| BRISTOL WEST HOLDINGS INC Item 1A Risk Factors An investment in our common stock involves a number of risks |
| Investors should carefully consider the following information, together with the other information contained in this Annual Report on Form 10-K, before investing in our common stock |
| Further, such factors could cause actual results to differ materially from those contained in any forward-looking statement contained in this report, statements by us in periodic press releases and oral statements by Company officials to securities analysts and stockholders during presentations about us |
| We face intense competition from other automobile insurance providers |
| The non-standard automobile insurance business is highly competitive and, except for regulatory considerations, there are relatively few barriers to entry |
| We compete with both large national insurance providers and smaller regional companies |
| The largest automobile insurance companies include The Progressive Corporation, The Allstate Corporation, State Farm Mutual Automobile Insurance Company, GEICO, Farmers Insurance Group, Safeco Corp, and American International Group (AIG) |
| Our chief competitors include some of these companies as well as Mercury General Corporation, Infinity Property & Casualty Corporation, Affirmative Insurance Holdings, Inc, and Direct General Corporation |
| Some of our competitors have more capital, higher ratings and greater resources than we have, and may offer a broader range of products and lower prices and down payments than we offer |
| Some of our competitors that sell insurance policies directly to customers, rather than through agencies or brokerages as we do, may have certain competitive advantages, including increased name recognition among customers, direct relationships with policyholders and potentially lower cost structures |
| In addition, it is possible that new competitors will enter the non-standard automobile insurance market |
| Our loss of business to competitors could have a material impact on our growth and profitability |
| Further, competition could result in lower premium rates and less favorable policy terms and conditions, which could reduce our underwriting margins |
| Our concentration on non-standard automobile insurance could make us more susceptible to unfavorable market conditions |
| Given this focus, negative developments in the economic, competitive or regulatory conditions affecting the non-standard automobile insurance industry could have a material adverse effect on our results of operations, financial condition and cash flows |
| In addition, these developments could have a greater effect on us, compared to more diversified insurers that also sell other types of automobile insurance products |
| Our profitability can be affected by cyclicality in the non-standard automobile insurance industry caused by price competition and fluctuations in underwriting capacity in the market, as well as changes in the regulatory environment |
| Our success depends on our ability to price the risks we underwrite accurately |
| Our results of operations and financial condition depend on our ability to underwrite and set rates accurately for a full spectrum of risks |
| Rate adequacy is necessary to generate sufficient premiums to pay losses, loss adjustment expenses and underwriting expenses and to earn a profit |
| If we fail to assess accurately the risks that we assume, we may fail to establish adequate premium rates, which could reduce our income and have a material adverse effect on our results of operations, financial condition or cash flows |
| In order to price our products accurately, we must collect and properly analyze a substantial volume of data; develop, test and apply appropriate rating formulas; closely monitor and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy |
| Our ability to undertake these efforts successfully, and as a result price our products accurately, is subject to a number of risks and uncertainties, including, without limitation: · availability of sufficient reliable data; · incorrect or incomplete analysis of available data; Page 18 _________________________________________________________________ · uncertainties inherent in estimates and assumptions, generally; · selection and application of appropriate rating formulas or other pricing methodologies; · unanticipated or inconsistent court decisions, legislation or regulatory action; · ongoing changes in our claim settlement practices, which can influence the amounts paid on claims; · changing driving patterns, which could adversely affect both frequency and severity of claims; · unexpected inflation in the medical sector of the economy, resulting in increased bodily injury and personal injury protection claim severity; and · unanticipated inflation in automobile repair costs, automobile parts prices and used automobile prices, adversely affecting automobile physical damage claim severity |
| Such risks may result in our pricing being based on inadequate or inaccurate data or inappropriate analyses, assumptions or methodologies, and may cause us to estimate incorrectly future increases in the frequency or severity of claims |
| As a result, we could underprice risks, which would negatively affect our profit margins, or we could overprice risks, which could reduce our volume and competitiveness |
| In either event, our results of operations, financial condition and cash flows could be materially and adversely affected |
| Our losses and loss adjustment expenses may exceed our loss and loss adjustment expense reserves, which could adversely impact our results of operation, financial condition and cash flows |
| Our financial statements include loss and loss adjustment expense reserves, which represent our best estimate of the amounts that we will ultimately pay on claims and the related costs of adjusting those claims as of the date of the financial statements |
| We rely heavily on our historical loss and loss adjustment expense experience in determining these loss and loss adjustment expense reserves |
| The historic development of reserves for losses and loss adjustment expenses may not necessarily reflect future trends in the development of these amounts |
| In addition, factors such as inflation, claims settlement patterns and legislative activities and litigation trends may also affect loss and loss adjustment expense reserves |
| As a result of these and other risks and uncertainties, ultimate paid losses and loss adjustment expenses may deviate, perhaps substantially, from our estimates of losses and loss adjustment expenses included in the loss and loss adjustment expense reserves in our financial statements |
| If actual losses and loss adjustment expenses exceed our expectations, our net income and our capital would decrease |
| Actual paid losses and loss adjustment expenses may be in excess of the loss and loss adjustment expense reserve estimates reflected in our financial statements |
| For additional information regarding our loss reserves, see "e Item 1 |
| We are subject to comprehensive regulation, and our ability to earn profits may be adversely affected by these regulations |
| We are subject to comprehensive regulation by government agencies in the states where our insurance subsidiaries are domiciled and where these subsidiaries issue policies and handle claims |
| Certain states impose restrictions or require prior regulatory approval of certain corporate actions, which may adversely affect our ability to operate, innovate, obtain necessary rate adjustments in a timely manner or grow our business profitably |
| In addition, certain federal laws impose additional requirements on insurers |
| Our ability to comply with these laws and regulations, and to obtain necessary regulatory action in a timely manner, is and will continue to be critical to our success |
| Required Licensing |
| We operate under licenses issued by various state insurance authorities |
| If a regulatory authority denies or delays granting a new license, our ability to enter that market quickly can be substantially impaired |
| Transactions between our subsidiaries and their affiliates (including us) generally must be disclosed to the state regulators, and prior approval of the applicable regulator generally is required before any material or extraordinary transaction may be consummated |
| State regulators may refuse to approve or delay approval of such a transaction, which may impact our ability to innovate or operate efficiently |
| The insurance laws of the states in which our insurance subsidiaries operate require insurance companies to file insurance rate schedules and insurance policy forms for review and/or approval |
| If, as permitted in some states, we begin using new rates before they are approved, we may be required to issue refunds or credits to our policyholders if the new rates are ultimately deemed excessive Page 19 _________________________________________________________________ or unfair and disapproved by the applicable state regulator |
| Accordingly, our ability to respond to market developments or increased costs in that state can be adversely affected |
| Restrictions on Cancellation, Non-Renewal or Withdrawal |
| Many states have laws and regulations that limit an insurer’s ability to exit a market |
| For example, certain states limit an automobile insurer’s ability to cancel or not renew policies |
| Some states prohibit an insurer from withdrawing from one or more lines of business in the state, except pursuant to a plan approved by the state insurance department |
| In some states, this restriction applies to significant reductions in the amount of insurance written, not just to a complete withdrawal |
| These laws and regulations could limit our ability to exit or reduce our writings in unprofitable markets or discontinue unprofitable products in the future |
| Other Regulations |
| We must also comply with regulations involving, among other things: · the use of non-public consumer information and related privacy issues; · investment restrictions; · the use of credit history in underwriting and rating; · the payment of dividends; · the acquisition or disposition of an insurance company or of any company controlling an insurance company; · the involuntary assignments of high-risk policies, participation in reinsurance facilities and underwriting associations, assessments and other governmental charges; and · reporting with respect to financial condition |
| Compliance with laws and regulations addressing these and other issues often will result in increased administrative costs |
| In addition, these laws and regulations may limit our ability to underwrite and price risks accurately, prevent us from obtaining timely rate increases necessary to cover increased costs and may restrict our ability to discontinue unprofitable relationships or exit unprofitable markets |
| These results, in turn, may adversely affect our results of operation or our ability or desire to grow our business in certain jurisdictions |
| The failure to comply with these laws and regulations may also result in actions by regulators, fines and penalties, and in extreme cases, revocation of our ability to do business in that jurisdiction |
| In addition, we may face individual and class action lawsuits by our insureds and other parties for alleged violations of certain of these laws or regulations |
| Our insurance subsidiaries are subject to minimum capital and surplus requirements |
| Our failure to meet these requirements could subject us to regulatory action |
| The laws of the states of domicile of our insurance subsidiaries impose risk-based capital standards and other minimum capital and surplus requirements |
| Failure to meet applicable risk-based capital requirements or minimum statutory capital requirements could subject us to further examination or corrective action imposed by state regulators, including limitations on our writing of additional business, state supervision or liquidation |
| Any changes in existing risk-based capital requirements or minimum statutory capital requirements may require us to increase our statutory capital levels, which we may be unable to do |
| Regulation may become more extensive in the future, which may adversely affect our business |
| States may make existing insurance laws and regulations more restrictive in the future or enact new restrictive laws |
| In such events, we may seek to reduce our premium writings in, or to withdraw entirely from, these states |
| In addition, from time to time, the United States Congress and certain federal agencies investigate the current condition of the insurance industry to determine whether federal regulation is necessary |
| We are unable to predict whether and to what extent new laws and regulations that would affect our business will be adopted in the future, the timing of any such adoption and what effects, if any, they may have on our financial condition, results of operations, and cash flows |
| Our failure to pay claims accurately could adversely affect our business, financial condition, results of operations and cash flows |
| We must accurately evaluate and pay claims that are made under our policies |
| Many factors affect our ability to pay claims accurately, including the training and experience of our claims representatives, our claims organization’s culture and the effectiveness of our management, our ability to develop or select and implement appropriate Page 20 _________________________________________________________________ procedures and systems to support our claims functions and other factors |
| Our failure to pay claims accurately could lead to material litigation, undermine our reputation in the marketplace, impair our image and materially adversely affect our financial condition, results of operations and cash flows |
| In addition, if we do not train new claims employees effectively or lose a significant number of experienced claims employees our claims department’s ability to handle an increasing workload could be adversely affected |
| In addition to potentially requiring that growth be slowed in the affected markets, we could suffer in decreased quality of claims work, which in turn could lower our operating margins |
| As a holding company, we are dependent on the results of operations of our subsidiaries and their ability to transfer funds to us to meet our obligations |
| We are a holding company without significant operations of our own |
| Dividends from our subsidiaries are our principal source of funds to meet our cash needs, including debt service payments and other expenses, and to pay dividends to our stockholders |
| Insurance laws limit the ability of our insurance subsidiaries to pay dividends to us |
| In addition, for competitive reasons, our insurance subsidiaries maintain financial strength ratings that require us to sustain certain capital levels in those subsidiaries |
| The need to maintain these required capital levels may affect the ability of our insurance subsidiaries to pay dividends to us |
| Under applicable restrictions, as of December 31, 2005, our insurance subsidiaries were permitted to pay up to dlra30dtta6 million of dividends without seeking regulatory approval |
| Our non-insurance subsidiaries’ ability to pay dividends to us is not limited by insurance law |
| Nevertheless, these non-insurance subsidiaries’ earnings are dependent on fees paid by policyholders, and those fees are subject to insurance regulation |
| ” The policy service fee revenues could be adversely affected by insurance regulation |
| Policy service fee revenues have provided additional revenues equivalent to approximately 10prca of gross earned premium |
| These fees include policy origination fees and installment fees to compensate us for the costs of providing installment payment plans, as well as late payment, policy cancellation, policy rewrite and reinstatement fees |
| Our revenues could be reduced by changes in insurance regulation that restrict our ability to charge these fees |
| Those arrangements are subject to insurance holding company act regulation in the states where our insurance subsidiaries are domiciled |
| Continued payment of these fees could be affected if insurance regulators in these states determined that these arrangements are not permissible under the insurance holding company acts |
| New pricing, claim and coverage issues and class action litigation are continually emerging in the automobile insurance industry, and these new issues could adversely impact our results of operations and financial condition |
| As automobile insurance industry practices and regulatory, judicial and consumer conditions change, unexpected and unintended issues related to claims, coverage and business practices may emerge |
| These issues can have an adverse effect on our business by changing the way we price our products, including limiting the factors we may consider when we underwrite risks, by extending coverage beyond our underwriting intent, by increasing the size or frequency of claims or by requiring us to change our claims handling practices and procedures or our practices for charging fees |
| The effects of these unforeseen emerging issues could negatively affect our results of operations, financial condition and cash flows |
| We may be unable to attract and retain independent agents and brokers |
| We distribute our products exclusively through independent agents and brokers |
| We compete with other insurance carriers to attract producers and maintain commercial relationships with them |
| Some of our competitors offer a larger variety of products, lower prices for insurance coverage or higher commissions |
| We may not be able to continue to attract and retain independent agents and brokers to sell our products |
| Our inability to continue to recruit and retain productive independent agents and brokers would have an adverse effect on our financial condition and results of operations and could impact our cash flows |
| Page 21 _________________________________________________________________ Our failure to maintain a commercially acceptable financial strength rating of our insurance subsidiaries could significantly and negatively affect our ability to implement our business strategy successfully |
| Financial strength ratings are an important factor in establishing the competitive position of insurance companies and have an effect on an insurance company’s sales |
| AM Best maintains a letter scale rating system ranging from “A++ (Superior)” to “F” (in liquidation) |
| In April 2005, AM Best assigned our insurance subsidiaries a rating of “B++” (Very Good), which is the 5th highest of 15 rating levels |
| According to AM Best, “B++” ratings are assigned to insurers that have a good ability to meet their ongoing obligations to policyholders |
| The rating of our insurance subsidiaries is subject to at least annual review by, and may be revised downward or revoked at the sole discretion of, AM Best |
| Many of our competitors have ratings higher than those of our insurance subsidiaries |
| A downgrade in the financial strength rating of our insurance subsidiaries would have an adverse impact on our ability to effectively compete with other insurers with higher ratings or our attractiveness to policyholders and agents and brokers |
| AM Best bases its ratings on factors that concern policyholders and not upon factors concerning investor protection |
| Such ratings are subject to change and are not recommendations to buy, sell or hold securities |
| We rely on information technology and telecommunication systems, and the failure of these systems could materially and adversely affect our business |
| Our business is highly dependent upon the successful and uninterrupted functioning of our information technology and telecommunications systems |
| We rely on these systems to process new and renewal business, provide customer service, make claims payments and facilitate collections and cancellations |
| These systems also enable us to perform actuarial and other modeling functions necessary for underwriting and rate development |
| The failure of these systems could interrupt our operations or materially impact our ability to evaluate and write new business |
| Because our information technology and telecommunication systems interface with and depend on third-party systems, we could experience service denials if demand for such service exceeds capacity or such third-party systems fail or experience interruptions |
| If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to write and process new and renewal business and provide customer service or compromise our ability to pay claims in a timely manner |
| This outcome could result in a material adverse effect on our business and our results of operations, financial condition and cash flows |
| We are parties to multiple lawsuits, which, if decided adversely against us, could have a negative impact on our financial results |
| We are named as a defendant in a number of lawsuits, including certain class action lawsuits challenging various aspects of our business operations, and lawsuits that allege bad faith and seek extra-contractual damages from us in addition to damages claimed under an insurance policy |
| We may be subject to further litigation in the future |
| Litigation, by its very nature, is unpredictable and the outcome of any case is uncertain |
| We are unable to predict the precise nature of the relief that may be sought or granted in any lawsuits or the effect that pending or future cases may have on our results of operations, financial condition and cash flows |
| For additional |