The Company owns its corporate offices which provide approximately 35,000 square feet of office space and additional parking. Future expansion could be possible by converting the parking area into office space.
The Company owns a 3.28 acre tract of land in Fort Worth, Texas and all improvements located thereon, including a 10,000 square foot office building. The Company currently has this property under lease to an unaffiliated third party.
(1) Excludes premiums of $26,973,000 in 2000, $58,137,000 in 1999, $47,588,000 in 1998, $40,136,000 in 1997 and $31,603,000 in 1996 from the Company's fronting arrangements, the commercial automobile plans of Arkansas, California, Louisiana, Mississippi, and Pennsylvania under which the Company was a servicing carrier and the reinsurance arrangement in Florida whereby MGAI premiums are ceded to a non-affiliated reinsurer and assumed by General Agents.
(2) Includes after tax net realized gains (losses) from securities transactions of $(1,258,000), $400,000, $457,000, $212,000, and $307,000 for 2000, 1999, 1998, 1997, and 1996, respectively.
In 2000, the Company recorded a net loss of $19,551,365, or $.97 per share (basic), primarily as a result of significant unfavorable claims experience in the commercial auto liability line of business. The Company is no longer writing certain identified nonprofitable coverages that had accounted for approximately $25 million in annual premiums in the commercial trucking portion of this line of business. The Company materially increased the ultimate estimated liabilities for the line and entered into a reinsurance agreement, effective December 31, 2000, that provides significant additional protection in the event of further adverse reserve development. Additionally, the Company has reinsured the run-off of this business in 2001. In 1999, net income was $7,127,137, or $.32 per share (diluted), compared to a net loss in 1998 of $11,662,564, or $.56 per share (basic). The Company recorded GAAP combined ratios of 126.3% in 2000, 99.4% in 1999 and 132.7% in 1998.
On January 7, 2000, the Company acquired Tri-State, Ltd. ("Tri-State"), an insurance operation specializing in underwriting, servicing and claims handling of nonstandard personal auto insurance in Minnesota, North Dakota and South Dakota. Tri-State owns and operates a managing general agency, a motor vehicle driving records service company and an insurance subsidiary, MCIC. Tri-State was incorporated in 1980 and currently markets nonstandard personal auto insurance through over 540 retail agencies in its three key states and commercial automobile insurance in four states. The purchase price consideration consisted of $6,000,000 in cash at closing, plus additional payments of up to $5,500,000 in cash over the next several years, contingent on conversion of business to the Company, meeting specific profitability targets and Tri-State's 1999 year-end book value. Tri-State's insurance subsidiary, MCIC, had approximately $3,000,000 of policyholders' surplus at December 31, 1999.
On March 23, 2001, the Company consummated the Stallings Transaction pursuant to which, among other things, the Company issued shares of its newly created Series B Preferred Stock and a warrant to purchase an aggregate of 1,050,000 shares of Common Stock at the defined Conversion Price in exchange for an aggregate purchase price of $3.0 million in cash. The annual dividend provisions and the redemption provisions of the Series B Preferred Stock are the same as those for the Series C Preferred Stock. The Series B Preferred Stock is convertible into Common Stock at the defined Conversion Price. Subject to adjustment for certain events, the Series B Preferred Stock is convertible into a maximum of 1,333,333 shares of Common Stock. The term of the warrant is five years. Mr. Stallings was elected non-executive Vice Chairman of the Board and a director of the Company.
Net investment income increased 45% in 2000 from 1999 after a decrease of 1% in 1999 from 1998. During 2000, approximately $80.5 million in bond securities were sold for a pre-tax loss of $1,906,911 and a large portion of the proceeds were reinvested in bond securities with an average taxable equivalent yield of more than 150 basis points over the bond securities that were sold. The increase in investments and the increase in yield on the proceeds reinvested from the sales of bonds account for the increase in investment income in 2000. The decrease in 1999 was the result of reinvesting maturities through the first nine months in shorter durations that had lower yields. In the fourth quarter of 1999 GMSP invested approximately $30 million in the Company and took over management of the Company's investments. Investment income in the fourth quarter of 1999 increased over the comparable 1998 period and offset a large portion of the decrease in investment income recorded during the first nine months of 1999 when compared to the first nine months of 1998. At December 31, 2000, 94% of the Company's investments were investment grade with an average duration of approximately 2.9 years. On a taxable equivalent basis the return on average investments was 6.5% in 2000, 5.7% in 1999, and 6.2% in 1998. The Company classifies its bond securities as available for sale. The Company does not have any non-performing fixed maturity securities. The unrealized gain associated with the investment portfolio was $3,897,371 (net of tax effects) at December 31, 2000.
Insurance service revenues decreased $794,453 in 2000 from 1999 and $1,078,997 in 1999 from 1998. The decrease in 2000 was primarily a result of the decrease in claim adjusting service revenues. The decrease in 1999 was primarily a result of the run-off of the plan servicing business and the sale of the computer software operation.
Interest expense from the note payable increased in 2000 as a result of higher interest rates. Amortization expense increased in 2000 as a result of the amortization of goodwill related to the Tri-State acquisition. Interest and amortization expense increased in 1999 from 1998 primarily as a result of recording a full year of expenses in 1999 versus approximately three months of expenses in 1998.
The effective tax rate of 15% for 1999 was primarily the result of tax-exempt income comprising a major portion of income before taxes. For 2000 and 1998 the Company generated a current tax benefit as a result of a net loss from operations. The effective tax benefit rate for 2000 was 37%. The effective tax benefit rate for 1998 of 45% is above the Federal statutory rate largely because of tax-exempt interest income. A reconciliation between income taxes computed at the Federal statutory rates and the provision for income taxes is included in Note (6) of Notes to Consolidated Financial Statements.
GAINSCO, INC. (GNA) is a holding company that provides administrative and financial services for its wholly owned subsidiaries. GNA needs cash for: (1) principal and interest on the note payable, (2) dividends on common and preferred stock, (3) administrative expenses, (4) income taxes, and (5) investments. In February, 2001, GNA discontinued its policy of paying dividends to common shareholders. The primary sources of cash to meet these obligations included statutory permitted payments from certain insurance subsidiaries including: (1) dividend payments, (2) surplus debenture interest payments, and (3) tax sharing payments. Subject to credit agreement restrictions, GNA may also obtain cash through the sale of subsidiaries or assets and through the issuance of common or preferred stock. The Company believes sufficient cash dividends are available from the insurance subsidiaries to meet its obligations for 2001.
Effective December 31, 2000, the insurance subsidiaries entered into a quota share reinsurance agreement whereby the Company ceded 100% of its commercial auto liability unearned premiums and 50% of all other commercial business unearned premiums at December 31, 2000 to a non-affiliated reinsurer. For policies with an effective date of January 1, 2001 or subsequent, the Company entered into a quota share reinsurance agreement whereby the Company will cede 20% of its commercial business to a non-affiliated reinsurer. Also effective December 31, 2000, the Company entered into a reserve reinsurance cover agreement with a non-affiliated reinsurer. This agreement reinsures the Company's ultimate net aggregate liability in excess of $32,500,000 up to an aggregate limit of $57,150,000 for net commercial auto liability losses and loss adjustment expense incurred but unpaid as of December 31, 2000. The Company established a reinsurance balance receivable and a liability for funds held under reinsurance agreements for the reserves transferred at December 31, 2000. These reinsurance agreements significantly impact many of the balance sheet items at December 31, 2000.
Reinsurance balances receivable increased primarily as a result of the reserve reinsurance cover agreement the insurance subsidiaries entered into effective December 31, 2000, mentioned previously. Ceded unearned premiums increased primarily as a result of the quota share reinsurance agreement the insurance subsidiaries entered into effective December 31, 2000. Deferred policy acquisition costs (DAC) decreased primarily because of an increase in deferred commission income as a result of the quota share reinsurance agreement effective December 31, 2000. Deferred Federal income taxes recoverable increased due to the net loss recorded for the period. The increase in goodwill is primarily related to the Tri-State acquisition discussed previously.
Unpaid claims and claim adjustment expenses increased primarily due to the significant unfavorable claims experience in the commercial auto liability line of business, as mentioned previously. Unearned premiums decreased primarily because of a decrease in fronting premiums written during 2000. Reinsurance balances payable increased primarily because of the ceded unearned premiums, net of ceding commission income due to the reinsurer under the quota share reinsurance agreement effective December 31, 2000. Drafts payable increased primarily as a result of an increase in paid claims during the fourth quarter of 2000 versus the fourth quarter of 1999.
The Company is not aware of any current recommendations by regulatory authorities, which if implemented, would have a material effect on the Company's liquidity, capital resources or results of operations. The Company's statutory capital exceeds the benchmark capital level under the Risk Based Capital formula for its major insurance companies. Risk Based Capital is a method for establishing the minimum amount of capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile.
Statements made in this report that are not strictly historical may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that important factors, representing certain risks and uncertainties, could cause actual results to differ materially from those contained in the forward-looking statements. These factors include, but are not limited to, (a) the Company's ability to operate successfully and maintain its A.M. Best rating, and meet its obligations under its new capital and amended debt arrangements, (b) the Company's ability to effect the successful exit from unprofitable trucking lines while maintaining and growing other profitable lines, (c) heightened competition from existing competitors and new competitor entrants into the Company's markets, (d) the extent to which market conditions firm up, the acceptance of higher prices in the market place and the Company's ability to realize and sustain higher rates, (e) contraction of the markets for the Company's various lines of business, (f) development and performance of new specialty programs, (g) the ongoing level of claims and claims-related expenses and the adequacy of claim reserves, (h) the ability to complete value-adding acquisitions and fully integrate newly acquired companies and their customers and managers into the Company, as well as the ability to implement growth strategies which can achieve incremental value, (i) the effectiveness of the redeployment of the Company's bond portfolio and other investment strategies implemented by the Company's investment manager, and (j) general economic conditions including fluctuations in interest rates. A forward-looking statement is relevant as of the date the statement is made. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which the statements are made.