PREMIUMS RECEIVABLE. Premiums receivable decreased $1.3 million, or 17.8% to $6.0 million as of December 31, 2004, from $7.3 million as of December 31, 2003. The decline can be attributed to the decline in automobile written premiums and the diversification of our product lines. The predominate user of the finance products is the automobile customer. There is less of a tendency to finance homeowner premiums due to policyholder mortgage escrow arrangements and only a modest need to finance commercial general liability insurance.
BANK OVERDRAFT. Bank overdraft increased $14.3 million to $14.8 million for the year ended December 31, 2004 as compared to $0.6 million for the year ended December 31, 2003. The significant increase primarily relates to hurricane-related loss and LAE checks issued but not yet paid by the bank.
LOSSES AND LAE. Loss and loss adjustment expenses increased by $47.5 million, or 172.6%, to $75.0 million for the year ended December 31, 2004, as compared to $27.5 million as of December 31, 2003. The increase is due to the impact of the 2004 hurricane season wherein August and September of 2004, the State of Florida experienced four hurricanes, Charley, Frances, Ivan and Jeanne. One of our subsidiaries, Federated National, incurred significant losses relative to its homeowners' insurance line of business. The Company's loss ratio, as determined in accordance with GAAP, for the year ended December 31, 2004 was 113.21% compared with 61.30% for the same period in 2003. The table below reflects the loss ratios by product line.
INCREASE IN UNEARNED PREMIUMS. The increase in unearned premiums declined by $8.8 million, or 63.1% to ($5.2) million as of December 31, 2003, as compared to ($14.0) million as of December 31, 2002. The unearned premium liability increase of $5.2 million during 2003 is net of homeowner and commercial liability unearned premiums increases of $5.7 million and $3.8 million, respectively, and is offset by automobile unearned premiums decreases of $4.3 million. These changes reflect our emphasis in 2003 on property and commercial general liability insurance products.
The Revolving Agreement contains various operating and financial covenants, with which we were in compliance at December 31, 2004 and December 31, 2003. Outstanding borrowings under the Revolving Agreement as of December 31, 2004 and December 31, 2003 were $2.1 million and $4.1 million, respectively. Outstanding borrowings in excess of the $2.0 million commitment totaled $148,542 as of December 31, 2004. The excess amount, permissible by reason of a compensating cash balance of $156,070 for December 31, 2004, was held for the benefit of WPAC and is included in other assets. Outstanding borrowings in excess of the $4.0 million commitment totaled $98,786 as of December 31, 2003. The excess amount, permissible by reason of a compensating cash balance of $200,430 for December 31, 2003, was held for the benefit of FPF and is included in other assets. Interest expense on this revolving credit line for the years ended December 31, 2004, 2003 and 2002 totaled approximately $178,000, $203,000 and $342,000, respectively.
In September 2002, FlatIron reduced the maximum credit commitment under the Revolving Agreement due to the A.M. Best ratings of third party insurance carriers with which we were financing policies at the time. Simultaneously, however, we ceased financing policies underwritten by third party insurance carriers altogether and began financing only those policies underwritten by our insurance carriers (in 2003 we began again to finance policies from a small number of independent agents whose customer base and operational history meet our strict criteria for credit worthiness). Additionally, in 2002, we implemented a direct bill program for policies underwritten by our carriers. These changes markedly decreased credit risks and made our reliance on the higher credit commitment previously offered by FlatIron unnecessary.
21st Century Holding Company and Subsidiaries CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2004 AND 2003
21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003, 2002
We recognize the income and expense on reinsurance contracts principally on a pro-rata basis over the life of the policies covered under the reinsurance agreements. We are reinsured under separate reinsurance agreements for the different lines of business underwritten. Reinsurance contracts do not relieve us from our obligations to policyholders. We continually monitor our reinsurers to minimize our exposure to significant losses from reinsurer insolvencies. We only cede risks to reinsurers whom we believe to be financially sound. At December 31, 2004, all reinsurance recoverables are considered collectible.
Years Ended December 31, ------------------------ 2004 2003 --------- --------- Allowance for credit losses at beginning of year $ 562,558 $ 404,356 Additions charged to bad debt expense 559,396 819,868 Write-offs charged against the allowance (646,166) (661,666) --------- --------- Allowance for credit losses at end of year $ 475,788 $ 562,558 ========= =========
As of December 31, 2003, Federated National was outside NAIC's usual ranges with respect to its IRIS tests on five out of twelve ratios. The first ratio relates to a larger than expected change in net writings, the second ratio relates to higher surplus growth that stemmed from the Parent company's capital contributions totaling $3.9 million during the year and the third ratio relates to an investment yield that was less than expected. The fourth and fifth ratios involved the one and two year reserve development to policyholder surplus ratios that were in excess of the "usual ranges" and relate to modest, but adverse, development which incurred in 2003 relating to 2002 and 2001 loss reserves.
We do not currently believe that the Florida Office of Insurance Regulation will take any significant action with respect to Federated National or American Vehicle regarding the IRIS ratios, though there can be no assurance that will be the case.
As a direct premium writer in the State of Florida, we are required to participate in certain insurer solvency pools under Florida Statutes 631.57(3)(a). Participation in these pools is based on our written premium by line of business to total premiums written statewide by all insurers. Participation may result in assessments against us. We were assessed $258,000 for the year ended December 31, 2002. There was no assessment made for the years ended December 31, 2004 or 2003.
At December 31, 2004, there are no minimum aggregate rental commitments.
Our Amended and Restated Articles of Incorporation authorize the issuance of one million shares of preferred stock with designations, rights and preferences determined from time to time by our board of directors. Accordingly, our board of directors is empowered, without shareholder approval, to issue preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of common stock. We have not issued preferred shares as of December 31, 2004.