Bristol West 10-K 12-31-2004

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2004

Or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

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 (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yesý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. o

The aggregate market value of the Registrant’s voting common stock held by non-affiliates, based on the stock price at the last business day of the second quarter of 2004 was $355,306,052. As of March 16, 2005, the total number of shares outstanding of Registrant's common stock was 32,032,551.

Portions of the Registrant’s definitive Proxy Statement for its 2005 Annual Meeting of Stockholders scheduled to be held on May 12, 2005 are incorporated herein by reference in Part III, Items 10, 11, 12, 13 and 14. Such Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days after Registrant’s fiscal year ended December 31, 2004.

Bristol West Holdings, Inc. (the "Company"), a Delaware corporation, is a provider of non-standard private passenger automobile insurance and related services. When this report uses the words "we," "us," and "our," these words refer to Bristol West Holdings, Inc. and its subsidiaries, unless the context otherwise requires. The Company was organized under the laws of the State of Delaware on February 17, 1998.

Non-standard automobile insurance provides coverage to drivers who find it difficult to purchase automobile insurance from standard carriers as a result of a number of factors, including their driving record, vehicle, age, claims history, or because they have limited financial resources. Typically, these drivers purchase minimal levels of insurance coverage in order to comply with state-mandated financial responsibility laws. For comparable coverage, premiums for non-standard automobile insurance policies are generally higher than for standard or preferred automobile insurance policies.

We offer insurance coverage exclusively through independent agents and brokers, which number in excess of 6,300. Because some of our agents and brokers operate from multiple locations, our products are offered at more than 8,300 locations. We are licensed to provide insurance in 37 states and the District of Columbia, although we focus our operations in 21 states that we believe provide significant opportunity for profitable growth. Our markets include California, Florida and Texas, the three largest non-standard automobile insurance markets in the United States. These states were our first, second, and fifth largest states by premium volume and accounted for 73% of our gross premiums written for the year ended December 31, 2004. In addition to the premiums we charge for our insurance policies, we receive fees for policy issuance, installment payment processing and other items that, in total, aggregate approximately 11% of premiums.

We offer insurance products and payment plans that are tailored to the non-standard marketplace. For customers whose selection of an insurance policy is driven by their desire to minimize their initial cash outlay, we offer low down payments and monthly billing plans. Our experience has shown us that total policy cost, although a variable in the purchasing decision, is not as important to this segment of applicants as is an installment plan with a low down payment. Accordingly, our payment plans are designed to be attractive to these customers by minimizing the up-front cash outlay through low down payments and monthly billing. Our billing and collection systems facilitate these attractive payment plans while preventing significant exposure to credit losses.

There is another large segment of drivers who do not qualify for standard products due to a driving record transgression, their age, or recent financial instability, but for whom total policy cost is the most important consideration. Our products are also structured to appeal to these potential customers. We offer various discounts for better risks, including a discount for having maintained automobile insurance within a prescribed prior time period and/or for maintaining homeowners insurance. Conversely, we add surcharges for traffic violations and accidents.

In addition to the premiums we collect for the insurance coverage we provide, we collect policy origination fees and installment fees. We may also charge additional fees for late payment, policy cancellation, policy rewrite and reinstatement and for other reasons. In the aggregate, these fees represent revenues of approximately 11% in excess of the premiums we collect.

We distribute our products through more than 6,300 independent producers. Some producers operate from multiple locations, and as a result, our products were offered through more than 8,300 locations as of year-end 2004. Since our products are only sold through the independent producer channel, building and maintaining strong relationships with our independent agents and brokers is a key element to our long-term success. We strive to maintain these relationships by providing our agents and brokers with high-quality service, a stable presence in their markets and competitive compensation programs. We provide our producers with easy-to-use underwriting and policy administration software. We offer competitively priced products, convenient installment billing plans and superior service to our producers and insureds.

Geographic Distribution. We have licenses to write insurance in 37 states and the District of Columbia, but we focus on 21 states that we believe provide significant opportunity for profitable growth based upon historical results, current market conditions and each state's legal and regulatory environment.

For the year ended December 31, 2004, our top three states represented 80.6% of our gross premiums written. The following table sets forth the distribution of our gross premiums written by state, excluding any change in the provision for expected cancellations, as a percent of total gross premiums written for the years ended December 31, 2004, 2003 and 2002:

	Years Ended December 31,
	2004			2003			2002

California		56.1	%		63.5	%		67.1	%
Florida		14.3			11.1			12.8
Michigan		10.2			7.4			6.8
South Carolina		2.5			1.9			1.3
Texas		2.4			1.6			2.4
Pennsylvania		2.2			2.2			1.6
Maine		1.9			1.8			1.0
New Hampshire		1.8			1.1			1.0
Georgia		1.6			3.2			2.2
Virginia		1.6			1.4			0.6
All other states		5.4			4.8			3.2
		100.0	%		100.0	%		100.0	%

Major Producers. Our top ten producers, as measured by premium volume, accounted for 25.5%, 31.7% and 33.3% of our gross written premiums for the years ended December 31, 2004, 2003 and 2002, respectively. In 2004, no single producer accounted for more than 10% of our gross premiums written. The concentration of our business with our top producers has declined as we have increased our producer base and entered new markets, and as a result of increased competition in California. We do not have any long-term producer contracts. Each of our ten largest producers produces the majority of its business in California.

For the years ended December 31, 2004, 2003 and 2002, our top three producers accounted for 17.2%, 21.0% and 18.2% of our gross premiums written, with our single largest producer accounting for 9.8%, 13.6% and 13.9% during the same timeframe. Our concentration of business with these large producers has declined as we have expanded both our geographic scope and the number of producers offering our products. Equally important, competition increased in California during 2004, as new companies entered the market and many companies, new and existing, loosened their underwriting standards, which we refused to do. This has led to a decline in our premium writings in 2004 compared to 2003 in California.

Relationships with Agents and Brokers. We sell our policies through more than 6,300 agents and brokers with over 8,300 locations. We devote considerable time and resources to developing and maintaining our relationships with these producers, and we endeavor to provide them with responsive services and a stable presence in their markets.

We provide proprietary software to agents and brokers that permit them to access centralized information about their customers. In addition, we have deployed point-of-sale underwriting and policy issuance software at most of our producers’ locations during the past year. Point-of-sale underwriting technology uses internet connectivity to obtain and verify an applicant’s underwriting and rating information as part of the application process. The producer enters the applicant’s underwriting data into a Company-provided software application, OneStepÔ or OneStep RaptorÔ. Concurrently, these software applications automatically and electronically obtain key underwriting and rating information, such as driving record and claim history, and reconcile it to the application information. In this manner, the producer can provide a final price quote to the applicant at the point of sale. If the applicant chooses to purchase the policy, the transaction can be completed immediately. The producer can collect the payment, and the insured can leave the producer’s office with their policy and insurance identification card.

We employ daily, weekly, monthly and quarterly data analysis to monitor various aspects of a producer's business conduct including adherence to our underwriting policies and procedures and the profitability of the producer's business with us. We evaluate each producer on numerous key factors, including the following:

Producer Compensation. Our producer compensation programs are designed to be competitive in each market in which we operate. Commissions are paid on new and renewal business at a percentage of the full term policy premium, and the full commission is paid at policy inception or renewal. Paying the full term commission up front is highly valued by our producers. If a policy cancels before its expiration date, the producer is contractually bound to return the unearned commission to us.

In addition to new and renewal commissions, we negotiated on a case-by-case basis profit sharing agreements with some of our larger producers that entailed maintaining or outperforming specified loss ratio targets and maintaining an agreed amount of in-force business. The ratio of commission expense to gross premiums earned, including all profit sharing compensation, was 15.3%, 15.2% and 15.0% for the years ended December 31, 2004, 2003 and 2002, respectively. The ratio of profit sharing commission expense to gross premiums earned was 0.6%, 0.9% and 0.9% for the years ended December 31, 2004, 2003 and 2002, respectively. The decline in profit sharing commissions in 2004 was due to increased competition, most notably in California, which resulted in a decline in premium writings, and certain producers, therefore, not earning such commissions. Effective January 1, 2005, the Company discontinued these profit sharing compensation arrangements and implemented various fixed commission tiers into which producers are placed depending upon the Company's assessment of economies of scale, the producer's level of expertise in placing automobile insurance and the geographic scope of the producer's operations. Within each state, the revised commission structure is intended to produce a commission ratio consistent with the previous structure.

Point-of-Sale Underwriting and Policy Issuance. The Company continues to make significant strides in point-of-sale underwriting. During the fourth quarter, we completed the deployment of our web-based system, OneStep, in California. OneStep is also fully operational in South Carolina. Throughout 2004, we also deployed OneStep Raptor, our client-server point-of-sale quoting and underwriting system, in twelve states. Together, the use of OneStep and OneStep Raptor resulted in point-of-sale underwriting on 74% of new business applications in the fourth quarter. By utilizing point-of-sale underwriting, policy issuance is now immediate in the states in which it is deployed compared to an average of 5 days prior to implementation of point-of-sale underwriting. In addition to reducing uprates, the efficiency gains we realize allowed us to grow while improving policyholder service. During the quarter, we also expanded our capabilities to process changes or endorsements to an insured’s policy through the OneStep program in South Carolina, and we have plans to expand this capability to other states over the next twelve to twenty-four months.

We establish policy rates utilizing a variety of factors, including, but not limited to, vehicle type, driver age, driving record, type of coverage, miles driven, financial responsibility, prior insurance coverage and policy limits. We continuously evaluate and modify our rates in order to maintain an acceptable level of underwriting profitability.

We have product managers for each state in which we operate or that we are considering entering. Each state manager is responsible for monitoring our competitive position and profitability. They work closely with our pricing actuaries, marketing department and senior staff to develop or alter our product and pricing strategies.

Our claims department has approximately 500 claims adjusters and managers who handle claims from 13 offices around the country. Each claims office has an assigned geographic service area, but has the flexibility to handle claims from other areas as indicated by workloads and available staff.

We have a toll-free access number that allows policyholders to report claims 24 hours a day, seven days a week. We attempt to contact all parties involved in an accident within 24 hours of receipt of notification and inspect any damaged property within 72 hours. We require our claims managers to review all new claims within 24 hours of receipt of notification and to provide specific instructions to the adjuster receiving the assignment.

Our staff investigates all claims, with a small percentage of automobile damage appraisals completed by independent appraisers when warranted by the appraisal location or when Company appraisal staff is not available. Twenty-four in-house attorneys defend most of the lawsuits brought against our insureds. Our claims department is supported by a special investigation unit with 33 employees deployed nationwide who control costs through fraud mitigation and ensure our compliance with applicable anti-fraud regulations. Our special investigation unit uses six anti-fraud databases to identify suspicious losses. We have a claim quality control group comprised of experienced claims professionals who monitor our claims files on a real-time basis, providing assistance when issues arise, and a claims training department which provides both new hire training and advanced training to experienced claims representatives. In addition, we conduct internal audits of our claim handling focusing on procedures, financial controls, data integrity and regulatory compliance.

Data Warehouse. We maintain an extensive proprietary database, which contains statistical records with respect to our insureds, including, among other data, the insured's rating classification, motor vehicle records, years licensed, loss experience by zip code and type of automobile. Analysis of this data enables us to identify trends emerging in our business and to respond with changes to prices, product or underwriting guidelines.

Claims Administration. Our in-house claims administration system maintains all notes, diaries and related party information on each claim and provides automated on-line management reports on the number of outstanding claims and service levels. It provides a financial control and automatically generates and maintains loss and loss adjustment expense reserves. The system was upgraded in 2004 to interface with a standardized estimating service and to incorporate pictures for each appraised vehicle.

Point-of-Sale Underwriting. We have online point-of-sale application systems, OneStep and OneStep Raptor, and as of March 2005, we were producing more than 85% of our business through these systems. We have an exclusive license to use OneStep in the non-standard automobile insurance industry through December 2009. OneStep and OneStep Raptor use technology to provide fast and accurate quotes by accessing third-party information at the point of sale, including an applicant's driving record, accident history and, where permitted by law, credit reports. This process reduces the frequency of uprates which may occur when an application is incomplete or inaccurate. Our point-of-sale application systems permit the producer to print the policy, the identification cards and the policy declaration page as soon as the verifications are complete, usually within minutes.

BWProducers.com. This website provides our producers with complete access to all information about their Bristol West policyholders, including billing information, policy status, cancellations and installments. This access to timely and centralized information gives our producers the ability to better manage their business and increase their retention rates. The system was upgraded to allow online payments from our agencies.

Automobile accidents generally result in insurance companies paying settlements resulting from physical damage to an automobile or other property and an injury to a person. Because our insureds typically notify us immediately after an accident has occurred, our ultimate liability on our policies becomes fairly apparent in a relatively short period of time. However, months and sometimes years may elapse between the occurrence of an accident, reporting of the accident to us and payment of the claim. We record a liability for estimates of losses and loss adjustment expenses that will be paid on accidents reported to us and we estimate and record a liability for accidents that have occurred but have not been reported to us, which we refer to as incurred but not reported loss and loss adjustment expense reserves.

Loss and loss adjustment expense reserves are estimated by our actuaries using statistical analyses after careful consideration of trends in claim severity, claim frequency, inflation, historical claims, settlement patterns, legislative activity and other factors. Our actuaries rely heavily on historical loss experience when determining loss reserve levels on the assumption that past loss experience is a good indicator of future loss experience. When necessary, and as new experience develops or new information becomes known, our estimates are revised accordingly.

As of December 31, 2004, we had $222.3 million of gross loss and gross loss adjustment expense reserves, which represented our best estimate of ultimate losses and loss adjustment expenses. Adjustments to our loss and loss adjustment expense reserves are reflected in our consolidated results of operations in the periods in which the estimates change.

Our management believes the provision for unpaid losses and loss adjustment expenses is adequate to cover the ultimate net cost of losses and loss adjustment expenses incurred to date.

An analysis of our losses and loss adjustment expenses for December 31, 2004, 2003 and 2002 is summarized in the following table:


		Page

PART I
Item 1.	Business	1
Item 2.	Properties	21
Item 3.	Legal Proceedings	21
Item 4.	Submission of Matters to a Vote of Security Holders	21

PART II
Item 5.	Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	22
Item 6.	Selected Financial Data	23
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 8.	Financial Statements and Supplementary Data	39
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	39
Item 9A.	Controls and Procedures	39
Item 9B.	Other Information	40

PART III
Item 10.	Directors and Executive Officers of the Registrant	40
Item 11.	Executive Compensation	40
Item 12.	Security Ownership of Certain Beneficial Owners and Management	40
Item 13.	Certain Relationships and Related Transactions	40
Item 14.	Principal Accountant Fees and Services	40

PART IV
Item 15.	Exhibits, Financial Statement Schedules	41

	Years Ended December 31,
	2004		2003		2002
	(in thousands)

Balance as of beginning of year	$	202,296	$	157,416	$	105,993
Less: Reinsurance recoverable		113,286		75,136		66,904

Net balance as of beginning of year		89,010		82,280		39,089