The following selected financial data have been taken from, or derived from, the Company's consolidated financial statements, including the related notes thereto. The Company's consolidated financial statements as of March 31, 1996 and 1997, and for the two years ended March 31, 1997, have been audited by Ernst & Young LLP, independent auditors, whose reports thereon appear elsewhere in this report. ESIF's consolidated financial statements as of March 31, 1995 and for the fiscal years ended March 31, 1994 and 1995 have been audited by Brinton & Mendez, certified public accountants, whose report thereon appears elsewhere in this report. The selected financial data provided as of March 31, 1993 and 1994 and for the fiscal year ended March 31, 1993 are unaudited but in the opinion of management contain all adjustments, consisting of only normal, recurring accruals, for a fair presentation of the results of such periods. The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with the consolidated financial statements and notes thereto.
(1) Includes the Acquisition as of January 16, 1996. (2) Ratio for Insurance Subsidiaries (3) Net loss ratio is the ratio of losses and loss adjustment expenses incurred to premiums earned.
(4) Expense ratio is the ratio of underwriting, general and administrative expenses to premiums earned. (5) Combined ratio is the sum of the net loss ratio and the expense ratio.
The following analysis of the consolidated results of operations and financial condition of the Company should be read in conjunction with "ITEM 6. SELECTED FINANCIAL DATA," the Consolidated Financial Statements and the accompanying Notes to the Consolidated Financial Statements included elsewhere herein.
The Company's managed care workers' compensation insurance operations are comprised primarily of the Administrative Subsidiaries and the Insurance Subsidiaries. The Company's income is generated principally from three sources: fees earned from the management of the Funds, underwriting profits derived from premiums earned on insurance policies written by the Insurance Subsidiaries and investment income generated by invested assets related to insurance underwriting.
All of the Company's insurance policies are written for entities located in Florida, and a significant portion of the Company's administrative services are provided to entities operating in Florida. Effective January 1, 1994 (with subsequent certain amendments), Florida enacted new legislation (the "New Florida Law") that changed the underwriting environment for workers' compensation by, among other things: (i) limiting certain benefits that must be provided; (ii) eliminating wage loss benefits in favor of a system of benefits based upon a schedule of impairment ratings plus supplemental benefits; (iii) obligating employers to rehire injured workers; (iv) adopting new procedures for dispute resolution designed to reduce litigation costs; and (v) redefining permanent impairment.
In addition, the New Florida Law authorized insurers and self-insured groups to apply to the Florida DOI for permission to offer premium credits of up to 10% from January 1, 1994 through December 31, 1996 to insured employers who participated in approved managed care arrangements and, effective January 1, 1997, required insured employers to participate in managed care arrangements. The New Florida Law also authorized premium credits for insured employers who participate in safety and drug-free workplace programs. In response to the New Florida Law, which was expected to result in savings to self-insured groups and insurers, the Florida DOI ordered a 10.6% overall rate decrease, effective January 1, 1994. In addition, the New Florida Law eliminated the residual market assessment that was levied against insurance companies to support the involuntary workers' compensation market and replaced it with a self-funded joint underwriting association. As a result, the financial obligation of funding deficits in the residual market mechanism was shifted from traditional insurance entities to employers who are insured by the joint underwriting association. While the long term impact of the New Florida Law cannot be determined, the Company believes that it has resulted in: (i) a more competitive workers' compensation market in Florida; (ii) conversions by some of the larger self-insured groups to traditional insurance entities; and (iii) loss portfolio transfers by self-insured groups to insurance companies.
Based in part upon the elimination of the managed care premium credit (10%) and upon other rate-making factors, the Florida DOI ordered an 11.2% overall workers' compensation insurance rate reduction, which applies to new and renewal policies written on and after January 1, 1997.
The Company believes that it can improve its return on invested capital following the Conversion through growth in its core workers' compensation business. Key aspects of the Company's business strategy following the Conversion include: (i) continued use of both self-insurance and indemnity products; (ii) emphasis on profitable underwriting results; (iii) proactive implementation of managed care; (iv) leveraging of administrative services capabilities; and (v) emphasis on excellent customer service.
Premiums Earned. Premiums earned decreased by $13.6 million, or 10.6%, for the year ended March 31, 1996, and decreased by $17.6 million, or 15.3%, for the year ended March 31, 1997. These declines in premiums resulted in large part from: (i) lost accounts due to the market's increasing preference for non-assessable products, which ESIF, as a Florida group self-insurance fund, was unable to offer; (ii) increased competition; (iii) the effects of increasing participation in the premium credit programs; (iv) an adjustment in estimation of accrued retrospective premiums which reduced reported premiums for the fiscal year ended March 31, 1996 by approximately $9.3 million; and (v) a rate decrease of 11.2% effective January 1, 1997.
The premium credits that ESIF has paid for managed care utilization have been larger during the past three years than all other credits combined. In January 1997, the 10% managed care premium credit was eliminated and a 11.2% premium rate reduction for new and renewal policies became effective.
Administrative Fees. The Administrative Subsidiaries generate administrative fees primarily through contracts with the Funds, pursuant to which the Administrative Subsidiaries provide marketing, underwriting, claims administration, loss control and policy administration services. Fees are generally based on a percentage of each Fund's premiums. For the period beginning on the date of the Acquisition, January 16, 1996, and ending on March 31, 1996, the administrative fees were $7.7 million. For the fiscal year ended March 31, 1997, the administrative fees were $33.3 million. Administrative fees represented 23% of total revenue for the fiscal year ended March 31, 1997.
Prior to the fiscal year ended March 31, 1995, management had recorded reserves in excess of reserve levels required by actuarial reports because the actuarial estimates for fund years 1991 and earlier had a history of increasing (or "adversely developing") as the fund years matured and more actual loss data became known. During the fiscal year ended March 31, 1995, ESIF began to record reserves at levels primarily supported by actuarial reviews since the actuarial estimates had by that time evidenced a trend of loss adverse development with the maturity of the fund years. Management's determination that it was no longer necessary to increase reserves over the actuarial estimates, together with a reduction in premiums earned and a lower actuarial loss ratio, resulted in a $39.3 million decrease in losses and LAE expenses for the fiscal year ended March 31, 1995 as compared to fiscal year ended March 31, 1994. The subsequent increase of $25.7 million in losses and LAE for the fiscal year ended March 31, 1996, was primarily the result of revised actuarial estimates for prior years. In the fiscal year ended March 31, 1997, losses and LAE decreased by $29.7 million as compared to the fiscal year ended March 31, 1996 primarily as a result of (i) the abnormally high losses and LAE in 1996 due to prior year adjustments all recorded in that year, and (ii) a reduction in premiums earned. The net loss ratio for the fiscal years ended March 31, 1995, 1996 and 1997 was 53.8%, 82.5%, and 66.9%, respectively, or an average of 67.8%.
Underwriting, General and Administrative Expenses. The increase in these expenses from $41.5 million to $43.7 million in the fiscal year ended March 31, 1996 was primarily due to the inclusion of the Acquisition as of January 16, 1996. The increase of $17.0 million in the fiscal year ended March 31, 1997 was primarily due to the inclusion of a full year of expenses for SHC.
Amortization and Depreciation. For the fiscal year ended March 31, 1995, ESIF had no amortization or depreciation expense. In connection with the Acquisition, SHC recorded certain intangibles including software, noncompete agreements, customer contracts and goodwill. For the fiscal years ended March 31, 1996 and 1997, amortization of these intangible assets was $1.1 million and $3.8 million, respectively. The expense associated with amortization of these intangible assets is not deductible for federal income tax purposes.
is $32.7 million, the revolving line of credit is $5.0 million, and the interest rate initially is the prime rate plus 1%. The annual principal payments (which are payable in quarterly installments) will be approximately $2.0 million, $5.0 million, $5.6 million, $7.6 million, $9.1 million and $3.4 million in each of calendar years 1997, 1998, 1999, 2000, 2001 and 2002, respectively. The Company anticipates that its debt obligations will be satisfied from the cash flow generated by the Administrative Subsidiaries.
The Company's balance sheets as of March 31, 1996 and March 31, 1997 reflect $20.1 million and $21.0 million, respectively, of recoverables from the SDTF. The Company received $5.6 million and $7.5 million in actual recoveries from the SDTF for the fiscal years ended March 31, 1996 and March 31, 1997, respectively. The SDTF has not failed to make payments on accepted claims, and the Company has no reason to believe that the SDTF will fail to meet its obligations to pay accepted claims in the future, although there can be no assurance. If the SDTF is discontinued, the Company believes that the existing reimbursement obligations of the SDTF would become general obligations of the State of Florida, although there is no assurance that a reviewing court would adopt that view. The SDTF has made no acknowledgment with regard to the enforceability of its reimbursement obligations to insurers such as the Company. See "ITEM 1. BUSINESS--Regulation--Special Disability Trust Fund."
The Company is not required to provide the supplementary financial information contemplated by Item 302 of Regulation S-K.