Becoming a Member of the Company is speculative in nature and involves risk, and each prospective participant should consider carefully the following risk factors, in addition to the risks discussed elsewhere in this Information Circular.

Availability of Insurance Coverage and Cost

There can be no assurance that any entity that becomes a Member of the Company will remain eligible to be a Member and to participate in the Reinsurance Program. The Company’s eligibility criteria are subject to change from time to time. If a Member’s coverage is terminated, cancelled or non-renewed for any reason, Membership in the Company will terminate, and the Member’s existing reinsurance will continue in run-off and future coverage will no longer be eligible for reinsurance by the Sponsored Captive. See “PAYMENT OF MEMBERSHIP ACCOUNT BALANCE.”

The Primary Insurers will establish the annual premium for each Member. There can be no assurance that the annual premium will not increase or that it will be competitive with premiums charged by other insurers for similar coverage. See “ANNUAL PREMIUM.”

Unanticipated Losses

The Company’s operating results are substantially dependent upon the Members’ underwriting results and loss experience. Reinsurance premiums are established so as to provide sufficient funds for the payment or discharge of expected claims liabilities and operating expenses, but there can be no assurance that it will be sufficient. Expected claims liabilities are based upon estimates for reported losses, plus actuarially developed estimates for unreported and expected losses, and actual losses may differ from loss estimates. Because the expected claims liabilities are necessarily based upon estimates derived from historical experience, the ultimate settlement of the Company’s liabilities may be significantly greater than such estimates and adversely impact the Company’s profitability and financial position.

If the losses of the Company or of other protected cells in the Sponsored Captive are substantial, the Sponsored Captive’s surplus could be reduced below the minimum amount required by the Vermont Insurance Commissioner. In such an event, each Member might sustain a total loss of its surplus contribution. Significant reduction in surplus may also cause the Sponsored Captive or Primary Insurer(s) to restrict or eliminate the Reinsurance Program.

Investment Returns

The profitability and success of the Company, to some extent, depends upon income earned on the investment of assets. There can be no assurance that the Company will be able to earn an investment return sufficient to offset potential expenses and underwriting losses.

Although investment guidelines have been established based on prudent investments permitted under the Vermont Insurance Code, which stress diversification of risks and conservation of principal and liquidity, the investments of the Company are subject to the normal risks of the market, as well as risks inherent in the individual securities in which it may invest from time to time. Any decline in the value of invested assets could significantly decrease the ability of the Company to pay expenses and losses related to the reinsurance provided by the Sponsored Captive on the Company’s behalf.

Coverage Structure

All insurance coverages involved in the Reinsurance Program are offered through the Sponsored Captive and issued by the Primary Insurer(s).  Under this arrangement, the Sponsored Captive reinsures a portion of that coverage through multiple reinsurance agreements on the Company’s behalf. As a general rule, with respect to auto liability, auto physical damage, general liability and workers’ compensation coverage issued by PMA, the Sponsored Captive, on behalf of the Company, assumes sixty percent (60%) of the exposures on a pro rata basis. Above a shared aggregate retention, PMA and its reinsurers assume all of the covered liabilities. This coverage structure, including attachment points and aggregate percentages, may vary by industry and may change over the course of time due to changes in the financial condition of the Sponsored Captive or Company, growth in premium, positive or negative operating results or other factors.  

Although these arrangements contractually obligate the Primary Insurer(s) to pay claims, the reinsurance agreements require the Sponsored Captive and the Company through the Participant Contract to reimburse the Primary Insurers for their share of those losses up to the per claim limit. If a Primary Insurer fails, and becomes unable to fulfill its obligations to the Members, the Sponsored Captive and the Company, as a participant in the Sponsored Captive, would likely incur an adverse financial impact as a result of having to continue to pay claims and becoming involved in insolvency proceedings of that Primary Insurer. There can be no guaranty that the Primary Insurer(s) will maintain any solvency or performance ratings applied by A.M. Best or another such rating company. Moreover, there can be no assurance that any Primary Insurer will continue its relationship with the Sponsored Captive, and the failure to secure a relationship with a new policy issuing company could have a material adverse impact on the Reinsurance Program. Also, should PMA discontinue its reinsurance relationship with the Sponsored Captive and its strategic alliance, the termination of the surplus note investment could have an adverse impact on the Sponsored Captive’s ability to meet regulatory minimum capital requirements.

Reinsurance

As discussed above, the Sponsored Captive has entered into agreements with the Primary Insurers to limit the Company’s exposures held by the Sponsored Captive above certain aggregate retentions. If the Primary Insurer(s), or any other reinsurer with which the Sponsored Captive has a contract, fail or become unable to fulfill their contractual obligations, the Sponsored Captive and the Company, as a participant in the Sponsored Captive, would likely incur an adverse financial impact. There can be no assurance that any Primary Insurer will continue to provide aggregate protection for the Sponsored Captive, and the failure to secure alternative reinsurance at acceptable rates could have a material adverse financial impact on the Sponsored Captive and the Company, as a participant in the Sponsored Captive.

Competition

The Reinsurance Program, facilitated by the Company’s participation in the Sponsored Captive, competes with other insurance carriers and reinsurers that have extensive experience in the areas of insurance provided by the program and that offer directly competitive insurance coverage. There is no assurance that the Reinsurance Program will continue to compete effectively with such other companies. Moreover, insurance markets are inherently cyclical and so-called “soft” market conditions may make it more difficult for the Reinsurance Program to remain competitive.

Exemption from Certain Regulations

As a Sponsored Captive insurer under Vermont law, the Sponsored Captive is exempt from many of the insurance laws andregulations of the State of Vermont.  The Sponsored Captive is not licensed in any other state. Accordingly, the Company and its Members will not receive some benefits that such laws and regulations might provide. See “INSURANCE REGULATION”.

Fluctuating Value of Membership Accounts

Each Membership Account is subject to significant fluctuation in value, depending upon many factors, including the loss experience of the Members, the Company’s overall underwriting results, investment results, competitive pressures upon premium structure, and other matters which may be beyond the control of the Company and cannot be predicted or foreseen at this time. A Membership Account could become worthless. Membership account losses have occurred. See “OWNERSHIP.”

Restrictions on Transferability of Memberships

Memberships in the Company are not transferable to any other person or entity, nor may Members directly or indirectly offer, sell, transfer, pledge, hypothecate or otherwise dispose of their Membership, except as may be approved by the Company’s Board of Directors and the Vermont Insurance Commissioner. Memberships are not securities and have not been registered under the federal Securities Act or under any state securities laws. Accordingly, each Member should be prepared to bear the economic risk of its surplus contribution on a long-term basis. See “OWNERSHIP.”

Inability to Pay Membership Account Balance

The obligation of the Company to pay Membership Account balances upon termination of Membership is subject to the possibility of deferral in the sole judgment of the Company’s Board of Directors. Payments must be postponed whenever and for so long as such payments are prohibited by the Vermont Insurance Commissioner. Deferred payments remain at the risk of the Company’s business and are therefore subject to complete loss. Deferrals of payment have occurred and continue. See “PAYMENT OF MEMBERSHIP ACCOUNT BALANCE.”payment-of-membership-account-balance

Limited Operating History

The Sponsored Captive and the Company have only a limited operating history, and neither is rated by any rating agency. Accordingly, prospective Members must consider the risks and uncertainties related to investing in a business with only a limited financial history.

Dependence on Qualified Consultants

As a new participant in a Sponsored Captive, the Company is highly dependent upon its ability to retain qualified management.The Company does not have internal management personnel, but instead relies on the expertise of various consultants and third-party service providers – most especially the Sponsored Captive. See “MANAGEMENT” and “CERTAIN INTERESTS.” There can be no assurance that the Sponsored Captive or any outside service provider or consultant will be able to achieve any particular result for the Company or that the Sponsored Captive or any outside service provider will continue to provide services to the Company in the future.