The Company owns a 3.28 acre tract of land in Fort Worth, Texas and all improvements located thereon, including a 10,000 square foot office building, which previously served as its corporate offices. The Company currently has this property under lease.
(1) Excludes premiums of $31,603,000 in 1996, $8,893,000 in 1995, $5,056,000 in 1994, $5,418,000 in 1993 and $6,942,000 in 1992 from the Company's fronting arrangements and the commercial automobile plans of Arkansas, California, Louisiana, Mississippi, and Pennsylvania under which the Company is a servicing carrier.
(3) All years retroactively adjusted for stock dividends and stock splits effected as stock dividends as follows: two 5% in 1995, two 5% in 1994, two 5% in 1993 and one 5% and one 50% in 1992.
(4) Certain reclassifications have been made to years prior to 1993 to comply with Statement of Financial Accounting Standards No. 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" which the Company implemented in the first quarter of 1993.
Net income for 1996 decreased 9% to $16,019,567, or $.74 per share compared to 1995 net income of $17,627,855, or $.81 per share and 1994 net income of $15,168,800, or $.70 per share. The Company recorded a 16% return on beginning equity and a GAAP combined ratio of 88.5% in 1996.
Net investment income increased 12% in 1996 over 1995 and increased 19% in 1995 over 1994. These increases are the result of growth in the portfolio due to continued positive cash flows from operations. The return on average investments for 1996 is 4.7% versus 4.8% in 1995 and 4.6% in 1994. Inflation can cause interest rates to increase, which would cause the Company's interest income to increase. Because of the Company's profitability in the underwriting operations, the Company achieves the highest after tax net income by investing predominantly in tax-exempt securities. At December 31, 1996, 86% of the Company's investments were in investment grade tax-exempt bonds with an average maturity of approximately 3.4 years. Since the majority of the Company's investments are tax-exempt, the yields appear lower than those of the industry; however, the industry as a whole has a significantly larger percentage of investments in taxable securities with substantially longer maturities. On a taxable equivalent basis the return on average investments was 6.6% in 1996 and 1995 and 6.4% in 1994. The Company has the ability to hold its fixed maturity securities until their maturity date. The Company does not actively trade its bonds, however, it does classify certain bond securities as available for sale. At December 31, 1996, approximately 4% of the Company's investments were in U.S. Treasury securities and 10% were in short-term money market funds. The Company has not and does not intend to invest in derivatives or high-yield ("junk") securities, nor equity securities in issuers of "junk" debt securities. The Company does not have any non-performing fixed maturity securities.
The Company recorded net realized capital gains of $471,956 in 1996 versus $108,024 in 1995. All of these gains were generated from bonds available for sale and were to some extent the result of extending durations.
Revenues in the computer software operation were flat for 1996 following a 15% decrease in 1995. New management brought in during the third quarter of 1995 has improved this operation and revenues are expected to show moderate increases in the future.
Revenues from the premium finance operation are up 23% in 1996 over the 1995 level which was 83% above the 1994 level. Marketing efforts implemented in 1995 and continued in 1996 account for the increases in both years. Amounts financed in 1996 were 5% above 1995 which had increased 84% over 1994. Premium finance notes receivable were approximately $1,991,000 at December 31, 1996 versus $2,015,000 at December 31, 1995 and the average return was 17% for 1996 versus 19% in 1995 and 18% in 1994.
Fronting fee revenues increased $280,838 during 1996 as a result of significant growth in the two fronting reinsurance accounts initiated in 1995 and the addition of a third account in 1996.
The increase in commissions from 1995 to 1996 is related to the increase in gross premiums written and to a decrease of approximately $1,669,000 in commission income from reinsurance treaties. Commissions increased in 1995 over 1994 as a result of the increase in written premiums between these years and as a result of additional commission income of approximately $2,164,000 recorded in 1994 from the 5% quota share treaty (it was not renewed in 1995). The ratio of commissions to gross premiums written increased to 22% in 1996 from 20% in 1995 and from the 19% level in 1994 as a result of the decrease in commission income in 1996 and 1995 discussed previously. The ratio of commissions to premiums earned was 23% for 1996 and 1995 as compared to 22% for 1994. The increase in 1995 was related to the decrease in commission income in 1995.
Underwriting and operating expenses were down slightly in 1996 from 1995, and they were up 7% in 1995 over 1994. As a percent of operating revenues (premiums earned and insurance services revenues) the ratio continued to decrease to 14.2% in 1996 versus 15.7% in 1995 and 16.8% in 1994. The decrease in 1996 was the result of savings from variable expenses of personnel and the plan servicing operation.
For 1997 the Company is targeting premiums written to be within a $115-125 million range with a GAAP combined ratio of 85-90% and a return on beginning equity of better than 18%. While the Company is optimistic these forward-looking goals can be attained, no assurances can be given they will occur.
With regard to long term liquidity, the average duration of the investment portfolio is approximately 2.9 years. The fair value of the fixed maturity portfolio at December 31, 1996 was $1,558,923 above amortized cost. With regard to the availability of funds to the holding company, see Note 6 of Notes to Consolidated Financial Statements for restrictions on the payment of dividends by the insurance companies. Various insurance departments of states in which the Company operates require the deposit of funds to protect policyholders within those states. At December 31, 1996 and 1995, the balance on deposit for the benefit of such policyholders totalled approximately $12,615,000 and $11,860,000, respectively.
Unpaid claims and claim adjustment expenses and unearned premiums both increased largely as a result of increases to reserves on retained business, as well as, material increases from plan servicing and fronting reinsurance. Drafts payable increased because a large amount of drafts were issued in the fourth quarter of 1996 in an aggressive effort to bring specifically targeted claims to an early and fair conclusion. The note payable was retired during the second quarter of 1996 (see Note 3 of Notes to Consolidated Financial Statements). The Company's liquidity position remains strong as a result of cash flows from underwriting and investment activities.
The unrealized gains or losses on fixed maturities available for sale are presented, net of tax, as a separate component of shareholders' equity (see Note 2 of Notes to Consolidated Financial Statements). The net unrealized gain on the fixed maturities classified as held to maturity was $794,808 at December 31, 1996.
The Company repurchased 470,702 shares of stock during 1996 at a cost of $4,426,182 or $9.40 per share. The Company is authorized to purchase an additional 529,298 shares.
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Statement was effective for years ending after December 15, 1995, and did not have any impact on the financial statements.
The Company is not aware of any current recommendations by the regulatory authorities, which if implemented, would have a material effect on the Company's liquidity, capital resources or results of operations. The Company's statutory capital significantly exceeds the benchmark capital level under the Risk Based Capital formula for its major insurance companies.