(1) The 1992, 1993, 1994, 1995 and 1996 amounts have been adjusted to reflect the Company's adoption of SFAS 113. "Accounting and Reporting for Reinsurance of Short-Duration and Long- Duration Contracts." See Note 1 of the Notes to Consolidated Financial Statements.
Management's Discussion and Analysis of Financial ------- Condition and Results of Operations -------------------------------------------------
During the year ended December 31, 1996, net premium income decreased by 25 percent to $3,808,000 from $5,068,000 for the year ended December 31, 1995.
Net reinsurance premiums earned through the Pooling Agreements were $2,693,418 and $4,440,632 for 1996 and 1995, respectively representing a decrease of $1,747,214, or an overall 39 percent decrease in assumed premiums.
During the year ended December 31, 1996, the amortization of deferred policy acquisitions costs decreased to $1,532,355 from $2,380,140 for the year ended December 31, 1995. The decrease is attributable to the decrease in earned premiums.
During the year ended December 31, 1996, operating expenses increased to $3,255,805 from $2,882,255 in 1995. The increase is due to additional expenses associated with the purchase of two agencies during 1995, expenses incurred in research and development of Cumberland's Bond Program, and additional personnel employed to direct market its insurance products.
The Company s effective tax (benefit) rate for 1996 and 1995 was -0- percent for 1996 and 1995. The deviation from statutory rates for 1996 and 1995 primarily relates to the Company s establishment of a valuation allowance on a portion of the net operating loss, the future realization of which is uncertain.
Other revenue for the year ended December 31, 1995 increased to $1,199,000 from $278,000 for the year ended December 31, 1994, an increase of 331%. The majority of the increase relates to $489,000 of commission income derived from SG and SA which were acquired in 1995, and $425,000 of consulting revenues derived from Qualex which was formed in November 1994.
During the year ended December 31, 1995, operating expenses increased to $2,882,000 from $1,515,000 in 1994. This increase was due primarily to purchasing the two agencies and expanding the Company's book of business.
Net interest expense increased to $508,200 in 1995 from $406,000 in 1994 primarily due to interest expense associated with the purchase of SG and SA.
Net cash (used in) provided by (used in) investing activities was $(1,024,000), $(383,000), and $358,000 for the years ended December 31, 1994, 1995 and 1996, respectively. Investing activities consist of purchases and sales of investments and advances to and from KC.
The consolidated financial statements include the estimated liability for unpaid losses and loss adjustment expenses (LAE) of CCS. The liabilities for losses and LAE are determined using case-basis evaluations and statistical projections and represent estimates of the ultimate net cost of all unpaid losses and LAE incurred through the end the period. These estimates are subject to the effect of trends in future claim severity and frequency. These estimates are continually reviewed and, as experience develops and new information becomes known, the liability is adjusted as necessary; such adjustments, if any, are included in current operations.
Liability for losses and LAE, net of reinsurance recoverable on unpaid losses, at beginning of year . . . . . . . . . . $1,708,761 $ 1,625,703 $1,052,547 ----------------------------------- Provision for losses and LAE for claims occurring in the current year, net of reinsurance . . . . . . . . 2,425,455 1,486,546 1,370,640
Losses and LAE payments for claims, net of reinsurance, occurring during: The current year . . . . . 810,903 161,279 422,544 Prior years . . . . . . . 1,918,210 1,657,423 1,705,721 ----------------------------------- 2,729,113 1,818,702 2,128,265 -----------------------------------
Reinsurance recoverables on unpaid losses at end of year (1) . . . . . . . . . . . . 1,512,219 1,299,257 1,396,874 -----------------------------------
Liability for losses and LAE, gross of reinsurance recoverables on unpaid losses, at end of year . . $ 3,137,922 $ 2,351,804 $1,991,796 ===================================
Cumberland experienced a $241,000 excess in reserves for losses and loss adjustment expenses in 1995, and experienced a deficiency of $220,600 and $300,000 in 1994 and 1996, respectively for losses incurred in prior years. The excess in 1995 principally resulted from settling case basis reserves established in prior years for amounts that were less than expected. The deficiency in 1994 principally resulted from a single principal on business written through the 1991/92 pooling agreement. This loss was atypical in nature and the Company does not expect this situation to be indicative of a trend. The deficiency in 1996 is a result of additional claims expense on a 1993/94 pooling agreement.
Liability for losses and LAE on a SAP basis (which is net of reinsurance recoverables on unpaid losses and LAE . . . . . . . . . . . $ 907,833
Analysis of Loss and Loss Adjustment Expense Development -------------------------------------------------------- The following table represents the development of the liability for unpaid liabilities, net of reinsurance, for 1989 through 1996 (in thousands).
The financial statements of the Company required by this Item are listed in Item 14(a)(1) and (2) and are submitted as a separate section of this report.