On October 23, 1998, the Company completed the acquisition of the Lalande Financial Group, Inc. ("Lalande Group"). The Lalande Group includes National Specialty Lines, Inc. ("NSL") and DLT Insurance Adjusters, Inc. ("DLT"). NSL is a managing general agency that markets nonstandard personal auto insurance through approximately 605 retail agencies in Florida. DLT is an automobile claims adjusting firm that provides claim services on NSL produced business and to outside parties. The purchase price was for $18,000,000 in cash paid at closing plus up to an additional $22,000,000 in cash to be paid over approximately five years contingent upon the operating performance of the Lalande Group. The Company paid $2,000,000 of the operating performance contingency in April of 2000.
1999 GMSP Transaction. On October 4, 1999, GNA sold to GMSP, for an aggregate purchase price of $31,620,000, (i) 31,620 shares of Series A Preferred Stock, which are convertible into 6,200,000 shares of Common Stock at a conversion price of $5.10 per share (subject to adjustment for certain events), (ii) the Series A Warrant to purchase an aggregate of 1,550,000 shares of Common Stock at an exercise price of $6.375 per share and (iii) the Series B Warrant to purchase an aggregate of 1,550,000 shares of Common Stock at an exercise of $8.50 per share. At closing GNA and its insurance company subsidiaries entered into Investment Management Agreements with GMSP, pursuant to which GMSP manages their respective investment portfolios. Completion of the 1999 GMSP Transaction concluded the strategic alternatives review process that the Company initiated in 1998. Proceeds from the 1999 GMSP Transaction were available for acquisitions, investments and other corporate purposes. See "Investment Strategy" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Operations."
2001 GMSP Transaction. On March 23, 2001, the Company consummated the 2001 GMSP Transaction with GMSP pursuant to which, among other things, the Company issued shares of its newly created Series C Preferred Stock to GMSP in exchange for an aggregate purchase price of $3.0 million in cash.
The annual dividend rate on the Series C Preferred Stock is 10% during the first three years and 20% thereafter. Unpaid dividends are cumulative and compounded. The Series C Preferred Stock is redeemable at the Company's option after five years and at the option of the majority holders after six years. The Series C Preferred Stock is not convertible into Common Stock.
The agreement with GMSP was conditioned upon the following changes in the securities currently held by GMSP. The exercise prices of the Series A Warrant and the Series B Warrant held by GMSP were amended to equal a defined Conversion Price (see below) and 115% of the defined Conversion Price, respectively. Each of these warrants provides for the purchase of 1,550,000 million shares of Common stock, subject to adjustment. Further, GNA is required to redeem the outstanding shares of its Series A Preferred Stock on January 1, 2006, subject to certain conditions. Any Series A Preferred Stock unredeemed for any reason after that date would accrue interest, payable quarterly at a rate equal to eight percent per year with any unpaid interest compounded annually.
The agreement with GMSP provides an opportunity to convert GNA holding company illiquid investments with a cost of $4.2 million to cash as of November 2002, as follows: GNA could at its option require GMSP to purchase the illiquid investments for $2.1 million, less any future cash received prior to November 2002 from the investments. GMSP could at its option require GNA to sell the illiquid investments to GMSP for $4.2 million, less any future cash received prior to November 2002 from the investments.
Gross premiums written in 2000 of $168,285,832 were 26% above the $133,898,001 recorded in 1999 primarily because of increases in commercial specialty lines, personal auto business written in Florida and personal umbrella business written in 2000. The 47% increase recorded in 1999 from 1998 was primarily due to the personal auto business written in Florida beginning in late 1998. The following table compares the major product lines between the years for gross premiums written:
COMMERCIAL LINES grew 17% in 2000 and 10% in 1999. Commercial auto contributed 2 points to the increase in 2000. Commercial auto contributed 7 points to the increase in 1999. The garage product increased slightly in 2000 but decreased in 1999 and accounted for 3 points of decrease in 1999. Pricing pressure and new entrants to the garage market are the primary reasons for the results in both years. The general liability line contributed 10 points to the increase in 2000 and 3 points to the increase in 1999. The large increase in 2000 is primarily attributable to specialty lines of business in professional liability and directors and officers liability.
PERSONAL LINES increased 49% in 2000 primarily as a result of nonstandard auto and umbrella business. The large increase in personal lines in 1999 was the result of the Florida nonstandard auto business the Company began writing in late 1998.
The Company recorded net realized capital losses of $1,906,911 in 2000 versus net realized capital gains of $605,606 in 1999 and $692,510 in 1998. All of these gains and losses were generated from the bonds available for sale category of the fixed maturity portfolio.
Claims and claim adjustment expenses ("C & CAE") increased $67,090,034 in 2000 from 1999 and decreased $10,003,936 in 1999 from 1998. The C & CAE ratio was 94.7% in 2000, 67.4% in 1999 and 93.7% in 1998. The ratio in 2000 is above the 1999 level primarily because of significant unfavorable claims experience in the commercial auto liability line of business for the current and prior accident years. As mentioned previously, the Company is ceasing to write new policies in the trucking portion in this line of business and has reinsurance agreements in place that are expected to minimize future adverse results from this line of business. The C & CAE ratio of 93.7% in 1998 was primarily related to unanticipated unfavorable development from the 1997, 1996 and 1995 accident years for commercial auto liability. With regard to environmental and product liability claims, the Company has an immaterial amount of exposure. The Company does not provide environmental impairment coverage and excludes pollution and asbestos related coverages in its policies. The Company's premium writings for product liability coverages are immaterial.
The primary sources of the insurance subsidiaries' liquidity are funds generated from insurance premiums, net investment income and maturing investments. The short-term investments and cash are intended to provide adequate funds to pay claims without selling fixed maturity investments. At December 31, 2000, the insurance subsidiaries held short-term investments and cash that the insurance subsidiaries believe are adequate liquidity for the payment of claims and other short-term commitments.
The note payable decreased as a result of quarterly principal repayments made by the Company during 2000. Funds held under reinsurance agreements represent claim funds held in conjunction with the reserve reinsurance cover agreement from which the insurance subsidiaries will pay future claims covered under this reinsurance agreement.
Accumulated other comprehensive income of $3,897,371 was recorded at December 31, 2000 as a result of the unrealized gains on bonds available for sale and common stocks. The decrease in retained earnings is primarily attributable to the net loss of $19,551,365 for the 2000 year.
The following consolidated Financial Statements are on pages 43 through 76
The following Consolidated Financial Statements Schedules are on pages 77 through 88: