The executive and general offices of the Registrant and its subsidiaries, consisting of approximately 22,915 square feet, are located at 10475 Fortune Parkway, Suite 110, Jacksonville, Florida. In 1997 the Registrant exercised a renewal option extending the term of the lease on this space to 2002. Annual lease payments range from $207,839 to $231,442 in the final year of the lease.
In 1997, the Registrant expanded its facilities by leasing approximate 7,500 square feet for its personal property, excess and surplus lines and fee for service processing. Annual lease payments range from $58,155 to $61,445 over a three year period.
Management's Discussion and Analysis of Financial Condition and Results of Operations 1997 Compared to 1996
Total consolidated revenues, exclusive of state mandated automobile assigned risk pool business, increased 3.9% from $57,836,017 in 1996 to $58,921,414 in 1997. Overall, total consolidated revenues increased 22.1% to $58,810,207 during 1997 from $48,163,935 for 1996. This change was influenced by an increase in insurance premiums earned (which was adversely effected by adjustments to state mandated assigned risk pool business in 1996), offset by a decline in service fees earned and lower net investment income.
Direct written premium in the Registrant's automobile lines decreased 10% in 1997 to $80,727,841 reflecting a decrease in market share as a result of rate increases instituted in December 1996 and increased competition in the market place. The Registrant believes premium volume may increase if competitors adjust their premium rates to offset the impact of adverse loss experience. The Registrant has taken steps, with the March 1998 rate revision, to exploit pockets of opportunity resulting in the establishment of new territories, more competitive rates and a revised commission structure.
Service fees earned declined 18.6% in 1997 to $8,957,080 compared to $11,001,222 reported in 1996. This decrease is the result of lower fee-for-service revenue due to the cancellation of certain service agreements with the FRPCJUA during the second quarter of 1996. In the fourth quarter of 1997, the Registrant was awarded a three year servicing contract by the FAJUA, effective January 1, 1998. In November 1997, the FRPCJUA extended a major servicing contract through March 1999. While it is impossible to predict with certainty, service fees generated over the life of these contracts could be as much as $14,000,000.
Total consolidated expenses, exclusive of state mandated automobile assigned risk pools, increased 3.7% from $48,385,265 during 1996 to $50,173,849 during 1997. Overall, total consolidated expenses increased 27.5% from $39,177,771 in 1996 to $49,942,311 in 1997, primarily due to losses and expenses associated with assigned risk pool business.
Loss and loss adjustment expenses incurred increased 5.0% during 1997 over 1996, exclusive of assigned risk pool business, for all lines of business written by the Registrant's insurance company subsidiaries. However, substantially all of this increase is attributable to the minimum limits automobile personal injury protection line of business. Loss and loss adjustment expenses incurred as a percentage of earned premium were 81.3% in 1995, 78.2% in 1996 and 74.8% in 1997, in each case, exclusive of assigned risk pool business. In its efforts to reduce loss and loss adjustment expenses incurred, as it relates to earned premium, the Registrant initiated a significant rate increase in the minimum limits personal injury protection line of business in the fourth quarters of 1995 and 1996. The Registrant will introduce a new rate increase in March 1998.
Due to the inherent uncertainty in estimating reserves for losses and loss adjustment expenses, which are estimates of the amounts necessary to settle reported and unreported claims and their related loss adjustment expenses, there can be no assurance that the ultimate liability will not exceed the amounts reserved, resulting in an adverse effect on the Registrant. At year end 1997, the Registrant's loss and loss adjustment expense reserves were at the lower end of a range which the Registrant's independent actuary deems appropriate. The Registrant believes its current reserves are adequate. The Registrant's independent actuary's range of reasonable direct reserve estimates as of December 31, 1997 is between $31.8 million and $43.0 million and net of reinsurance recoveries the reserve range is between $15.1 million to $20.5 million.
Net cash flow from operations was negative in 1997 as loss and loss adjustment expense payments and consolidated operating expense payments exceeded premiums, fees and investment revenues. The Registrant put forth a concerted effort in 1997 to settle outstanding claims, thereby reducing the number of claims outstanding in the minimum limits automobile personal injury protection line of business. This process accelerated loss payments contributing to the negative cash flow the Registrant experienced. The Registrant believes this practice will improve overall loss and loss expense experience by reducing ultimate loss settlement costs and litigation expenses. The Registrant's practice of maintaining a highly liquid investment portfolio allowed the Registrant to meet cash demands with no adverse impact on operating performance. The Registrant is optimistic that cash flow will improve as rate increases take effect and the settlement of losses returns to a more normal pattern.
The Registrant is in the process of purchasing a new computer system to meet the year 2000 transition and provide support for a growing business. The Registrant has budgeted $1.4 million for this project. The new computer system will allow the Registrant to process more business in-house eliminating the costs of using third party providers as well as providing cost saving opportunities on the Registrant's core business.
The Registrant paid an annual dividend of $.35 per share on February 3, 1998 to shareholders of record on January 20, 1998. The dividend payment totaled $2,526,724.
The Registrant maintains sufficient liquidity to meet operational needs. Cash dividend, capital expenditure and operating requirements will be provided by operations and investment activities. The investment policy continues to emphasize higher quality securities matched closely with the short liability duration.
Insurance premiums, exclusive of state mandated automobile assigned risk pool business, increased 20% during 1996 due primarily to an increase in automobile personal injury protection and property damage rates initiated in September and October 1995 as well as the continued earning of premiums at a lower reinsurance cession rate. Overall insurance premiums decreased 19% as a result of an amendment of premiums assumed from the state mandated automobile assigned risk pool. This amendment resulted in no material effect on net income.
Loss and loss adjustment expenses as a percentage of earned premium were 77.0% in 1994, 81.6% in 1995 and 72.8% in 1996. The Registrant believes that its current reserves are adequate and proper. However, additional reserve increases may be required in the future. In it's efforts to reduce loss and loss adjustment expenses, as it relates to earned premium, the Registrant initiated a significant rate increase in the minimum limits personal injury protection line of business during the fourth quarter 1996. This increase follows closely behind a similar sized rate increase in the fourth quarter 1995. Due to the inherent uncertainty in estimating reserves for losses and loss adjustment expenses there can be no assurance that the ultimate liability will not exceed the amounts reserved, resulting in an adverse effect on the Registrant. At year end 1996, the Registrant's loss and loss adjustment expense reserves were at the lower end of a range which the Registrant's independent actuary deems appropriate.
The increasing loss and loss adjustment expense experienced on the business which the Registrant originates and cedes to its reinsurers may also adversely affect the Registrant's profitability in the future. In an effort to reduce it's reliance on reinsurance, the Registrant decreased the ceding percentage from 70% to 60% on certain lines effective January 1, 1996.
We have audited the accompanying consolidated balance sheets of Mobile America Corporation and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements and schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mobile America Corporation and Subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the accompanying Index in Item 14(a)2 of this Form 10-K are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Mobile America Corporation and Subsidiaries Consolidated Statements of Operations Years Ended December 31, 1997, 1996 and 1995
Mobile America Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 1997, 1996 and 1995
The Company is a publicly held holding company providing property and casualty insurance, life insurance, insurance administrative services to various state underwriting associations on a fee for service basis and premium financing. The Company is principally involved in writing personal lines automobile insurance in Florida.
Realized gains and losses on sale of fixed maturities and equity securities are determined on the specific identification basis using amortized cost for fixed maturities and cost for equity securities. Any gains and losses are reflected in the accompanying statements of operations.
In the normal course of business, the Company enters into transactions involving various financial instruments, including debt, investments such as fixed maturities, and equity securities. These instruments involve credit risk and also may be subject to risk of loss due to interest rate fluctuations. The Company evaluates and monitors each financial instrument to minimize the risk of loss.
The costs, primarily commissions, associated with acquiring new insurance contracts have been deferred. Such costs are being amortized to income as premiums are earned or over the contracts premium paying period.
The insurance contracts accounted for in these financial statements include both short-duration contracts and long-duration contracts. Short-duration contracts provide insurance protection for a fixed period of short-duration, usually six months to one year, and enable the insurer to cancel the contract or to adjust the provisions at the end of any contract period. Most property-liability insurance contracts and certain term life insurance contracts are short-term and generally are not subject to unilateral changes in their provisions and require the performance of various functions and services, including insurance protection, for the contract term. Long-duration contracts include whole-life contracts and guaranteed renewable term life contracts. The Company has not issued participating policies.
The liability for future policy benefits of long-duration contracts has been provided for on a net level premium method based on estimated investment yields, withdrawals, mortality, termination's, morbidity, and other assumptions which were appropriate at the time the contracts were issued.
Service fees represent proceeds from servicing insurance policies for third parties on a fee-for-service basis. Fees are recognized as revenue over the expected term of the underlying insurance policies.
In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share". Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully dilutive earnings per share. All earnings per share amounts for all periods have been presented , and where appropriate, restated to conform to the Statement 128 requirements.
Income Taxes Paid - Income taxes paid totaled $2,230,000 in 1997, $3,577,423 in 1996 and $2,008,351 in 1995. Interest paid totaled $1,014,161 in 1997, $1,005,760 in 1996 and $156,375 in 1995.
Income taxes are calculated under the liability method. Deferred taxes are provided for temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Items giving rise to such differences are insurance reserves and unearned premiums.
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" , encourages, but does not require companies to record compensation costs for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, compensation cost of stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock.
All common shares and per share amounts have been adjusted to give effect to a 15% stock dividend distributed to shareholders on June 23, 1997.
Certain prior-year amounts have been reclassified to conform with current-year presentations.
The scheduled maturities of available for sale and held to maturity securities at December 31, 1997 are as follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations without penalties.
The Company's three insurance subsidiaries, Fortune, Fortune Life, and Pegasus maintain certain deposits with state regulatory agencies as a statutory licensing requirement. The carrying value of the investments on deposit was $1,550,000 at December 31, 1997 and $1,550,000 at December 31, 1996. These deposits are included in the investment tables and exhibits of this report.
Several of the automobile insurance lines written by Fortune have been reinsured on a quota share basis, whereby a reinsurer provides ceding commission to the Company in return for ceded premium. In some instances
In 1995, Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" was issued. This statement requires the recognition of an impairment loss for an asset held for use when the estimate of undiscounted future cash flows expected to be generated by the asset is less than its carrying amount. Due to the nature of the Company's business, with limited use of long-lived assets, it has been determined that no impairment loss need be recognized.
The insurance subsidiaries have various reinsurance agreements which significantly affect their operations. Risks are reinsured to limit loss size and to increase underwriting capacity, although the Company remains primarily liable to the policyholders on all risks transferred.
Fortune, Fortune Life and Pegasus are subject to regulation by the insurance departments of the states in which they are licensed. Under the regulations, cash dividends may only be paid out of accumulated surplus funds derived from net operating profits and capital gains, or out of earned surplus even though total surplus may be less than capital stock and paid-in capital. Fortune, which is subject to Florida law, may not pay, unless otherwise approved by the State Insurance Commissioner, dividends in any one year which exceed the greater of (a) 10% of such surplus funds or (b) the total amount of such funds derived during the immediate preceding year.
Following are reconciliations of net income and stockholders' equity for Fortune, Fortune Life and Pegasus from a statutory basis to those presented on a GAAP basis for the year ended December 31, 1997:
The Company's defined contribution pension plan covers substantially all full-time employees. Contributions are based on employee earnings. Total contributions made by the Company during 1997, 1996, and 1995 were $288,000, $240,000, and $210,000, respectively.
The Company's incentive plan, adopted in 1995, provides for the issuance to key employees and directors of up to 300,000 shares of common stock through options, stock appreciation rights and other stock-based awards as defined under current tax laws. An additional 200,000 shares will be added to the plan pending shareholder approval at the 1998 Annual Meeting. Incentive stock options for employees are exercisable for periods of up to ten years from the date of the grant at a price equal to the fair market value on the date of the grant. In the case of an incentive option granted to an individual who owns at least 10% of the total combined voting power of the Company, the exercise price must be at least 110% of the fair market value of the common stock on the date of grant and the option term cannot exceed five years. Stock appreciation rights entitle the recipient to receive the difference between the fair market value of the common stock on the date of exercise and the stock appreciation rights price in cash or in shares of common stock, or a combination. Restricted stock awards entitle the recipient to receive shares of common stock subject to forfeiture restrictions that lapse over time or upon the occurrence of specific events.
The fair value of options granted in 1997, 1996 and 1995 was estimated using the Black-Scholes option pricing model. The weighted average fair value and related assumptions were as follows:
Consolidated deferred tax expense (credit) results from timing differences in the recognition of revenue and expense for tax and financial statement purposes. The source of these differences and their tax effect are summarized as follows (in thousands):
Beginning in 1995, the Company and its subsidiaries filed a consolidated federal income tax return, while prior to 1995 the life insurance subsidiary filed a separate return.
Summarized financial information by business segment for 1997, 1996 and 1995 is as follows:
In 1996 the FAJUA issued reports amending Fortune's participation for years prior to 1996. These changes were reported in the 1996 financial statements. A summary of Fortune's 1996 participation and the prior year adjustment is presented below.
The note was collateralized by the assignment of the capital stock of the Company's subsidiaries on October 24, 1995, as well as the execution of guaranty agreements between the bank and certain subsidiaries of the Company.
The following is a schedule of the required annual principal payments:
- - Insurance Premium Receivable The carrying amount approximates fair value due to the short-term nature of the receivable.