The selected consolidated financial data presented below for, and as of the end of each of the years ended December 31, have been derived from the consolidated financial statements of the Company which have been audited by KPMG LLP, independent certified public accountants. The consolidated balance sheets as of December 31, 1999 and 1998, and the consolidated statements of operations, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1999, and the independent auditors report thereon are included elsewhere in this document. The information presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," consolidated financial statements and the notes thereto, and the other financial information included herein.
(1) Excludes premiums of $58,137,000 in 1999, $47,588,000 in 1998, $40,136,000 in 1997, $31,603,000 in 1996, and $8,893,000 in 1995 from the Company's fronting arrangements, the commercial automobile plans of Arkansas, California, Louisiana, Mississippi, and Pennsylvania under which the Company was a servicing carrier and the reinsurance arrangement in Florida whereby MGAI premiums are ceded to a non-affiliated reinsurer and assumed by General Agents.
The Company recorded net income of $7,127,137, or $.32 per share (diluted) in 1999, compared to a net loss in 1998 of $11,662,564, or $.56 per share (basic), and net income for 1997 of $11,923,526, or $.56 per share (diluted) for 1997. The Company recorded GAAP combined ratios of 99.4% in 1999 and 132.7% in 1998.
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 800 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 will pay $2,000,000 of the operating performance contingency in the second quarter of 2000.
In April 1999, the Company completed the sale of the assets of Agents Processing Systems, Inc. ("APS"), which marketed a computer software package related to general agency operations. The purchaser acquired all rights to the APS software products, assignment of the APS customer contracts and other miscellaneous assets for a nominal amount of cash, assumption of contract obligations, a fixed number of software use licenses and development work on an electronic data interchange project. The Company recorded a small write-off as a result of this transaction.
On January 7, 2000 the Company completed the acquisition of Tri-State, Ltd., an insurance operation specializing primarily in underwriting, servicing and claims handling of nonstandard personal auto insurance in Minnesota, North Dakota and South Dakota. The purchase price was for $6,000,000 with additional payments of up to approximately $5,500,000 in cash over the next several years based on conversion of business, specific profitability targets and Tri-State, Ltd.'s December 31, 1999 book value.
Gross premiums written in 1999 of $133,898,001 were 47% above the $91,162,086 recorded in 1998 largely because of the nonstandard personal auto business written in Florida beginning in late 1998. The 9% decrease recorded in 1998 from 1997 was largely due to the run-off of discontinued classes and continued pricing pressure from competition. The following table compares the major product lines between the years for gross premiums written:
For 1999 gross premiums written percentages by significant product line are as follows: commercial auto (41%), personal auto (26%), general liability (13%) and garage (13%), with no other product line comprising 5% or more. Premiums earned increased 23% in 1999 but decreased 10% in 1998 as a direct result of the level of premiums written.
Net investment income decreased 1% in 1999 from 1998 after a 1% increase in 1998 over 1997. The decrease in 1999 was the result of reinvesting maturities through the first nine months in shorter durations that had lower yields. In the fourth quarter GMSP invested approximately $30 million in the Company and took over management of the Company's investments. Investment income in the fourth quarter of 1999 increased over the comparable 1998 period and offset a large portion of the decrease in investment income recorded during the first nine months of 1999 when compared to the first nine months of 1998. At December 31, 1999, 98% of the Company's investments were investment grade with an average duration of approximately 2.6 years. On a taxable equivalent basis the return on average investments was 5.7% in 1999, 6.2% in 1998 and 6.5% in 1997. The Company classifies its bond securities as available for sale. The Company does not have any non-performing fixed maturity securities. The Company anticipates redeploying up to approximately 50% of its bond securities during the year 2000 in an attempt to increase the taxable equivalent yield. This strategy is expected to result in net realized after tax losses in 2000. The impact on book value is anticipated to be significantly less than the impact on earnings because the securities have been recorded on the balance sheet at fair value at December 31, 1999. The unrealized loss associated with the investment portfolio was $2,246,575 (net of tax effects) at December 31, 1999. The scope and results of the investment redeployment program will depend upon interest rates and the timing of specific transactions.
Claims and claim adjustment expenses ("C & CAE") decreased $10,003,936 in 1999 from 1998 but increased $24,267,337 in 1998 over 1997. The C & CAE ratio was 67.4% in 1999, 93.7% in 1998 and 60.7% in 1997. The ratio in 1998 is above the 1999 and 1997 levels because of significant unfavorable development from prior accident years that was recorded in 1998. The 1998 C & CAE ratio included 33 percentage points of unanticipated unfavorable development in C & CAE incurred from the 1997, 1996 and 1995 accident years for commercial auto liability. The Company writes in areas where catastrophes have recently occurred. The net claims incurred from these events were approximately $900,000 in 1999. 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. Inflation impacts the Company by causing higher claim settlements than may have originally been estimated. Inflation is implicitly reflected in the reserving process through analysis of cost trends and review of historical reserve results.
The change in deferred policy acquisition costs and deferred ceding commission income ("DAC") resulted in a net increase to income of $3,607,531 in 1999 and a net decrease to income of $297,994 and $1,015,802 for 1998 and 1997, respectively. The change in the amount of the increase or decrease in DAC between the comparable periods is primarily related to the rate at which unearned premiums are growing or declining as a result of premium writings. Since DAC (asset) is a function of unearned premiums (liability), an increase in the growth rate of net unearned premiums would correspondingly result in an increase in the growth rate of DAC and vice versa.
Underwriting and operating expenses were down 13% in 1999 from 1998, but were up 9% in 1998 over 1997. The decrease for 1999 and the increase for 1998 were primarily due to approximately $2 million in non-recurring expenses associated with a reduction in the number of employees, legal fees and consulting fees that were incurred in 1998.
With regard to long term liquidity, the average duration of the investment portfolio is approximately 2.6 years. The fair value of the fixed maturity portfolio at December 31, 1999 was $3,338,143 below amortized cost. With regard to the availability of funds to the holding company, see Note 7 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, 1999 and 1998, the balance on deposit for the benefit of such policyholders totaled $14,832,735 and $14,699,727, respectively.
The increase in preferred stock, common stock warrants and additional paid-in capital is primarily related to the GMSP transaction described previously.
The Company is not aware of any current recommendations by 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 exceeds the benchmark capital level under the Risk Based Capital formula for its major insurance companies.
The following consolidated Financial Statements are on pages 41 through 71: