The following table sets forth certain information with respect to the principal facilities used in the Company’s operations:
The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto included elsewhere in this Report, and “
The following discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes thereto included elsewhere in this Report, as well as the risk factors highlighted above in “Item 1. Business-Risk Factors.”
Insurance Management Solutions Group, Inc. (together with its subsidiaries, the “Company”) is a holding company that was incorporated in the State of Florida in December 1996 by Bankers Insurance Group, Inc. (together with its subsidiaries, “BIG”), which contributed to the Company two of its wholly-owned operating subsidiaries, Insurance Management Solutions, Inc. (“IMS”) and Bankers Hazard Determination Services, Inc. (“BHDS”) that were previously formed in August 1991 and June 1988, respectively. The Company, through its wholly-owned subsidiaries, IMS and Colonial Claims Corporation (“Colonial Claims”), provides comprehensive policy and claims outsourcing services to the property and casualty (“P&C”) insurance industry with an emphasis on providing these services to the flood insurance market.
During 2001 and 2002, the Company processed approximately 925,000 and 775,000 insurance policies, respectively, including approximately 565,000 flood insurance policies in each year, making it a significant provider of flood insurance outsourcing services.
The Company is a 68%-owned subsidiary of BIG which is also the Company’s principal customer representing 67.9% and 66.1% of outsourcing revenues for 2001 and 2002, respectively. The various service agreements with BIG and it’s affiliates are described following.
Prior to 1997, the Company’s outsourcing services principally related to IT services provided to BIG on a cost reimbursement basis. In 1997, the Company entered into service arrangements with BIG to provide a broader menu of outsourcing services. These services primarily consisted of policy and claims administration (including policy issuance, billing and collection functions, claims adjusting and processing) and IT services provided for BIG’s flood and homeowners insurance lines of business. Revenues for these services were derived based on a percentage of direct written premiums for policy administration services and direct paid claims for claims administration services. The Company also provided claims administration services for BIG’s other insurance lines, excluding flood and homeowners, on a cost reimbursement basis in 1997.
Effective January 1, 1998, the Company entered into a written service agreement (collectively, the “Service Agreements”) with each of BIC, BSIC and FCIC, all direct or indirect subsidiaries of BIG. These service
Effective as of October 1, 2001, the Company entered into a new Insurance Administration Services Agreement with BIC, BSIC and FCIC (the “New Service Agreement”). The New Service Agreement replaced the Service Agreements, as amended by the Letter Agreement. Pursuant to the New Service Agreement, the Company provided policy administration, claims administration and data processing services to such entities in connection with their flood, homeowners and automobile lines of business, and claims administration and data processing for all such entities’ other P&C lines of business.
Effective August 12, 2002, the Company amended the Amended New Service Agreement with BIG. Pursuant to this amendment, the Company provides additional IT support services to BIG. In return for providing these services, the Company receives not less than approximately $876,000 annually in fees from BIG, which is a minimum amount based upon estimated IT usage of the Company’s services. In addition, the Company hired eleven persons previously employed by BIG, at an anticipated annualized cost of approximately $764,000. See “Item 13. Certain Relationships and Related Transactions-New Service Agreement.”
Effective as of the consummation of the foregoing transaction between BIG and FNF, the Company entered into a new Flood Insurance Full Service Vendor Agreement, dated January 3, 2003 (the “FCIC Service Agreement”), with FCIC, now a wholly-owned subsidiary of FNF, pursuant to which the Company continues to provide policy administration, claims administration, claims administration, data processing and other related services to FCIC in connection with FCIC’s Write Your Own (“WYO”) Flood Insurance Program. As of the date of this Report, FCIC’s WYO Program consists soley of the flood insurance book of business previously administered by the Company on behalf of BIG. Given, among other factors, FNF’s substantial size and financial strength relative to BIG, the Company believes that FCIC’s prospects for both retention and growth of the existing flood insurance book of business are favorable. No assurances can be given, however, as to whether the acquisition of FCIC and certain related assets by FNF from BIG will have a positive impact on the Company’s business, financial condition or results of operations.
The cost of outsourcing services primarily includes wages and related benefits associated with personnel who perform policy and claims administration services, as well as postage and telephone charges, data processing and other direct costs associated with providing service to customers. Selling, general and administrative expenses include the wages and related benefits of sales and marketing, executive, finance and accounting personnel, as well as other general operating costs.
Valuation of Accounts Receivable and Due from Affiliate at December 31, 2001 and 2002, respectively
At December 31, 2001 the Company established a $200,000 provision (not considered a bad debt item) relating to potential disputed billing items with its affiliates under the New Service Agreement. This matter was resolved in early 2002 and the provision was reversed.
In conjunction with the sale of Geotrac, the Company’s flood zone determination subsidiary, on December 28, 2001, the Company obtained a favorable long-term service contract with Geotrac for flood zone determinations, which was recorded at its estimated fair value of $2,189,090 at December 27, 2001. Accumulated amortization at December 31, 2002 was $387,807. The unamortized balance is classified in Other Assets in the Company’s balance sheet. The contract will be amortized over the 10-year contract period using a method that approximates the projected annual requirements of flood zone determinations. The Company’s internal assessment during 2002 concluded that no impairment existed at December 31, 2002.
As of December 31, 2001 and 2002, the Company has recorded a liability for a settlement accrual of $800,000 relating to an unaffiliated third-party customer contract with a former customer that was terminated in 2000 and for which no settlement has yet been reached with this former customer. No discussions between the Company and this customer have taken place since October 2000. On November 6, 2002, the Company received a letter from the Deputy Insurance Commissioner of the Commonwealth of Pennsylvania, on behalf of the former customer. This letter notified the Company that the liquidator for this former customer disavows and terminates the Insurance Administration Services Agreement between Insurance Management Solutions, Inc. and this former customer. Recently, the Company was informed through a communication that this party planned to possibly make a new claim for the aforementioned amount. The Company is of the opinion that no termination agreement was ever made but also that the original services agreement had been officially terminated by the aforementioned state of PA insurance department communication. According to the aforementioned information and other, more detailed information the Company has with regard to this matter, Management believes that if this matter is re-opened, this issue can be resolved either through litigation or mediation, but that there is no merit to this latest communication. If this matter is re-opened, an adverse outcome could have a material effect on the Company’s business, financial condition and results of operations.
The following table sets forth, for the periods indicated, certain selected operating results of the Company as a percentage of total revenues:
Outsourcing Services Revenues. Outsourcing services revenues decreased $24.8 million or 43.4% to $32.3 million in 2002 from $57.1 million in 2001. The decrease in outsourcing services revenue was primarily attributable to a lack of material storm activity and decreases in the Company’s affiliated outsourcing revenues resulting from changes in the amounts and lines of business that the Company processes for BIG. More specifically, the decrease was attributable to decreased claims processing revenue of $10.3 million due to lack of substantial storm activity in 2002 as compared to 2001, coupled with reduced affiliated homeowner and automobile outsourcing services revenue of $10.1 million. The Company’s claims processing revenue decreased $10.3 million, or 60% and consisted of $4.5 million of claims processing coupled with $5.8 million related to a decrease in claims processing by the Company’s Colonial Claims subsidiary. The reduction in affiliated automobile and homeowner outsourcing services revenue was primarily a result of (i) reduced affiliated automobile direct written premium (“DWP”) of approximately 54% resulting from stricter underwriting guidelines and BIG’s decision to effectively exit this product line in the second quarter of 2002, (ii) reduced affiliated homeowner DWP of approximately 46% resulting from BIG’s sale of Florida wind-inclusive policies effective February 2002, and (iii) the implementation of the Amended New Service Agreement with BIG effective July 1, 2002. See “-Overview” above.
The DWP for the flood program represented approximately 565,000 policies for both 2001 and 2002, or 38% and 50% of the Company’s total outsourcing revenue. Affiliated revenue represented 72% and 67% of the total flood program in 2001 and 2002. The decrease in affiliated production of approximately 5% was offset by an unaffiliated production increase of approximately 18%. As described earlier in this section, in January 2003 the affiliated flood business serviced by the Company was sold to FNF by BIG (see “Background,” above.)
Cost of Outsourcing Services. Cost of outsourcing services decreased 35.8% to $26.9 million in 2002 from $41.9 million in 2001. As a percentage of outsourcing services revenues, cost of outsourcing services increased to 83.3% in 2002 from 73.4% in 2001. The decrease in cost of outsourcing services from the prior year was primarily due to (i) salary and related expense reductions of $5.3 million from the prior year due to the termination of 98 employees effective July 1, 2002 and a decrease of an additional 89 employees resulting from further layoffs and attrition, (ii) a reduction in adjuster expense of $4.5 million from the Company’s Colonial Claims subsidiary due to lack of material storm activity in 2002 as compared to 2001, (iii) a reduction in telephone expense of $1.3 million due primarily to reduced usage and favorable service rates with a new service provider, (iv) decreased postage expense of $824,000 primarily due to the termination of automobile and homeowner processing as described above; for BIG effective July 1, 2002 pursuant to the Amended New Service Agreement, (v) decreased equipment-related expense of $624,000 due to reduced personal computer equipment lease costs coupled with reduced equipment usage resulting from decreased service volumes as described above, and (vi) reduced claims contract labor expense of approximately $516,000 resulting from the aforementioned reduced claims processing volumes due to the lack of material storm activity in 2002 as compared to 2001.
Selling, General and Administrative Expenses. Selling, general and administrative (“SGA”) expenses increased 7.4% to $7.5 million in 2002 from $6.9 million in 2001. As compared to 2001, the Company experienced an aggregate increase of approximately $1.9 million legal expense, consulting fees, director fees, and director and officer insurance expense relating primarily to activities of the Special Committee of the Board of Directors. These increases were offset by a $900,000 decrease in salary expense related to the aforementioned staffing reductions and, in the case of the Company’s Colonial Claims subsidiary, reduced incentive compensation. At December 31, 2001 the Company established a $200,000 provision (not considered a bad debt item) relating to potential disputed billing items with its affiliates under the New Service Agreement. This matter was resolved in early 2002 and the provision was reversed.
Interest Income. Interest income increased 239% to $955,000 in 2002 from $282,000 in 2001. This increase resulted from interest earned on the Company’s lines of credit with BIG (see “-Liquidity and Capital Resources” below), coupled with investment income earned on the net cash proceeds from the sale of Geotrac in December 2001.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 6.8% to $6.9 million in 2001 from $7.4 million in 2000. This decrease of $500,000 was primarily attributable to a decrease in payroll costs as a result of previously-noted staff reductions and the completion of certain severance payment obligations, partially offset by the continued assumption of certain administrative services that were previously provided to the Company by BIG under a management service agreement and a $200,000 provision recorded during the fourth quarter of 2001 related to billing adjustments under the New Service Agreement and already paid to the Company by BIG.
Interest Expense. Interest expense decreased 90.2% to $6,000 in 2001 from $61,000 in 2000. This decrease resulted primarily from the payment of substantially all of the Company’s remaining outstanding debt obligations during 2000 and 2001. The nominal amount booked for the period relates to expenses for capital leases for information technology equipment; these leases expired during the fourth quarter of 2001.
Flood Zone Determination Services Revenue. Flood zone determination services revenue increased 28.1% to $21.9 million in 2001 from $17.1 million in 2000. The increase was primarily attributable to an increase in the
number of flood zone determinations processed by Geotrac during 2001 as compared to 2000. The increase in the number of flood zone determinations processed was primarily due to a continued low mortgage interest rate market. These attractive interest rates resulted in a corresponding increase in mortgage refinancing activity and loan originations, which historically drive the demand for flood zone determinations.
Cost of Flood Zone Determination Services. Cost of flood zone determination services increased 18.2% to $9.1 million in 2001 from $7.7 million in 2000. As a percentage of flood zone determination services revenues, cost of flood zone determination services decreased to 41.6% for 2001 from 45.0% in 2000. The increase in the dollar amount of cost of flood zone determination services was primarily attributable to corresponding increases in revenues related to flood zone determinations.
The cost of flood zone determination services is exclusive of a fourth quarter of 2001 write-off of capitalized software of approximately $1.3 million. Principally during the fourth quarter of 2001, Geotrac’s management, with Geotrac’s Board approval, decided to abandon further development of many components of a new software system that had been in process since 1999. The decision was based on various factors including funding limitations, other available strategies, and technical difficulties.
The Company’s principal sources of liquidity have historically consisted of cash on-hand and cash flows from operations. In addition, the Company received net cash proceeds of approximately $18.2 million as a result of the sale of its Geotrac subsidiary in late December 2001.
insurance agents (including but not limited to general agents with respect to the sale of federal flood insurance) (collectively, the “Flood Book”), and (ii) an option (the “Option”) to purchase from BIG the outstanding capital stock, consisting of 10,898 shares (the “Option Shares”) of common stock, $318 par value per share, of First Community Insurance Company, a New York insurance company licensed in all fifty states (“FCIC”). As of the date the Original BIG Loan was established, management of the Company believed the fair market value of the Flood Book well exceeded the aggregate principal amount of the Original BIG Loan.
Pursuant to the Original Credit Agreement, all unpaid principal and interest became due and payable in full on February 28, 2002. As of such date, BIG owed the Company an aggregate of approximately $5 million under the Original BIG Loan. On March 14, 2002, the Company and BIG amended the Credit Agreement to extend the Original BIG Loan Credit until May 31, 2002. This amendment to the Original Credit Agreement was approved unanimously by the Audit Committee of the Board of Directors of the Company at a special meeting held on March 8, 2002. In making this determination the Audit Committee considered, among other things, (i) the Company’s continued dependence on BIG (including certain of its subsidiaries) as the Company’s principal customer and, (ii) the financial condition of BIG and the current status of the collateral securing the Original BIG Loan.
As previously reported, in August 2002 the Company announced an intention to commence a cash tender offer for all of the presently outstanding shares of its Common Stock, at a price of $3.08 per share, net to the seller in cash (the “Offer”). The Offer was to be conditioned upon at least a majority of the shares of Common Stock not held by members of the BIG Group (as hereinafter defined) being tendered and other closing conditions typical for this type of transaction. The Offer was to have been made pursuant to an Agreement and Plan of Merger, dated August 15, 2002 (the “BIG Agreement”), by and among the Company, BIG, BIC, BSIC and Bankers Management Corporation (“Acquisition Corp.”). BIC is a wholly-owned subsidiary of BIG and BSIC is a jointly-owned subsidiary of BIG and BIC. BIG, BIC and BSIC constitute the “BIG Group.” Acquisition Corp. is a Florida corporation wholly-owned by BIC and BSIC and formed solely for purposes of consummating a short-form merger following the Offer. As of the date of the BIG Agreement, the members of the BIG Group collectively owned approximately 68.0% of the outstanding shares of Common Stock. Pursuant to the BIG Agreement, the members of the BIG Group had agreed not to tender the shares of Common Stock owned thereby in response to the Offer. Also pursuant to the BIG Agreement, the Company agreed to loan BIG and/or BUI up to $7.0 million under a revolving line of credit (the “Line of Credit”), secured by the Flood Book of BUI. All amounts due under the Line of Credit were due July 31, 2003 and monthly interest-only payments would be due prior to maturity.
As of February 28, 2003, BIG owed the Company an aggregate of approximately $5.2 million under the Amended New Service Agreement (substantially all of which was overdue), including approximately $450,000 in late payment fees. The Company has made written demand on BIG for payment in full of all past due amounts owing under the Amended New Service Agreement, and the Audit Committee of the Company’s Board of Directors is currently considering various alternatives for collecting such past due amounts. If such past due amounts are not paid in full and BIG does not thereafter continue to pay amounts due under the Amended New Service Agreement on a timely basis, it could have a material adverse effect on the Company’s business, financial condition, and results of operations.
Based upon and subject to the aforementioned, the Company expects cash on hand and cash from operations to be adequate to support its operating cash needs for the foreseeable future, although no assurances can be given in this regard.
Consolidated Statements of Income for the years ended December 31, 2000, 2001 and 2002
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 2001 and 2002