- ---------- (1) Excludes premiums of $40,136,000 in 1997, $31,603,000 in 1996, $8,893,000 in 1995, $5,056,000 in 1994 and $5,418,000 in 1993 from the Company's fronting arrangements and the commercial automobile plans of Arkansas, California, Louisiana, Mississippi, and Pennsylvania under which the Company is a servicing carrier.
(2) Includes after tax net realized gains of $212,000, $307,000, $70,000, $87,000 and $3,000 for 1997, 1996, 1995, 1994, and 1993, respectively.
Net income for 1997 decreased 26% to $11,923,526, or $.56 per share (diluted) compared to 1996 net income of $16,019,567, or $.74 per share (diluted) and 1995 net income of $17,627,855, or $.81 per share (diluted). The Company recorded an 11% return on beginning equity and a GAAP combined ratio of 94.4% in 1997.
Gross premiums written in 1997 of $99,775,854 were 9% below the $110,000,103 recorded in 1996. In 1996, gross premiums written increased 2% over the 1995 level. The cancellation of the Kentucky coal truck program and a taxi program in New Jersey contributed 3 percentage points (points) of decrease while increased competition in the Florida, Georgia, Pennsylvania and Virginia markets contributed another 4 points of decrease in 1997. In 1996, the small growth rate was the result of Texas contributing 4 points of decrease due to intensified competition. The following table compares the major product lines between the years for gross premiums written:
Plan servicing revenues from commercial automobile plans decreased 12% in 1997 from 1996 following an 11% decrease in 1996. Written premiums in 1997 are 14% below 1996 as a result of decreases in the Louisiana and Pennsylvania plans. In 1996, the California, Louisiana and Pennsylvania plans all recorded decreases in written premiums from 1995. These plans are depopulating as risks are moving into the voluntary market due to lower pricing. The Company continues to pursue management contracts with other states to administer their commercial automobile plans and is seeking a larger participation in existing plans.
Fee income increased $265,021 in 1997 over 1996 and $280,838 in 1996 over 1995 as a result of continued significant growth in the fronting reinsurance operation.
Revenues in the computer software operation increased 39% in 1997 from 1996 after being flat from 1995 to 1996. A significant increase in system sales occurred in 1997 as a result of marketing initiatives implemented in late 1996. New management brought in during the third quarter of 1995 has improved this operation and revenues are expected to show increases in the future.
Claims and claim adjustment expenses (C & CAE) increased $3,706,923 in 1997 over 1996 and $9,913,707 in 1996 over 1995. The C & CAE ratio was 60.7% in 1997, 54.7% in 1996 and 49.8% in 1995. The increase in the C & CAE ratio of 6 percentage points in 1997 is the result of claim reserve increases recorded for commercial auto claims in Kentucky from the 1995 and 1996 accident years and adverse development in claim adjustment expense reserves for commercial auto in the 1994, 1995 and 1996 accident years. The increase in the C & CAE ratio of 4.9 percentage points in 1996 was also related to commercial auto claims in the 1995 and 1994 accident years. While the Company writes a material amount of business in areas where catastrophes have recently occurred, the gross and net claims incurred from these events were immaterial because the Company primarily writes liability coverages. With regard to environmental and product liability claims, the Company has an immaterial amount of exposure. The Company does not provide environmental impairment coverage and excludes pollution and asbestos related coverages in its policies. Approximately 2% of the Company's premium writings are for product liability coverages and this is limited to non-manufacturing risks only. Inflation impacts the Company by causing higher claim settlements than may have originally been estimated. Inflation is implicitly reflected in the reserving process through analysis of cost trends and review of historical reserve results.
The change in deferred policy acquisition costs and deferred ceding commission income (DAC) resulted in a net decrease to income of $1,015,802 for 1997 and a net increase to income of $519,257 and $2,284,138 for 1996 and 1995, respectively. The change in the amount of the increase or decrease in DAC between the comparable periods is directly related to the rate at which unearned premiums are growing or declining as a result of premium writings. Since DAC (asset) is a function of unearned premiums (liability), an increase in the growth rate of net unearned premiums would correspondingly result in an increase in the growth rate of DAC and vice versa. The ratio of DAC to net unearned premiums was 25.9%, 25.8% and 25.5% at December 31, 1997, 1996 and 1995, respectively.
The primary sources of the Company's liquidity are funds generated from insurance premiums, net investment income and maturing investments. The short-term investments and cash are intended to provide adequate funds to pay claims without selling fixed maturity investments. At December 31, 1997, the Company held short-term investments and cash of $3,519,906 which the Company believes is adequate liquidity for the payment of claims and other short-term commitments.
The increase in investments is primarily attributable to continued positive cash flows from operating activities which are the result of continued and substantial underwriting profits. Premiums receivable and Deferred policy acquisition costs decreased as a result of the decrease in premiums written. Ceded unpaid claims and claim adjustment expenses as well as ceded unearned premiums increased largely as a result of the increase in fronting reinsurance activity mentioned previously.
This Form 10-K Report and the Company's shareholder reports contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Important factors include, but are not limited to, (i) heightened competition, including price competition from existing competitors, from newly formed competitors and from the entry into the Company's markets of standard insurance companies which historically have not competed in the Company's specialty markets, (ii) contraction of the markets for the Company's various lines of business, (iii) development and performance of new specialty programs, (iv) the ongoing level of claims and claims-related expenses, (v) adequacy of claim reserves, and (vi) general economic conditions.
The following consolidated Financial Statements are on pages 34 through 58:
The following Consolidated Financial Statements Schedules are on pages 59 through 70: