We are a specialty property and casualty insurance company with a niche orientation
and a focus on the transportation industry. Founded in 1989, we have had an
uninterrupted record of profitability in every year since 1990, our first full
year of operation. We have also reported an underwriting profit in 22 of the
27 years we have been in business.
Alternative Risk Transfer. We underwrite, market and distribute primarily truck
transportation, passenger transportation and moving and storage ART insurance
products, also known as captives. ART products function by utilizing insurance
or reinsurance companies that are owned or “rented” (as described
below) by the participants in the program. Participants may include homogeneous
groups of passenger transportation, trucking or moving and storage companies,
transportation insurance agencies and individual, larger insureds as single
participants in our national account ART products. Program participants share
in the underwriting profits or losses and the investment results associated
with the risks of being insured through the program. Participants in these programs
typically are interested in improved risk control, increased participation in
the claims settlement process and asset investment features associated with
an ART insurance program.
We support two forms of ART programs – member-owned and rental. In a member-owned
ART program, the participants form, capitalize and manage their own reinsurance
company. In a rental ART program, the reinsurance company is formed, capitalized
and managed by someone other than the participants. The participants in a rental
ART program pay a fee to use the reinsurance facility in their ART program;
in other words, the participants “rent” it. For both member-owned
and rental ART programs, we typically underwrite and price the risk, issue the
policies and adjust the claims. A portion of the risk and premium is ceded to
the ART insurance program. The ART insurance program serves the same purpose
for the participants regardless of whether they own the reinsurance company
or rent it. Hudson Indemnity, Ltd. (“HIL”), our consolidated subsidiary,
is “rented” to program participants to facilitate the transfer of
risk to the participants and the respective program’s results are recorded
solely in HIL’s financial statements. Captive reinsurance facilities owned
and managed directly by the member-owned program participants are not consolidated
in our financial results since they are not variable interest entities.
The revenue we earn, our profit margins and the risks we assume are substantially
consistent in member-owned and rental ART programs. The primary differences
to us are the expenses associated with these programs and who ultimately bears
those expenses. In a member-owned ART program, the participants own and manage
their own reinsurance company, which includes general management responsibilities,
financial statement preparation, actuarial analysis, investment management,
corporate governance, regulatory management and legal affairs. If the actual
expenses associated with managing a member-owned ART program exceed the funded
projections, the participants pay for these added expenses outside the insurance
transaction. In our rental ART programs, we include an expense charge in the
program premium that we charge participants to fund expenses related to the
managing of HIL. Investment management expenses also are included in the program
premium and we cap the participant’s expense contribution regardless of
whether or not we collect adequate funds to operate the off-shore reinsurance
company.
All other loss, expense and profit margin components are substantially the same
for our member-owned or rental ART programs. The advantage of a member-owned
ART program to the participants is the ability to change policy issuing companies
and service providers without changing the makeup of their group. Rental ART
program participants are not obligated to capitalize their own reinsurer. They
generally enjoy a slightly lower expense structure and their ART program expenses
are fixed for the policy year regardless of the amount of expenses actually
incurred to operate the reinsurer and facilitate participant meetings.
The premiums generated by each of the ART insurance programs offered by us are
developed in a similar manner. The most important component of the premium charged
is the development of the participants’ loss fund. The loss fund represents
the amount of premium needed to cover the participants’ expected losses
in the layer of risk being ceded to the captive reinsurer. Participants may
assume 100% of the losses in the first loss layer or participate in a quota
share arrangement, where the losses are shared between the participants and
us. The loss layers typically range from $50,000 to $700,000 per occurrence
and our members’ participation percentages in quota share arrangements
generally range from 30% to 50%. Each participant’s loss fund layer is
analyzed quarterly on a policy year basis to determine if the loss fund is sufficient
to cover all losses within the layer. If the results in the loss fund layer
are unfavorable to expectations an assessment of premium is charged and if results
are favorable to expectations a return of premium is credited at the participant
or group level. Typically, the premium and losses incurred through the funding
of our captive participant’s loss layer are comparable period-over-period.
However, increased member participation or assessment premium charged on the
loss fund layer through HIL has the potential to unfavorably impact our loss
and LAE ratio, and conversely, have a favorable impact on our underwriting expense
ratio, when comparing results to a prior period.
Once the participants’ loss fund is established, all other expenses related
to the coverages and services being provided are derived by a formula which
is agreed to in advance by the ART program participants and the service providers.
We provide services, including policy issuance, claims adjusting and insurance
coverage in excess of the ART program retention, for our participants utilizing
either our rental captive or a member owned captive. Additionally, for rental
captive participants we provide loss control services and management of their
captive program, whereas for member owned captive participants we coordinate
these services with the member owned captive manager. These items, which are
included in premiums charged to the insured, range from approximately 30% to
70% of a $1 million policy premium depending on the program structure and the
loss layer ceded to the ART program.
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