-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MzEgYCgnRnxkfdsKp58gHQKINGwVixOSa8ufBXT51z+6A7PNhzFxHL+UA4MBLWTU rZEftStDlgpVcO0zTc7MzQ== 0001116502-02-000396.txt : 20020415 0001116502-02-000396.hdr.sgml : 20020415 ACCESSION NUMBER: 0001116502-02-000396 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 21ST CENTURY HOLDING CO CENTRAL INDEX KEY: 0001069996 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 650248866 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-25001 FILM NUMBER: 02594218 BUSINESS ADDRESS: STREET 1: 4161 N W 5TH STREET CITY: PLANTATION STATE: FL ZIP: 33317 BUSINESS PHONE: 9545819993 MAIL ADDRESS: STREET 1: 4161 N W 5TH STREET CITY: PLANTATION STATE: FL ZIP: 33317 10-K405 1 century-10k405.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) (X) ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934 For the fiscal year ended December 31, 2001 or ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period of _____________to_______________ Commission file number 0-2500111 21ST CENTURY HOLDING COMPANY (Exact name of registrant as specified in its Charter) Florida 65-0248866 ------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No) 4161 N.W. 5TH STREET, PLANTATION, FLORIDA 33317 ----------------------------------------------- (Address of Principal executive offices) (Zip Code) Registrant's telephone number, including area code (954) 581-9993 Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par value $0.01 per share (Title of Class) 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-X is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of March 25, 2002, the aggregate market value of the Issuer's Common Stock held by non-affiliates (based on the last sale of the common stock as reported by the Nasdaq National market) was: $7,323,081. As of March 25, 2002, there were 3,027,901 shares of the common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE 21st Century Holding Company's Definitive Proxy Statement for its 2002 Annual Meeting of Shareholders will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this report on Form 10-K pursuant to General Instruction G (3) of the Form 10-K. Information from such Definitive Proxy Statement will be incorporated by reference into Part III, Items 10, 11,12 and 13 hereof. FORWARD-LOOKING STATEMENTS 21st Century Holding Company (the "Company") cautions readers that certain important factors may affect the Company's actual results and could cause such results to differ materially from any forward-looking statements which may be deemed to have been made in this report or which are otherwise made by or on behalf of the Company. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. 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. Factors which may affect the Company's results include, but are not limited to, risks discussed elsewhere in this Report and in the Company's other filings with the Securities and Exchange Commission the ("Commission"). See "Glossary of Selected Terms" at the end of Item 1 for definition of insurance terms used in this report. PART I ------ ITEM 1. BUSINESS - ------- -------- GENERAL The Company is a vertically integrated insurance holding company, which, through its subsidiaries, controls substantially all aspects of the insurance underwriting, distribution and claims process. The Company underwrites nonstandard and standard personal automobile insurance and homeowners and mobile home property and casualty insurance in the State of Florida through its wholly-owned subsidiaries, Federated National Insurance Company ("Federated National") and American Vehicle Insurance Company ("American Vehicle"). The Company has underwriting authority for third-party insurance companies, which it represents through a wholly owned managing general agent, Assurance Managing General Agents, Inc. ("Assurance MGA"). The Company internally processes claims made by Federated National, American Vehicle and third-party insurance companies through a wholly-owned claims adjusting company, Superior Adjusting, Inc. ("Superior"). The Company also offers premium financing to its own and third-party insureds through its wholly-owned subsidiary, Federated Premium Finance, Inc. ("Federated Premium"), and pay advances through Fed First Corp ("Fed First"). The Company markets and distributes Federated National's, American Vehicle's and third-party insurers' products and its other services primarily in South Florida, through a network of 23 agencies, owned by the Company's wholly-owned subsidiary Federated Agency Group, Inc. ("Federated Agency Group"), 18 franchised agencies and approximately 125 active independent agents. The Company, through its wholly-owned subsidiary, FedUSA, Inc. ("FedUSA"), franchises agencies under the FedUSA name. In December 2000, the Company sold its first franchised agency, which began operations on January 1, 2001. The Company intends to focus its future expansion efforts on franchised agencies. The Company offers income tax preparation software and service through its 80% owned subsidiary Express Tax Service Company ("Express Tax"). Currently, Express Tax has 850 licensees in 32 states. The Company believes that it can be distinguished from its competitors because it generates revenue from substantially all aspects of the insurance underwriting, distribution and claims process. The Company provides quality service to both its agents and insureds by utilizing an integrated computer system, which links the Company's insurance and service entities. The Company's computer and software systems allow for automated premium quotation, policy issuance, billing and payment and claims processing and enables the Company to continuously monitor substantially all aspects of its business. Using these systems, the Company's agents can access a customer's driving record, quote a premium, offer premium financing and, if requested, generate a policy on-site. The Company believes that these systems have facilitated its ability to market and underwrite insurance products on a cost-efficient basis, and that they will enhance the Company's ability to achieve its goal of expanding to other regions in Florida and to other states. 2 The Company's primary product is nonstandard personal automobile insurance, which is principally provided to insureds who are unable to obtain preferred or standard insurance coverage because of their payment history, driving record, age, vehicle type or other factors, including market conditions for preferred or standard risks. Underwriting standards for preferred or standard insurance coverage have become more restrictive, thereby requiring more drivers to seek coverage in the nonstandard automobile insurance market. These factors have contributed to an increase in the size of the nonstandard personal automobile insurance market. Based on information provided by A.M. Best, a leading rating agency for the insurance industry, from 1994 to 1998, the nonstandard personal automobile insurance market in the United States grew from approximately $15.6 billion to approximately $23.3 billion in annual premium volume and from approximately 15.7% to approximately 19.2% of the total personal automobile insurance market. Also, according to A.M. Best, from 1994 to 1998, annual premium volume in the nonstandard personal automobile insurance market in Florida grew from approximately $1.8 billion to approximately $2.6 billion and from approximately 30.5% to approximately 34.8% of the total personal automobile insurance market in Florida. The Company's executive offices are located at 4161 N.W. 5th Street, Plantation, Florida and its telephone number is (954) 581-9993. RECENT DEVELOPMENTS In August 2001, the Company acquired American Vehicle Insurance Company ("American Vehicle") for $900,000, including $400,000 to be paid to two former employees of American Vehicle. In November 2001, American Vehicle, which had not written any policies since June 1997, began writing automobile insurance policies in the State of Florida. These policies are 80% reinsured by Transatlantic Reinsurance Company ("Transatlantic"), an A++ rated reinsurance company. The Company currently intends to expand the operations of American Vehicle into other states, while reinsuring 100% of the risk with Transatlantic. As a first step in its expansion plans American Vehicle has already applied to South Carolina to write automobile insurance in that state. BUSINESS STRATEGY The Company's strategy is to seek continued growth of its business by capitalizing on the efficiencies of its vertical integration and by: o Expanding into additional states using American Vehicle. Initially, American Vehicle will reinsure 100% of the policies written; however, if the business proves to be profitable, American Vehicle may reduce its reinsurance to 80% quota share. o expanding its agency network primarily through the sale of FedUSA franchises; o employing the business practices developed and used in Florida to expand to other selected states; o maintaining a commitment to provide quality service to its agents and insureds by emphasizing customer service; o encouraging agents to place a high volume of quality business with the Company by providing them with attractive commission structures tied to premium levels and loss ratios; and o expanding Express Tax to all 50 states 3 INSURANCE OPERATIONS UNDERWRITING GENERAL. The Company underwrites its nonstandard and standard personal automobile insurance, homeowners and mobile home property insurance and casualty insurance through Federated National and American Vehicle. Federated National and American Vehicle are currently licensed to conduct business only in Florida. The following tables set forth the amount and percentages of Federated National's and American Vehicle's gross premiums written and premiums ceded to reinsurers and net premiums written by line of business for the periods indicated.
YEARS ENDED DECEMBER 31, 2001 2000 1999 ------------------------ ------------------------ ------------------------ PREMIUM PERCENT PREMIUM PERCENT PREMIUM PERCENT -------- ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Written: Nonstandard Automobile .............. $ 24,743 72.2% $ 25,361 79.1% $ 16,779 87.1% Homeowners .......................... 7,662 22.4 4,604 14.3 -- -- Mobile Home ......................... 1,866 5.4 2,109 6.6 2,495 12.9 -------- ------- -------- ------- -------- ------- Total Written ...................... $ 34,271 100.0% $ 32,074 100.0% 19,274 100.0% Ceded: Nonstandard Automobile .............. (12,789) 100.0% (7,625) 100.0% (5,058) 81.3% Homeowners .......................... -- -- -- -- -- -- Mobile Home ......................... -- -- -- -- (1,164) 18.7 -------- ------- -------- ------- -------- ------- Total Ceded ......................... (12,789) 100.0% (7,625) 100.0% (6,222) 100.0% Net: Nonstandard Automobile .............. 11,954 55.6% 17,736 72.5% 11,721 89.8% Homeowners .......................... 7,662 35.7 4,604 18.8 -- -- Mobile Home ......................... 1,866 8.7 2,109 8.7 1,331 10.2 -------- ------- -------- ------- -------- ------- Total Net ............................. $ 21,482 100.0% $ 24,449 100.0% $ 13,052 100.0% ======== ======= ======== ======= ======== =======
The Company markets Federated National's and American Vehicle's personal automobile coverage primarily through its network of Company-owned agencies, franchised agents and independent agents. The Company emphasizes customer service to both its agents and insureds by utilizing an integrated computer system, which links all of the Company's insurance and service entities. The Company's computer and software systems allow for rapid automated premium quotation, policy issuance, billing and payment and claims processing and enables the Company to monitor substantially all aspects of its business. This system enables the Company's agents to rapidly access the customer's driving record, quote a premium and, if requested, generate the policy on-site. The Company currently writes insurance only in Florida; however, the Company intends to expand to other selected states and American Vehicle has applied to obtain a license to write insurance in South Carolina. The Company will select additional states for expansion based on a number of criteria, including the size of the personal automobile insurance market, statewide loss results, competition and the regulatory climate. The Company's ability to expand into other states will be subject to the prior regulatory approval of each state. Certain states impose operating requirements upon licensee applicants, which may impose burdens on the Company's ability to obtain a license to conduct insurance business in those other states. There can be no assurance that the Company will be able to obtain the required licenses, and the failure to do so would limit the Company's ability to expand geographically. 4 NONSTANDARD AUTOMOBILE. Nonstandard personal automobile insurance is principally provided to insureds that are unable to obtain standard insurance coverage because of their payment history, driving record, age, vehicle type or other factors, including market conditions. Underwriting standards for preferred and standard coverage have become more restrictive, thereby requiring more insureds to seek nonstandard coverage and contributing to the increase in the size of the nonstandard automobile market. Nonstandard automobile insurance, however, generally involves the potential for increased loss exposure and higher claims experience. Loss exposure is limited because premiums usually are at higher rates than those charged for standard insurance coverage and because approximately 30% of the policies issued by the company provide the minimum coverage required of the policyholder by statute and provide no bodily injury coverage. Federated National currently underwrites nonstandard personal automobile insurance in Florida, where the minimum limits are $10,000 per individual, $20,000 per accident for bodily injury, $10,000 per accident for property damage and comprehensive and $50,000 for collision. The average annual premium on policies currently in force is approximately $850. Federated National underwrites this coverage on an annual and semi-annual basis. Due to the purchasing habits of nonstandard automobile insureds (for example, insureds seeking the least expensive insurance required of the policyholder by statute which satisfies the requirements of state laws to register a vehicle), policy renewal rates tend to be low compared to standard policies. Federated National's experience has been that a significant number of existing policyholders allow their policies to lapse and then reapply for insurance as new policyholders. Federated National's average policy renewal rate is 35% to 40%. The success of Federated National's nonstandard automobile insurance program, therefore, depends in part on its ability to replace non-renewing insureds with new policyholders through marketing efforts. STANDARD AUTOMOBILE. Standard personal automobile insurance is principally provided to insureds that present an average risk profile in terms of payment history, driving record, vehicle type and other factors. Limits on standard personal automobile insurance are generally significantly higher than those for nonstandard coverage, but typically provide for deductibles and other restrictive terms. The Company is underwriting standard personal automobile insurance policies providing coverage no higher than $100,000 per individual, $300,000 per accident for bodily injury, $50,000 per accident for property damage and comprehensive and collision up to $50,000 per accident, with deductibles ranging from $200 to $1,000. The Company markets standard personal automobile insurance through its network of Company-owned agencies franchised agencies and independent agents. MOBILE HOME. Federated National underwrites homeowners insurance for mobile homes, principally in Central and Northern Florida, where the Company believes that the risk of catastrophe loss from hurricanes is less than in other areas of the state. Homeowners' insurance generally protects an owner of real or personal property against covered causes of loss to that property. Homeowners' insurance for mobile homes generally involves the potential for above-average loss exposure. In the absence of major catastrophe losses, loss exposure is limited because premiums usually are at higher rates than those charged for non-mobile home property and casualty insurance. Additionally, Federated National's property lines typically provide maximum coverage in the amount of $75,000, with the average policy limit being approximately $31,000. In addition, the Company presently limits its mobile home coverage to no more than 10% of its underwriting exposure. The average annual premium on policies currently in force is approximately $314 and the typical deductible is $500. As the Company-owned agencies are located primarily in South Florida, the Company markets Federated National's mobile home property and casualty insurance through independent agents in Central and Northern Florida. HOMEOWNERS. In January 2000, Federated National commenced underwriting homeowners' insurance principally in Central and Southern Florida. Homeowners' insurance generally protects an owner of real and personal property against covered causes of loss to that property. Limit on homeowners' insurance is generally significantly higher than those for mobile homes, but typically provide for deductibles and other restrictive terms. Federated National's property lines typically provide maximum coverage in the amount of $150,000, with the average policy limit being approximately $100,000. The average annual premium on policies currently in force is approximately $1,260 and the typical deductible is $1,000. The Company markets Federated National's homeowners' insurance through its network of Company-owned agencies and independent agents. 5 FUTURE PRODUCTS. The Company intends to expand its product offerings by underwriting additional insurance products and programs and marketing them through its distribution network. During 2002, the Company intends to expand its product line to include flood insurance. Expansion of the Company's product offerings will result in a slight increase in expenses due to additional costs incurred in additional actuarial rate justifications, software and personnel. Future products may require regulatory approval. ASSURANCE MGA Assurance MGA acts as Federated National's and American Vehicle's exclusive managing general agent. Assurance MGA currently provides all underwriting policy administration, marketing, accounting and financial services to Federated National and the Company's agencies and participates in the negotiation of reinsurance contracts. Assurance MGA has established a relationship with and has underwriting authority for Lloyds of London for insurance products and State National Specialty Insurance Company ("State National") for automobile insurance. Assurance MGA also generates revenue through policy fee income and other administrative fees from the marketing of these companies' products through the Company's distribution network. Assurance MGA plans to establish relationships with additional carriers and add additional insurance products. SUPERIOR The Company internally processes claims made by Federated National's and American Vehicle's insureds through Superior. The Company-owned agencies and independent agents have no authority to settle claims or otherwise exercise control over the claims process. Management believes that the employment of salaried claims personnel, as opposed to independent adjusters, results in reduced ultimate loss payments, lower loss adjustment expenses and improved customer service. The Company only retains independent appraisers and adjusters on an as needed basis. Additionally, Superior currently adjusts claims for State National for a fee equal to 7.5% of State National's earned premiums. Claims settlement authority levels are established for each adjuster or manager based on the employee's ability and level of experience. Upon receipt, each claim is reviewed and assigned to an adjuster based on the type and severity of the claim. In 2000, the Company hired in-house counsel to monitor claims-related litigation and to advise staff of changes in law. The claims policy of the Company emphasizes prompt and fair settlement of meritorious claims and the establishment of appropriate liability for claims. The Company believes that the internal processing of claims enables it to provide quality customer service while controlling claims adjustment expenses. FEDERATED PREMIUM Federated Premium provides premium financing to Federated National's, American Vehicle's and third-party insureds. Premium financing is marketed through the Company's distribution network of Company-owned agencies, franchised agencies and, prior to the fourth quarter of 2001, independent agents. Lending operations are supported by Federated Premium's own capital base and are currently leveraged through the Company's credit facility with Flatiron Funding Company LLC. Premiums for property and casualty insurance are typically payable at the time a policy is placed in force or renewed. Federated Premium's services allow the insured to pay a portion of the premium when the policy is placed in force and the balance in monthly installments over the life of the policy. As security, Federated Premium retains a contractual right, if a premium installment is not paid when due, to cancel the insurance policy and to receive the unearned premium from the insurer, or in the event of insolvency of an insurer, from the Florida Guarantee Association, subject to a $100 per policy deductible. In the event of cancellation, Federated Premium applies the unearned premium towards the payment obligation of the insured. As part of its premium financing offered to third-party insureds, Federated Premium may advance funds for financed premiums to independent insurance agencies that represent third-party insurers. If remittance is not made by the agency to the third-party insurer, advances made by Federated Premium may only be recoverable to the extent that the agency's receipt of such advances is received by the third-party insurer. In the past, the Company closely monitored the independent insurance agencies it used to reduce this risk. Beginning in the fourth quarter of 2001, in order to reduce the amount of charge offs of uncollected accounts, Federated Premium discontinued financing policies generated by independent agents. Premium financing which the Company offers to its own insureds involves limited credit risk. 6 The following table sets forth the amount and percentages of premiums financed for Federated National and other insurers for the periods indicated:
YEARS ENDED DECEMBER 31, 2001 2000 1999 ---- ---- ---- PREMIUMS PERCENT PREMIUMS PERCENT PREMIUMS PERCENT -------- ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Federated National........................ $20,174 43.9% $17,006 38.4% $12,338 46.8% American Vehicle.......................... 1,066 2.3 -- -- -- -- Other insurers............................ 24,728 53.8 27,293 61.6 14,035 53.2 ------ ---- ------ ---- ------ ---- Total.................................. $45,968 100.0% $44,299 100.0% $26,373 100.0% ======= ===== ======= ===== ======= =====
TAX PREPARATION SERVICES AND ANCILLARY SERVICES The Company also offers other services at its agencies including tax return preparation and electronic filing and the issuance and renewal of license tags. In August 1999, the Company acquired an 80% interest in Express Tax. Express Tax licenses tax return preparation software to over 850 business locations throughout the United States and also earns fees on all electronically filed returns. Express Tax previously licensed its software to the Company's agencies and will continue to do so in the future. FRANCHISE OPERATIONS In April 2000, the Company formed a wholly-owned subsidiary, FedUSA, for the purpose of franchising insurance and financial service agencies as well as tax preparation centers. FedUSA commenced the offering of franchises in December 2000. FedUSA sold its first franchised insurance agency during December 2000 and currently has 18 operating franchises of which 10 are former Company-owned agencies. In addition, FedUSA has sold four additional franchises which are not yet open for business. The franchise agreement for each FedUSA franchise grants the franchisee a license for the operation of a FedUSA insurance agency within an exclusive territory to open and operate a center for a seven year period, with two additional seven year options. FedUSA collects a non-refundable initial franchise fee of $14,950, royalty fees, advertising fees, and other fees, pursuant to its Uniform Franchise Offering Circular ("UFOC"). Express Tax is a FedUSA franchise for tax return preparation and related financial products. The Express Tax franchise agreement grants the franchisee a non-exclusive license to open and operate a center for a seven year period, with two additional seven year options. FedUSA collects a non-refundable initial franchise fee of $7,500, royalty fees, advertising fees, and other fees, as defined in the UFOC. Currently, the initial franchise fee for an Express Tax franchise may be waived if a franchisee acquires both a FedUSA and Express Tax franchise at the same time. As of December 31, 2001, no seperate Express Tax franchises had been sold. PAYDAY ADVANCES In August 1999, the Company began to offer payday advances. Pursuant to changes in Florida law, the Company may advance up to $500 to a customer for a minimum of seven days and a maximum of 31 days. The Company charges the customer 9% of the amount advanced plus a fee of $5 per advance. MARKETING AND DISTRIBUTION The Company markets and distributes Federated National's, American Vehicle's and third-party insurers' products and its other services primarily in South Florida and greater Orlando, Florida through a network of 23 Company-owned agencies, 18 franchised agencies and approximately 125 active independent agents. The Company's agencies are located in Miami-Dade, Broward, Palm Beach, Martin, Orange, Osceola and Seminole Counties, Florida. Its franchised agencies are located in Miami-Dade, Broward, Palm Beach and Orange Counties, Florida and its network of independent agents are located primarily in South Florida. The Company supports its agency network by advertising in various media in conjunction with its franchised agencies. 7 Company-employed, franchise-employed and independent agents have the authority to sell and bind insurance coverages in accordance with procedures established by Assurance MGA. Assurance MGA reviews all coverages bound by the agents promptly and generally accepts all coverages that fall within stated underwriting criteria. Assurance MGA also has the right, within a period of 60 days from a policy's inception, to cancel any policy upon 45 days' notice, even if the risk falls within its underwriting criteria. The Company believes that its integrated computer system, which allows for rapid automated premium quotation and policy issuance by its agents, is a key element in providing quality service to both its agents and insureds. For example, upon entering a customer's basic personal information, the customer's driving record is accessed and a premium rate is quoted. If the customer chooses to purchase the insurance, the system generates the policy on-site. The Company believes that its distribution system will ultimately enable it to lower its expense ratio and operate with more favorable loss experience. A lower expense ratio will, in turn, allow the Company to more effectively compete with larger providers of nonstandard automobile and other forms of insurance. The following table sets forth the amount and percentages of insurance premiums written through Company-owned agencies and independent agents for the periods indicated:
YEARS ENDED DECEMBER 31, 2001 2000 1999 -------------------- --------------------- ---------------------- PREMIUMS PERCENT PREMIUMS PERCENT PREMIUMS PERCENT -------- ------- -------- ------- -------- -------- (DOLLARS IN THOUSANDS) Through Company-owned agencies.......... $9,932 29.0% $12,990 40.5% $7,929 41.1% Through franchised agencies............. 2,659 7.7 -- -- -- -- Through independent agents.............. 21,680 63.3 19,084 59.5 11,345 58.9 ------ ---- ------ ---- ------ ----- Total................................ $34,271 100.0% $32,074 100.0% $19,274 100.0% ======= ====== ======= ====== ======= =====
The Company plans to continue to expand its distribution network and market its products and services in other regions of Florida and other states by franchising additional insurance agencies and establishing relationships with additional independent agents. As the Company expands its insurance operations to other states, the Company will seek to replicate its distribution network in those states. There can be no assurance, however, that the Company will be able to obtain the required regulatory approvals to offer additional insurance products or expand into states other than Florida. REINSURANCE The Company follows industry practice of reinsuring a portion of its risks and paying for that protection based upon premiums received on all policies subject to such reinsurance. Reinsurance involves an insurance company transferring or "ceding" all or a portion of its exposure on insurance underwritten by it to another insurer, known as a "reinsurer." The reinsurer assumes a portion of the exposure in return for a portion, or quota share, of the premium, and pays the ceding company a commission based upon the amount of insurance ceded. The ceding of insurance does not legally discharge the insurer from its primary liability for the full amount of the policies. If the reinsurer fails to meet its obligations under the reinsurance agreement, the ceding company is still required to pay the loss. Reinsurance is ceded under separate contracts or "treaties" for the separate lines of business underwritten. The Company ceded $12.8 million in premiums written for the year ended December 31, 2001. The Company's reinsurance for automobile insurance is primarily ceded with Transatlantic, an A++ rated reinsurance company. Federated National ceded 50%, 30% and 30% of automobile premiums written in 2001, 2000 and 1999, respectively, to Transatlantic. Effective for policies written beginning January 1, 2002, the Company has decreased its automobile quota share reinsurance to 40% and will assume 50% of losses between 70% and 75% of premiums earned and 100% of losses between 75% and 80% of premiums earned. The reinsurance program renews annually, although the Company continually reviews the program and may elect to change it more frequently. Reinsurance is placed directly by the Company and through national reinsurance intermediaries. American Vehicle intends to minimize its risk and reinsures 80% of its premiums written in Florida. 8 The Company is selective in choosing a reinsurer and considers numerous factors, the most important of which is the financial stability of the reinsurer, its history of responding to claims and its overall reputation. In an effort to minimize its exposure to the insolvency of a reinsurer, the Company evaluates the acceptability and reviews the financial condition of the reinsurer at least annually. The Company's current policy is to use only reinsurers that have an A.M. Best rating of "A (Excellent)" or better. In order to minimize the effect of a natural disaster, the Company purchases catastrophic reinsurance from both the state run Florida Hurricane Catastrophe fund and private re-insurers. As of December 31, 2001, Federated National would pay approximately $3 million in claims before catastrophic reinsurance would take effect and pay all claims in excess of approximately $29 million. LIABILITY FOR UNPAID LOSSES AND LAE The Company is directly liable for loss and loss adjustment expenses ("LAE") payments under the terms of the insurance policies that it writes. In many cases, several years may elapse between the occurrence and reporting of an insured loss, the reporting of the loss to the Company and the Company's payment of that loss. As required by insurance regulations and accounting rules, the Company reflects its liability for the ultimate payment of all incurred losses and LAE by establishing a liability for those unpaid losses and LAE for both reported and unreported claims, which represent estimates of future amounts needed to pay claims and related expenses. When a claim involving a probable loss is reported, the Company establishes a liability for the estimated amount of the Company's ultimate loss and LAE payments. The estimate of the amount of the ultimate loss is based upon such factors as the type of loss, jurisdiction of the occurrence, knowledge of the circumstances surrounding the claim, severity of injury or damage, potential for ultimate exposure, estimate of liability on the part of the insured, past experience with similar claims and the applicable policy provisions. All newly reported claims received with respect to nonstandard personal automobile policies are set up with an initial average liability. The average liability for these claims are determined every quarter by dividing the number of closed claims into the total amount paid during the three-month period. If a claim is open more than 45 days, that open case liability is evaluated and the liability is adjusted upward or downward according to the facts and damages of that particular claim. In addition, management provides for a liability on an aggregate basis to provide for losses incurred but not reported ("IBNR"). The Company utilizes independent actuaries to help establish its liability for unpaid losses and LAE. The Company does not discount the liability for unpaid losses and LAE for financial statement purposes. The estimates of the liability for unpaid losses and LAE are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this process, the Company reviews historical data and considers various factors, including known and anticipated legal developments, changes in social attitudes, inflation and economic conditions. As experience develops and other data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for unpaid losses and LAE. Adjustments are reflected in results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates. Among the classes of insurance underwritten by the Company, the automobile and homeowners liability claims historically tend to have longer time lapses between the occurrence of the event, the reporting of the claim to the Company and the final settlement than do automobile physical damage and homeowners property claims. Liability claims often involve parties filing suit and therefore may result in litigation. By comparison, property damage claims tend to be reported in a relatively shorter period of time and settle in a shorter time frame with less occurrence of litigation. There can be no assurance that the Company's liability for unpaid losses and LAE will be adequate to cover actual losses. If the Company's liability for unpaid losses and LAE proves to be inadequate, the Company will be required to increase the liability with a corresponding reduction in the Company's net income in the period in which the deficiency is identified. Future loss experience substantially in excess of established liability for unpaid losses and LAE could have a material adverse effect on the Company's business, results of operations and financial condition. 9 The following table sets forth a reconciliation of beginning and ending liability for unpaid losses and LAE as shown in the Company's consolidated financial statements for the periods indicated.
YEARS ENDED DECEMBER 31, 2001 2000 1999 ---- ---- ---- (DOLLARS IN THOUSANDS) Balance at January ........................................... $9,766 $6,314 $7,603 Less reinsurance recoverables............................... (2,790) (1,886) (2,237) ------- ------- ------- Net balance at January 1................................... $6,976 $4,428 $5,366 ====== ====== ====== Incurred related to: Current year................................................ $13,586 $13,545 $8,764 Prior years................................................. 2,569 1,445 (670) ----- ----- ----- Total incurred............................................. $16,155 $14,990 $8,094 ======= ======= ====== Paid related to: Current year................................................ $8,769 $8,013 $5,552 Prior years................................................. 8,258 4,429 3,480 ----- ----- ----- Total paid................................................. $17,027 $12,442 $9,032 ======= ======= ====== Balance, American Vehicle, at acquisition date................ $103 $-- $-- ==== === === Net balance at end of period.................................. $6,207 $6,976 $4,428 Plus reinsurance recoverables............................... 4,798 2,790 1,886 ----- ----- ----- Balance at end of period................................... $11,005 $9,766 $6,314 ======= ====== ======
As shown above, as a result of the Company's review of its liability for losses and LAE, which includes a re-evaluation of the adequacy of reserve levels for prior year's claims, the Company increased its liability for loss and LAE for claims occurring in prior years by $2,569,000 and $1,445,000 for the years ended December 31, 2001 and 2000, respectively, and reduced its liability for loss and LAE for claims occurring in prior years by $670,000 in 1999. There can be no assurance concerning future adjustments of reserves, positive or negative, for claims through December 31, 2001. The nonstandard automobile program experienced an increase in the Loss Ratio, caused mainly by a 10% price reduction in December 1999, which occurred at the same time larger competitors were increasing prices. Consequently, the Company's written policies increased significantly and the quality of the business declined. Since December 1999, the Company has increased prices five times in an effort to improve its Loss Ratio. Based upon consultations with the Company's independent actuarial consultants and their statement of opinion on losses and LAE, the Company believes that the liability for unpaid losses and LAE is currently adequate to cover all claims and related expenses which may arise from incidents reported and IBNR. The following table presents total unpaid loss and LAE, net, and total reinsurance recoverables shown in the Company's consolidated financial statements for the periods indicated.
YEARS ENDED DECEMBER 31, 2001 2000 1999 ---- ---- ---- (DOLLARS IN THOUSANDS) Loss and LAE, net............................................. $2,736 $4,662 $3,124 IBNR, net..................................................... 3,471 2,314 1,304 ----- ----- ----- Total unpaid loss and LAE, net............................. $6,207 $6,976 $4,428 ====== ====== ====== Reinsurance recoverable....................................... $1,910 $1,861 $1,319 IBNR recoverable.............................................. 2,888 929 567 ----- --- --- Total reinsurance recoverable.............................. $4,798 $2,790 $1,886 ====== ====== ======
10 The following table presents the liability for unpaid losses and LAE for the Company for the years ended December 31, 1992 through 2001. The top line of the table shows the estimated net liabilities for unpaid losses and LAE at the balance sheet date for each of the periods indicated. These figures represent the estimated amount of unpaid losses and LAE for claims arising in all prior years that were unpaid at the balance sheet date, including losses that had been incurred but not yet reported. The portion of the table labeled "Cumulative paid as of" shows the net cumulative payments for losses and LAE made in succeeding years for losses incurred prior to the balance sheet date. The lower portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year.
YEARS ENDED DECEMBER 31, (1) ---------------------------- 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Balance Sheet Liability $6,207 $ 6,976 $4,428 $5,366 $4,635 $4,532 $3,688 $3,355 $2,507 $611 Cumulative paid as of: One year later.................... 6,718 3,250 3,480 2,690 2,852 2,638 2,449 1,964 499 Two years later................... 4,148 4,080 3,531 3,539 2,658 2,792 2,426 554 Three years later................. 4,452 3,745 3,884 2,924 3,018 2,449 585 Four years later.................. 4,077 4,005 3,061 3,114 2,529 580 Five years later.................. 4,045 3,100 3,172 2,560 583 Six years later................... 3,121 3,179 2,601 583 Seven years later................. 3,219 2,659 583 Eight years later................. 2,751 583 Nine years later.................. 583 Re-estimated net liability as of: End of year....................... $6,207 $ 6,976 $4,428 $5,366 $4,635 $4,532 $3,688 $3,355 $2,507 $611 One year later.................... 9,396 5,824 4,696 4,364 4,334 3,750 3,570 2,566 628 Two years later................... 6,040 4,911 4,003 4,204 3,252 3,231 2,780 586 Three years later................. 5,004 4,053 4,048 3,255 3,305 2,596 593 Four years later.................. 4,111 4,086 3,129 3,289 2,619 580 Five years later.................. 4,096 3,167 3,207 2,638 583 Six years later................... 3,152 3,245 2,628 583 Seven years later................. 3,210 2,697 583 Eight years later................. 2,736 586 Nine years later.................. 581 Cumulative redundancy (deficiency).. -- $(2,420) $(1,612) $ 362 $ 524 $ 436 $ 536 $ 145 $ (229) $ 30
(1) To evaluate the information in the table properly it should be noted that, although the Company recorded its participation in the Florida Joint Underwriting Association ("FJUA"), an assigned risk pool for automobile insurance drivers, from 1992 until 1995 in its 1996 statutory financial statements, this table properly reflects the Company's participation in the FJUA in the corresponding years. The cumulative redundancy or deficiency represents the aggregate change in the estimates over all prior years. A deficiency indicates that the latest estimate of the liability for losses and LAE is higher than the liability that was originally estimated and a redundancy indicates that such estimate is lower. It should be emphasized that the table presents a run-off of balance sheet liability for the periods indicated rather than accident or policy loss development for those periods. Therefore, each amount in the table includes the cumulative effects of changes in liability for all prior periods. Conditions and trends that have affected liabilities in the past may not necessarily occur in the future. Underwriting results of insurance companies are frequently measured by their Combined Ratios. However, investment income, Federal income taxes and other non-underwriting income or expense are not reflected in the Combined Ratio. The profitability of property and casualty insurance companies depends on income from underwriting, investment and service operations. Underwriting results are considered profitable when the Combined Ratio is under 100% and unprofitable when the Combined Ratio is over 100%. 11 The following table sets forth Loss Ratios, Expense Ratios and Combined Ratios for the periods indicated for the insurance business of Federated National. The ratios, inclusive of unallocated loss adjustment expenses ("ULAE"), are shown in the table below, and are computed based upon SAP. The expense ratios include management fees paid to the Company in the amount of $0, $300,000 and $1.0 million in 2001, 2000 and 1999, respectively. YEARS ENDED DECEMBER 31, 2001 2000 1999 ---- ---- ---- Loss Ratio........................... 82% 80% 67% Expense Ratio........................ 27 31 38 --- --- --- Combined Ratio....................... 109% 111% 105% === === === In order to reduce losses and thereby reduce the loss ratio and the combined ratio, Federated National has taken several steps. Federated National has raised premiums five times in the last 30 months. In June 2001, a new president of Superior was hired in an effort to reduce claims and adjustment expenses. In 2000, in house counsel was hired to reduce claim litigation costs and, in 2001, Federated National discontinued the use of independent agents in Miami-Dade County. Historically, Miami-Dade County has had high loss ratios. COMPETITION The Company operates in a highly competitive market and faces competition from both national and regional insurance companies, many of whom are larger and have greater financial and other resources than the Company, have favorable A.M. Best ratings and offer more diversified insurance coverage. The Company's competitors include other companies, which market their products through agents, as well as companies, which 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. The Company may also face competition from new or temporary entrants in its niche markets. In some cases, such entrants may, because of inexperience, desire for new business or other reasons, price their insurance below the pricing structure of the Company. Although the Company's pricing is inevitably influenced to some degree by that of its competitors, management of the Company believes that it is generally not in the Company's best interest to compete solely on price, choosing instead to compete on the basis of underwriting criteria, its distribution network and superior service to its agents and insureds. The Company competes with respect to automobile insurance in Florida with more than 100 companies, which underwrite personal automobile insurance. Companies of comparable or smaller size, which compete with the Company in the nonstandard automobile insurance industry, include Fortune Insurance Company, U.S. Security Insurance Company, United Automobile Insurance Company, Direct General Insurance Company and Security National, as well as major insurers such as Progressive Casualty Insurance Company. Competition could have a material adverse effect on the Company's business, results of operations and financial condition. REGULATION GENERAL The Company is subject to the laws and regulations in Florida and will be subject to the laws and regulations of any other states in which it seeks to conduct business in the future. The regulations cover all aspects of its business and are generally designed to protect the interests of insurance policyholders, as opposed to the interests of shareholders. Such regulations relate to authorized lines of business, capital and surplus requirements, allowable rates and forms (particularly for the nonstandard auto segment), investment parameters, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, market conduct, maximum amount allowable for premium financing service charges and a variety of other financial and non-financial components of the Company's business. The failure of the Company to comply with certain provisions of applicable insurance laws and regulations could have a material adverse effect on the Company's business, results of operations or financial condition. In addition, any changes in such laws and regulations including the adoption of consumer initiatives regarding rates charged for automobile or other insurance coverage, could materially adversely affect the operations of the Company's, ability to expand its operations. The Company, however, is unaware of any consumer initiatives, which could have a material adverse effect on the Company's business, results of operations or financial condition. 12 Many states have also enacted laws which restrict an insurer's underwriting discretion, such as the ability to terminate policies, terminate agents or reject insurance coverage applications, and many state regulators have the power to reduce, or to disallow increases in, premium rates. These laws may adversely affect the ability of an insurer to earn a profit on its underwriting operations. Most states have insurance laws requiring that rate schedules and other information be filed with the state's insurance regulatory authority, either directly or through a rating organization with which the insurer is affiliated. The regulatory authority may disapprove a rate filing if it finds that the rates are inadequate, excessive or unfairly discriminatory. Rates, which are not necessarily uniform for all insurers, vary by class of business, hazard covered, and size of risk. The Company is permitted to file rates for nonstandard policies which are usually higher than those charged for standard risks, reflecting the higher probability of loss. Florida and several other states have recently adopted laws or are considering proposed legislation which, among other things, limit the ability of insurance companies to effect rate increases or to cancel, reduce or non-renew insurance coverage with respect to existing policies, particularly private passenger automobile insurance. Most states require licensure or regulatory approval prior to the marketing of new insurance products. Typically, licensure review is comprehensive and includes a review of a company's business plan, solvency, reinsurance, character of its officers and directors, rates, forms and other financial and non-financial aspects of a company. The regulatory authorities may not allow entry into a new market by not granting a license or by withholding approval. All insurance companies must file quarterly and annual statements with certain regulatory agencies and are subject to regular and special examinations by those agencies. The last regulatory examination of Federated National covered the three-year period ended on December 31, 1998. No material deficiencies were found during this regulatory examination. In some instances, various states routinely require deposits of assets for the protection of policy holders either in those states or for all policyholders. As of December 31, 2001, investment securities with a carrying value of approximately $1,538,000 were on deposit with the State of Florida. Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its shareholders except out of that part of its available and accumulated capital surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may not make dividend payments or distributions to shareholders without prior approval of the Florida Department of Insurance if the dividend or distribution would exceed the larger of (i) the lesser of (a) 10.0% of its capital surplus or (b) net income, not including realized capital gains, plus a two-year carryforward, (ii) 10.0% of capital surplus with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains or (iii) the lesser of (a) 10.0% of capital surplus or (b) net investment income plus a three-year carryforward with dividends payable constrained to unassigned funds minus 25.0% of unrealized capital gains. Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida Department of Insurance (i) if the dividend is equal to or less than the greater of (a) 10.0% of the insurer's capital surplus as regards policyholders derived from realized net operating profits on its business and net realized capital gains or (b) the insurer's entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, (ii) the insurer will have policy holder capital surplus equal to or exceeding 115.0% of the minimum required statutory capital surplus after the dividend or distribution, (iii) the insurer files a notice of the dividend or distribution with the department at least ten business days prior to the dividend payment or distribution and (iv) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115% of required statutory capital surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the Florida Department of Insurance or (ii) 30 days after the Florida Department of Insurance has received notice of such dividend or distribution and has not disapproved it within such time. Under these laws, Federated National is permitted to pay dividends of approximately $569,000 to the Company in 2002 without prior regulatory approval, while American Vehicle is not permitted to pay dividends in 2002. Although the Company believes that amounts required for it to meet its financial and operating obligations will be available from sources other than dividends from insurance subsidiaries, there can be no assurance in this regard. Further, there can be no assurance that, if requested, the Florida Department of Insurance will allow any dividends in excess of the amount available, to be paid by Federated National to the Company in the future. No dividends were paid by Federated National or American Vehicle in 2001, 2000 or 1999, and none are anticipated in 2002. 13 The maximum dividends permitted by state law are not necessarily indicative of an insurer's actual ability to pay dividends or other distributions to a parent company, which also may be constrained by business and regulatory considerations, such as the impact of dividends on capital surplus, which could affect an insurer's competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and regulations require that the statutory capital surplus of an insurance company following any dividend or distribution by it be reasonable in relation to its outstanding liabilities and adequate for its financial needs. While the non-insurance company subsidiaries are not subject directly to the dividend and other distribution limitations, insurance holding company regulations govern the amount that any affiliate within the holding company system may charge any of the insurance companies for service (e.g., management fees and commissions). In order to enhance the regulation of insurer solvency, the NAIC established risk-based capital requirements for insurance companies that are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policy holders. These requirements measure three major areas of risk facing property and casualty insurers: (i) underwriting risks, which encompass the risk of adverse loss developments and inadequate pricing; (ii) declines in asset values arising from credit risk; and (iii) other business risks from investments. Insurers having less statutory surplus than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The requirements establish various levels of regulatory action. Based upon the 2001 statutory financial statements for Federated National and American Vehicle, each company's statutory surplus exceeds all regulatory action levels established by the NAIC. The Florida Department of Insurance, which follows these requirements, could require Federated National or American Vehicle to cease operations in the event they fail to maintain the required statutory capital. The extent of regulatory intervention and action increases as the ratio of an insurer's statutory surplus to its Authorized Control Level ("ACL"), as calculated under the NAIC's requirements, decreases. The first action level, the Company Action Level, requires an insurer to submit a plan of corrective actions to the insurance regulators if statutory surplus falls below 200.0% of the ACL amount. The second action level, the Regulatory Action Level, requires an insurer to submit a plan containing corrective actions and permits the insurance regulators to perform an examination or other analysis and issue a corrective order if statutory surplus falls below 150.0% of the ACL amount. The Authorized Control Level, the third action level, allows the regulators to rehabilitate or liquidate an insurer in addition to the aforementioned actions if statutory surplus falls below the ACL amount. The fourth action level is the Mandatory Control Level, which requires the regulators to rehabilitate or liquidate the insurer if statutory surplus falls below 70.0% of the ACL amount. Federated National's ratio of statutory surplus to its ACL was 300.8%, 273.2% and 370.9% at December 31, 2001, 2000 and 1999, respectively. American Vehicle's ratio of statutory surplus to its ACL was 3,234.6% at December 31, 2001. Regulatory action is triggered if surplus falls below 200.0% of the ACL amount. The NAIC has also developed Insurance Regulatory Information Systems ("IRIS") ratios to assist state insurance departments in identifying companies, which may be developing performance or solvency problems, as signaled by significant changes in the companies' operations. Such changes may not necessarily result from any problems with an insurance company, but may merely indicate changes in certain ratios outside the ranges defined as normal by the NAIC. When an insurance company has four or more ratios falling outside "usual ranges," state regulators may investigate to determine the reasons for the variance and whether corrective action is warranted. As of December 31, 2001, Federated National was outside NAIC's usual ranges with respect to its IRIS tests on 7 out of 12 ratios. Federated National was not in the "usual ranges" primarily because of the losses on the common stock portfolio and because of the short fall in Federated National's loss and LAE reserves in 2000 and 1999. Federated National has sold its common stock portfolio and no longer invests in common stock. In addition, Federated National has carefully reviewed its loss and LAE reserves and management believes that such reserves at December 31, 2001 are adequate. American Vehicle was outside NAIC's usual ranges on three ratios primarily because prior to its acquisition, American Vehicle had not written insurance policies since 1997 and was under capitalized. Management does not currently believe that the Florida Department of Insurance will take any significant action with respect to Federated National or American Vehicle regarding the IRIS ratios, although there can be no assurance that will be the case. Effective January 1, 2001, the Company's insurance subsidiaries adopted the Codification of Statutory Accounting Principles guidance issued by the NAIC, which provides guidance for areas where statutory accounting has been silent and changes current accounting in some areas. The adoption of this codification did not have a material effect on the Company's consolidated financial statements. 14 INSURANCE HOLDING COMPANY REGULATION The Company is subject to laws governing insurance holding companies in Florida where Federated National is domiciled. These laws, among other things, (i) require the Company to file periodic information with the Florida Department of Insurance, including information concerning its capital structure, ownership, financial condition and general business operations, (ii) regulate certain transactions between the Company and its affiliates, including the amount of dividends and other distributions and the terms of surplus notes and (iii) restrict the ability of any one person to acquire certain levels of the Company's voting securities without prior regulatory approval. Any purchaser of 5% or more of the outstanding shares of Common Stock of the Company will be presumed to have acquired control of Federated National unless the Florida Insurance Commissioner, upon application, has determined otherwise. FINANCE COMPANY REGULATION The Company's premium financing program is also subject to certain laws governing the operation of premium finance companies. These laws pertain to such matters as books and records that must be kept, forms, licensing, fees and charges. For example, in Florida, the maximum late payment fee Federated Premium may charge is the greater of $10 per month or 5% of the amount of the overdue payment. FRANCHISE COMPANY REGULATION FedUSA is subject to Federal Trade Commission ("FTC") regulation, and state and international laws which regulate the offer and sale of franchises. FedUSA is also subject to a number of state laws which regulate substantive aspects of the franchisor-franchisee relationship. The FTC's Trade Regulation Rule on Franchising (the "FTC Rule") requires FedUSA to furnish to prospective franchisees a franchise offering circular containing information prescribed by the FTC Rule. State laws that regulate the offer and sale of franchises and the franchisor-franchisee relationship presently exist in a substantial number of states. Such laws often require registration of the franchise offering with state authorities and regulate the franchise relationship by, for example, requiring the franchisor to deal with its franchisees in good faith, prohibiting interference with the right of free association among franchisees, limiting the imposition of standards of performance on a franchisee and regulating discrimination among franchisees in charges, royalties or fees. UNDERWRITING AND MARKETING RESTRICTIONS During the past several years, various regulatory and legislative bodies have adopted or proposed new laws or regulations to address the cyclical nature of the insurance industry, catastrophic events and insurance capacity and pricing. These regulations include (i) the creation of "market assistance plans" under which insurers are induced to provide certain coverages, (ii) restrictions on the ability of insurers to rescind or otherwise cancel certain policies in mid-term, (iii) advance notice requirements or limitations imposed for certain policy non-renewals and (iv) limitations upon or decreases in rates permitted to be charged. LEGISLATION From time to time, new regulations and legislation are proposed to limit damage awards, to control plaintiffs' counsel fees, to bring the industry under regulation by the Federal government, to control premiums, policy terminations and other policy terms and to impose new taxes and assessments. It is not possible to predict whether, in what form or in what jurisdictions, any of these proposals might be adopted, or the effect, if any, on the Company. INDUSTRY RATINGS SERVICES Federated National received a B rating and American Vehicle received a B+ rating from A.M. Best during 2001. A.M. Best's ratings are based upon factors of concern to agents, reinsurers and policyholders and are not primarily directed toward the protection of investors. Federated National is rated "A" (Strong) by Demotech, Inc. 15 EXECUTIVE OFFICERS Set forth below is certain information concerning the executive officers of the Company that are not also directors of the Company: SAMUEL A. MILNE has served as the Company's Chief Financial Officer since July 1999. Prior thereto, Mr. Milne was an employee of Premier Administrative Services, Inc., a financial consulting company from July 1998 to July 1999. From May 1995 to April 1998, Mr. Milne was Senior Vice President and Chief Financial Officer for BankUnited Financial Corporation. From April 1992 to May 1995, Mr. Milne was Senior Vice President and Chief Financial Officer for Consolidated Bank, N.A. From August 1984 to September 1991, Mr. Milne served in a number of executive positions at Southeast Bank, N.A., most recently serving as Senior Vice President-Finance. Prior thereto, Mr. Milne was a Senior Manager with Arthur Andersen LLP, the international public accounting firm. EMPLOYEES As of December 31, 2001, the Company and its subsidiaries had 231 employees, including four executive officers. The Company is not a party to any collective bargaining agreement and has not experienced work stoppages or strikes as a result of labor disputes. The Company considers relations with its employees to be satisfactory. 16 GLOSSARY OF SELECTED TERMS CEDE To transfer to an insurer or reinsurer all or part of the insurance written by an insurance entity. CEDING COMMISSION A payment by a reinsurer to the ceding company, generally on a proportional basis, to compensate the ceding company for its policy acquisition costs. COMBINED RATIO The total of the Loss Ratio plus the Expense Ratio on either SAP or GAAP basis. EXPENSE RATIO Under SAP, the ratio of underwriting expenses to net written premiums. Using GAAP basis, the ratio of underwriting expenses to net premiums earned. GENERALLY ACCEPTED ACCOUNTING Accounting practices and PRINCIPLES ("GAAP") principles, as defined principally by the American Institute of Certified Public Accountants, the Financial Accounting Standards Board, and the Commission. GAAP is the method of accounting typically used by the Company for reporting to persons or entities other than insurance regulatory authorities. GROSS PREMIUMS WRITTEN The total of premiums received or to be received for insurance written by an insurer during a specific period of time without any reduction for reinsurance ceded. HARD MARKET The portion of the market cycle of the property and casualty insurance industry characterized by constricted industry capital and underwriting capacity, increasing premium rates and, typically, enhanced underwriting performance. INCURRED BUT NOT REPORTED LOSSES The estimated liability of an ("IBNR") insurer, at a given point in time, with respect to losses that have been incurred but not yet reported to the insurer, and for potential future developments on reported claims. INSURANCE REGULATORY INFORMATION A system of ratio analysis SYSTEM ("IRIS") developed by the NAIC primarily intended to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies. LOSS ADJUSTMENT EXPENSE ("LAE") The expense of investigating and settling claims, including legal fees, outside adjustment expenses and other general expenses of administering the claims adjustment process. LOSS RATIO Under both SAP and GAAP, net losses and LAE incurred, divided by net premiums earned, expressed as a percentage. LOSS RESERVES The estimated liability of an insurer, at a given point in time, with respect to unpaid incurred losses, including losses, which are IBNR and related LAE. LOSSES INCURRED The total of all policy losses sustained by an insurance company during a period, whether paid or unpaid. Incurred losses include a provision for claims that have occurred but have not yet been reported to the insurer. 17 NATIONAL ASSOCIATION OF INSURANCE A voluntary organization of COMMISSIONERS ("NAIC") state insurance officials that promulgates model laws regulating the insurance industry, values securities owned by insurers, develops and modifies insurer financial reporting, statements and insurer performance criteria and performs other services with respect to the insurance industry. NET PREMIUMS EARNED The amount of net premiums written allocable to the expired period of an insurance policy or policies. NET PREMIUMS WRITTEN The gross premiums written during a specific period of time, less the portion of such premiums ceded to (reinsured by) other insurers. NONSTANDARD Risks that generally have been found unacceptable by standard lines insurers for various underwriting reasons. REINSURANCE A procedure whereby a primary insurer transfers (or "cedes") a portion of its risk to a reinsurer in consideration of a payment of premiums by the primary insurer to the reinsurer for their assumption of such portion of the risk. Reinsurance can be affected by a treaty or individual risk basis. Reinsurance does not legally discharge the primary insurer from its liabilities with respect to its obligations to the insured. REINSURERS Insurers (known as the reinsurer or assuming company) who agree to indemnify another insurer (known as the reinsured or ceding company) against all or part of a loss that the latter may incur under a policy or policies it has issued. RISK-BASED CAPITAL REQUIREMENTS Capital requirements for ("RBC") property and casualty insurance companies adopted by the NAIC to assess minimum capital requirements and to raise the level of protection that statutory surplus provides for policy holder obligations. SOFT MARKET The portion of the market cycle of the property and casualty insurance industry characterized by heightened premium rate competition among insurers, increased underwriting capacity and, typically, depressed underwriting performance. STANDARD AUTOMOBILE INSURANCE Personal automobile insurance written for those individuals presenting an average risk profile in terms of loss history, driving record, type of vehicle driven and other factors. STATUTORY ACCOUNTING PRACTICES Those accounting principles and ("SAP") practices which provide the framework for the preparation of financial statements, and the recording of transactions, in accordance with the rules and procedures adopted by regulatory authorities, generally emphasizing solvency consideration rather than a going concern concept of accounting. The principal differences between SAP and GAAP are as follows: (a) SAP, certain assets (non-admitted assets) are eliminated from the balance sheet; (b) under SAP, policy acquisition costs are expensed upon policy inception, while under GAAP they are deferred and amortized over the term of the policies; (c) under SAP,certain reserves are recognized which are not recognized under GAAP. 18 UNDERWRITING The process whereby an underwriter reviews applications submitted for insurance coverage and determines whether it will provide all or part of the coverage being requested, and the price of such premiums. Underwriting also includes an ongoing review of existing policies and their pricing. UNDERWRITING EXPENSE The aggregate of policy acquisition costs, including that portion of general and administrative expenses attributable to underwriting operations. UNEARNED PREMIUMS The portion of premiums written representing unexpired policy terms as of a certain date. 19 ITEM 2. PROPERTIES - ------- ---------- The Company's agencies are primarily located in leased locations pursuant to leases expiring at various times through February 2016. The aggregate annual rental for the facilities is approximately $495,000. Two locations are owned by 21st Century Holding Company. Federated National owns the Company's current headquarters in Plantation, Florida, a two story building with approximately 13,960 square feet of office space. Federated National also owns and partially occupies a three story building with approximately 39,250 square feet of office space in Lauderdale Lakes, Florida. Approximately 40% of the Lauderdale Lakes building is leased to third parties and the remainder is occupied by Federated National or is vacant. The Company believes that these facilities are adequate for its current needs. ITEM 3. LEGAL PROCEEDINGS - ------- ----------------- The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. In June 2000, a lawsuit was filed against the Company and its directors and executive officers seeking compensatory damages on the basis of allegations that the Company's amended registration statement dated November 4, 1998 was inaccurate and misleading concerning the manner in which the Company recognized ceded insurance commission income, in violation of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The lawsuit was filed in the United States District Court for the Southern District of New York and seeks class action status. The plaintiff class purportedly includes purchasers of the Company's common stock between November 5, 1998 and August 13, 1999. The Company believes that the lawsuit is without merit and is vigorously defending such action. The Company is currently awaiting the Court's ruling on its Motion to Dismiss the plaintiff's First Amended Complaint. Prior to its acquisition, American Vehicle was involved in litigation with a former officer and director of American Vehicle. The litigation was adjudicated and American Vehicle, among others, was found liable and paid the final judgment. There remains one outstanding issue, which is the assessment of attorney's fees and costs. A petition has been filed seeking costs of $136,000 and appellate attorney's fees in excess of $2 million. If American Vehicle is found liable for such fees and costs, they are indemnified by American Vehicle's previous owners, in accordance with the purchase agreement. Furthermore, the $500,000 purchase price paid to the former owners remains in escrow pending settlement of the fees and costs. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- None 20 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------- --------------------------------------------------------------------- (A) MARKET INFORMATION The Company's Common Stock has been listed for trading on the Nasdaq National Market under the symbol "TCHC" since November 5, 1998. For the calendar quarters indicated, the table below sets forth the high and low closing prices per share of the Common Stock based on published financial resources. QUARTER ENDED HIGH LOW ------------- ---- --- March 31, 2001 $3.38 $1.91 June 30, 2001 $3.10 $2.03 September 30, 2001 $2.65 $0.98 December 31, 2001 $3.15 $1.50 March 31, 2000 $8.00 $3.94 June 30, 2000 $7.00 $4.50 September 30, 2000 $5.00 $3.06 December 31, 2000 $4.00 $2.81 (B) SALES OF UNREGISTERED SECURITIES The following unregistered shares of the Company's Common Stock were issued in 2001: SHARES DATE REASON ------ ---- ------ 51,700 January 2001 Employees bonuses 10,000 November 2001 Employee bonus No commissions were paid in connection with the foregoing sales, which were made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933. (C) HOLDERS As of March 26, 2002, there were approximately 37 holders of record of the Company's Common Stock. The Company believes that the number of beneficial owners of its Common Stock is in excess of 450. (D) DIVIDENDS The Company began paying a quarterly dividend of $0.02 per share on its Common Stock in the fourth quarter of 2000, and expects to continue to pay a quarterly dividend in the future. However, the ability of the Company to continue to pay dividends may be restricted by regulatory limits on the amount of dividends that Federated National and American Vehicle are permitted to pay to the Company. See "Regulations" in Part I, Item I. 21 ITEM 6. SELECTED FINANCIAL DATA - ------- -----------------------
As of or for the year ended December 31, --------------------------------------- OPERATIONS DATA: 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Revenue: Gross premiums written................... $34,271,338 $32,073,768 $19,273,561 $21,195,144 $17,675,375 Gross premiums ceded..................... (12,789,404) (7,625,095) (6,221,853) (6,628,270) (4,659,378) ---------- ---------- ---------- ---------- ---------- Net premiums written................. 21,481,934 24,448,673 13,051,708 14,566,874 13,015,997 Decrease (increase) in unearned premiums, net of prepaid reinsurance premiums.... (1,226,373) (4,127,334) 404,640 (604,143) (2,091,718) ---------- ---------- ---------- ---------- ---------- Net premiums earned.................. 20,255,561 20,321,339 13,456,348 13,962,731 10,924,279 Commission income........................ 2,828,779 2,780,869 4,410,856 2,036,637 2,357,579 Finance revenue.......................... 5,267,523 5,709,848 3,696,843 1,825,268 220,434 Managing general agent fees.............. 5,871,388 5,410,500 963,797 971,794 819,576 Net investment income.................... 1,066,641 1,225,413 853,659 983,592 1,047,348 Net realized investment gains (losses)... (2,911,658) (109,256) 952,153 441,810 (19,395) Other income............................. 3,098,332 2,214,894 1,043,798 446,635 399,319 --------- --------- --------- ------- ------- Total revenue........................ 35,476,566 37,553,607 25,377,454 20,668,467 15,749,140 ---------- ---------- ---------- ---------- ---------- Expenses: Losses and loss adjustment expenses...... 16,154,902 14,990,118 8,094,677 9,133,332 7,414,151 Operating and underwriting expenses...... 11,644,183 11,892,577 7,032,428 4,291,613 3,300,713 Salaries and wages....................... 8,478,771 9,375,775 7,474,572 4,042,226 3,148,558 Amortization of deferred acquisition costs, net............................. 1,467,238 1,673,754 (18,563) 179,057 343,716 Amortization of goodwill................. 540,010 606,653 547,548 239,619 38,102 ---------- ---------- ---------- ---------- ---------- Total expenses....................... 38,285,104 38,538,877 23,130,662 17,885,847 14,245,240 ---------- ---------- ---------- ---------- ---------- Income (loss) before provision for income tax expense and extraordinary gain....... (2,808,538) (985,270) 2,246,792 2,782,620 1,503,900 (Provision) benefit for income tax expense.. 630,553 462,396 (680,061) (965,000) (339,369) ---------- ---------- ---------- ---------- ---------- Net income (loss) and extraordinary gain.............................. (2,177,985) (522,874) 1,566,731 1,817,620 1,164,531 Extraordinary gain.......................... 1,185,895 -- -- -- -- --------- ---------- ---------- ----------- ----------- Net income (loss).................... $ (992,090) $ (522,874) $1,566,731 $1,817,620 $1,164,531 ========== ========== ========== ========== ========== Basic net income (loss) per share before extraordinary gain................ $ (0.69) $ (0.15) $ 0.46 $ 0.79 $ 0.55 ========== ========== ========== ========== ========== Extraordinary gain.......................... 0.38 -- -- -- -- ========== ========== ========== ========== ========== Basic net income (loss) per share........... $ (0.31) $ (0.15) $ 0.46 $ 0.79 $ 0.55 ========== ========== ========== ========== ========== Cash dividends declared per share........... $ 0.08 $ 0.02 -- -- -- ========== ========== ========== ========== ========== BALANCE SHEET DATA: Total assets................................ $56,228,577 $55,412,969 $38,686,404 $38,176,403 $25,184,892 Investments.............................. 17,507,422 18,965,798 13,916,571 17,705,266 15,759,590 Finance contracts, consumer loans and pay advances receivable, net........... 10,813,881 13,792,791 9,642,163 7,093,593 2,226,777 Total liabilities........................... 42,019,446 40,456,972 22,932,516 23,208,580 20,457,239 Unpaid losses and loss adjustment expenses 11,005,337 9,765,848 6,314,307 7,603,460 6,726,462 Unearned premiums........................ 14,951,228 13,038,417 8,037,083 8,534,320 7,499,742 Revolving credit outstanding............. 6,676,817 8,091,034 4,650,026 2,062,948 1,593,752 Total shareholders' equity.................. $14,209,131 $14,955,997 $15,753,888 $14,967,823 $ 4,727,653 Book value per share........................ $ 4.69 $ 4.49 $ 4.67 $ 4.47 $ 4.54
22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------- --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------------------------------------------------- OVERVIEW The Company is a vertically integrated insurance holding company, which, through its subsidiaries, controls substantially all aspects of the insurance underwriting, distribution and claims process. The Company underwrites nonstandard and standard personal automobile insurance and homeowners and mobile home property and casualty insurance in the State of Florida through its subsidiaries, Federated National and American Vehicle. The Company has underwriting authority for third-party insurance companies, which it represents through a wholly owned managing general agent, Assurance MGA. The Company internally processes claims made by Federated National, American Vehicle and third-party insurance companies through a wholly-owned claims adjusting company, Superior. The Company also offers premium financing to its own and third-party insureds through its wholly-owned subsidiary, Federated Premium and pay advances through Fed First. The Company markets and distributes Federated National's and third-party insurers' products and its other services primarily in South Florida, through a network of 23 Company-owned agencies, 18 franchised agencies and approximately 125 active independent agents. The Company, through its wholly-owned subsidiary, FedUSA, franchises agencies under the FedUSA name. In December 2000, the Company sold its first franchised agency, which began operations on January 1, 2001. The Company intends to focus its future expansion efforts on franchised agencies. The Company offers income tax preparation software and service through its 80% owned subsidiary, Express Tax. Currently, Express Tax has 850 licensees in 32 states. The Company's 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 the Company's business, results of operations and financial condition. Also, if the Company's estimated liabilities for unpaid losses and LAE are less than actual losses and LAE, the Company will be required to increase reserves with a corresponding reduction in the Ccompany's net income in the period in which the deficiency is identified. The Company operates in a highly competitive market and faces competition from both national and regional insurance companies, many of whom are larger and have greater financial and other resources than the Company, have favorable A.M. Best ratings and offer more diversified insurance coverage. The Company's competitors include other 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. The Company may also face competition from new or temporary entrants in its niche markets. In some cases, such entrants may, because of inexperience, desire for new business or other reasons, price their insurance below the pricing structure of the Company. Although the Company's pricing is inevitably influenced to some degree by that of its competitors, management of the Company believes that it is generally not in the Company's best interest to compete solely on price, choosing instead to compete on the basis of underwriting criteria, its distribution network and superior service to its agents and insureds. The Company competes with respect to automobile insurance in Florida with more than 100 companies, which underwrite personal automobile insurance. Companies of comparable or smaller size, which compete with the Company in the nonstandard automobile insurance industry, include U.S. Security Insurance Company, United Automobile Insurance Company, Direct General Insurance Company and Security National, as well as major insurers such as Progressive Casualty Insurance Company. Competition could have a material adverse effect on the Company's business, results of operations and financial condition. CRITICAL ACCOUNTING POLICIES The Company's accounting policies are more fully described in Note 2 of Notes to Consolidated Financial Statements. As disclosed therein, the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. 23 The most significant accounting estimates inherent in the preparation of the Company's financial statements include estimates associated with management's evaluation of the determination of liability for unpaid losses and loss adjustment expense and the recoverability of goodwill. In addition, significant estimates form the bases for the Company's reserves with respect to finance contracts, consumer loans, pay advances receivable, premiums receivable and deferred income taxes. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, and in the case of unpaid losses and loss adjustment expense, an actuarial valuation. Management constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. ANALYSIS OF FINANCIAL CONDITION AS OF DECEMBER 31, 2001 AS COMPARED TO DECEMBER 31, 2000 INVESTMENTS. Investments decreased $1.5 million to $17.5 million as of December 31, 2001 from $19.0 million as December 31, 2000 primarily as a result of losses in the Company's common stock portfolio which was sold in the third quarter. FINANCE CONTRACTS, CONSUMER LOANS AND PAY ADVANCES RECEIVABLE. Finance contracts, consumer loans and pay advances receivable decreased $3.0 million from $13.8 million as of December 31, 2000 to $10.8 million as of December 31, 2001 primarily because, beginning in the third quarter, the Company now only finances contracts from Company owned agencies and Company franchised agencies and no longer finances contracts originated by third party agencies. PREPAID REINSURANCE PREMIUMS. Prepaid reinsurance premiums increased $2.7 million to $5.6 million as of December 31, 2001 from $2.9 million as of December 31, 2000 because the Company increased its quota-share reinsurance on automobile insurance from 30% of premiums to 50%, effective January 1, 2001. PREMIUMS RECEIVABLE. Premiums receivable were $1.6 million as of December 31, 2001, an increase of $1.4 million as compared to $247,000 outstanding as of December 31, 2000. This increase is the result of added emphasis placed on direct bill premium financing by Federated National. REINSURANCE RECOVERABLE. Reinsurance recoverable increased $3.9 million to $7.0 million as of December 31, 2001 from $3.1 million as of December 31, 2000. This increase is the result of the increase of reinsurance discussed above. DEFERRED ACQUISITION COSTS, NET. Deferred acquisition costs decreased from $1.2 million as of December 31, 2000 to $12,000 as of December 31, 2001. Included in the December 31, 2000 balance were deferred commissions of $2.1 million offset by unearned ceded commissions of $877,000. As of December 31, 2001, deferred commissions were $1.7 million offset by unearned ceded commissions of $1.7 million. The increase in unearned ceded commissions is related to the increase in reinsurance discussed above. DEFERRED INCOME TAXES. The deferred income tax asset decreased $664,000 to $2.3 million as of December 31, 2001 from $2.9 million as of December 31, 2000, primarily due to the sale of the Company's common stock portfolio, which had an unrealized loss of $1.7 million as of December 31, 2000. GOODWILL. Goodwill declined from $2.8 million as of December 31, 2000 to $1.8 million as of December 31, 2001, due to amortization of $540,000 and a reduction in goodwill because of the sale of 11 insurance agencies. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES. Unpaid loss and loss adjustment expenses increased $1.2 million, from $9.8 million at December 31, 2000 to $11.0 million as of December 31, 2001. This increase is primarily due to an increase in losses and loss adjustment expenses recorded during the year.. UNEARNED PREMIUM. Unearned premium increased $2.0 million form $13.0 million as of December 31, 2000 to $15.0 million as of December 31, 2001. The balance of unearned premium is determined by the amount and timing of when policies are written. 24 PREMIUM DEPOSITS. Premium deposits were $1.1 million as of December 31, 2001 as compared $382,000 as of December 31, 2000. This change is caused primarily by the timing of disbursements for cancelled policies and the timing of receipt of premium dollars as compared to the receipt of the policy from the agents. REVOLVING CREDIT OUTSTANDING. Revolving credit outstanding decreased $1.4 million to $6.7 million as of December 31, 2001 from $8.1 million as of December 31, 2000. This decrease is related to the decrease in finance contracts discussed above. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 GROSS PREMIUMS WRITTEN. Gross premiums written increased $2.2 million, or 6.9%, to $34.3 million for the year ended December 31, 2001 as compared to $32.1 million in 2000. The increase is primarily due to an increase in homeowners premiums written, which increased to $7.7 million in 2001 from $4.6 million in 2000. GROSS PREMIUMS CEDED. Gross premiums ceded increased from $7.6 million for the year ended December 31, 2000, to $12.8 million for the year ended December 31, 2001. In 2000, the Company had 30% automobile quota-share reinsurance as compared to 50% automobile quota-share reinsurance in 2001. DECREASE (INCREASE) IN UNEARNED PREMIUMS, NET OF PREPAID REINSURANCE PREMIUMS. The decrease in unearned premiums, net of prepaid reinsurance premiums, was $1.2 million for the year ended December 31, 2001 compared to $4.1 million for the year ended December 31, 2000. This decrease is due primarily to the change in quota-share reinsurance discussed above. NET REALIZED INVESTMENT GAINS (LOSSES). The Company experienced net losses of $2.9 million for the year ended December 31, 2001 compared to $109,000 for the same period in 2000. Realized gains or losses are primarily a function of the equity markets. In August 2001, the Company divested itself of its investments in common stock and will no longer invest in common stock. OTHER INCOME. Other income increased $883,000 to $3.1 million for the year ended December 31, 2001 from $2.2 million for 2000. This increase is primarily attributable to an increase in adjusting fees due to the addition in 2000 of two nonaffiliated insurance companies as claims adjusting customers. LOSSES AND LAE. The Company's loss ratio, as determined in accordance with GAAP, for the year ended December 31, 2001 was 79.8% compared with 73.8% for 2000. Losses and LAE incurred increased $1.2 million to $16.2 million for 2001 from $15.0 million for 2000. Losses and LAE, the Company's most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of its policyholders, including expenses required to settle claims and losses. In 2001, the Company experienced a significant increase in lawsuits relating to automobile claims. Management believes this increase in lawsuits was in anticipation of the effective date of recent legislation passed by the Florida legislature. This legislation, which became effective October 1, 2001, includes the establishment of a pre-suit notice requirement for no fault claims, fee schedules for certain medical procedures, the licensing of health care clinics, and toughened criminal sanctions for fraud. EXTRAORDINARY GAIN. In August 2001, the Company recorded an extraordinary gain of $1.2 million which represents the excess of the fair value of the net assets purchased over the purchase price, when the Company acquired American Vehicle. 25 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 GROSS PREMIUMS WRITTEN. Gross premiums written increased $12.8 million, or 66.4% to $32.1 million for the year ended December 31, 2000 as compared to $19.3 million in 1999. This increase is attributable to an increase in pricing by the Company's major competitors, as well as a 10% rate reduction by the Company, all effective December 1, 1999. Prior to December 1999, these two competitors' pricing was below the Company's pricing. After the price changes, the Company became more competitive with respect to pricing, resulting in a substantial increase in written premiums. The Company reversed its 10% rate reduction effective June 1, 2000 to slow the growth in premiums written and further increased prices on selected products in October 2000. GROSS PREMIUMS CEDED. Gross premiums ceded increased $1.4 million to $7.6 million for the year ended December 31, 2000 from $6.2 million for the year ended December 31, 1999. The increase in gross premiums ceded is directly related to the increase in gross premiums written. NET PREMIUMS EARNED. Net premiums earned increased 51.0% to $20.3 million for the year ended December 31, 2000 from $13.5 million for the year ended December 31, 1999. The increase in net premiums written discussed above was partially offset by the increase in the deferral of premiums over the life of the policies. COMMISSION INCOME. Commission income decreased 37.0% to $2.8 million for the year ended December 31, 2000 from $4.4 million in 1999. Commission income consists of fees earned by Company-owned agencies placing business with third-party insurers and third-party premium finance companies. The decrease is attributable to a higher percentage of commissions from Federated National and Assurance MGA, which are eliminated in consolidation. FINANCE REVENUES. Finance revenues increased 54.5% to $5.7 million for the year ended December 31, 2000 from approximately $3.7 million in 1999. The increase was attributable to an increase in the number of premium contracts financed by Federated Premium, as well as income generated from pay advances, which began operations in the third quarter 1999. NET INVESTMENT INCOME. Net investment income increased 43.6% or $372,000 to $1.2 million for the year ended December 31, 2000 from $854,000 for the year ended December 31, 1999 because the Company had additional funds invested from the increase in premiums written by Federated National and third party insurers for which Assurance MGA is the managing general agent. NET REALIZED INVESTMENT GAINS (LOSSES). In 1999, the Company realized $952,000 in investment gains compared to investment losses of $109,000 in 2000. This change is due to the downturn in the stock market in the last third of 2000. MANAGING GENERAL AGENT FEES. Managing general agent fees increased from $964,000 for the year ended December 31, 1999 to $5.4 million for the year ended December 31, 2000. This increase is because Assurance MGA began writing policies for one unaffiliated insurance company in July 1999 and for an additional company in January 2000. Prior to July 1999, substantially all policies were written for Federated National for which Assurance MGA retained $25 per policy. OTHER INCOME. Other income increased $1.2 million to $2.2 million for the year ended December 31, 2000 from $1.0 million for the same period in 1999. This increase is primarily attributable to increased tax preparation fees of $860,000 and adjusting fee income of $634,000 for the year ended December 31, 2000 compared to $353,000 and $4,000, respectively, in 1999. LOSSES AND LAE. The Company's loss ratio, as determined in accordance with GAAP, for 2000 was 73.8% compared with 60.2 % for the same period in 1999. Losses and LAE incurred increased $6.9 million to $15.0 million for the year ended December 31, 2000 from $8.1 million for 1999. Losses and LAE, the Company's most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of its policyholders, including expenses required to settle claims and losses. The Company believes the increase in its loss ratio is a function of a 10% price reduction on policies written from December 1, 1999 to May 31, 2000 coupled with increased claims on policies issued during that period. 26 OPERATING AND UNDERWRITING EXPENSES. Operating and underwriting expenses increased $4.9 million or 69.1% to $11.9 million for the year ended December 31, 2000 from $7.0 million for the year ended December 31, 1999. The increase is due primarily to the 47.9% increase in revenues and is expected to continue in the near future. Included in operating and underwriting expenses are the provision for credit losses and the provision for uncollectible premiums receivables. The provision for credit losses increased to $1,994,000 for the year ended December 31, 2000 from $838,000 for the year ended December 31, 1999. The provision for uncollectible premiums receivable increased to $432,000 for 2000 from $50,000 in 1999. SALARIES AND WAGES. Salaries and wages increased 25.4% to $9.4 million for 2000 from $7.5 million for 1999. The increase is related to the increase in the volume of business during the period. AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS. The amortization of deferred policy acquisition costs increased from a credit of $19,000 for the year ended December 31, 1999 to a debit of $1.7 million for 2000. Policy acquisition costs consists of commission expenses paid to third-party agencies less commissions earned on reinsurance ceded. The increase is primarily due to policy acquisition costs of $1.6 million incurred by Assurance MGA for third party insurers' policies in 2000 compared to zero in 1999. INCOME TAX EXPENSE. The Company recorded a benefit for income taxes of $462,000 in 2000 as compared to a provision of $680,000 in 1999 primarily due to pre-tax income/loss. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of capital are revenues generated from operations, investment income and borrowings under a revolving agreement discussed below. Because the Company is a holding company, it is largely dependent upon management fees and /or dividends from its subsidiaries for cash flow. Federated Premium's operations are funded by a revolving loan agreement ("Revolving Agreement") with Flatiron Funding Company LLC ("Flatiron"). The Revolving Agreement is structured as a sale of contracts receivable under a sale and assignment agreement with FPF, Inc. (a wholly-owned subsidiary of Flatiron), which gives FPF Inc. the right to sell or assign these contracts receivable. Federated Premium, which services these contracts, has recorded transactions under the Revolving Agreement as secured borrowings. The Revolving Agreement, which was amended and revised in October 2001, allows for a maximum credit commitment of $7.0 million plus an initial additional amount of $700,000 for the transition from September 30, 2001 when the previous agreement expired. This initial additional amount declines by $100,000 each month beginning November 1, 2001. The amount of an advance is subject to availability under a borrowing base calculation, with maximum advances outstanding not to exceed the maximum credit commitment. The annual interest rate on advances under the Revolving Agreement is the prime rate plus additional interest varying from 1.25% to 2.75% based on the prior month's ratio of contracts receivable related to insurance companies with an A. M. Best rating of B or worse to total contracts receivable. The Revolving Agreement contains various operating and financial covenants, with which the Company was in compliance at December 31, 2001 and 2000. The Revolving Agreement, as amended, expires September 30, 2004. Outstanding borrowings under the Revolving Agreement as of December 31, 2001 and 2000 were approximately $6.7 million and $8.1 million, respectively. For the year ended December 31, 2001, operations generated a cash flow deficit of $946,000; however, operating cash flow is expected to be positive in the future as the Company currently believes operations will be profitable. The Company's investment portfolio, which is highly liquid as it consists almost entirely of readily marketable securities, is available to offset any cash flow deficits. Cash flow from investing activities was $2.5 million in 2001 and was used to offset deficits in operating and financing cash flows. Cash flow used by financing activities was $2.0 million in 2001, as the Company reduced its revolving credit outstanding and purchased shares of its common stock in the open market. Future financing activities may use cash, if the Company believes its stock is undervalued and decides to continue to purchase its shares in the open market. The Board of Directors has authorized the purchase in the open market of approximately $1.0 million of additional shares. The Company believes that its current capital resources, together with cash flow from its operations and investing activities will be sufficient to meet its anticipated working capital requirements for the foreseeable future. There can be no assurances, however, that such will be the case. 27 To retain its certificate of authority, the Florida insurance laws and regulations require that Federated National and American Vehicle maintain capital surplus equal to the greater of 10% of its liabilities or the 2001 statutory minimum capital and surplus requirement of $3.0 million as defined in the Florida Insurance Code. The Companies are in compliance with this requirement. The Companies are also required to adhere to prescribed net premium-to-capital surplus ratios and for the year ended December 31, 2001, the Companies were in compliance with these ratios. The maximum amount of dividends that can be paid by Florida insurance companies without prior approval of the Florida Commissioner, is subject to restrictions relating to statutory surplus. The maximum dividend that may be paid in 2001, by the insurance companies without prior approval is limited to the lesser of statutory net income from operations of the preceding calendar year or 10% of statutory unassigned capital surplus as of the preceding December 31. No dividends were paid by Federated National or American Vehicle during 2001, 2000 or 1999. The Company is required to comply with the NAIC's risk-based capital requirements. The NAIC's risk-based capital requirements are a method of measuring the amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. NAIC's risk-based capital standards are used by regulators to determine appropriate regulatory actions relating to insurers who show signs of weak or deteriorating condition. As of December 31, 2001, based on calculations using the appropriate NAIC formula, the Company's total adjusted capital is in excess of ratios that would require any form of regulatory action. GAAP differs in some respects from reporting practices prescribed or permitted by the Florida Department of Insurance. Federated National's statutory capital surplus was approximately $5.7 million as of December 31, 2001 and $6.2 million as of December 31, 2000. Statutory net income was a loss of $2.1 million and $1.4 million for the years ended December 31, 2001 and 2000, respectively, and income of $1.1 million for 1999. American Vehicle had statutory capital surplus of approximately $3.1 million as of December 31, 2001 and had statutory net income of $64,000 in 2001. 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. The primary assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of the general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the cost of paying losses and LAE. Insurance premiums are established before the Company knows the amount of loss and LAE and the extent to which inflation may affect such expenses. Consequently, the Company attempts to anticipate the future impact of inflation when establishing rate levels. While the Company attempts to charge adequate rates, the Company may be limited in raising its premium levels for competitive and regulatory reasons. Inflation also affects the market value of the Company's investment portfolio and the investment rate of return. Any future economic changes which result in prolonged and increasing levels of inflation could cause increases in the dollar amount of incurred loss and LAE and thereby materially adversely affect future liability requirements. 28 SELECTED QUARTERLY FINANCIAL DATA
Year ended December 31, 2001 -------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------ ------- ------- -------- Revenue: Net premiums earned .................................. $ 4,683,724 $ 5,191,369 $ 5,273,233 $ 5,107,235 Other revenue ........................................ 4,864,426 2,971,661 3,400,731 3,984,187 ------------ ------------ ------------ ------------ Total revenue ..................................... 9,548,150 8,163,030 8,673,964 9,091,422 ------------ ------------ ------------ ------------ Expenses: Losses and loss adjustment expenses .................. 3,331,245 5,257,370 3,620,297 3,945,990 Other expenses ....................................... 5,450,816 5,328,624 6,376,311 4,974,451 ------------ ------------ ------------ ------------ Total expenses .................................... 8,782,061 10,585,994 9,996,608 8,920,441 ------------ ------------ ------------ ------------ Income (loss) before provision for income tax expense and extraordinary gain ...................... 766,089 (2,422,964) (1,322,644) 170,981 (Provision) benefit for income tax expense ............. (267,343) 933,293 (12,133) (23,264) ------------ ------------ ------------ ------------ Net income (loss) before extraordinary gain ....... 498,746 (1,489,671) (1,334,777) 147,717 Extraordinary gain ..................................... -- -- 1,185,895 -- ------------ ------------ ------------ ------------ Net income (loss) ................................. $ 498,746 $ (1,489,671) $ (148,882) $ 147,717 ============ ============ ============ ============ Basic net income (loss) per share before extraordinary gain ........................... $ 0.15 $ (0.47) $ (0.43) $ 0.05 ============ ============ ============ ============ Extraordinary gain per share ........................... -- -- 0.38 -- ============ ============ ============ ============ Basic net income (loss) per share ...................... $ 0.15 $ (0.47) $ (0.05) $ 0.05 ============ ============ ============ ============ Year ended December 31, 2000 -------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------------ ------------ ------------ ------------ Revenue: Net premiums earned .................................. $ 4,303,400 $ 5,897,780 $ 6,288,711 $ 3,831,448 Other revenue ........................................ 4,726,731 4,478,558 6,382,173 1,644,806 ------------ ------------ ------------ ------------ Total revenue ..................................... 9,030,131 10,376,338 12,670,884 5,476,254 ------------ ------------ ------------ ------------ Expenses: Losses and loss adjustment expenses .................. 2,998,076 4,377,200 4,306,663 3,308,179 Other expenses ....................................... 5,210,803 5,515,421 7,406,240 5,416,295 ------------ ------------ ------------ ------------ Total expenses .................................... 8,208,879 9,892,621 11,712,903 8,724,474 ------------ ------------ ------------ ------------ Income (loss) before provision for income tax expense and extraordinary gain ...................... 821,252 483,717 957,981 (3,248,220) (Provision) benefit for income tax expense ............. (280,023) (148,948) (344,132) 1,235,499 ------------ ------------ ------------ ------------ Net income (loss) ................................. $ 541,229 $ 334,769 $ 613,849 $ (2,012,721) ============ ============ ============ ============ Basic net income (loss) per share ...................... $ 0.16 $ 0.10 $ 0.18 $ (0.60) ============ ============ ============ ============
29 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - ------- --------------------------------------------------------- The Company's investment objective is to maximize total rate of return after Federal income taxes while maintaining liquidity and minimizing risk. The Company's current investment policy limits investment in non-investment grade fixed maturity securities (including high-yield bonds), and limits total investments in preferred stock, common stock and mortgage notes receivable to 17%, 0% and 10%, respectively, of total consolidated investments. The Company also complies with applicable laws and regulations, which further restrict the type, quality and concentration of investments. In general, these laws and regulations permit investments, within specified limits and subject to certain qualifications, in Federal, state and municipal obligations, corporate bonds, preferred and common equity securities and real estate mortgages. The Company's investment policy is established by its Board of Directors and is reviewed on a regular basis. Pursuant to this investment policy, as of December 31, 2001, approximately 95.5% of the Company's investments were in fixed income securities and short-term investments, which are considered to be available for sale, based upon the Company's intent at the time of purchase. Fixed maturities are considered available for sale and are marked to market. The Company may in the future also consider fixed maturities to be held to maturity and carried at amortized cost. The Company does not use any material swaps, options, futures or forward contracts to hedge or enhance its investment portfolio. The Company's investment portfolio is managed by the Company's Investment Committee consisting of the Company's President and one outside advisor, in accordance with guidelines established by the Florida Department of Insurance. The table below sets forth investment results for the periods indicated.
YEARS ENDED DECEMBER 31, 2001 2000 1999 ---- ---- ---- (DOLLARS IN THOUSANDS) Interest on fixed maturities............................... $ 485 $ 552 $ 777 Dividends on equity securities............................. 13 44 72 Interest on short-term investments......................... 559 647 23 Other...................................................... 39 10 5 ------- ----- ----- Total investment income.................................... 1,096 1,253 877 Investment expense......................................... (29) (28) (23) ------- ------ ----- Net investment income...................................... $ 1,067 $1,225 $ 854 ======= ====== ===== Net realized gain (loss)................................... $(2,912) $ (109) $ 952 ======= ====== =====
The following table summarizes, by type, the investments of the Company as of December 31, 2001.
CARRYING PERCENT AMOUNT OF TOTAL ------- -------- (DOLLARS IN THOUSANDS) Fixed maturities, at market: U.S. government agencies and authorities $ 2,630 15.0% Obligations of states and political subdivisions 5,986 34.3 Corporate securities 7,954 45.4 Collateralized mortgage obligations 143 0.8 ------- ---- Total fixed maturities 16,713 95.5 Equity securities, at market 192 1.1 Mortgage notes receivable 602 3.4 ------- ---- Total investments $17,507 100% ======= =====
30 Fixed maturities are carried on the Company's balance sheet at market. At December 31, 2001, fixed maturities had the following quality ratings (by Moody's Investors Service, Inc. ("Moody's") and for securities not assigned a rating by Moody's, by Standard and Poor's Corporation): CARRYING PERCENT OF AMOUNT TOTAL ------ ----- (DOLLARS IN THOUSANDS) AAA................... $ 2,875 17.2% AA.................... 255 1.5 A..................... 5,844 35.0 BBB................... 2,030 12.1 BB++.................. 2,193 13.1 Not rated............. 3,516 21.1 ------- ----- $16,713 100.0% ======= ===== The following table summarizes, by maturity, the fixed maturities of the Company as of December 31, 2001.
CARRYING PERCENT OF AMOUNT TOTAL ------ ----- (DOLLARS IN THOUSANDS) Matures In: One year or less..................................... $434 2.6% One year to five years............................... 7,407 44.3 Five years to 10 years............................... 3,643 21.8 More than 10 years................................... 5,229 31.3 ------- ----- Total fixed maturities........................... $16,713 100.0% ======= =====
At December 31, 2001, the weighted average maturity of the fixed maturities portfolio was approximately 8 years. The following table provides information about the Company's financial instruments as of December 31, 2001 that are sensitive to changes in interest rates. The table presents principal cash flows and the related weighted average interest rate by expected maturity date:
Carrying 2002 2003 2004 2005 2006 Thereafter Total Amount ---- ---- ---- ---- ---- ---------- ----- -------- (dollars in thousands) Principal amount by expected maturity: U.S. government agencies and authorities $425 $ -- $100 $1,140 $416 $500 $2,581 $2,630 Obligations of states and political subdivisions -- 100 100 -- -- 5,870 6,070 5,986 Corporate securities -- -- 1,000 -- 4,416 2,834 8,250 7,954 Collateralized mortgage obligations 2 2 2 2 2 126 136 143 Equity securities, at market -- -- -- -- -- 250 250 192 Mortgage notes receivable 456 7 7 8 9 115 602 602 --- ---- ------ ------ ------ ------ ------- ------- Total investments $883 $109 $1,209 $1,150 $4,843 $9,695 $17,889 $17,507 ==== ==== ====== ====== ====== ====== ======= ======= Weighted average interest rate by expected maturity: U.S. government agencies and authorities 5.39% --% 5.88% 7.13% 4.47% 8.00% 6.54% Obligations of states and political subdivisions -- 4.60 6.00 -- -- 5.18 5.19 Corporate securities -- -- 6.50 -- 6.99 7.03 6.94 Collateralized mortgage obligations 8.00 8.00 8.00 8.00 8.00 8.00 8.00 Equity securities, at market -- -- -- -- -- 5.49 5.49 Mortgage notes receivable 9.98 8.50 8.50 8.50 8.50 8.50 9.62 ----- ---- ---- ---- ---- ---- ---- Total investments 7.77% 4.90% 6.42% 7.14% 6.78% 5.95% 6.29% ===== ==== ==== ==== ==== ==== ====
31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- ------------------------------------------- 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Reports................................................................................. 33 Consolidated Balance Sheets as of December 31, 2001 and 2000............................................................................ 35 Consolidated Statements of Operations For the years ended December 31, 2001, 2000 and 1999........................................................ 36 Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (Loss) For the years ended December 31, 2001, 2000 and 1999........................................................ 37 Consolidated Statements of Cash Flows For the years ended December 31, 2001, 2000 and 1999........................................................ 38 Notes to Consolidated Financial Statements.................................................................... 40
32 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of 21st Century Holding Company: We have audited the accompanying consolidated balance sheets of 21st Century Holding Company and Subsidiaries ("the Company" and a Florida Corporation) as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in shareholders' equity and comprehensive income (loss) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 21st Century Holding Company and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. MCKEAN, PAUL, CHRYCY, FLETCHER & CO. Miami, Florida, March 29, 2002. 33 INDEPENDENT AUDITORS' REPORT The Board of Directors 21st Century Holding Company: We have audited the accompanying consolidated statement of operations of 21st Century Holding Company and subsidiaries (the "Company") and the related consolidated statements of changes in shareholders' equity and comprehensive income (loss), and cash flows for the year ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of the operations of 21st Century Holding Company and subsidiaries and their cash flows for the year ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Miami, Florida March 30, 2000 34 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000
2001 2000 ---- ---- ASSETS Investments Fixed maturities, available for sale, at fair value .......................... $ 16,713,321 $ 15,691,147 Equity securities ............................................................ 192,500 2,889,627 Mortgage loans ............................................................... 601,601 385,024 ------------ ------------ Total investments ........................................................ 17,507,422 18,965,798 ------------ ------------ Cash and cash equivalents ...................................................... 2,150,665 2,627,041 Finance contracts, consumer loans and pay advances receivable, net of allowance for credit osses of $723,756 and $832,231, respectively ............ 10,813,881 13,792,791 Prepaid reinsurance premiums ................................................... 5,559,909 2,924,082 Premiums receivable, net of allowance for credit losses of $235,000 and $325,000, respectively ....................................................... 1,560,914 246,787 Reinsurance recoverable, net ................................................... 7,053,329 3,142,239 Deferred acquisition costs, net ................................................ 11,952 1,192,260 Deferred income taxes .......................................................... 2,252,176 2,915,894 Property, plant and equipment, net ............................................. 5,086,884 5,381,780 Other assets ................................................................... 2,442,092 1,428,547 Goodwill, net .................................................................. 1,789,353 2,795,750 ------------ ------------ Total assets ............................................................. $ 56,228,577 $ 55,412,969 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Unpaid losses and loss adjustment expenses ..................................... $ 11,005,337 $ 9,765,848 Unearned premiums .............................................................. 14,951,228 13,038,417 Premium deposits ............................................................... 1,133,977 382,058 Revolving credit outstanding ................................................... 6,676,817 8,091,034 Bank overdraft ................................................................. 3,522,512 3,212,962 Unearned commissions ........................................................... 2,098,808 2,505,690 Accounts payable and accrued expenses .......................................... 2,030,015 2,674,088 Drafts payable to insurance companies .......................................... 600,752 786,875 ------------ ------------ Total liabilities ........................................................ 42,019,446 40,456,972 ------------ ------------ Commitments and contingencies Shareholders' equity: Common stock of $0.01 par value. Authorized 25,000,000 shares; issued 3,410,667 shares; outstanding 3,030,001 and 3,330,367 shares, respectively . 34,107 34,107 Additional paid-in capital ................................................... 12,833,146 12,894,630 Accumulated other comprehensive deficit ...................................... (218,137) (1,300,404) Retained earnings ............................................................ 2,400,301 3,642,066 Treasury stock, 380,666 and 80,300 shares, respectively, at cost ............. (840,286) (314,402) ------------ ------------ Total shareholders' equity ............................................... 14,209,131 14,955,997 ------------ ------------ Total liabilities and shareholders' equity ............................... $ 56,228,577 $ 55,412,969 ============ ============
See accompanying notes to consolidated financial statements. 35 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999 ---- ---- ---- Revenue: Gross premiums written ........................................ $ 34,271,338 $ 32,073,768 $ 19,273,561 Gross premiums ceded .......................................... (12,789,404) (7,625,095) (6,221,853) ------------ ------------ ------------ Net premiums written ................................. 21,481,934 24,448,673 13,051,708 Decrease (increase) in unearned premiums, net of prepaid reinsurance premiums ............................ (1,226,373) (4,127,334) 404,640 ------------ ------------ ------------ Net premiums earned .................................. 20,255,561 20,321,339 13,456,348 Commission income ............................................. 2,828,779 2,780,869 4,410,856 Finance revenue ............................................... 5,267,523 5,709,848 3,696,843 Managing general agent fees ................................... 5,871,388 5,410,500 963,797 Net investment income ......................................... 1,066,641 1,225,413 853,659 Net realized investment gains (losses) ........................ (2,911,658) (109,256) 952,153 Other income .................................................. 3,098,332 2,214,894 1,043,798 ------------ ------------ ------------ Total revenue ........................................ 35,476,566 37,553,607 25,377,454 ------------ ------------ ------------ Expenses: Losses and loss adjustment expenses ........................... 16,154,902 14,990,118 8,094,677 Operating and underwriting expenses ........................... 11,644,183 11,892,577 7,032,428 Salaries and wages ............................................ 8,478,771 9,375,775 7,474,572 Amortization of deferred acquisition costs, net ............... 1,467,238 1,673,754 (18,563) Amortization of goodwill ...................................... 540,010 606,653 547,548 ------------ ------------ ------------ Total expenses ....................................... 38,285,104 38,538,877 23,130,662 ------------ ------------ ------------ Income (loss) before provision for income tax expense and extraordinary gain ........................................ (2,808,538) (985,270) 2,246,792 (Provision) benefit for income tax expense ...................... 630,553 462,396 (680,061) ------------ ------------ ------------ Net income (loss) before extraordinary gain .......... (2,177,985) (522,874) 1,566,731 Extraordinary gain .............................................. 1,185,895 -- -- ------------ ------------ ------------ Net income (loss) .................................... $ (992,090) $ (522,874) $ 1,566,731 ============ ============ ============ Basic net income (loss) per share before extraordinary gain ..... $ (0.69) $ (0.15) $ 0.46 ============ ============ ============ Extraordinary gain .............................................. 0.38 -- -- ============ ============ ============ Basic net income (loss) per share ............................... $ (0.31) $ (0.15) $ 0.46 ============ ============ ============
See accompanying notes to consolidated financial statements. 36 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Accumulated Additional Other Comprehensive Common Paid-In Comprehensive DESCRIPTION Income Stock Capital Deficit - ----------- ------------ ----------- ---------- ---------- Balance as of December 31, 1998 ....... -- $ 33,500 $ 12,460,287 $ (257,227) Net income ........................... $ 1,566,731 -- -- -- Stock issued for acquisitions ........ -- 600 429,400 -- Acquisition of common shares ......... -- -- -- -- Cancellation of common shares ........ -- (400) (199,600) -- Net unrealized change in investments, net of tax effect of $595,855 ...... (987,603) -- -- (987,603) ------------ Comprehensive income .................. $ 579,128 -- -- -- ============ ------------ ------------ ------------ Balance as of December 31, 1999 ...... 33,700 12,690,087 (1,244,830) Net loss ............................. $ (522,874) -- -- -- Cash dividends ....................... -- -- -- -- Acquisition of common shares ......... -- -- -- -- Stock issued ......................... -- 407 204,543 -- Net unrealized change in investments, net of tax effect of $33,530 ...... (55,574) -- -- (55,574) ------------ Comprehensive loss .................... $ (578,448) -- -- -- ============ ------------ ------------ ------------ Balance as of December 31, 2000 ....... 34,107 12,894,630 (1,300,404) Net loss ............................. $ (992,090) -- -- -- Cash dividends ...................... -- -- -- -- Acquisition of common shares ........ -- -- -- -- Stock issued to employees .......... -- -- (78,814) -- Stock option expense ................ -- -- 17,330 -- Net unrealized change in investments, net of tax effect of $784,079 ... 1,082,267 -- -- 1,082,267 ------------ Comprehensive income .................. $ 90,177 -- -- -- ============ ------------ ------------ ------------ Balance as of December 31, 2001 ....... $ 34,107 $ 12,833,146 $ (218,137) ============ ============ ============ [RESTUBBED] Total Retained Treasury Shareholders' DESCRIPTION Earnings Stock Equity - ----------- --------- ------- ---------- Balance as of December 31, 1998 ....... $ 2,731,263 $ -- $ 14,967,823 Net income ........................... 1,566,731 -- 1,566,731 Stock issued for acquisitions ........ -- -- 430,000 Acquisition of common shares ......... -- (223,063) (223,063) Cancellation of common shares ........ -- 200,000 -- Net unrealized change in investments, net of tax effect of $595,855 ...... -- -- (987,603) Comprehensive income .................. -- -- -- ------------ ------------ ------------ Balance as of December 31, 1999 ...... 4,297,994 (23,063) 15,753,888 Net loss ............................. (522,874) -- (522,874) Cash dividends ....................... (133,054) -- (133,054) Acquisition of common shares ......... -- (291,339) (291,339) Stock issued ......................... -- -- 204,950 Net unrealized change in investments, net of tax effect of $33,530 ...... -- -- (55,574) Comprehensive loss .................... -- -- -- ------------ ------------ ------------ Balance as of December 31, 2000 ....... 3,642,066 (314,402) 14,955,997 Net loss ............................. (992,090) -- (992,090) Cash dividends ...................... (249,675) -- (249,675) Acquisition of common shares ........ -- (784,798) (784,798) Stock issued to employees .......... -- 258,914 180,100 Stock option expense ................ -- -- 17,330 Net unrealized change in investments, net of tax effect of $784,079 ... -- -- 1,082,267 Comprehensive income .................. -- -- -- ------------ ------------ ------------ Balance as of December 31, 2001 ....... $ 2,400,301 $ (840,286) $ 14,209,131 ============ ============ ============
See accompanying notes to consolidated financial statements. 37 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999 ------------ ------------ ------------ Cash flow from operating activities: Net income (loss) ........................................................... $ (992,090) $ (522,874) $ 1,566,731 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Amortization (accretion) of investment premium (discount), net ........... (50,738) (10,592) 3,232 Depreciation and amortization of property plant and equipment ............ 396,047 323,743 199,537 Amortization of goodwill ................................................. 540,010 606,653 547,548 Deferred income tax expense .............................................. (132,284) (1,096,850) (106,337) Net realized investment (gains) losses ................................... 2,911,658 109,256 (952,153) Amortization of deferred acquisition costs, net .......................... 1,467,238 1,673,754 (18,563) Provision for credit losses, net ......................................... 2,506,757 1,994,274 838,335 Provision for uncollectible premiums receivable .......................... 421,349 432,052 50,000 Loss on sale of agencies ................................................. 13,198 -- -- Stock option expense ..................................................... 17,330 -- -- Extraordinary Gain ....................................................... (1,185,895) -- -- Changes in operating assets and liabilities: Premiums receivable .................................................. (1,735,476) 577,646 (1,306,485) Prepaid reinsurance premiums ......................................... (2,635,827) (319,475) 92,597 Reinsurance recoverable, net ......................................... (3,911,090) (1,471,390) 255,887 Deferred acquisition costs, net ...................................... (286,930) (2,876,257) 118,330 Other assets ......................................................... (550,666) (447,261) (163,146) Unpaid losses and loss adjustment expenses ........................... 1,136,120 3,451,541 (1,289,153) Unearned premiums .................................................... 1,912,811 5,001,334 (497,237) Premium deposits ..................................................... 751,919 24,872 (135,236) Unearned commissions ................................................. (406,882) 1,702,933 216,165 Drafts payable to insurance companies ................................ (186,123) 474,224 16,704 Accounts payable and accrued expenses ................................ (945,983) 2,195,386 (1,420,953) ------------ ------------ ------------ Net cash (used in) provided by operating activities ............................. (945,547) 11,822,969 (1,984,197) ------------ ------------ ------------ Cash flow from investing activities: Proceeds from sale of investment securities available for sale .............. 62,419,076 49,110,449 37,826,024 Purchases of investment securities available for sale ....................... (59,713,976) (54,081,724) (34,715,726) Finance contracts receivable, consumer loans and pay advances receivable .... 472,153 (6,144,902) (3,386,905) Mortgage loans .............................................................. (450,000) (272,773) (120,000) Sale of and collection of mortgage loans .................................... 233,423 7,053 163,860 Purchases of property and equipment ......................................... (153,387) (3,191,018) (910,561) Net cash used in acquisitions ............................................... (301,330) -- (491,697) ------------ ------------ ------------ Net cash provided by (used in) investing activities ............................ 2,505,959 (14,572,915) (1,635,005) ------------ ------------ ------------ Cash flow from financing activities: Bank overdraft .............................................................. 309,550 1,684,226 328,795 Loans from Shareholders ..................................................... -- -- (400,494) Dividends paid .............................................................. (188,807) (67,260) -- Purchases of treasury stock ................................................. (743,314) (291,339) (223,063) Repayment of indebtedness ................................................... -- (312,823) -- Revolving credit outstanding ................................................ (1,414,217) 3,441,008 2,587,078 ------------ ------------ ------------ Net cash (used in) provided by financing activities ............................. (2,036,788) 4,453,812 2,292,316 ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents ............................ (476,376) 1,703,866 (1,326,886) Cash and cash equivalents at beginning of year .................................. 2,627,041 923,175 2,250,061 ------------ ------------ ------------ Cash and cash equivalents at end of year ........................................ $ 2,150,665 $ 2,627,041 $ 923,175 ============ ============ ============
(Continued) See accompanying notes to consolidated financial statements. 38 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
Supplemental disclosure of cash flow information: Cash paid (received) during the year for: Interest ........................................................................ $ 591,618 $ 662,809 $ 374,496 ========== ========== ========== Income taxes .................................................................. $ (915,037) $1,529,690 $1,788,500 ========== ========== ========== Non-cash investing and financing activities: Accrued dividend payable ......................................................... $ 60,868 $ 65,794 -- ========== ========== Stock issued to employees ........................................................ $ 180,100 $ 100,000 -- ========== ========== Stock received for sale of agency ................................................ $ 41,484 -- -- ========== Notes receivable, net of deferred gains, received for sales of agencies ......... $ 463,941 -- -- ========== Shares issued for settlement of note payable ..................................... -- $ 104,950 -- ========== Shares issued for acquisition of agency and majority owned subsidiary ............ -- -- $ 430,000 ========== Notes payable issued for agency acquisition ..................................... -- -- $ 300,000 ==========
See accompanying notes to consolidated financial statements. 39 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (1) ORGANIZATION AND BUSINESS The accompanying consolidated financial statements include the accounts of 21st Century Holding Company and its subsidiaries (collectively referred to as the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. The Company is a vertically integrated insurance holding company, which, through its subsidiaries, controls substantially all aspects of the insurance underwriting, distribution and claims process. The Company underwrites nonstandard and standard personal automobile insurance and homeowners and mobile home property and casualty insurance in the State of Florida through its wholly-owned subsidiaries, Federated National Insurance Company ("Federated National") and American Vehicle Insurance Company ("American Vehicle"). The Company has underwriting authority for third-party insurance companies, which it represents through a wholly-owned managing general agent, Assurance Managing General Agents, Inc. ("Assurance MGA"). The Company internally processes claims made by Federated National, American Vehicle and third-party insurance companies through a wholly-owned claims adjusting company, Superior Adjusting, Inc. ("Superior"). The Company also offers premium financing to its own and third-party insureds through its wholly-owned subsidiary, Federated Premium Finance, Inc. ("Federated Premium"), and pay advances through Fed First Corp ("Fed First"). The Company markets and distributes Federated National's, American Vehicle's and third-party insurers' products and its other services primarily in South Florida, through a network of 23 agencies, owned by the Company's wholly-owned subsidiary Federated Agency Group, Inc. ("Federated Agency Group"), 18 franchised agencies and approximately 125 active independent agents. The Company, through its wholly-owned subsidiary, FedUSA, Inc. ("FedUSA"), franchises agencies under the FedUSA name. The Company offers income tax preparation software and service through its 80% owned subsidiary Express Tax Service Company ("Express Tax"). (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (A) CASH AND CASH EQUIVALENTS The Company considers all short-term highly liquid investments with original maturities of three months or less to be cash equivalents. (B) INVESTMENTS All of the Company's investment securities have been classified as available-for-sale because all of the Company's securities are available to be sold in response to the Company's liquidity needs, changes in market interest rates and asset-liability management strategies, among other reasons. Investments available-for-sale are stated at fair value on the balance sheet. Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive income within shareholders' equity, net of related deferred income taxes. A decline in the fair value of an available-for-sale security below cost that is deemed other than temporary results in a charge to income, resulting in the establishment of a new cost basis for the security. For the years ended December 31, 2001 and 2000, there are no unrealized losses deemed to be other than temporary. For the year ended December 31, 1999, the unrealized losses for declines in fair value deemed to be other than temporary were approximately $100,000 and are reported as a component of net realized investment gains (losses) on the consolidated statements of operations. 40 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Premiums and discounts are amortized or accreted, respectively, over the life of the related fixed maturity security as an adjustment to yield using a method that approximates the effective interest method. Dividends and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific-identification method for determining the cost of securities sold. (C) PREMIUM REVENUE Premium revenue on property and casualty insurance is earned on a pro rata basis over the life of the policies. Unearned premiums represent the portion of the premium related to the unexpired policy term. (D) DEFERRED ACQUISITION COSTS Deferred acquisition costs represent primarily commissions paid to the Company's outside agents at the time of policy issuance (to the extent they are recoverable from future premium income) net of ceding premium commission earned from reinsurers, and are amortized over the life of the related policy in relation to the amount of premiums earned. The method followed in computing deferred acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, unpaid losses and loss adjustment expenses and certain other costs expected to be incurred as the premium is earned. There is no indication that these costs will not be fully recoverable in the near term. An analysis of deferred acquisition costs follows: YEAR ENDED DECEMBER 31, 2001 2000 1999 ----------- ----------- ----------- Balance, beginning of period $ 1,192,260 $ (10,243) $ 89,524 Acquisition costs deferred 286,930 2,876,257 (118,330) Amortized to expense during period (1,467,238) (1,673,754) 18,563 ----------- ----------- ----------- Balance, end of period $ 11,952 $ 1,192,260 $ (10,243) =========== =========== =========== The negative deferred acquisition cost balance as of December 31, 1999 is the result of unearned reinsurance commissions exceeding policy acquisition costs. (E) PREMIUM DEPOSITS Premium deposits represent premiums received on policies not yet written. The Company takes approximately 30 working days to write the policy from the date the cash and policy application are received. (F) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES Unpaid losses and loss adjustment expenses are provided for through the establishment of liabilities in amounts estimated to cover incurred losses and loss adjustment expenses. Such liabilities are determined based upon the Company's assessment of claims pending and the development of prior years' loss liability. These amounts include liabilities based upon individual case estimates for reported losses and loss adjustment expenses and estimates of such amounts that are incurred but not reported. Changes in the estimated liability are charged or credited to operations as the estimates are revised. Unpaid losses and loss adjustment expenses are reported net of estimates for salvage and subrogation recoveries, which totaled approximately $544,000, $559,000 and $342,000, net of reinsurance, at December 31, 2001, 2000 and 1999, respectively. 41 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 The estimates of unpaid losses and loss adjustment expenses are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of the process, the Company reviews historical data and considers various factors, including known and anticipated legal developments, changes in social attitudes, inflation and economic conditions. As experience develops and other data becomes available, these estimates are revised, as required, resulting in increases or decreases to the existing unpaid losses and loss adjustment expenses. Adjustments are reflected in results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates. There can be no assurance that the Company's unpaid losses and loss adjustment expenses will be adequate to cover actual losses. If the Company's unpaid losses and loss adjustment expenses prove to be inadequate, the Company will be required to increase the liability with a corresponding reduction in the Company's net income in the period in which the deficiency is identified. Future loss experience substantially in excess of the established unpaid losses and loss adjustment expenses could have a material adverse effect on the Company's business, results of operations and financial condition. The Company does not discount unpaid losses and loss adjustment expenses for financial statement purposes. (G) COMMISSION INCOME Commission income consists of fees earned by the Company-owned agencies placing business with third party insurers and third party premium finance companies. Commission income is earned on a pro rata basis over the life of the policies. Unearned commissions represent the portion of the commissions related to unexpired policy terms. (H) FINANCE REVENUE Interest and service income, resulting from the financing of insurance premiums and pay advances, is recognized using a method that approximates the effective interest method. Late charges are recognized as income when chargeable. (I) CREDIT LOSSES Provisions for credit losses are charged to operations in amounts sufficient to maintain the allowance for credit losses at a level considered adequate to cover anticipated losses. The activity in the allowance for credit losses for premiums receivable was as follows for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 -------- --------- ------- Allowance for credit losses at beginning of year $325,000 $50,000 $ -- Additions charged to bad debt expense 421,349 432,052 50,000 Write-downs charged against the allowance (511,349) (157,052) -- -------- --------- ------- Allowance for credit losses at end of year $235,000 $325,000 $50,000 ======== ======== =======
See Note 4 for the activity in the allowance for credit losses for finance contracts, consumer loans and pay advances receivable. (J) MANAGING GENERAL AGENT FEES If substantially all the costs associated with the managing general agent ("MGA") contract are incurred during the underwriting process, then the MGA fees and the related acquisition costs are recognized at the time the policy is underwritten, net of estimated cancellations. If the MGA contract requires significant involvement subsequent to the completion of the underwriting process, then the MGA fees and related acquisition costs are deferred and recognized over the life of the policy. 42 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (K) POLICY FEES Policy fees represent a $25 non-refundable application fee for insurance coverage, which is intended to reimburse the Company for the costs incurred to underwrite the policy. The fees and related costs are recognized when the policy is underwritten. These underwriting costs are not included as a component of deferred acquisition costs. (L) REINSURANCE The Company recognizes the income and expense on reinsurance contracts principally on a pro-rata basis over the life of the policies covered under the reinsurance agreements. The Company is reinsured under separate reinsurance agreements for the different lines of business underwritten. Reinsurance contracts do not relieve the Company from its obligations to policyholders. The Company continually monitors its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company only cedes risks to reinsurers whom the Company believes to be financially sound. At December 31, 2001, all reinsurance recoverables are considered collectible. (M) INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (N) CONTINGENT REINSURANCE COMMISSION The Company's reinsurance contracts provide ceding commissions for premiums written which are subject to adjustment. The amount of ceding commissions is determined by the loss experience for the reinsurance agreement term. The reinsurer provides commissions on a sliding scale with maximum and minimum achievable levels. The reinsurer provides the Company with the provisional commissions. The Company has recognized the commissions based on the current loss experience for the policy year premiums. This results in establishing a liability for the excess of provisional commissions retained compared to amounts recognized, which is subject to variation until the ultimate loss experience is determinable. No contingent ceding commissions were recognized for the year ended December 31, 2001, approximately $78,000 of contingent ceding commissions were recognized as an expense for the year ended December 31, 2000, and approximately $89,000 of contingent ceding commissions were recognized in income in 1999. (O) CONCENTRATION OF CREDIT RISK Financial instruments, which potentially expose the Company to concentrations of credit risk consist primarily of investments, premiums receivable, amounts due from reinsurers on paid and unpaid losses, and finance contracts, consumer loans and pay advances receivable. The Company has not experienced significant losses related to premiums receivable from individual policyholders or groups of policyholders in a particular industry or geographic area. The Company has not experienced significant losses related to consumer loans or pay advances receivable. Management believes no credit risk beyond the amounts provided for collection losses is inherent in the Company's premiums receivable or finance contracts, consumer loans and pay advances receivable. In order to reduce credit risk for amounts due from reinsurers, the Company seeks to do business with financially sound reinsurance companies and regularly reviews the financial strength of all reinsurers used. 43 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (P) DUE FROM FLORIDA JOINT UNDERWRITING ASSOCIATION (THE "ASSOCIATION") PARTICIPATION An amount recorded as a component of other assets represents the Company's proportionate share of the net assets of the Association. The Company's proportionate share of premiums, losses, loss expenses, and other related items is recorded and presented in their respective accounts in the accompanying consolidated financial statements. (Q) ACCOUNTING CHANGES Effective January 1, 1999, the Company adopted Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for Insurance Related Assessments", which requires entities to recognize liabilities for insurance related assessments when such assessments are probable and the amount of the assessments can be reasonably estimated. Adoption of this statement did not materially impact the Company's results of operations or financial position. (R) RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS') No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among other provisions, SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It also requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for financial statements for fiscal years beginning after June 15, 2000. There was no impact to the Company as a result of adopting this statement. On March 31, 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - An Interpretation of APB Opinion No. 25" (FIN 44). This interpretation provides guidance for issues that have arisen in applying APB Opinion No. 25, "Accounting for Stock Issued to Employees". FIN 44 applies prospectively to new awards, exchanges of awards in a business combination, modifications to outstanding awards, and changes in grantee status that occur on or after July 1, 2000, except for the provisions related to repricings and the definition of an employee which apply to awards issued after December 15, 1998. The provisions related to modifications to fixed stock option awards to add a reload feature are effective for awards modified after January 12, 2000. The implementation of FIN 44 did not have a material impact on the Company's consolidated financial statements and notes thereto. In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Company is required to adopt the provisions of SFAS No. 141 immediately, except with regard to business combinations initiated prior to July 1, 2001, which it expects to account for using the pooling-of-interests method, and SFAS No. 142 becomes effective for fiscal years beginning after December 15, 2001. Furthermore, goodwill and intangible assets determined to have an indefinite useful life acquired in a purchase business combination completed after June 30, 2001, but before SFAS No. 142 is adopted in full will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized and tested for impairment in accordance with the appropriate pre-SFAS No. 142 accounting requirements prior to the adoption of SFAS No. 142. 44 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 SFAS No. 141 will require, upon adoption of SFAS No. 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with SFAS No. 142's transitional goodwill impairment evaluation, the SFAS will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of operations. And finally, any unamortized negative goodwill existing at the date SFAS No. 142 is adopted must be written off as the cumulative effect of a change in accounting principle. As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $1,789,353, and unamortized identifiable intangible assets in the amount of $16,964, all of which will be subject to the transition provisions of SFAS Nos. 141 and 142. Amortization expense related to goodwill was $540,010 for the year ended December 31, 2001. Because of the extensive effort needed to comply with adopting SFAS Nos. 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements at the date of this report, including whether it will be required to recognize any transitional impairment losses as the cumulative effect of a change in accounting principle. (S) USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with general accepted accounting principles requires management to make estimates and assumptions that affect the reported financial statement balances as well as the disclosure of contingent assets and liabilities. Actual results could differ materially from those estimates used. Similar to other property and casualty insurers, the Company's liability for unpaid losses and loss adjustment expenses, although supported by actuarial projections and other data is ultimately based on management's reasoned expectations of future events. Although considerable variability is inherent in these estimates, management believes that this liability is adequate. Estimates are reviewed regularly and adjusted as necessary. Such adjustments are reflected in current operations. In addition, the realization of the Company's deferred income tax assets is dependent on generating sufficient future taxable income. It is reasonably possible that the expectations associated with these accounts could change in the near term and that the effect of such changes could be material to the consolidated financial statements. 45 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (T) NATURE OF OPERATIONS The following is a description of the most significant risks facing the Company and how it mitigates those risks: (I) LEGAL/REGULATORY RISKS--the risk that changes in the regulatory environment in which an insurer operates will create additional expenses not anticipated by the insurer in pricing its products. That is, regulatory initiatives designed to reduce insurer profits, restrict underwriting practices and risk classifications, mandate rate reductions and refunds, and new legal theories or insurance company insolvencies through guaranty fund assessments may create costs for the insurer beyond those recorded in the financial statements. The Company attempts to mitigate this risk by monitoring proposed regulatory legislation and by assessing the impact of new laws. As the Company writes business only in the state of Florida, it is more exposed to this risk than some of its more geographically balanced competitors. (II) CREDIT RISK--the risk that issuers of securities owned by the Company will default or that other parties, including reinsurers to whom business is ceded, which owe the Company money, will not pay. The Company attempts to minimize this risk by adhering to a conservative investment strategy, maintaining reinsurance agreements with financially sound reinsurers, and by providing for any amounts deemed uncollectible. (III) INTEREST RATE RISK--the risk that interest rates will change and cause a decrease in the value of an insurer's investments. To the extent that liabilities come due more quickly than assets mature, an insurer might have to sell assets prior to maturity and potentially recognize a gain or a loss. (U) FAIR VALUE The fair value of the Company's investments are estimated based on prices published by financial services or quotations received from securities dealers and is reflective of the interest rate environment that existed as of the close of business on December 31, 2001 and 2000. Changes in interest rates subsequent to December 31, 2001 may affect the fair value of the Company's investments. Refer to note 3(a) for details. The carrying amounts for the following financial instrument categories approximate their fair values at December 31, 2001 and 2000 because of their short-term nature: cash and cash equivalents, premiums receivable, finance contracts, consumer loans and pay advance receivable, due from reinsurers, drafts payable to insurance companies, revolving credit outstanding, bank overdraft, and accounts payable and accrued expenses. The fair value of mortgage loans is estimated using the present value of future cash flows based on the market rate for similar types of loans. Carrying value approximates market value as rates used are commensurate with market rate. (V) GOODWILL Goodwill, representing the excess of cost over the fair value of assets acquired, is amortized on a straight-line basis over seven years. The carrying value of goodwill is periodically reviewed by the Company based on the expected future undiscounted operating cash flows of the related item. Based upon its most recent analysis, the Company believes that no impairment of goodwill exists at December 31, 2001. See Note 2 ( r ) for additional information. (W) STOCK OPTION PLAN The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Compensation cost for stock options, if any, is measured as the excess of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. 46 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 SFAS No. 123, "Accounting for Stock-Based Compensation", establishes accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. ( See Note 16.) (X) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation on property, plant and equipment is calculated on a straight-line basis over the following estimated useful lives: building and improvements - 30 years and furniture and fixtures 7 years. The carrying value of property, plant and equipment is periodically reviewed by the Company based on the expected future undiscounted operating cash flows of the related item. Based upon its most recent analysis, the Company believes that no impairment of property, plant and equipment exists at December 31, 2001. (Y) RECLASSIFICATIONS Certain 2000 and 1999 financial statement amounts have been reclassified to conform with 2001 presentation. (3) INVESTMENTS (A) FIXED MATURITIES AND EQUITY SECURITIES A summary of the amortized cost, estimated fair value, gross unrealized gains and losses of fixed maturities and equity securities at December 31, 2001 and 2000 is as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ----------- ----------- ----------- ----------- DECEMBER 31, 2001 Fixed Maturities: Mortgage-backed securities ................... $ 152,569 $ -- $ 9,794 $ 142,775 U. S. Government obligations ................. 2,604,780 25,144 -- 2,629,924 Obligations of states and political subdivisions ............................... 6,122,521 -- 136,017 5,986,504 Corporate securities ......................... 8,035,773 -- 81,655 7,954,118 ----------- ----------- ----------- ----------- $16,915,643 $ 25,144 $ 227,466 $16,713,321 =========== =========== =========== =========== Equity securities - preferred stocks ......... $ 208,316 $ -- $ 15,816 $ 192,500 =========== =========== =========== =========== DECEMBER 31, 2000 Fixed Maturities: Mortgage-backed securities ................... $ 223,277 $ -- $ 13,544 $ 209,733 U. S. Government obligations ................. 3,212,927 92,353 -- 3,305,280 Obligations of states and political subdivisions ............................... 10,568,822 -- 165,685 10,403,137 Corporate securities ......................... 2,044,485 -- 271,488 1,772,997 ----------- ----------- ----------- ----------- $16,049,511 $ 92,353 $ 450,717 $15,691,147 =========== =========== =========== =========== Equity Securities: Preferred stocks ............................. $ 218,396 $ -- $ 63,179 $ 155,217 Common stocks ................................ 4,397,351 $ -- 1,662,941 2,734,410 ----------- ----------- ----------- ----------- $ 4,615,747 $ -- $ 1,726,120 $ 2,889,627 =========== =========== =========== ===========
47 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Below is a summary of fixed maturities at December 31, 2001 and 2000 by contractual or expected maturity periods. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
DECEMBER 31, 2001 DECEMBER 31, 2000 AMORTIZED ESTIMATED AMORTIZED ESTIMATED COST FAIR VALUE COST FAIR VALUE ----------- ----------- ----------- ----------- Due in one year or less......................... $ 430,713 $ $434,338 $ 0 $ 0 Due after one year through five years..................................... 7,399,113 7,406,880 2,712,927 2,799,345 Due after five years through ten years.......................................... 3,701,348 3,642,922 3,975,492 3,817,916 Due after ten years............................. 5,384,469 5,229,181 9,361,092 9,073,886 ----------- ----------- ----------- ----------- $16,915,643 $16,713,321 $16,049,511 $15,691,147 =========== =========== =========== ===========
Political subdivision bonds with an amortized cost of approximately $1,519,000 and a fair market value of approximately $1,538,000 were on deposit with the Florida Department of Insurance as of December 31, 2001, as required by law. A summary of the sources of net investment income follows:
YEARS ENDED DECEMBER 31, 2001 2000 1999 ---- ---- ---- Fixed maturities................................ $ 484,913 $ 551,973 $ 776,948 Equity securities............................... 13,301 44,343 71,744 Cash and cash equivalents....................... 559,017 646,780 23,363 Other........................................... 38,390 10,459 5,162 --------- ---------- ---------- Total investment income...................... 1,095,621 1,253,555 877,217 Less investment expenses........................ (28,980) (28,142) (23,558) --------- ---------- ---------- Net investment income........................ $1,066,641 $1,225,413 $ 853,659 ========== ========== ==========
Proceeds from sales of fixed maturities and equity securities for the years ending December 31, 2001, 2000 and 1999 were $62,419,076, $49,110,449 and $37,826,024, respectively. A summary of realized investment gains (losses) and (increases) decreases in net unrealized losses follows:
YEARS ENDED DECEMBER 31, 2001 2000 1999 ------------ ----------- ------------ Net realized gains (losses): Fixed maturities................................. $ 173,294 $ (14,937) $ (66,048) Equity securities................................ (3,084,952) (94,319) 1,018,201 ------------ --------- ============ Total......................................... $ (2,911,658) $ (109,256) $ $952,153 ============ ========= ============ Change in net unrealized losses: Fixed maturities................................. $ 156,042 $1,112,530 $ (1,506,800) Equity securities................................ 1,710,304 (1,201,634) (71,022) ------------ ----------- ------------ Total......................................... $ 1,866,346 $ (89,104) $(1,577,822) ============ ========== ============
48 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (B) MORTGAGE LOANS A portion of these amounts represents outstanding balances from related party transactions. Refer to Note 13 for details. (4) FINANCE CONTRACTS, CONSUMER LOANS AND PAY ADVANCES RECEIVABLE Below is a summary of the components of the finance contracts, consumer loans and pay advances receivable balance:
DECEMBER 31, 2001 2000 ---- ---- Finance contracts receivable $11,678,176 $14,580,589 Consumer loans receivable -- 118,693 Pay advances receivable 322,763 493,707 ----------- ----------- 12,000,939 15,192,989 Less: Unearned income (463,302) (567,967) Allowance for credit losses (723,756) (832,231) ----------- ----------- Finance contracts, consumer loans and pay advances receivable, net $10,813,881 $13,792,791 =========== ===========
The activity in the allowance for credit losses was as follows for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 ---------- ----------- -------- Allowance for credit losses at beginning of year $ 832,231 $ 272,192 $195,883 Additions charged to bad debt expense 2,506,757 1,994,274 838,335 Write-downs charged against the allowance (2,615,232) (1,434,235) (762,026) ---------- ----------- -------- Allowance for credit losses at end of year $ 723,756 $ 832,231 $272,192 ========== =========== ========
As security, Federated Premium retains a contractual right, if a premium installment is not paid when due, to cancel the insurance policy and to receive the unearned premium from the insurer. (5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 2001 and 2000 consist of the following:
2001 2000 ---- ---- Land $ 917,369 $ 907,369 Building and Improvements 3,643,515 3,572,483 Furniture and Fixtures 1,633,994 1,698,335 ----------- ---------- 6,194,878 6,178,187 Accumulated Depreciation (1,107,994) (796,407) ----------- ---------- $ 5,086,884 $ 5,381,780 =========== ===========
Depreciation of property, plant, and equipment was $396,047, $323,743 and $199,537 during 2001, 2000 and 1999 respectively. 49 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (6) REINSURANCE The Company reinsures (cedes) a portion of its written premiums on a quota-share basis to nonaffiliated insurance companies in order to limit its loss exposure. The Company also maintains coverages to limit losses from large exposures, which the Company believes are adequate for its current volume. To the extent that reinsuring companies are unable to meet their obligations assumed under the reinsurance agreements, the Company remains primarily liable to its policyholders. The impact of reinsurance on the financial statements is as follows:
YEAR ENDED DECEMBER 31, 2001 2000 1999 ------------ ------------ ------------ Premiums written: Direct .................................. $ 34,271,338 $ 32,073,768 $ 19,273,561 Ceded ................................... (12,789,404) (7,625,095) (6,221,853) ------------ ------------ ------------ $ 21,481,934 $ 24,448,673 $ 13,051,708 ============ ============ ============ Premiums earned: Direct .................................. $ 32,358,300 $ 27,072,339 $ 19,770,797 Ceded ................................... (12,102,739) (6,751,000) (6,314,449) ------------ ------------ ------------ $ 20,255,561 $ 20,321,339 $ 13,456,348 ============ ============ ============ Losses and loss adjustment expenses incurred Direct .................................. $ 29,064,763 $ 21,003,683 $ 11,698,046 Ceded ................................... (12,909,861) (6,013,565) (3,603,369) ------------ ------------ ------------ $ 16,154,902 $ 14,990,118 $ 8,094,677 ============ ============ ============
AS OF DECEMBER 31, 2001 2000 ---- ---- Unpaid losses and loss adjustment expenses, net: Direct .......................... $ 11,005,337 $ 9,765,848 Ceded ........................... (4,798,556) (2,789,619) ------------ ------------ $ 6,206,781 $ 6,976,229 ============ ============ Unearned premiums: Direct .......................... $ 14,951,228 $ 13,038,417 Ceded ........................... (5,559,909) (2,924,082) ------------ ------------ $ 9,391,319 $ 10,114,335 ============ ============ The Company received approximately $3.8 million, $2.3 million and $1.8 million in commissions on premiums ceded during the years ended December 31, 2001, 2000 and 1999, respectively. Had all of the Company's reinsurance agreements been canceled at December 31, 2001, the Company would have returned a total of approximately $1.7 million in reinsurance commissions to its reinsurers; in turn, its reinsurers would have returned approximately $5.6 million in unearned premiums to the Company. At December 31, 2001 and 2000, the Company had an unsecured aggregate recoverable for paid and unpaid losses and loss adjustment expenses and unearned premiums with the following reinsurers:
DECEMBER 31, 2001 2000 ----------- ----------- Transatlantic Reinsurance Company (A++ A.M. Best Rated): Unearned premiums ................................................. $ 5,559,909 $ 2,924,082 Reinsurance recoverable on paid losses and loss adjustment expenses 4,176,436 1,059,793 Unpaid losses and loss adjustment expenses ........................ 4,798,556 2,789,619 ----------- ----------- $14,534,901 $ 6,773,494 =========== ===========
50 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Amounts due from reinsurers consisted of amounts related to: Unpaid losses and loss adjustment expenses ............................................ $ 4,798,556 $ 2,789,619 Reinsurance recoverable on paid losses and loss adjustment expenses ................... 4,176,436 1,059,793 Reinsurance payable ................................................................... (1,921,663) (707,173) ----------- ----------- $ 7,053,329 $ 3,142,239 =========== ===========
(7) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES The liability for unpaid losses and loss adjustment expenses is determined on an individual-case basis for all incidents reported. The liability also includes amounts for unallocated expenses, anticipated future claim development and IBNR. Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:
DECEMBER 31, 2001 2000 1999 ------------ ------------ ------------ Balance at January 1 .................... $ 9,765,848 $ 6,314,307 $ 7,603,460 Less reinsurance recoverables .......... (2,789,619) (1,886,226) (2,237,688) ------------ ------------ ------------ Net balance at January 1 ............. $ 6,976,229 $ 4,428,081 $ 5,365,772 ============ ============ ============ Incurred related to: Current year ........................... $ 13,586,426 $ 13,545,562 $ 8,764,334 Prior years ............................ 2,568,476 1,444,556 (669,657) ------------ ------------ ------------ Total incurred ....................... $ 16,154,902 $ 14,990,118 $ 8,094,677 ============ ============ ============ Paid related to: Current year ........................... $ 8,768,672 $ 8,012,742 $ 5,551,789 Prior years ............................ 8,259,045 4,429,228 3,480,579 ------------ ------------ ------------ Total paid ........................... $ 17,027,717 $ 12,441,970 $ 9,032,368 ============ ============ ============ Balance, American Vehicle, at acquisition $ 103,367 $ -- $ -- ============ ============ ============ Net balance at year end ................. $ 6,206,781 $ 6,976,229 $ 4,428,081 Plus reinsurance recoverables .......... 4,798,556 2,789,619 1,886,226 ------------ ------------ ------------ Balance at year end .................. $ 11,005,337 $ 9,765,848 $ 6,314,307 ============ ============ ============
Based upon consultations with the Company's independent actuarial consultants and their statement of opinion on losses and loss adjustment expenses, the Company believes that the liability for unpaid losses and loss adjustment expenses is adequate to cover all claims and related expenses which may arise from incidents reported. As a result of the Company's review of its liability for losses and LAE, which includes a re-evaluation of the adequacy of reserve levels for prior year's claims, the Company increased its liability for loss and LAE for claims occurring in prior years by $2,568,000 for the year ended December 31, 2001, increased its liability for loss and LAE for claims occurring in prior years by $1,445,000 for the year ended December 31, 2000, and reduced its liability for loss and LAE for claims occurring in prior years by $670,000 in 1999. The adjustments in the liability were primarily attributable to loss development with respect to the Company's automobile insurance program. There can be no assurance concerning future adjustments of reserves, positive or negative, for claims through December 31, 2001. 51 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (8) REVOLVING CREDIT OUTSTANDING The Company, through its wholly owned subsidiary, Federated Premium Finance, Inc. ("Federated Premium") is a party to a revolving loan agreement ("Revolving Agreement") with Flatiron Funding Company LLC ("Flatiron"). The Revolving Agreement is structured as a sale of contracts receivable under a sale and assignment agreement with FPF, Inc. (a wholly-owned subsidiary of Flatiron), which gives FPF Inc. the right to sell or assign these contracts receivable. Federated Premium, which services these contracts, has recorded transactions under the Revolving Agreement as secured borrowings. The Revolving Agreement, which was amended and revised in September 2001, allows for a maximum credit commitment of $7.0 million plus an initial additional amount of $700,000 for the transition from September 30, 2001 when the previous agreement expired. This initial additional amount declines by $100,000 each month beginning November 1, 2001. The amount of an advance is subject to availability under a borrowing base calculation, with maximum advances outstanding not to exceed the maximum credit commitment. The annual interest rate on advances under the Revolving Agreement is the prime rate plus additional interest varying from 1.25% to 2.75% based on the prior month's ratio of contracts receivable related to insurance companies with an A. M. Best rating of B or worse to total contracts receivable. The Revolving Agreement contains various operating and financial covenants, with which the Company was in compliance at December 31, 2001 and 2000. The Revolving Agreement, as amended, expires September 30, 2004. Outstanding borrowings under the Revolving Agreement as of December 31, 2001 and 2000 were $6,676,817 and $8,091,034, respectively, including $211,522 on the overline availability as of December 31, 2000. Interest expense for the years ended December 31, 2001, 2000 and 1999 totaled approximately $592,000, $643,000 and $341,000, respectively. (9) INCOME TAXES A summary of the provision for income tax expense (benefit) for the years ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999 ---- ---- ---- Federal: Current................................. $(453,263) $ 583,772 $ 640,525 Deferred................................ (103,197) (1,001,203) (92,635) -------- ----------- --------- (556,460) (417,431) 547,890 --------- ----------- --------- State: Current................................. (56,428) 126,421 145,873 Deferred................................ (17,665) (171,386) (13,702) -------- ----------- --------- (74,093) (44,965) 132,171 -------- ----------- --------- $(630,553) $ (462,396) $ 680,061 ========== =========== =========
The actual income tax expense (benefit) differs from the "expected" income tax expense (benefit) for the years ended December 31, 2001, 2000 and 1999 (computed by applying the U.S. federal tax rate of 34 percent to income (loss) before provision for income tax expense (benefit)) as follows:
2001 2000 1999 ---- ---- ---- Computed "expected" tax (benefit), at federal rate $ (954,903) $ (334,992) $ 763,909 State tax, net of federal deduction benefit..... (48,901) (29,676) 87,233 Tax-exempt interest............................. (125,321) (156,459) (179,812) Amortization of goodwill........................ 55,335 60,747 55,677 Dividend received deduction..................... (4,522) (14,257) (26,997) Reserve for capital loss carry forward.......... 482,491 -- -- Other, net...................................... (34,732) 12,241 (19,949) ---------- ---------- ---------- Income tax expense (benefit), as reported....... $ (630,553) $ (462,396) $ 680,061 =========== ========== ==========
52 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax asset as of December 31, 2001 and 2000 are as follows:
DECEMBER 31, 2001 2000 ----------- ----------- Deferred tax assets: Unpaid losses and loss adjustment expenses ...... $ 208,313 $ 347,120 Unearned premiums ............................... 713,046 756,025 Unrealized loss on investments available for sale -- 784,580 Allowance for credit losses ..................... 360,780 436,602 Unearned Commissions ............................ 789,782 942,892 Goodwill ........................................ 202,999 171,468 Capital loss carryforward ....................... 482,491 -- Other ........................................... -- 8,905 ----------- ----------- Total gross deferred tax assets ............... 2,757,411 3,447,592 ----------- ----------- Deferred tax liabilities: Deferred acquisition costs, net ................. (4,498) (514,393) Depreciation .................................... (18,246) (17,305) ----------- ----------- Total gross deferred tax liabilities .......... (22,744) (531,698) ----------- ----------- Reserve for deferred tax asset ................ (482,491) -- ----------- ----------- Net deferred tax asset ........................ $ 2,252,176 $ 2,915,894 =========== ===========
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At December 31, 2001 and 2000, based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences with the exception of the capital loss carryforward, for which a reserve has been provided as of December 31, 2001. (10) REGULATORY REQUIREMENTS AND RESTRICTIONS To retain its certificate of authority, the Florida Insurance Code (the "Code") requires that Federated National and American Vehicle maintain capital and surplus equal to the greater of 10 percent of its liabilities or the statutory minimum capital and surplus requirement of $3.0 million as defined in the Code. In 2001, 2000 and 1999, Federated National was required to have capital surplus of $3.0 million, $2.75 million and $5.9 million, respectively. At December 31, 2001, 2000 and 1999, Federated National's capital surplus was $5.7 million, $6.2 million and $7.1 million, respectively. At December 31, 2001, American Vehicle was required to have capital surplus of $3.0 million and had capital surplus of $3.1 million. Further, the Companies were also required to adhere to a prescribed net premium-to-surplus ratio. For the year ended December 31, 2001, both Companies were in compliance with this requirement. As of December 31, 2001, to meet regulatory requirements, the Company had bonds with a carrying value of approximately $1,538,000 pledged to the Insurance Commissioner of the State of Florida. 53 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its shareholders except out of that part of its available and accumulated capital surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may not make dividend payments or distributions to shareholders without prior approval of the Florida Department of Insurance if the dividend or distribution would exceed the larger of (i) the lesser of (a) 10 percent of capital surplus (b) net income, not including realized capital gains, plus a two-year carryforward, (ii) 10 percent of capital surplus with dividends payable constrained to unassigned funds minus 25 percent of unrealized capital gains of (iii) the lesser of (a) 10 percent of capital surplus or (b) net investment income plus a three-year carryfoward with dividends payable constrained to unassigned funds minus 25 percent of unrealized capital gains. Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida Department of Insurance (i) if the dividend is equal to or less than the greater of (a) 10 percent of the insurer's capital surplus as regards policyholders derived from realized net operating profits on its business and net realized capital gains or (b) the insurer's entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, (ii) the insurer will have policyholder capital surplus equal to or exceeding 115 percent of the minimum required statutory capital surplus after the dividend or distribution, (iii) the insurer files a notice of the dividend or distribution with the department at least ten business days prior to the dividend payment or distribution and (iv) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115 percent of required statutory capital surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the Florida Department of Insurance or (ii) 30 days after the Florida Department of Insurance has received notice of such dividend or distribution and has not disapproved it within such time. No dividends were declared or paid in 2001, 2000 or 1999. Under these laws, Federated National is permitted to pay dividends of approximately $569,000 to the Company in 2002, while American Vehicle is not permitted to pay dividends in 2002. Dividends in excess of this amount require approval by the Florida Department of Insurance. There can be no assurance that, if requested, the Florida Department of Insurance will allow any dividends in excess of this amount to be paid by Federated National. The Company is required to comply with NAIC risk-based capital ("RBC") requirements. RBC is a method of measuring the amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. NAIC's RBC standards are used by regulators to determine appropriate regulatory actions relating to insurers who show signs of weak or deteriorating condition. As of December 31, 2001, based on calculations using the appropriate NAIC formula, both Federated National's and American Vehicle's total adjusted capital are in excess of ratios, which would require any form of regulatory action. The NAIC has developed Insurance Regulatory Information Systems ("IRIS") ratios to assist state insurance departments in identifying companies, which may be developing performance or solvency problems, as signaled by significant changes in the companies' operations. Such changes may not necessarily result from any problems with an insurance company, but may merely indicate changes in certain ratios outside the ranges defined as normal by the NAIC. When an insurance company has four or more ratios falling outside "usual ranges," state regulators may investigate to determine the reasons for the variance and whether corrective action is warranted. As of December 31, 2001, Federated National was outside NAIC's usual ranges with respect to its IRIS tests on 7 out of 12 ratios. Federated National was not in the "usual ranges" primarily because of the losses on the common stock portfolio and because of the short fall in Federated National's loss and LAE reserves in 2000 and 1999. Federated National has sold its common stock portfolio and no longer invests in common stock. In addition, Federated National has carefully reviewed its loss and LAE reserves and management believes that such reserves at December 31, 2001 are adequate. American Vehicle was outside NAIC's usual ranges on three ratios primarily because prior to its acquisition, American Vehicle had not written insurance policies since 1997 and was under capitalized. Management does not currently believe that the Florida Department of Insurance will take any significant action with respect to Federated National or American Vehicle regarding the IRIS ratios, although there can be no assurance that will be the case. 54 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Generally accepted accounting principles differ in some respects from reporting practices prescribed or permitted by the Florida Department of Insurance. Federated National's statutory capital and surplus was $5.7 million and $6.2 million as of December 31, 2001 and 2000, respectively. Federated National's statutory net loss was $2.1 million and $1.4 million for the years ended December 31, 2001 and 2000, respectively. In 1999, Federated National's statutory net income was approximately $1.1 million. Statutory non-admitted assets were approximately $395,000 and $1.2 million as of December 31, 2001 and 2000, respectively. American Vehicle's statutory capital and surplus was $3.1 million as of December 31, 2001, and its statutory net income was $64,000 for the year ended December 31, 2001. Statutory non-admitted assets were approximately $13,000 as of December 31, 2001. (11) COMMITMENTS AND CONTINGENCIES The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. In June 2000, a lawsuit was filed against the Company and its directors and executive officers seeking compensatory damages on the basis of allegations that the Company's amended registration statement dated November 4, 1998 was inaccurate and misleading concerning the manner in which the Company recognized ceded insurance commission income, in violation of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The lawsuit was filed in the United States District Court for the Southern District of New York and seeks class action status. The plaintiff class purportedly includes purchasers of the Company's common stock between November 5, 1998 and August 13, 1999. The Company believes that the lawsuit is without merit and is vigorously defending such action. The Company is currently awaiting the Court's ruling on its Motion to Dismiss the plaintiff's First Amended Complaint. Prior to its acquisition, American Vehicle was involved in litigation with a former officer and director of American Vehicle. The litigation was adjudicated and American Vehicle, among others, was found liable and paid the final judgment. There remains one outstanding issue, which is the assessment of attorney's fees and costs. A petition has been filed seeking costs of $136,000 and appellate attorney's fees in excess of $2 million. If American Vehicle is found liable for such fees and costs, they are indemnified by American Vehicle's previous owners, in accordance with the purchase agreement. Furthermore, the $500,000 purchase price paid to the former owners remains in escrow pending settlement of the fees and costs. Consequently, no liability for these fees and costs has been recorded. The Company, as a direct premium writer in the State of Florida, is required to participate in certain risk pools. Participation in these pools is based on the Company's written premium by line of business to total premiums written statewide by all insurers. Participation may result in assessments against the Company. For the year ended December 31, 2001, the Company was assessed $203,000, which the Company intends to recover as permitted by the state of Florida through policy surcharges in 2002. For the years ended December 31, 2000 and 1999, no amounts were assessed against the Company. (12) LEASES The Company leases office space under various lease agreements with expiration dates through September 2016. Rental expense associated with operating leases is charged to expense in the period incurred. Rental expenses for 2001, 2000 and 1999 were approximately $797,000, $962,000 and $821,000, respectively, and are included in operating and underwriting expenses in the accompanying consolidated statements of operations. 55 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 At December 31, 2001, the minimum aggregate rental commitments are as follows: FISCAL YEAR LEASES ----------- ------ 2002 $ 494,548 2003 371,433 2004 250,693 2005 159,249 Thereafter 304,402 ---------- Total $1,580,325 ========== (13) RELATED PARTY TRANSACTIONS One of the Company's directors is a partner at Conroy, Simberg, and Ganon, a law firm that handles the Company's claims litigation. Fees paid to this law firm amounted to approximately $530,000, $533,000 and $281,000 for the years ended December 31, 2001, 2000 and 1999, respectively. In June 1999, the Company purchased the assets of three insurance agencies from a director for $130,000 in cash and a note payable for $300,000. The note was subsequently paid with 20,667 shares of the Company's common stock in April 2000 and $195,050 cash. Mortgage loan receivables in the amount of $227,391 as of December 31, 2000, represent secured loans to relatives of an officer of the Company. (14) NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding during the periods presented. Options granted in accordance with the Company's stock option plan are anti-dilutive and are not taken into account in the computation. At December 31, 2001, 2000 and 1999, warrants issued to two employees to purchase 62,500 shares of common stock at $9 per share were outstanding. At December 31, 2001, 2000 and 1999, warrants sold as part of an underwriting agreement at a price of $0.0001 per warrant, entitling the holder to purchase 125,000 shares of common stock at $10.86 per share, were outstanding. All of these potential common shares were excluded from the computation of net income (loss) per share for 2001, 2000 and 1999 because their inclusion would have an anti-dilutive effect. A summary of the numerator and denominator of the basic net income (loss) per share is presented below:
INCOME (LOSS) SHARE PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ----------- -------- For the year ended December 31, 2001: Basic net (loss) per share ................................... $ (992,090) 3,153,640 $ (0.31) =========== =========== ======== For the year ended December 31, 2000: Basic net (loss) per share .................................... $ (522,874) 3,375,498 $ (0.15) =========== =========== ======== For the year ended December 31, 1999: Basic net income per share .................................... $ 1,566,731 3,382,188 $ 0.46 =========== =========== ========
56 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (15) SEGMENT INFORMATION The Company and its subsidiaries operate principally in two business segments consisting of insurance and financing. The insurance segment consists of underwriting through Federated National, managing general agent operations through Assurance MGA, claims processing through Superior Adjusting and marketing and distribution through Federated Agency Group, franchised agencies and independent agents. The insurance segment sells primarily nonstandard personal automobile insurance and includes substantially all aspects of the insurance, distribution and claims process. The financing segment consists of premium financing through Federated Premium Finance and pay advances through FedFirst Corporation. The financing segment provides premium financing to both the Company's insureds and to third-party insureds, and pay advances, and is marketed through the Company's distribution network of Company-owned agencies and franchised agencies. The accounting policies of the segments are the same as those described in the summary of significant accounting policies and practices. The Company evaluates its business segments based on GAAP pretax operating earnings. Corporate overhead expenses are not allocated to business segments. Transactions between reportable segments are accounted for at fair value. Operating segments that are not individually reportable are included in the "All Other" category, which includes the operations of 21st Century Holding Company. Information regarding components of operations for the years ended December 31, 2001, 2000 and 1999 follows:
2001 2000 1999 ------------ ------------ ------------ TOTAL REVENUES Insurance Segment Earned Premiums $ 20,255,561 $ 20,321,339 $ 13,456,348 Investment Income (Loss) (1,368,347) 499,331 1,718,382 Adjusting Income 2,605,893 1,858,326 895,485 MGA Fee Income 5,843,078 5,410,500 963,797 Commission Income 5,524,379 6,355,081 6,053,118 Other Income 342,044 142,439 841,791 ------------ ------------ ------------ Total Insurance Revenue 33,202,608 34,587,016 23,928,921 ------------ ------------ ------------ Financing Segment: Premium finance income 4,503,994 4,575,674 2,810,357 Consumer loan interest 35,340 334,963 716,352 Pay advance interest 567,233 783,843 170,134 Miscellaneous Income (15,885) 15,368 -- ------------ ------------ ------------ Total Financing Revenues 5,090,682 5,709,848 3,696,843 All Other 1,332,819 2,140,538 2,442,927 ------------ ------------ ------------ Total Operating Segments 39,626,109 42,437,402 30,068,691 Intercompany Eliminations (4,149,543) (4,883,795) (4,691,237) ------------ ------------ ------------ Total Revenues $ 35,476,566 $ 37,553,607 $ 25,377,454 ============ ============ ============ EARNINGS (LOSS) BEFORE INCOME TAXES Insurance Segment $ (4,813,846) $ (2,495,974) $ 1,970,279 Financing Segment 723,505 1,165,769 1,400,931 All Other 1,281,803 344,935 (876,369) ------------ ------------ ------------ Total Operating Segments (2,808,538) (985,270) 2,494,841 Intercompany Eliminations -- -- (248,049) ------------ ------------ ------------ Total Earnings (Loss) before Income Taxes $ (2,808,538) $ (985,270) $ 2,246,792 ============ ============ ============
57 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Information regarding total assets as of December 31, 2001 and 2000 follows: TOTAL ASSETS 2001 2000 ---- ---- Insurance Segment $42,016,846 $35,849,212 Finance Segment 10,556,012 14,570,175 All Others 3,633,623 7,072,230 --------- --------- Total Operating Segments 56,206,481 57,491,617 Intercompany Eliminations 22,096 (2,078,648) ----------- ----------- Total Assets $56,228,577 $55,412,969 =========== =========== Supplemental segment information as of and for the year ended December 31, 2001, 2000 and 1999 follows:
2001 2000 1999 ---- ---- ---- Deferred Policy Acquisition Costs - Insurance Segment $ 11,952 $ 1,192,260 $ (10,243) Reserves for Unpaid Claims and Claim Adjustment Expense - Insurance Segment 11,005,337 9,765,848 6,314,307 Unearned Premiums- Insurance Segment 14,951,228 13,038,417 8,037,083 Earned Premiums- Insurance Segment 20,255,561 20,321,339 13,456,348 Net Investment Income (Loss) Insurance Segment (1,368,347) 499,331 1,718,382 Other (476,670) 616,826 87,430 ------------ ------------ ------------ Total Net Investment Income (Loss) (1,845,017) 1,116,157 1,805,812 Claims and Adjustment Expenses Incurred Related to Current Years- Insurance Segment 13,586,426 13,545,562 8,764,334 Claims and Adjustment Expenses Incurred Related to Prior Years- Insurance Segment 2,568,476 1,444,556 (669,657) Amortization of Deferred Acquisition Costs Insurance Segment 4,210,523 4,617,951 1,209,256 Financing Segment 406,088 668,284 257,507 Eliminations (3,149,373) (3,612,481) (1,485,326) ------------ ------------ ------------ Total Amortization of Deferred Acquisition Costs 1,467,238 1,673,754 (18,563) Paid Claims and Claim Adjustment Expense- Insurance Segment 17,013,886 12,441,970 9,032,368 Net Premiums Written- Insurance Segment 21,481,934 24,448,673 13,051,708
(16) STOCK COMPENSATION PLANS On December 1998, the Company issued warrants to two employees to purchase 62,500 shares of common stock of the Company at $9 per share. The warrants vested immediately and are exercisable between December 1999 and December 2004, at which time if they have not been exercised, they will be canceled. The estimated fair value of these warrants at the date issued was approximately $226,000 using a Black-Scholes option pricing model and assumptions similar to those used for valuing the Company's stock options as described below. As of December 31, 2001, no warrants have been exercised. The Company initiated a stock option plan in November 1998 that provides for the granting of stock options to officers, key employees and consultants. The objectives of this plan includes attracting and retaining the best personnel, providing for additional performance incentives, and promoting the success of the Company by providing employees the opportunity to acquire common stock. Options outstanding under this plan have been granted at prices, which are either equal to or above the market value of the stock on the date of grant, vest over a four-year period, and expire ten years after the grant date. Under this plan, the Company is authorized to grant options to purchase up to 600,000 common shares, and, as of December 31, 2001, the Company had granted options to purchase 412,572 shares. 58 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 In 2001, the Company initiated a franchise stock option plan that provides for the granting of stock options to individuals purchasing Company owned agencies which are then converted to franchised agencies. The purpose of the plan is to advance the interests of the Company by providing an additional incentive to encourage managers of Company owned agencies to purchase the agencies and convert them to franchises. Options outstanding under the plan have been granted at prices, which are above the market value of the stock on the date of grant, vest over a ten-year period, and expire ten years after the grant date. Under this plan, the Company is authorized to grant options to purchase up to 689,000 common shares, and, as of December 31, 2001, the Company had granted options to purchase 83,830 shares. Activity in the Company's stock option plans for the period from January 1, 1999 to December 31, 2001 is summarized below:
1998 Plan 2001 Franchise Plan ------------------------------------------ ------------------------------------------ Weighted Average Weighted Average Number of Shares Option Exercise Price Number of Shares Option Exercise Price ---------------- --------------------- ---------------- --------------------- Outstanding at January 1, 1999 310,800 $10 Granted 198,300 $10 Exercised -- Canceled (36,590) $10 --------- Outstanding at December 31, 1999 472,510 $10 Granted 136,500 $10 Exercised -- Canceled (121,039) $10 --------- Outstanding at December 31, 2000 487,971 $10 -- Granted 20,000 $10 83,830 $10 Exercised -- -- Canceled (95,399) $10 -- --------- ------ Outstanding at December 31, 2001 412,572 $10 83,830 $10 ========= === ====== === Options outstanding as of December 31, 2001 are exercisable as follows: 1998 Plan 2001 Franchise Plan -------------------------------------- ------------------------------------- Weighted Average Weighted Average Options exercisable at: Number of Shares Option Exercise Price Number of Shares Option Exercise Price ---------------- --------------------- ---------------- --------------------- 2001 226,760 $10 -- 2002 100,982 $10 8,383 $10 2003 56,596 $10 8,383 $10 2004 23,984 $10 8,383 $10 2005 4,250 $10 8,383 $10 Thereafter -- 50,298 $10 --------- ------ 412,572 83,830 ========= ======
The Company continues to account for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, under which no compensation cost for stock options is recognized for stock option awards granted to employees at or above fair market value. Had compensation expense for the Company's stock compensation plan been determined based upon fair values at the grant dates for awards under the plan in accordance with SFAS No. 123, the Company's net income (loss) and net income (loss) per share would have been reduced (increased) to the pro forma amounts indicated below. Additional stock option awards are anticipated in future years. Net income (loss) 2001 2000 1999 ---- ---- ---- As reported $ (992,090) $ (522,874) $1,566,731 Pro forma $(1,181,855) $ (741,191) $1,409,408 Net income (loss) per share As reported $(0.31) $(0.15) $0.46 Pro forma $(0.37) $(0.22) $0.42 59 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 The weighted average fair value of options granted during 2001, 2000 and 1999 estimated on the date of grant using the Black-Scholes option-pricing model was $2.38 to $2.92 in 2001; $2.79 to $6.23 in 2000; and $1.86 in 1999. The fair value of options granted is estimated on the date of grant using the following assumptions: 2001 2000 1999 ---- ---- ---- Dividend yield 2.68%-3.20% 0.00% 0.00% Expected volatility 136%-152% 73%-93% 45% Risk-free interest rate 4.89%-5.29% 5.75% 5.70% Expected life (in years) 10 10 10 Summary information about the Company's stock options outstanding at December 31, 2001:
Weighted Average Weighted Range of Outstanding Contractual Average Exercisable Exercise Price at 12/31/01 Periods in Years Exercise Price at 12/31/01 -------------- ----------- ---------------- -------------- ----------- 1998 Plan $10 412,572 7.8 $10 226,760 2001 Franchise Plan $10 83,830 9.5 $10 --
(17) EMPLOYEE BENEFIT PLAN The Company has established a profit sharing plan under Section 401(k) of the Internal Revenue Code. This plan allows eligible employees to contribute up to 15 percent of their compensation on a pre-tax basis, not to exceed statutory limits. For the year ended December 31, 2001, the Company did not contribute to the plan. For the year ended December 31, 2000, the Company declared a discretionary match of 50 percent of the first 6 percent of the employees' contribution. For the year ended December 31, 1999, the Company declared a discretionary match of 100 percent of the first 3 percent of the employees' contribution. Such matching Company contributions are vested incrementally over five years. The charge to operations for the Company's matching contribution was approximately $143,000 and $59,000 in 2000 and 1999, respectively. (18) ACQUISITIONS In August 2001, the Company purchased all of the outstanding stock and all of the outstanding surplus notes of American Vehicle for $500,000 in cash. In addition, the Company agreed to pay two executives of American Vehicle a finders' fee of $400,000 over a period of three years. Income and expenses of American Vehicle beginning September 1, 2001 are included in the Company's Consolidated Statements of Operations. The fair value of the net assets (which consisted primarily of marketable securities) of American Vehicle at the date of acquisition was approximately $2.1 million. In accordance with SFAS No. 141, Business Combinations, the excess of the fair value of the net assets purchased over the purchase price has been reported as an extraordinary gain in the accompanying Consolidated Statements of Operations. American Vehicle was organized and incorporated as a multi-line property and casualty insurance company and primarily wrote nonstandard private passenger automobile liability and physical damage coverage. Pursuant to a January 8, 1998, consent order entered into with the Florida Department of Insurance (the "Department"), American Vehicle ceased writing new or renewal business and pursuant to an additional consent order, the Company had been placed in Administrative Supervision effective March 2, 2001. Pursuant to a third consent order as of August 30, 2001, the two previous consent orders were vacated and the Department approved this acquisition. Also, pursuant to the third consent order, American Vehicle is not allowed to pay dividends for three years without Department approval and all contracts with affiliates must also be approved by the Department. 60 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 The Consolidated Balance Sheet at December 31, 2001 includes the balance sheet of American Vehicle. The Consolidated Statements of Operations for the year ended December 31, 2001 and the Consolidated Statement of Cash Flow for the year ended December 30, 2001 include American Vehicle from the acquisition date (August 30, 2001) through December 31, 2001. Unaudited pro forma results of operations giving effect to the acquisition as of the beginning of each year presented are as follows:
2001 2000 1999 ---- ---- ---- Revenue $35,545,435 $37,813,233 $25,664,267 Income before extraordinary gain (2,270,396) (637,823) 1,168,562 Extraordinary gain 1,185,895 1,185,895 1,185,895 Net income (1,084,501) 548,072 2,354,457 Earnings (loss) per share and earnings (loss) per share assuming dilution Net income (loss) before extraordinary gain $(0.72) $(0.19) $0.35 Extraordinary gain 0.38 0.35 0.35 Net income (loss) (0.34) 0.16 0.70
The above pro forma information is not necessarily indicative of the results of operations that would have occurred had the acquisition taken place as of the beginning of each period reported, or of results, which may occur in the future. (19) COMPREHENSIVE INCOME (LOSS) Reclassification adjustments related to the investment securities included in comprehensive income (loss) for the years ended December 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999 ----------- ----------- ----------- Unrealized holdings net gains (losses) arising during the year $ 143,925 $ (665,931) $(1,412,094) Reclassification adjustment for (gains) losses included in net income 1,722,421 576,827 (171,364) ----------- ----------- ----------- 1,866,346 (89,104) (1,583,458) Tax effect 784,079 33,530 595,855 ----------- ----------- ----------- Net depreciation on investment securities $ 1,082,267 $ (55,574) $ (987,603) =========== =========== ===========
(20) AUTHORIZATION OF PREFERRED STOCK The Company's Amended and Restated Articles of Incorporation authorize the issuance of one million shares of preferred stock with designations, rights and preferences determined from time to time by its board of directors. Accordingly, the Company's board of directors is empowered, without shareholder approval, to issue preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of common stock. The Company has not issued preferred shares as of December 31, 2001. 61 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (21) 21ST CENTURY HOLDING COMPANY The following summarizes the major categories of 21st Century Holding Company's (parent company only) financial statements: Condensed Balance Sheets
ASSETS 2001 2000 ------------ ------------ Cash and cash equivalents ..................................... $ 3,853 $ 335,547 Investments ................................................... -- 453,432 Investments and advances to subsidiaries ...................... 11,664,309 10,436,535 Deferred income taxes ......................................... 1,414,829 2,330,949 Property, plant and equipment, net ............................ 939,213 1,132,555 Other assets .................................................. 909,315 849,638 ------------ ------------ Total assets ............................................. $ 14,931,519 $ 15,538,656 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Bank overdraft ................................................ $ 83,583 $ -- Other liabilities ............................................. 638,805 582,659 ------------ ------------ Total liabilities ........................................ 722,388 582,659 ------------ ------------ Shareholders' equity: Common stock ................................................ 34,107 34,107 Additional paid-in capital .................................. 12,833,146 12,894,630 Accumulated other comprehensive deficit ..................... (218,137) (1,300,404) Retained earnings ........................................... 2,400,301 3,642,066 Treasury stock .............................................. (840,286) (314,402) ------------ ------------ Total shareholders' equity ............................... 14,209,131 14,955,997 ------------ ------------ Total liabilities and shareholders' equity ............... $ 14,931,519 $ 15,538,656 ============ ============
Condensed Statements of Operations
2001 2000 1999 ----------- ----------- ----------- Revenue: Management fees from subsidiaries ..................... $ 2,939,000 $ 3,452,500 $ 1,993,500 Equity in income (loss) of subsidiaries ............... (2,933,999) (1,497,354) 1,845,936 Net investment income (loss) .......................... (477,445) 688,547 190,503 Other income .......................................... 155,149 101,280 114,289 ----------- ----------- ----------- Total revenue ................................ (317,295) 2,744,973 4,144,228 ----------- ----------- ----------- Expenses: Advertising ........................................... 958,082 1,477,055 1,159,715 Salaries and wages .................................... 173,777 938,906 489,563 Other expenses ........................................ 886,536 1,568,118 1,370,842 ----------- ----------- ----------- Total expenses ............................... 2,018,395 3,984,079 3,020,120 ----------- ----------- ----------- Income (loss) before provision for income tax expense and extraordinary gain .................................... (2,335,690) (1,239,106) 1,124,108 Benefit for income tax expense .......................... 157,705 716,232 442,623 ----------- ----------- ----------- Net income (loss) before extraordinary gain .. (2,177,985) (522,874) 1,566,731 Extraordinary gain ...................................... 1,185,895 -- -- ----------- ----------- ----------- Net income (loss) ............................ $ (992,090) $ (522,874) $ 1,566,731 =========== =========== ===========
62 21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Condensed Statements of Cash Flow
2001 2000 1999 ------------ ------------ ------------ Cash flow from operating activities: Net income (loss) .............................................. $ (992,090) $ (522,874) $ 1,566,731 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in income (loss) of subsidiaries ..................... 2,933,999 1,497,354 (1,845,936) Depreciation and amortization of property plant and equipment 174,646 209,917 113,694 Deferred income tax expense ................................. (132,284) (1,096,850) (106,337) Net realized investment (gains) losses ...................... 477,445 (687,397) (175,454) Extraordinary Gain .......................................... (1,185,895) -- -- Changes in operating assets and liabilities: Other assets ............................................ (37,347) 92,573 (181,859) Other Liabilities ....................................... 231,246 488,511 43,581 ------------ ------------ ------------ Net cash provided by (used in) operating activities ................ 1,469,720 (18,766) (585,580) ------------ ------------ ------------ Cash flow from investing activities: Proceeds from sale of investment securities available for sale . 31,944,339 18,526,882 7,195,618 Purchases of investment securities available for sale .......... (31,382,730) (18,878,539) (6,635,157) Purchases of property and equipment ............................ -- (254,629) (1,058,032) Cash dividends received from subsidiaries ...................... 2,300,000 Net cash used in acquisitions .................................. (900,000) -- (442,000) ------------ ------------ ------------ Net cash provided by (used in) investing activities ............... 1,961,609 (606,286) (939,571) ------------ ------------ ------------ Cash flow from financing activities: Bank overdraft ................................................. 83,583 (35,969) 35,969 Loans from Shareholders ........................................ -- -- (400,494) Dividends paid ................................................. (249,675) (67,260) -- Purchases of treasury stock .................................... (784,798) (291,339) (223,063) Advances from (to) subsidiaries ................................ (2,812,133) 1,667,990 1,022,276 Repayment of indebtedness ...................................... -- (312,823) -- ------------ ------------ ------------ Net cash provided by (used in) financing activities ................ (3,763,023) 960,599 434,688 ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents ............... (331,694) 335,547 (1,090,463) Cash and cash equivalents at beginning of year ..................... 335,547 -- 1,090,463 ------------ ------------ ------------ Cash and cash equivalents at end of year ........................... $ 3,853 $ 335,547 $ -- ============ ============ ============
63 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING - ------ ----------------------------------------------------------- AND FINANCIAL DISCLOSURE ------------------------ None PART III -------- ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL - ------- ---------------------------------------------------- PERSONS, COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT ---------------------------------------------------------- The information contained under the caption "Election of Directors" to appear in the Company's definitive proxy statement relating to the Company's Annual Meeting of Shareholders, which definitive proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year covered by this report on Form 10-K (herein referred to as the "Annual Meeting Proxy Statement") is incorporated herein by reference. Information regarding executive officers is included in Part I of this form 10-K as permitted by General Instruction G (3). ITEM 11. EXECUTIVE COMPENSATION - ------ ---------------------- The information contained under the caption "Executive Compensation" to appear in the Annual Meeting Proxy Statement is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------- --------------------------------------------------------------- The information contained under the caption "Beneficial Security Ownership" to appear in the Annual Meeting Proxy Statement is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------- ---------------------------------------------- The information contained under the caption "Certain Transactions" to appear in the Annual Meeting Proxy Statement is incorporated by reference. 64 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K - ------- --------------------------------------------------------------- (A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT: (1) Financial Statements The following financial statements of 21st Century Holding Company and the reports of independent auditors thereon are filed with this report: Independent Auditors' Report (McKean, Paul, Chrycy, Fletcher & Co.). Independent Auditors' Report (KPMG LLP). Consolidated Balance Sheets as of December 31, 2001 and 2000. Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999. Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss) for the years ended December 31, 2001, 2000 and 1999. Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999. Notes to Consolidated Financial Statements for the years ended December 31, 2001, 2000 and 1999. (2) Financial Statement Schedules. Schedules are omitted because the conditions requiring their filing are not applicable or because the required information is provided in the Consolidated Financial Statements, including the Notes thereto. 65 (3) Exhibits
EXHIBIT DESCRIPTION ------- ----------- 3.1 Amended and Restated Articles of Incorporation (1) 3.2 Form of Registrant's Amended and Restated Bylaws (1) 4.1 Specimen of Common Stock Certificate (1) 4.2 Revised Representative's Warrant Agreement including form of Representative's Warrant (2) 10.1 Form of Stock Option Plan, as amended (3)* 10.2 Employment Agreement between the Registrant and Edward J. Lawson (1)* 10.3 Employment Agreement between the Registrant and Michele V. Lawson (1)* 10.4 Form of Indemnification Agreement between the Registrant and its directors and executive officers (1)* 10.5 Revolving Credit and Term Loan Agreement between FlatIron Funding Company, LLC and FPF, Inc., as amended (1) 10.6 Intentionally deleted 10.7 Reinsurance Agreement between Federated National and Transatlantic Re (1) 10.8 Intentionally deleted 10.9 Employment Agreement between Registrant and Richard A. Widdicombe (4)* 10.10 Addendum No. 1 to Reinsurance Agreement between Federated National and Transatlantic Re (5) 10.11 Addendum No. 2 to Reinsurance Agreement between Federated National and Transatlantic Re (6) 10.12 Third Modification Agreement to Revolving Credit and Term Loan Agreement between FlatIron Funding Company, LLC and FPF, Inc., and Sale and Assignment Agreement between Federated Premium and FPF, Inc. (5) 10.13 Fourth Modification Agreement to Revolving Credit and Term Loan Agreement between Federated Premium Finance, Inc., FlatIron Funding Company, LLC, FlatIron Funding Company and FlatIron Credit Company, Inc. (6) 10.14 Sale and Assignment Agreement between Federated Premium Finance, Inc. and FPF, Inc. (6) 10.15 Premium Receivable Servicing Agreement between Federated Premium Finance, Inc. and FPF, Inc. (6) 10.16 1/1/2002 Reinsurance Terms for Federated National Insurance Company (6) 10.17 Reinsurance Agreement between American Vehicle and Transatlantic Reinsurance Corporation (6) 10.18 Reimbursement Contract between Federated National and The Florida Hurricane Catastrophe Fund (6) 10.19 First Property Catastrophe Excess of Loss Reinsurance Contract between Federated National and Guy Carpenter & Company, Inc. (6) 10.20 Second Property Catastrophe Excess of Loss Reinsurance Contract between Federated National and Guy Carpenter & Company, Inc. (6) 21.1 Subsidiaries of the Registrant (6) 23.1 Consent of Independent Certified Public Accountants (6) 23.2 Consent of Independent Certified Public Accountants (6) - -------------------- * Management Compensation Plan or Arrangement (1) Previously filed exhibit of the same number to the Registrant's Registration Statement on Form SB-2 (File No. 333-63623) and incorporated herein by reference. (2) Previously filed exhibit of the same number of the 1998 Annual Report on Form 10-KSB. (3) Previously as an exhibit on the Company's 2000 Annual Meeting Proxy Statement. (4) Previously filed exhibit of the same number of the 1999 Annual Report on Form 10-KSB. (5) Previously filed exhibit of the same number of the 2000 Annual Report on Form 10-KSB. (6) Filed herewith.
(B) REPORTS ON FORM 8-K None. 66 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. 21ST CENTURY HOLDING COMPANY By: /s/ Edward J. Lawson ---------------------------------------- Edward J. Lawson, Chairman of the Board, President and Chief Executive Officer /s/ Samuel A. Milne ---------------------------------------- Samuel A. Milne, Chief Financial Officer Dated: March 28, 2002 Pursuant to the requirements of the Exchange Act of 1934, this Report has been signed by the following persons on behalf of he registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE /s/ Edward J. Lawson Chairman of the Board, March 28, 2002 - ---------------------------- President and Chief Executive Edward J. Lawson Officer /s/ Samuel A. Milne Chief Financial Officer (Principal March 28, 2002 - ---------------------------- Financial and Accounting Officer) Samuel A. Milne /s/ Michele V. Lawson Vice President-Agency Operations, March 28, 2002 - ---------------------------- Treasurer and Director Michele V. Lawson /s/ Richard A. Widdicombe President, Federated National and March 28, 2002 - ---------------------------- Director Richard A. Widdicombe /s/ Carl Dorf Director March 28, 2002 - ---------------------------- Carl Dorf /s/ Robert E. McNally Director March 28, 2002 - ---------------------------- Robert E. McNally /s/ Bruce Simberg Director March 28, 2002 - ---------------------------- Bruce Simberg /s/ Ronald A. Wyers Director March 28, 2002 - ---------------------------- Ronald A. Wyers
67 EX-10.11 3 ex10-11.txt ADDENDUM #2 TO TRANSATLANTIC AGREEMENT Exhibit 10.11 Addendum No. 2 Attaching to and forming part of the COMMERCIAL AND PRIVATE PASSENGER AUTOMOBILE QUOTA SHARE TREATY (hereinafter referred to as the "Agreement") issued to FEDERATED NATIONAL INSURANCE COMPANY Plantation, Florida (hereinafter referred to as the "Company") by TRANSATLANTIC REINSURANCE COMPANY New York, New York (hereinafter referred to as the "Reinsurer") IT IS HEREBY MUTUALLY AGREED by the parties that effective 12:01 a.m., Eastern Standard Time, December 31, 2000, Article 2- Cover of this Agreement, paragraph A, as amended by Addendum No. 1, will be deleted and replaced in its entirety with: A. The Company will cede, and the Reinsurer will accept as reinsurance, a 50% share of all business reinsured (Sections A and B) hereunder subject to the maximum Policy limits stated below: IT IS ALSO MUTUALLY AGREED by the parties that effective 12:01 a.m., Eastern Standard Time, January 1, 2001, Article 2- Cover of this Agreement, will be amended by the addition of paragraph E: E. The maximum limit of liability of the Reinsurer in any one Agreement Year as respects Excess of Policy Limits or Extra Contractual Obligations only, shall be $1,500,000. IT IS ALSO MUTUALLY AGREED by the parties that effective 12:01 a.m., Eastern Standard Time, January 1, 2001, Article 7- Reports and Remittances, the concluding sentence as added by Addendum No. 1, will be deleted and replaced in its entirety with: Effective December 31, 2000 the Reinsurer's share of the incoming unearned premium reserve shall be 50%. ALL OTHER TERMS AND CONDITIONS SHALL REMAIN UNCHANGED. IN WITNESS WHEREOF, the parties hereto by their duly authorized representatives have executed this ADDENDUM NO. 2 in duplicate, as of the dates undermentioned. Signed in Plantation, Florida on this 15 day of January 2001. FEDERATED NATIONAL INSURANCE COMPANY /s/ Richard A. Widdicombe and in New York, New York on this 9th day of January 2001. TRANSATLANTIC REINSURANCE COMPANY /s/ Suzanne A. Spantidos EX-10 4 ex10-13.txt FOURTH MODIFICATION AGREEMENT Exhibit 10.13 FOURTH MODIFICATION AGREEMENT This MODIFICATION AGREEMENT ("Modification") is entered into as of September 30, 2001 by and among FPF, INC., a Colorado corporation ("FPF"), FEDERATED PREMIUM FINANCE, INC., a Florida corporation, as originator (the "Originator"), FLATIRON FUNDING COMPANY, LLC, a Delaware limited liability company (the "Lender"), FEDERATED FUNDING CORPORATION, a Florida corporation (the "Residual Interest Holder") and FLATIRON CREDIT COMPANY, INC. ("Flatiron"). WITNESSETH; WHEREAS, pursuant to that certain Revolving Credit and Term Loan Agreement dated as of September 24, 1997 by and among the Lender and FPF (the "Loan Agreement"), the Lender has loaned and will loan to FPF, subject to the conditions thereof, funds for the acquisition by FPF of certain Premium Loans originated by the Originator pursuant to that certain Sale and Assignment Agreement dated as of September 24, 1997 by and between FPF, as purchaser, and the Originator, as seller (the "Sale and Assignment Agreement") and contingent upon certain advances by the Residual Interest Holder under the Residual Purchase and Funding Agreement dated September 24, 1997 (the "Residual Agreement") each as modified by those certain Modification Agreements, the first dated May 1, 1998, and the second dated January 25, 1999, the third dated October 31, 2000; and WHEREAS, the Agreement has definitions contained therein to which reference is made to that ceratin Agreement of Definitions by and among the parties to this Modification dated as of September 24, 1997 (the "Agreement of Definitions"); and WHEREAS, the Loan Agreement, Sale and Assignment Agreement, the Residual Agreement and the Agreement of Definitions and all exhibits to said documents are collectively referred to herein as the "Documents"; and WHEREAS, all capitalized terms used herein and not otherwise defined in the Documents shall have the meaning set forth herein; and WHEREAS, the parties desire to modify and amend the Documents as hereinafter set forth. NOW THEREFORE, in consideration of the covenants, conditions and agreements contained in the Documents, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby amend the Agreement of Definitions and all other Documents as follows: 1. Amended and Restated Promissory Note. All recitations and references to the Note in the Agreement of Definitions and in Section 1.05 of the Loan Agreement shall refer to that certain Fourth Amended and Restated Promissory Note in the face principal amount of $7,000,000 dated as of the date hereof, executed by FPF in favor of Lender (the "Fourth Amended Note"). The Fourth Amended Note constitutes an amendment and restatement of the Promissory Note dated September 24, 1997 in the face principal amount of $5,000,000 executed by the FPF in favor of the Lender pursuant to the Loan Agreement (the "Amended Note") and supersedes and replaces the prior Amended Note. 2. Interest Rate as described in the Fourth Amended Note shall mean (so long as no Default occurs) a fluctuating interest rate per annum in effect from time to time equal to the Prim plus a spread of one and three-quarter percent (1.75%); except that upon delivery on or prior to October 19, 2001 of written notice from the Originator to FPF or Flatiron, requesting termination of future advances on that certain Sale and Assignment Agreement by and between the Originator and FPF dated September 29,2001, then the Interest Rate as described in the Fourth Note shall from October 19, 2001 and thereafter (so long as no Default occurs) mean a fluctuating interest rate per annum in effect from time to time equal to the Prime Rate plus a spread of one-half percent (0.50%). 3. Document Ratification. All terms, conditions and covenants of the Documents, not otherwise modified hereby, are hereby ratified and confirmed and this Agreement, when executed by the parties hereto, shall become a part of the Documents and shall have the same force and effect as if the terms and conditions hereof were originally incorporated in the Documents prior to the execution thereof. IN WITNESS WHEREOF, the parties hereto have caused this Modification Agreement to be executed by their respective officers thereunder duly authorized as of the date and year first above written. FLATIRON FUNDING COMPANY, LLC By: /s/ Bruce I. Lundy ------------------------------------ Name: Bruce I. Lundy ---------------------------------- Title: President --------------------------------- FPF, INC. FLATIRON CREDIT COMPANY, INC. By: /s/ Bruce I. Lundy By: /s/ Bruce I. Lundy -------------------------------- ------------------------------------ Name: Bruce I. Lundy Name: Bruce I. Lundy ------------------------------ --------------------------------- Title: President Title: President ----------------------------- --------------------------------- FEDERATED FUNDING CORPORATION FEDERATED PREMIUM FINANCE, INC. By: /s/ Edward J. Lawson By: /s/ Stephen C. Young -------------------------------- ------------------------------------ Name: Edward J. Lawson Name: Stephen C. Young ------------------------------ --------------------------------- Title: President Title: President ----------------------------- --------------------------------- EX-10.14 5 ex10-14.txt SALE AND ASSIGNMENT AGREEMENT Exhibit 10.14 - -------------------------------------------------------------------------------- SALE AND ASSIGNMENT AGREEMENT between FEDERATED PREMIUM FINANCE, INC. and FPF, INC. ------------------------------ Dated as of September 30, 2001 ------------------------------ - -------------------------------------------------------------------------------- ----------------- TABLE OF CONTENTS ----------------- Page ---- Section 1. Definitions.............................................. 1 Section 2. Sale of Conveyed Property................................ 5 Section 3. Termination.............................................. 7 Section 4. Purchase Price and Payment Terms for Conveyed Property/ Right of Set-Off......................................... 7 Section 5. Notification of Sale..................................... 7 Section 6. Repurchase of Conveyed Property.......................... 8 Section 7. Delivery to FPF of Proceeds; Power of Attorney........... 8 Section 8. Verification, Notification and Collection of Premium Receivables.............................................. 8 Section 9. Financial Statements and Books and Records............... 8 Section 10. Seller's General Representations and Warranties.......... 8 Section 11. Seller's Representations and Warranties With Respect to the Conveyed Property.................................10 Section 12. Additional Covenants of Seller...........................13 Section 13. Taxes....................................................14 Section 14. Further Assurances and Substituted Performance...........14 Section 15. Indemnification..........................................15 Section 16. Default..................................................15 Section 17. Remedies.................................................15 Section 18. Waiver...................................................16 Section 19. Counterparts/Facsimiles..................................16 Section 20. Essence of Time..........................................17 Section 21. Assignment...............................................17 Section 22. Standard of Care.........................................17 Section 23. Costs and Expenses/Attorneys Fees........................17 Section 24. Notices..................................................17 Section 25. Successors and Assigns...................................17 Section 26. Severability.............................................17 Section 27. Force Majeure............................................18 Section 28. Governing Law............................................18 Section 29. Jurisdiction and Waiver of Certain Damages...............18 Section 30. Entire Agreement.........................................18 Section 31. Waiver of Jury Trial.....................................18 SALE AND ASSIGNMENT AGREEMENT This Sale and Assignment Agreement is dated as of the 30 day of September, 2001 by Federated Premium Finance, Inc.("Seller"), whose address is 4161 NW 5th Street, Plantation, FL 33317 and FPF, Inc. ("FPF"), whose address is 600 Seventeenth Street, Suite 1900S, Denver, Colorado 80202. RECITALS: A Seller originated and/or owns Premium Receivables evidenced by Premium Finance Agreements to finance payments by Obligors of premiums for the purchase of insurance policies and, in connection therewith, Seller has a security interest arising under statutory authority or otherwise in unearned premiums, dividends and loss payments with respect to such insurance policies and in state or industry guaranty funds for the reimbursement of unearned premiums from cancelled insurance policies and failed insurance companies; and B Seller wishes to sell from time to time during the Term of this Agreement and FPF wishes to purchase all of Seller's Eligible Premium Receivables and related interests under the terms and conditions described in this Agreement. NOW, THEREFORE, in consideration of the foregoing and the covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. Definitions. The following terms shall be defined in this Agreement: "Additional Provisions" means the Additional Provisions of this Agreement as set forth in Schedule A attached hereto. "Affiliate" of any specified Person means any other Person controlling or controlled by or under common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. "Agent" means any Person licensed and qualified to sell or arrange for the sale of insurance in the state in which any Premium Receivable is originated. "Agreement" means this Agreement together with all schedules, and all amendments, modifications, replacements or substitutions thereto and together with all documents and instruments contemplated to be executed pursuant to this Agreement. "Amount Financed" means, with respect to each Premium Receivable Sold to FPF, an amount equal to 100% of the premium and other financeable amounts relating to the insurance policy that gives rise to the Premium Receivable less any down payment made at the inception of the Premium Finance Agreement. "AVIC" means American Vehicle Insurance Company "Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banking institutions in Denver, Colorado are authorized or obligated by law or executive order to be closed. "Cancelled Premium Receivable" means each Premium Receivable for which a request for cancellation has been sent to the Issuing Insurance Company, and for which a reinstatement notice has not been received by the Servicer from such insurance company. "Capital Charge" means the charges, if any, described in Schedule A attached hereto. "Closing Fee and Due Diligence" means the fee described in Schedule A attached hereto. "Collections" shall mean all amounts received daily by FPF, or the Servicer on behalf of FPF, on all Premium Receivables Sold under this Agreement including, but not limited to: (a) payments from Obligors, (b) return of unearned commission from agents, (c) return of unearned premium from Issuing Insurance Companies, and (d) amounts received from a guaranty fund or other amounts paid by or on behalf of the Obligor, agent or Issuing Insurance Company. The amounts referred to as "Collections" shall exclude Obligor's down payment amounts, correction amounts or amounts not lawfully eligible under applicable law to be applied to the payment of amounts due under the Premium Receivables. "Concentration Limits" means the Premium Receivable concentration limits set forth in Schedule B attached hereto. "Conveyed Property" means all of the Seller's right, title and interest in, to and under the Premium Receivables Sold pursuant to this Agreement, all related Premium Finance Agreements and all related documents including, without limitation, all loan documents and servicer documents, and all of the Seller's rights to any payment from the Obligors and any and all rights against any Obligor with respect to such Premium Receivables, all collateral and guaranties with respect to such Premium Receivables, all other related rights and assets, and all proceeds of the foregoing. "Default" shall have the meaning specified in Section 16 of this Agreement. "Default Rate" shall mean the annual rate of interest as set forth in Schedule A attached hereto. "Defaulted Premium Receivable" means (without duplication) any Premium Receivable which (a) has an amount due and unpaid for 120 days, or (b) is a Cancelled Premium Receivable and has an unpaid principal balance after application of all expected unearned premium received by or on behalf of the Issuing Insurance Company, or (c) has been written off by the Servicer. "Down Payment Requirement" shall have the meaning set forth in Schedule A attached hereto. "Effective Date" shall have the meaning set forth in Schedule A attached hereto. "Eligible Insurance Company" means (a) an insurance company which is licensed and in good standing to do business in the state in which the policy to which a Premium Receivable relates is issued by such insurance company, (b) a joint underwriting organization, intercompany insurance pool or intercompany reinsurance pool which is licensed or otherwise permitted to do business in the state in which the policy to which a Premium Receivable relates is issued by such joint underwriting organization or intercompany insurance pool, (c) a foreign or alien insurance company which is authorized or approved to issue insurance on a nonadmitted basis, through a licensed surplus or excess lines broker, in the state in which the policy to which a Premium Receivable relates is issued by such foreign or alien insurance company. No such insurer may be an Eligible Insurance Company (i) if such insurer is the subject of a rehabilitation or liquidation proceeding commenced by a state or foreign insurance regulatory authority, or (ii) if such insurer is not, in the judgment of FPF, a creditworthy Person which FPF has full expectations will return, on a timely basis, unearned premiums on Cancelled Premium Receivables. "Eligible Premium Receivable" has the meaning defined in Section 11. "Endorsement Refunds" means all funds returned by an insurance company to the Seller or any other Person arising out of a reduction in the premium payable under an insurance policy relating to a change in the coverage thereof. "Existing Documents" means The documents entered into relative to the 1997 funding arrangement between FPF and Seller, including the Agreement of Definitions dated September 24, 1997, Premium Receivable Servicing Agreement dated September 24, 1997, Residual Purchase and Funding Agreement dated September 24, 1997, 2 Security Agreement dated September 24, 1997, and Sale and Assignment Agreement dated September 24, 1997, together with all amendments and modification agreements. "FNIC" means Federated National Insurance Company. "FPF Concentration Limits" means the limits to the Premium Receivables as described in Schedule B. "FPF Principal Balance" means for any day of determination, the sum of the Up-front Purchase Price paid by FPF for the Premium Receivables under this Agreement, less the sum of (a) all Collections received by FPF representing principal payments, and (b) the principal amount of repurchases of Premium Receivables by the Seller under Section 6 of this Agreement. "GAAP" means generally accepted accounting principles applied in the United States of America in effect from time to time which are recognized by the American Institute of Certified Public Accountants. "Guarantor" means each guarantor of Seller's repurchase obligations as described in Section 6(b) of this Agreement listed in Schedule A attached hereto, if any. "Independent Public Accountants" means any firm of public accountants acceptable to FPF; provided, that such firm is independent with respect to the Seller and FPF within the meaning of the Securities Act of 1933, as amended. "Interest Rate" means the rate of interest set forth in Schedule A attached hereto. "Issuing Insurance Company" means, with respect to any Premium Receivable, the insurance company which issued the insurance policy related to such Premium Receivable. "Lien" means any statutory, judicial, contractual or other lien, security interest, encumbrance or claim of any kind. "Loss" shall mean (i) with respect to Defaulted Premium Receivables, an amount equal to the outstanding principal balance on such Defaulted Premium Receivable, and (ii) with respect to any Repurchase Property not reacquired by Seller, an amount equal to the Repurchase Price. "Low Rated Insurance Companies" means any Issuing Insurance Company whose published rating from the A.M. Best & Co., for any time a related Premium Receivable is outstanding, is "B" or lower (including all categories of "not rated" as defined by A.M. Best & Co.). "Low Rated Insurance Company Ratio" means the percentage ratio calculated on the Seller's portfolio of Premium Receivables included under this Agreement whereby (a) the numerator is the principal balance of the Seller's Premium Receivables which relates to Low Rated Insurance Companies and (b) the denominator is the principal balance of all of the Seller's Premium Receivables included under this Agreement. "Material Adverse Change" shall mean any material and adverse change, either individually or in the aggregate, in the business, prospects, management, financial position, results of operations or general condition of Seller or any of its Affiliates as determined by FPF in its reasonable discretion. "Maximum Purchase Commitment" means the maximum outstanding principal balance of the Eligible Premium Receivables Sold under this Agreement, at the time of calculation, not to exceed the amount set forth in Schedule A attached hereto. "Minimum Yield Trigger" shall have the meaning set forth in Schedule A attached hereto. 3 "Obligor" means, with respect to any Premium Finance Agreement, the obligor or account debtor thereunder. "Person" means an individual, partnership, limited liability company, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "Premium Finance Agreement" means the premium finance agreement or agreements which evidence a Premium Receivable in the form prescribed under applicable law. The Premium Finance Agreements shall be in form and substance acceptable to FPF in its sole discretion. "Premium Receivable" means the entire interest in a Premium Finance Agreement, all security interests relating thereto, all moneys due or to become due thereon subsequent to the Sale of such Premium Receivable to FPF, all related Realization Provisions, all related Endorsement Refunds, all Allowable Endorsement Additions relating thereto which have been acquired by FPF pursuant to this Agreement and any related documents and the proceeds of any and all of the foregoing. "Prohibited Agent" means any Agent that has been identified by written notice from FPF to the Seller as being prohibited from producing insurance policies financed by Premium Receivables that are subject to purchase by FPF pursuant to this Agreement. "Purchase Premium" means the portion of the Purchase Price as set forth in Schedule A attached hereto. "Purchase Price" means the price paid by FPF for each Eligible Premium Receivable equal to the sum of the (a) Up-front Purchase Price plus (b) the Purchase Premium. "Realization Provisions" means, with respect to any Premium Receivable, collectively: (a) the security interest granted or assigned by an Obligor, pursuant to the terms of the documents creating and evidencing the respective Premium Receivable at the time of execution thereof to the originator of such Premium Receivable, in all unearned premiums, dividends, and loss payments which reduce the unearned premiums under the respective insurance policy or policies, (b) any interest arising under a state guaranty fund for all unearned premiums from the cancelled policy or policies in the event the Issuing Insurance Company becomes insolvent, (c) Endorsement Refunds with respect to such Premium Receivable, (d) if applicable to such Premium Receivable, all broker or agent guarantee agreements with respect thereto, and (e) if applicable to such Premium Receivable, any interest thereof in a cash collateral account established with respect to such Premium Receivable. "Repurchase Price" shall have the meaning set forth in Schedule A attached hereto. "Repurchase Property" shall have the meaning defined in Section 6(a). "Required Documents" means the original signed Premium Finance Agreement, evidence satisfaction ot FPF of funding of financing each policy listed on the Premium Finance Agreement the check or draft relating thereto, the signed power of attorney of the insured (if a power of attorney signed by the insured is not included in the Premium Finance Agreement, and all other documents necessary for the legal origination of the Premium Finance Agreement. "Sale" or "Sell" or "Sold" means to absolutely sell, transfer, assign or otherwise convey property. "Servicer" means the servicer of the Premium Receivables described in Schedule C attached hereto. "Servicing Agreement" means the Premium Receivable Servicing Agreement in the form attached hereto in Schedule C "Servicing Fee" means the fee to be paid to the Servicer pursuant to the Servicing Agreement. 4 "Static Pool Cancellation Rate" means the applicable rate set forth in Schedule A attached hereto. "Static Pool Cancellation Rate Trugger" means the rate trigger as set forth in Schedule A "Tangible Net Worth" shall mean the tangible net worth, determined in accordance with GAAP, to be maintained by Seller in the amount set forth in Schedule A attached hereto. For purposes of this definition (i) Tangible Net Worth may be in the form of common or preferred equity or unsecured debt, the terms and conditions of which shall be satisfactory to FPF in its sole discretion ("Subordinated Debt"), and (ii) tangible assets used to calculate net worth shall exclude all intangible assets, goodwill and intercompany or Affiliate indebtedness of any nature. "Term" means the term of this Agreement as defined in Schedule A attached hereto. "Termination Fee" means the fee to be paid by Seller as provided under Section 3 of this Agreement and as set forth in Schedule A attached hereto. "Up-front Purchase Price" means the portion of the Purchase Price paid by FPF for a Premium Receivable as set forth in Schedule A attached hereto. Section 2. Sale of Conveyed Property. (a) During the Term of this Agreement, Seller irrevocably agrees to Sell to FPF all of the Eligible Premium Receivables originated, acquired or otherwise owned by Seller and FPF agrees to purchase up to the amount of the Maximum Purchase Commitment all of Seller's Eligible Premium Receivables in accordance with the terms and conditions of this Agreement. Seller shall Sell Eligible Premium Receivables to FPF no less frequently than weekly as originated, unless otherwise agreed by FPF in writing. The parties agree that FPF shall have the exclusive right, during the Term of this Agreement, to purchase all Eligible Premium Receivables originated, acquired or otherwise owned by Seller. (b) FPF's obligation to be bound by the terms of this Agreement is subject to the satisfaction of each of the following conditions by evidence in form and substance satisfactory to FPF in its reasonable discretion: (i) Seller shall provide evidence that it has the necessary authority and has secured any required consents to execute and deliver this Agreement and to enter into the transactions contemplated by this Agreement, which evidence shall include, at a minimum, good standing certificate of Seller and any Guarantor (if not an individual), officers' certificates regarding (together with copies of) the articles and bylaws of Seller (or other organizational documents as may be applicable) and any amendments thereto, UCC searches regarding the Seller, proof of Seller's license to originate the Premium Finance Agreements, the form of the Premium Finance Agreements to be originated by Seller, and such other evidence as FPF may require in its reasonable discretion including, without limitation, any legal opinions that FPF may require regarding Seller and Seller's ability to enter into and perform under this Agreement; (ii) FPF shall have completed its due diligence of the Seller and determined that the findings of such due diligence, including the hardware and software for the Seller's data processing system, are acceptable to FPF in its sole discretion; (iii) The Closing and Due Diligence Fee has been paid in full by Seller to FPF; (iv) Seller shall have provided evidence that there are no prior Liens or existing Uniform Commercial Code financing Statements granting to any party a security interest in any of Seller's Premium Receivables or other Conveyed Property; and 5 (v) Seller shall have provided to FPF Uniform Commercial Code financing statements in form and substance acceptable to FPF establishing a first priority ownership interest in favor of FPF in the Premium Receivable and related Conveyed Property. (c) Each Sale of a Premium Receivable hereunder is subject to the satisfaction to FPF of each of the following conditions at Seller's sole cost and expense: (i) All covenants and conditions of this Agreement have been complied with by Seller and no default (or event which, with the passage of time or notice or both would constitute a default) exists hereunder or under the Servicing Agreement; (ii) No Material Adverse Change has occurred; (iii) Each of the Minimum Yield Trigger, Static Pool Cancellation Rate Trigger, and Maximum Purchase Commitment shall not be exceeded; (iv) The availability to FPF of funding from FPF's funding source for the transactions contemplated hereby; (v) The Concentration Limits established in Schedule B, with respect to concentrations with Issuing Insurance Companies or Agents shall not be exceeded; (vi) The Premium Receivables shall be Eligible Premium Receivables; provided, however, that any Premium Receivable Sold on the Effective Date may include Premium Receivables with respect to which any payment has been due and unpaid for more than 30 days and for which a cancellation notice has been delivered to the Obligor and to the Issuing Insurance Company; and (vii) Seller shall provide such additional evidence, documents and instruments as FPF may reasonably request to consummate the Sale of the Conveyed Property in accordance with the terms and provisions of this Agreement. (d) In connection with the Sale of each Premium Receivable hereunder, Seller shall timely deliver to FPF the Required Documents relating to each Premium Finance Agreement, which delivery shall be made by the later of (A) the twentieth (20th) day following funding of the premium financed by such Premium Finance Agreement, or (B) twentieth (20th) day following receipt by Servicer of the Premium Finance Agreement. (e) The Sale of any Conveyed Property shall be effective (i) with respect to the Conveyed Property Sold to FPF on the Effective Date, upon delivery to FPF of an assignment in form and substance acceptable to FPF or by other method of transfer as may be directed by FPF, and (ii) with respect to all Conveyed Property Sold after the Effective Date, upon the origination or acquisition by the Seller of each Premium Finance Agreement giving rise to the Premium Receivable and other Conveyed Property without the need for execution and delivery of any further assignments or instruments of transfer unless specifically requested in writing by FPF. The Seller shall cooperate with FPF and the Servicer in immediately supplying to the Servicer the Premium Receivable data needed to enter the Premium Receivables on the Servicer's data processing system. All Sales shall be deemed to take place at the offices of FPF described on the first page of this Agreement or such other location as Seller and FPF may agree in writing. (f) Seller and FPF intend and agree that each purchase and Sale hereunder shall be treated as a true and absolute Sale of all of Seller's right, title and interest in, to and under the Conveyed Property and not a transfer intended as a security interest. However, if, notwithstanding such intention, a determination is made by a court or other body with appropriate jurisdiction over the matter that such transfer shall not be treated as a 6 true and absolute Sale, this Agreement shall be deemed to constitute a security agreement and the transaction effected hereby shall be deemed to constitute a secured financing, and Seller hereby pledges and grants to FPF a first priority Lien on, and security interest in, to and under, all of Seller's right, title and interest in, to and under the Premium Receivables and all other related Conveyed Property as collateral for and as security for all amounts paid and to be paid by FPF to Seller in connection with the Conveyed Property and for all amounts due and owing and all obligations arising under this Agreement. Section 3. Termination. Seller shall have the right to terminate this Agreement upon sixty (60) days prior written notice to FPF and payment to FPF of the Termination Fee. Upon termination by Seller as provided herein, FPF shall continue to own all Premium Receivables acquired by FPF to the date of termination and the Servicer shall service the portfolio of Conveyed Property in the normal course of its business and, in connection therewith, all provisions of this Agreement or any Servicing Agreement with respect to such existing portfolio shall remain in full force and effect and shall survive the termination of this Agreement under this Section 3, including, without limitation, the repurchase obligations of Seller or Guarantor relating to such existing portfolio. Section 4. Purchase Price and Payment Terms for Conveyed Property/Right of Set-Off. FPF shall pay Seller the Purchase Price for the Conveyed Property pursuant to the terms and conditions set forth in this Agreement. The Up-front Purchase Price shall be paid to Seller or a third party acceptable to FPF upon satisfaction of the conditions set forth in Section 2(c). The Purchase Premium, if any, shall be paid to Seller monthly in arrears, not later than the eighth Business Day of each month. FPF shall have a right to off-set from such Purchase Price amounts due to Seller any amounts due FPF from Seller or Guarantor under this Agreement including, without limitation, any Repurchase Price amounts due under Section 6 [and any Agent Statement Unpaid Balance amounts]. Section 5. Notification of Sale. FPF shall send or cause to be sent notice of the Sale of the Premium Receivables to FPF, (i) to each Obligor to the effect that the Premium Receivables have been Sold to FPF and that all payments with respect thereto are required to be made payable as specified in such notice, and (ii) to each Issuing Insurance Company to the effect that the Premium Receivables have been Sold to FPF and that all payments with respect thereto are required to be paid to the Servicer as specified in such notice. The Seller shall promptly respond to reasonable inquiries from FPF or third parties confirming the Sale of the Conveyed Property hereunder. Section 6. Repurchase of Conveyed Property. (a) Not later than five (5) Business Days after notice from FPF, Seller shall repurchase from FPF any Premium Receivables and other related Conveyed Property (collectively, the "Repurchase Property") (i) that does not comply in all respects with Seller's representations and warranties described in Section 11 of this Agreement or (ii) for which the Required Documents have not been timely delivered to FPF. The amount payable by Seller to FPF for the Repurchase Property shall be equal to the Repurchase Price. Upon its receipt of the Repurchase Price, FPF shall convey to Seller all of its right, title and interest in such Repurchase Property on an "AS IS, WHERE IS" basis without recourse and without any warranties, written or oral, express or implied, of any kind including, but not limited to, warranties of TITLE; MERCHANTABILITY OR ABSENCE FROM LIENS. (b) Each Guarantor (jointly and severally, if more than one Guarantor) hereby agrees to repurchase (i) the Repurchase Property referred to in Section 6(a) upon the failure of Seller to do so, and (ii) any Premium Receivable originated in a fraudulent manner. Upon its receipt of all of the amounts due under this Section, FPF shall convey to Guarantor all of its right, title and interest in such Repurchase Property on an "AS IS, WHERE IS" basis without recourse and without any warranties, written or oral, express or implied, of any kind including, but not limited to, warranties of TITLE; MERCHANTABILITY OR ABSENCE FROM LIENS. Section 7. Delivery to FPF of Proceeds; Power of Attorney. FPF shall be the owner of any Conveyed Property including any proceeds thereof. Following the Sale of any Conveyed Property, if any proceeds of such Conveyed Property are received by Seller, Seller shall hold such proceeds in trust for FPF separate and apart from its 7 own property and, at its own cost, immediately endorse (if necessary) and deliver such proceeds, as FPF directs. Seller hereby constitutes and appoints FPF as its true and lawful attorney with the power to endorse the name of Seller upon any instrument or other document pertaining to the Conveyed Property and any related proceeds. This power is coupled with an interest and is irrevocable. Section 8. Verification, Notification and Collection of Premium Receivables. FPF shall be entitled, in its own or any other name and in form determined by FPF, to contact any Obligor or any other Person and verify the payment of or inquire about any other issue pertaining to any Conveyed Property that has been or is to be Sold to FPF. Upon the Sale of any Conveyed Property, FPF shall be entitled to notify and, upon the request of FPF, Seller shall notify the Obligors, insurance companies and any other Persons that FPF is the owner of such Conveyed Property and direct such Persons to pay FPF any amounts owing with respect to such Conveyed Property. FPF, as the owner of the Conveyed Property, shall be entitled to amend, compromise, modify, release or settle the indebtedness and obligations of the Obligors with respect to the Conveyed Property that is Sold to FPF hereunder, and to take any legal action to collect any amounts owing with respect to such Conveyed Property and to take or refrain from taking any additional action with respect to such Conveyed Property in good faith, without notice to or the consent of Seller and without affecting any obligation of Seller to repurchase such Conveyed Property as may be required by FPF under this Agreement. Seller, at its own cost, shall execute and deliver to FPF any documents and take any actions deemed necessary or desirable by FPF to assist FPF in exercising any right or remedy pertaining to the Conveyed Property. Section 9. Financial Statements and Books and Records. Seller shall keep accurate and complete books and financial records pertaining to the Conveyed Property in accordance with GAAP and shall disclose the Sale of any Conveyed Property to FPF and the respective date of such Sale in Seller's books and records. FPF or its designated representative shall have the right, upon written notice to Seller and during regular business hours, to inspect, audit and copy Seller's books and records relating to the Conveyed Property. Section 10. Seller's General Representations and Warranties. Seller hereby represents and warrants to and for the benefit of FPF on the date of this Agreement and on any date of Sale of Premium Receivables hereunder that: (a) Seller is duly organized and is validly existing as a corporation in good standing under the laws of the state of its organization with full power and authority to execute and deliver this Agreement and to Sell the Conveyed Property to FPF and otherwise to perform the terms and provisions thereof; (b) Seller is duly qualified to do business as a domestic or foreign business entity in good standing, and has obtained all required licenses and approvals, if any, in all jurisdictions in which the conduct of its business requires such qualifications, and has complied with all federal, state and local laws and regulations in connection with the origination of the Premium Receivables and the Sale of the Conveyed Property under this Agreement; (c) The execution and delivery by Seller of this Agreement and Seller's performance of the terms and conditions thereof have been duly authorized by all necessary action of Seller, do not require any approval or consent of any governmental agency or authority or any other Person, and do not and will not conflict with or result in a breach or (with or without notice or lapse of time) a default under any agreement, law or governmental regulation binding upon or applicable to Seller or the Conveyed Property; (d) No litigation or administrative proceeding of or before any court, tribunal or governmental body is presently pending or threatened, against Seller or its properties which have not been previously disclosed in writing to FPF; (e) This Agreement and any related documents to which Seller or any Guarantor is a party constitute valid, legal and binding obligations of Seller and any such Guarantor, enforceable against Seller and any such Guarantor in accordance with the terms thereof, subject to applicable bankruptcy, insolvency, 8 reorganization, moratorium and other laws affecting the enforcement of creditor's rights generally and to general principles of equity, regardless of whether such enforcement is considered in a proceeding in equity or at law; (f) Seller does not have material liabilities or obligations other than those previously disclosed in writing to FPF; (g) No information, certificate, statement or report furnished by or on behalf of Seller or any Guarantor to FPF contains any untrue statement of a material fact or omits a material fact necessary to make such information, certificate, statement or report not misleading. There is no fact peculiar to Seller or any Affiliate of Seller or, to its knowledge, any Conveyed Property or Obligor, which it has not disclosed to FPF in writing which could adversely affect Seller's ability to perform the transactions contemplated by this Agreement and any related documents to which Seller is a party; (h) All tax returns required to be filed by Seller, any of its Affiliates, subsidiaries or any Guarantor in any jurisdiction have in fact been filed, and all taxes, assessments, fees, claims and other governmental charges upon Seller, such Affiliate or subsidiary, such Guarantor or any of their respective properties, income or franchises, shown to be due and payable on such returns have been paid; provided, that neither Seller nor such Affiliate or subsidiary or Guarantor shall be required to pay or discharge any such tax, assessment, fee, claim or other charge which is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained in accordance with GAAP. To the best of Seller's knowledge, all such tax returns were true and correct and Seller does not know of any contemplated or proposed additional tax assessment against Seller or any of its subsidiaries in any material amount or of any basis therefor; (i) The provisions for taxes on Seller's and its subsidiaries' books are in accordance with GAAP; (j) At the close of any Sale of Conveyed Property, Seller met the Tangible Net Worth Requirement (k) The principal executive office of Seller is located at the address described on the first page of this Agreement, and has been located at such address for a period of not less than four months preceding the date of this Agreement or since its formation; (l) "FEDERATED PREMIUM FINANCE, INC." is the only legal name under which Seller is operating its business upon the execution of this Agreement. Seller has not changed its name in the last six years (or such shorter period of time during which Seller was in existence) and does not have any other trade names, fictitious names, assumed names or "doing business as" names other than those that have been previously disclosed in writing to FPF; (m) The transactions contemplated by this Agreement are in the ordinary course of Seller's business and Seller has valid business reasons for selling the related Conveyed Property rather than obtaining a secured loan with the Conveyed Property as collateral. At the time of each Sale: (i) Seller Sold the related Conveyed Property to FPF without any intent to hinder, delay or defraud any current or future creditor of Seller; (ii) Seller was not insolvent or did not become insolvent as a result of any Sale; (iii) Seller was not engaged and was not about to engage in any business or transaction for which any property remaining with Seller would constitute unreasonably small capital or for which the remaining assets of Seller are unreasonably small in relation to the business of Seller or the transaction; (iv) Seller did not intend to incur, and did not believe or reasonably should not have believed, that it would incur, debts beyond its ability to pay as they become due; and (v) the consideration paid by FPF to Seller for the Conveyed Property was equivalent to the fair market value of such Conveyed Property; 9 (n) No Material Adverse Change has occurred since the previous Sale of Conveyed Property; (o) Each Sale of Conveyed Property contemplated by this Agreement and any related documents constitutes a true sale and not a pledge of collateral in connection with a financing and such Conveyed Property shall not be part of Seller's property for any purpose under state or federal law; (p) Each Sale of Conveyed Property (including all payments due or to become due thereunder) by Seller pursuant to this Agreement to the best of Seller's knowledge is not subject to and will not result in any tax, fee or governmental charge payable by Seller or FPF to any federal, state or local government; (q) The consideration to be received by Seller in exchange for each Sale of Conveyed Property (including the right to receive all payments due or to become due thereunder) (i) is fair consideration having value equivalent to or in excess of the fair market value of the Conveyed Property and, except with respect to the Purchase Premium (ii) is or will be paid in full to Seller upon the consummation of each Sale thereof, and (iii) no provision exists whereby the consideration will be modified after the date of such Sale. The foregoing representations and warranties shall be continuing in nature and shall survive the termination of this Agreement. Section 11. Seller's Representations and Warranties With Respect to the Conveyed Property. Upon each Sale of Conveyed Property, each Premium Receivable Sold to FPF shall have all of the following characteristics as of the date of Sale (such Premium Receivables having all of such characteristics shall be referred to herein as "Eligible Premium Receivables"): (a) Each Premium Receivable represents the genuine, legal, valid and binding payment obligation in writing of the Obligor thereon, enforceable by the holder thereof in accordance with its terms; (b) Each Premium Receivable arises under a Premium Finance Agreement which contains customary and enforceable provisions such that the rights and remedies of the holder thereof are adequate to enforce the Realization Provisions; (c) Each Premium Receivable is not subject to any proceedings or investigations pending or threatened, before any court, regulatory body, administrative agency or other governmental instrumentality having jurisdiction over Seller or its properties: (i) asserting the invalidity of such Premium Receivable; (ii) seeking to prevent the enforcement of such Premium Receivable; or (iii) seeking any determination or ruling that may adversely affect the payment on or enforceability of such Premium Receivable; (d) Each Premium Receivable was originated in a state where Seller is licensed (if required to be licensed) to do business as an insurance premium finance company; (e) Each Premium Receivable does not (and did not at the time of origination) contravene any federal, state or local laws, rules or regulations applicable thereto or contract between Seller and FPF applicable thereto, and no party to any such contract is in contravention of any such law, rule or regulation; (f) Each Premium Receivable was originated in the United States of America by Seller or purchased by Seller from another premium finance company in the ordinary course of Seller's business of financing insurance premiums written through affiliated and independent insurance agents and brokers or insurance companies directly, in either case, through the application of and consistent with Seller's standard procedures in a fashion not less stringent taken as a whole than those other Premium Receivables owned by Seller; (g) Each Premium Receivable is payable in U.S. Dollars by an Obligor who at time of policy origination is located within the United States of America; 10 (h) Each Premium Receivable is evidenced by only one original contract, in the form of a Premium Finance Agreement, properly completed and executed without variations, with notation of the Sale to FPF, on or before the Sale of such Premium Receivable; (i) Each Premium Receivable provides, according to its original or modified terms, that the amount payable thereunder will be paid in consecutive equal monthly payments that fully amortize such Premium Receivable by its stated terms and which amount will be paid in a maximum of eleven (11) payments (if financing an annual policy), and a maximum of five (5) payments (if financing a six-month policy) with the first payment due not later than 31 days following the inception date of the related insurance policy; (j) Each Premium Receivable relates to an insurance policy issued by an Eligible Insurance Company; (k) Each Premium Receivable relates to an insurance policy for which the insured has paid a down payment amount of not less than the Down Payment Requirement; (l) Each Premium Receivable is evidenced by proof of payment to the Issuing Insurance Company or its designated general Agent equal to an amount not less than the original principal amount of such Premium Receivable and the related down payment due under the Premium Finance Agreement has been paid in full by, or on behalf of, the related Obligor; (m) The information and related documents regarding the Premium Receivables being Sold to FPF is true and correct in all material respects as of the opening of business on the date of Sale and no selection procedures believed to be adverse to FPF have been utilized in selecting the Premium Receivables for inclusion therein; (n) Except for Premium Receivables Sold on the Effective Date, no Premium Receivable or related Premium Finance Agreement has been satisfied, terminated or is more than 30 days past due or is subject to a right of rescission, setoff, counterclaim, subordination, recoupment or defense which has been asserted or threatened with respect to such Premium Receivable nor have the Realization Provisions securing such Premium Receivable been released from the Lien granted by the Obligor; (o) Except for assignments or pledges to lenders who have provided financing to Seller and which assignments and pledges have been released prior to the Sale of the Premium Receivables to FPF, no Premium Receivable has been Sold or pledged by Seller to any Person other than FPF; immediately prior to any Sale contemplated by this Agreement Seller had good title to the Premium Receivable sold to FPF free and clear of all Liens and, immediately upon any Sale of the Premium Receivables contemplated by this Agreement, FPF will have good title to the Premium Receivables Sold to FPF free and clear of all Liens; (p) No Premium Receivable has terms which have been extended or modified other than through Allowable Endorsement Additions, the originals of which have been included in the Premium Finance Agreement loan documents delivered to FPF; (q) No Premium Receivable has any Liens or claims which have been filed or claims that would be Liens prior to or equal to the Realization Provisions granted by the Obligor pursuant to such Premium Receivable; (r) At the time of Sale of any Premium Receivable which finances a commercial line insurance policy, to the best of Seller's knowledge, the Obligor with respect to such Premium Receivable is not subject to any bankruptcy or insolvency proceeding; (s) No Premium Receivable relates to an insurance policy which is deemed fully earned in the 11 case of a claim; (t) No Premium Receivable has been originated by a Prohibited Agent; and (u) No Premium Receivable has been originated in, nor is subject to the laws of, any jurisdiction under which the Sale of such Premium Receivable would be unlawful, void or voidable. The foregoing and any additional representations, warranties and covenants contained in this Agreement shall be continuing in nature and shall survive the termination of this Agreement. Section 12. Additional Covenants of Seller. During the Term of this Agreement, (a) Seller shall at its expense cause all Uniform Commercial Code termination statements, satisfactions, releases or partial releases, as the case may be, with respect to Liens on the Conveyed Property to be filed on the date of Sale of the Conveyed Property. (b) Seller shall cause all Uniform Commercial Code financing statements, continuation statements and any other documents, reasonably requested by FPF, establishing the right, title and interest of FPF, to and under the Conveyed Property, to be promptly executed and filed by Seller, and shall deliver to FPF or its designee file-stamped, complete copies of, or filing receipts for, any document recorded, registered or filed as provided above, as soon as available but in any event not later than thirty (30) days following such recordation, registration or filing. (c) At least thirty (30) days prior to Seller making any change in its name, identity or organizational structure which would make any termination statement, financing statement or continuation statement filed by FPF or Seller seriously misleading within the applicable provisions of the Uniform Commercial Code or any title statute, Seller shall give FPF notice of any such change and shall execute and file such financing statements or amendments as may be necessary or reasonably required by FPF to continue the perfection of the respective interests of FPF in the Conveyed Property. (d) Except for the Sale to FPF of the Conveyed Property and Liens granted or caused by FPF in such Conveyed Property, Seller shall not Sell to any other Person, or grant, incur, assume or suffer to exist any Lien on such Conveyed Property or on any interest therein, and Seller shall defend the right, title and interest of FPF in, to and under such Conveyed Property against all claims of third parties claiming through or under Seller. (e) Seller shall not impair FPF's right, title and interest in, to and under any of the Conveyed Property. (f) Seller shall maintain Tangible Net Worth of not less than the amount set forth in Schedule A attached hereto. (g) Seller shall furnish to FPF: (i) within forty-five (45) days after the end of each of the first three fiscal quarters of Seller (commencing with the first fiscal quarter ending after the date hereof) an unaudited balance sheet and income statement (prepared in accordance with GAAP without accompanying notes) for Seller and its subsidiaries and any affiliated Insurance companies covering the preceding quarter, in each case certified by the president or principal financial officer of Seller to be true, accurate and complete copies of such financial statements; (ii) on the earlier of (A) ninety (90) days after the end of each fiscal year of Seller beginning at the end of the first fiscal year after the date hereof or (B) if financial statements are 12 prepared by an Independent Public Accountant, fifteen (15) days after delivery by an Independent Public Accountant, a balance sheet and income statement (prepared in accordance with GAAP) for Seller and its subsidiaries and any affiliated Insurance companies covering the preceding fiscal year, in each case certified by the president or principal financial officer of Seller to be true, accurate and complete copies of such financial statements; (iii) such other information respecting the condition or operations, financial or otherwise, of Seller, any of its subsidiaries and any Guarantor as FPF may from time to time reasonably request; and (iv) prompt notice to FPF (but in no event more than three (3) Business Days following) of any Material Adverse Change. (h) Seller shall provide prompt written notice to FPF if: (i) Seller ceases to be managed and controlled by the Person or Persons who manage and control Seller as of the date of this Agreement; (ii) any such Person which is a corporation, partnership, trust or other entity is dissolved or liquidated or merged with or into any other Person or for any period of more than ten (10) days ceases to exist in its present form and (where applicable) in good standing and duly qualified under the laws of the jurisdiction of its incorporation or formation and any jurisdiction in which such standing or qualification is necessary or advisable in connection with the conduct of business; or (iii) Seller commences a sale of all or substantially all of its assets, except for the Sale of Conveyed Property by Seller to FPF under this Agreement and any related documents. (i) Seller shall not dissolve or liquidate in whole or in part. (j) Seller shall not voluntarily institute any proceedings to adjudicate Seller or any of its Affiliates bankrupt or insolvent, consent to the institution of bankruptcy or insolvency proceedings against Seller or any of its Affiliates, file a petition seeking or consenting to reorganization or relief under any applicable federal or state law relating to bankruptcy, consent to the appointment of a receiver, liquidator, assignee, trustee (or other similar official) of Seller or any of its Affiliates or a substantial part of its or their property or admit its or their inability to pay its or their debts generally as they become due or authorize any of the foregoing to be done or taken on behalf of Seller or any of its Affiliates. (k) Seller shall maintain at its own expense, a blanket fidelity bond or an errors and omissions insurance policy, in form and content and in amounts acceptable to FPF and naming FPF as an additional loss payee or beneficiary thereunder. (l) Seller shall comply with all Additional Provisions set forth in Schedule A, if any. Section 13. Taxes. Seller shall pay when due all present and future income taxes, withholding taxes, worker's compensation premiums, sales taxes, use taxes, excise taxes, personal property taxes and all assessments and other amounts levied by or required to be paid to any governmental or quasi-governmental authority and pertaining to Seller, its business operations, its assets or the Conveyed Property (except for FPF's income taxes) and provide FPF with written proof of such payment upon the request of the latter party. Section 14. Further Assurances and Substituted Performance. Seller shall take or cause any third party to take any actions and execute or cause any third party to execute any additional documents (including, but not limited to, Uniform Commercial Code filings) deemed necessary or desirable by FPF to carry out the intent or purposes of this 13 Agreement and any related documents. FPF shall be entitled, but not required, to take any action and execute any document that was required to be, but not, taken or executed by Seller under this Agreement and any related documents. This power is coupled with an interest and is irrevocable. Upon demand, Seller shall reimburse FPF for any amounts, attorneys' fees, expenses and costs paid by FPF in connection with such actions together with interest thereon at the Interest Rate from the date of payment until the date of reimbursement. No action taken by FPF shall be deemed to relieve Seller's obligation to take such action or cure Seller's default under this Agreement. Section 15. Indemnification. Seller shall indemnify and hold FPF and its Affiliates harmless from all claims, defenses, offsets, counterclaims, loss, costs, damages, liabilities, causes of action, actions and suits (including, but not limited to, attorneys' fees, expenses and costs) arising from (i) Seller's breach of any representation, warranty or covenant contained in this Agreement or any related documents, (ii) the unauthorized use of drafts provided by FPF to Seller for the funding of Premium Finance Agreements, or (iii) the failure of the Premium Receivables Sold hereunder to be originated in compliance with all requirements of law. These indemnity provisions are in addition to any other obligations that the Seller may otherwise have hereunder and shall survive the termination of this Agreement. Section 16. Default. Seller shall be deemed in default (a "Default") under this Agreement upon the occurrence of any one or more of the following: (a) Seller fails to pay any indebtedness, fails to perform any obligation, or breaches any covenant, representation or warranty (other than a breach of any representation or warranty under Section 11 of this Agreement) to FPF under this Agreement and/or any related documents and any other present or future agreement with FPF; (b) Seller breaches any representation or warranty by Seller under Section 11 of this Agreement pertaining to Conveyed Property and Seller fails to repurchase such Conveyed Property within five (5) Business Days from the date of written notification by FPF of such breach in accordance with the terms and conditions of Section 6 of this Agreement; (c) Seller defaults under any of the Existing Documents (d) Seller permits the entry or service of any garnishment, judgment, tax levy, attachment or lien against it or any of its property; (e) Seller or any Guarantor becomes insolvent or unable to pay its debts in a timely manner; (f) Seller or any Guarantor makes a general assignment for the benefit of its creditors, a receiver or trustee is appointed for all or a substantial portion of Seller's or Guarantor's respective assets, or a bankruptcy, insolvency, liquidation or reorganization proceeding is commenced by or against Seller or Guarantor in any state or federal court; (g) Seller challenges the validity of the true Sale of the Premium Receivables hereunder or the priority, validity or enforceability of any ownership interest granted by Seller in the Conveyed Property to FPF; (h) Seller ceases to operate its business, or is dissolved or terminated for any reason; (i) Any Guarantor dies or any Guarantor fails to perform any obligation to FPF under this Agreement or challenges the validity of its guaranty provision of this Agreement or provides FPF with notice of its intent to terminate any guaranty provision of this Agreement to FPF or its future obligations under such guaranty provisions for any reason; or (j) FPF, in good faith, believes that Seller's or any Guarantor's ability to pay and perform any of the obligations described in this Agreement or any related documents is or shall be impaired or otherwise deems itself insecure for any reason and provides written notice thereof to Seller, or; 14 (k) An event of default by the Servicer under the provisions of the Servicing Agreement. Section 17. Remedies. In the event of Seller's default under this Agreement, FPF may exercise one or more of the following cumulative remedies without notice or demand of any kind: (a) terminate immediately any of its remaining obligations under this Agreement; (b) collect all amounts due from Seller to FPF under this Agreement or any other agreement, together with interest thereon at the Default Rate until paid, with or without resorting to legal process; (c) in the event FPF terminates this Agreement, collect, in addition to the amounts set forth in (b) above, liquidated damages in the amount of the maximum Termination Fee that would be collectible in the event of termination hereunder, it being agreed by the parties that damages would be difficult to assess under this Agreement and that liquidated damages in addition to collection of the amounts set forth in (b) above shall be due to FPF to compensate FPF for the default by Seller or any Guarantor and the termination of this Agreement by FPF as a result thereof; (d) change Seller's mailing address, and as it relates to the Conveyed Properly only, open Seller's mail, endorse Seller's name on checks, bills of exchange, notes, acceptances, money orders, drafts or other documents or forms of payment and retain any proceeds of the Conveyed Property; (e) terminate any Servicing Agreement or lock box agreement pertaining to the Conveyed Property and change such servicers and lock box arrangements; (f) notify Obligors to make payment on Premium Receivables Sold under this Agreement to FPF or its designee; (g) enter Seller or any Affiliate's premises during normal business hours and take possession of any Conveyed Property; (h) require Seller, at its expense, to deliver and make available to FPF any Conveyed Property Sold to FPF at a place reasonably convenient to FPF; (i) commence a suit for the turnover or replevin of the Conveyed Property; (j) collect, compromise, settle, sell or otherwise dispose of any Conveyed Property that Seller was required to, but did not, repurchase from FPF; (k) set-off Seller's and any Guarantor's obligations owing to FPF under this Agreement, any other written agreement or by operation of law against any amounts owed by FPF to such Persons under this Agreement or any related documents, respectively, including, but not limited to, moneys, instruments and other property deposited or maintained with FPF or any third party for the benefit of FPF; and (l) exercise all other rights available to FPF under any other present or future agreement or applicable law. FPF's rights and remedies are cumulative and may be exercised together, separately and in any order. Section 18. Waiver. FPF shall not be deemed to have waived any right or remedy described in this Agreement unless FPF has executed and delivered to Seller a written waiver thereof. A waiver of a right or remedy on one occasion shall not act as a waiver of that or any other right or remedy on a future occasion. Without limiting the foregoing, FPF's delay in exercising any right or remedy shall not constitute a waiver of that or any other right or remedy described in this Agreement. 15 Section 19. Counterparts/Facsimiles. This Agreement may be executed by facsimile signature and in one or more counterparts, each of which when taken together shall constitute one complete Agreement. Section 20. Essence of Time. Seller and FPF agree that time is of the essence. Section 21. Assignment. FPF shall be entitled to assign or grant a Lien on its interests hereunder, and the obligations, rights and remedies under this Agreement to any Person in its sole discretion. Such Persons shall be deemed to be third party beneficiaries hereunder and shall be entitled to rely on the provisions hereof for the benefit of FPF including, without limitation, the indemnification provisions of Section 15. Any assignee or designee of FPF shall be entitled to enforce the provisions of this Agreement against Seller. Seller shall not be entitled to assign or grant a security interest in any of its obligations, rights or remedies under this Agreement to any Person without the prior written consent of FPF, or its assignees or designees, which consent may be withheld in the sole discretion of FPF. No person shall be deemed a third party beneficiary of Seller. Section 22. Standard of Care. FPF shall not be liable to Seller for any action taken or not taken by FPF in good faith in connection with this Agreement. FPF shall not be deemed a fiduciary of Seller or be required to perform any of Seller's obligations to FPF or any third party under any circumstances. Section 23. Costs and Expenses/Attorneys Fees. (a) Seller shall pay all costs and expenses incident to the performance of its obligations under this Agreement; (b) Seller shall pay on demand FPF's attorneys' fees and other costs and expenses incurred before trial, at trial and on appeal in the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, including without limitation, all costs, expenses and attorneys fees incurred by FPF in connection with any bankruptcy or insolvency proceeding involving the Seller. Section 24. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered personally or mailed by first-class registered and certified mail, postage prepaid, or by telephonic facsimile transmission, electronic mail or overnight delivery service, postage prepaid, to the parties at the following addresses or such other addresses that they may provide each other with written notice of in the future: If to Seller: Federated Premium Finance, Inc. 4161 NW 5th Street Plantation, Florida 33317 Attn: Chief Executive Officer Facsimile: (954) 584-5330 If to FPF, Inc.: 600 Seventeenth Street, Suite 1900S Denver, Colorado 80202 Attn: Chief Executive Officer Facsimile: (303) 571-1811 Such notices shall be effective upon the earlier of (i) receipt or (ii) two (2) Business Days after the confirmed delivery by overnight delivery service. Section 25. Successors and Assigns. Except as provided in Section 21 hereof limiting assignments by Seller, this Agreement shall inure to the benefit of and be binding upon the successors, assigns, trustees, receivers, heirs and personal representatives of the parties hereto. 16 Section 26. Severability. Any part, provision, agreement, representation, warranty or covenant of this Agreement which is prohibited or unenforceable or is held to be void or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the parties waive any provision of law which prohibits or renders void or unenforceable any provision hereof. If the invalidity of any part, provision, agreement, representation, warranty or covenant of this Agreement shall deprive any party of the economic benefit intended to be conferred by this Agreement, the parties shall negotiate in good faith to develop a structure the economic effect of which is as nearly as possible the same as the economic effect of the transactions contemplated hereunder without regard to such invalidity. Section 27. Force Majeure. Neither party shall be liable for damages due to delay or failure to perform any obligation under this Agreement if such delay or failure results directly or indirectly from circumstances beyond the control of such party. Such circumstances shall include, but shall not be limited to, acts of God, acts of war, civil commotions, riots, strikes, lockouts, acts of the government, disruption of telecommunications transmissions accident, fire, water damages, flood, earthquake or other natural catastrophes. Section 28. Governing Law. THIS AGREEMENT AND ANY RELATED DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF COLORADO WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS. Section 29. Jurisdiction and Waiver of Certain Damages. THE PARTIES HERETO HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF COLORADO AND THE UNITED STATES DISTRICT COURT OF COLORADO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT AND THE PARTIES HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH COURTS. THE PARTIES HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING AND IRREVOCABLY CONSENT TO THE SERVICE OF ANY SUMMONS AND COMPLAINT AND ANY OTHER PROCESS BY THE MAILING OF COPIES OF SUCH PROCESS TO THEM AT THEIR RESPECTIVE ADDRESSES AS SPECIFIED IN THIS AGREEMENT. THE PARTIES HEREBY AGREE THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF FPF TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION. NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT TO THE CONTRARY, NO CLAIM MAY BE MADE BY THE SELLER AGAINST FPF OR ANY OF ITS AFFILIATES FOR ANY LOST PROFITS, OR ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES IN RESPECT TO ANY BREACH OR WRONGFUL CONDUCT (OTHER THAN WILLFUL MISCONDUCT CONSTITUTING FRAUD) ARISING OUT OF OR IN ANY WAY RELATED TO THE TRANSACTIONS CONTEMPLATED HEREUNDER. Section 30. Entire Agreement. This Agreement (including any Servicing Agreement between Seller and FPF ) contains the complete and integrated understanding and agreement between the parties and their respective Affiliates pertaining to the subject matter hereof, and all other prior and contemporaneous discussions, negotiations, agreements and proposal letters, written or oral, express or implied shall be of no force and effect. Section 31. Waiver of Jury Trial. EACH OF THE PARTIES HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT. 17 [SIGNATURE PAGE FOLLOWS] 18 IN WITNESS WHEREOF, the undersigned duly authorized officers of the parties have executed this Agreement as of the day first stated above. FEDERATED PREMIUM FINANCE, INC: By: /s/ Stephen C. Young ------------------------------- Name: Stephen C. Young ------------------------------- Title: President ------------------------------- FPF, INC. By: /s/ Bruce I. Lundy ------------------------------- Name: Bruce I. Lundy ------------------------------- Title: President ------------------------------- AGREED TO WITH RESPECT TO SECTION 6(b): 21ST CENTURY HOLDINGS CORP. By: /s/ Edward J. Lawson ----------------------------------------- Name: Edward J. Lawson ----------------------------------------- Title: President ----------------------------------------- 19 Schedule A ---------- This Schedule A forms a part of the Sale and Assignment Agreement ("Agreement") to which it is attached and is incorporated therein. Section A-1. Definitions. The following definitions shall have the following meanings: "Additional Charges" shall mean for amounts advanced by FPF, which are determined by FPF to be ineligible upon Default, the sum (a) the additional interest due for amounts advanced by FPF, which are determined by FPF to be ineligible upon Default, equal to the FPF Principal Balance multiplied by the difference between the Default Rate and the Interest Rate, (b) all other expenses due from the Seller under this Agreement, (c) the Termination Fee, as applicable, (d) repurchase obligations, if any, under Section 6 of this Agreement and (e) the costs and expenses set forth in Section 23 of this Agreement. "Advance Rate" Federated will be eligible to receive advances equal to the LOWER of 92.50% of each Eligible Premium Receivable principal balance, or an Eligible Premium Receivable principal balance less the Reserves applicable to such Eligible Premium Receivable. Advances will be available as frequently as daily. "Capital Charge" shall mean the sum of: (a) The FPF Principal Balance multiplied by 1/360th of the Interest Rate, plus; (b) Any unpaid Capital Charge due for any prior day or accounting period, plus; (c) The Commitment Fee, plus (d) Additional Charges. "Closing and Due Diligence Fee" Federated shall pay FPF a due diligence fee of $7,500; $2,500 of which has been previously paid and $5,000 due at the time of closing. "Commitment Fee" means a commitment fee payable by FPF to the Lender in accordance with Section 1.03(b) of the Revolving Loan Agreement in an amount equal to the product of (a) the Unused Portion and (b) (i) if such Unused Portion is equal to or greater than 0.25% of the Maximum Funding Commitment, 0.25% per annum and (ii) if such Unused Portion is less than 0.25% of the Maximum Funding Commitment, 0% per annum. No Commitment Fee shall be due and owed for the first 180 days following the effective date. "Default Rate shall be the higher of 18% or Prime + 10.0%. "Guarantor" means, 21st Century Holding Corp. whose addresses is 4161 NW 5th Street, Plantation, FL 33317. 20 "Interest Rate" A floating rate of interest equal to the Prime Rate plus a spread ("Spread") determined as follows: Low Rated Insurance Company Ratio Resulting Spread Over Prime --------------------------------- --------------------------- 15.0% or less 1.25% Above 15.0% and Below 25.0% 1.50% Above 25.0% and Below 50.0% 1.75% Above 50.0% and Below 65.0% 2.00% Above 65.0% 2.75% The Low Rated Insurance Company Ratio shall be calculated by FPF not later than three (3) business days prior to the end of each calendar month, and the applicable ratio shall apply for the next month immediately following the date of calculation. The Low Rated Insurance Company Ratio and resulting spread over Prime shall be communicated to Seller by notice via mail, overnight delivery, facsimile, or other electronic means. "Maximum Purchase Commitment" Flatiron will provide a continuous funding facility in a maximum outstanding amount equal to $7,000,000 (the "Maximum Funding Commitment"). The Maximum Funding Commitment may be increased at the sole discretion of Flatiron, upon the request and consent of Federated. "Minimum Yield Trigger" shall mean, for any monthly period, the failure of FPF to receive payment in full of the Capital Charge. "Parity Shortfall" means for each Premium Receivable (including each Premium Receivable in any current Sale), the amount by which the outstanding principal balance of the applicable Premium Finance Agreement exceeds the expected return premium due from the Issuing Insurance Company in the actual or prospective event of a cancellation of such Premium Receivable. If the expected return premium due from the Issuing Insurance Company exceeds such outstanding principal balance, then no parity shortfall exists. "Parity Shortfall Amount" means for all outstanding Premium Receivables, the sum of (a) for Cancelled Premium Receivables, the total Parity Shortfall on such Cancelled Premium Receivables, plus (b) for all other Premium Receivables not in a cancelled status, the total Parity Shortfall for such Premium Receivables calculated as if the next payment due date is missed, times 125% of the projected lifetime Static Pool Cancellation Rate for the portfolio of Premium Receivables as determined by FPF, plus (c) the outstanding principal balance of all Defaulted Premium Receivables. "Prime Rate" shall be the rate published in the Money Section of The Wall Street Journal. If more than one rate is published, then the highest rate published shall apply. For any day The Wall Street Journal 21 is not published, the previous published rate shall apply. "Purchase Premium" shall be equal to the Collections (but not including any unearned commissions from Agents) due the Seller as provided herein. Collections shall be allocated in the following order: (a) Principal payments received shall be allocated to FPF until the FPF Principal Balance is reduced to zero. (b) FPF shall retain all Collections until the unpaid Capital Charge is paid in full. (c) If Seller is in Default, then FPF shall retain all Collections until all amounts payable to FPF pursuant to Section 17 of this Agreement are paid in full. (e) Remaining Collections, if any, will be paid to the Seller as a Purchase Premium. "Repurchase Price" means (a) the lesser of (i) the Up-front Purchase Price paid to Seller by FPF for the Premium Receivables and other related Conveyed Property or (ii) the current outstanding balance due on the Premium Receivable at the time of repurchase under the applicable Premium Finance Agreement(s) with respect to the Repurchase Property, plus (b) interest on the amount payable by Seller to FPF under (a) above at the Interest Rate from the date that FPF advanced funds to purchase the Premium Receivables and other related Conveyed Property to the date of payment by Seller of the Repurchase Price reduced by any payments previously received by FPF and allocated to interest, plus (c) the Purchase Premium paid to Seller, if any. "Reserve Percentage" means for all outstanding Premium Receivables (including each Premium Receivable in any current Sale) the percentage resulting from dividing (a) the total Parity Shortfall Amount plus the total outstanding principal balance of Premium Receivables in excess of the FPF Concentration Limits plus the outstanding principal balance or Premium Receivables not received by FPF pursuant to Section 2(d); by (b) the outstanding principal balance of all Eligible Premium Receivables at the time of calculation. "Rule of 78's" means the method by which interest income will be allocated on Premium Receivable payments and calculated for any payment as a fraction, the numerator being the number of payments or days remaining under the original payment schedule for such Premium Receivable and the denominator being the sum of the digits for the number of all scheduled payments or days remaining. Example: A 10 monthly payment receivable will recognize 10/55ths of the total expected lifetime interest in month one and 9/55ths of the total interest in month two and so forth. "Static Pool Cancellation Rate" means for each monthly period, the percentage resulting from dividing (a) the total number of Premium Receivables Sold in such month that are or become Cancelled Premium Receivables, by (b) the total number of Premium Receivables Sold in such month. EXAMPLE: 100 Premium Receivables are originated in January 2001 and in a calculation on July 30, 2001, 32 of these January Originated Premium Receivables had been cancelled since their origination. The Static Pool Cancellation Rate for such January 2001 Premium Receivables would be 32% as of July 30, 2001. "Static Pool Cancellation Rate Trigger" shall be sixty percent (60%). "Tangible Net Worth Requirement" shall not be less than $2,000,000. 22 "Term" means the Term of this Agreement commencing on the Effective Date and, if not earlier terminated as provided in this Agreement, terminating on September 30, 2004. "Termination Fee" shall be the amount shown in the following schedule if Seller terminates this Agreement pursuant to Section 3: - ------------------------------------ ------------------------------------------- Date of Termination Prepayment Penalty (as a % of Maximum Purchase Commitment then in effect - ------------------------------------ ------------------------------------------- Up to October 19, 2001 0% - ------------------------------------ ------------------------------------------- October 20, 2001 - January 31, 2002 0.25% - ------------------------------------ ------------------------------------------- February 1 - September 30, 2002 1.50% - ------------------------------------ ------------------------------------------- October 1, 2002 - September 30, 2003 1.00% - ------------------------------------ ------------------------------------------- October 1, 2003 and Thereafter 0% - ------------------------------------ ------------------------------------------- "Unused Portion" means, as of each day of calculation, an amount equal to (a) the Maximum Purchase Commitment, less (b) the average FPF Principal Balance during the period of calculation. "Up-front Purchase Price" shall mean the Amount Financed for all outstanding Eligible Premium Receivables Sold by Seller to FPF multiplied by the Advance Rate. Section A-2. Additional Provision. The following Additional Provisions shall be a part of this Agreement. A-2(i) . Identification of Collections. Collections shall be identified for application against each Premium Receivable balance and applied against the unpaid Premium Receivable balance as follows: (1) First, to any earned-at-writing Premium Finance Agreement fees; then (2) Principal calculated in accordance with the applicable amortization schedule; then (3) Interest or finance charge at the applicable annual percentage rate determined in accordance with the Rule of 78's (or determined as may otherwise be required under applicable state law for the state in which the Premium Receivables were originated); then (4) Any late fees, cancellation fees and other allowable charges; then (5) From any remaining amounts, any amount required to be paid to the Obligor as the insured party in accordance with applicable state law governing the Premium Receivables. 23 Schedule B ---------- Concentration Limits 1. Cancelled Premium Receivables. Canceled Premium Receivables for which all expected return premium has not been received after being aged 120 days following the first missed due contract payment date shall be limited to zero (-0-). 2. Insurance Company Concentration Limits.
- -------------------------------------------------------------------------------------------------------------- Insurance Eligible Premium Companies Receivable Advance Rate Maximum % of Eligible Concentration Insurance per Eligible Insurance Contracts Outstanding Limits and Company's Company (based on (factored at Advance Rate) Advance Rates: A.M. Best Rating Rating Category per Carrier - -------------- ---------------- --------------- ----------- Admitted Insurance "A-" or better 100% no limit Companies: "B++" 95% 50.0% "B+" 85% 40.0% "B" 75% 25.0% "B-" or lower 65% 15.00% (including any N.R.) Non-Admitted "A-" or better 100% 15% Companies "B++" 85% 7.5% All Others 0% 0% - --------------------------------------------------------------------------------------------------------------
a) EXCEPTION FOR FEDERATED NATIONAL: So long as FNIC is rated "B" by A.M. Best & Co. then FNIC shall be allowed a net amount of Eligible Portfolio Balance (using a Company Advance Rate of 75%) of up to 40% of the Eligible Balance of the Portfolio. If FNIC falls to a "B-" rating, then at such time the applicable maximum concentration of 25% shall apply, and on the first day of the month following such rating change, FNIC allowable concentration percentage will reduce by 5.0% per month for the immediately following 3 months until a 25% level is achieved. If Federated rating falls to a A.M. Best & Co. "C" rating or lower (including any "+" modification) and including any "N.R." rating designation, then immediately following such rating change Federated will not be considered an Eligible Insurance Company. B-1 b) Insurance Companies not eligible: Any company with (i) a "C" rating (without regard to any "+" or "-"), (ii) any company declared insolvent or in default by any regulatory basis, or (iii) any company which fails to pay return premium due on a valid cancellation within 150 days of a cancel date, shall be deemed an ineligible. The above definition shall also apply to FNIC and American Vehicle Insurance Company ("AVIC"). c) New Companies added to Portfolio: No Insurance Company which, at the time of entry into the Portfolio, is rated "B" or less by A.M. Best & Co. shall be eligible without the prior written approval of Flatiron. This requirement shall not apply to any company which exists in the Federated Portfolio at time of closing. AVIC is approved to be added to the program, and will be subject to the eligibility category, based on its rating (at any point in time) of A.M. Best. B-2 Schedule C ---------- Servicing Agreement C-1 EX-10.15 6 ex10-15.txt PREMIUM RECEIVABLE SERVICING AGREEMENT Exhibit 10.15 ================================================================================ PREMIUM RECEIVABLE SERVICING AGREEMENT by and among FPF, INC., and FEDERATED PREMIUM FINANCE, INC. ------------------------------- Dated as of September 30, 2001 ================================================================================ PREMIUM RECEIVABLE SERVICING AGREEMENT This PREMIUM RECEIVABLE SERVICING AGREEMENT ("Servicing Agreement") is made as of September 30, 2001 by and among FPF, INC., a Colorado corporation ("FPF"), as servicer (the "Servicer"). PRELIMINARY STATEMENT WHEREAS, pursuant to the Master Sale and Assignment Agreement (the "Sale Agreement") dated of even date herewith by and between FPF and FEDERATED PREMIUM FINANCE, INC., a Florida corporation, FPF will acquire certain Premium Receivables originated by the Originator, as seller, and FPF, as purchaser; and WHEREAS, the parties hereto desire to enter into this Servicing Agreement to provide for, among other things, the management, administration, servicing and collections with respect to the Premium Receivables for the benefit of FPF and its assignees and designees and to perform certain duties as described herein. NOW, THEREFORE, in consideration of the covenants and conditions contained in this Servicing Agreement, the parties, intending to be legally bound, hereby agree as follows: ARTICLE I DEFINITIONS DEFINED TERMS. Capitalized terms used and not otherwise defined in this Servicing Agreement shall have the meaning set forth in the Sale Agreement. As used in this Servicing Agreement, the following terms, unless the context otherwise requires, have the following meanings (such meanings to be equally applicable to the singular and plural forms of the terms defined): "Allowable Coverage Change" means, with respect to a Premium Receivable, a modification thereof approved by the Servicer in the ordinary course of its business and in accordance with the standard of care set forth in Section 2.16 of this Servicing Agreement, which modification does not (a) provide that the principal and interest on the Premium Receivable can be paid over an aggregate period extending beyond the Term, (b) decrease the annual percentage rate of interest payable on the Premium Receivable or (c) reduce the principal amount of the Premium Receivable or release the Realization Provisions with respect to such Premium Receivable. "Approved Expenses" means, with respect to a Person, all reasonable and documented direct out-of-pocket expenses incurred by such Person including, without limitation, professional services (such as attorneys, consultants and accountants), postage, courier services, insurance, stationery, telephone, facsimile transmission and travel, any of which are incurred specifically in the performance of its duties under this Servicing Agreement, other than required reporting duties thereunder and general office overhead. "Cancellation Standard" means, as of any date, the timely cancellation by the Servicer of the underlying insurance policies relating to at least ninety-seven percent (97%) of the Premium Receivables on which payments are overdue by thirty (30) days or more. "Change of Control" shall have the meaning set forth in Section 2.11(c) of this Servicing Agreement. "Collections Account" means the lock box account or other accounts established by Servicer in the name of FPF or its designee into which the Collections are to be deposited pursuant to Section 3.01 of this Servicing Agreement. "Daily Servicer Report" means a report in the form of Exhibit A-1 to this Servicing Agreement, to be delivered to FPF pursuant to Section 2.10(a) hereof. 2 "Event of Servicing Default" shall have the meaning set forth in Section 5.01 of this Servicing Agreement. "Loan Documents" means with respect to each Premium Receivable listed on each Schedule of Premium Receivables (a) the original Premium Finance Agreement and any Endorsement Additions or other riders thereto, or if any original has been lost or destroyed, certified copies thereof, each stamped with an assignment stamp evidencing the Sale thereof to FPF, (b) originals of all guarantees, if any, executed in connection with such Premium Receivable, (c) all assumption, modification, consolidation or extension agreements, if any, and (d) original or facsimile copy of the paid and cancelled check or draft payable to the applicable Issuing Insurance Company evidencing payment of an amount equal to or greater than the financed portion of the premium with respect to the insurance policy issued by such Issuing Insurance Company relating to such Premium Receivable; provided, however, that with the prior written consent of FPF or its designees, each of the documents to be included in items (b) and (c) above may be in the form of a file maintained on an optical scan system. "Reporting Period" shall mean the period beginning on the first day of the calendar month and ending on the last day of such calendar month; provided, that the initial Reporting Period begins on the Effective Date. "Scheduled Payment" shall mean the monthly payment relating to a Premium Receivable required to be made by the Obligor thereunder in order to fully amortize the principal balance of the Premium Receivable under the method, term and rate stated in the Premium Finance Agreement or similar agreement evidencing such Premium Receivable. "Servicing Fee" shall have the meaning specified in Section 2.08 of this Servicing Agreement. "Successor Servicer" means that Person succeeding the Servicer under and pursuant to Section 5.02 of this Servicing Agreement as may be designated by FPF. ARTICLE II ADMINISTRATION AND SERVICING OF PREMIUM RECEIVABLES SECTION 2.01. APPOINTMENT AND DUTIES OF SERVICER. (a) FPF hereby appoints the Originator as the Servicer, and the Originator shall remain as Servicer until the earlier to occur of (i) the payment in full of all amounts due to FPF under a termination of the Sale Agreement, (ii) written notice from FPF or its designees to the Servicer of termination of the Servicer hereunder due to the occurrence of a Default under the Sale Agreement, or (iii) written notice from FPF or its designees to the Servicer of termination of the Servicer hereunder due to the occurrence of an Event of Servicing Default. The Servicer shall perform the services required of it pursuant to the terms of this Servicing Agreement. In performing its duties hereunder, the Servicer shall have full power and authority to do or cause to be done any and all things in connection with such servicing and administration which it may deem necessary or desirable in accordance with the standard of care specified herein. (b) The Servicer, in making collections of Premium Receivable payments pursuant to Section 2.02 hereof, shall be deemed to be holding such funds in trust on behalf of, and as agent for, FPF and its designees. (c) FPF shall take all such lawful action in its discretion to compel or secure the performance and observance by the Servicer of its obligations to FPF under or in connection with this Servicing Agreement, in accordance with the terms hereof, and shall exercise any and all rights, remedies, powers and privileges lawfully available to FPF under or in connection with this Servicing Agreement. (d) The Servicer may not delegate any or all of its duties or obligations hereunder, and the Servicer shall not otherwise permit any other Person to engage in any servicing, auditing, administrating, 3 managing, collecting or other activities with respect to the Premium Receivables, unless approved in writing by FPF or its designees in each such Person's absolute discretion. (e) The Servicer, upon execution of this Servicing Agreement, shall execute and deliver a power of attorney to FPF and its assigns in substantially the form of Exhibit C attached hereto. SECTION 2.02. COLLECTION OF PREMIUM RECEIVABLE PAYMENTS. All servicing of the Premium Receivables will be performed on a "private label" basis using the name of Originator on a premium finance software system approved by FPF in writing. The Servicer shall be responsible for collection of payments called for under the terms and provisions of the Premium Receivables as and when the same shall become due. In addition, the Servicer shall be responsible for the collection of late payments and enforcing the Realization Provisions with respect thereto, and shall follow such collection procedures as are consistent with the standard of care set forth in Section 2.16 hereof. In accordance with the foregoing, the Servicer may grant extensions, rebates or adjustments on a Premium Receivable, but shall not modify the original due dates, interest rate or Scheduled Payments on the Premium Receivables except as would constitute an Allowable Coverage Change. The Servicer may in its discretion waive any late payment charge or any other fees that may be collected in the ordinary course of servicing a Premium Receivable. SECTION 2.03. PAST-DUE PREMIUM RECEIVABLES; CANCELLED PREMIUM RECEIVABLES. (a) In the event an Obligor has not made a payment with regard to a Premium Receivable, the Servicer shall promptly, but in no event later than 10 days after such due date, (i) notify the defaulting Obligor that the Servicer shall request the Issuing Insurance Company to cancel the insurance coverage pertaining to the Premium Receivable if payment is not received within 10 days of such Obligor's receipt of such notice (the "Ten Day Notice"), (ii) upon failure to receive the payment due from Obligor following the period stated in the Ten Day Notice (plus such grace period, if any, as determined by the Servicer but in no event longer than the date 25 days from the original due date, except as may be required under applicable state law or regulation), request cancellation of the policy from the Issuing Insurance Company (such date stated in the cancellation request being the "Cancellation Date") and (iii) enforce on behalf of FPF and its designees, any and all Realization Provisions and other rights relating to the Premium Receivable. (b) The Servicer may, but is not obligated to, submit a written request to the applicable Issuing Insurance Company (whereupon the Servicer shall retain a copy of such request and any response thereto) to reinstate the insurance policy underlying a Canceled Premium Receivable; provided, that, prior to such request for reinstatement, all past due payments have been received by, or credited to, the Servicer in the form of a money order, certified check, wire transfer or other means of immediately available funds. In the event the underlying insurance policy is reinstated by the Issuing Insurance Company, the Servicer shall make appropriate adjustments in its records and reports, and such Premium Receivable shall no longer be considered a Cancelled Premium Receivable. (c) The Servicer shall, upon receipt of unearned premiums, unearned commissions, state guaranty funds, broker guarantee funds or funds from a cash collateral account with respect to the related Canceled Premium Receivable, remit such funds to the Collections Account pursuant to Section 3.02 hereof. SECTION 2.04. DEFAULTED PREMIUM RECEIVABLES. With respect to each Defaulted Premium Receivable, the Servicer shall promptly provide in its Monthly Servicer Report notice of such Defaulted Premium Receivable together with the outstanding principal amount of such Defaulted Premium Receivable and the number of days such Defaulted Premium Receivable is delinquent. The Servicer shall use its best efforts, consistent with the standard of care set forth in Section 2.16 hereof, to collect funds on a Defaulted Premium Receivable from the Issuing Insurance Company, insured or otherwise (any such collections from whatever source being a "Defaulted Premium Receivable Recovery"). All Defaulted Premium Receivable Recoveries shall be deposited by the Servicer into the Collections Account by the close of business on the Business Day following receipt thereof. 4 SECTION 2.05. MAINTENANCE OF INTERESTS IN PREMIUM RECEIVABLES. The Servicer shall take, or cause to be taken, such steps as are necessary or reasonably required by FPF or its assignees and designees to maintain perfection of the respective interests of FPF and its assignees and designees in the Premium Receivables and the other related Conveyed Property. SECTION 2.06. COVENANTS OF SERVICER. (a) The Servicer shall (i) not release any Realization Provisions granted by an Obligor in whole or in part except in the event of payment in full by the Obligor thereunder or upon reacquisition of the related Premium Receivable by the Originator, (ii) not impair the rights of FPF or its assignees in the Premium Receivables, (iii) not modify the Scheduled Payments due under a Premium Receivable except as expressly provided by Section 2.02 hereof, (iv) not Sell or pledge to any other Person, or grant, create, incur, assume, or suffer to exist any Lien on any Premium Receivable granted to FPF or any interest therein, (v) immediately notify FPF of the existence of any Lien on any Premium Receivable which was Sold pursuant to the Sale Agreement, (vi) defend the perfected ownership interest of FPF, its designees and assigns in, to, and under the Premium Receivables Sold to FPF under the Sale Agreement against all claims of third parties claiming through or under the Servicer, (vii) deposit into the Collections Account all payments received by the Servicer with respect to the Premium Receivables in accordance with Article III hereof, (viii) comply in all respects with the terms and conditions of the Sale Agreement and not amend, modify, or waive any provision of the Sale Agreement, (ix) promptly notify FPF of the occurrence of any Event of Servicing Default hereunder and (x) make at the sole cost and expense of the Servicer any filings, reports, notices or applications and seek any consents or authorizations from any and all government agencies, tribunals or authorities in accordance with the UCC and any state license or registration authority on behalf of FPF as may be necessary or advisable to create, maintain and protect a first-priority, perfected ownership interest of FPF in, to, and on the Premium Receivables Sold to it or as may be required by such government agencies, tribunals or authorities. (b) The Servicer shall promptly make available to FPF or its designee all information relating to each Premium Receivable being serviced hereunder in form and manner consistent with the data processing system maintained by FPF or its designee and the Servicer shall respond to reasonable directions or requests for information that FPF or its designees might have with respect to the Premium Receivables. SECTION 2.07. REACQUISITION OF PREMIUM RECEIVABLES UPON BREACH OF REPRESENTATIONS OR WARRANTIES. The Servicer shall inform FPF promptly, in writing, upon the discovery of any breach by the Originator of any of the representations, warranties or covenants contained in the Sale Agreement. Unless the breach shall have been cured within five Business Days after such discovery, the Servicer, if directed by FPF in accordance with Section 6 of the Sale Agreement, shall use its best efforts to cause the Originator, within five days following such cure period, to acquire any Premium Receivable that FPF has deemed as not being an Eligible Premium Receivable in accordance with the terms of Section 6 of the Sale Agreement. The Servicer shall remit all Repurchase Price funds received with respect to the Repurchase Property to the Collections Account within one Business Day of receipt thereof. SECTION 2.08. PREMIUM RECEIVABLE SERVICING FEES. (a) For so long as the Servicer is acting as Servicer pursuant to this Servicing Agreement, FPF shall pay or cause to be paid to the Servicer the following monthly Servicing Fee (the "Servicing Fee") for each Reporting Period payable during the following Reporting Period on the date specified in the Sale Agreement: (i) an amount equal to 2.50% multiplied by the average outstanding principal balance of all Premium Receivables sold under the Sale Agreement per Premium Finance Agreement boarded on the servicing data processing system during such Reporting Period if Originator does not utilize the FPF point of sale system to originate the Premium Receivable. 5 (b) In the event the initial Servicer is replaced by a Successor Servicer (which may be FPF, Flatiron Credit Company, Inc. or any successor designated by FPF) pursuant to this Servicing Agreement, FPF shall pay or cause to be paid to any Successor Servicer a monthly servicing fee (the "Successor Servicing Fee"), which Successor Servicing Fee shall be, with respect to each Reporting Period, an amount equal to the sum of (i) the Servicing Fee times 150% plus (ii) all Approved Expenses. The Successor Servicing Fee with respect to a Reporting Period shall be paid to the Successor Servicer during the month immediately following such Reporting Period on the date as provided in the Sale Agreement. SECTION 2.09. SERVICER'S CERTIFICATE AS TO COMPLIANCE. Upon the written request of FPF, the Servicer shall deliver to FPF, from time to time, an officers' certificate, signed by an officer of Servicer (including the President, any Vice President, and Assistant Vice President, the Secretary, the Treasurer or any other officer customarily performing functions similar to those performed by any of such designated officers (a "Responsible Officer")) and dated effective as of the last day of the preceding month, stating, as to each signer thereof, that (a) a review of the activities of the Servicer during the preceding six-month period and of performance under this Servicing Agreement has been made under each such Responsible Officer's supervision, and (b) to the best of each such officer's knowledge, based on such review, the Servicer has fulfilled all its obligations under this Servicing Agreement throughout such six-month period, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to each such Responsible Officer and the nature and status thereof and remedies therefor being pursued. SECTION 2.10. REPORTING OBLIGATIONS; INSPECTION AND AUDIT RIGHTS. (a) The Servicer shall make available to FPF or its designee information sufficient to allow FPF or its designee to generate the Daily Servicer Reports and the Monthly Servicer Reports regarding payments received from or on behalf of Obligors and deposited to the Collections Account representing Collections and other amounts with respect to Premium Receivables, including, without limitation, Defaulted Premium Receivable Recoveries and Endorsement Refunds. Such information shall be delivered (i) with respect to the Daily Servicer Report, on the Business Day following the date of such report, and (ii) with respect to the Monthly Servicer Report, on the second Business Day following the end of the immediately preceding Reporting Period. (b) The Servicer shall promptly provide to FPF or its designees such reports, information and documentation as any such Person may reasonably request with respect to the Servicer, the Servicer's operations, the Premium Receivables and any other matters to which this Servicing Agreement relates, which such reports, information or documentation shall be provided to each such Person by facsimile copy, hard copy, electronic certified copy or any combination thereof as such Person may specify. In addition, the Servicer grants to FPF and any of its designees and hereby authorizes each of them the right to contact insurers relating to the Premium Receivables, the Obligors and insurance agents in order to verify, substantiate or reconcile reports, information and documentation provided by the Servicer to FPF or its designees pursuant to this Servicing Agreement. (c) At all times during the term hereof, the Servicer shall afford FPF and its assignees, authorized agents and designees reasonable access during normal business hours to all of the Servicer's books of account, reports, records and computer files relating to the Premium Receivables and shall cause its personnel to assist in any examination of such records by any such Person, to make copies and extracts therefrom, and to discuss the Servicer's affairs, finances and accounts relating to the Premium Receivables with officers, employees and independent certified public accountants of each such Person, all at such reasonable times and as often as may be reasonably requested. (d) Any such report, information and documentation provided by the Servicer to FPF or its designees pursuant to this Section 2.10 shall be, to the knowledge of the Servicer, true and correct as of the time of transmittal and such transmittal (whether by facsimile, hard copy, electronic transmission or otherwise) shall constitute certification to such effect. 6 SECTION 2.11. FINANCIAL STATEMENTS AND OTHER REPORTS. (a) REPORTING REQUIREMENTS. The Servicer shall deliver, in duplicate, to FPF and its designees: (i) within 45 days after the end of each calendar quarter of the Servicer (commencing with the quarter ending September 30, 2001), an unaudited balance sheet and income statement (prepared in accordance with GAAP without accompanying notes) for the Servicer and its subsidiaries covering the preceding quarter, in each case certified by a principal financial officer of the Servicer to be true, accurate and complete copies of such financial statements; (ii) on the earlier of (A) fifteen days after delivery by an Independent Public Accountant, if any, to the Servicer or (B) March 15 of each year beginning [March 15, 2002], a balance sheet and income statement (prepared in accordance with GAAP without accompanying notes) for the Servicer and its subsidiaries covering such preceding fiscal year prepared by the Servicer or its accountants, in each case certified by a principal financial officer of the Servicer to be true, accurate and complete copies of such financial statements; and (iii) such other information respecting the condition or operations, financial or otherwise, of the Servicer or any of its subsidiaries as FPF or its designees may from time to time reasonably request. (b) REPORT ON PROCEEDINGS. Promptly upon (but in no event more than three Business days following) the Servicer becoming aware of: (i) any proposed or pending investigation of the Servicer, any of its Affiliates or any of their respective employees by any governmental authority or agency; (ii) any court or administrative proceeding which involves or may involve the possibility of materially and adversely affecting the properties, business, prospects, profits, management, financial position, results of operation or general condition of the Servicer or any of its Affiliates; (iii) an event or development (including, without limitation, a change in any relevant law or regulation) which could have a material adverse impact on the properties, business, prospects, profits, management, financial position, results of operations or general condition of the Servicer or any of its Affiliates; or (iv) any Event of Servicing Default hereunder or any event which could likely become an Event of Servicing Default hereunder; such information shall be provided by the Servicer to FPF and its designees, as applicable. (c) CHANGE OF CONTROL. The Servicer shall provide prompt written notice to FPF and its designees, as applicable, upon the occurrence of any of the following events (each a "Change of Control"): (i) the Servicer ceases to be managed and controlled by the Person or Persons who manage and control the Servicer as of the Effective Date, (ii) any such Person which is a corporation, partnership, trust or other entity is dissolved or liquidated or merged with or into any other Person or for any period of more than 10 days ceases to exist in its present form and (where applicable) in good standing and duly qualified under the laws of the jurisdiction of its incorporation or formation and any jurisdiction in which such standing or qualification is necessary or advisable in connection with the conduct of business or (iii) the Servicer commences a Sale of all or substantially all of its assets, except, if the Originator is then acting as Servicer hereunder, for the Sale of the Conveyed Property by the Originator to FPF under the Sale Agreement. 7 SECTION 2.12. COSTS AND EXPENSES. All Approved Expenses incurred by any Successor Servicer and all direct extraordinary out-of-pocket expenses incurred by FPF or its designees and assignees, as the case may be, in carrying out their respective duties hereunder, including payments of all fees and expenses incurred in connection with the enforcement of Premium Receivables (including enforcement of Defaulted Premium Receivables), and realization under the Realization Provisions, shall be reimbursed to such Successor Servicer (in addition to the compensation and expenses, as applicable, to be paid to such Successor Servicer pursuant to Section 2.08) and paid according to the provisions of the Sale Agreement. SECTION 2.13. RESPONSIBILITY FOR OWNERSHIP INTERESTS. The Servicer shall ensure that FPF has a valid, perfected first priority ownership interest in, to and under each Premium Receivable by taking all necessary action under applicable law and by assuring, among other things, that UCC-1 financing statements and appropriate continuation statements are filed in each jurisdiction in which filing is necessary for such perfection which financing statements and continuation statements (a) contain a general description of the Premium Finance Agreements, amounts payable thereunder, and after-acquired collateral, and (b) direct subsequent creditors to sources containing more detailed information, such as the Premium Finance Agreements themselves. SECTION 2.14. DOCUMENTS HELD BY FPF; DOCUMENTS HELD BY THE SERVICER; INDICATION OF FPF OWNERSHIP. (a) FPF or its designees shall be entitled to maintain physical possession of the Loan Documents in its files with respect to each Premium Receivable. (b) The Servicer shall maintain the following documents in its files on behalf of FPF and its designees or have the following immediately accessible on computer screen with respect to each Premium Receivable: (i) Copies of the Loan Documents; (ii) Copies of all correspondence to the Obligor or the Issuing Insurance Company, including any notification to the Obligor and the Issuing Insurance Company of the Sale of the Premium Receivable and delivery of possession of the related Premium Finance Agreement to FPF or its designees, to the extent required by applicable law to perfect an ownership interest in the Premium Receivable and the related Conveyed Property; (iii) Copies of all late notices to the Obligor; (iv) Copies of cancellation requests to the Issuing Insurance Company and, if applicable, the Obligor; (v) Copies of reinstatement notices and related correspondence; (vi) Payment history and status of each Premium Receivable; and (vii) Such other documents as the Servicer may customarily retain in connection with its normal servicing activities under this Servicing Agreement in order to satisfy its standard of care under Section 2.16. (c) The Servicer shall keep satisfactory books and records pertaining to each Premium Receivable and shall make periodic reports in accordance with this Servicing Agreement. Such records may not be destroyed or otherwise disposed of, except as provided herein and as allowed by applicable laws, regulations or decrees. (d) The Servicer shall maintain physical possession of the instruments and documents listed in Section 2.14(b) hereof, such other instruments or documents that modify or supplement the terms or 8 conditions of any of the foregoing, and all other instruments and documents generated by or coming into the possession of the Servicer (including, without limitation, insurance premium receipts, ledger sheets, payment records, correspondence and current and historical computerized data files) that are required to document or service any Premium Receivable. Collectively, all of the documents described in paragraphs (b), (c) and (d) of this Section 2.14 with respect to a Premium Receivable are referred to as "Servicer Documents." All Servicer Documents shall remain the property of FPF and shall be held in trust by the Servicer for the benefit of FPF and its assignees and designees, to the extent of their interests therein. SECTION 2.15. MAINTENANCE OF COMPUTER SYSTEMS. The Servicer shall provide computer backup in a format acceptable to FPF not less than weekly or such other period as FPF may request. Such computer backup shall contain the data necessary to enable FPF or its assignee or designees to service the Premium Receivables in the event any such assignee or designee becomes the Successor Servicer. The Servicer shall (a) provide FPF and its designee or assignees, as applicable, with a copy of its computer software used with respect to the servicing of the Premium Receivables including any licenses needed or required with respect thereto, and (b) not substitute or materially alter its computer software or systems or vendor or document forms, without the prior written consent of FPF. SECTION 2.16. STANDARD OF CARE. In performing its duties and obligations hereunder and in administering and enforcing the servicing relating to the Premium Receivables pursuant to this Servicing Agreement, the Servicer shall exercise that degree of skill and care consistent with the degree of skill and care that the Servicer exercises with respect to similar loans owned and/or serviced by it, and, shall apply in performing such duties and obligations, those standards, policies and procedures consistent with the standards, policies and procedures the Servicer applies with respect to similar loans owned or serviced by it, and to the extent more exacting than the foregoing, shall act prudently and in accordance with customary and usual servicing procedures for other servicers of insurance premium finance receivables; provided, however, that notwithstanding the foregoing, the Servicer shall not, except pursuant to a judicial order from a court of competent jurisdiction, or as otherwise required by applicable law or regulation, release or waive the right to collect the unpaid balance on any Premium Receivable. In performing its duties and obligations hereunder and in administering and enforcing the servicing relating to the Premium Receivables pursuant to this Servicing Agreement, the Servicer shall comply with all applicable federal and state laws and regulations, shall maintain all state and federal licenses and franchises necessary for it to perform its servicing responsibilities hereunder, shall not impair the rights of FPF, its designees or assignees in the Conveyed Property, and shall act with respect to the Premium Receivables as will, in the reasonable judgment of the Servicer, maximize the amount to be received with respect thereto. SECTION 2.17. ENFORCEMENT. (a) The Servicer is hereby authorized and empowered to sue to enforce or collect upon the Premium Receivables, in its own name, if possible, or as attorney-in-fact and agent for FPF or its designees. If the Servicer elects to commence a legal proceeding to enforce a Premium Receivable, the act of commencement shall be deemed to be an automatic assignment of the Premium Receivable by FPF to the Servicer solely for purposes of, and to the extent necessary for, collection only. If, however, in any enforcement suit or legal proceeding it is held that the Servicer may not enforce a Premium Receivable on the grounds that it is not a real party in interest or a holder entitled to enforce the Premium Receivable, FPF shall, at the Servicer's request and expense, take such steps as FPF deems necessary or appropriate to enforce the Premium Receivable, including bringing suit in its name or the name of FPF. (b) The Servicer shall exercise any rights of recourse against third Persons that exist with respect to any Premium Receivable in accordance with the standard of care required by Section 2.16 hereof. SECTION 2.18. FIDELITY BOND OR ERRORS AND OMISSIONS INSURANCE. The Servicer shall maintain, at its own expense, a blanket fidelity bond or an errors and omissions insurance policy, in form and content acceptable to FPF, in an amount not less than $500,000 and naming FPF as an additional loss payee or beneficiary of each such insurance policy or fidelity bond. The Servicer shall be deemed to have complied with this provision if one of its respective Affiliates has such fidelity bond or errors and omissions policy coverage and, by the terms of such fidelity bond or errors and omissions policy, the coverage afforded thereunder extends to the Servicer. Any such fidelity 9 bond or insurance policy shall not be cancelled or modified without ten days' prior written notice to FPF. Evidence of each such insurance policy or fidelity bond shall be delivered to FPF by the Servicer in conjunction with the Responsible Officers' certificate required to be delivered pursuant to Section 2.09 hereof. ARTICLE III ACCOUNTS; COLLECTIONS SECTION 3.01. ACCOUNTS. The Servicer shall establish in the name of FPF or its designee the Collections Account with a Collections Account Depository referred to in Section 3.03 hereof. All Obligors, Issuing Insurance Companies and Originator shall be directed to cause all Collections to be remitted to the Collections Account so established. All Collections effectuated by pre-authorized debits of Obligor accounts shall be deposited directly into the Collections Account. The Servicer shall not alter the instructions to the Obligors, Originator, the Issuing Insurance Company or any other party regarding payments to be made to the Collections Account without the prior written approval of FPF or its designee. All amounts in the Collections Account shall be retrieved on each Business Day by FPF or its designee. SECTION 3.02. COLLECTIONS. The Servicer shall segregate all Collections on the Premium Receivables from its general funds, shall not use such funds for its benefit and shall hold such funds in trust for the benefit of FPF and its designee. The Servicer shall remit to the Collections Account and to no other account, on a daily basis, but in no event later than the close of business on the Business Day following the day of receipt thereof, all payments received on or in connection with the Conveyed Property by the Servicer by or on behalf of the Obligors, the Issuing Insurance Companies or any other party, including, without limitation, Collections, Endorsement Refunds, broker guarantee funds or funds from a cash collateral account or Defaulted Premium Receivable Recoveries, all as collected, in respect of a Premium Receivable being serviced by the Servicer. The Servicer shall also deposit in the Collections Account the aggregate Repurchase Price with respect to any Repurchase Property. All such deposits shall be separately shown in the Daily Servicer Reports. SECTION 3.03. COLLECTIONS ACCOUNT DEPOSITORY. FPF has appointed City National, Ft. Lauderdale, Florida as the initial Collections Account Depository (the "Collections Account Depository") hereunder. The Collections Account Depository shall transfer funds from the Collections Account as instructed by the FPF or its designee. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. REPRESENTATIONS AND WARRANTIES OF THE SERVICER. The Servicer hereby represents, warrants and covenants to FPF that as of the date of this Servicing Agreement and, for so long as the Servicer shall continue to act as Servicer hereunder, that the representations, warranties and covenants contained in Sections 1 and 2 of Exhibit B hereto are true and correct and shall remain true and correct. SECTION 4.02. REPRESENTATIONS AND WARRANTIES OF FPF. As of the date of the Servicing Agreement FPF represents, warrants and covenants to Servicer each of the matters referred to in Section 2 of Exhibit B hereto. ARTICLE V DEFAULT, REMEDIES AND INDEMNITY SECTION 5.01. EVENTS OF SERVICING DEFAULT. Any of the following acts or occurrences shall constitute an Event of Servicing Default under this Servicing Agreement: (a) any failure by the Servicer to make any payment, transfer or deposit to the Collections Account within one Business Day after receipt; 10 (b) any failure by the Servicer to provide any notices to FPF pursuant to this Servicing Agreement relating to the transfer or calculation of funds which has not been cured within two Business Days after the date of receipt of notice of such failure; (c) any failure by the Servicer to request cancellation of the policy from the Issuing Insurance Company pursuant to Section 2.03, unless otherwise approved by FPF or its designee in writing. (d) failure on the part of the Servicer to either duly to observe or perform any other covenants or agreements of the Servicer set forth in this Servicing Agreement; or the Servicer shall attempt to assign any of its duties hereunder; (e) any representation, warranty or certification made by the Servicer (or any officer of the Servicer) in this Servicing Agreement, or any certificate delivered pursuant to this Servicing Agreement, shall prove to have been incorrect when made, which could have an adverse effect on FPF and which continues to be incorrect in any material respect; (f) the Servicer shall consent to the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to the Servicer, or the Servicer shall admit in writing its inability to pay its debts generally as they become due, file a petition or commence an action to take advantage of any applicable insolvency or reorganization statute, make any assignment for the benefit of its creditors or voluntarily suspend payment of its obligations; (g) any Change in Control unless the same is approved in writing by FPF, in its absolute discretion; (h) an event or development shall occur which is expected by FPF (in its sole discretion) to have a material adverse impact on the ability of the Servicer to perform its obligations under this Servicing Agreement; (i) the Servicer shall not be in compliance with the Cancellation Standard. SECTION 5.02. REMEDIES. (a) If an Event of Servicing Default shall have occurred and then be continuing, then by notice given in writing to the Servicer (the "Terminated Party") (together with any termination notice described in Section 2.01(a) hereof, (a "Termination Notice"), all of the rights and obligations of the Terminated Party, shall be terminated upon the later of (i) the date, if any, specified in the Termination Notice or (ii) upon receipt of the Termination Notice. (b) After receipt by the Terminated Party of a Termination Notice, all authority and power of the Terminated Party under this Servicing Agreement shall pass to and be vested in a Successor Servicer; and, without limitation, FPF or its designees are hereby authorized and empowered to execute and deliver, on behalf of the Terminated Party, as attorney-in-fact, authorized agent or otherwise, all documents and other instruments upon the failure of the Terminated Party to execute or deliver such documents or instruments, and to do and accomplish all other acts or things necessary or appropriate to effect the purposes of such transfer of servicing rights. The Servicer hereby agrees to cooperate with FPF, its designees and such Successor Servicer in effecting the termination of the responsibilities and rights of the Terminated Party to conduct servicing under this Servicing Agreement, including, without limitation, the transfer to such Successor Servicer of all authority of the Terminated Party to service the Premium Receivables provided for under this Servicing Agreement, including, without limitation, the right to receive all collections, all authority over all collections which shall on the date of transfer be held by the Terminated Party for deposit or which have been deposited by the Terminated Party in the Collections Account or which shall thereafter be received with respect to the Premium Receivables, and in assisting the 11 Successor Servicer and in enforcing all rights to Realization Provisions. The Terminated Party shall immediately transfer its electronic records relating to the Premium Receivables to the Successor Servicer in such electronic form as the Successor Servicer may request. The Terminated Party shall immediately relinquish all rights in, to and under the Loan Documents and the Servicing Documents and shall immediately transfer to the Successor Servicer all Loan Documents and Servicing Documents with respect to the Premium Receivables in the manner and at such times as the Successor Servicer shall request. Immediately upon receipt of a Termination Notice, the Terminated Party shall not amend, alter or modify any of the Loan Documents or Servicing Documents without FPF's prior written consent. The Terminated Party shall give notices of the transfer of servicing to the Obligors, Issuing Insurance Companies and state guaranty funds, all in the manner and at such times as the Successor Servicer shall request. (c) On and after the receipt by the Terminated Party of a Termination Notice pursuant to this Section 5.02, the Terminated Party shall continue to perform all servicing functions under this Servicing Agreement until the date specified in the Termination Notice or otherwise specified by FPF in writing. (d) Upon its appointment, the Successor Servicer shall be the successor in all respects to the Terminated Party, with respect to servicing functions under this Servicing Agreement. (e) In connection with such appointment and assumption, FPF may make such arrangements for the compensation of itself and the Successor Servicer out of collections of Premium Receivable payments, as it and such Successor Servicer shall agree. (f) All authority and power granted to the Servicer or the Successor Servicer under this Servicing Agreement shall automatically cease and terminate upon payment in full of all Obligations and termination of the Sale Agreement, and shall pass to and be vested in FPF or its designee. SECTION 5.03. INDEMNITY BY THE SERVICER. The Servicer shall indemnify and hold FPF, its Affiliates, its designees and assigns and each of their respective officers, directors, employees and agents and any Person holding an interest in the Conveyed Property or acting as a trustee therefor (collectively, the "Indemnified Parties") harmless against any liability, loss, damage, penalty, fine, forfeiture, legal or accounting fees, court reporting expenses, expert witness fees, and all other fees or costs of any kind, judgments or expenses, resulting from or arising out of a breach of this Servicing Agreement by the Servicer; provided, however, the Servicer shall not be liable to the Indemnified Parties by reason of any act, contract or transaction performed in good faith by the Servicer pursuant to this Servicing Agreement in accordance with the standard of care under Section 2.16 nor shall it be liable for any loss resulting therefrom, so long as such act, contract or transaction shall, at the time at which it was performed or entered into, have been reasonable and prudent under the circumstances and shall have conformed to the express provisions of this Servicing Agreement. The rights of the Indemnified Parties to indemnity, reimbursement or limitation on its liability pursuant to this Section 5.03 shall survive any Event of Servicing Default or termination of the Servicer pursuant to the provisions hereof and the transfer of the rights, duties and obligations of the Servicer to a Successor Servicer. SECTION 5.04. WAIVER OF EVENTS OF SERVICING DEFAULT. FPF may waive any Event of Servicing Default by the Servicer in the performance of its obligations hereunder and its consequences. Upon any such waiver of an event of Servicing Default, such default shall cease to exist, and any default arising therefrom shall be deemed to have been remedied for every purpose of this Servicing Agreement. No such waiver shall extent to any subsequent or other default or impair any right consequent thereon except to the extent expressly so waived. SECTION 5.05. SURVIVAL. The agreements in this Article V shall survive the termination of this Servicing Agreement and the payment in full of all sums and obligations owed to FPF under the Sale Agreement. 12 ARTICLE VI TERMINATION OF SERVICING AGREEMENT SECTION 6.01. TERM. Unless terminated in accordance with the provisions of Section 2.01(a), this Servicing Agreement shall remain in effect until all obligations due to FPF pursuant to the Sale Agreement have been paid in full. ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 7.01. NO OFFSET. Prior to the termination of this Servicing Agreement, the obligations of the Servicer under this Servicing Agreement shall not be subject to any defense, counterclaim or right of offset which the Servicer may have against FPF or its assignees or designees, whether in respect of this Servicing Agreement or the Sale Agreement, any Premium Receivable or otherwise. SECTION 7.02. POWERS OF ATTORNEY. FPF shall, from time to time, provide to the employees of the Servicer with limited, revocable powers of attorney or other such written authorizations as may be appropriate to enable the Servicer to perform its obligations under this Servicing Agreement; provided, however, that FPF shall not be required to provide such powers with respect to any matter for which FPF does not have authority to perform itself. SECTION 7.03. ASSIGNMENTS; THIRD PARTY BENEFICIARIES. This Servicing Agreement may be assigned by FPF and shall inure to the benefit of FPF's assignees and designees (all of whom shall be deemed third party beneficiaries hereunder). Without limiting the generality of the foregoing, all representations, covenants and agreements in this Servicing Agreement which expressly confer rights upon FPF shall be for the benefit of and run directly to each assignee and designee, and each such assignee and designee shall be entitled to rely on and enforce such representations, covenants and agreements to the same extent as if it were a party hereto. The Servicer shall not assign its rights or obligations under this Servicing Agreement without the written approval and consent of FPF. With such written approval and consent of FPF contemplated hereby, this Servicing Agreement shall be binding upon the parties hereto, and their respective successors, legal representatives and assigns; no other Person shall have or be construed to have any equitable right, remedy or claim under or in respect of or by virtue of this Servicing Agreement or any provision contained herein. There shall be no third party beneficiaries of Servicer without the written approval and consent of FPF. SECTION 7.04. AMENDMENT. This Servicing Agreement may be amended from time to time by a written amendment duly executed and delivered by each of the parties hereto and no waiver of any of the terms hereof shall be effective unless it is in writing and signed by the party or parties whose rights are being waived. SECTION 7.05. WAIVERS. No failure or delay on the part of FPF or any of its assignees or designees in exercising any power, right or remedy under this Servicing Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or remedy preclude any other or further exercise thereof or the exercise of any other power, right or remedy. No such waiver shall extend to any subsequent or other default or impair any rights consequent thereon, except to the extent expressly so waived. Each of the rights, powers and remedies described in this Servicing Agreement is cumulative and not exclusive of, and shall not prejudice, any other right, power or remedy provided in this Servicing Agreement, the Sale Agreement or by law. Each such right, power and remedy may be exercised from time to time as deemed necessary by FPF or any of its assignees or designees, as applicable, and in such order and manner as such applicable party may determine. The parties hereto hereby acknowledge and agree that with respect to a violation or breach by the Servicer of any representation, warranty, covenant or other term or provision of this Servicing Agreement, it shall be the Servicer's obligation to prepare and obtain a written waiver for such breaches or violations from FPF or its designee, as applicable. FPF or its designee, as applicable, may grant or deny any such requested waiver in its sole and absolute discretion. At no time may the 13 parties hereto infer a course of dealing among the parties that would negate the requirement to obtain a written waiver from FPF or its designee, as applicable. SECTION 7.06. NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered personally or mailed by first-class registered or certified mail, postage prepaid, or by telephonic facsimile transmission, electronic mail and overnight delivery service, postage prepaid, to the parties to this Servicing Agreement; provided, that notices shall be effective upon receipt, and in any case addressed to the Servicer as provided in the introductory paragraph of this Servicing Agreement and to FPF at 600 Seventeenth Street, Suite 1900S, Denver, Colorado 80202, Attention: Robert A. Pinkerton. SECTION 7.07. GOVERNING LAW. THIS SERVICING AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF COLORADO WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS. SECTION 7.08. JURISDICTION. THE PARTIES HERETO HEREBY IRREVOCABLY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF COLORADO AND THE UNITED STATES DISTRICT COURT OF COLORADO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS SERVICING AGREEMENT AND THE PARTIES HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH COURTS. THE PARTIES HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING AND IRREVOCABLY CONSENT TO THE SERVICE OF ANY SUMMONS AND COMPLAINT AND ANY OTHER PROCESS BY THE MAILING OF COPIES OF SUCH PROCESS TO THEM AT THEIR RESPECTIVE ADDRESSES AS SPECIFIED IN SECTION 7.06. THE PARTIES HEREBY AGREE THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS SECTION 7.08 SHALL AFFECT THE RIGHT OF FPF TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS SERVICING AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION. SECTION 7.09. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS SERVICING AGREEMENT. SECTION 7.10. SEVERABILITY OF PROVISIONS. Any part, provision, agreement, representation, warranty or covenant of this Servicing Agreement which is prohibited or unenforceable or is held to be void or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the parties waive any provision of law which prohibits or renders void or unenforceable any provision hereof. If the invalidity of any part, provision, agreement, representation, warranty or covenant of this Servicing Agreement shall deprive any party of the economic benefit intended to be conferred by this Servicing Agreement, the parties shall negotiate in good faith to develop a structure the economic effect of which is as nearly as possible the same as the economic effect of the transactions contemplated hereunder without regard to such invalidity. SECTION 7.11. COUNTERPARTS. For the purpose of facilitating the execution of this Servicing Agreement and for other purposes, this Servicing Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed to be an original, and together shall constitute and be one and the same instrument. 14 SECTION 7.12. CAPTIONS. The article, paragraph and other headings contained in this Servicing Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Servicing Agreement. SECTION 7.13. LEGAL HOLIDAYS. In the case where the date on which any action required to be taken, document required to be delivered or payment required to be made is not a Business Day in New York, New York or Denver, Colorado, such action, delivery or payment need not be made on that date, but may be made on the next succeeding Business Day. SECTION 7.14. ADVICE FROM INDEPENDENT COUNSEL. The parties understand that this Servicing Agreement is a legally binding agreement that may affect such party's rights. Each party represents to the others that it has received legal advice from counsel of its choice regarding the meaning and legal significance of this Servicing Agreement and that it is satisfied with its legal counsel and the advice received from it. SECTION 7.15. JUDICIAL INTERPRETATION. Should any provision of this Servicing Agreement require judicial interpretation, it is agreed that a court interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against any Person by reason of the rule of construction that a document is to be construed more strictly against the Person who itself or through its agent prepared the same, it being agreed that each party has participated in the preparation of this Servicing Agreement. (SIGNATURE PAGE FOLLOWS) 15 IN WITNESS WHEREOF, the parties hereto have caused this Servicing Agreement to be duly executed by their respective authorized officers as of the date first written above. FPF, INC. By /s/ Bruce I. Lundy ------------------------------------- Name Bruce I. Lundy ------------------------------------- Title President ------------------------------------- FEDERATED PREMIUM FINANCE, INC. By /s/ Stephen C. Young ------------------------------------- Name Stephen C. Young ------------------------------------- Title President ------------------------------------- 16 EXHIBIT A-1 DAILY SERVICER REPORT Date of Report ---------------------------- Date of Deposit ---------------------------- --------------- ---------------- ------------------------ ------------- GROSS DEPOSITS NSF DELETIONS OTHER NETTING INTEREST NET DEPOSIT 1. --------------- ---------------- ------------------------ ------------- -------- ------- ------- ------- Specify Other Netting Items: The undersigned [Name of Servicer] (the "Servicer") hereby certifies that this report complies with the requirements of, and is being delivered pursuant to, Section 2.10(a) of the Premium Receivable Servicing Agreement (the "Servicing Agreement") dated as of September ___, 2001 by and among FPF and the Servicer. Capitalized terms used and not otherwise defined herein shall have the meaning ascribed to such terms in the Servicing Agreement. Dated: FEDERATED PREMIUM FINANCE, INC. ----------------------------- By ---------------------------------- Name -------------------------------- Title ------------------------------- EXHIBIT B REPRESENTATIONS AND WARRANTIES SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE SERVICER WITH RESPECT TO SECTION 4.01 OF THE PREMIUM RECEIVABLE SERVICING AGREEMENT. (a) POWER AND AUTHORITY. The Servicer has the power and authority to execute and deliver the Premium Receivable Servicing Agreement and to carry out the terms thereof; there are no injunctions, writs, restraining orders or any other order of any nature which adversely affects the Servicer's performance of the Premium Receivable Servicing Agreement or any transactions contemplated thereby; and no consent, approval or authorization which has not been obtained is required for the consummation by the Servicer of the transactions contemplated by the Premium Receivable Servicing Agreement. (b) NO VIOLATION. The consummation of the transactions contemplated by the Premium Receivable Servicing Agreement and the fulfillment of the terms thereof do not conflict with, result in any breach of any of the terms and provisions of, nor constitute (with or without notice or lapse of time) a default under, the certificate of incorporation or bylaws of the Servicer, or any indenture, agreement or other instrument to which the Servicer is a party or by which it or its properties is bound; nor result in the creation or imposition of any Lien upon any of its properties pursuant to the terms of any such indenture, agreement or other instrument; nor violate any applicable laws, rules, regulations or orders regarding the conduct of the Servicer's business or the ownership of its properties; nor violate any law or any order, rule or regulation applicable to the Servicer of any court or of any federal or state regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over the Originator or its properties except, in each case, for such violations, conflicts, breaches, Liens and defaults which could not, in the reasonable judgment of the Servicer, have an adverse effect on the condition (financial or otherwise) of the Servicer, any Premium Receivable or the Servicer's obligations under the Premium Receivable Servicing Agreement. (c) ABILITY TO PERFORM. There has been no impairment in the ability of Servicer to perform its obligations under the Premium Receivable Servicing Agreement. (d) FINANCIAL STATEMENTS. The Servicer's financial statements dated as of [ ], and [ ], as delivered to FPF and the financial statements of the Servicer to be delivered pursuant to Section 2.11 of this Servicing Agreement, present or will present fairly, in all material respects, the information presented therein, and no material adverse change has occurred in the Servicer's financial status since the date thereof. (e) NO MATERIAL LIABILITIES. The Servicer does not have material liabilities or obligations other than those disclosed in the financial statements referred to in subparagraph (d) above or for which adequate reserves are reflected in such financials. (f) NO MATERIAL MISSTATEMENTS OR OMISSIONS. No information, certificate of an officer, statement furnished in writing or report delivered to FPF by the Servicer contains any untrue statement of a material fact or omits a material fact necessary to make such information, certificate, statement or report not misleading; provided, that the Servicer makes no representation or warranty with respect to any information incorporated into or forming the basis of any officer's certificate, information, statement or report provided by the Servicer that is provided to the Servicer by any other Person. (g) CAPABILITY TO PERFORM. The Servicer has the knowledge, the experience and the systems, financial and operational capacity available to timely perform each of its obligations under the Premium Receivable Servicing Agreement. B-2 (h) OTHER AGREEMENTS. The Servicer is not a party to any indenture, loan or credit agreement, lease or other instrument or agreement which is likely to have a material adverse effect on the business, properties, assets, operations or operation, financial or otherwise, of the Servicer or the ability of the Servicer to perform its obligations under this Servicing Agreement. (i) NO MATERIAL ADVERSE CHANGE. No material adverse change has occurred in the business, properties, operating results, prospects, assets, operations or condition, financial or otherwise, of the Servicer from the Closing Date or the immediately preceding Acquisition Date, as the case may be. SECTION 2. REPRESENTATIONS AND WARRANTIES WITH REGARD TO SECTION 4.01 AND 4.02 OF THE PREMIUM RECEIVABLE SERVICING AGREEMENT. (References in this Section 2 to "such Person" refer to the Person making the representation and warranty pursuant to the Premium Receivable Servicing Agreement.) (a) ORGANIZATION, ETC. Such Person is duly organized and is validly existing as a corporation or limited liability company, as the case may be, in good standing under the laws of the state of its organization with full power and authority to execute and deliver the Premium Receivable Servicing Agreement and to perform the terms and provisions thereof. (b) DUE QUALIFICATION. Such Person is duly qualified to do business as a foreign business entity in good standing, and has obtained all required licenses and approvals, if any, in all jurisdictions in which the ownership or lease of property or the conduct of its business requires such qualifications except those jurisdictions in which failure to be so qualified would not have an adverse effect on the business or operations of such Person or any Premium Receivable. (c) DUE AUTHORIZATION. The execution, delivery and performance by such Person of the Premium Receivable Servicing Agreement have been duly authorized by all necessary action of such Person, do not require any approval or consent of any governmental agency or authority, do not and will not conflict with any provision of its constituent documents, and do not and will not conflict with or result in a breach which would constitute (with or without notice or lapse of time) a default under any agreement binding upon or applicable to it or its property, or any law or governmental regulation or court decree applicable to it or its property. (d) NO LITIGATION. No litigation or administrative proceeding of or before any court, tribunal or governmental body is presently pending, or threatened, against such Person or its properties, which, if adversely determined could, in the reasonable opinion of such Person, have an adverse effect on the transactions contemplated by the Premium Receivable Servicing Agreement or on such Person's ability to perform any of its obligations thereunder. (e) ENFORCEABILITY. The Premium Receivable Servicing Agreement constitutes the valid, legal and binding obligation of such Person, enforceable against such Person in accordance with the terms thereof, subject to applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the enforcement of creditor's rights generally and to general principles of equity, regardless of whether such enforcement is considered in a proceeding in equity or at law. SECTION 3. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in this Exhibit B shall survive the date of the Premium Receivable Servicing Agreement. Upon discovery by FPF or its designee of a breach of any of the foregoing representations and warranties, the party discovering such breach shall give prompt written notice to the other parties thereto; provided, however, that failure to give such notice shall not affect the rights of such other parties with respect to such breach. B-3 EXHIBIT C POWER OF ATTORNEY FEDERATED PREMIUM FINANCE, INC. a corporation organized and existing under the laws of the State of Florida (the "Servicer"), hereby grants to FPF, INC. ("FPF") pursuant to that certain Premium Receivable Servicing Agreement, dated as of September 30, 2001, among the Servicer and FPF, Inc., as the same may be amended or otherwise modified from time to time (the "Servicing Agreement"), an irrevocable power of attorney, with full power of substitution, coupled with an interest, to take any and all actions at the option of FPF or its assigns at any time after the occurrence and during the continuance of any Event of Servicing Default, in the name of the Servicer or its assigns, to execute such documents or instruments and to do and accomplish all other acts or things necessary or appropriate to effect the transfer of servicing rights under the Servicing Agreement. Capitalized terms used and not otherwise defined herein shall have the meaning ascribed to such terms in the Servicing Agreement. IN WITNESS WHEREOF, the undersigned a duly authorized officer of FEDERATED PREMIUM FINANCE, INC. hereunto sets his hand this 30 day of September, 2001. FEDERA FEDERATED PREMIUM FINANCE, INC. By /s/ Stephen C. Young --------------------------------------- Name Stephen C. Young --------------------------------------- Title President --------------------------------------- STATE OF FL ) ) ss: COUNTY OF BROWARD ) BE IT REMEMBERED, that on this 30 day of September, 2001 before me the undersigned, a Notary Public in and for the County and State aforesaid, came Stephen Young, a Officer of FEDERATED PREMIUM FINANCE, INC., a corporation duly organized, incorporated and existing under and by virtue of the laws of Florida, who is personally known to me to be such officer, and who is personally known to me to be the same person who executed, as such officer, the within instrument on behalf of said corporation, and such person duly acknowledged the execution of the same to be the act and deed of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal, the day and year last above written. /s/ Joseph V. Aloisio ------------------------------------- Notary Public Sept. 30, 2001 My commission expires: [SEAL] Joseph V. Aloisio - ------------------------------------------- Commission #CC902275 Expires Feb. 28, 2004 Bonded Thru Atlantic Bonding Co., Inc. TABLE OF CONTENTS Article I DEFINITIONS....................................................................2 Article II ADMINISTRATION AND SERVICING OF PREMIUM RECEIVABLES Section 2.01. Appointment and Duties of Servicer...........................3 Section 2.02. Collection of Premium Receivable Payments....................4 Section 2.03. Past-Due Premium Receivables; Cancelled Premium Receivables..4 Section 2.04. Defaulted Premium Receivables................................5 Section 2.05. Maintenance of Interests in Premium Receivables..............5 Section 2.06. Covenants of Servicer........................................5 Section 2.07. Reacquisition of Premium Receivables Upon Breach of Representations or Warranties..............5 Section 2.08. Premium Receivable Servicing Fees............................6 Section 2.09. Servicer's Certificate as to Compliance......................6 Section 2.10. Reporting Obligations; Inspection and Audit Rights...........6 Section 2.11. Financial Statements and Other Reports.......................7 Section 2.12. Costs and Expenses...........................................8 Section 2.13. Responsibility for Ownership Interests.......................8 Section 2.14. Documents Held by FPF; Documents Held by the Servicer; Indication of FPF Ownership.............8 Section 2.15. Maintenance of Computer Systems..............................9 Section 2.16. Standard of Care.............................................9 Section 2.17. Enforcement.................................................10 Section 2.18. Fidelity Bond or Errors and Omissions Insurance.............10 Article III ACCOUNTS; COLLECTIONS Section 3.01. Accounts....................................................10 Section 3.02. Collections.................................................10 Section 3.03. Collections Account Depository..............................11 Article IV REPRESENTATIONS AND WARRANTIES Section 4.01. Representations and Warranties of the Servicer..............11 Section 4.02. Representations and Warranties of FPF.......................11 TABLE OF CONTENTS (continued) Page Article V DEFAULT, REMEDIES AND INDEMNITY Section 5.01. Events of Servicing Default.................................11 Section 5.02. Remedies....................................................12 Section 5.03. Indemnity by the Servicer...................................13 Section 5.04. Waiver of Events of Servicing Default.......................13 Section 5.05. Survival....................................................13 Article VI TERMINATION OF SERVICING AGREEMENT Section 6.01. Term........................................................13 Article VII MISCELLANEOUS PROVISIONS Section 7.01. No Offset...................................................13 Section 7.02. Powers of Attorney..........................................13 Section 7.03. Assignments; Third Party Beneficiaries......................13 Section 7.04. Amendment...................................................14 Section 7.05. Waivers.....................................................14 Section 7.06. Notices.....................................................14 Section 7.07. Governing Law...............................................14 Section 7.08. Jurisdiction................................................14 Section 7.09. Waiver of Jury Trial........................................15 Section 7.10. Severability of Provisions..................................15 Section 7.11. Counterparts................................................15 Section 7.12. Captions....................................................15 Section 7.13. Legal Holidays..............................................15 Section 7.14. Advice from Independent Counsel.............................15 Section 7.15. Judicial Interpretation.....................................15 EXHIBIT A-1 FORM OF SERVICER'S DAILY REPORT EXHIBIT B REPRESENTATIONS AND WARRANTIES EXHIBIT C POWER OF ATTORNEY ii EX-10.16 7 ex10-16.txt REINSURANCE TERMS - FEDERATED NATIONAL Exhibit 10.16 LOGO TO: FROM: Teddy Lawson Suzanne A. Spantidos /s/ COMPANY: DATE: Federated National FEBRUARY 22, 2002 FAX NUMBER: TOTAL NO. OF PAGES INCLUDING COVER: 954-316-9201 4 PHONE NUMBER: SENDER'S REFERENCE NUMBER: 954-308-1250 300300302 RE: 1/1/2002 Reinsurance Terms for Federated National Insurance Company Dear Teddy: TRC is prepared to authorize 100% based on the Revised terms outlined below. This quotation contains the changes we discussed yesterday and are in bold for your reference. Please sign this copy and fax to my attention. I will forward hard copies via Federal Express from "wet signature". Thank you for all of your help. - -------------------------------------------------------------------------------- Company: Federated National - -------------------------------------------------------------------------------- Business Covered: Private Passenger Auto Only - -------------------------------------------------------------------------------- Territory: Florida - -------------------------------------------------------------------------------- Commencement Effective January 1, 2002, on new and renewal business. & Termination: Policies Attaching Basis. The treaty may be cancelled at semi annually by giving 90 days prior written notice by certified mail. Special Termination Clause (see attached) Company has option to elect Runoff or Cutoff. Election must be made within 30 days of notice or cancellation/ termination. - -------------------------------------------------------------------------------- Coverage: 40% Quota Share - -------------------------------------------------------------------------------- Ceding Commission: Minimum: 30% @ 66% ILR, sliding 0:1 30% @ 63% ILR, client realizing 100% of profits under 63% ILR - -------------------------------------------------------------------------------- Loss Corridor: Federated National to assume 50% of Incurred Losses from 70% to 75% and then 100% of Incurred Losses from a 75% to 80%. - -------------------------------------------------------------------------------- Commission Adjustment Commission to be adjusted 24 months from inception, calculation to apply a 6.5% IBNR factor. - -------------------------------------------------------------------------------- Loss Adjustment Exp: Treaty Limitation of ALAE: Total allocated loss adjustment expense, including outside legal counsel, shall be the lesser of actual ALAE or 8% of Earned Premium. Allocated loss adjustment expense and legal expense shall be reported separately. Payment of ALAE: Superior Adjusting Inc. will receive, through the monthly accounts, 7.5% of Earned Premium. An adjustment for Actual ALAE will be made at the time of the Commission Adjustment. - -------------------------------------------------------------------------------- Page 2 - -------------------------------------------------------------------------------- Non-Traditional QS Transatlantic will have the option at 7-15-02 to modify Option: the terms to a Non-Traditional Quota Share treaty including the following: Change would be retroactive to 1-1-02. Reinsurer's Margin: 4% (96% Combined Ration) TRC will transfer of funds to establish a Funds Withheld Structure: Federated National will hold all funds except the Reinsurer's Margin. Ceding Commission: 30% @ 66% ILR, client realizing 100% of profits under a 66% ILR. Profit Contingency to be calculated 24 months from inception with a 6.5% IBNR factor applied. Loss corridor: Federated National to assume 100% of Incurred Losses from a 66% ILR to 86% ILR. Establish an Incurred Loss Ratio Cap of 110% - -------------------------------------------------------------------------------- Definitions: Written Premium: Gross Written Premium for the policy, less cancellations and return premium. Collected Premium: Premium actually collected by producer/agent or MGA from the insureds policy payment schedule. Earned Premium: Earned Portion of the Written Premium (as defined above), using the Daily Pro Rata calculation method or other accepted calculation method as agreed to. - -------------------------------------------------------------------------------- Limits: Basic Limits Section A Increased Limits Section B BI $10,000/$20,000 BI $100,000/$300,000 PD $10,000 PD $50,000 APD $50,000 APD $50,000 - -------------------------------------------------------------------------------- Reports & Remittances: Monthly reports within 30 days and remittance within 30 days. Basic Limits and Increased Limits to be reported separately. - -------------------------------------------------------------------------------- Warranty: No rate decreases or discount increases without prior reinsurer written approval. Ceded Premium Cap of $12,000,000 - -------------------------------------------------------------------------------- Exclusions: Guaranty funds, insolvency funds, pools, pollution BRMA 39A and 39B, and attached auto specific list. - -------------------------------------------------------------------------------- ECO/XPL ECO/XPL will be covered at 100% with a total per claim limitation of $500,000 inclusive of policy limits. Annual Aggregate limit of $1.5MM. - -------------------------------------------------------------------------------- Terrorism In the event of a terrorist act, this treaty will be subject to an Annual Aggregate Limit of $1M for all losses incurred by a terrorist act. This condition will be readdressed when the ISO PPA Terrorist wording has been developed and distributed. - -------------------------------------------------------------------------------- General Conditions: General conditions to include wording attached for: offset clause, salvage and subrogation clause, arbitration clause and access to records. - -------------------------------------------------------------------------------- Informational: Underwriting guidelines and rates to be filed with Reinsurer. Ceding Commission to be paid on a Collected basis. Full placement of these Reinsurance Terms must be obtained within 10 business days of the quotation being accepted. The program must incept within 30 days of the acceptance of these terms and conditions or the Reinsurance Agreement will be terminated. - -------------------------------------------------------------------------------- /s/Suzanne A. Spantidos Date 2-22-02 /s/Teddy Lawson Date 2/25/02 - ----------------------- ---------------- Suzanne A. Spantidos Teddy Lawson Transatlantic Reinsurance Company Federated National Insurance Company Special Termination Clause Either party to this Agreement shall have the right to cancel this Agreement immediately by giving 10 days written notice to the other party by registered mail in the event that one party; 1. has its financial condition impaired by a reduction of surplus as regards policyholders of 15% or more in any twelve month period from the inception date of this Agreement; 2. is declared insolvent or put in liquidation by any competent regulatory authority or court of competent jurisdiction; 3. loses its operating license, or has its operating license suspended, in any jurisdiction; 4. ceases writing new or renewal business; 5. has any change in ownership, which is considered to be 10% or more of its stock and/or a change in management; 6. fails to remit premiums/losses in accordance with the terms of this Agreement. The coverage afforded by this Agreement shall cease as of the date of termination except in the case of failure to remit premium, termination shall be effective as at the date through which premium has been paid. The Reinsurer shall have the right to cancel this Agreement 90 days notice for the following provision: 1. Has it's A.M. Best rating reduced to B- or lower; Subject to the Special Termination items above, the party giving notice shall have the option to return or request the return of the unearned premium, if any, on the business in force at the date of cancellation, less any commission allowed thereon. Thereby terminating this agreement on a cutoff basis. If the Reinsurer requests termination on a Cutoff basis, such termination shall not apply to business written restricted by the state regulatory authority. Private Passenger Auto Exclusions A. This Agreement does not apply to and specifically excludes the following: 1. Financial Guarantee and insolvency; 2. Business written to apply in excess of a deductible of more than $5,000, and business issued to apply specifically in excess over underlying insurance; 3. Liability as a member, subscriber or reinsurer of any Pool, Syndicate or Association, but this exclusion shall not apply to Assigned Risk Plans or similar plans. 4. Automobile Liability Insurance relating to the ownership, maintenance or use of: A. A Taxicab, public livery conveyance or bus; B. An ambulance, fire department or law enforcement, private emergency vehicle or other municipal equipment; C. A racing or exhibition vehicle; D. Rental and leasing of all motor vehicles; E. Commercial automobiles, except service vehicles used by Craftsmen and Artisans up to a maximum of one ton; F. Risks engaged in the transportation or distribution of munitions and explosives such as, but not limited to: liquid hydrogen, nitrogen, chlorine, fireworks, fuses, dynamite, nitroglycerine, ammonia nitrate, anhydrous ammonia, celluloid, pryroxline, or their derivatives, LGP, butane, propane and gasoline; G. Recreational and high performance vehicles. H. Policies sold to celebrity persons. 5. Any automobile not classified as private passenger automobile. 6. Business written on a co-surety or co-indemnity basis not controlled by the Company. 7. Loss or damage arising from pollution and environment impairment. 8. Loss or damage resulting from any of the following lines of business; Ocean Marine, Accident and Health, Worker's Compensation, Aircraft (all perils), Fidelity, Surety, Glass, Boiler and Machinery, Credit, Title, and/or Life. If any business falling within the scope of one or more of the exclusions is assigned to the Company under an Assigned Risk Plan, such exclusion(s)shall not apply, it being understood and agreed that the limits of liability extended by the Company as respects such policies shall not exceed the minimum statutory limits of liability prescribed in such Assigned Risk Plan. Definitions: - ------------ Recreational Vehicles include: road buggies, dune buggies, caravans, motor coaches and motor homes. Celebrity Persons include: actors (guild and/or association membership), professional athletes (with league membership), olympic athletes, college athletes, radio personalities, news broadcasters, musicians, authors/writers (of published works), and models. EX-10.17 8 ex10-17.txt REPLACEMENT OF STATE NAITONAL TREATY Exhibit 10.17 LOGO To: FROM: Rich Widdicombe Suzanne A. Spantidos COMPANY: DATE: American Vehicle Insurance Co DECEMBER 6, 2000 FAX NUMBER: TOTAL NO. OF PAGES INCLUDING COVER: 954-308-1211 TWO PHONE NUMBER: SENDER'S REFERENCE NUMBER: 954-308-1254 TBD RE: Replacement of State National Treaty with American Vehicle Treaty Dear Rich: Below please find a summary of the terms and conditions for the American Vehicle Treaty. As you are aware, this treaty is replacing the State National/Federated treaty. The terms follow the State National treaty, including the commission structure. As you may remember, Teddy initially stated he would reduce the front fee, but then decided that he could not make this change. Please note that the wording will be more closely related to the existing Federated treaty as I expect American Vehicle to assume all Insurance and Business risk. There will be no Hold Harmless provisions and LAE and ECO/XPL are limited within the treaty terms. I will be forwarding the wordings sometime in February. Please sign one of the copies enclosed and return it to my attention. Please keep the other copy for your files. - -------------------------------------------------------------------------------- Company: American Vehicle Insurance Company - -------------------------------------------------------------------------------- Business Covered: Private Passenger Auto - -------------------------------------------------------------------------------- Territory: Florida - -------------------------------------------------------------------------------- Commencement Effective 11/1/2001, on new and renewal business & Termination Losses Occurring Basis. The treaty may be cancelled at semi annually by giving 90 days prior written notice by certified mail. Special Termination Clause (see attached) Company has option to elect Runoff or Cutoff. Election must be made within 30 days of notice of cancellation/termination. - -------------------------------------------------------------------------------- Coverage: 80% Quota Share - -------------------------------------------------------------------------------- Ceding Commission: Minimum/Provisional: 26.5% @ 68.5% LR 0.8:1 Pivot: 30.0% @ 63.5% LR 1:1 Maximum: 36.5% @ 57.5% LR Deficit/Credit Carryforward to extinction. - -------------------------------------------------------------------------------- Definitions: Written Premium: Gross Written Premium for the policy, less cancellations and return premium. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Page 2 American Vehicle Terms - -------------------------------------------------------------------------------- Definitions Continued Collected Premium: Premium actually collected by producer/agent or MGA from the insureds policy payment schedule. Earned Premium: Earned Portion of the Written Premium (as defined above), using the Daily Pro Rata calculation method or other accepted calculation method as agreed to. - -------------------------------------------------------------------------------- Commission Adjustment 24 months from inception, with 6.5% IBNR. - -------------------------------------------------------------------------------- Loss Adjustment Exp: Treaty Limitation of ALAE: Total allocated loss adjustment expense, including outside legal counsel, shall be the lesser of actual ALAE or 8% of Earned Premium. Allocated loss adjustment expense and legal expense shall be reported separately. Payment of ALAE: Superior Adjusting Inc. will receive, through the monthly accounts, 7.5% of Earned Premium. An adjustment for Actual ALAE will be made at the time of the Commission Adjustment. - -------------------------------------------------------------------------------- Limits: Basic Limits Policies Only BI 10,000/20,000 PD 10,000 APD 30,000 - -------------------------------------------------------------------------------- Reports & Remittances: Monthly reports within 30 days and remittance within 60 days. - -------------------------------------------------------------------------------- Warranty: No rate decreases or discount increases without prior reinsurer written approval. Premium Cap of $15MM MGA cannot write additional programs without prior reinsurer approval - -------------------------------------------------------------------------------- Exclusions: Guaranty funds, insolvency funds, pools, pollution BRMA 39A and 39B, and attached auto specific list. - -------------------------------------------------------------------------------- ECO/XPL ECO/XPL will be covered at 80% with a total per claim limitation of $500,000 inclusive of policy limits. Annual Aggregate limit of $1.5MM - -------------------------------------------------------------------------------- Terrorism In the event of a terrorist act, this treaty will be subject to an Annual Aggregate Limit of $1.5M for all losses incurred by a terrorist act. This condition will be re-addressed when the ISO PPA Terrorist wording has been developed and distributed. - -------------------------------------------------------------------------------- General Conditions: General conditions to include wording attached for: offset clause, salvage and subrogation clause, arbitration clause and access to records. - -------------------------------------------------------------------------------- Informational: Underwriting guidelines and rates to be filed with Reinsurer. Ceding Commission to be paid on a Collected basis. - -------------------------------------------------------------------------------- /s/Suzanne A. Spantidos Date 12-7-01 /s/Rich Widdicombe Date 2/12/02 - ----------------------- ------------------ Suzanne A. Spantidos Rich Widdicombe Transatlantic Reinsurance Company American Vehicle Insurance Company Special Termination Clause Either party to this Agreement shall have the right to cancel this Agreement immediately by giving 10 days written notice to the other party by registered mail in the event that one party: 1. has its financial condition impaired by a reduction of surplus as regards policyholders of 15% or more in any twelve month period from the inception date of this Agreement; 2. Has it's A.M. Best rating reduced to B or lower or its S&P rating reduced to BB+ or lower; 3. is declared insolvent or put in liquidation by any competent regulatory authority or court of competent jurisdiction; 4. Loses its operating license, or has its operating license suspended, in any jurisdiction; 5. ceases writing new or renewal business; 6. has any change in ownership, which is considered to be 10% or more of its stock and/or a change in managment; 7. fails to remit premiums/losses in accordance with the terms of this Agreement. The coverage afforded by this Agreement shall cease as of the date of termination except in the case of failure to remit premium, termination shall be effective as at the date through which premium has been paid. Subject to the Special Termination items above, the party giving notice shall have the option to return or request the return of the unearned premium, if any, on the business in force at the date of cancellation, less any commission allowed thereon. Thereby terminating this agreement on a cutoff basis. If the Reinsurer requests termination on a Cutoff basis, such termination shall not apply to business written restricted by the state regulatory authority. Private Passenger Auto Exclusions A. This Agreement does not apply to and specifically excludes the following: 1. Financial Guarantee and insolvency; 2. Business written to apply in excess of a deductible of more than $5,000, and business issued to apply specifically in excess over underlying insurance; 3. Liability as a member, subscriber or reinsurer of any Pool, Syndicate or Association, but this exclusion shall not apply to Assigned Risk Plans or similar plans. 4. Automobile Liability insurance relating to the ownership, maintenance or use of: A. A Taxicab, public livery conveyance or bus; B. An ambulance, fire department or law enforcement, private emergency vehicle or other municipal equipment; C. A racing or exhibition vehicle; D. Rental and leasing of all motor vehicles; E. Commercial automobiles, except service vehicles used by Craftsmen and Artisans up to a maximum of one ton; F. Risks engaged in the transportation or distribution of munitions and explosives such as, but not limited to: liquid hydrogen, nitrogen, chlorine, fireworks, fuses, dynamite, nitroglycerine, ammonia nitrate, anhydrous ammonia, celluloid, pryroxline, or their derivatives, LGP, butane, propane and gasoline; G. Recreational and high performance vehicles. H. Policies sold to celebrity persons. 5. Any automobile not classified as private passenger automobile. 6. Business written on a co-surety or co-indemnity basis not controlled by the Company. 7. Loss or damage arising from pollution and environment impairment. 8. Loss or damage resulting from any of the following lines of business; Ocean Marine, Accident and Health, Worker's Compensation, Aircraft (all perils), Fidelity, Surety, Glass, Boiler and Machinery, Credit, Title, and/or Life. If any business falling within the scope of one or more of the exclusions is assigned to the Company under an Assigned Risk Plan, such exclusion(s) shall not apply, it being understood and agreed that the limits of liability prescribed in such Assigned Risk Plan Definitions: - ------------ Recreational Vehicles include: road buggies, dune buggies, caravans, motor coaches and motor homes. Celebrity Persons include: actors (guild and/or association membership), professional athletes (with league membership), olympic athletes, college athletes, radio personalities, news broadcasters, musicians, authors/writers (of published works), and models. EX-10.18 9 ex10-18.txt REIMBURSEMENT CONTRACT Exhibit 10.18 State Board of Administration Of Florida Post Office Box 13300 32317-3300 1801 Hermitage Boulevard-Suite 100 Tallahassee, Florida 32308 (850) 488-4406 REIMBURSEMENT CONTRACT Effective: June 1, 2001 ("Contract") between FEDERATED NATIONAL INSURANCE COMPANY Ft. Lauderdale, FL (the "Company") NAIC #27980 and THE STATE BOARD OF ADMINISTRATION OF THE STATE OF FLORIDA ("SBA") WHICH ADMINISTERS THE FLORIDA HURRICANE CATASTROPHE FUND ("FHCF") PREAMBLE The Legislature of the State of Florida has enacted Section 215.555, Florida Statutes, which directs the SBA to administer the FHCF. This Contract is subject to the Statute and to any administrative rule adopted pursuant thereto, and is not intended to be in conflict therewith. In consideration of the promises set forth in this Contract, the parties agree as follows: ARTICLE 1 - SCOPE OF AGREEMENT As a condition precedent to the SBA's obligations under this Contract, the Company, an authorized insurer or any joint underwriting association or assigned risk plan under Section 627.351, Florida Statutes, in the State of Florida, shall report to the SBA in a specified format the business it writes which is described in this Contract as Covered Policies. The terms of this Contract shall determine the rights and obligations of the parties. This Contract provides reimbursement to the Company under certain circumstances, as described herein, and does not provide or extend insurance or reinsurance coverage to any person, firm, corporation or other entity. The SBA shall reimburse the Company for its Ultimate Net Loss on Covered Policies in excess of the Company's Retention as a result of each Loss Occurrence commencing during the Contract Year, to the extent funds are available, all as hereinafter defined. 1 ARTICLE II - PARTIES TO THE CONTRACT This Contract is solely between the Company and the SBA which administers the FHCF. In no instance shall any insured of the Company or any claimant against an insured of the Company, or any other third party, have any rights under this Contract, except as provide in Article XIV. ARTICLE III - TERM This Contract shall apply to Loss Occurrences which commence during the period from 12:01 a.m., Eastern Daylight Time, June 1, 2001, to 12:01 a.m., Eastern Daylight Time, June 1, 2002 (the "Contract Year"). The SBA shall not be liable for Loss Occurrences which commence after the effective time and date of expiration or termination. Should this Contract expire or terminate while a Loss Occurrence covered hereunder is in progress, the SBA shall be responsible for such Loss Occurrence in progress in the same manner and to the same extent it would have been responsible had the Contract expired the day following the conclusion of the Loss Occurrence in progress. ARTICLE IV - LIABILITY OF THE FHCF (1) The SBA shall reimburse the Company, with respect to each Loss Occurrence commencing during the Contract Year for the "Reimbursement Percentage" elected, that percentage times the amount of Ultimate Net Loss paid by the Company in excess of the Company's Retention, plus 5% of the reimbursed losses for Loss Adjustment Expense Reimbursement. (2) The Reimbursement Percentage will be 45% or 75% or 90%, at the Company's option as elected under Schedule A attached to and forming part of this Contract, unless it must be adjusted for some or all Companies in the FHCF as provided in (3) below. (3) In determining reimbursements under this Article, the SBA shall: (a) First, reimburse Companies qualified as limited apportionment companies under Section 627.351(2)(b)3., Florida Statutes, for the amount (if any) of reimbursement due under the individual company's reimbursement contract, but not to exceed the lesser of $10 million or an amount equal to 10 times the individual company's Reimbursement Premium for the Contract Year. This provision does not apply if the year-end projected balance of the FHCF, exclusive of any bonding capacity of the FHCF, exceeds $2 billion. Further, if the Company is a member of a group, the Company may not receive reimbursement under this provision if any other member of the group has received reimbursement under this provision. (b) Next, reimburse each of the Companies for the amount (if any) of reimbursement due under the individual company's reimbursement contract, but not to exceed an amount equal to the Projected Payout Multiple times the individual company's Reimbursement Premium for the Contract Year, provided, however, that entities created under Section 627.351, Florida Statutes, shall be further reimbursed in accordance with subsection (c) below. If the Company qualifies as a limited apportionment company under Section 627.351(2)(b)3., Florida Statutes, any amount payable under this provision shall be reduced by the amount (if any) payable under (a) above. 2 (c) Thereafter, reimburse each entity created by Section 627.351, Florida Statutes, for a pro rata share of any remaining Actual Claims-Paying Capacity of the FHCF based on the proportion that such entity's remaining reimbursable losses under Covered Policies from Covered Events for the Contract Year bear to the total remaining reimbursable losses under Covered Policies from Covered Events for the Contract Year, for which any remaining FHCF balance or bond proceeds are sufficient, up to a limit of $11 billion for any one Contract Year, in accordance with Section 215.555, Florida Statutes. (4) Reimbursement amounts shall not be reduced by reinsurance paid or payable to the Company from other sources; however, the Company shall not allow recoveries from such other sources, except reinsurance recoveries from affiliated insurers and/or reinsurers, taken together with reimbursements under this Contract, to exceed 100% of the Company's losses under Covered Policies from Covered Events. If such recoveries and reimbursements exceed 100% of the Company's losses under Covered Policies from Covered Events, and if there is no agreement between the Company and its reinsurer(s) to the contrary, any amount in excess of 100% of the Company's losses under Covered Policies from Covered Events shall be returned to the SBA. (5) Annually, the SBA shall notify the Company of the FHCF's estimated Borrowing Capacity for the next contract year, the projected year-end balance of the FHCF, and the Company's estimated share of total reimbursement premium to be paid to the FHCF for the Contract Year. In May and October of each year, the SBA shall publish in the Florida Administrative Weekly a statement of the FHCF's estimated borrowing capacity and the projected year-end balance of the FHCF.. (6) The obligation of the SBA with respect to all reimbursement contracts covering a particular year shall not exceed the balance of the FHCF as of December 31 of that contract year, together with the maximum amount the SBA is able to raise through the issuance of revenue bonds or other means available to the SBA under Section 215.555, Florida Statutes, up to a limit of $11 billion for any one contract year. The obligations and the liability of the SBA are more fully described in Rule 19-8.013, Florida Administrative Code (F.A.C.). If reimbursement premiums are used for debt service in the event of a temporary shortfall in the collection of emergency assessments, then the amount of the premiums so used will be reimbursed to the SBA when sufficient emergency assessments are received. ARTICLE V - DEFINITIONS (1) Actual Claims-Paying Capacity of the FHCF This term means the sum of the balance of the FHCF as of December 31 of a Contract Year, plus any reinsurance purchased by the FHCF, plus the amount the SBA is able to raise through the issuance of revenue bonds up to a limit of $11 billion pursuant to Sections 215.555(4)(c) and (6), Florida Statutes. (2) Actuarially Indicated This term means, with respect to Premiums paid by insurers for reimbursement provided by the FHCF, an amount determined in accordance with the definition provided in Section 215.555(2)(a), Florida Statutes. (3) Administrator This term means the entity with which the SBA contracts to perform administrative tasks associated with the operations of the FHCF. The present Administrator is Paragon Reinsurance Risk Management Services, Inc., 3600 West 80th Street, Minneapolis, Minnesota 55431. The telephone number is (800) 689-3863, and the facsimile number is (800) 264-0492. 3 (4) Authorized Insurer This term is defined in Section 624.09(1), Florida Statutes. (5) Borrowing Capacity This term means the amount of funds which are able to be raised by the issuance of revenue bonds or through other financial mechanisms. (6) Contract This term means this Reimbursement Contract for the current Contract Year. (7) Covered Event This term means any one storm declared to be a hurricane by the National Hurricane Center, which causes insured losses in Florida, both while it is still a hurricane and throughout any subsequent downgrades in storm status by the National Hurricane Center. Any storm, including a tropical storm, which does not become a hurricane is not a Covered Event. (8) Covered Policy (a) This term means only that portion of a binder, policy or contract of insurance ("Policy Contract") that insures real or personal property located in the State of Florida to the extent of such Policy Contract insures a residential structure or the contents of a residential structure located in the State of Florida. For purposes of this Contract, "residential" means habitational structures and includes personal lines residential coverages, commercial lines residential coverages, and mobile home coverages. 1. The term "covered policy" does not include any excess policy that contains coverage for non-habitational property or non-Florida property. "Excess policy," for purposes of the FHCF, means insurance protection for large commercial property risks that provides a layer of coverage above a primary layer that acts much the same as a very large deductible. The primary layer is insured through another policy. The excess policy does not reimburse losses unless the losses exceed the primary layer. Several excess policies may be used to cover high value properties, each with different but coordinating primary layers. 2. For personal lines residential coverages report Coverage A (dwelling), B (appurtenant structures), and/or C (contents) exposure and any increases to these coverages. 3. For commercial lines residential coverages, include all Coverage A (dwelling), B (appurtenant structures), and/or C (contents) exposure which directly covers, or is used in relation to, covered habitational structures and any additional coverages or coverage extensions which increase the limit of coverage for habitational structure. Some of the coverages may include, but are not limited to, valuable papers, signs, moneys and securities, outdoor property, personal effects, and fine arts. Also report Coverage A, B, and/or C exposure which directly covers, or is used in relation to, habitational structures covered under a farmowners policy. Additional coverages: Report exposure from additional coverages and coverage extensions only if such coverages increase the limit of coverage provided under Coverages A, B, and C and is directly related to the covered habitational structure. 4 (b) Residential structures (personal lines residential, commercial residential, and mobile home) are those dwelling units used as a home, residence or sleeping place for other than short-term, transient occupancy, as that term is defined in Sections 83.43(10) and 509.013(11), Florida Statutes. These include the primary structure and appurtenant structures, including the contents therein, insured under the same policy and any other structure or contents covered under endorsements associated with a policy covering a residential structure, the principal function of which at the time of loss was as a primary or secondary residence. (c) Because of the specialized nature of the definition of Covered Policies, Covered Policies are not limited to only one line of business in the Company's annual statement required to be filed by Section 624.424, Florida Statutes. Instead, Covered Policies are found in several lines of business on the Company's annual statement. Covered Policies will at a minimum be reported in the Company's statutory annual statement as: -Fire -Allied Lines -Farmowners Multiple Peril -Homeowners Multiple Peril -Commercial Multiple Peril (non liability portion, covering condominiums and apartments) -Inland Marine (d) Specific companies will report Covered Policies in other lines of business, as their specific situation requires. Note, however, that where particular insurance exposures are reported on an annual statement is not dispositive of whether or not the exposure is a Covered Policy. This definition applies only to the first-party property section of Policy Contracts pertaining strictly to the structure or its contents. Insured losses from coverages other than those pertaining strictly to damage to the structure or its contents, that may be afforded under Policy Contracts, are not reimbursable under this Contract. (9) Estimated Claims-Paying Capacity of the FHCF This term means the sum of the projected year-end balance of the FHCF as of December 31 of a contract year, plus any reinsurance if purchased by the FHCF, plus the most recent estimate of the borrowing capacity of the FHCF, determined pursuant to Section 215.555(4)(c), Florida Statutes. (10) Florida Department of Insurance (DOI) This term means that Florida regulatory agency charged with regulating the Florida insurance market which is established in Section 20.13, Florida Statutes, and administers the Florida Insurance Code. (11) Florida Insurance Code This term means those chapters in Section 624.01, Florida Statutes, which are designated as the Florida Insurance Code. (12) Florida Residential Property and Casualty Joint Underwriting Association (JUA) The term refers to an entity formed under Section 627.351(6), Florida Statutes. (13) Florida Windstorm Underwriting Association (FWUA) This term refers to an entity formed under Section 627.351(2), Florida Statutes. (14) Formula or the Premium Formula This term means the formula approved by the SBA for the purpose of determining the Actuarially Indicated Premium to be paid to the FHCF. The Premium Formula is defined as an approach or methodology which leads to the creation of premium rates. The resulting rates are therefore incorporated as part of the Premium Formula and are the result of the approach or methodology employed. 5 (15) Fund Balance as of 12/31 This term means the "Fund balance: Unrestricted" as indicated on the unconsolidated FHCF Balance Sheets for the then current Contract Year, to which is added: reported FHCF losses (including loss adjustment expense) for the then current Contract Year, whether paid or unpaid by FHCF, as of December 31, and from which is subtracted: any reinsurance recovered prior to, or recoverable as of, December 31; any obligations paid or expected to be paid with bonding proceeds or receipts from emergency assessments. (16) Ground-up Losses This term means all losses under the "Covered Policy" definition including losses which would otherwise be considered part of the Company's retention. (17) Insurer Group For purposes of the coverage option election in Section 215.555(4)(b), Florida Statutes, "Insurer Group" means the group designation assigned by the National Association of Insurance Commissioners (NAIC) for purposes of filing consolidated financial statements. An insurer is a member of a group as designated by the NAIC until such insurer is assigned another group designation or is no longer a member of a group recognized by the NAIC. (18) Joint Underwriting Association (JUA) This term means any entity created under Section 627.351, Florida Statutes, and which engages in the writing of Covered Policies. (19) Loss Occurrence This term means the sum of individual insured losses incurred under Covered Policies resulting from the same Covered Event. "Losses" means direct incurred losses under Covered Policies, excluding losses attributable to additional living expense and business interruption coverages and excluding Loss Adjustment Expenses. (20) Loss Adjustment Expense Reimbursement (a) Loss Adjustment Expense Reimbursement shall be 5% of the reimbursed losses under this Contract as provided in Article IV, pursuant to subsection (4)(b)1. of Section 215.555, Florida Statutes. (b) To the extent that loss reimbursements are limited to the payout multiple applied to each Company, the 5% Loss Adjustment Expense is included in the total payout multiple applied to each Company. The Loss Adjustment Expense Reimbursement will not be paid in addition to payments for other loss reimbursements. (21) Payout Multiple This term means the multiple derived by dividing the claims-paying capacity of the FHCF by the total industry Reimbursement Premium for the FHCF for the Contract Year billed as of 12/31 of the Contract Year. The multiple is finally determined once reimbursement premiums have been billed as of 12/31 and the amount of bond proceeds has been determined. (22) Premium This term means the same as Reimbursement Premium, which is the premium determined by multiplying each $1,000 of insured value reported by the Company in accordance with Section 215.555(5)(b), Florida Statutes, by the rate as derived from the Premium Formula. (23) Projected Payout Multiple The Projected Payout Multiple is used to calculate an insurer's projected payout pursuant to Section 215.555(4)(d)2.b., Florida Statutes. The Projected Payout Multiple is derived by dividing the estimated single season Claims-Paying Capacity of the FHCF by the estimated total industry Reimbursement Premium for the FHCF for the Contract year. The Company's Reimbursement Premium as paid to the SBA for the Contract Year is multiplied by the Projected Payout Multiple to estimate the Company's coverage from the FHCF for the Contract Year. The SBA will pay no reimbursement for any losses under this Contract unless the Company incurs losses from Covered Events for Covered Policies in excess of its FHCF retention. 6 (24) Retention The Company's Retention means the amount of hurricane loss incurred by an insurer below which an insurer is not entitled to reimbursement from the FHCF. An insurer is eligible for reimbursement only after its paid covered losses exceed the retention level established for that insurer. An insurer's retention level is established in accordance with the provisions of subsection (2)(e) of Section 215.555, Florida Statutes. The Company's Retention shall be determined by multiplying the Retention Multiple by the Company's Reimbursement Premium for the Contract Year. (25) Retention Multiple (a) The Retention Multiple is applied to the Company's Reimbursement Premium to determine the Company's Retention. The Retention Multiple for the Contract Year shall be equal to $3 billion, adjusted to reflect the percentage growth in FHCF exposure for covered policies since 1998, divided by the estimated total industry Reimbursement Premium at the 90% Reimbursement Percentage level for the Contract Year as determined by the SBA. (b) The Retention Multiple as determined under (25)(a) above shall be adjusted to reflect the Reimbursement Percentage elected by the Company under this Contract as follows: 1. If the Company elects a 90% Reimbursement Percentage, the adjusted Retention Multiple is 100% of the amount determined under (25)(a) above; 2. If the Company elects 75% Reimbursement Percentage, the adjusted Retention Multiple is 120% of the amount determined under (25)(a) above; or 3. If the Company elects a 45% Reimbursement Percentage, the adjusted Retention Multiple is 200% of the amount determined under (25)(a) above. (26) Ultimate Net Loss (a) The term means the Company's actual loss (excluding loss adjustment expense) arising from each Loss Occurrence during the Contract Year, provided, however, that the Company's loss shall be determined in accordance with the deductible levels reported to the FHCF for the exposure sustaining the loss. (b) Salvages and all other recoveries, excluding reinsurance recoveries, shall be first deducted from such loss to arrive at the amount of liability attaching hereunder. (c) All salvages, recoveries or payments recovered or received subsequent to a loss settlement under this Contract shall be applied as if recovered or received prior to the aforesaid settlement and all necessary adjustments shall be made by the parties hereto. (d) Nothing in this clause shall be construed to mean that losses under this Contract are not recoverable until the Company's Ultimate Loss has been ascertained. (e) The SBA shall be subrogated to the rights of the Company to the extent of its reimbursement of the Company. The Company agrees to assist and cooperate with the SBA in all respects as regards such subrogation. The Company further agrees to undertake such actions as may be necessary to enforce its rights of salvage and subrogation, and its rights, if any, against other insurers as respects any claim, loss, or payment arising out of a Covered Event. 7 ARTICLE VI - EXCLUSIONS This Contract does not provide reimbursement for: (1) All business not defined as being within the scope of this Contract. (2) Any reinsurance assumed by the Company. (3) Any liability assumed by the Company from Pools, Associations and Syndicates. Exception: Covered Policies assumed from the JUA and from the FWUA under the terms and conditions of an executed assumption agreement between the authorized insurer and either such association are covered by this Contract. (4) All liability of the Company arising by contract, operation or law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. "Insolvency Fund" includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part of all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. (5) Any liability of the Company for loss or damage caused by or resulting from nuclear reaction, nuclear radiation, or radioactive contamination from any cause, whether direct or indirect, proximate or remote, and regardless of any other cause or event contributing concurrently or in any other sequence to the loss. (6) Any liability of the Company for extra contractual obligations and excess of original policy limits liabilities. (7) Any policy meeting the definition contained in Section 624.6085, Florida Statutes, regarding collateral protection insurance. (8) Losses in excess of the sum of the funds which are available at 12/31 of the Contract Year and the amount the SBA is able to raise through the issuance of revenue bonds or by the use of other financial mechanisms, up to a limit of $11 billion, pursuant to Section 215.555(4)(c), Florida Statutes. (9) Any policy which excludes wind or hurricane coverage. (10) The FHCF provides coverage for losses caused by any one storm declared to be a hurricane by the National Hurricane Center which causes losses in the state which damages the primary structure, appurtenant structures, and/or contents, as provided in the definition of Covered Policy, and which causes an opening in a roof or wall through which the rain enters through this opening. The FHCF does not provide coverage for water damage which is generally excluded under property insurance contracts and has been defined to mean flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these whether or not driven by wind. (11) Any "excess policy" that contains coverage for non-habitational property or non-Florida property. ARTICLE VII - MANAGEMENT OF CLAIMS AND LOSSES The Company shall investigate and settle or defend all claims and losses. All payments of claims or losses by the Company within the terms and limits of the appropriate coverage parts of Covered Policies shall be binding on the SBA, subject to the terms of this Contract, including the provision in Article XIII relating to inspection of records and audits. ARTICLE VIII - PAYMENT ADJUSTMENT (1) Offsets Section 215.555(4)(d)1., Florida Statutes, provides the SBA with the right to offset amounts due and payable to the SBA from the Company against any reimbursement amounts due and payable to the Company from the SBA as a result of the liability of the SBA. 8 (2) Reimbursement Adjustments Section 215.555(4)(d)1., Florida Statutes, provides the SBA with the right to seek the return of excess loss reimbursements which have been paid to the Company. Excess loss reimbursement are those payments made to the Company by the SBA on the basis of incorrect exposure submissions or resubmissions, incorrect calculations of reimbursement premiums or retentions, incorrect proof of loss reports, incorrect calculation of reinsurance recoveries, or subsequent readjustment of policyholder claims, including subrogation and salvage, or any combination of the foregoing. Regarding incorrect reinsurance recoveries, please see also Article X(3)(b)4. ARTICLE IX - REIMBURSEMENT PREMIUM (1) The Company shall, in a timely manner, pay the SBA its Reimbursement Premium for the Contract Year. The annual Reimbursement Premium for the Contract Year shall be calculated in accordance with Section 215.555, Florida Statutes with any rules promulgated thereunder, and with Article X(2). (2) Since the calculation of the actuarially-indicated premium assumes that the Companies will pay their reimbursement premiums timely, interest charges will accrue under the following circumstances. If a Company chooses to estimate its own premium installments, then an interest charge will accrue on any premium which is underestimated. No interest will accrue regarding any provisional premium, if paid as billed by the FHCF's Administrator. However, if the premium payment is not received from a Company when it is due, an interest charge will accrue on a daily basis until the payment is received. An interest credit will be applied for any premium which is overpaid as either an estimate or as a provisional premium. Interest shall not be credited past December 1 of any contract year. The applicable interest rate for interest credits will be the projected average rate earned by the SBA for the FHCF for the first six months of the Contract Year. The applicable interest rate for interest charges will accrue at this rate plus 3%. ARTICLE X - REPORTS AND REMITTANCES (1) Exposures (a) If the Company writes Covered Policies on or before June 1 of the Contract Year, the Company shall report to the SBA, unless otherwise provided in Rule 19-8.029, F.A.C., no later than the statutorily required date of September 1 of the Contract Year, by zip code or other limited geographical area as specified by the SBA, its insured values under Covered Policies as of June 30 of the Contract Year, and other data or information in the format specified by the SBA. (b) If the Company first begins writing Covered Policies after June 1 but prior to December 1 of the Contract Year, the Company shall report to the SBA, no later than March 1 of the Contract Year, by zip code or other limited geographical area as specified by the SBA, its insured values under Covered Policies as of December 31 of the Contract Year, and other data or information in the format specified by the SBA. (c) If the Company first begins writing Covered Policies on or after December 1 but through and including May 31 of the Contract Year, the Company shall not report its exposure data for the Contract Year to the SBA. 9 (d) The requirements in (a) and (b), above, that reports are due on September 1 and March 1, as applicable, means that the report shall be in the physical possession of the FHCF's Administrator in Minneapolis no later than 5 p.m., Central Time, on September 1 or March 1, as applicable. If September 1 or March 1 is a Saturday, Sunday or legal holiday, and if September 1 or March 1's being a Saturday, Sunday or legal holiday means that neither the United States Postal Service nor private delivery services are operating that day, then the applicable due date will be the day immediately following September 1 or March 1, as applicable, which is not a Saturday, Sunday or legal holiday. For purposes of the timeliness of the submission, neither United States Postal Service postmark nor a postage meter date is in any way determinative. Reports sent to the SBA in Tallahassee, Florida, will be returned to the sender. Reports not in the physical possession of the FHCF's Administrator by 5 p.m., Central Time, on the applicable due date are late. (e) Confidentiality of exposure reports. Pursuant to the provisions of Section 215.557 Reports of insured values, the reports of insured values under covered policies by zip code submitted to the State Board of Administration pursuant to Section 215.555, as created by s. 1., ch. 93-409, Laws of Florida, or similar legislation, are confidential and exempt from the provisions of Section 119.07(1) and section 24(a), Art. I of the State Constitution. This exemption is subject to the Open Government Sunset Review Act in accordance with Section 119.04, Florida Statutes. (2) Reimbursement Premium (a) If the Company writes Covered Policies on or before June 1 of the Contract Year, the Company shall pay the FHCF its Reimbursement Premium in installments due on or before August 1, October 1 and December 1 of the Contract Year in amounts to be determined by the FHCF. However, if the Company's Reimbursement Premium for the prior Contract Year was less than $5,000, the Company's full provisional Reimbursement Premium, in an amount equal to the Reimbursement Premium paid in the prior year, shall be due in full on or before August 1 of the Contract Year. The Company will be invoiced for amounts due, if any, beyond the provisional Reimbursement Premium payment, on or before 12/1 of the Contract Year. (b) If the Company first begins writing Covered Policies after June 1 but prior to December 1 of the Contract Year, the Company shall pay the FHCF a provisional Reimbursement Premium of $1,000 upon execution of this Contract. The Administrator shall calculate the Company's actual reimbursement premium for the period after June 1 and through December 31 based on its actual exposure, as reported on March 1. To recognize that New Companies have limited exposure during this period, the actual premium as determined by processing the Company's exposure data shall then be divided in half, the provisional premium shall be credited, and the resulting amount shall be the total premium due for the Company for the remainder of the Contract Year. However, if that amount is less than $1,000.00, then the Company shall pay $1,000.00. The premium payment is due no later than May 1 of the Contract Year. The Company's Retention and Coverage will be determined based on the total premium due as calculated above. (c) If the Company first begins writing Covered Policies on or after December 1 but through and including May 31 of the Contract Year, the Company shall pay the FHCF a Reimbursement Premium of $1,000 upon execution of this Contract. The Company shall pay no other Reimbursement Premium for the Contract Year. (d) The requirement that the Reimbursement Premium is due on a certain date means that the Premium shall be in the physical possession of the FHCF no later than 5 p.m., Eastern Time, on the due date applicable to the particular installment. If remitted by check to the FHCF's Post Office Box, the check shall be physically in the Post Office Box 550261, Tampa, FL 10 33655-0261, as set out on the invoice sent to the Company. If remitted by check by hand delivery, the check shall be physically on the premises of the FHCF's bank in Tampa, Florida, as set out on the invoice sent to the Company. If remitted electronically, the wire transfer shall have been completed to the FHCF's account at its bank in Tampa, Florida. If the applicable due date is a Saturday, Sunday or legal holiday, and if the due date's being a Saturday, Sunday or legal holiday means that neither the United States Postal Service nor private delivery services are operating that day and if the due date's being a Saturday, Sunday or legal holiday means that electronic wire transfers cannot be completed, then the applicable due date will be the day immediately following the applicable due date which is not a Saturday, Sunday or legal holiday. For purposes of the timeliness of the remittance, neither the United States Postal Service postmark nor a postage meter date is in any way determinative. Premium checks sent to the SBA in Tallahassee, Florida, or to the FHCF's Administrator in Minneapolis, Minnesota, will be returned to the sender. Reimbursement Premiums not in the physical possession of the FHCF by 5 p.m., Easter Time, on the applicable due date are late. (3) Claims and Losses (a) In General 1. Claims and losses resulting from Loss Occurrences commencing during the Contract Year shall be reported by the Company and reimbursed by the FHCF as provided herein and in accordance with the Statute, with this Contract, and any rules adopted pursuant to the Statute. 2. Pursuant to Section 215.555(4)(c), Florida Statutes, the SBA is obligated to pay losses not to exceed the Actual Claims-paying Capacity of the FHCF, up to a limit of $11 billion for any one Contract Year. (b) Claims Reports 1. At the direction of the SBA, the Company shall report its ground-up losses for Covered Policies from each Covered Event to provide information to the SBA in determining any potential liability for possible reimbursable losses under the Contract on the Interim Loss Report, Form FHCF-L1A, as adopted in Rule 19-8.029, F.A.C. 2. No later than December 31 of the Contract Year, the Company shall report to the FHCF its Ultimate Net Loss with respect to each Loss Occurrence from the beginning of the Contract Year on the Proof of Loss Report, Form FHCF-L1B, as adopted in Rule 19-8.029, F.A.C. 3. Quarterly thereafter until all claims and losses resulting from Loss Occurrences commencing during the Contract Year are fully discharged, the Company shall render to the FHCF revised reports of the actual amount of Ultimate Net Loss incurred and paid to date by the Company with respect to each Loss Occurrence commencing during the contract Year. If the Company's retention must be recalculated as the result of an exposure resubmission and if the newly-recalculated retention changes the FHCF's reimbursement obligations, then the Company shall submit add itional reports of claims and losses for recalculation of the FHCF's obligations. 4. Such reports shall include the actual or anticipated reinsurance recoveries from non-affiliated insurers and/or reinsurers on the Company's Ultimate Net Loss, and a certification that such recoveries, together with the actual or anticipated reimbursement from the FHCF shall not exceed 100% of the Company's losses under Covered Policies from Covered Events. 11 5. The SBA will determine and pay, as soon as practicable after receiving Proof of Loss Reports described and adopted in Rule 19-8.029, F.A.C. the reimbursement amount due based on losses paid by the Company to date and adjustments to this amount based on subsequent quarterly information. The adjustments to reimbursement amounts shall require the SBA to pay, or the Company to return, amounts reflecting the most recent determination of losses. 6. Initial or quarterly reports received on or before the due date for that report will be reimbursed within 30 days following the due date or as soon as practicable after the receipt of the report and verification of the reported losses. Those received after the initial or quarterly reporting due date will be reimbursed within 30 days following the due date or as soon as practicable after the receipt of the report and verification of the reported losses. 7. If a Covered Event occurs during the Contract Year, but after 12/31, Companies shall report their losses as soon as practicable thereafter and the FHCF shall begin to reimburse Companies for paid losses as soon as the losses are reported and the FHCF has established the availability of the moneys to pay the reimbursements. The FHCF shall determine the schedule for reporting losses for Covered Events after 12/31 by taking into consideration the date or dates of the Covered Event's occurrence; its size; severity; windspeeds; forward track; occurrence of tornadoes or flooding as a result of the Covered Event; geographical area impacted; and ability of adjusters to assess the damage. 8. All loss reports received will be compared with the FHCF's exposure data to establish the facial reasonableness of the reports. Preliminarily, the FHCF will examine the reported losses to determine whether reported losses exceed reported exposure in the affected counties; whether the Company has reported a low concentration of exposure in the affected counties; and whether the ground-up loss as a percentage of exposure in affected counties is significantly higher than the average. Companies meeting these tests for reasonableness will be scheduled for reimbursement. Companies not meeting these tests for reasonableness will be handled on a case-by-case basis and will be contacted to provide specific information regarding their individual book of business. (c) Claims Reimbursement Calculations 1. In General. An insurer's covered paid losses must exceed its FHCF retention as determined in accordance with Section 215.555(2)(e), Florida Statutes, before any reimbursement is payable from the FHCF. If more than one Covered Event occurs in any one Contract Year, any reimbursements due from the FHCF shall take into account the separate retention requirement for each insurer for each Covered Event, as that term is defined in subsection (2)(b) of Section 215.555, Florida Statutes. 2. Exhaustion of claims-paying capacity. This section of Article X provides procedures for reimbursing insurers for losses from Covered Events in those situation in which the SBA determines, pursuant to Section 215.555(6)(a), Florida Statutes, and Rule 19-8.013, F.A.C., that reimbursable losses from a Covered Event are likely to exhaust the available claims-paying capacity of the FHCF. The "claims-paying capacity" is the total of the balance of the FHCF as of 12/31 of the Contract Year in which the Covered Event occurs plus the amount the SBA is able to raise, to 12 the extent allowed by law, through the issuance of bonds, by purchasing reinsurance or through the incurrence of other indebtedness, up to the statutory limit of $11 billion for any one Contract Year. In that situation, each insurer sustaining reimbursable losses will receive the amount of reimbursement due under the reimbursement contract up to the amount of the insurer's payout, based on the payout multiple, as calculated in accordance with subsections (4)(c) and (4)(d)2.b. of Section 215.555, Florida Statutes, and as defined in Article V(21) of this Contract. For purposes of the projected payout calculation, the "actual premium paid for that contract year," as referenced in subsection (4)(d)2.b. of Section 215.555, Florida Statutes, shall be the premium billed by the FHCF as of December 31 of the Contract Year. Thereafter, payments for additional reimbursable losses will be available only to entities created under Section 627.351, Florida Statutes, and will be based on a pro rata share of the outstanding losses to the extent of any funds available up to the $11 billion limitation. In order to determine the amount available for payment of reimbursable losses on a pro rata basis for entities created under Section 627.351, Florida Statutes, the SBA will review reported loss information from all insurers and determine that all insurers which received payments for reimbursable losses but which did not exceed their projected payout have settled all, or substantially all, of their claims eligible for reimbursement. The SBA will then determine the remaining amount of claims-paying capacity and will pay entities created under Section 627.351, Florida Statutes, on a pro rata basis, up to the $11 billion limitation. Reimbursements for all covered events occurring during the same Contract Year will be made in accordance with this section (3)(c)2. of Article X. 3. Exhaustion of cash, but not of claims-paying capacity. This section of Article X provides procedures for reimbursing insurers for losses from Covered Events in those situations in which the SBA determines, pursuant to Section 215.555(6)(a), Florida Statutes, and Rule 19-8.013, F.A.C., that reimbursable losses for Covered Events will exhaust the balance of the FHCF as of 12/31 of the Contract Year in which the Covered Event has occurred but will not exceed the amount the SBA is able to raise through the issuance of bonds, reinsurance purchased, or the incurrence of other indebtedness. In that situation, each insurer sustaining reimbursable losses will receive the among of reimbursement due under the Reimbursement Contract up to the amount of the insurer's projected payout, as calculated in accordance with subsections (4)(c) and (4)(d)2.b. of Section 215.555, Florida Statutes, and as defined in Article V(21) of this Contract. Thereafter, payments for additional reimbursable losses will continue to be made based on the loss reports required pursuant to this Contract from entities created under Section 627.351, Florida Statutes. 4. Losses payable from cash. This section of Article X provides procedures for reimbursing insurers for losses from Covered Events in those situations in which the SBA determines that the reimbursable losses will not exhaust the balance of the FHCF as of 12/31 of the contract year in which the Covered Event has occurred. In that situation, each insurer sustaining reimbursable losses will receive the amount of reimbursement due under the Reimbursement Contract. Thereafter, payments for additional reimbursable losses will continue to be made based on the loss reports required pursuant to this Contract from entities created under Section 627.351, Florida Statutes. 13 5. Reserve established. When a Covered Event occurs in a subsequent Contract Year when reimbursable losses are still being paid for a Covered Event in a previous Contract Year, the SBA will establish a reserve for the outstanding reimbursable losses for the previous Contract Year, based on the length of time the losses have been outstanding, the amount of losses already paid, the percentage of incurred losses still unpaid, and any other factors specific to the loss of development of the Covered Events involved. (4) Advances (a) The SBA may make advances to the Company prior to December 31 of the Contract Year in accordance with Section 215.555(4)(e), Florida Statutes. All interest assessed will commence on the date the SBA issues a check for an advance and will cease at midnight on the date upon which the FHCF has received the Company's loss reimbursement report for the storm for which the advance was issued qualifying the Company for reimbursement equal to or exceeding the amount(s) of the advance(s). If, upon audit, it is determined that the Company received funds in excess of those to which it was entitled, the interest as to those sums will not cease on the date of the receipt of the loss reimbursement report but will continue until the Company reimburses the FHCF for the overpayment. The following procedures in Article X(4) apply to the specific type of advances enumerated in the Statute. (b) Advances to insurers to prevent insolvency. 1. Pursuant to subsection (4)(e) of Section 215.555, Florida Statutes, the SBA may advance certain Companies certain percentages of the SBA's estimate of reimbursement due the Company. Section 215.555(4)(e)1., Florida Statutes, provides that if Companies demonstrate to the SBA that the immediate receipt of moneys from the SBA is likely to prevent the Company from becoming insolvent due to the occurrence of one or more Covered Events, the SBA shall advance, at market interest rates, up to 50 percent of the SBA's estimate of the reimbursement due to the Company from FHCF. A Company is insolvent if it is unable to pay its policyholders for justifiable claims. The "market interest rate" shall be the then current interest rate being earned on the FHCF's investments. 2. Companies shall request a specific amount for the advance and shall demonstrate that the immediate receipt of moneys from the SBA is likely to prevent the Company from becoming insolvent by providing the SBA with the following information, determined in accordance with statutory accounting principles, which are the rules and procedures governing insurer financial reporting for regulatory purposes: a. Current assets; b. Current liabilities other than liabilities due to the Covered Event; c. Current liabilities due to the Covered Event, paid and unpaid, submitted on the Proof of Loss Report, Form FHCF-L1B, as adopted in Rule 19-8.029, F.A.C.; d. Evidence of estimated-retention breached by payment of paid losses from the Covered Event; e. Current surplus as to policyholders; f. Estimate of expected liabilities due to the Covered Event; g. Estimate of other expected liabilities not due to the Covered Event; h. Estimate of reinsurance immediately available to pay claims for the Covered Event under other reinsurance treaties; i. Estimated amount of payout from the FHCF, determined in accordance with Section 215.555(4)(b), Florida Statutes. This estimate is necessarily predicated on the Company's premium which in turn is predicated on its exposure. Therefore, if the Covered Event occurs in June, July, or August, the Company shall provide its exposure data prior to September 1 in order that the appropriate calculations may be made. 14 3. Companies seeking advances pursuant to Section 215.555(4)(e)1., Florida Statutes, shall also describe any steps they have taken to pay claims, including liquidation of assets, and may also supply such other information as they deem necessary and appropriate to aid the SBA in reaching a determination regarding whether or not to grant an advance. 4. The information outlined above shall be supplied in the form of a letter, signed by two executive officers of the insurer, with the supporting information attached. 5. In determining whether or not to grant an advance pursuant to subsection (4)(e) of Section 215.555, Florida Statutes, the SBA shall take the following steps: a. The SBA shall carefully review and consider all the information submitted by such Companies; b. The SBA shall consult with all relevant regulatory agencies seeking all relevant information about the Company's financial and solvency condition; c. The SBA shall carefully review its currently available liquid assets; and d. The SBA shall review the damage caused by the Covered Event and when that Covered Event occurred. 6. The SBA's final decision regarding an application for an advance under Section 215.555(4)(e)1., Florida Statutes, shall be based on whether or not, considering the totality of the circumstances, including the SBA's obligations to provide reimbursement for all Covered Events occurring during the Contract Year, granting an advance will prevent the insolvency of the applicant Company so that the Company is able, not only to pay its policyholders' claims arising from the Covered Event, but also to maintain its existence as a viable source of residential property insurance coverage to the people of this state. A majority vote of the Trustees in favor is required before an advance can be granted. 7. If an advance is granted, the "market interest rate" shall be determined with reference to the then current interest rate earned on the FHCF's investments on the date the Trustees' vote is taken. Pursuant to Section 215.555(4)(e)1., Florida Statutes, the amount of the advance shall not exceed 50 percent of the SBA's estimate of the reimbursement due the Company. The Company's final reimbursement shall be reduced by an amount equal to the amount of the advance and the interest thereon. 8. Any amount advanced by the SBA shall be used by the Company only to pay claims of its policyholders for the Covered Event or Covered Events which have precipitated the immediate need to continue to pay additional claims as they become due. The advance is a reimbursement which allows the Company to continue to pay claims in a timely manner. (c) Advances to entities created pursuant to Section 627.351, Florida Statutes. 1. Section 215.555(4)(e)2., Florida Statutes, provides that entities created under Section 627.351, Florida Statutes, may receive an advance at market interest rates of up to 90% of the lesser of the SBA's estimate of reimbursement for losses due to such entity or the entity's share of Reimbursement Premium for that Contract Year multiplied by the currently available liquid assets of the FHCF. The purpose of the advance under that subsection is to allow the entity to continue to pay additional claims from a Covered Event in a timely manner. The "market interest rate" shall be the then current interest rate earned on the FHCF's investments. 15 2. The entity shall request a specific amount for the advance and shall demonstrate that an advance is essential to allow the entity to continue to pay claims for a Covered Event in a timely manner once currently available liquid assets have been exhausted by providing the SBA with the following information, determined in accordance with the statutory accounting principles, which are the rules and procedures governing insurer financial reporting for regulatory purposes: a. Current assets; b. Current liabilities other than liabilities due to the Covered Event; c. Current liabilities due to the Covered Event, paid and unpaid, submitted on the Proof of Loss Report, Form FHCF-L1B, as adopted in Rule 19-8.029, F.A.C.; d. Evidence that the estimated retention will be breached by payment of covered losses from the Covered Event; e. Current surplus as to policyholders; f. Estimate of expected liabilities due to the Covered Event; g. Estimate of other expected liabilities not due to the Covered Event; h. Estimate of reinsurance available to pay claims for the Covered Event; i. Estimated amount of payout from the FHCF, determined in accordance with subsection (4)(b) of Section 215.555, Florida Statutes. This estimate is necessarily predicated on the entity's Premium which in turn is predicated on its exposure. Therefore, if the Covered Event occurs in June, July, or August, the entity shall provide its exposure data prior to September 1 in order that the appropriate calculations may be made. 3. Entities seeking advances pursuant to subsection (4)(e)2. of Section 215.555, Florida Statutes, shall describe any steps they have taken to pay claims, including liquidation of assets, and may also supply such other information as they deem necessary and appropriate to aid the SBA in reaching a determination regarding whether or not to grant an advance. 4. The information outlined above shall be supplied in the form of a letter, signed by two executive officers of the entity, with the supporting information attached. 5. In determining whether or not to grant an advance pursuant to subsection (4)(e) of Section 215.555, Florida Statutes, the SBA shall take the following steps: a. The SBA shall carefully review and consider all the information submitted by such entities; b. The SBA shall consult with all relevant regulatory agencies seeking all relevant information about the entity's financial and solvency condition; c. The SBA shall carefully review its currently available liquid assets; and d. The SBA shall review the damage caused by the Covered Event and when that Covered Event occurred during the Contract Year. 6. The SBA's final decision regarding an application for an advance shall be based on whether or not, considering the totality of the circumstances, including the SBA's obligations to provide reimbursement for all Covered Events occurring during the Contract Year, granting an advance is essential to allowing the entity to continue to pay additional claims for a Covered Event in a timely manner once currently available liquid assets have been exhausted. A majority vote of the Trustees in favor is required before an advance can be granted. 16 7. If an advance is granted, the "market interest rate" shall be determined with reference to the then current interest rate earned on the FHCF's investments on the date the Trustees' vote is taken. Pursuant to Section 215.555(4)(e)2., Florida Statutes, the amount of the advance shall not exceed the lesser of 90% of the SBA's estimate of the reimbursement for reimbursable losses due to such entity or the entity's share of the actual Reimbursement Premium paid for that Contract Year multiplied by the currently available liquid assets of the FHCF. The Company's final reimbursement shall be reduced by an amount equal to the amount of the advance and the interest thereon. 8. Any amount advanced by the SBA shall be used by the entity only to pay claims of its policyholders for the Covered Event or Covered Events which have precipitated the need to continue to pay additional claims as they become due. The advance is a reimbursement which allows the entity to continue to pay claims in a timely manner. (d) Advances to limited apportionment companies. 1. Subsection (4)(e)3. of Section 215.555, Florida Statutes, provides that any limited apportionment company qualified under Section 627.351(2)(b)3., Florida Statutes, may receive an advance of the amount of the estimated reimbursement payable to such Company as calculated pursuant to subsection (4)(d) of Section 215.555, Florida Statutes, at market rates, if the SBA determines that the FHCF's assets are sufficient and are sufficiently liquid to permit the SBA to make an advance to such Company and at the same time fulfill its reimbursement obligations to the FHCF's other participating insurers. 2. Limited apportionment companies seeking an advance pursuant to subsection (4)(e)3. of Section 215.555, Florida Statutes, shall request a specific amount for the advance and provide the SBA with the following information, determined in accordance with statutory accounting principles, which are the rules and procedures governing insurer financial reporting for regulatory purposes: a. Current assets; b. Current liabilities other than liabilities due to the Covered Event; c. Current liabilities due to the Covered Event, paid and unpaid, submitted on the Proof of Loss Report, Form FHCF-L1B, adopted in Rule 19-8.029, F.A.C.; d. Evidence of estimated retention breached by payment of paid losses from the Covered Event; e. Current surplus as to policyholders; f. Estimate of expected liabilities due to the Covered Event; g. Estimate of other expected liabilities not due to the Covered Event; h. Amount of reinsurance available to pay claims for the Covered Event; 17 i. Estimated amount of payout from the FHCF, determined in accordance with Section 215.555(4)(b), Florida Statutes. This estimate is necessarily predicated on the Company's Premium which in turn is predicated on its exposure. Therefore, if the Covered Event occurs in June, July, or August, the Company shall provide its exposure data prior to September 1 in order that the appropriate calculations may be made. 3. Limited apportionment companies may also supply such other information as they deem necessary and appropriate to aid the SBA in reaching a determination regarding whether or not to grant an advance pursuant to Section 215.555(4)(e), Florida Statutes. 4. The information outlined above shall be supplied in the form of a letter, signed by two executive officers of the Company, with the supporting information attached. 5. In determining whether or not to grant an advance pursuant to subsection (4)(e) of Section 215.555, Florida Statutes, the SBA shall take the following steps: a. The SBA shall carefully review and consider all the information submitted by such companies; b. The SBA shall consult with all relevant regulatory agencies seeking all relevant information about the Company's financial and solvency condition; c. The SBA shall carefully review its currently available liquid assets; and d. The SBA shall review the damage caused by the Covered Event and when that Covered Event occurred during the Contract Year. 6. The SBA's final decision regarding an application for an advance under Section 215.555(4)(e)3., Florida Statutes, shall be based on whether or not, considering the totality of the circumstances, the FHCF's assets are sufficient and sufficiently liquid to permit the SBA to make an advance to the limited apportionment company and at the same time fulfill its reimbursement obligations to the FHCF's other participating insurers. A majority vote of the Trustees in favor is required before an advance can be granted. 7. If an advance is granted, the "market interest rate" shall be determined with reference to the then current interest rate earned on the FHCF's investments on the date the Trustees' vote is taken. Pursuant to Section 215.555(4)(e)3., Florida Statutes, the amount of the advance shall not exceed the SBA's estimate of the reimbursement due the Company calculated in accordance with subsection (4)(d) of Section 215.555, Florida Statutes. The Company's final reimbursement shall be reduced by an amount equal to the amount of the advance and the interest thereon. 8. Any amount advanced by the SBA shall be used by the Company only to pay claims of its policyholders for the Covered Event or Covered Events which have precipitated either the need to continue to pay additional claims as they become due. The advance is a reimbursement which allows the Company to continue to pay claims in a timely manner. (5) Delinquent Payments Failure to submit a Reimbursement Premium or Reimbursement Premium installment when due is a violation of the terms of this Contract and Section 215.555, Florida Statutes. Interest on late payment shall be due as set forth in Article IX(2) of this Contract. In addition, the SBA will refer any Company failing to submit such payments to the DOI for administrative action or will take other action as appropriate pursuant to Sections 215.555(10) and (11), Florida Statutes. (6) Inadequate Data Submissions If exposure data or other information required to be reported by the Company under the terms of this Contract is not received by the FHCF in the format specified by the FHCF and is inadequate to the extent that the FHCF requires resubmission of data, the Company will be required to pay the FHCF a resubmission fee of $1,000. The $1,000 fee is also applicable to exposure resubmissions made as a result of audits of the Company's exposure and of audits of the Company's claims data. 18 (7) Delinquent Submissions Failure to submit an exposure submission or an exposure resubmission when due is a violation of the terms of this Contract and of the Statute. The SBA will refer any Company failing to submit such submissions or resubmissions to the DOI for administrative action or will take other action as appropriate pursuant to subsections (10) and (11) of Section 215.555, Florida Statutes. ARTICLE XI - TAXES In consideration of the terms under which this Contract is issued, the Company agrees to make no deduction in respect of the Premium herein when making premium tax returns to the appropriate authorities. Should any taxes be levied on the Company in respect of the Premium herein, the Company agrees to make no claim upon the SBA for reimbursement in respect of such taxes. ARTICLE XII - ERRORS AND OMISSIONS An inadvertent delay, omission or error on the part of the SBA shall not be held to relieve the Company from any liability which would attach to it hereunder if such delay, omission or error had not been made. ARTICLE XIII - INSPECTION OF RECORDS The Company shall allow the SBA to inspect, examine, and audit, at reasonable times, all records of the Company relating to the Covered Policies under this Contract, including Company files concerning claims, losses, or legal proceedings regarding subrogation or claims recoveries which involve this Contract, including premium, loss records and reports involving exposure data on Covered Policies and applicable ceded reinsurance contracts. All discovered errors, inadvertent omissions, and typographical errors associated with the data reporting of insured values shall be corrected to reflect the proper values. This right shall survive the termination of this Contract. The Company shall retain its records in accordance with the requirements for records retention regarding exposure reports and claims reports in Article X of this Contract, and in any administrative rules adopted pursuant to Section 215.555, Florida Statutes. (1) Auditing Requirements for Exposure Audits The Company shall retain complete and accurate records, in policy level detail, of all exposure data submitted to the SBA in any Contract Year until the SBA has completed its audit of the Company's exposure submissions. The Company shall also retain complete and accurate records of any Contract Year in which the Company incurred losses until the completion of the loss reimbursement audit for that year. The records to be retained shall include computer runs of the files used to support the exposure reported to the SBA. The files shall include sufficient detail to support the exposure reported to the SBA. All computer runs must contain the policy number, policy effective date, policy expiration date, type of business, line of business, construction type, deductible group, zip code, county code, total number of insured risks, total insured value - building, total insured value - appurtenant structures, total insured value - contents, composite windstorm mitigation credit code, BCEG code, and any other information which would allow for a complete audit of the Company's reported exposure data or information which is specifically requested in the data call for that Contract Year. The Company must also have available, at the time of the audit, a copy of its underwriting manual, a copy of its rating manual, a copy of its most recent Certificate of Authority as issued by the Florida DOI, and a 19 copy of its Renewal Notice, indicating the lines of business the Company is authorized to write in Florida. The Company is also required to retain declarations pages and policy applications to support reported exposure. To meet the requirement that the application must be retained, an insurer may retain either the actual application or may retain, in electronic format, all the information from the actual application. (2) Auditing Requirements for Claims Reports All insurers reporting losses and/or receiving reimbursements or advances from the SBA for paid losses from Covered Events are subject to audit by the SBA or its agents pursuant to this Article XIII for the Contract Year during which the Covered Event occurs for which losses are reported and/or reimbursements are made by the SBA. Therefore, the Company shall retain complete and accurate records of all losses paid by the SBA until the SBA has completed its audit of the Company's reimbursable losses, whichever is later. The records to be retained are set forth as part of the Proof of Loss Report, Form L1B and as part of the Reinsurance Recovery Worksheet, Form FHCF-L1C, adopted in Rule 19-8.029, F.A.C., and are also set out immediately below. (a) All records, including the Proof of Loss Report, Form FHCF-L1B, correspondence, and supporting documentation, must be available with computer runs produced containing the following information: 1. Detail claims listing which supports the losses reported on the Proof of Loss Report, Form FHCF-L1B, including: claim number; date of loss; policy number; policy effective date; paid loss - habitational building, appurtenant structure, and contents; outstanding loss reserve - habitational building, appurtenant structure, and contents; and salvage received, if any. 2. Hard copy claim files which include documentation of the following: claim number; claim description; policy number and location of property; evidence of salvage received; amount of loss adjustment expense; and copies of checks for payment of losses. 3. Detail exposure listing which was retained at the time the exposure data was submitted to the FHCF for the Contract Year the loss occurred. (b) In addition, all records relating to the Reinsurance Recovery Worksheet, Form FHCF-L1C, as adopted in Rule 19-8.029, F.A.C., must be available with the supporting information listed below: 1. For reinsurance recoveries in which FHCF recoveries inure to the benefit of the private reinsurer, provide the reinsurance agreement(s). 2. For reinsurance recoveries in which FHCF recoveries do not inure to the benefit of the private reinsurer, provide the following: a. Summary of reinsurance in effect at the date of loss. Include subject per risk and aggregate agreements. b. For proportional per risk reinsurance include percentage ceded, placement percentage, and treaty limits. c. For non-proportional per risk reinsurance include attachment point, limit, percentage placed, and treaty limits. d. For proportional aggregate reinsurance include attachment point, percentage ceded, placement percentage, and treaty limit. e. For non-proportional aggregate reinsurance include attachment point, limit, and treaty limit. f. For facultative reinsurance, provide summary of coverage placed. 20 3. Provide treaties or placement slips for the subject reinsurance agreements for all layers. 4. In no per risk, facultative, or aggregate reinsurance was in place at the time of the subject event, provide written confirmation. 5. Documentation supporting total paid loss for all lines, all states which reconciles to amounts reported on the Reinsurance Recovery Worksheet, FHCF-Form L1C, Section III A. Include summary of direct paid loss listing for loss portion only. Do not include loss adjustment expenses. 6. Documentation supporting total incurred loss for all lines, all states that reconciles to amounts reported on the Reinsurance Recovery Worksheet, FHCF-Form L1C, Section III A. Include summary of direct incurred loss listing for loss portion only. Do not include loss adjustment expenses. 7. Documentation supporting total paid reinsurance recovery that reconciles to amounts reported on the Reinsurance Recovery Worksheet, FHCF-form L1C, Section III E. Include reinsurance statements, notice of loss statements to reinsurer, or loss bordereau. 8. Documentation supporting total incurred reinsurance recoverable that reconciles to amounts reported on the Reinsurance Recovery Worksheet, FHCF-Form L1C, Section III E. Include reinsurance statements, notice of loss statements to reinsurer, or loss bordereau. a. The Company must retain the required exposure audit file for the Contract Year in which the loss occurred. b. The Company must also have available any other information not set out above which is specific to its claims payment procedures and without which a complete and accurate audit would not be possible. (3) Audit Procedures (a) The FHCF will send an audit notice to the participating insurer providing the commencement date of the audit, the site of the audit, any accommodation requirements of the auditor, and the reports and data which must be assembled by the participating insurer and forwarded to the FHCF upon request. (b) The reports and data forwarded to the FHCF upon request are reviewed internally and forwarded to the auditor. If the FHCF receives accurate and complete records as requested, the auditor will contact the participating insurer to inform the insurer as to what policies or other documentation will be required once the auditor is on site. Any records not provided to the auditor in advance shall be made available at the time the auditor arrives on site. (c) At the conclusion of the auditor's audit and the management review of the auditor's report, findings, recommendations, and work papers, the FHCF will forward a preliminary draft of the audit report to the participating insurer and require a response from the participating insurer by a date certain as to the audit's findings and recommendations. (d) If the participating insurer accepts the audit's findings and recommendations, and there is no recommendation for resubmission of the participating insurer's exposure data, the audit report will be finalized and the audit file closed. (e) If the Company disputes the audit's findings, the areas in dispute will be resolved by a meeting or a conference call between the participating insurer and FHCF management. (f) 1. If the recommendation of the audit is to resubmit the insurer's exposure data for the Contract Year in question, then the FHCF will send the participating insurer a letter outlining the process for resubmission and including a deadline for the resubmission to be received by the FHCF's Administrator. Once the resubmission is received by the FHCF's Administrator, the FHCF's Administrator calculates a 21 revised reimbursement premium for the Contract Year which has been audited and the FHCF determines whether to send an invoice to the participating insurer or to refund the reimbursement premium, as the case may be. Once the resubmission has been approved, the audit report will be finalized and the audit file closed. 2. If the recommendation of the audit is either to resubmit the insurer's exposure data for the Contract Year in question or giving the option to pay the estimated premium difference, then the FHCF will send the participating insurer a letter outlining the process for resubmission or for paying the estimated premium difference and including a deadline for the resubmission or the payment to be received by the FHCF's Administrator. If the Company chooses to resubmit, the resubmission is received by the FHCF's Administrator who calculates a revised reimbursement premium for the contract year which has been audited and the FHCF determines whether to send an invoice to the participating insurer or to refund the reimbursement premium, as the case may be. Once the resubmission has been approved or the payment of the estimated premium difference received, the audit report will be finalized and the audit file closed. (g) If the Company continues to dispute the audit's findings and/or recommendations and no resolution of the disputed matters is obtained through discussions between the insurer and FHCF management, then the process within the SBA is at an end and further administrative remedies may be obtained under Chapter 120, Florida Statutes. (h) The auditor's list of errors is made available to the Company. Given that the audit was based on a sample of the Company's policies rather than the whole universe of the Company's Covered Policy exposure, the error list is not intended to provide a complete list of errors but is intended to indicate what Covered Policy information needs to be reviewed and corrected throughout the Company's book of Covered Policy business to ensure more complete and accurate reporting in the resubmission if required and for any future submissions. (4) Costs of the Audits The costs of the audits shall be borne by the SBA. However, in order to remove any incentive for a Company to delay preparations for an audit, the SBA shall be reimbursed by the Company for any audit expenses incurred in addition to the usual and customary costs of the audits, which additional expenses were incurred as a result of the Company's failure, despite proper notice, to be prepared for the audit or as a result of a Company's failure to provide requested information for the audit. All requested information must be complete and accurate. The Company shall be notified of any administrative remedies which may be obtained under Chapter 120, Florida Statutes. ARTICLE XIV - INSOLVENCY OF THE COMPANY In the event of the insolvency of the Company, the SBA shall pay directly to the Florida Insurance Guaranty Association for the benefit of Florida policyholders of the Company the net amount of all reimbursement moneys owed to the Company. As used in this Article, the "net amount of all reimbursement moneys" means that amount which remains after reimbursement for (1) preliminary or duplicate payments owed to private reinsurers or other inuring reinsurance payments to private reinsurers that satisfy statutory or contractual obligations of the insolvent Company attributable to Covered Events to such reinsurers; or (2) funds owed to a bank or other financial institution to cover obligations of the insolvent insurer under a credit agreement that assists the insolvent insurer in 22 paying claims attributable to Covered Events. Such private reinsurers or banks or other financial institutions shall be reimbursed or otherwise paid prior to payment to the Florida Insurance Guaranty Association, notwithstanding any law to the contrary. The Florida Insurance Guaranty Association shall pay all claims up to the maximum amount permitted by Chapter 631, Laws of Florida; thereafter, any remaining moneys shall be paid pro rata to claims not fully satisfied. This Article does not apply to a joint underwriting association, a risk apportionment plan, or any other entity created under Section 627.351, Florida Statutes. ARTICLE XV - TERMINATION The FHCF and the obligations of both parties under this Contract can be terminated only as may be provided by law or applicable rules. ARTICLE XVI - VIOLATIONS Pursuant to the provisions of Section 215.555(10), Florida Statutes, any violation of the terms of this Contact by the Company constitutes a violation of the Insurance Code of the State of the Florida. Pursuant to the provisions of Section 215.555(11), Florida Statutes, the SBA is authorized to take any action necessary to enforce any administrative rules adopted pursuant to Section 215.555, Florida Statutes, and the provisions and requirements of this Contract. ARTICLE XVII - APPLICABLE LAW (1) Applicable Law: This Contract shall be governed by and construed according to the laws of the State of Florida in respect of any matter relating to or arising out of this Contract. (2) Notice of Rights: Pursuant to Chapter 120, Florida Statutes, and the Uniform Rules of Procedure, codified as Chapters 28-101 through 28-110, FAC, a person whose substantial interests are affected by a decision of the SBA regarding the FHCF may request a hearing with the SBA by filing a petition within 21 days of receipt of the written notice of the decision. Any person who fails to file a petition within 21 days shall have waived his right to a hearing. The hearing may be a formal hearing or an informal hearing pursuant to the provisions of Sections 120.569 and 120.57, Florida Statutes. The petition must be filed (received) in the office of Dr. Jack Nicholson, Chief Operating Officer, Florida Hurricane Catastrophe Fund, State Board of Administration, P.O. Box 13300, Tallahassee, FL 32317-3300 within the 21 day period. All petitions shall contain: (a) The name, address, and telephone number of the petitioner or petitioners. (b) An explanation of how each petition's substantial interests will be affected by the SBA's decision; (c) A statement of when and how the petitioner received notice of the decision; (d) A statement of all disputed issues of material fact. If there are none, the petition must so indicate. (e) A concise statement of the facts which the petitioner believes entitle the petitioner to the relief sought as well as the statutes and rules which support the petitioner's claim for relief; (f) A statement of the relief sought, stating precisely the action the petitioner wants the SBA to take; (g) Any other information which the petitioner contends is material. Upon receipt of a petition, the SBA shall review the petition for compliance with the SBA's requirements and timeliness. The petition will be denied for lack of compliance and for failure to timely file. If the SBA elects to request that an administrative law judge of the Division of Administrative hearings be assigned to conduct the hearing, the SBA will forward the petition and all materials filed with the SBA to the division and shall notify the petitioner or petitioners of its action. Once This decision becomes final, the petitioner's rights to appeal will be governed by Section 120.68, Florida Statutes. 23 Approved by: Florida Hurricane Catastrophe Fund By. State Board of Administration By: /s/ Linda Lettera 10/19/01 ----------------------------------------- ---------------------------- Tom Herndon Date Approved as to legality: /s/ Thomas A. Beenck for 10/19/01 - ------------------------------------------- ---------------------------- Horace Schow II Date General Counsel FL Bar ID#0251471 Federated National Insurance Company Company By:/s/ Richard A. Widdicombe, President 05/24/01 ----------------------------------------- ---------------------------- Name/Title Date Schedule A to the REIMBURSEMENT CONTRACT Effective: June 1, 2001 ("Agreement") between FEDERATED NATIONAL INSURANCE COMPANY Ft. Lauderdale, FL (the "Company") and THE STATE BOARD OF ADMINISTRATION OF THE STATE OF FLORIDA ("SBA") WHICH ADMINISTERS THE FLORIDA HURRICANE CATASTROPHE FUND ("FHCF") Contract Year This Schedule A shall be applicable for the Contract Year beginning 12:01 a.m., Eastern Daylight Time, June 1, 2001, to 12:01 a.m., Eastern Daylight Time, June 1, 2002. Reimbursement Percentage For purposes of determining reimbursement (if any) due the Company under this Contract and in accordance with the Statute, the Company has the option to elect a 45% or 75% or 90% Reimbursement Percentage under this Contract. The Reimbursement Percentage elected by the Company for the Contract Year beginning 12:01 a.m., Eastern Daylight Time, June 1, 2000, to 12:01 a.m., Easter Daylight Time, June 1, 2001, was as follows: 90% The Company hereby elects the following Reimbursement Percentage for the Contract Year beginning 12:01 a.m., Easter Daylight Time, June 1, 2001, to 12:01 a.m., Eastern Daylight Time, June 1, 2002, (the individual executing this Contract on behalf of the Company shall place his or her initials in the box to the left of the percentage elected for the Company): [ ] 45% OR [ ] 75% OR [X] 90% Note that the choice indicated immediately above is for the 2001-2002 Contract Year. If the Company is a member of a group, all members of the group must elect the same Reimbursement Percentage. If the Company is a member of a group, the individual executing this Contract on behalf of the Company, by placing his or her initials in the box below, affirms that the Company has elected the same Reimbursement Percentage as all members of the group: [ RW ] The Company shall not be permitted to change its Reimbursement Percentage during the Contract Year. The Company shall, however, be permitted to change its Reimbursement Percentage election at the beginning of a new Contract Year, except that: (1) The Company shall not be permitted to reduce its Reimbursement Percentage if a Covered Event required the issuance of revenue bonds, until the bonds have been fully repaid; (2) If the Company is a member of a group, all members of the group must continue to elect the same Reimbursement Percentage; (3) If the Company is a joint underwriting association or an assigned risk plan under Section 627.351, Florida Statutes, the Company must elect the 90% Reimbursement Percentage. EX-10.19 10 ex10-19.txt TREATY #1- 9870-00-001-01/01 EXHIBIT 10.19 Treaty Number: 9870-00-0001-01/01 COVER NOTE ---------- REINSURED: FEDERATED NATIONAL INSURANCE COMPANY Plantation, Florida (hereinafter referred to as the "Company") PERIOD: Effective 12:01 a.m., Eastern Standard Time, July 1, 2001 to 12:01 a.m., Eastern Standard Time, July 1, 2002, as respects all losses occurring (or beginning) during the term of this Contract. TYPE: FIRST PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT CLASS: Inforce, new and renewal business classified by the Company as Property, including Homeowners and Mobilehome. EXCLUSIONS: As per attached. TERRITORY: To follow the Company's original policies. LIMIT: 100% of $2,500,000 each and every loss occurrence excess of $3,000,000 each and every loss occurrence. The Company shall retain a minimum of 5% net. PREMIUM: Rate: 6.9444% Gross Net Earned Premium Income. Deposit Premium: $625,000 annually, payable in equal quarterly installments of $156,250, at each July 1, October 1, January 1, and April 1. Minimum Premium: $500,000 REINSTATEMENT: One full reinstatement with additional premium calculated pro rata as to amount and 100% as to time. CONDITIONS: Ultimate Net Loss Clause (including Loss Adjustment Expenses). Definition of Loss Occurrence Clause- BRMA 27D. No Reinstatement for same event. 72 hours Wind, Hail, Riot. 168 hours Earthquake, Freeze and all other perils. 1 Treaty Number 9870-00-0001-01/01 CONDITIONS: Extra Contractual Obligations Clause @ 80%. (Continued) Losses in Excess of Original Policy Limits Clause @ 80%. Net Retained Lines Clause - BRMA 32D. Currency Clause. Loss Funding Clause - BRMA 55I. Offset Clause. Taxes Clause and Federal Excise Tax Clause - BRMA 50A and BRMA 17B. Errors and Omissions Clause. Access to Records Clause. Notice of Loss and Loss Settlements Clause. Service of Suit Clause. Insolvency Clause. Arbitration Clause - BRMA 6D. Interest Penalty Clause - BRMA 70H. Guy Carpenter & Company, Inc. Intermediary Clause. WORDING: To follow existing wording as far as applicable. INFORMATION: Any recoveries from the Florida Hurricane Catastrophe Fund will inure to the benefit of Reinsurers hereon. Estimated Subject Earned Premium = $9,000,000. 2 Treaty Number 9870-00-0001-01/01
EFFECTED WITH: - -------------- FEIN NO.: NAIC NO.: Through Guy Carpenter & Co. - Atlanta - --------- --------- ------------------------------------- 13-3031176 38636 Partner Reinsurance Corporation of the U.S. 30.000% New York, New York Patriot Re Corporation Skillman, New Jersey For and on behalf of: Various Lloyd's Syndicates 4.000% (Per Schedule B Attached) London, England St. Paul Re, Inc. Schaumberg, Illinois For and on behalf of: 41-0406690 24767 St. Paul Fire and Marine Insurance Company 10.000% St. Paul, Minnesota 6-1206728 29807 PX RE Reinsurance Company Edison, New Jersey 20.000% ------- Sub-Total: 64,000% FEIN NO.: NAIC NO.: Through Heath Lambert Limited - London - --------- --------- -------------------------------------- AA-1122000 Underwriting Members of Lloyd's 25.000% (Per Schedule A Attached) London, England Sub Total: 25.000% ------- TOTAL PLACEMENT 89.000%
3 Treaty Number 9870-00-0001-01/01 GUY CARPENTER & COMPANY, INC. /s/ Hartwell C. Dew --------------------------- Hartwell C. Dew Managing Director /s/ Robert A. McKenzie, Jr. --------------------------- Robert A. McKenzie, Jr. Vice President This Cover Note confirms the terms and conditions of the reinsurance negotiated with the listed reinsurers on your behalf. In the event that any of these details do not meet with your approval, or the security of the participating reinsurers does not meet with your requirements, please notify this office immediately. If all is in order, please sign and return one copy of this Cover Note to confirm your approval and complete our files. REGULATION 98: Premium and loss payments made to Guy Carpenter & Company, Inc. shall be deposited in a Premium and Loss Account in accordance with Section 32.3(a)(1) of Regulation 98 of the New York Insurance Department. The parties hereto consent to withdrawals from said account in accordance with Section 32.3(a)(3) of the Regulation, including interest and Federal Excise Tax. ACCEPTED & APPROVED /s/ Richard A. Widdicombe DATE June 29, 2001 ------------------------------- ----------------- 4 Treaty Number 9870-00-0001-01/01 EXCLUSIONS: - ----------- 1. Reinsurance assumed by the Company, other than inter-company reinsurance. 2. Hail damage to growing or standing crops. 3. Flood Insurance when written and classified as such. 4. Mortgage Impairment and Difference in Conditions when written as such. 5. Title Insurance and all forms of Financial Guarantee, Credit and Insolvency Insurance. 6. Aviation, Ocean Marine, Boiler and Machinery, Fidelity and Surety, Accident and Health, Animal Mortality and Workers' Compensation and Employer's Liability Insurance. 7. Errors and Omissions, Malpractice and any other type of Professional Liability Insurance. 8. Seepage and Pollution and Seepage Exclusion Clause, BRMA 39A. 9. War as set forth in North America War Exclusion Clause (Reinsurance), BRMA 56A. 10. Nuclear Incident as set forth in the Nuclear Incident Exclusion Clauses, BRMA 35A and 35B. 11. Pools, Associations and Syndicates as set forth in the Pools and Associations and Syndicates Exclusion Clause, BRMA 40C. 12. Insolvency Funds as set forth in the Insolvency Funds Exclusion Clause, BRMA 20A. 13. Transmission and distribution lines. Treaty Number 9870-00-0001-01/01 SCHEDULE A PARTICIPATIONS FOR UNDERWRITING MEMBERS OF LLOYD'S PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE AGREEMENT EFFECTIVE: JULY 1, 2001 Syndicate Number Pseudonym Share NAIC ID Number - ---------------- --------- ----- -------------- 2001 AML 15.000% AA-1128001 2791 MAP 10.000% AA-1128791 ------ Total Participation for Underwriting Members of Lloyd's 25.000% 6 Treaty Number 9870-00-0001-01/01 SCHEDULE B PARTICIPATIONS FOR UNDERWRITING MEMBERS OF LLOYD'S THROUGH PATRIOT RE CORPORATION PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE AGREEMENT Syndicate Number Pseudonym Share NAIC ID Number - ---------------- --------- ----- -------------- 0002 WHS 6.560% AA-1126002 0227 ROS 39.340% AA-1126227 0506 PDA 3.280% AA-1126506 0990 BAR 42.620% AA-1126990 1009 DEH 6.560% AA-1127009 1173 CML 1.640% AA-1127173 Total Participation for Underwriting Members of Lloyd's 100.000% of 4.000% Through Patriot Re Corporation 7 EX-10.20 11 ex10-20.txt TREATY #2 EXHIBIT 10.20 Treaty Number: 9870-00-0001-01/02 COVER NOTE ---------- REINSURED: FEDERATED NATIONAL INSURANCE COMPANY Plantation, Florida (hereinafter referred to as the "Company") PERIOD: Effective 12:01 a.m., Eastern Standard Time, July 1, 2001 to 12:01 a.m., Eastern Standard Time, July 1, 2002, as respects all losses occurring (or beginning) during the term of this Contract. TYPE: SECOND PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT CLASS: Inforce, new and renewal business classified by the Company as Property, including Homeowners and Mobilehome. EXCLUSIONS: As per attached. TERRITORY: To follow the Company's original policies. LIMIT: 100% of $5,000,000 each and every loss occurrence excess of $5,500,000 each and every loss occurrence. The Company shall retain a minimum of 5% net. PREMIUM: Rate: 8.0556% Gross Net Earned Premium Income. Deposit Premium: $725,000 annually, payable in equal quarterly installments of $181,250, at each July 1, October 1, January 1, and April 1. Minimum Premium: $580,000 REINSTATEMENT: One full reinstatement with additional premium calculated pro rata as to amount and 100% as to time. CONDITIONS: Ultimate Net Loss Clause (including Loss Adjustment Expenses). Definition of Loss Occurrence Clause- BRMA 27D. No Reinstatement for same event. 72 hours Wind, Hail, Riot. 168 hours Earthquake, Freeze and all other perils. 1 Treaty Number 9870-00-0001-01/02 CONDITIONS: Extra Contractual Obligations Clause @ 80%. (Continued) Losses in Excess of Original Policy Limits Clause @ 80%. Net Retained Lines Clause - BRMA 32D. Currency Clause. Loss Funding Clause - BRMA 55I. Offset Clause. Taxes Clause and Federal Excise Tax Clause - BRMA 50A and BRMA 17B. Errors and Omissions Clause. Access to Records Clause. Notice of Loss and Loss Settlements Clause. Service of Suit Clause. Insolvency Clause. Arbitration Clause - BRMA 6D. Interest Penalty Clause - BRMA 70H. Guy Carpenter & Company, Inc. Intermediary Clause. WORDING: To follow existing wording as far as applicable. INFORMATION: Any recoveries from the Florida Hurricane Catastrophe Fund will inure to the benefit of Reinsurers hereon. Estimated Subject Earned Premium = $9,000,000. 2 Treaty Number 9870-00-0001-01/02
EFFECTED WITH: - -------------- FEIN NO.: NAIC NO.: Through Guy Carpenter & Co. - Atlanta - --------- --------- ------------------------------------- 13-2997499 38776 Folksamerica Reinsurance Company 5.000% New York, New York 13-2781282 25070 Odyssey Reinsurance Corporation 5.500% Stamford, Connecticut 13-3031176 38636 Partner Reinsurance Corporation of the U.S. 30.000% New York, New York Patriot Re Corporation Skillman, New Jersey For and on behalf of: Various Lloyd's Syndicates 2.500% (Per Schedule B Attached) London, England 23-1641984 10219 QBE Reinsurance Company 8.000% Columbia, Missouri 43-1424791 26557 Shelter Reinsurance Company 5.000% Columbia, Missouri AA-3190757 XL Re Limited 20.000 Hamilton, Bermuda ------ Sub-Total: 76.000% FEIN NO.: NAIC NO.: Through Heath Lambert Limited - London - --------- --------- -------------------------------------- AA-1122000 Underwriting Members of Lloyd's 4.000% (Per Schedule A Attached) London, England AA-1120962 St. Paul Reinsurance Company Limited 15.000% London, England Sub Total: 19.000% ------- TOTAL PLACEMENT 95.000%
3 Treaty Number 9870-00-0001-01/02 GUY CARPENTER & COMPANY, INC. /s/ Hartwell C. Dew --------------------------- Hartwell C. Dew Managing Director /s/ Robert A. McKenzie, Jr. --------------------------- Robert A. McKenzie, Jr. Vice President This Cover Note confirms the terms and conditions of the reinsurance negotiated with the listed reinsurers on your behalf. In the event that any of these details do not meet with your approval, or the security of the participating reinsurers does not meet with your requirements, please notify this office immediately. If all is in order, please sign and return one copy of this Cover Note to confirm your approval and complete our files. REGULATION 98: Premium and loss payments made to Guy Carpenter & Company, Inc. shall be deposited in a Premium and Loss Account in accordance with Section 32.3(a)(1) of Regulation 98 of the New York Insurance Department. The parties hereto consent to withdrawals from said account in accordance with Section 32.3(a)(3) of the Regulation, including interest and Federal Excise Tax. ACCEPTED & APPROVED /s/ Richard A. Widdicombe DATE June 29, 2001 -------------------------------- ---------------- 4 Treaty Number 9870-00-0001-01/02 EXCLUSIONS: - ----------- 1. Reinsurance assumed by the Company, other than inter-company reinsurance. 2. Hail damage to growing or standing crops. 3. Flood Insurance when written and classified as such. 4. Mortgage Impairment and Difference in Conditions when written as such. 5. Title Insurance and all forms of Financial Guarantee, Credit and Insolvency Insurance. 6. Aviation, Ocean Marine, Boiler and Machinery, Fidelity and Surety, Accident and Health, Animal Mortality and Workers' Compensation and Employer's Liability Insurance. 7. Errors and Omissions, Malpractice and any other type of Professional Liability Insurance. 8. Seepage and Pollution and Seepage Exclusion Clause, BRMA 39A. 9. War as set forth in North America War Exclusion Clause (Reinsurance), BRMA 56A. 10. Nuclear Incident as set forth in the Nuclear Incident Exclusion Clauses, BRMA 35A and 35B. 11. Pools, Associations and Syndicates as set forth in the Pools and Associations and Syndicates Exclusion Clause, BRMA 40C. 12. Insolvency Funds as set forth in the Insolvency Funds Exclusion Clause, BRMA 20A. 13. Transmission and distribution lines. Treaty Number 9870-00-0001-01/02 SCHEDULE A PARTICIPATIONS FOR UNDERWRITING MEMBERS OF LLOYD'S PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE AGREEMENT EFFECTIVE: JULY 1, 2001 Syndicate Number Pseudonym Share NAIC ID Number - ---------------- --------- ----- -------------- 1400 DRE 4.000% AA-1127400 ------ Total Participation for Underwriting Members of Lloyd's 4.000% 6 Treaty Number 9870-00-0001-01/02 SCHEDULE B PARTICIPATIONS FOR UNDERWRITING MEMBERS OF LLOYD'S THROUGH PATRIOT RE CORPORATION PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE AGREEMENT EFFECTIVE: JULY 1, 2001 Syndicate Number Pseudonym Share NAIC ID Number - ---------------- --------- ----- -------------- 0002 WHS 6.560% AA-1126002 0227 ROS 39.340% AA-1126227 0506 PDA 3.280% AA-1126506 0990 BAR 42.620% AA-1126990 1009 DEH 6.560% AA-1127009 1173 CML 1.640% AA-1127173 Total Participation for Underwriting Members of Lloyd's 100.000% of 2.500% Through Patriot Re Corporation 7 EX-21.1 12 ex21-1.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT American Vehicle Insurance Company, a Florida corporation Assurance Managing General Agents, Inc., a Florida corporation Attorney on Call, Inc., a Florida corporation Express Insurance and Tax Service, Inc., a Florida corporation Express Tax Service, Inc., a Florida corporation Federated Agency Group, Inc., a Florida corporation Federated Funding Corporation, a Florida corporation Federated National Insurance Company, a Florida corporation Federated Premium Finance, Inc., a Florida corporation FedFirst Corp., a Florida corporation Fed USA, Inc., a Florida corporation Reliable Towing and Rental, Inc., a Florida corporation RPA Financial Corporation, a Florida corporation Superior Adjusting, Inc., a Florida corporation EX-23.1 13 ex23-1.txt CONSENT OF PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, we hereby consent to the incorporation of our report dated March 29, 2002 included in this Form 10-K, into the Company's previously filed Registration Statement on Form S-8 File No. 333-94879. MCKEAN, PAUL, CHRYCY, FLETCHER & CO. Miami, Florida, March 29, 2002. EX-23.2 14 ex23-2.txt CONSENT OF KPMG LLP Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT To the Board of Directors 21st Century Holding Company We consent to the incorporation by reference in the registration statement (No. 333-94879) on Form S-8 of 21st Century Holding Company of our report dated March 30, 2000, relating to the consolidated statements of operations, changes in shareholders' equity and comprehensive income, and cash flows for the year ended December 31, 1999, which report appears in the December 31, 2001 annual report on Form 10-K. KPMG LLP March 29, 2002 Miami, Florida -----END PRIVACY-ENHANCED MESSAGE-----