The executive and general offices of the Registrant and its subsidiaries, consisting of approximately 23,000 square feet, are located at 10475 Fortune Parkway, Suite 110, Jacksonville, Florida. In 1997 the Registrant exercised a renewal option extending the term of the lease on this space to 2002. Annual lease payments range from $257,352 to $269,796 in the final year of the lease.
In 1997, the Registrant expanded its facilities by leasing approximately 7,500 square feet for its personal property, excess and surplus lines and fee for service processing, This lease is on a month to month term with current monthly lease payments of $6,455.
Earnings per share and cash dividends per share amounts have been restated to conform with stock dividends and splits.
Total consolidated revenues decreased 17.9% during 1998 due to a 20.9% reduction in earned insurance premiums and a 14.1% reduction in investment income.
Service fee revenue which includes fee-for-service revenue, premium finance revenue and MAIG agency revenue remained steady in 1998. Revenues from the fee-for-service business increased 7.9% and premium finance revenues increased 63.5%. MAIG agency revenue from the automobile segment declined 12.0% following the trend in direct premium volume for this segment. Fees from the excess and surplus lines segment remained steady.
Net loss and loss adjustment expenses declined 20.5% in 1998 to $26,142,808. The incurred loss and loss expense to earned premium ratio is 74.8% in 1998 compared to 74.4% in 1997.
During 1998 salary and wages remained level and general and administrative expenses increased 23.3%. This increase is due to costs associated with the computer modification problems and higher professional fees resulting from the due diligence process, associated with the possible sale of the Registrant, which took place during 1998.
As a result of loss cost studies, the Registrant has historically been operating at the low end of the actuarial range. During the fourth quarter, loss and loss adjustment expense reserves increased from approximately 90% of the Registrant's independent actuary's estimate of $37.4 million at year end 1997 to approximately 93% of the estimate of $31.3 million at year end 1998.
Due to the inherent uncertainty in estimating reserves for losses and loss adjustment expenses, which are estimates of the amounts necessary to settle reported and unreported claims and their related loss adjustment expenses, there can be no assurance that the ultimate liability will not exceed the amounts reserved, resulting in an adverse effect on the Registrant. The Registrant believes its current reserves are adequate. The Registrant's independent actuary's range of reasonable direct reserve estimates as of December 31, 1998 is between $26.6 million and $36.0 million and net of reinsurance recoveries the reserve range is between $10.4 million to $14.1 million.
In order to promote top-line growth, effective January 1, 1999 the Registrant reduced its ceding percentage on personal injury protection and property damage liability products by 13% to a ceding percentage of 65%.
The Registrant maintains sufficient liquidity to meet operational needs. Cash dividend, capital expenditure, debt repayment and operating requirements will be provided by operations and investment activities. The investment policy continues to emphasize higher quality securities matched closely with the short liability duration.
The Registrant is aware of the issues associated with the programming code in existing computer systems as the Year 2000 approaches. The "Year 2000" problem is pervasive and complex, as virtually every computer system will be affected in some way by the rollover of the two-digit value to "00". The issue is whether computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or fail.
In the ordinary course of business, the Registrant has installed various software and hardware that is Year 2000 compliant. The Registrant's telephone system is not completely Year 2000 compliant but the Registrant expects to install the necessary upgrades prior to September 30, 1999. The Registrant believes all other mission critical systems to be Year 2000 compliant.
As a result of installing a new Year 2000 compliant premium and claims processing system the Registrant has experienced an increase in the backlog of policies, endorsements and cancellations to be processed. While progress continues to be made, it was necessary to increase staffing and engage outsourcing assistance in order to be able to eliminate the backlog in a reasonable time. At this time the Registrant is not able to estimate the extent to which costs of implementing this system will be in excess of the proposed budget of $1.4 million. However, the Registrant has budgeted an additional $200,000 for these expenses. Expenses associated with the installation of the Year 2000 compliant system were approximately $139,000 in 1998. Capital investments for this project approximate $860,000.
The Registrant has conducted a comprehensive review of its underwriting guidelines and has determined that there is very little Year 2000 exposure in the insurance policies it sells. The Registrant believes that its exposure to Year 2000 claims will not be material. However, changing social and legal trends may create unintended coverage for exposures by reinterpreting insurance contracts and exclusions. It is impossible to predict what, if any, exposure insurance companies may ultimately have for Year 2000 claims whether coverage for the issue is specifically excluded or included.
The Registrant's exposure to market risk for changes in interest rates is concentrated in its investment portfolio and to a lesser extent its debt obligation. The following table provides information as of December 31, 1998 about our fixed maturity investments that are sensitive to interest rates. The table presents principal cash flow and related weighted-average interest rates by expected maturity dates. Actual cash flows may differ from those stated as a result of calls and prepayments. Short-term investments, which total $21,210,230 at December 31, 1998, all mature within one year. Principal payments on the note payable are scheduled at $600,000 per quarter over the next 48 months. The note payable accrues interest at 90 day LIBOR plus 250 basis points and is payable monthly.
The Registrant paid an annual dividend of $.11 per share on February 5, 1999 to shareholders of record on January 22, 1999. The dividend payment totaled $794,988
Income before provision for income taxes decreased 1.3% in 1997 to $8,867,896 compared to $8,986,164 reported in 1996 primarily due to increased earned premium and lower acquisition costs being offset by reduced service fee income and higher salaries, wages and general and administrative costs. Net income decreased 18.4% in 1997 to $6,175,796 compared to $7,571,392 reported in 1996 principally due to a nonrecurring tax benefit resulting from the release of a valuation allowance and the recognition of income tax credits during 1996.
Total consolidated revenues, exclusive of state mandated automobile assigned risk pool business, increased 3.9% from $57,836,017 in 1996 to $58,921,414 in 1997. Overall, total consolidated revenues increased 22.1% to $58,810,207 during 1997 from $48,163,935 for 1996. This change was influenced by an increase in insurance premiums earned (which was adversely affected by adjustments to state mandated assigned risk pool business in 1996), offset by a decline in service fees earned and lower net investment income.
Property insurance direct written premium produced through the Registrant's surplus lines insurance subsidiary increased 135% in 1997 to $4,367,466. The Registrant plans to remain active in this market.