The following selected financial data has been taken from, or derived from, the Company's consolidated financial statements, including the related notes thereto. The Company's consolidated financial statements as of and for the years ended March 31, 1996 and 1997, and as of and for the nine months ended December 31, 1997, have been audited by Ernst & Young LLP, independent auditors, whose report thereon appears elsewhere in this report. The consolidated financial statements of ESIF (predecessor to Bridgefield) as of March 31, 1994 and 1995, and for the years then ended, have been audited by Brinton & Mendez, certified public accountants. The selected financial data provided as of and for the nine months ended December 31, 1996 is unaudited but in the opinion of management contains all adjustments, consisting of only normal recurring accruals, for a fair presentation of the results of such periods. The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with the consolidated financial statements and notes thereto.
(1) Includes the Acquisition as of January 16, 1996. (2) Ratio for Insurance Subsidiaries (3) Net loss ratio is the ratio of losses and LAE incurred to premiums earned. (4) Expense ratio is the ratio of underwriting, general and administrative expenses to premiums earned. (5) Combined ratio is the sum of the net loss ratio and the expense ratio.
All of the Company's insurance policies are written for entities located in Florida, and a significant portion of the Company's administrative services are provided to entities operating in
Historically, ESIF was not operated for the purpose of accumulating profits, but it retained a portion of its earnings and profits to avoid making assessments against its members.
ESIF occasionally during its operating history paid distributions of profits to its members, but it never made an assessment against its members. ESIF's indemnity agreements indemnified the member employers against loss or liability relating to workers' compensation insurance risks.
REVENUE. Revenue was $110.8 million and $55.3 million for the nine months ended December 31, 1996 and 1997, respectively. The revenues decreased primarily due to the ceding of $67.9 million of premium in quota share agreements. Set forth below is a discussion of the composition of revenue for the periods indicated.
Premiums Earned. Premiums earned during the nine months ended December 31, 1997 declined by $55.0 million, or 73.8%, from that of the nine-month period ended December 31, 1996. This decline is attributable primarily to the 75% quota share reinsurance agreement entered into by Bridgefield effective April 1, 1997. During the nine months ended December 31,
1996 and 1997, the Company ceded $4.7 million and $67.9 million, respectively, of earned premiums under reinsurance agreements. This increase in ceded premiums of $63.2 million had a corresponding decreasing effect upon earned premiums of the same amount. For the nine months ended December 31, 1996 and 1997, premiums earned before the effect of ceded premiums were $79.2 million and $87.5 million, respectively. This was an increase of $8.3 million or 10.5%
Administrative Fees. During the nine months ended December 31, 1997, the Company's administrative fee income decreased $2.9 million, or 11.4%, from that of the nine months ended December 31, 1996. This decline resulted from the premiums of the administrative subsidiaries' non-affiliated clients, upon which the Company's administrative fees are based, being adversely affected by both the aforementioned 11.2% premium rate reduction and the increased competitive environment within the self-insurance workers' compensation marketplace.
Net Realized Investment Gains. Net realized investment gains increased $1.2 million during the nine months ended December 31, 1997 compared to the nine-month period ended December 31, 1996. For the nine months ended December 31, 1996 and 1997, the Company's proceeds on sales of fixed maturity and equity investments were $67.2 million and $68.3 million, respectively. Though the overall investment sales volume remained level, gains realized from the sale of equity securities were $0.7 million and $1.5 million for the nine months ended December 31, 1996 and 1997, respectively. The sale of stocks accounted for $0.8 million of the total $1.2 million increase. This result is primarily due to the continued strength in the United States stock markets.
Losses and Loss Adjustment Expenses. Losses and LAE decreased by $37.8 million from the nine-month period ended December 31, 1996 to the nine-month period ended December 31, 1997. This change was in large part due to the ceding of losses and LAE under the reinsurance agreements. The amount of losses ceded was $9.1 million and $51.2 million for the nine-month period ended December 31, 1996 and 1997, respectively. Before the effect of reinsurance transactions, the Company's losses and LAE expense were $59.3 million and $63.6 million during the nine-month period ended December 31, 1996 and 1997, respectively. This increase of $4.3 million corresponds favorably to the growth of premium earned between the nine-month periods ended December 31, 1996 and 1997.
Another factor contributing to the decrease in losses and LAE for the Insurance Subsidiaries was the improvement of the loss ratio from 67.4% to 63.8% for the nine months ended December 31, 1996 and 1997, respectively.
Underwriting, General and Administrative Expenses. During the nine months ended December 31, 1997 the Company's other underwriting, general and administrative expenses declined by $21.1 million, or 46.0%, from that for the nine-month period ended December 31 1996. A major factor contributing to this change was the ceding commissions received by the Insurance Subsidiaries corresponding to the quota share reinsurance agreements, and, particularly, the 75% quota share agreement entered into by Bridgefield effective April 1, 1997. Such ceding commissions are recorded as reductions to other underwriting, general and administrative expenses. During the nine months ended December 31, 1996 and 1997, the Company recognized ceding commissions in the amount of $1.2 million and $27.0 million, respectively
During the period ended December 31, 1997, an accrual for the 1998 assessment for the Florida Workers' Compensation Guaranty Association of approximately $2.0 million was recorded.
Losses and Loss Adjustment Expenses. The Company establishes reserves to cover its estimated liabilities for losses from claims and for LAE incurred. Such loss reserves are estimates established by management based upon, among other factors: (i) results of actuarial reviews which incorporate the Company's experience with similar cases, estimates of future claim trends, and historical trends such as recurring loss payment and reporting patterns, claim closures, and product mixes; (ii) facts known to the Company; and (iii) regulatory requirements. Losses and LAE incurred for the fiscal year ended March 31, 1996 were $94.8 million compared to $65.2 million for the fiscal year ended March 31, 1997.
NET INCOME. Income from continuing operations was $0.4 million, and $7.0 million for the fiscal years ended March 31, 1996 and 1997, respectively. The $6.6 million increase resulted from the stability of losses and LAE during that year and the depressed net income for the fiscal year ended March 31, 1996 resulting from adjustments of loss reserves in that year.
The Company has historically met its cash requirements and financed its growth principally through cash flows generated from operations. The Insurance Subsidiaries' primary sources of cash flows are premiums earned, investment income and the proceeds from the sale or maturity of invested assets. The Administrative Subsidiaries' primary source of cash flow is service fees generated from the Insurance Subsidiaries and the Non-affiliated Entities. The cash requirements of the Insurance Subsidiaries are primarily for the payment of claims, commissions, reinsurance premiums, administration fees and the purchase of investment securities. The cash requirements of the Administrative Subsidiaries are primarily for the payment of salaries, employee benefits, debt obligations and other operating expenses. Due to the uncertainty regarding settlement of unpaid claims, the liquidity requirements of the Company vary, and, consequently, the Company has attempted to structure its investment portfolio to take into account historical payout patterns. See "ITEM 1. BUSINESS--Investment Portfolio." The Company purchases reinsurance to mitigate the effect of catastrophic claims and to help stabilize demands on its liquidity. See "ITEM 1. BUSINESS--Reinsurance."
In December 1997, Summit secured, with SunTrust Bank of Tampa Bay, a $30.0 million revolving line of credit which offered more favorable terms and greater flexibility than that of the existing debt. Of this line of credit, $25.0 million was utilized to extinguish all other debt. At December 31, 1997, the balance outstanding under this revolving line of credit was $16.5 million. Interest on this revolving debt ranges from LIBOR plus 1.5% to LIBOR plus 2.25%. Availability under this revolving line of credit reduces by $4.0 million annually until the loan maturity date which is the last business day of 2003.
As collateral for the debt outstanding at December 31, 1997, Summit has pledged all of the issued and outstanding capital stock of two subsidiaries of SHC, Summit Consulting, Inc. and Summit Healthcare Holdings, Inc. As a condition for this debt, the Company must comply with certain financial convenants and operating restrictions, to which the Company has so complied.
For the fiscal years ended March 31, 1996 and 1997, net cash provided by operating activities was $10.8 million and $5.7 million, respectively, while net cash used in investing activities was $47.1 million and $1.5 million, respectively. During the year ended March 31, 1996, cash of $44.0 million was provided through debt proceeds, and most of these proceeds were utilized in financing activities relating to the Acquisition. In the year ended March 31, 1997,
The Company's balance sheets as of March 31, 1996 and 1997, and December 31, 1996 and 1997, reflect recoverables from the SDTF in an amount of $20.1 million, $21.0 million, $21.1 million and $23.8 million, respectively. The Company received $5.6 million and $7.5 million in actual recoveries from the SDTF during the years ended March 31, 1996 and 1997, respectively, and $6.5 million and $3.5 million during the nine months ended December 31, 1996 and 1997, respectively.
As a self-insurance fund, ESIF recorded for statutory reporting an asset of $47.4 million and $44.4 million at March 31, 1996 and March 31, 1997, respectively, for future investment income determined by discounting loss and LAE reserves at a statutorily prescribed rate. Following its conversion to a stock insurance company, Bridgefield is permitted to record discounts only on permanent disability cases. The amount of such discount, combined with that
of Bridgefield Casualty, is estimated at approximately $4.7 million, $4.4 million and $4.1 million at March 31, 1996, March 31, 1997 and December 31, 1997, respectively. ESIF's statutory basis surplus as a self-insurance fund was approximately $21.8 million at March 31, 1997. Following its conversion to a stock insurance company and the related public offering of the Company's Common Stock which resulted in net proceeds contributed to Bridgefield of approximately $48 million, plus $7.1 million of additional statutory capital which resulted from the simultaneous reorganization, Bridgefield's statutory basis surplus as a stock insurance company was approximately $53.8 million at December 31, 1997. Such capital and surplus is considered adequate to satisfy the requirements of the Florida Insurance Code. From time to time, the Company may be required to increase the capital surplus of the Insurance Subsidiaries to remain in compliance with state regulatory requirements. If the Company is unable to generate sufficient capital, either internally or from outside sources, it could be required to reduce its growth. There can be no assurance that capital will continue to be available when needed or, if available, will be on terms acceptable to the Company.