The Company owns two adjacent two-story brick buildings in Highland Heights, Ohio, which contain an aggregate of 233,000 square feet of office and warehouse space. The property was purchased in August 1994 for approximately $6.7 million. The buildings are currently being renovated to accommodate the Company's operations.
The Company owns a modern 26,400 square foot building in Tampa, Florida, used for post-processing document assembly and mailing. The property was purchased on March 31, 1995, for approximately $1.4 million.
All per share amounts have been adjusted for the December 8, 1992 3-for-1 stock split.
(2)During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve" ($46.2 million after tax), resulting in a one-time increase in earnings of $.62 per share. See Management Discussion and Analysis of Financial Condition and Results of Operations set forth in
The Company has substantial capital resources and is unaware of any trends, events or circumstances that are reasonably likely to affect its capital resources in a material way. The Company also has available a $20.0 million revolving credit agreement. Given its 31% debt to equity ratio, the Company believes it has sufficient borrowing capacity and other capital resources to support current and anticipated growth.
The Company's insurance operations create liquidity by collecting and investing premiums from new and renewal business in advance of paying claims. For the three years ended December 31, 1995, operations generated a positive cash flow of $1,305.4 million, and cash flow is expected to be positive in both the short-term and reasonably foreseeable future. The Company's substantial investment portfolio is highly liquid, consisting almost entirely of readily marketable securities. On or after May 31, 1996, the Company's 9 3/8% Serial Preferred Shares, Series A, are redeemable at the Company's option at the price of $25 per share plus accrued dividends to the redemption date. If the Company elects to redeem these securities, the redemption could be funded through operating cash flows or, if market conditions warrant, funds could be raised externally on the debt or equity markets. The Company does not expect any material changes in its cash requirements and is not aware of any trends, events or uncertainties that are reasonably likely to have a material effect on its liquidity.
Total capital expenditures for the three years ended December 31, 1995, aggregated $156.5 million. In 1994, the Company completed its new corporate office complex in Mayfield Village, Ohio. The cost of the project was $75.5 million and was funded through operating cash flows.
Consistent with the Company's objective to increase its common stock investments, the Company liquidated its high-yield portfolio, reducing it to .2% of the portfolio at December 31, 1995, from 4.4% at December 31, 1994, resulting in a net gain of $6.6 million.
As of December 31, 1995, the Company held $729.1 million of asset-backed securities which represented 19.3% of the total investment portfolio. The portfolio included collateralized mortgage obligations (CMOs) and commercial mortgage-backed obligations (CMBs) totaling $335.2 million and $117.2 million, respectively. As of December 31, 1995, the CMO portfolio included sequential bonds representing 65.9% of the CMO portfolio ($221.0 million) with an average life of 3.1 years, and planned amortization class bonds representing 34.1% of the CMO portfolio ($114.2 million) with an average life of 1.6 years. One hundred percent of the CMOs held by the Company are rated AAA by Moody's or Standard & Poor's. At December 31, 1995, the CMB portfolio had an average life of 7.4 years and a weighted average Moody's or Standard & Poor's rating of A. At December 31, 1995, the CMO and CMB portfolios had unrealized gains of $3.9 million and $1.1 million, respectively. The single largest unrealized loss in any CMO security was $.1 million, or .5% of such position, and there were no unrealized losses in any CMB security at December 31, 1995. Both the CMO and CMB portfolios are highly liquid with readily available quotes and contain no residual interests. The remainder of the asset-backed portfolio is invested primarily in auto loan and credit card-backed securities.
The Company regularly reviews the individual holdings in its portfolio for evidence of impairment. Changes in market value are evaluated to determine the extent to which such changes are attributable to: (i) interest rates, (ii) market-related factors other than interest rates and (iii) financial conditions, business prospects and other fundamental factors specific to the issuer. Declines attributable to issuer fundamentals are reviewed in further detail. Available evidence is considered to estimate the realizable value of the investment. When a security in the Company's investment portfolio has a decline in market value which is other than temporary, the Company is required by GAAP to reduce the carrying value of such security to its net realizable value. It is the Company's general policy to dispose of securities when the Company determines that the issuer is unable to reverse its deteriorating financial condition and the prospects for its business within a reasonable period of time. In less severe circumstances, the Company may decide to dispose of a portion of its holdings in a specific issuer when the risk profile of the investment becomes greater than its tolerance for such risk.
Direct premiums written increased 16% to $3,068.9 million in 1995, compared to $2,645.1 million in 1994 and $1,966.4 million in 1993. Net premiums written increased 19% to $2,912.8 million, compared to $2,457.2 million in 1994 and $1,819.2 million in 1993. The difference between direct and net premiums written is largely attributable to premiums written under state-mandated involuntary Commercial Auto Insurance Procedures (CAIP), for which the Company retains no indemnity risk, of $105.4 million in 1995, $115.4 million in 1994 and $98.0 million in 1993. During the three years ended December 31, 1995, the Company provided policy and claim processing services to 28 state CAIPs. Premiums earned, which are a function of the amount of premiums written in the current and prior periods, increased 24% in 1995, compared to 31% in 1994 and 17% in 1993.
Claim costs, the Company's most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of its policyholders, including expenses required to settle claims and losses. These costs include a loss estimate for future assignments and assessments, based on current business, under state-mandated involuntary automobile programs. Claims costs are influenced by inflation and loss severity and frequency, the impact of which is mitigated by adequate pricing. Increases in the rate of inflation increase loss payments, which are made after premiums are collected. Accordingly, anticipated rates of inflation are taken into account when the Company establishes premium rates and loss reserves. Claim costs, expressed as a percentage of premiums earned, were 71% in 1995, compared to 67% (excluding the elimination of the "supplemental reserve") in 1994 and 62% in 1993. The Company has allowed loss costs to rise at a faster pace than rates, reflecting the Company's intent to maintain rates at competitive levels.
Recurring investment income (interest and dividends) increased 26% to $199.1 million in 1995, compared to $158.5 million in 1994 and $134.5 million in 1993, primarily due to an increase in the average investment portfolio and a mix shift in the portfolio to taxable securities. Net realized gains on security sales were $46.7 million in 1995, $23.8 million in 1994 and $107.9 million in 1993. A significant portion of the 1993 realized gains resulted from the sale of certain equity securities held in the Company's investment portfolio.