Management s Discussion and Analysis 2013 Maxum Specialty Insurance Group - NAIC Group Code # 3589 - Maxum Indemnity Company - NAIC Code # 26743 - Maxum Casualty Insurance Company - NAIC Code # 10784
Group Overview This report covers the two property and casualty insurance companies comprising the Maxum Specialty Insurance Group (the Group). Maxum Indemnity Company (NAIC Company Code # 26743) is an excess and surplus lines insurer domiciled in the State of Delaware. Maxum Casualty Insurance Company (NAIC Company Code # 10784) writes on an admitted basis and also is domiciled in the State of Delaware. The Group has a Financial Strength Rating of A- (Excellent) from the A.M. Best Company. The Group s Financial Size Category from A.M. Best is VIII. Maxum Indemnity Company In addition to being licensed in Delaware, Maxum Indemnity Company is authorized to write in forty-nine states on a non-admitted basis as well as the District of Columbia, Puerto Rico and the U.S. Virgin Islands. Maxum Indemnity Company s business plan focuses on writing traditional excess and surplus lines commercial accounts produced through a select number of wholesale brokers and general agents. Maxum Indemnity Company has been in operation under its current business plan and management since the beginning of 2003. Maxum Casualty Insurance Company Maxum Casualty Insurance Company is licensed in fifty states and the District of Columbia. Maxum Casualty Insurance Company s current business plan has been in operation since 2005. Maxum Casualty Insurance Company focuses on writing commercial transportation accounts on an admitted basis produced through a select number of general agents. Maxum Casualty Insurance Company was one hundred percent reinsured by its parent, Maxum Indemnity Company, through December 31, 2010. Maxum Casualty Insurance Company is operated by Maxum Indemnity Company under the terms of a service agreement. Maxum Indemnity Company and Maxum Casualty Insurance Company entered into an Inter- Company Pooling Agreement effective January 1, 2011 whereby Maxum Indemnity retains 84% and Maxum Casualty Insurance Company assumes 16% of the Group s underwriting results. P a g e 2 o f 7
Financial Position Assets: The Group s total admitted assets as of December 31, 2013 were $329.3 million compared to $317.0 million as of December 31, 2012. Admitted assets increased for 2012 and 2013 both from favorable cash flow for the Group as well as net income for the two years. At December 31, 2013, the Group s fixed income portfolio was 93.9% invested in securities classified as NAIC 1. The weighted average credit quality of the fixed income portfolio at December 31, 2013 was AA-. 60.0% of the fixed income portfolio is invested in tax exempt municipal bonds. $20.7 million of invested assets are in common and preferred stocks primarily for their ability to generate income. Additionally, $12.2 million of invested assets were cash and short-term investments. $25.2 million of assets are uncollected premiums due from brokers and agents. The amount of uncollected premium that is deferred decreased during 2013 relative to 12/31/2012 due to planned reduction in commercial automobile premium written during the year. Commercial automobile is the only line written by the Group that provides installment plans. Receivables are tightly managed through stringent collection management as exhibited by the low level of over ninety day old accounts receivable balances which were nonadmitted at December 31, 2013. Amounts recoverable from reinsurers increased from $0.8 million at December 31, 2012 to $2.2 million at December 31, 2013 due to the timing of when particular losses are paid that create recoveries from reinsurers. The $2.1 million in current federal income tax recoverable at December 31, 2013 represents the overpayment of estimated taxes for 2013. Net Deferred Tax Assets admitted under statutory accounting increased modestly from $6.3 million at December 31, 2012 to $6.5 million at December 31, 2013. Liabilities: The Group s total liabilities increased only slightly from $220.3 million as of December 31, 2012 to $223.2 million as of December 31, 2013. The largest increases were in the funds held by company under reinsurance treaties account which is from a quota share reinsurance contract that has been in effect since April 1, 2009. Loss and loss adjustment expense reserves of $129.0 million at 12/31/13 were only slightly increased from $125.6 million at 12/31/2012. Unearned P a g e 3 o f 7
premium reserves decreased to $38.6 million which is down from $43.2 million as of 12/31/2012. Limited increase in loss and loss adjustment expenses reserves and the decrease in unearned premium reserves were primarily caused by the Group decreasing premium writings in commercial automobile in 2013 compared to 2012. Capital and Surplus: Northern Homelands Company made capital contributions to Maxum Indemnity Company of $232,205 in 2013 and $127,470 in 2012. $10.0 million of Maxum Indemnity Company s capital came from debt taken on by the parent company of the Group, Northern Homelands Company, in 2009. $520,000 in dividends from the Group to Northern Homelands in 2013 and $405,000 in 2012 were used to pay a portion of the interest on this note. Net income after federal income taxes was $9.071 million for 2013 and $0.4 million for 2012 which contributed to the increase in Surplus for the Group. Results of Operations Underwriting: The Group s direct written premium decreased to $168.2 million for 2013 from $170.8 million for 2012. Net premiums earned increased to $87.9 million for 2013 from $80.3 million for 2012. The statutory calendar year combined ratio for 2013 was 98.2% compared to 107.8% for 2012. Direct written premium for the six underwriting divisions for the past four years was: Division 2010 2011 2012 2013 Casualty Brokerage $31,415,000 $35,046,000 $37,160,000 $39,407,000 Professional Liability 13,229,000 15,824,000 17,394,000 20,636,000 Binding / Programs 21,147,000 24,759,000 33,373,000 40,782,000 Transportation 38,937,000 44,319,000 44,526,000 23,992,000 Special Property 13,062,000 19,494,000 28,273,000 34,128,093 Specialty Inland Marine 0 2,391,000 10,165,000 _9,278,581 Total $117,791,000 $141,832,000 $170,890,000 $168,224,000 The Casualty Brokerage, Professional Liability, Binding/Programs and Special Property Divisions all had steady premium growth in 2013 compared to 2012. The Casualty Brokerage Division benefitted from an improving economy as well as strong support from its brokers. Growth in the Professional Liability Division was primarily driven by the addition of a new P a g e 4 o f 7
class of business to their portfolio. The Binding/Programs Division continued to experience steady growth in 2013 due to strengthening relationships with several general agents as well as improved system efficiencies for those agents to process business with the Group. The Transportation Division s premium growth declined in 2013 compared to 2012 as the division made significant underwriting and pricing changes during the year seeking to improve profitability. A decision was made in October, 2013 to close this division and discontinue writing commercial automobile liability coverage. The Specialty Inland Marine Division declined in premium in 2013 compared to 2012 as it tightened underwriting guidelines and raised prices in one segment of its business during the year. The Group had $1.1 million of catastrophe losses in 2013 from multiple storms throughout the year which compared with $6.4 million in 2012 with the largest loss being from storm Sandy. The pre-tax net loss from Sandy in 2012 was $5.6 million which includes a reinstatement premium for its property catastrophe reinsurance coverage. The Group maintains a combination of excess of loss and quota share reinsurance treaties for all divisions. The Group s occurrence retention for property catastrophe losses has remained the same for 2013 and 2012. The Other Underwriting Expense ratio increased to 30.1% for 2013 from 28.6% for 2012 primarily due to the decrease in net written premium for 2013 compared to 2012. Reserves for unpaid loss and loss adjustment expenses (LAE) reflect management s best estimate of future amounts needed to pay claims and related settlement costs with respect to insured events which have occurred and include events which have not been reported (IBNR). Loss and LAE reserves were developed through a necessarily complex and judgmental process, based on management s informed estimates and judgment using data currently available. Management reviews a variety of information, including industry information given the Group has only eight years of its own experience. Actuarial methods are applied to historical claims data, which produce a range of possible results. As additional experience and other data become available, these estimates and judgments are revised, at which point reserves may be increased or decreased accordingly. Such increases or decreases are reflected in operating results for the time period in which the adjustments are made. While the estimate for unpaid losses and LAE is subject to many uncertainties, management believes unpaid losses and LAE are fairly stated at December 31, 2013. Also, an outside actuarial firm completed independent reviews to verify the adequacy of the Group s estimate of unpaid losses and LAE for both 2012 and 2013. The amount of ultimate losses and LAE that will be paid by the Group have a higher than usual degree of uncertainty since a large portion of the premium written through 2013 is for long-tailed lines of business and since premium writings only began in 2003. P a g e 5 o f 7
Investments: Net investment income was $7.6 million for 2013 which was a modest decrease from $7.9 million for 2012. Yields on new fixed income investments made during 2013 continued to be relatively low and were lower than maturing securities. Favorable cash flow allowed the bond portfolio to increase to $256.3 million at December 31, 2013 compared to $241.5 million at December 31, 2012. During 2012 and 2013 a significant percentage of new investments continued to be made in municipal bonds for their favorable tax treatment. The tax equivalent yield on the bond portfolio decreased to 3.81% at December 31, 2013 from 4.25% at December 31, 2012 reflecting the current relatively low interest rate environment for new investments. Additionally, new investments continue to be made with relatively short effective durations in anticipation of an eventual increasing interest rate environment. The average duration of the bond portfolio decreased to 2.9 years at December 31, 2013 from 3.0 years at December 31, 2012. Realized gains of $2,403,540 were recognized in 2013 compared to $1,195,132 for 2012. For 2013, $25,000 was recognition of Other Than Temporary Impairments for one bond. For 2012, $154,423 was recognition of Other Than Temporary Impairments for three bonds and one common stock. Only one of the bonds that has been written down to-date as an Other Than Temporary Impairments is in default. All remaining bonds continue to pay interest. Other Income: The Group has a quota share reinsurance agreement that has been in effect since April 1, 2009. Included in Other Income are both an interest credit for the funds withheld for reinsurance account plus accrual of a maintenance fee obligation which will be due in three years after the end of the current treaty year provided the Group does not commute the contract prior to that date. For 2013, the expense for this reinsurance treaty was $1,558,651 which is an increase from $1,260,256 for 2012 as the account balance increased which increased the corresponding interest credit. Cash Flow and Liquidity Net cash flow from operations was $16.9 million for 2013 and $24.5 million for 2012. Cash flow continues to be positive primarily since the Group writes a large proportion of long-tail lines of business. Loss payments in 2013 for storm Sandy claims as well as the decline in net written premium both contributed to the reduction in 2013 compared to 2012. Additionally, paid losses increased in 2013 and 2012 as more years were added to the Group s relatively short history (since 2003) and a larger portion of property business was written by the Group which is P a g e 6 o f 7
shorter-tail in nature. Net paid losses and LAE compared to net incurred losses for the past five calendar years were: Net Paid Net Incurred Calendar Year Loss and LAE Loss and LAE 2009 $10,238,000 $30,769,000 2010 15,727,000 35,017,000 2011 18,826,000 42,254,000 2012 32,031,000 63,610,000 2013 43,129,000 59,874,000 The Group maintains a high quality investment portfolio which is highly marketable and highly liquid. 21.0% of bonds owned as of December 31, 2013 mature in less than one year, 53.6% mature in one to five years, 24.2% mature in over five to ten years, and 1.2% mature in over ten years. $12.2 million was held in cash and money market accounts as of December 31, 2013. No investments are held directly in real estate or mortgage loans. As of December 31, 2013, the bonds owned by the Group have a duration of 2.9 years. This compares with a duration of 3.1 years for the loss and allocated loss adjustment expense reserves for the Group. This document contains forward-looking statements regarding the Maxum Specialty Insurance Group. These statements present management's expectations, beliefs, plans and objectives regarding future financial performance, and assumptions or judgments concerning such performance. Any discussions contained in this document, except to the extent that they contain historical facts, are forward-looking and accordingly involve estimates, assumptions, judgments and uncertainties. There are a number of factors that could cause actual results or outcomes to differ materially from those addressed in the forward-looking statements. P a g e 7 o f 7