The Registrant seeks to: (1) increase its identification as a provider of small commercial lines insurance; and (2) expand and diversify its insurance operations outside the State of New Jersey. The Registrant believes that both of these objectives can be attained through the acquisition of other insurance companies which present opportunities to write these product lines in different geographic areas. The Registrant expects to continue to pursue these objectives during 1999 and beyond.
Under the terms of the Merger Agreement, North East shareholders will receive, at their individual election, (a) $3.30 per share of North East common stock, (b) one share of the Registrant's common stock for each 5.25 shares of North East common stock, or (c) a combination thereof. If the North East shareholders in the aggregate elect to exchange more than 50% of their shares for the Registrant's stock, the aggregate percentage will be ratably reduced to 50%.
Consummation of the Merger is subject to the satisfaction of certain conditions set forth in the merger agreement, including approval from the shareholders of the Registrant and North East and authorization by state insurance regulators. Both the Registrant and North East expect that these conditions will be satisfied in due course.
Historically, the Insurance Companies' results of operations have been influenced by factors affecting the property and casualty insurance industry in general and the New Jersey PPA market in particular. The operating results of the U.S. property and casualty insurance industry have been subject to significant variations due to competition, weather, catastrophic events, regulation, general economic conditions, judicial trends, fluctuations in interest rates and other changes in the investment environment.
The Registrant continues to write new amounts of personal lines business, both PPA by Motor Club and Homeowners by Preserver. However, the growth in these respective lines of business is at a slower rate than the Commercial Lines business written by Preserver, which is expected to continue in 1999 and beyond.
Losses and loss expenses incurred increased by $3,338,000 or 10%, which produced the following loss and loss expense ratios:
Despite the higher loss and loss expense ratio on a comparative basis, no significant adverse trends were experienced or identified during 1998.
The $343,000 or 20% increase in other operating expenses is due to increased expenditures related to the Registrant's merger and acquisition efforts along with expenditures to comply with the PPA reforms being implemented in New Jersey.
The Registrant expects to reduce its expenses and expense ratio further in the long-term by pursuing further automation of its policy processing functions, particularly as relates to data provided by and to its independent agents. During 1997, the Registrant converted its information systems to a smaller, more contemporary computing platform which will allow for more efficient operations and lower maintenance costs. The Registrant expects to continue the efforts made previously to reduce all unnecessary overhead expenditures.
The Registrant's book value increased to $13.15 per share at December 31, 1998 from $10.98 per share at December 31, 1997. The principal sources of the net increase were: (1) net income of $4,256,000 or $2.02 per share described previously; (2) $159,400 or $.08 decrease per share due to the increase of the minimum required pension liability for the defined benefit pension plan sponsored by the Registrant; and (3) $668,400 or $.32 per share increase due to the increase (net of applicable deferred taxes) in the fair value of the fixed maturity investments accounted for as available-for-sale securities under SFAS No. 115 ("Accounting for Certain Investments in Debt and Equity Securities").
The increase in the minimum pension liability was the result of a decrease in the discount rate used to compute Plan liabilities to 6.75% at December 31, 1998, from 7.25% at December 31, 1997, offset by the performance of the Plan assets in excess of the expected return on these assets. See Note K of the Notes for additional information regarding the Registrant's minimum pension liability.
Despite the higher loss and loss expense ratio on a comparative basis, no significant adverse trends were experienced or identified during 1997.
The increase in Motor Club's PPA loss and loss expense ratio is largely due to the new business written by Motor Club since January 1995. The Registrant reserved the ultimate development of this new business at a loss and loss expense ratio of 78%.
The increase in acquisition costs of $1,483,000 or 11% generally corresponds with the increase in insurance premiums noted above, although the rate of increase was slightly lower due to savings on net commissions realized in 1997. During 1998, the FAIR Act assessments previously paid were eliminated. These assessments totaled $971,000 and $962,000 in 1997 and 1996, respectively.
The Registrant's book value increased to $10.98 per share at December 31, 1997 from $9.17 per share at December 31, 1996. The principal sources of the net increase were: (1) net income of $3,483,000 or $1.68 per share described previously; (2) $161,800 or $.08 increase per share due to the reduction of the minimum required pension liability for the defined benefit pension plan sponsored by the Registrant; and (3) $327,700 or $.16 per share increase due to the increase (net of applicable deferred taxes) in the fair value of the fixed maturity investments accounted for as available-for-sale securities under SFAS No. 115 ("Accounting for Certain Investments in Debt and Equity Securities").
LIQUIDITY AND CAPITAL RESOURCES - - ------------------------------- The Insurance Companies' need for liquidity arises primarily from the obligation to pay claims. The primary sources of liquidity are premiums received, collections from reinsurers and proceeds from investments.
Reserving assumptions (except as noted in Loss Reserves) and payment patterns of the Insurance Companies did not materially change from the prior year and there were no unusually large retained losses resulting from claim activity. Unpaid losses are not discounted.
Net cash provided by operating activities was $10,547,000, $10,389,000 and $6,851,000 in 1998, 1997 and 1996, respectively. The higher amounts in these years are attributable to the growth in premium revenue combined with the reduction in overhead expenses described previously.
The Registrant paid no dividend on its common stock in 1998, 1997 and 1996.
On September 30, 1998, the Registrant borrowed $3 million from Dresdner Bank, AG (the "Loan"). The Loan assisted the Registrant with certain internal restructuring of its organization, in order to improve the prospects of Preserver to attain its own separate rating from Best, which was achieved in January 1999. Please refer to Note G in the Notes to Consolidated Financial Statements for further information on the Loan.
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued and established standards for accounting and reporting of derivative instruments and hedging activities. The Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Registrant is in the process of determining the effect, if any, of this Statement on its financial statements.
Financial Statements and Supplementary Data - - ---------------------------------------------------- See Item 14 (a).