Properties - - ------------------ Effective January 1, 1996, the Registrant entered into a lease at 95 Route 17 South, Paramus, New Jersey. The Registrant's home office is located at this facility. The lease expires on December 31, 2005. The Registrant has an option to terminate the lease after six years, and an option to extend the lease for an additional five years after the initial lease term expires.
The Registrant and a group of affiliated corporations provide property and casualty insurance related services. The Registrant also operated until December 1, 1996 a motor club through Enterprises. One hundred percent of the Registrant's insurance operations are presently in the State of New Jersey.
On March 16, 1999, the Registrant signed a definitive Agreement and Plan of Merger ("Merger Agreement") to acquire North East through a merger of a wholly-owned subsidiary of the Registrant with and into North East ("Merger"). North East is a NASDAQ listed property and casualty insurance company, headquartered in Scarborough, Maine and trading under the symbol NEIC.
The table below reconciles operating net income to reported net income for 1996 with adjustments for certain unusual and non-recurring items (all per share amounts shown are basic):
(1) This non-recurring charge was incurred in connection with the termination of the lease of the office building in which the Registrant and its subsidiaries formerly operated.
(3) This non-recurring charge was incurred in connection with the settlement of a previously reported dispute with a reinsurer of Motor Club.
(5) The Registrant believed that it was more likely than not that it will generate future taxable income to realize the benefits of the net deferred tax asset, which consists primarily of net operating loss carryforwards. The Registrant accordingly eliminated the valuation allowance on its net deferred tax asset in 1996, resulting in a benefit to net income. The ultimate amounts realized, however, could be reduced if actual amounts of future taxable income differ from projected future taxable income.
Insurance premiums increased by $2,298,000 or 5% during the year, due primarily to commercial lines premiums written by Preserver and savings on reinsurance programs. The following table details the increases in Insurance Premiums:
The increase in Motor Club's PPA loss and loss expense ratio is largely due to the new business written by Motor Club since January 1995 which constituted 53% of Motor Club's total PPA business as of December 31, 1998. The Registrant has reserved the ultimate development of this new business at a loss and loss expense ratio of approximately 78%; the underlying loss development to date for each accident year on this new business has supported the ultimate development selected, with the exception of Accident Year 1996, which has developed approximately 25% worse than anticipated. This has been the primary cause of some initial deficient development in the Registrant's loss reserves in 1997 and 1998. However, the Registrant believes that the 1996 Accident Year experience is not indicative of the overall book of business and subsequent accident year development continues to support the ultimate loss ratios utilized.
More than half of the $1,787,000 or 12% decrease in acquisition costs is attributable to the 1998 elimination of the FAIR Act assessments previously paid, which totaled $971,000 in 1997. The remainder of the decrease is attributable to the temporary effects of the Policy Term Conversion, which has resulted in additional expenses being deferred to reflect the increase in unearned premiums through December 31, 1998. This circumstance is temporary as noted, and the amount of expense amortized in 1999 related to acquisition expenses may rise in conjunction with the completion of the Policy Term Conversion.
This decrease in net expenses is the realization of the Registrant's previously stated strategy to increase its revenue while decreasing its overhead expenditures and has resulted in a decrease in the expense ratio to 29.1% in 1998 as compared to 31.4% in 1997 (as adjusted for the FAIR Act assessments described above).
In 1997, increased Federal tax expense reduced operating net income by $1,105,000 as a result of utilization of the deferred tax asset recognized in 1996 as noted in the table. Operating net income was also reduced in 1996 by the effects of winter storms, which increased losses by $635,000. Excluding these items, the increase in operating net income of $517,000 or 13% was due to continuing revenue growth and a stable combined ratio. The combined ratio was 98.4% in 1997 as compared to 99.1% in 1996 (adjusted for the non-recurring items noted). Insurance premiums increased by $5,684,000 or 13% during the year, due primarily to increased earnings of personal auto premiums written by Motor Club. The following table details the increases in Insurance Premiums:
The decrease in expenses allowed for a decrease in the expense ratio (as adjusted for the non-recurring charges described above) to 33.3% as compared to 36.0%.
These increases in book value were offset by the dilutive effects ($.11 per share) of the issuance of 46,925 shares of common stock upon exercise of employee stock options granted under the 1987 and 1992 Stock Option plans. See Note O of the Notes for additional information regarding the Registrant's stock option plans.
The reduction in the minimum pension liability was the result of the performance of the Plan assets in excess of the expected return on these assets, offset by a decrease in the discount rate used to compute Plan liabilities to 7.25% at December 31, 1997, from 7.50% at December 31, 1996. See Note K of the Notes for additional information regarding the Registrant's minimum pension liability.
Net cash utilized in investing activities was $11,054,000, $13,886,000 and $6,015,000 in 1998, 1997 and 1996, respectively. The amounts used reflect the investment of cash provided by operating activities; the amounts used in 1996 were offset by the $1,125,000 proceeds from the sale of Enterprises described previously.
In connection with its announced acquisition of North East, the Registrant may borrow up to $10 million additional funds in either the public or private securities markets. While such a borrowing is not expected to have a material effect on the Registrant's financial condition or results of operations, credit terms have not been agreed upon. The cost of the any such borrowing is subject to rising interest rates and economic downturns. The Registrant has no other material outstanding capital commitments which would require additional financing.
In December 1997, the Accounting Standards Executive Committee of the American Institute of the American Institute of Certified Public Accountants ("AcSEC") issued Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance Related Assessments." This Statement provides guidance for the recording of a liability for insurance related assessments. The Statement requires that a liability be recognized in certain defined circumstances. The Registrant believes that the impact of this Statement on its results of operations, financial condition or liquidity will not be significant. This Statement is effective for the year commencing January 1, 1999.