The executive and general offices of the Registrant and its subsidiaries, consisting of approximately 22,915 square feet, are located at 100 Fortune Parkway, Jacksonville, Florida. The space is leased by the Registrant for a period ending January 31, 1997, at an initial aggregate annual rental of $179,195 increasing to $202,110. In 1997 the Registrant exercised a renewal option extending the term of the lease to 2002. Annual lease payments range from $207,839 to $231,442 in the final year of the lease.
In 1997, the Registrant expanded its facilities by leasing approximate 7500 square feet for its personal property, excess and surplus lines and fee for service processing. Annual lease payments range from $58,155 to $61,445 over a three year period.
Earnings per share and cash dividends per share amounts have been restated to conform with stock splits.
Total consolidated revenues, exclusive of state mandated automobile assigned risk pool business, increased 18% from $48,917,912 in 1995 to $57,836,017 in 1996. Overall, total consolidated revenues decreased 9% to $48,163,935 during 1996 from $52,925,874 for 1995.
Net cash flow from operations was negative in 1996 as loss and loss adjustment expense payments and consolidated operating expense payments exceeded premium and investment revenues. Such negative cash flow resulted in part from poor loss development in the minimum limit automobile personal injury protection line of business for the years prior to 1996. The Registrant's practice of maintaining a highly liquid investment portfolio allowed the Registrant to meet cash demands with no adverse impact on operating performance. Management is optimistic that cash flow will improve during 1997 as additional rate increases take affect and the settlement of losses returns to a more normal pattern.
Insurance premiums earned increased by 10% in 1995 as a result of increases in the automobile segments primarily generated by increased assumptions of business from state mandated assigned risk pools. Reduced reinsurance cessions and regulatory assessments during 1995 also contributed to this overall increase in revenues. Material rate increases introduced in the fourth quarter of 1995 to the major private passenger automobile segment have provided increased premium writings and will provide generous assistance to the overall profitability of this segment.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mobile America Corporation and Subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
MOBILE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995
CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995 MOBILE AMERICA CORPORATION AND SUBSIDIARIES
MOBILE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Fixed maturity investments are securities that mature at a specified future date more than one year after being acquired. On January 1, 1994, the Company implemented Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The Company classified its entire fixed maturity investment portfolio as "held to maturity". Accordingly, these investments are reported at amortized cost, adjusted for amortization of premiums or discounts and other than temporary declines in fair value. At December 29, 1995, the Company reassessed the appropriateness of the classifications of all securities held at that time and reclassified from the held to maturity category a portion of the Company's fixed maturity portfolio to the
available for sale category. Classifying these securities as available for sale did not impact net income.
The costs, primarily commissions, associated with acquiring new insurance contracts have been deferred. Such costs are being amortized in proportion to premiums earned on the underlying contracts or over the contracts premium paying period.
Property and equipment is carried at cost and is depreciated principally under the straight-line method over the estimated useful lives of the respective assets. Maintenance and repairs are charged to expenses as incurred; additions and major betterment's are capitalized and depreciated. At the time of retirement or other disposition of modular offices, equipment and leasehold improvements, the accounts are relieved of the cost and the related accumulated depreciation and any gains or losses are reflected in the consolidated statements of operations.
The insurance contracts accounted for in these financial statements include both short-duration contracts and long-duration contracts. Short-duration contracts provide insurance protection for a fixed period of short-duration, usually six months to one year, and enable the insurer to cancel the contract or to adjust the provisions at the end of any contract period. Most property-liability insurance contracts and certain term life insurance contracts are short-term and generally are not subject to unilateral changes in their provisions and require the performance of various functions and services, including insurance protection, for the contract term. Long-duration contracts include
whole-life contracts and guaranteed renewable term life contracts. The Company has not issued participating policies.
Estimates of future policy benefits were based on past experience as adjusted to provide for possible adverse deviation from the estimates. Interest assumptions are based on historical assumptions and experience, and range from 3% to 4.5% at December 31, 1996.
Premiums for long-duration contracts are recognized as revenues when due from the policyholders. A liability for the expected costs relating to such long-duration contracts is accrued over the current and expected renewal periods.
Premiums for short-duration contracts are recognized as revenues over the period of the contract in proportion to the amount and duration of the insurance protection provided.
Service fees represent proceeds from servicing insurance policies for third parties on a fee-for-service basis. Fees are recognized as revenue over the expected service life of the underlying insurance policies.
Earnings per share are computed on the basis of the weighted average number of common shares outstanding during each year. The effect of stock options is not material to the computation of earnings per share.
The scheduled maturities of available for sale and held to maturity securities at December 31, 1996 are as follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations without penalties.
the ceding commissions received exceed the costs to the Company of soliciting new business, thereby generating credits to commission expense and deferred policy acquisition costs. Ceding commission received in 1996, 1995 and 1994 is approximately $7,527,000, $15,694,000 and $13,756,000, respectively. Deferred policy acquisition cost reinsurance credits reported in the Company's balance sheet at December 31, 1996 and 1995 are $8,516,878 and $10,298,723, respectively.
Note 4. Modular Office Units, Land and Equipment and Leasehold Improvements (continued)
In 1995, Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" was issued. This statement requires the recognition of an impairment loss for an asset held for use when the estimate of undiscounted future cash flows expected to be generated by the asset is less than its carrying amount. Due to the nature of the Company's business, with limited use of long-lived assets, it has been determined that no impairment loss need be recognized.
The insurance subsidiaries have various reinsurance agreements which significantly affect their operations. Risks are reinsured to limit loss size and to increase writing capacity, although the Company remains primarily liable to the policyholders on all risks transferred.
The Company evaluates the financial condition of its reinsurers to minimize its exposures to significant losses from reinsurer insolvency. Reinsurance receivables, prepaid reinsurance premiums and offsetting funds withheld/payable balances for each significant reinsurer at December 31, 1996 is presented below (in thousands):
Fortune, Fortune Life and Pegasus are subject to regulation by the insurance departments of the states in which they are licensed. Under the regulations, cash dividends may only be paid out of accumulated surplus funds derived from net operating profits and capital gains, or out of earned surplus even though total surplus may be less than capital stock and paid-in capital. Fortune, which is subject to Florida law, may not pay, unless otherwise approved by the State Insurance Commissioner, dividends in any one year which exceed the greater of (a) 10% of such surplus funds or (b) the total amount of such funds derived during the immediate preceding year. The insurance companies did not pay dividends in 1996, 1995 and 1994.
The Company's incentive plan, adopted in 1995, provides for the issuance to key employees and directors of up to 300,000 shares of common stock through options, stock appreciation rights and other stock-based awards as defined under current tax laws. Incentive stock options for employees are exercisable for periods of up to ten years from the date of the grant at a price equal to the fair market value on the date of the grant. In the case of an incentive option granted to an individual who owns at least 10% of the total combined voting power of the Company, the exercise price must be at least 110% of the fair market value of the common stock on the date of grant and the option term cannot exceed five years. Stock appreciation rights entitle the recipient to receive the difference between the fair market value of the common stock on the date of exercise and the stock appreciation rights price, in cash or in shares of common stock, or a combination. Restricted stock awards entitle the recipient to receive shares of common stock subject to forfeiture restrictions that lapse over time or upon the occurrence of specific events.
The Company believes, that based upon its lengthy and consistent history of profitable operations, it is probable that the deferred tax asset will be realized and no deferred tax allowance is deemed necessary at December 31, 1996.
Fortune Insurance Company, as a direct premium writer in the state of Florida, is required to participate in the Florida Automobile Joint Underwriting Association (FAJUA). Fortune's participation is based on its automobile premium to total automobile premium written state wide by all automobile insurers. In 1996 the FAJUA issued reports amending Fortune's participation for years prior to 1996. These changes are reported in the current year. A summary of Fortune's 1996 participation and the prior year adjustment is presented below.
The Company leases certain office facilities under operating leases which contain renewal options. Lease terms range from 18 months to five years. Rent expense was $295,499, $297,597 and $263,649 for 1996, 1995 and 1994, respectively.
For a discussion of credit risk related to reinsurance see note (5) of the consolidated financial statements.
The note was collateralized by the assignment of the capital stock of the Registrant's subsidiaries on October 24, 1995, as well as the execution of guaranty agreements between the bank and certain subsidiaries of the Registrant.
Activity in the liability for insurance loss reserves is summarized as follows:
- - Note Payable The interest rate on the note payable is reset monthly to reflect current market rates, consequently the carrying value of the note approximates fair value.
(a) 1. Financial Statements The following financial statements are included in Part II,