Cumberland leases office space from a company owned by the chairman of the Board, Mr. Francis M. Williams, at a monthly rate of $4,347. The lease expired on February 28, 1997. A new lease was executed March 1, 1997.
(1) Pro forma net income (loss) per share (unaudited) for 1992 and 1993 has been calculated based on the 4,039,780 shares of Cumberland Common Stock that were outstanding after the Distribution. The 1994, 1995 and 1996 net income (loss) per share amounts have been computed based on the actual weighted average number of shares outstanding during the respective years, adjusted for the dilutive effect of stock options.
Year Ended December 31, 1996 Compared to Year Ended December 31, ----------------------------------------------------------------- -
Direct premiums earned were $1,114,901 and $627,683 for 1996 and 1995, respectively, representing an increase of $487,218 or 78 percent.
Total . . . . . $ 4,781,567 $ 4,915,846 $ 3% ============== ============== ==============
During the year ended December 31, 1996 and 1995, investment income before capital gains was $403,919 and $397,681, respectively. Realized gains, net of losses, for the year ended December 31, 1996 and 1995 was $117,824 and $124,004, respectively. The net result was investment income remained consistent for 1996 as compared to 1995.
Other revenues for the year ended December 31, 1996 increased to $2,039,331 from $1,198,249 for the year ended December 31, 1995, an increase of 70.1%. The increase is a direct result of an increase of $612,350 in commission income earned by subsidiary surety agencies, and an increase of $228,729 in consulting revenues derived from Qualex which was formed in November 1994.
During the year ended December 31, 1996, benefits and claims expenses increased to $1,670,640 from $1,245,546 for the year ended December 31, 1995. The increase in benefit and claims expenses of $425,095 is attributed to claims on reinsurance assumed pooling agreements. During 1996, an increase of $300,000 was charged to the 1993/94 pooling agreement. Management believes the increase in claims arising from business written in the Pooling Agreement has leveled off and anticipates that losses associated with the reinsurance contracts will decrease during 1997. Losses associated with direct premiums represent approximately 11% of premiums earned or $127,232.
Year Ended December 31, 1995 Compared to Year Ended December 31, -----------------------------------------------------------------
During the year ended December 31, 1995, net premium income increased by 2 percent to $5,068,000 from $4,957,000 for the year ended December 31, 1994. Premium income for 1995, when compared to 1994, remained relatively flat. Net reinsurance premiums earned through the pooling agreements were $4,441,000 and $4,453,000 for 1995 and 1994, respectively. Direct premiums earned were $628,000 for 1995 as compared to $503,000 for 1994, an increase of $125,000 or 25%.
During the year ended December 31, 1995, net investment income increased to $521,000 from $160,000 for the year ended December 31, 1994. The increase in investment income is attributed to net realized gains of $124,000 and an increase in the interest rate earnings on the bond portfolio during 1995. The Company realized net losses on sales of investments in common stocks in 1994 of $123,000.
During the year ended December 31, 1995, benefits and claims expenses decreased to $1,246,000 from $2,646,000 for the year ended December 31, 1994. The ratio of benefits and claims expenses to net premium income for 1995 (25%) decreased from 1994 (53%) primarily due to a decrease in incurred losses relating to a single principal on business written through the 1991/92 pooling agreement. This loss was atypical in nature and expensed during 1994.
During the year ended December 31, 1995, the amortization of deferred policy acquisition costs increased to $2,380,000 from $2,038,000 for the year ended December 31, 1994. The ratio of amortization of deferred policy acquisition costs to net premium income for 1995 (47%) approximated that for 1994 (41%).
The Company s effective tax (benefit) rate for 1995 was -0- percent as compared to (11.2) percent for 1994. The deviation from statutory rates for 1994 and 1995 primarily relates to the Company s establishment of a valuation allowance on a portion of the net operating loss, the future realization of which is uncertain.
The capacity of a surety company to underwrite insurance and reinsurance is based on maintaining liquidity and capital resources sufficient to pay claims and expenses as they become due. Based on standards established by the National Association of Insurance Commissioners (NAIC) and promulgated by the Florida Department of Insurance, the Company is permitted to write premiums up to an amount equal to three times its statutory surplus, or approximately $15,104,000 and $15,405,000 at December 31, 1996 and 1995, respectively. Therefore, based upon statutory guidelines, the Company could increase earned premiums by approximately $11,296,000 in 1997 in addition to the amount earned in 1996. The primary sources of liquidity for the Company are funds generated from surety premiums, investment income, and proceeds from sales and maturities of portfolio investments. The principal expenditures are payment of losses and loss adjustment expenses, insurance operating expenses, and commissions.
The Company maintains a liquid operating position and follows investment guidelines that are intended to provide an acceptable return on investment while maintaining sufficient liquidity to meet its obligations.
Net cash used in operating activities was $315,000, $375,000 and $355,000 for the years ended December 31, 1994, 1995 and 1996, respectively. In 1994, the cash used in operating activities of $315,000 was due primarily to an increase in trade accounts receivable and the net loss for the year offset by an increase in ceded reinsurance payable. In 1995 and 1996 the cash used in operating activities was primarily attributable to payments of claims and reinsurance, which offset in part by a decrease in accounts receivable.
KC and Cumberland entered into a term note agreement evidencing the balance of the surplus debenture which was due KC from CCS. The surplus debenture, as well as all accrued interest, has been assigned to Cumberland. Refer to Note 8 of the Notes to Consolidated Financial Statements.
The following table provides a reconciliation of the beginning and ending liability balances, net of reinsurance recoverable, for 1994, 1995 and 1996 to the gross amounts reported in Cumberland s balance sheets:
Increase (decrease) in estimated losses and LAE for claims occurring in prior years, net of reinsurance 220,600 (241,000) 300,000 -----------------------------------
Incurred losses during the current year, net of reinsurance . . . . . . . . 2,646,055 1,245,546 1,670,640
Liability for losses and LAE, net of reinsurance recoverable on unpaid losses, at end of year . . 1,625,703 1,052,547 594,922
The differences between the December 31, 1996 liability for losses and LAE reported in the accompanying consolidated financial statements in accordance with generally accepted accounting principles ("GAAP") and that reported in the annual statement filed with the state insurance departments in accordance with statutory accounting practices ("SAP") are as follows:
Reinsurance recoverables on unpaid losses and LAE . . . . . . . . . . . . . . . . . . . . 1,396,874
Salvage and subrogation . . . . . . . . . . . (312,911) --------------- Liability for losses and LAE, as reported in the accompanying GAAP basis financial statements . . . . . . . . . . . . . . . . . $ 1,991,796 ===============