Insurance

In seeking to both diversify Lockhart's businesses and utilize its expertise, the Company's Management has focused on acquiring and growing selected insurance companies in the profitable Caribbean property and casualty market, and will seek to acquire niche Continental U.S. insurance businesses, particularly those serving the U.S.-based Caribbean community.

The Caribbean property and casualty insurance business historically has been, is, and is expected to continue to be exceptionally profitable. This profitability results from the sustained ability to underwrite insurance at premiums that generously compensate for the seasonal hurricane and other weather-related risks which are common to much of the Caribbean.

Historically, the occurrence of significant property damage resulting from a major hurricane has justified relatively high property and casualty insurance premium rates, further increasing Caribbean insurers' returns. At the same time, as a result of the possibility but not the probability of an unusually high loss, competition continues to be limited in the Caribbean property and casualty market. More specifically, the U.S. Virgin Islands insurance market is an attractive market, as property and casualty insurance companies' combined ratios (defined as the sum of their loss ratios and expense ratios, with investment income not included as part of their revenues) typically are in the 80s.

In comparison, the combined ratios for property and casualty insurance companies based in the Continental U.S. typically are above 100, which means that these companies typically write insurance policies at a loss and expect to offset this loss with investment income on their premiums. By having combined ratios below 100, Caribbean property and casualty insurers earn some profit both on writing policies and on generating investment income.

Over the last 50 years, the U.S. Virgin Islands has experienced only two major hurricanes, Hugo in 1989 and Marilyn in 1995. As a result of these hurricanes, hurricane insurance is a condition of loan approval by all U.S. Virgin Islands lending institutions, and construction is required to conform to the rigorous, new Uniform Building Code of the U.S. Virgin Islands. Commercial and residential property owners are currently required to maintain property and casualty insurance in amounts at least equal to the value of their mortgages, and this required coverage has resulted in the significant growth of the property and casualty insurance market in the U.S. Virgin Islands in particular, and in the Caribbean region in general.

Lockhart actively reinsures selected risks in its liability pool with experienced credit-worthy reinsurers. Lockhart's principal reinsurance agreement provides coverage to protect both Guardian's and Heritage's automobile insurance businesses from losses which might otherwise arise from natural disasters. Reinsurance coverage is underwritten in the London and Bermuda markets.

Lockhart intends to maximize the profitability and minimize the losses of its Caribbean property and casualty insurance business by: (i) prudently underwriting selected risks using its knowledge of the region, its businesses and its people; (ii) using the reinsurance market to mitigate exposure to concentrated risks; (iii) maintaining sound reserves for losses; and (iv) conservatively investing its funds.

In December 1998, Lockhart purchased the outstanding shares of stock of Guardian Insurance Company, Inc. ("Guardian") and Heritage Insurance (Caribbean) Limited ("Heritage"). Guardian, which was established in 1984, is a U.S. Virgin Islands corporation and one of the oldest existing insurance companies in the territory. Heritage, domiciled in the British Virgin Islands, was founded in 1992 and is authorized to do business in the British Virgin Islands, Anguilla and Turks and Caicos Islands. The acquisition of these insurance companies also provides Lockhart with the opportunity to cross-sell services to its PFC customer base both in the U.S. Virgin Islands and throughout the Caribbean region.

Guardian, based on St. Thomas, U.S. Virgin Islands, is a property and casualty insurer. Historically, Guardian has focused on serving the Hispanic community in the Caribbean, and nearly all of its employees are fluent in Spanish. While Guardian is licensed to provide homeowners', commercial property, private and commercial automobile, surety, medical malpractice, general liability and marine coverage, the current underwriting focus of Guardian is primarily on automobile insurance, which accounts for a significant portion of its portfolio.

Guardian is the largest automobile insurer in the U.S. Virgin Islands and has about 60% of the current market share of the personal automobile insurance market. Through active advertising and by locating Guardian insurance agents in strategic locations, including inside Lockhart's own community shopping centers, Guardian has established a significant presence in the U.S. Virgin Islands.

Guardian's business is generated through insurance agents and brokers that have executed agreements to represent the company. In addition, Guardian has opened neighborhood offices to service claims and walk-in clients that are not already placed with Guardian through any of their existing agents and brokers. Guardian's first neighborhood office was opened in the early summer of 1999, just on time to celebrate Guardian's 15th year of service to the community of the Virgin Islands. Guardian has also entered into programs with various commercial banks in the U.S. Virgin Islands to insure vehicles for which the banks have provided loans. In 2004, Guardian received a B+ rating from A.M. Best, which it had prior to Hurricane Marilyn in 1995.

Heritage, domiciled in the British Virgin Islands, is a property and casualty insurer with offices in the British Virgin Islands (for processing claims) and Turks and Caicos Islands (for direct sales). The major portion of the company's business is currently generated in the Turks and Caicos Islands. The company, like Guardian, is primarily an automobile insurer but offers homeowner coverage in its primary market in the Turks and Caicos Islands. Heritage estimates its current targeted automobile insurance market to represent over $3 million in annual premiums.