(1) Certain subsidiaries of RISCORP were S Corporations prior to the Reorganization [as referred to in Note 1(a) to the Company's consolidated financial statements] and were not subject to corporate income taxes.
(4) The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share". As required by that pronouncement, these amounts have, for all years presented, been recalculated in accordance with its provisions.
Since April 1, 1998, the Company has had no employees or insurance operations, and has provided no services to self-insurance funds or other insurance related entities. Because of the significant changes in the operating activities of the Company after April 1, 1998, a comparison of the results of operations for 1998 to 1997 and 1996 is meaningless. Therefore, the results of operations for the nine months ended December 31, 1998 are explained separately with no comparison to the comparable prior periods. The results of operations of the Company prior to the April 1, 1998 sale to Zenith, compared to the comparable period in 1997 and 1996 are included to comply with the requirements of the Exchange Act and the rules and regulations of the Securities and Exchange Commission; however, those results of operations are not indicative of the operations of the Company since April 1, 1998 and are not indicative of any future operations by the Company since no future operations are anticipated.
During the nine months ended December 31, 1998, the Company's primary operating activities were the defense of the Proposed Business Balance Sheet, the investment of the net $25 million initial payment received from Zenith on April 2, 1998, the investment of other invested assets retained by the Company, compliance with the provisions of the Asset Purchase Agreement, and the administration of the day-to-day activities of the surviving corporate entities. Compliance with the provisions of the Asset Purchase Agreement included the transfer of all of the assets and liabilities, not retained by the Company, to Zenith, and assisting with the orderly transition of the Company's insurance operations to Zenith.
At December 31, 1998, the Company had investments totaling $16 million, of which $4.6 million consisted of securities to be transferred to Zenith. Those securities were primarily regulatory deposits and securities held in trust in connection with certain reinsurance agreements.
Restricted cash and cash equivalents consisted primarily of the $10 million initial purchase price payment which is being held in escrow under the terms of the Asset Purchase Agreement.
Other assets of $7.3 million consisted primarily of prepaid insurance coverages of $4.1 million, retainers paid to certain professionals and consultants of $1.1 million, and accrued investment income of $2.1 million, of which $1.8 million relates to interest receivable from Zenith.
Accounts receivable-other of $7.7 million consisted primarily of a $2.3 million receivable which is expected to be realized upon the redemption of the Company's outstanding stock and $4.8 million of certain insurance recoverables which is expected to be received when the accrued legal settlements discussed herein are actually paid.
Accrued expenses and other liabilities totaled $27.8 million and consisted primarily of $20.5 million of an accrued legal settlement, $2.5 million of accrued legal, accounting, auditing, and actuarial expenses that primarily relate to the defense of the Proposed Business Balance Sheet, $1.3 million of trade accounts payable, $1 million of income taxes payable, $0.6 million of unpaid restructuring cost relating to the June 1997 corporate restructuring, and $1 million of other accruals and payables.
The Company's operating results for the nine months ended December 31, 1998 resulted in a net loss of $61.6 million. The following comments pertain to the Company's revenues and expenses for the nine months ended December 31, 1998:
Net realized gains were $2.8 million. The net realized gains consisted primarily of gains on the sale of securities transferred to Zenith in connection with the Asset Purchase Agreement. For 1998, the net realized gains were $4.3 million, of which $1.3 million was the gain on the sale of Third Coast recognized in the first quarter of 1998, more fully discussed in Note 4 of the accompanying consolidated financial statements.
Operating expenses totaled $18.6 million. This amount included three significant non-recurring expenses that relate to the sale to Zenith. The first non-recurring expense totaled $3.4 million and consisted of severance payments to certain of the Company's former executives and employees. The second expense totaled $4.1 million and consisted of the issuance of RISCORP stock to The Phoenix Management Company, Ltd. ("Phoenix") in accordance with a Restricted Stock Award Agreement. The third expense totaled $2.8 million and represented a payment for a tax gross up related to the issuance of the restricted stock award to Phoenix. The remaining $8.3 million of operating expenses consisted of $2.8 million of accounting and auditing expenses, $1.7 million of recurring operating expenses such as rent, telephone, insurance, and similar costs, $1 million of adjustments to the Proposed Business Balance Sheet (discussed more fully in Note 1(b) of the accompanying consolidated financial statements), $0.9 million of management expenses, $0.3 million of transition expenses incurred as a result of the sale to Zenith, and $1.6 million of other expenses.
Depreciation and amortization expense was $0.3 million. The Company transferred all assets subject to amortization to Zenith in connection with the sale and, based on discussions with representatives of Zenith, retained $0.3 million of fixed assets (consisting primarily of computer equipment) which is being depreciated over three years.
The discussion that follows relates to the operations and operating philosophy of the Company's activities which existed prior to April 1, 1998 and includes the results for the year ended December 31, 1998 compared to 1997 and 1996.
Prior to 1996, the Company's at-risk operations were focused in Florida. During 1996, RISCORP acquired RNIC and its 19 licenses and assumed business from several self insurance funds outside of Florida which allowed RISCORP to diversify its at-risk operations. A
comparison of the Company's direct written premiums for 1998, 1997, and 1996 (prior to reinsurance cessions or assumptions) by state is presented below (in millions):
Year Ended December 31 1998 (a) 1997 1996 Direct premiums earned $ 48.4 $328.2 $326.9 Assumed premiums earned 0.1 18.8 11.7 Premiums ceded to reinsurers (22.7) (167.3) (165.0) Net premiums earned $25.8 $179.7 $173.6
The $1.3 million net increase in the direct premiums earned for 1997 compared to 1996 was primarily the result of the following factors:
The infusion of $68.9 million of capital into RISCORP's insurance subsidiaries from RISCORP's initial public offering ("IPO") proceeds allowed the insurance subsidiaries to increase their premium writing capacity and, as a result, the Company was able to increase premiums during the last nine months of 1996 due to its expanded premium writing capabilities. Written premiums were earned pro rata over the policy periods (usually 12 months); therefore, increased premiums written during the last nine months of 1996 had a positive impact on earned premiums in 1996 and 1997.
Written premiums increased in the third and fourth quarters of 1996 and the first quarter of 1997 from the assumption reinsurance and loss portfolio agreements entered into by the Company and from the acquisitions made by the Company during 1996.
Enhanced marketing initiatives implemented by the Company after the IPO to increase the number of policies and to write accounts with larger premiums.
In September 1995, the Company entered into a fronting agreement with another insurer which enabled the Company to begin expansion into states where the RISCORP insurance companies were not licensed. The fronting agreement was cancelled effective December 31, 1997. The cancellation of the fronting agreement and the sale to Zenith were the primary reasons that the assumed premiums decreased to $0.1 million in 1998 from $18.8 million in 1997. The increase in assumed premiums earned in 1997 from 1996 was primarily the result of the Company recording $11.4 million of earned premiums from the National Council on Compensation Insurance, Inc. pool participation. The assumed premiums from the fronting agreement were $7.1 million and $11.7 million for 1997 and 1996, respectively. While the company assumed premiums from several insurers, the fronting agreement generated the majority of the assumed premiums.
Net investment income for 1998, 1997, and 1996 was $7.1 million, $16.4 million, and $12.2 million, respectively. Net investment income consists entirely of earnings from the investment portfolio, excluding realized gains and losses in 1997 and 1996. See the foregoing comments on the components of the 1998 investment income.
Commissions and general and administrative expenses for 1998, 1997, and 1996 were $34.2 million, $70.8 million, and $65.7 million, respectively. The net increase of $5.1 million from 1996 to 1997 is primarily the result of a $6.3 million increase in the amortization of deferred acquisition costs, a $2.1 million increase in personnel expenses primarily related to severance payments incurred in connection with the June 1997 workforce reduction, a $5.9 million increase in accounting, auditing, consulting, and legal expenses primarily resulting from the Company's inability to file its 1996 financial statements in a timely manner, a $2.8 million increase in postage, telephone, and insurance expenses, a $13 million expense recognized in the fourth quarter of 1997 in connection with the proposed settlement of the securities class action lawsuit, a $5 million increase relating to expenses associated with the NCCI pool participation, a $5.3 million increase in commissions paid to agents, and a $1.7 million reduction in ceding commission income. These expense increases were offset by reductions in marketing related travel expenses of $1.5 million, decreases in premium taxes of $8.5 million resulting from a decline in written premiums, and a decline in bad debt expenses of $27 million. The Company had no employees at the end of 1998 and approximately 580 at December 31, 1997.
Effective April 1, 1998, RISCORP ceased substantially all of its former business operations, including its core insurance and managerial services operations. RISCORP's computer systems and proprietary computer software, including the policy issue and management system and the claims systems, were included in the assets sold to Zenith, pursuant to the Asset Purchase Agreement.