduced its fee, to earn amounts varying between 2% and 4%,
which we anticipate will return to 6% at an unknown future date with approval
from the Florida OIR. A formal agreement reflecting this fee modification was
executed during January 2011.
We internally process claims made by our insureds through our wholly owned
claims adjusting company, Superior Adjusting, Inc. ("Superior"). Our agents have
no authority to settle claims or otherwise exercise control over the claims
process. Furthermore, we believe that the retention of independent adjusters, in
addition to the employment of salaried claims personnel, results in reduced
ultimate loss payments, lower LAE and improved customer service for our
claimants and policyholders. We also employ an in-house legal department to
cost-effectively manage claims-related litigation and to monitor our claims
handling practices for efficiency and regulatory compliance.
Until June 2011, our wholly owned subsidiary, Federated Premium Finance, Inc.
("Federated Premium"), offered premium financing to our own and third-party
insureds. Premium financing was marketed through our distribution network of
general agents and independent agents.
Insure-Link, Inc. ("Insure-Link") was formed in March 2008 to serve as an
independent insurance agency. The insurance agency markets direct to the public
to provide a variety of insurance products and services to individual clients,
as well as business clients, by offering a full line of insurance products
including, but not limited to, homeowners', flood, personal and commercial
automobile, commercial general liability and workers' compensation insurance
through their agency appointments with over 50 different carriers. Insure-Link
intends to expand its business through marketing and by acquiring other
insurance agencies. There were no other agency relationships with affiliated
captive or franchised agents during 2011 or the six months ended June 30, 2012.
Insurance Markets in Which We Operate
We operate in highly competitive markets and face competition from national,
regional and residual market insurance companies in the homeowners', commercial
general liability, and automobile markets. Our competitors include companies
that market their products through agents, as well as companies that sell
insurance directly to their customers. Large national writers may have certain
competitive advantages over agency writers, including increased name
recognition, increased loyalty of their customer base and reduced policy
acquisition costs. We compete based on underwriting criteria, our distribution
network and superior service to our agents and insureds. Although our pricing is
inevitably influenced to some degree by that of our competitors, we believe that
it is generally not in our best interest to compete solely on price.
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Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
In Florida, more than 200 companies are authorized to underwrite homeowners'
insurance. Several of our competitors include Citizens Property Insurance
Corporation ("Citizens"), Universal Property and Casualty Insurance Company and
St. Johns Insurance Company. In Florida, more than one dozen companies compete
with us in the commercial general liability insurance market.
Significant competition also emerged because of fundamental changes made to the
property and casualty insurance business in Florida, in recent years, which
resulted in a multi-pronged approach to address the cost of residential property
insurance in Florida. First, the law increased the capacity of reinsurance that
stabilized the reinsurance market to the benefit of the insurance companies
writing properties lines in Florida. Secondly, the law provided for rate relief
to all policyholders. The law also authorized the state-owned insurance company,
Citizens, which is free of many of the restraints on private carriers such as
surplus, ratios, income taxes and reinsurance expense, to reduce its premium
rates and begin competing against private insurers in the residential property
insurance market and expands the authority of Citizens to write commercial
insurance.
Critical Accounting Policies
See Note 3, "Summary of Significant Accounting Policies" in the Notes to the
Company's condensed consolidated financial statements for the quarter ended June
30, 2012 included in Item 1 of this Quarterly Report on Form 10-Q for a
discussion of the Company's critical accounting policies.
New Accounting Pronouncements
See Note 3, "Summary of Significant Accounting Policies" in the Notes to the
Company's condensed consolidated financial statements for the quarter ended June
30, 2012 included in Item 1 of this Quarterly Report on Form 10-Q for a
discussion of recent accounting pronouncements and their effect, if any, on the
Company.
Analysis of Financial Condition
As of June 30, 2012 Compared with December 31, 2011
Total Investments
Total investments increased $6.1 million, or 4.7%, to $135.6 million as of June
30, 2012, compared with $129.5 million as of December 31, 2011.
We account for our investment securities consistent with FASB issued guidance
that requires our securities be classified into one of three categories: (i)
held-to-maturity, (ii) trading securities or (iii) available-for-sale.
Investments classified as held-to-maturity include debt securities where the
Company's intent and ability are to hold the investment until maturity and are
carried at amortized cost without consideration to unrealized gains or losses.
Investments classified as trading securities include debt and equity securities
bought and held primarily for sale in the near term and are carried at fair
value with unrealized holding gains and losses included in current period
operations. Investments classified as available-for-sale include debt and equity
securities that are not classified as held-to-maturity or as trading security
investments and are carried at fair value with unrealized holding gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity, namely "Other Comprehensive Income."
The debt and equity securities that are available-for-sale and carried at fair
value represent 95% of total investments as of June 30, 2012, compared with 94%
as of December 31, 2011.
We did not hold any trading investment securities during the six months ended
June 30, 2012.
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Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Below is a summary of net unrealized gains and losses as of June 30, 2012 and
December 31, 2011, by category.
Unrealized Gains and (Losses)
June 30, 2012 December 31, 2011
(Dollars in Thousands)
Debt securities:
United States government obligations and authorities $ 1,064 $ 659
Obligations of states and political subdivisions 205 138
Corporate 2,709 1,543
International 13 5
3,991 2,345
Equity securities:
Common stocks 436 (939 )
Total debt and equity securities $ 4,427 $ 1,406
The net unrealized gain of $4.4 million is inclusive of $1.4 million of
unrealized losses. The $1.4 million of unrealized losses is inclusive of $1.3
million unrealized losses from equity securities and $0.1 million unrealized
losses from debt securities.
The $1.3 million of unrealized losses from equity securities is from common
stocks and mutual funds held in diverse industries as of June 30, 2012. The
Company evaluated the near-term prospects in relation to the severity and
duration of the impairment. Based on this evaluation and the Company's ability
and intent to hold these investments for a reasonable period of time sufficient
for a forecasted recovery of fair value, the Company does not consider these
investments to be other-than-temporarily impaired at June 30, 2012.
The $0.1 million of unrealized losses from debt securities is related to
corporate bonds. The Company does not expect to settle at prices less than the
amortized cost basis. The Company does not consider these investments to be
other-than-temporarily impaired at June 30, 2012 because we neither currently
intend to sell these investments nor consider it likely that we will be required
to sell these investments before recovery of the amortized cost basis.
The FASB issued guidance also addresses the determination as to when an
investment is considered impaired, whether that impairment is
other-than-temporary, and the measurement of an impairment loss. The Company's
policy for the valuation of temporarily impaired securities is to determine
impairment based on the analysis of the following factors.
· rating downgrade or other credit event (e.g., failure to pay interest when
due);
· length of time and the extent to which the fair value has been less than
amortized cost;
· financial condition and near term prospects of the issuer, including any
specific events which may influence the operations of the issuer such as
changes in technology or discontinuance of a business segment;
· prospects for the issuer's industry segment;
· intent and ability of the Company to retain the investment for a period of
time sufficient to allow for anticipated recovery in market value;
· historical volatility of the fair value of the security.
Pursuant to FASB issued guidance, the Company records the unrealized losses, net
of estimated income taxes, that are associated with that part of our portfolio
classified as available-for-sale through the shareholders' equity account titled
"Other Comprehensive Income". Management periodically reviews the individual
investments that comprise our portfolio in order to determine whether a decline
in fair value below our cost either is other-than temporarily or permanently
impaired. Factors used in such consideration include, but are not limited to,
the extent and length of time over which the market value has been less than
cost, the financial condition and near-term prospects of the issuer and our
ability and intent to keep the investment for a period sufficient to allow for
an anticipated recovery in market value.
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Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
In reaching a conclusion that a security is either other-than-temporarily or
permanently impaired we consider such factors as the timeliness and completeness
of expected dividends, principal and interest payments, ratings from nationally
recognized statistical rating organizations such as Standard and Poor's ("S&P")
and Moody's Investors Service, Inc. ("Moody's"), as well as information released
via the general media channels. In connection with this process, we have not
charged net realized losses to operations during the three months ended June 30,
2012; in connection with this process we have charged $44,000 of net realized
investment losses to operations during the six months ended June 30, 2012.
As of June 30, 2012 and December 31, 2011, respectively, all of our securities
are in good standing and not impaired as defined by FASB issued guidance, except
as noted above.
As of June 30, 2012 and December 31, 2011, our investments consisted primarily
of corporate bonds held in various industries, municipal bonds and United States
government bonds. As of June 30, 2012, 63% of our debt portfolio was in diverse
industries and 37% is in United States government bonds. As of June 30, 2012,
approximately 93% of our equity holdings were in equities related to diverse
industries and 7% were in mutual funds. As of December 31, 2011, 61% of our debt
portfolio was in diverse industries and 39% is in United States government
bonds. As of December 31, 2011, approximately 83% of our equity holdings were in
equities related to diverse industries and 17% were in mutual funds.
As of June 30, 2012 and December 31, 2011, we have classified $7.1 million and
$7.1 million, respectively, of our bond portfolio as held-to-maturity. We only
classify bonds as held-to-maturity to support securitization of credit
requirements. Fully funded trust agreements used for such purposes totaled $4.6
million as of June 30, 2012 and December 31, 2011.
During the three and six months ended June 30, 2012 and 2011, respectively, we
did not re-classify any of our bond portfolio between available-for-sale and
held-to-maturity.
The following table summarizes, by type, our investments as of June 30, 2012 and
December 31, 2011.
June 30, 2012 December 31, 2011
Carrying Percent Carrying Percent
Amount of Total Amount of Total
(Dollars in Thousands)
Debt securities, at market:
United States government obligations and
authorities $ 37,549 27.69 % $ 37,217 28.75 %
Obligations of states and political
subdivisions 3,956 2.92 % 2,303 1.77 %
Corporate 66,453 49.01 % 63,268 48.87 %
International 1,996 1.47 % 1,523 1.18 %
109,954 81.09 % 104,311 80.57 %
Debt securities, at amortized cost:
Corporate 1,115 0.82 % 962 0.74 %
United States government obligations and
authorities 5,998 4.42 % 6,166 4.76 %
7,113 5.24 % 7,128 5.50 %
Total debt securities 117,067 86.33 % 111,439 86.07 %
Equity securities, at market: 18,533 13.67 % 18,028 13.93 %
Total investments $ 135,600 100.00 % $ 129,467 100.00 %
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Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Cash and Short-Term Investments
Cash and short-term investments, which include cash, certificates of deposits,
and money market accounts, increased $6.2 million, or 40.9%, to $21.4 million as
of June 30, 2012, compared with $15.2 million as of December 31, 2011. Cash and
short-term investments increased primarily due to the sale of treasury-linked
securities not yet reinvested and due to the timing of reinsurance payments.
Prepaid Reinsurance Premiums
Prepaid reinsurance premiums decreased $5.9 million, or 71.0%, to $2.4 million
as of June 30, 2012, compared with $8.3 million as of December 31, 2011. The
change is due to $3.7 million of ceded premiums, net of payments to reinsurers,
reduced by $9.6 million amortization of prepaid reinsurance premiums associated
with our reinsurance programs. We believe concentrations of credit risk
associated with our prepaid reinsurance premiums are not significant.
Premiums Receivable, Net of Allowance for Credit Losses
Premiums receivable, net of allowance for credit losses, increased $2.5 million,
or 44.1%, to $8.1 million as of June 30, 2012, compared with $5.6 million as of
December 31, 2011. Our homeowners' insurance premiums receivable increased $2.2
million, or 57.6%, to $5.9 million as of June 30, 2012, compared with $3.7
million as of December 31, 2011. Our commercial general liability insurance
premiums receivable decreased $0.3 million, or 24.5%, to $0.9 million as of June
30, 2012, compared with $1.2 million as of December 31, 2011. Premiums
receivable in connection with our automobile line of business increased $0.6
million, or 78.9%, to $1.4million as of June 30, 2012, compared with $0.8
million as of December 31, 2011. Our allowance for credit losses remained
unchanged at $0.1 million as of June 30, 2012, compared with $0.1 million as of
December 31, 2011.
Reinsurance Recoverable, Net
Reinsurance recoverable, net, decreased $0.4 million, or 18.7%, to $1.7 million
as of June 30, 2012, compared with $2.1 million as of December 31, 2011. The
change is due to the payment patterns by our reinsurers, as influenced by the
diminishing catastrophe related claims. All amounts are current and deemed
collectable. We believe concentrations of credit risk associated with our
reinsurance recoverables, net, are not significant.
Deferred Policy Acquisition Costs ("DPAC")
DPAC increased $1.7 million, or 22.3%, to $9.4 million as of June 30, 2012,
compared with $7.7 million as of December 31, 2011. The change is due primarily
to the increase in unearned premiums.
Deferred Income Taxes, Net
Deferred income taxes, net, decreased $2.5 million, or 29.1%, to $6.1 million as
of June 30, 2012, compared with $8.6 million as of December 31, 2011. Deferred
income taxes, net, is comprised of approximately $8.8 million and $10.6 million
of deferred tax assets, net of approximately $2.7 million and $2.0 million of
deferred tax liabilities as of June 30, 2012 and December 31, 2011. The change
in the net deferred tax asset is primarily due to the decrease in the deferred
tax assets related to the decreases in the net operating loss carry forward and
available-for-sale portfolio, offset by the increase in discounted unearned
premiums.
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Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Other Assets
Other assets decreased $0.2 million, or 7.2%, to $1.9 million as of June 30,
2012, compared with $2.1 million as of December 31, 2011. Major components of
other assets are shown in the following table; the accrued interest income
receivable is primarily investment related. The receivable for investments sold
is primarily related to common stock sold and not settled at the end of the
quarter.
June 30, 2012 December 31, 2011
(Dollars in Thousands)
Accrued interest income receivable $ 1,070 $ 1,130
Deposits 90 185
Prepaid expenses 516 432
Receivable for investments sold 101 -
Other 167 347
Total $ 1,944 $ 2,094
Unpaid Losses and LAE
Unpaid losses and LAE decreased $7.0 million, or 11.6%, to $53.0 million as of
June 30, 2012, compared with $60.0 million as of December 31, 2011. The
composition of unpaid losses and LAE by product line is as follows.
June 30, 2012 December 31, 2011
Case Bulk Total Case Bulk Total
(Dollars in Thousands) (Dollars in Thousands)
Homeowners' $ 9,258 $ 8,296 $ 17,554 $ 8,795 $ 10,652 $ 19,447
Commercial General
Liability 3,967 22,930 26,897 4,225 27,717 31,942
Automobile 3,506 5,043 8,549 3,533 5,061 8,594
Total $ 16,731 $ 36,269 $ 53,000 $ 16,553 $ 43,430 $ 59,983
Please See "Results of Operations - Three Months Ended June 30, 2012 Compared
with Three Months Ended June 30, 2011 - Losses and LAE" for a description of the
factors that affect unpaid losses and LAE and management's revised processes to
its estimates based on the results of its analysis of the Company's claim and
loss history and expectations.
Unearned Premium
Unearned premiums increased $13.7 million, or 28.5%, to $61.6 million as of June
30, 2012, compared with $47.9 million as of December 31, 2011. The change was
due to a $13.2 million increase in unearned homeowners' insurance premiums, a
$0.3 million increase in unearned flood insurance premiums, a $0.2 million
increase in unearned commercial general liability premiums, and a less than $0.1
million increase in unearned automobile insurance premiums. Generally, as is in
this case, an increase in unearned premium directly relates to an increase in
written premium on a rolling twelve-month basis. Competition could negatively
affect our unearned premium.
Premium Deposits and Customer Credit Balances
Premium deposits and customer credit balances decreased $0.6 million, or 19.9%,
to $2.2 million as of June 30, 2012, compared with $2.8 million as of December
31, 2011. Premium deposits are monies received on policies not yet in-force as
of June 30, 2012.
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Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Income Taxes Payable
Income taxes payable remained unchanged at less than $0.1 million, as of June
30, 2012 and December 31, 2011.
Bank Overdraft
Bank overdraft decreased $2.1 million, or 26.3 %, to $5.8 million as of June 30,
2012, compared with $7.9 million as of December 31, 2011. The bank overdraft
relates primarily to losses and LAE disbursements paid but not presented for
payment by the policyholder or vendor. The change relates to the timing of
presentation of claims checks to the issuing bank.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses decreased $1.0 million, or 31.5%, to $2.1
million as of June 30, 2012, compared with $3.1 million as of December 31,
2011. The change from prior year is primarily due to the $1.0 million decrease
in the payable for bonds purchased but not settled.
Results of Operations
Three Months Ended June 30, 2012 Compared with Three Months Ended June 30, 2011
Effective January 26, 2011, Federated National merged with and into American
Vehicle, and the resulting entity changed its name to "Federated National
Insurance Company".
Gross Premiums Written
Gross premiums written increased $5.1 million, or 18.1%, to $33.1 million for
the three months ended June 30, 2012, compared with $28.0 million for the three
months ended June 30, 2011. The following table denotes gross premiums written
by major product line.
Three Months Ended June 30,
2012 2011
(Dollars in Thousands)
Amount Percentage Amount Percentage
Homeowners' $ 28,283 85.52 % $ 22,568 80.59 %
Commercial General Liability 2,533 7.66 % 2,819 10.07 %
Federal Flood 1,452 4.39 % 1,274 4.55 %
Automobile 803 2.43 % 1,341 4.79 %
Gross written premiums $ 33,071 100.00 % $ 28,002 100.00 %
The Company's increase in the sale of homeowners' policies by $5.7 million, or
25.3%, to $28.3 million for the three months ended June 30, 2012, compared with
$22.6 million for the three months ended June 30, 2011, is gross of reinsurance
costs and net of Florida's mandated homeowners' wind mitigation discounts. Our
number of in-force homeowners' policies increased by approximately 5,400, or
11.4%, to approximately 52,900 as of June 30, 2012, compared with approximately
47,500 as of March 31, 2012. This increase is due to increased marketing
efforts and a change in our underwriting process.
We continue to offer premium discounts for wind mitigation efforts by
policyholders, as required by Florida law. These discounts have had a
significant effect on both written and earned premium. During the three months
ended June 30, 2012 and 2011, the change to the cumulative wind mitigation
credits afforded our policyholders totaled $7.7 million and $0.8 million,
respectively. As of June 30, 2012, 68.4% of our in-force homeowners'
policyholders were receiving wind mitigation credits totaling approximately
$45.9 million (a 33.5% reduction of in-force premium), while 60.7% of our
in-force homeowners' policyholders were receiving wind mitigation credits
totaling approximately $26.4 million, (a 25.6% reduction of in-force premium),
as of June 30, 2011.
We are required to report write-your-own flood premiums on a direct and 100%
ceded basis.
- 42 -
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Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company's sale of commercial general liability policies decreased by $0.3
million, or 10.2%, to $2.5 million for the three months ended June 30, 2012,
compared with $2.8 million for the three months ended June 30, 2011. The primary
factor for this decrease has been the slowdown in the economy, which had a
dramatic impact on the artisan contractor portfolio written by Federated
National. Additional factors include improvements to our underwriting standards
and our decision to restrict underwriting authority within specific commercial
general liability classes and geographic areas.
The following table sets forth the amounts and percentages of our gross premiums
written in connection with our commercial general liability program by state.
Three Months Ended June 30,
2012 2011
Amount Percentage Amount Percentage
(Dollars in Thousands)
State
Alabama $ 25 0.99 % $ 15 0.53 %
Florida 2,342 92.46 % 2,339 82.97 %
Louisiana 53 2.09 % 286 10.15 %
Texas 113 4.46 % 179 6.35 %
Total $ 2,533 100.00 % $ 2,819 100.00 %
The Company's sale of auto insurance policies decreased $0.5 million, or 40.1%,
to $0.8 million for the three months ended June 30, 2012, compared with $1.3
million for the three months ended June 30, 2011.
We are currently rated by Demotech, Inc. ("Demotech") as "A" ("Exceptional"),
which is the third of seven ratings, and defined as "Regardless of the severity
of a general economic downturn or deterioration in the insurance cycle, insurers
earning a Financial Stability Rating ("FSR") of "A" possess "Exceptional"
financial stability related to maintaining surplus as regards to policyholders".
Demotech's ratings are based upon factors of concern to agents, reinsurers and
policyholders and are not primarily directed toward the protection of investors.
Our Demotech rating could be jeopardized by factors including adverse
development and various surplus related ratio exceptions.
The withdrawal of our ratings could limit or prevent us from writing or renewing
desirable insurance policies, from competing with insurers who have higher
ratings, from obtaining adequate reinsurance, or from borrowing on a line of
credit. The withdrawal of our ratings could have a material adverse effect on
the Company's results of operations and financial position because the Company's
insurance products might no longer be acceptable to the secondary marketplace
and mortgage lenders. Furthermore, a withdrawal of our ratings could prevent
independent agents from selling and servicing our insurance products.
Gross Premiums Ceded
Gross premiums ceded decreased $1.8 million, or 13.2%, to $11.7 million for the
three months ended June 30, 2012, compared with $13.5 million for the three
months ended June 30, 2011. Gross premiums ceded relating to our homeowners',
write-your-own flood, commercial general liability and automobile programs
totaled $9.6 million, $1.4 million, $0.1 million and $0.6 million for the three
months ended June 30, 2012, respectively. Gross premiums ceded relating to our
homeowners', write-your-own flood and automobile programs totaled $11.8 million,
$1.3 million and $0.4 million for the three months ended June 30, 2011,
respectively.
Increase in Prepaid Reinsurance Premiums
The increase in prepaid reinsurance premiums was $0.3 million for the three
months ended June 30, 2012, compared with a $0.9 million increase for the three
months ended June 30, 2011. The decreased benefit to written premium is
associated with the timing of our reinsurance payments measured against the term
of the underlying reinsurance policies.
- 43 -
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Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Increase in Unearned Premiums
The increase in unearned premiums was $6.9 million for the three months ended
June 30, 2012, compared with a $3.7 million increase for the three months ended
June 30, 2011. The increased charge to written premium was due to a $6.3 million
increase in unearned homeowners' insurance premiums, a $0.3 million increase in
unearned flood premiums, a $0.2 million increase in unearned commercial general
liability premiums, and a $0.1 million increase in unearned automobile premiums
during the three months ended June 30, 2012. These changes are a result of
differences in written premium volume during this period as compared with the
same period last year. See "Gross Premiums Written" above.
Net Premiums Earned
Net premiums earned increased $3.0 million, or 26.0%, to $14.7 million for the
three months ended June 30, 2012, compared with $11.7 million for the three
months ended June 30, 2011. The following table denotes net premiums earned by
product line.
Three Months Ended June 30,
2012 2011
Amount Percentage Amount Percentage
(Dollars in Thousands)
Homeowners' $ 12,244 83.33 % $ 8,405 72.08 %
Commercial General Liability 2,280 15.52 % 2,698 23.14 %
Automobile 169 1.15 % 557 4.78 %
Net premiums earned $ 14,693 100.00 % $ 11,660 100.00 %
The $3.8 million increase in homeowners' net premiums earned is due to a $5.7
million increase in gross written premium, a $2.2 million decrease in gross
premiums ceded and a $4.1 million increase in the net change to prepaid
reinsurance premiums and unearned premium.
The $0.4 million decrease in commercial general liability net premiums earned is
a result of a $0.3 million decrease in gross written premium and a $0.1 million
increase in gross premiums ceded.
The $0.4 million decrease in automobile net premiums earned is a result of a
$0.5 million decrease in gross written premium, a $0.1 million increase in gross
premiums ceded and a $0.2 million increase in the net change to prepaid
reinsurance premiums and unearned premium.
Commission Income
Commission income increased $0.1 million, or 28.2%, to $0.4 million for the
three months ended June 30, 2012, compared with $0.3 million for the three
months ended June 30, 2011. The primary sources of our commission income are our
managing general agent services, write-your-own flood premiums and our
independent insurance agency, Insure-Link.
Net Investment Income
Net investment income decreased $0.2 million, or 11.1%, to $0.9 million for the
three months ended June 30, 2012, compared with $1.1 million for the three
months ended June 30, 2011.
Our investment yields, net and gross of investment expenses, excluding equities
and including cash, were 2.5% and 2.8%, respectively, for the three months ended
June 30, 2012. Our investment yields, net and gross of investment expenses,
excluding equities and including cash, were 2.9% and 3.2% respectively, for the
three months ended June 30, 2011.
Our investment yield, net and gross of investment expenses measured against debt
securities, excluding equities and cash, were 2.7% and 2.9%, respectively, for
the three months ended June 30, 2012. Our investment yield, net and gross of
investment expenses measured against debt securities, excluding equities and
cash, were 3.3% and 3.5%, respectively, for the three months ended June 30,
2011.
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Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
See also "Analysis of Financial Condition as of June 30, 2012 Compared with
December 31, 2011 - Investments" for a further discussion on our investment
portfolio.
Net Realized Investment (Losses) Gains
Net realized investment losses totaled $0.2 million for the three months ended
June 30, 2012, compared with net realized investment gains of $0.4 million
during the three months ended June 30, 2011.
FASB has issued guidance regarding when an investment is considered impaired,
whether that impairment is other-than temporary, and the measurement of an
impairment loss. Management periodically reviews the individual investments that
comprise our portfolio in order to determine whether a decline in fair value
below our cost is either other-than temporarily or permanently impaired. During
the three months ended June 30, 2012 and June 30, 2011 respectively, pursuant to
guidelines prescribed in FASB issued guidance, we did not mark any investments
to market value pursuant to guidelines prescribed in FASB issued guidance.
The table below depicts the net realized investment (losses) gains by investment
category during the three months ended June 30, 2012 and 2011.
Three Months Ended June 30,
2012 2011
(Dollars in Thousands)
Realized gains:
Debt securities $ 315 $ 200
Equity securities 144 418
Total realized gains 459 618
Realized losses:
Debt securities (109 ) 0
Equity securities (568 ) (176 )
Total realized losses (677 ) (176 )
Net realized (losses) gains on investments $ (218 ) $ 442
Losses and LAE
Losses and LAE, our most significant expense, represent actual payments made and
changes in estimated future payments to be made to or on behalf of our
policyholders, including expenses required to settle claims and losses. We
revise our estimates based on the results of analysis of estimated future
payments to be made. This process assumes that experience, adjusted for the
effects of current developments and anticipated trends, is an appropriate basis
for predicting future events.
Losses and LAE decreased by $0.7 million, or 8.7%, to $7.1 million for the three
months ended June 30, 2012, compared with $7.8 million for the three months
ended June 30, 2011. This is due primarily to a reassessment of our losses by
line and increased underwriting procedures to manage our risks. The overall
change includes a $2.9 million increase in our homeowners' program, a $3.0
million decrease in our commercial general liability program and a $0.6 million
decrease in connection with our automobile program. During the three months
ended June 30, 2012, we reallocated approximately $2.7 million of Incurred but
Not Yet Reported ("IBNR") reserves from commercial liability to private property
lines. An estimated $1.4 million of bulk reserves from private passenger
automobile were released during this period.
We continue to revise our estimates of the ultimate financial impact of claims
made resulting from past storms. The revisions to our estimates are based on our
analysis of subsequent information that we receive regarding various factors,
including: (i) per claim information; (ii) Company and industry historical loss
experience; (iii) legislative enactments, judicial decisions, legal developments
in the awarding of damages, and (iv) trends in general economic conditions,
including the effects of inflation.
- 45 ---------------------------------------------------------------------------------
Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The composition of unpaid losses and LAE by product line is as follows.
June 30, 2012
December 31, 2011
Case Bulk Total Case Bulk Total
(Dollars in Thousands) (Dollars in Thousands)
Homeowners' $ 9,258 $ 8,296 $ 17,554 $ 8,795 $ 10,652 $ 19,447
Commercial General
Liability 3,967 22,930 26,897 4,225 27,717 31,942
Automobile 3,506 5,043 8,549 3,533 5,061 8,594
Total $ 16,731 $ 36,269 $ 53,000 $ 16,553 $ 43,430 $ 59,983
Factors that affect unpaid losses and LAE include the estimates made on a
claim-by-claim basis known as "case reserves" coupled with bulk estimates known
as IBNR. Periodic estimates by management of the ultimate costs required to
settle all claim files are based on the Company's analysis of historical data
and estimations of the impact of numerous factors such as (i) per claim
information; (ii) Company and industry historical loss experience; (iii)
legislative enactments, judicial decisions, legal developments in the awarding
of damages, and changes in political attitudes; and (iv) trends in general
economic conditions, including the effects of inflation. Other factors
influencing the unpaid loss and LAE balance include our claim severity for both
the property and liability lines that do not appear to be materializing as
planned, as well as improved underwriting processes and claim settling
techniques.
Management revises its estimates based on the results of its analysis. This
process assumes that experience, adjusted for the effects of current
developments and anticipated trends, is an appropriate basis for estimating the
ultimate settlement of all claims. There is no precise method for subsequently
evaluating the impact of any specific factor on the adequacy of the reserves,
because the eventual redundancy or deficiency is affected by multiple factors.
Because of our process, reserves were decreased by approximately $2.3 million
during the three months ended June 30, 2012. This overall change includes a $1.6
million increase in reserves for our homeowners' program, a $3.9 million
decrease in reserves for our commercial general liability program and a less
than $0.1 million decrease in reserves for our automobile program. During the
three months ended June 30, 2012, we reallocated approximately $2.7 million of
IBNR reserves from commercial liability to private property lines. An estimated
$1.4 million of bulk reserves from private passenger automobile were released
during this period. Decreases for unpaid loss and LAE reserves are typically
primarily attributable to our payment patterns in connection with the settlement
of claims for loss and LAE.
In accordance with GAAP and as discussed above, our loss ratio is computed as
losses and LAE divided by net premiums earned. A lower loss ratio generally
results in higher operating income. Our loss ratio for the three months ended
June 30, 2012 was 48.6% compared with 67.0% for the same period in 2011. The
favorable decrease to our loss ratio is due to the $0.7 million decrease in
losses and LAE measured against the $3.0 million increase in net premium earned
during the three months ended June 30, 2012 as compared with the same period in
2011.
The table below reflects the loss ratios by product line.
Three Months Ended June 30,
2012 2011
Homeowners' 65.23 % 60.79 %
Commercial General Liability -44.23 % 72.01 %
Automobile 92.99 % 137.46 %
All lines 48.56 % 67.05 %
Operating and Underwriting Expenses
Operating and underwriting expenses decreased $0.1 million, or 6.8%, to $2.4
million for the three months ended June 30, 2012, compared with $2.5 million for
the three months ended June 30, 2011.
- 46 -
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Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Salaries and Wages
Salaries and wages increased $0.1 million, or 5.5%, to $2.0 million for the
three months ended June 30, 2012, compared with $1.9 million for the three
months ended June 30, 2011. The charge to operations for stock-based
compensation, in accordance with FASB guidance, was approximately $70,000 during
the three months ended June 30, 2012 compared with approximately $55,000 for the
three months ended June 30, 2011.
Policy Acquisition Costs - Amortization
Policy acquisition costs - amortization, remained unchanged at $3.0 million for
the three months ended June 30, 2012, compared with the three months ended June
30, 2011.
Policy acquisition costs - amortization, consists of the actual policy
acquisition costs, including commissions, payroll and premium taxes, less
commissions earned on reinsurance ceded and policy fees earned.
Provision for Income Tax Expense (Benefit)
The provision for income tax expense was $0.9 million for the three months ended
June 30, 2012, compared with a $0.3 million provision for income tax benefit for
the three months ended June 30, 2011. The effective rate for income taxes was
39.2% for the three months ended June 30, 2012, compared with 27.9% for the
three months ended June 30, 2011.
Net Income (Loss)
As a result of the foregoing, the Company's net income for the three months
ended June 30, 2012 was $1.4 million compared with a $0.8 million net loss for
the three months ended June 30, 2011.
Results of Operations
Six Months Ended June 30, 2012 Compared with Six Months Ended June 30, 2011
Effective January 26, 2011, Federated National merged with and into American
Vehicle, and the resulting entity changed its name to "Federated National
Insurance Company".
Gross Premiums Written
Gross premiums written increased $9.2 million, or 16.7%, to $64.3 million for
the six months ended June 30, 2012, compared with $55.1 million for the six
months ended June 30, 2011. The following table denotes gross premiums written
by major product line.
Six Months Ended June 30,
2012 2011
(Dollars in Thousands)
Amount Percentage Amount Percentage
Homeowners' $ 55,369 86.05 % $ 44,962 81.53 %
Commercial General Liability 4,953 7.70 % 5,615 10.18 %
Federal Flood 2,531 3.93 % 2,259 4.10 %
Automobile 1,492 2.32 % 2,310 4.19 %
Gross written premiums $ 64,345 100.00 % $ 55,146 100.00 %
The Company's increase in the sale of homeowners' policies by $10.4 million, or
23.1%, to $55.4 million for the six months ended June 30, 2012, compared with
$45.0 million for the six months ended June 30, 2011, is gross of reinsurance
costs and net of Florida's mandated homeowners' wind mitigation discounts. Our
number of in-force homeowners' policies increased by approximately 9,100, or
20.9%, to approximately 52,900 as of June 30, 2012, as compared with
approximately 43,800 as of December 31, 2011. This increase is due to the
increased marketing efforts and a change in our underwriting process.
- 47 -
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Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
We continue to offer premium discounts for wind mitigation efforts by
policyholders, as required by Florida law. These discounts have had a
significant effect on both written and earned premium. During the six months
ended June 30, 2012 and 2011, the change to the cumulative wind mitigation
credits afforded our policyholders totaled $14.4 million and ($1.0) million,
respectively. As of June 30, 2012, 68.4% of our in-force homeowners'
policyholders were receiving wind mitigation credits totaling approximately
$45.9 million (a 33.4% reduction of in-force premium), while 60.7% of our
in-force homeowners' policyholders were receiving wind mitigation credits
totaling approximately $26.3 million, (a 25.6% reduction of in-force premium),
as of June 30, 2011.
We are required to report write-your-own flood premiums on a direct and 100%
ceded basis.
The Company's sale of commercial general liability policies decreased by $0.6
million, or 11.8%, to $5.0 million for the six months ended June 30, 2012,
compared with $5.6 million for the six months ended June 30, 2011. The primary
factor for this decrease has been the slowdown in the economy, which had a
dramatic impact on the artisan contractor portfolio written by Federated
National. Additional factors include improvements to our underwriting standards
and our decision to restrict underwriting authority within specific commercial
general liability classes and geographic areas.
The following table sets forth the amounts and percentages of our gross premiums
written in connection with our commercial general liability program by state.
Six Months Ended June 30,
2012 2011
Amount Percentage Amount Percentage
(Dollars in Thousands)
State
Alabama $ 32 0.65 % $ 27 0.47 %
California - 0.00 % 6 0.10 %
Florida 4,615 93.17 % 4,766 84.91 %
Louisiana 98 1.98 % 519 9.24 %
Oklahoma - 0.00 % 3 0.05 %
Texas 208 4.20 % 294 5.23 %
Total $ 4,953 100.00 % $ 5,615 100.00 %
The Company's sale of auto insurance policies decreased $0.8 million, or 35.4%,
to $1.5 million for the six months ended June 30, 2012, compared with $2.3
million for the six months ended June 30, 2011. The decrease is due to the
Company's decision to not write new commercial automobile insurance policies
during the current period.
We are currently rated by Demotech as "A" ("Exceptional"), which is the third of
seven ratings, and defined as "Regardless of the severity of a general economic
downturn or deterioration in the insurance cycle, insurers earning a FSR of "A"
possess "Exceptional" financial stability related to maintaining surplus as
regards to policyholders". Demotech's ratings are based upon factors of concern
to agents, reinsurers and policyholders and are not primarily directed toward
the protection of investors. Our Demotech rating could be jeopardized by factors
including adverse development and various surplus related ratio exceptions.
The withdrawal of our ratings could limit or prevent us from writing or renewing
desirable insurance policies, from competing with insurers who have higher
ratings, from obtaining adequate reinsurance, or from borrowing on a line of
credit. The withdrawal of our ratings could have a material adverse effect on
the Company's results of operations and financial position because the Company's
insurance products might no longer be acceptable to the secondary marketplace
and mortgage lenders. Furthermore, a withdrawal of our ratings could prevent
independent agents from selling and servicing our insurance products.
Gross Premiums Ceded
Gross premiums ceded decreased $1.4 million, or 9.5%, to $13.6 million for the
six months ended June 30, 2012, compared with $15.0 million for the six months
ended June 30, 2011. Gross premiums ceded relating to our homeowners',
write-your-own flood, commercial general liability and automobile programs
totaled $9.6 million, $2.5 million, $0.3 million and $1.2 million for the six
months ended June 30, 2012, respectively. Gross premiums ceded relating to our
homeowners', write-your-own flood and automobile programs totaled $11.9 million,
$2.2 million and $0.9 million for the six months ended June 30, 2011,
respectively.
- 48 -
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Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Decrease in Prepaid Reinsurance Premiums
The decrease in prepaid reinsurance premiums was $9.6 million for the six months
ended June 30, 2012, compared with $10.6 million for the six months ended June
30, 2011. The decreased charge to written premium is associated with the timing
of our reinsurance payments measured against the term of the underlying
reinsurance policies.
Increase in Unearned Premiums
The increase in unearned premiums was $13.7 million for the six months ended
June 30, 2012, compared with $6.7 million for the six months ended June 30,
2011. The increased charge to written premium was due to a $13.2 million
increase in unearned homeowners' insurance premiums, a $0.3 million increase in
unearned flood premiums, a $0.2 million increase in unearned commercial general
liability premiums, and a less than $0.1 million increase in unearned automobile
premiums during the six months ended June 30, 2012. These changes are a result
of differences in written premium volume during this period as compared with the
same period last year. See "Gross Premiums Written" above.
Net Premiums Earned
Net premiums earned increased $4.7 million, or 20.6%, to $27.5 million for the
six months ended June 30, 2012, compared with $22.8 million for the six months
ended June 30, 2011. The following table denotes net premiums earned by product
line.
Six Months Ended June 30,
2012 2011
Amount Percentage Amount Percentage
(Dollars in Thousands)
Homeowners' $ 22,545 81.95 % $ 16,396 71.90 %
Commercial General Liability 4,624 16.81 % 5,448 23.89 %
Automobile 342 1.24 % 960 4.21 %
Net premiums earned $ 27,511 100.00 % $ 22,804 100.00 %
The $6.1 million increase in homeowners' net premiums earned is due to a $10.4
million increase in gross written premium, a $2.3 million decrease in gross
premiums ceded and a $6.6 million increase in the net change to prepaid
reinsurance premiums and unearned premium.
The $0.8 million decrease in commercial general liability net premiums earned is
a result of a $0.7 million decrease in gross written premium, a $0.2 million
increase in gross premiums ceded and a less than $0.1 million decrease in the
net change to unearned premium.
The $0.6 million decrease in automobile net premiums earned is a result of a
$0.8 million decrease in gross written premium, a $0.3 million increase in gross
premiums ceded and a $0.5 million decrease in the net change to prepaid
reinsurance premiums and unearned premium.
Commission Income
Commission income increased $0.1 million, or 15.8%, to $0.7 million for the six
months ended June 30, 2012, compared with $0.6 million for the six months ended
June 30, 2011. The primary sources of our commission income are our managing
general agent services, write-your-own flood premiums and our independent
insurance agency, Insure-Link.
- 49 -
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Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Net Investment Income
Net investment income decreased $0.1 million, or 6.3%, to $1.9 million for the
six months ended June 30, 2012, compared with $2.0 million for the six months
ended June 30, 2011.
Our investment yields, net and gross of investment expenses, excluding equities
and including cash, were 2.6% and 2.9%, respectively, for the six months ended
June 30, 2012. Our investment yields, net and gross of investment expenses,
excluding equities and including cash, were 2.9% and 3.2%, respectively, for the
six months ended June 30, 2011.
Our investment yield, net and gross of investment expenses measured against debt
securities, excluding equities and cash, were 2.7% and 3.0%, respectively, for
the six months ended June 30, 2012. Our investment yield, net and gross of
investment expenses measured against debt securities, excluding equities and
cash, were 3.2% and 3.5%, respectively, for the six months ended June 30, 2011.
See also "Analysis of Financial Condition as of June 30, 2012 Compared with
December 31, 2011 - Investments" for a further discussion on our investment
portfolio.
Net Realized Investment (Losses) Gains
Net realized investment losses were $0.2 million for the six months ended June
30, 2012, compared with net realized gains of $0.3 million for the six months
ended June 30, 2011.
FASB has issued guidance regarding when an investment is considered impaired,
whether that impairment is other-than temporary, and the measurement of an
impairment loss. Management periodically reviews the individual investments that
comprise our portfolio in order to determine whether a decline in fair value
below our cost is either other-than temporarily or permanently impaired. During
the six months ended June 30, 2012, pursuant to guidelines prescribed in FASB
issued guidance, we have charged to operations realized investment losses of
approximately $44,000, while during the same period in 2011 we did not mark any
investments to market value pursuant to guidelines prescribed in FASB issued
guidance.
The table below depicts the net realized investment (losses) gains by investment
category during the six months ended June 30, 2012 and 2011.
Six Months Ended June 30,
2012 2011
(Dollars in Thousands)
Realized gains:
Debt securities $ 548 $ 425
Equity securities 660 737
Total realized gains 1,208 1,162
Realized losses:
Debt securities (315 ) (432 )
Equity securities (1,121 ) (391 )
Total realized losses (1,436 ) (823 )
Net realized (losses) gains on investments $ (228 ) $ 339
Losses and LAE
Losses and LAE, our most significant expense, represent actual payments made and
changes in estimated future payments to be made to or on behalf of our
policyholders, including expenses required to settle claims and losses. We
revise our estimates based on the results of analysis of estimated future
payments to be made. This process assumes that experience, adjusted for the
effects of current developments and anticipated trends, is an appropriate basis
for predicting future events.
- 50 ---------------------------------------------------------------------------------
Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Losses and LAE decreased by $3.4 million, or 20.9%, to $12.9 million for the six
months ended June 30, 2012, compared with $16.3 million for the six months ended
June 30, 2011. This is due primarily to a reassessment of our losses by line and
increased underwriting procedures to manage our risks. The overall change
includes a $1.8 million increase in our homeowners' program, a $4.2 million
decrease in our commercial general liability program and a $1.0 million decrease
in connection with our automobile program. During the six months ended June 30,
2012, we reallocated approximately $2.7 million of IBNR reserves from commercial
liability to private property lines. An estimated $1.4 million of bulk reserves
from private passenger automobile were released during this period.
We continue to revise our estimates of the ultimate financial impact of claims
made resulting from past storms. The revisions to our estimates are based on our
analysis of subsequent information that we receive regarding various factors,
including: (i) per claim information; (ii) Company and industry historical loss
experience; (iii) legislative enactments, judicial decisions, legal developments
in the awarding of damages, and (iv) trends in general economic conditions,
including the effects of inflation.
The composition of unpaid losses and LAE by product line is as follows.
June 30, 2012
December 31, 2011
Case Bulk Total Case Bulk Total
(Dollars in Thousands) (Dollars in Thousands)
Homeowners' $ 9,258 $ 8,296 $ 17,554 $ 8,795 $ 10,652 $ 19,447
Commercial General
Liability 3,967 22,930 26,897 4,225 27,717 31,942
Automobile 3,506 5,043 8,549 3,533 5,061 8,594
Total $ 16,731 $ 36,269 $ 53,000 $ 16,553 $ 43,430 $ 59,983
Factors that affect unpaid losses and LAE include the estimates made on a
claim-by-claim basis known as "case reserves" coupled with bulk estimates known
as IBNR. Periodic estimates by management of the ultimate costs required to
settle all claim files are based on the Company's analysis of historical data
and estimations of the impact of numerous factors such as (i) per claim
information; (ii) Company and industry historical loss experience; (iii)
legislative enactments, judicial decisions, legal developments in the awarding
of damages, and changes in political attitudes; and (iv) trends in general
economic conditions, including the effects of inflation. influencing the unpaid
loss and LAE balance include our claim severity for both the property and
liability lines that do not appear to be materializing as planned, as well as
improved underwriting processes and claim settling techniques.
Management revises its estimates based on the results of its analysis. This
process assumes that experience, adjusted for the effects of current
developments and anticipated trends, is an appropriate basis for estimating the
ultimate settlement of all claims. There is no precise method for subsequently
evaluating the impact of any specific factor on the adequacy of the reserves,
because the eventual redundancy or deficiency is affected by multiple factors.
Because of our process, reserves were decreased by approximately $7.0 million
during the six months ended June 30, 2012. This overall change includes a $1.9
million decrease in reserves for our homeowners' program, a $5.0 million
decrease in reserves for our commercial general liability program and a less
than $0.1 million decrease in reserves for our automobile program. During the
six months ended June 30, 2012, we reallocated approximately $2.7 million of
IBNR reserves from commercial liability to private property lines. An estimated
$1.4 million of bulk reserves from private passenger automobile were released
during this period. Decreases for unpaid loss and LAE reserves are typically
primarily attributable to our payment patterns in connection with the settlement
of claims for loss and LAE.
In accordance with GAAP and as discussed above, our loss ratio is computed as
losses and LAE divided by net premiums earned. A lower loss ratio generally
results in higher operating income. Our loss ratio for the six months ended June
30, 2012 was 46.8% compared with 71.3% for the same period in 2011. The
favorable decrease to our loss ratio is due to the $3.4 million decrease in
losses and LAE measured against the $4.7 million increase in net premium earned
during the six months ended June 30, 2012 as compared with the same period in
2011.
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Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The table below reflects the loss ratios by product line.
Six Months Ended June 30,
2012 2011
Homeowners' 54.88 % 64.20 %
Commercial General Liability 1.16 % 78.10 %
Automobile 127.78 % 154.55 %
All lines 46.76 % 71.33 %
Operating and Underwriting Expenses
Operating and underwriting expenses decreased $0.5 million, or 9.0%, to $4.8
million for the six months ended June 30, 2012, compared with $5.3 million for
the six months ended June 30, 2011. The change includes a temporary $0.3 million
decrease in rent expense and a $0.2 million decrease in consulting fees.
Salaries and Wages
Salaries and wages increased $0.1 million, or 2.9%, to $4.2 million for the six
months ended June 30, 2012, compared with $4.1 million for the six months ended
June 30, 2011. The charge to operations for stock-based compensation, in
accordance with FASB guidance, was approximately $128,000 during the six months
ended June 30, 2012 compared with approximately $118,000 for the six months
ended June 30, 2011.
Policy Acquisition Costs - Amortization
Policy acquisition costs - amortization, decreased $0.3 million, or 4.2%, to
$5.7 million for the six months ended June 30, 2012, compared with $6.0 million
for the six months ended June 30, 2011. This decrease is due primarily to the
mix of policies written in each period for which homeowners' commission rates
are less than commercial general liability commission rates. Policy acquisition
costs - amortization, consists of the actual policy acquisition costs, including
commissions, payroll and premium taxes, less commissions earned on reinsurance
ceded and policy fees earned.
Provision for Income Tax Expense (Benefit)
The provision for income tax expense was $1.5 million for the six months ended
June 30, 2012, compared with a $1.5 million provision for income tax benefit for
the six months ended June 30, 2011. The effective rate for income taxes was
37.4% for the six months ended June 30, 2012, compared with 34.4% for the six
months ended June 30, 2011.
Net Income (Loss)
As a result of the foregoing, the Company's net income for the six months ended
June 30, 2012 was $2.5 million compared with a $2.8 million net loss for the six
months ended June 30, 2011.
Liquidity and Capital Resources
During the six months ended June 30, 2012, our primary sources of capital
included proceeds from the sale of investment securities, increased unearned
premiums, decreased prepaid reinsurance premiums, decreased deferred income tax
expense, amortization of investment premium discount, net, decreased reinsurance
recoverable, net, net realized investment losses, decreased other assets and
depreciation and amortization. Additional sources of capital included non-cash
compensation, a tax benefit related to non-cash compensation, non-cash
impairment recognition, increased provision for uncollectible premiums
receivable and exercised stock options.
During the six months ended June 30, 2012 and 2011, operations provided net
operating cash flow of $10.3 million and $12.1 million, respectively.
During the six months ended June 30, 2012, operations generated $25.2 million of
gross cash flow, due to a $13.7 million increase in unearned premiums, a $5.9
million decrease in prepaid reinsurance premiums, a $1.4 million decrease in
deferred income tax expense, $0.7 million of amortization of investment premium,
a $0.4 million decrease in reinsurance recoverable, net and $0.2 million in net
realized investment loss. Additional sources of cash included a $0.2 million
decrease in other assets, $0.1 million depreciation and amortization and $0.1
million non-cash compensation, all in conjunction with a $2.5 million net
income.
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Index
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
During the six months ended June 30, 2012, operations used $14.9 million of
gross cash flow, due to a $7.0 million decrease in unpaid losses and LAE, a $2.5
million increase in premiums receivable and a $2.1 million decrease in bank
overdraft. Additional uses of cash included a $1.7 million increase in policy
acquisition costs, net of amortization, a $1.0 million decrease in accounts
payable and accrued expenses and a $0.6 million decrease in premium deposits and
customer credit balances.
During the six months ended June 30, 2012 and 2011, net cash used by investing
activities was $4.1 million and $6.2 million, respectively. Our
available-for-sale investment portfolio is highly liquid as it consists entirely
of readily marketable securities. During the six months ended June 30, 2012,
investing activities generated $42.8 million and used $46.9 million.
During the six months ended June 30, 2012 and 2011, net financing activities
provided less than $0.1 million. In 2012, the source of cash in connection with
financing activities was a less than $0.1 million tax benefit related to
non-cash compensation.
We offer direct billing in connection with our homeowners', commercial general
liability and automobile programs. Direct billing is an agreement in which the
insurance company accepts from the insured, as a receivable, a promise to pay
the premium, as opposed to requiring the full amount of the policy at policy
inception, either directly from the insured or from a premium finance company.
The advantage of direct billing a policyholder by the insurance company is that
we are not reliant on a credit facility, but remain able to charge and collect
interest from the policyholder.
We believe that our current capital resources will be sufficient to meet
currently anticipated working capital requirements. There can be no assurances,
however, that such will be the case.
As of June 30, 2012, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
"structured finance" or "special purpose" entities, which were established for
the purpose of facilitating off-balance-sheet arrangements or other
contractually narrow or limited purposes. As such, management believes that we
currently are not exposed to any financing, liquidity, market or credit risks
that could arise if we had engaged in transactions of that type requiring
disclosure herein.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have
been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. Our primary assets and liabilities are monetary in nature. As a
result, interest rates have a more significant impact on performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or with the same magnitude as the inflationary effect on
the cost of paying losses and LAE.
Insurance premiums are established before we know the amount of losses and LAE
and the extent to which inflation may affect such expenses. Consequently, we
attempt to anticipate the future impact of inflation when establishing rate
levels. While we attempt to charge adequate premiums, we may be limited in
raising premium levels for competitive and regulatory reasons. Inflation also
affects the market value of our investment portfolio and the investment rate of
return. Any future economic changes that result in prolonged and increasing
levels of inflation could cause increases in the dollar amount of incurred
losses and LAE and thereby materially adversely affect future liability
requirements.
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21st Century Holding Company
Item 3
