The Registrant reports a net loss of $999,534 ($.14 a share) for the year ended December 31, 1998. This is a significant departure from the net income of $6,175,796 ($.86 a share) reported during 1997. The loss is primarily due to lower earned revenues, increases in loss reserves, less favorable reinsurance recoveries and higher operating expenses. These factors were off set to some degree by tax benefits which will allow the Registrant to recover approximately $2,700,000.
Direct excess and surplus lines earned premium increased 18.0% to $4,027,051 in 1998, however net earned premium remained flat at $2,600,000 reflecting higher reinsurance cost for excess loss coverage.
During 1998 net incurred loss and loss expenses in the automobile segment declined 22.6% to $24,482,706 which includes a 14.7% decline in direct paid loss and loss adjustment expense to $72,257,900 compared to $84,671,040 paid in 1997. The loss and loss expense ratio in this segment was 75.7% in 1998 and 76.3% in 1997.
Excess and surplus lines net incurred loss and loss expense totaled $1,422,524 in 1998, 6.2% higher than in 1997. Direct loss and loss expense payments totaled $1,951,703 in 1998, 44.4% higher than in 1997 primarily due to storm damage during the first quarter of 1998. For 1998 the loss and loss expense ratio was 56.5% compared to 51.2% in 1997.
Policy acquisition costs increased significantly in 1998 reflecting $6,700,000 in expense recovery recognized in 1997 and in lower reinsurance commission credits in 1998. In 1998 certain quota share reinsurance agreements covering automobile business were restructured under less favorable terms limiting loss recovery provisions. The effect of these changes flows through the reinsurance commission credits.
As expected the Registrant experienced a net loss of $4,251,378 during the fourth quarter after reporting net income of $3,251,844 during the first nine months of the year. This loss results from reduced earned premium revenue in the automobile segment due to increased competition as well as processing backlogs the result of computer modification problems during the Year 2000 conversion process and reserve increases. Net earned premium for the fourth quarter was $6,836,508 compared to $8,610,027 reported during the third quarter. In addition, ultimate losses in the automobile segment were increased $20,130,000 during this period resulting in loss and loss expenses of $7,193,566, a 105.2% loss ratio.
The loss and loss adjustment expense experienced on the business which the Registrant originates and cedes to its reinsurers may also adversely affect the Registrant's profitability in the future. The Registrant increased the ceding percentage to 75% from 60% on certain lines effective January 1, 1998. If the Registrant's ratio of loss and loss adjustment expenses to earned premium deteriorates, it is likely that over time, the Registrant's cost of reinsurance would increase, and it is possible that at some future point the Registrant could not obtain reinsurance on economically viable terms.
Failure of the Registrant, or its significant third party suppliers and vendors, to become fully Year 2000 compliant prior to December 31, 1999 could have a material adverse impact on the Registrant's results of operations, financial position and cash flows. The Registrant has identified certain third parties that could service its major lines of business in the event that critical system applications should fail as a result of the date roll-over to January 1, 2000.
During 1998 the Registrant conducted discussions with various companies interested in merging with or acquiring the Registrant and its subsidiaries. Due to stock market volatility during the last half of 1998 and an inability to reach a firm offer, the Registrant has discontinued any further negotiation and is not currently pursuing a merger or acquisition candidate.
This Form 10-K contains certain forward-looking statements within the meaning of section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are deemed by the Registrant to be covered by and to qualify for safe harbor protection provided by the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to, among other things, (a) the expected benefits from (i) the award of a three year servicing contract by the Florida Automobile Joint Underwriting Association, and (ii) the extension of a service contract by the Florida Residential Property and Casualty Joint Underwriting Association, (b) the improvement of cash flow as a result of rate increases and a return to a more normal pattern of loss settlements, (c) the Registrant's third party vendors state of readiness and the Registrant's potential underwriting exposure to Year 2000 claims. Such statements reflect the current views of the Registrant and are subject to certain risks and uncertainties that include, but are not limited to, obtaining policy volume service levels under the Joint Underwriting Association service contracts, continued market acceptance of premium rate increases in the automobile minimum limits personal injury protection line of business and adequacy of loss reserves. The Registrant disclaims any intent or obligation to update publicly these forward-looking statements, whether as a result of new information, future events or otherwise.
Insurance premiums earned, exclusive of state mandated automobile assigned risk pool business, increased 9.7% during 1997 due primarily to a 55.6% increase in property earned premium and a 6.7% increase in private passenger automobile personal injury protection/property damage earned premium. Overall insurance premiums earned increased 43.9% after giving effect to business associated with the state mandated automobile assigned risk pool.
Direct written premium in the Registrant's automobile lines decreased 10% in 1997 to $80,727,841 reflecting a decrease in market share as a result of rate increases instituted in December 1996 and increased competition in the market place. The Registrant took steps, with a March 1998 rate revision, to exploit pockets of opportunity resulting in the establishment of new territories, more competitive rates and a revised commission structure.
Investment income decreased 9.2% in 1997 due to lower available rates and the utilization of cash to meet the maturation of prior years loss costs.
Loss and loss adjustment expenses incurred increased 5.0% during 1997 over 1996, exclusive of assigned risk pool business, for all lines of business written by the Registrant's insurance company subsidiaries. However, substantially all of this increase is attributable to the minimum limits automobile personal injury protection line of business. Loss and loss adjustment expenses incurred as a percentage of earned premium were 81.3% in 1995, 78.2% in 1996 and 74.8% in 1997, in each case, exclusive of assigned risk pool business. In its efforts to reduce loss and loss adjustment expenses incurred, as it relates to earned premium, the Registrant initiated a significant rate increase in the minimum limits personal injury protection line of business in the fourth quarters of 1995 and 1996. The Registrant introduced a new rate increase in March 1998.
Due to the inherent uncertainty in estimating reserves for losses and loss adjustment expenses, which are estimates of the amounts necessary to settle reported and unreported claims and their related loss adjustment expenses, there can be no assurance that the ultimate liability will not exceed the amounts reserved, resulting in an adverse effect on the Registrant. At year end 1997, the Registrant's loss and loss adjustment expense reserves were at the lower end of a range which the Registrant's independent actuary deems appropriate. The Registrant's independent actuary's range of reasonable direct reserve estimates as of December 31, 1997 is between $31.8 million and $43.0 million and net of reinsurance recoveries the reserve range is between $15.1 million to $20.5 million.
The loss and loss adjustment expense experienced on the business which the Registrant originates and cedes to its reinsurers may also adversely affect the Registrant's profitability in the future. The Registrant decreased the ceding percentage from 70% to 60% on certain lines effective January 1, 1996. The Registrant will increase the ceding percentage to 75% in 1998, taking advantage of reduced reinsurance costs. If the Registrant's ratio of loss and loss adjustment expenses to earned premium deteriorates, it is likely that over time, the Registrant's cost of reinsurance would increase, and it is possible that at some future point the Registrant could not obtain reinsurance on economically viable terms.
Policy acquisition costs decreased 13.5% during 1997 due principally to a reduction in direct premium volume. Salary and wages increased 10.3% due to the hiring of a number of key personnel to help manage the Registrant into the next century. This included a senior vice president of claims, a vice president of information systems and a vice president of human resources.