The Registrant's subsidiaries, Fortune Insurance Company and Fortune Life Insurance Company own property in Jacksonville, Florida for which there are no definite plans for development at this time. Fortune Insurance Company purchased land in 1987 and 1986 for $165,000 and $140,000 respectively. During 1982, Fortune Life Insurance Company purchased land and a building for $88,000. In 1996 the Registrant purchased land and a building in Jacksonville, Florida for $167,000. This facility serves as off-sight storage.
Total revenues and net income amounts have been restated to conform with the new accounting standard for realized gains and losses.
Total asset amounts have been restated to conform with the new accounting standard for accounting and reporting for reinsurance.
Management's Discussion and Analysis of Financial Condition and Results of Operations 1996 Compared to 1995
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 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.
The reserves for loss and loss adjustment expenses established by the insurance subsidiaries of the Registrant are estimates of the amounts necessary to settle reported and unreported claims and their related loss adjustment expenses. Loss and loss adjustment expenses increased 15% during 1996 over 1995. This increase is principally due to continued strengthening of the Registrant's property and casualty insurance company subsidiary's loss and loss adjustment expense reserves relating to the minimum limits automobile personal injury protection line of business. Policy acquisition costs increased significantly due principally to reduced ceding commission rates. Total consolidated expenses, including the state mandated automobile assigned risk pool, decreased 12% as a result of an amendment of losses assumed from the state mandated automobile assigned risk pool. Interest payments due on the Note have to date been generated from the proceeds of the $12,000,000 loan which was consummated in the fourth quarter 1995.
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. During 1997, the Registrant intends to establish additional reserves in an effort to move toward a more conservative reserve position. The Registrant's independent actuary's range of reasonable direct reserve estimates as of December 31, 1996 is between $46.5 million and $61.5 million and net of reinsurance recoveries the reserve range is between $19.3 million to $25.5 million.
Operations Total consolidated revenues of $52,925,874 for 1995 increased 21% from consolidated revenues of $43,767,330 for 1994.
Loss and loss adjustment expense as a percentage of earned premium was 77.6% in 1993, 77.0% in 1994 and 81.6% in 1995. The Company believes that its current reserves are adequate and proper. The Company has continued corrective action, specifically in the form of substantial rate increases in the fourth quarter of 1995, to reduce the ratio of loss and loss adjustment expense to earned premium. However, additional reserve strengthening may be required in the future. The Company continues to have comprehensive independent actuarial reviews of its reserves. At year end 1995, the Company's loss reserves are within a range which the Company's independent actuary deems appropriate but is approximately 7.1% below the midpoint of that range.
The increasing loss and loss adjustment expense experienced on the business which the Company originates and cedes to its reinsurers may also adversely affect the Company's profitability in the future. If the Company's ratio of loss and loss adjustment expense to earned premium does not improve or should continue to deteriorate, it is likely that over time, the Company's cost of reinsurance would increase, and it is possible that the Company could not obtain reinsurance on economically viable terms.
The Registrant consummated a $12,000,000 loan in the fourth quarter of 1995 with the proceeds to be used for additional capital infusion into the insurance subsidiaries to absorb planned growth. A very sound financial condition was maintained in 1995 with a 48% increase in earnings per share. Cash dividend and capital expenditure requirements continue to be provided from funds generated from operations. Liquidity is substantial for new operational or investment opportunities.
To the Board of Directors and Stockholders Mobile America Corporation Jacksonville, Florida
We have audited the accompanying consolidated balance sheets of Mobile America Corporation and Subsidiaries as of December 31, 1996 and 1995, 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, 1996. 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.
As discussed in Note 1 to the consolidated financial statements, the company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," in 1994.
MOBILE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
MOBILE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The consolidated financial statements have been prepared on the basis of generally accepted accounting principles which vary from statutory reporting practices prescribed or permitted for insurance companies by regulatory authorities.
Common Stock, redeemable preferred stock and fixed maturities, not classified as held to maturity are classified as available for sale and are reported at fair value, with unrealized gains and losses reported as a separate component of stockholders' equity. Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
The cost of securities sold is based upon the specific identification method and any gains or losses are reflected in the accompanying statements of operations.
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, terminations, morbidity, and other assumptions which were appropriate at the time the contracts were issued.
The liabilities for unpaid claims of short-duration contracts and related adjustment expenses are determined using case basis evaluations and statistical analysis and represent estimates of the ultimate net cost of all reported and unreported claims relating to insured events which are unpaid at year-end. The liabilities include estimates of future trends in claims severity and frequency and other factors which could vary as the claims are ultimately settled. Although such estimates may vary, management believes that the liabilities for unpaid claims and related adjustment expenses are adequate. The estimates are continually reviewed, and as adjustments to these liabilities become necessary, they are reflected in current operations.
Earned premiums are stated after a reduction for related premiums ceded to reinsurers. The Company considers anticipated investment income in determining if a premium deficiency exists on short-duration contracts.
For purposes of the consolidated statement of cash flows, cash includes balances in bank deposit accounts maintained with high credit quality financial institutions. Short-term investments are stated at cost, and consist primarily of certificates of deposits, money market accounts, commercial paper and repurchase agreements. For purposes of the consolidated statement of cash flows, the Company does not consider short-term investments to be cash equivalents as they generally have original maturities in excess of three months.
Income Taxes Paid - Income taxes paid totaled $3,577,423 in 1996, $2,008,351 in 1995 and $34,326 in 1994.
Income tax provisions are based on the asset and liability method. Deferred income taxes have been provided for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements.
Certain fees earned, previously reported as a reduction in policy acquisition costs, were reclassified in the 1994 financial statements to conform to 1995 presentation. These reclassifications had no effect on net income, or shareholders' equity, as previously reported.
Net realized and net unrealized gains (losses) on fixed maturities and equity securities are summarized as follows:
The aggregate fair value, gross unrealized gains, gross unrealized losses and amortized cost for available for sale and held to maturity securities by major security type at December 31, 1996 and 1995 are as follows:
Proceeds from sales of investments in debt maturities and related gross realized gains and losses were as follows:
The Company's two finance companies also maintain certain deposits with state regulatory agencies as a statutory licensing requirement. The carring value of these investments was $70,000 at December 31, 1996 and 1995.
Costs, principally commissions, related to the production of new business, are deferred and amortized as summarized below:
Note 4. Modular Office Units, Land and Equipment and Leasehold Improvements
The cost and annual rates of depreciation and amortization for the major classifications of property, equipment and leasehold improvements are as follows:
Fortune and Pegasus have limited their property and liability losses to a maximum of $40,000 per occurrence. On catastrophe losses up to $5,000,000, liability is limited to 5% of the loss in excess of $400,000 in a treaty year. Additionally, with several of the automobile insurance lines, Fortune has reinsured various percentages of its liability on a quota share basis
The effect of reinsurance on premiums written and earned for 1996, 1995 and 1994 is as follows (dollars in thousands):
The amount of reinsurance recoveries deducted from direct and pool participation losses incurred during 1996, 1995 and 1994 was approximately $37,970,000, $59,612,000 and $38,639,000, respectively.
The following represent reconciliations of net income and stockholder's equity of Fortune, Fortune Life and Pegasus from a statutory basis to those presented on a GAAP basis for the year ended December 31, 1996:
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 1996, 1995, and 1994 were $240,739, $210,000, and $170,000 respectively.
The options are accounted for under Accounting Principles Board Opinion No. 25 (APB 25). Under APB 25, because the exercise price of the options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
At December 31, 1996 options for 87,250 shares were exercisable. The proforma disclosure required by Statement of Financial Accounting Standards No. 123 has been omitted because management believes the shares under option are not material.
The following analysis reconciles the statutory Federal income tax rate to the effective tax rates:
Consolidated deferred taxes receivable resulting from temporary differences in the recognition of revenue and expense for tax and financial statement purposes are summarized as follows (in thousands).
Deferred taxes payable of $61,072 and $355,000 are provided on unrealized gains, on equity securities and fixed maturities available for sale at December 31, 1996 and 1995, respectively.
Fortune Life Insurance Company's "policyholders surplus account" which arose under prior tax law, is generally that portion of the life insurance company's gain from operations that has not been subjected to tax. The balance of this account, which under provisions of the Tax Reform Act of 1984, will not increase after 1983, is approximately $98,000 at December 31, 1996. This amount has not been subjected to current income tax, but under certain conditions, may become subject to income tax in future years. At current tax rates, the maximum amount of such tax (for which no provision has been made in the financial statements) is approximately $33,000.
The Company and its subsidiaries operate principally in five business segments consisting of automobile insurance, personal property insurance, commercial lines insurance, life insurance, and fee for service insurance administration. The four insurance segments furnish various forms of property, liability and life insurance marketed through independent insurance agents in the state of Florida. The Company acts as a servicing carrier for the Florida Residential Property and Casualty Joint Underwriting Association, the Florida Automobile Joint Underwriting Association and as a subcontractor for Policy Management Systems Corporation performing various underwriting and claims services for a service fee.
A summary of FAJUA activity reported in 1995 and 1994 is as follows:
The Company is subject to credit risk through short-term cash investments, insurance premium receivables and reinsurance receivables. Short-term investments are placed with high credit quality financial institutions or in short duration high quality debt securities. At times, such investments may be in excess of FDIC insurance limits. No losses have been experienced on such investments.
A significant portion of insurance premium receivables relates to the financing of automobile insurance premiums in south Florida. An allowance for non-collection of $300,000 has been provided for at December 31, 1996. The Company's exposure to loss is limited by the fact that non-payment of premiums will result in cancellation of the underlying insurance policy.
On October 24, 1995 the Company obtained a bank loan in the amount of $12,000,000, for which the proceeds have been used primarily as additional capital for the insurance subsidiaries. The note accrues interest at the 90 day LIBOR rate plus 275 basis points. Interest only is paid through January 24, 1998 with the first principal payment due on the twenty seventh monthly interest payment date and quarterly thereafter in the amount of $600,000 each payment. The entire unpaid principal balance, together with accrued interest thereon is due and payable on the loan maturity date of October 24, 2002.
Loan acquisition costs are being amortized on a straight-line basis over the term of the loan and are included in the other asset section of the consolidated balance sheet.
The Company paid interest of $1,005,760 in 1996 and $156,375 in 1995.
- - Cash and Short-term Investments The carrying amounts approximates fair value because of the short-term maturity of these investments.
Items 10, 11, 12, and 13 have been omitted pursuant to instructions to Form 10-K. The Registrant intends to file with the Securities and Exchange Commission not later than April 30, 1997 a definitive proxy statement to be used in connection with its Annual Meeting of Shareholders, at which time directors will be elected for the ensuing year.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8K