Interest expense has increased to $4,946,418 in 1996 from $4,810,578 in 1995. The increase in interest expense in 1996 is due primarily to the increase in short term borrowings offset, in part, by a decrease in long-term debt.
The combined ratio is one means of measuring the underwriting experience of a property and casualty insurer. The combined ratio, consisting of the ratio of losses and loss adjustment expenses to premiums earned (the "loss ratio") plus the ratio of underwriting expenses to premiums written (the "expense ratio") reflects relative underwriting profit or loss. The Company's insurance subsidiaries' loss ratios under generally accepted accounting principles ("GAAP") were 30.0% for each of the years ended December 31, 1996, 1995 and 1994. These loss ratios are below industry averages and are believed to be the result of conservative underwriting. There can be no assurance that such loss ratios can continue. The Company's insurance subsidiaries' expense ratios under GAAP were 43.5%, 41.4% and 39.6% for the years ended December 31, 1996, 1995 and 1994, respectively. The Company's insurance subsidiaries' combined ratios under GAAP were 73.5%, 71.4% and 69.6% for the years ended December 31, 1996, 1995 and 1994, respectively. The increase in the 1996 combined ratio results primarily from the decline in premiums.
ACMAT's principal sources of funds are dividends from its wholly-owned subsidiaries, intercompany and short-term borrowings, insurance underwriting fees from its subsidiaries, construction contracting operations and rental income. Management believes that these sources of funds are adequate to service its indebtedness. ACMAT has recently utilized short-term borrowings to repurchase its stock. On a long-term basis, ACMAT could rely, if necessary, on dividends from its insurance subsidiaries to improve its working capital.
Net cash used for investing activities amounted to $11,358,672 in 1996, $11,454,974 in 1995 and $4,535,375 in 1994. In December 1996, the Company sold fixed maturity securities with a book value of approximately $34,000,000 resulting in a realized gain of approximately $204,000.
ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
Reinsurance recoveries on ceded paid losses and loss adjustment expenses totaled approximately $98,000 and $30,000 for the years ended December 31, 1996 and 1995, respectively. There were no reinsurance recoveries on ceded paid losses and loss adjustment expenses for the year ended December 31, 1994. Ceded incurred losses and loss adjustment expenses totaled $421,408 and $378,254 for the years ended December 31, 1996 and 1995, respectively.
The terms of the note agreements contain limitations on payment of cash dividends, re-acquisition of shares, borrowings and investments and require maintenance of specified ratios and a minimum tangible net worth of $12,000,000. ACMAT may also require its insurance subsidiaries to pay dividends to the extent of funds legally available therefor, in order to enable ACMAT to have funds to pay on a timely basis all amounts due with respect to the notes. The Company is in compliance with all but one of these covenants at December 31, 1996 and the Company has received a waiver relative to the covenant with which the Company was not in compliance.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for the options granted in 1996: no dividend yield; expected volatility of 20%; risk free interest rate of 6.7%; and expected life of ten years for the options. The weighted average of fair value of options granted in 1996 was $5.99 per share.