The Company owns a one-story Commercial building in Rock Hill, New York, which is used for storage and rental property.
The Company leases approximately 940 square feet of office space in an office building in San Jose, California, under a lease expiring in December 1997 at a monthly rental of $1,175, at which SDIA conducts branch agency operations.
The Company leases approximately 6,590 square feet of office space in an office building in Fort Lauderdale, Florida, under a lease expiring in February 2000 at a monthly rental of $8,441, at which claims settlement and adjusting services are performed.
The Company leases approximately 616 square feet of office space in an office building in Phoenix, Arizona, under an open lease at a monthly rental of $722, at which SDIA conducts branch agency operations.
The Company leases approximately 1,100 square feet of office space in Canton, Ohio, under a lease expiring in May 1998 at a monthly rental of $958, at which medical malpractice insurance agency operations are performed.
The Company leases approximately 5,478 square feet of office space in an office building in Orlando, Florida, under a lease expiring in February 2002 at a monthly rental of $7,989, at which claims settlement and adjusting services are performed.
Net premiums earned for the general liability line increased primarily because of increases in various programs, including social services, alarms and guards, pest control and excess employer's liability. These increases were partially offset by a decrease in net written premiums earned in the umbrella and in the crane operator liability programs.
Net premiums earned for the other lines of business increased primarily due to increased volume in commercial package policies in the social services program, and the recent start-up of an earthquake program. These increases were partially offset by decreases in other miscellaneous small programs.
Total expenses increased by 15.4% compared to the 25.2% increase in net premiums earned. Losses and loss adjustment expenses ("LAE") increased by 7.5% as a result of a 5.5% increase in losses and a 14.1% increase in LAE. The increase in losses was substantially lower than that for net premiums earned as a result of the one-time addition of $17.5 million to the 1994 loss reserves applicable to the Company's medical malpractice business in Florida, subrogation recoveries in the surety line of business in excess of expectations, favorable reserve development in accident years prior to 1995 for general liability and workers' compensation and recoveries under the aggregate excess of loss reinsurance contract which provides coverage for certain losses and LAE in excess of 66% of the net earned premium for the 1995 accident year. These decreases were partially offset by carrying higher loss and LAE ratios to premiums earned for 1995 business. The Company also increased prior years reserves by approximately $19.0 million, offset by subrogation recoverable of like amount, recognized in conjunction with the favorable ruling in the New York Court of Appeals as more fully described in Note--C of the Notes to Consolidated Financial Statements. The 14.1% increase in LAE resulted from the increase in loss and LAE ratios, partially offset by a change in the line of business mix to those having a lower percentage relationship of LAE to losses and the allocation of recoveries under the aggregate excess of loss contract and the favorable court ruling mentioned above. Due to the disproportionate relationship of losses and LAE to earned premium, the loss and LAE component of the GAAP Combined Ratio was 9.6 percentage points lower than in the comparable 1994 period. The 38.7% increase in the
The foregoing changes resulted in income before income taxes of $43.3 million for the year ended 1995, a 102.9% increase from the comparable 1994 period. Net income for the year increased by $14.2 million, or 83.8%. The comparative results were significantly impacted by the $17.5 million addition to loss reserves in the third quarter of 1994 reflected above, which resulted in a disproportionately lower net income for the 1994 period.
A variety of factors accounted for the 34.7% growth in net premiums earned, a principal factor being a January 1994 change in a major portion of the Company's reinsurance ceded arrangements. Commencing January 1, 1994, the Company increased its risk retention level from $500,000 to $1,000,000 per occurrence on medical malpractice, surety, and major components of its other principal lines, thereby significantly decreasing the amounts of premiums ceded and increasing the amount of premiums retained. As premiums are recognized as earned over the term of the related policy, the positive impact of this change on the Company's net premiums earned was recognized increasingly throughout 1994.
The increase in medical malpractice net premiums earned was attributable primarily to an increase in the number of physicians insured associated with mental health, home care, and other social service organizations, growth in the Company's program for psychiatrists, greater penetration of the Ohio physician market, and rate increases, which were partially offset by rate decreases on dental malpractice insurance.
Net premiums earned for the workers' compensation line decreased primarily as a result of decreases in the specialty niche program for cotton gins and other smaller programs due to the Company's decision not to renew accounts deemed unprofitable. This trend is expected to continue due to the continued re-underwriting of the workers' compensation line and elimination of unprofitable risks. Net premiums earned further declined by a reduction in the required participation in the National Workers' Compensation Reinsurance Pools, primarily attributable to a decrease in the Company's participation percentage in the pools. These decreases were partially offset by an increase in workers' compensation
Net premiums earned for the other lines of business decreased primarily due to decreased volume in commercial and farm package policies and commercial auto, attributable to the 1993 non-renewal of the insurance placement agreement with Markel Services, Inc. ("Markel/Rhulen"). These decreases were partially offset by increases in commercial package policies in the social services program and in accident and health policies in the excess medical stop loss program.
Net investment income, before realized capital losses, increased by 8.6% due principally to significant increases in investable assets resulting from the cash proceeds of a public offering of the Company's Common Stock in September 1993, the January 1994 commutation of certain medical malpractice reinsurance treaties, the decrease in cash outflow attributable to the 1994 ceded reinsurance treaty changes, and the cash inflow from regular operations. This increase was partially offset by an increase in tax-advantaged securities which have lower pre-tax yields than taxable securities. Total net investment income, however, increased by only 2.7% due to a significant increase in realized capital losses recognized by a short-term fund limited partnership in which the Company is an investor and other short-term bond fund investments, which were adversely affected by the 1994 increase in interest rates. The average annual pre-tax yield on investments, excluding realized capital losses, decreased to 6.6% from 7.8%, primarily as the result of an increase in the proportion of tax-advantaged investment income to taxable income, compounded by generally lower available interest rates. The average annual after-tax yield on investments, excluding realized capital losses, decreased to 5.4% in 1994 from 6.3% in 1993, primarily as a result of generally lower available interest rates.
Gross claims adjusting income decreased 39.7% primarily as a result of a decrease in claim services provided to outside companies, principally Markel/Rhulen, partially offset by an increase in the rates charged for certain services.
Total expenses increased by 45.7% compared to the 34.7% increase in net premiums earned. Losses and loss adjustment expenses ("LAE") increased at a 42.9% rate as a result of a 46.4% increase in losses and a 32.8% increase in LAE. The percentage increase in losses, which was substantially greater than the percentage increase in net premiums earned, was primarily attributable to a $17.5 million addition to loss reserves in the third quarter due to adverse medical malpractice claims development in Florida resulting from the higher than anticipated dollar settlements. The Company has taken a number of steps to address the Florida loss experience, including rate increases, and the opening of a Company claims office in Ft. Lauderdale in February 1995 staffed on a local basis by claims examiners and attorneys employed by the Company to adjust and defend claims. This increase was partially offset by a change in the mix of business to other programs having lower loss ratios and the reduction of some redundant reserves on other lines of business. The 32.8% increase in LAE was relatively proportionate to growth in net premiums earned, and was attributable to the increased volume of claims resulting from the increased volume of insurance in force. The increase in losses and LAE resulted in a loss and LAE component of the GAAP Combined Ratio 4.1 percentage points higher than in the comparable prior period. The 52.5% increase in amortization of policy acquisition costs, underwriting, and other expenses resulted from a 75.8% increase in amortization of policy acquisition costs and a 23.7% increase in underwriting and other expenses. The 75.8% increase in amortization of policy acquisition costs was attributable primarily to an increase in direct commission expense resulting from the growth in programs with higher commission rates, a decrease in ceded commissions resulting from the January 1994 change in reinsurance ceded arrangements, a decrease in contingent reinsurance ceded commissions, increased staffing and marketing expenses related to expansion, and salary increases, partially offset by a decrease in assumed commission expense resulting from the continued decrease in assumed written premiums. The 23.7% increase in underwriting and other expenses was primarily the result of increased staffing, increased facilities expenses, and equipment and materials expense necessitated by the Company's growth, salary increases, and an increase in policyholder dividends, partially offset by decreases in assessments for state and residual market funds.
At December 31, 1995, the Company's total assets of $773.3 million was comprised of the following: cash and investments, 72.1%; reinsurance recoverables, 10.0%; premiums receivable, 6.5%; deferred expenses (policy acquisition costs and deferred federal income taxes), 5.5%; home office building and equipment, 3.6%; and other assets, 2.3% .
In December 1995, the Company reclassified all of its previously held securities classified as held-to-maturity, to available-for-sale as permitted by the FASB's Special Report, A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equities Questions and Answers. The reclassification increased shareholders' equity by $2,753,000 at December 31, 1995.
Prior to January 1, 1994, the Company classified fixed maturity securities in accordance with the then existing accounting standards and, accordingly, those fixed maturity securities that were not intended to be held-to-maturity were designated as actively managed, and were carried at fair value with unrealized holding gains and losses reported in a separate caption in shareholders' equity. Other fixed maturity securities were carried at amortized cost, since the Company had both the ability and intent to hold those securities until maturity.
In September 1993, the Company sold 2.097 million shares of Common Stock in a public offering realizing net proceeds of approximately $58.9 million, all of which was added to the Company's working capital to be used for general corporate purposes, including contributions to the statutory surplus of its two insurance company subsidiaries to expand their capacity to write insurance and for the possible acquisitions of insurance related lines and/or businesses.
In April 1994, the Company completed the acquisition of Spencer Douglass Insurance Associates, Inc., a California license and permit bond insurance agency, for $3.2 million and entered into a five-year consulting agreement with the owner/principal of the agency. Personnel of the agency involved in placing and servicing the acquired business have become employees of the Company, operating from their respective locations in Phoenix, Arizona; Reno and Las Vegas, Nevada; and San Jose, Orange County and La Jolla, California. All new and renewal policies with respect to the approximately $5 to $6 million of license and permit bond business acquired are issued by the Company.
On June 29, 1995, the Company obtained a 4 1/2 year, $35 million line of credit facility from The Bank of New York, under which it borrowed $25 million at an interest rate of 6.87% per annum, payable quarterly. The bank's commitment reduces by $5 million at the end of each of 1996, 1997, and 1998, and expires at the end of 1999. The Company has no other outstanding debt.
In March 1992, the Company commenced quarterly cash dividend payments. Cash dividends declared in 1995, 1994 and 1993 were $6,200,000, $6,000,000, and $4,400,000, respectively.
Effective January 1, 1995, the Company has entered into a stop loss reinsurance contract with Centre Reinsurance Company of New York ("Centre Re") for accident years 1995 and future. Under the terms of the agreement, Centre Re provides reinsurance protection within certain accident year and contract aggregate dollar limits for losses and LAE in excess of a predetermined ratio of these expenses to net premiums earned for a given accident year for all lines of business except bail, customs, license and permit, and miscellaneous surety bonds. The loss and LAE ratio above which the reinsurance provides coverage is 66%, 65%, and 64%, respectively, for accident years 1995 through 1997, respectively. The maximum amount recoverable for an accident year is 175% of the reinsurance premium paid for the accident year, or $162,500,000 in the aggregate for the three years.
In its ongoing effort to improve solvency regulation, the National Association of Insurance Commissioners ("NAIC") and individual states have enacted certain laws and financial statement changes. The NAIC has adopted Risk-Based Capital ("RBC") requirements for property/casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment
The Company has been served with several purported class actions alleging violations of federal securities laws by the Company and, in some cases, by certain of its officers and directors; certain other