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 seeks to increase its identification as a provider of small commercial lines insurance. The Registrant also seeks to expand and diversify its insurance operations outside the State of New Jersey. The Registrant believes that both of these objectives can be attained through the acquisition of other insurance companies which present opportunities to write these product lines in different geographic areas. The Registrant expects to pursue these objectives during 1998 and beyond.
The table below reconciles operating net income to reported net income for 1997, 1996 and 1995 with adjustments for certain unusual and non-recurring items (all per share amounts shown are basic):
The increases in Commercial Lines and Personal Property premium were enhanced by $331,000 in savings on reinsurance programs which principally affected Preserver and were implemented effective July 1, 1997. Preserver also increased its retention for property excess of loss reinsurance at that date from $75,000 to $100,000, which contributed to the reduction in rate.
Losses and loss expenses incurred increased by $3,993,000 or 14%, which produced the following loss and loss expense ratios: 1997 1996 Motor Club 66.8% 61.4% Preserver 59.7% 75.5% Total 65.1% 64.5%
During 1996, winter storm losses of $635,000 increased Preserver's loss ratio by 6.3 points. The remaining improvement in Preserver's loss ratio during 1997 was attributable to reduced amounts of losses, particularly large losses greater than $35,000. Frequency of losses remains at acceptable levels for all lines of Preserver's business.
The increase in acquisition costs of $1,483,000 or 11% generally corresponds with the increase in insurance premiums noted above, although the rate of increase was slightly lower due to savings on net commissions realized in 1997. During 1998, the FAIR Act assessments previously paid will be eliminated. These assessments totaled $971,000 and $962,000 in 1997 and 1996, respectively.
Excluding the non-recurring items in 1996 noted in the table, which includes the lease termination charge, other operating expenses declined $1,282,000 or 42%, due to lower overhead expenditures.
These increases in book value were offset by the dilutive effects ($.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 M of the Notes for additional information regarding the Registrant's stock option plans.
Net investment income increased $323,000 or 12% resulting from an increase in invested assets. The increase in insurance premiums noted above contributed to the increase in invested assets. Other revenues decreased $11,000 or 9%, primarily due to reduced mortgage loan revenue and other miscellaneous income reductions.
Despite the higher loss and loss expense ratio on a comparative basis, no significant adverse trends were experienced or identified during 1996.
The decrease in other operating expenses resulted from lower operating expenses in general, including lower salaries and the savings realized from the aforementioned relocation. The decrease in expenses allowed for a decrease in the expense ratio (as adjusted for the non-recurring charges) to 36.8% for 1996 as compared to 43.9% for 1995.
The Registrant's book value increased to $9.17 per share at December 31, 1996 from $6.89 per share at December 31, 1995. The principal sources of the net increase were: (1) net income of $5,330,000 or $2.61 per share described previously; and (2) a $487,000 or $.24 per share increase due to the reduction of the minimum required pension liability for the defined benefit pension plan sponsored by the Registrant; and (3) a $1,122,000 or $.55 per share decrease due to the decrease in the fair value of the fixed maturity investments accounted for as available-for-sale securities under SFAS No. 115.
Reserving assumptions (except as noted in Loss Reserves) and payment patterns of the Insurance Companies did not materially change from the prior year and there were no unusually large retained losses resulting from claim activity. Unpaid losses are not discounted. Operating and Investing Activities
The payout ratio of losses has not fluctuated substantially over this period. Cash flow from operations is expected to continue to increase as the Registrant increases its revenue through additional premium writings, specifically commercial lines and PPA, and continues to reduce its expenses and expense ratio. This will be offset somewhat by the development and payment of losses on the new PPA which Motor Club is writing.
The Registrant paid no dividend on its common stock in 1997, 1996 and 1995. The Registrant has no material outstanding capital commitments which would require additional financing. In 1995 the Registrant repaid the $2,750,000 borrowed from Midlantic Bank, N.A. in conjunction with the Settlement with the Receiver of MCA Insurance Company in Liquidation.
In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". As compared to the prior standard, SFAS No. 128 simplifies computational guidelines, revises disclosure requirements and increases earnings per share ("EPS") comparability on an international basis.
This standard requires that an enterprise: (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position.
Comprehensive income for the Registrant would presently consist of net income, the change in net unrealized appreciation of investments, net of deferred income taxes, and the change in its unfunded accumulated benefit obligation ("minimum pension liability"). The Registrant is presently evaluating the impact of this standard. The differences in comprehensive income between years are caused principally by significant fluctuations in the changes in unrealized appreciation of investments net of deferred income taxes and minimum pension liability, combined with the impact of steadily increasing net income.