In June 1994, the Company acquired a 102,079 square foot office building in San Antonio, Texas, which serves as its headquarters. The Company presently occupies approximately one-third of the available office space, with the remainder leased to third parties. The Company also owns a 27,630 square foot retail center adjacent to the home office building in San Antonio, Texas. The majority of this facility is utilized by the Company and the remainder is leased.
The company leases approximately 30,000 square feet of office space in Troy, Michigan under a lease expiring in 1998. The Company also leases smaller facilities for all of its wholly-owned DRCs and its regional offices in Phoenix, Arizona and St. Louis Park, Minnesota.
(1) Prior amounts have been restated for the effects of 5% stock dividends effective May 13, 1996 and June 1, 1995.
(3) Prior amounts have been restated to exclude amortization of intangible assets.
The following section contains forward-looking statements regarding premium growth and other matters, which involve risks and uncertainties that may affect the Company's actual results of operations. The following important factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements: claims frequency, claims severity, severe adverse weather conditions, economics, competitive pricing and the regulatory environment in which the Company operates.
During 1996, TITAN Auto's operations in Michigan and Arizona provided for a majority of the increase in non-standard automobile premiums written. Michigan premiums written increased 19% to $80.3 million in 1996 versus a 22% increase in 1995 to $67.4 million from $55.4 million in 1994. Arizona premiums written totaled $20.9 million in 1996, $13.2 million in 1995 and $1.0 million in 1994. The Arizona operations commenced in September of 1994 and in two full years of operation, 1996 versus 1995, premium writings increased by 58%. During 1996, TITAN Auto began underwriting operations, through acquisitions of independent insurance agencies which the Company converted into direct response centers, in Nevada (in the second quarter of 1996), Colorado and Texas (both in the third quarter of 1996) which accounted for $1.3 million, $2.1 million and $1.8 million, respectively in premiums written. In January 1997, TITAN Auto commenced underwriting operations in New Mexico through Tri-West Holdings Inc., ("Tri-West"), an independent company that acquires agencies and operates DRCs under contract with the Company. Tri-West writes New Mexico business exclusively for TITAN Auto and TITAN Auto has acquired an option to purchase Tri-West's New Mexico operation at a future time. TITAN Auto anticipates writing business in Indiana through Tri-West beginning May 1, 1997 and expects to enter other states through Tri-West in 1997 and beyond.
The Company attributes the growth in Michigan to an increase in its agency force to in excess of 1,600 independent licensed agencies. In addition, TITAN Auto has formed strategic alliances with certain
Premiums ceded represent the cost of reinsurance purchased by the Company which generally is a function of the amount of premiums written and the level of risk transferred to the reinsurer. Premiums ceded as a percent of premiums written for the years ended December 31, 1996, 1995 and 1994 were 6.1%, 8.0% and 9.6%, respectively. The reductions in reinsurance costs are attributable to the proportional increase in TITAN Auto's operations, which have lower reinsurance costs due to relatively low policy limits. The reductions in reinsurance costs are also attributable to a reduction in the Michigan Catastrophic Claims Association ("MCCA") assessment rate in early 1996 and a reduction in TITAN Public Entity's reinsurance premium rates associated with continued favorable experience and the Company increasing its net retentions. At the renewal of the public entity's casualty reinsurance contract effective January 1, 1996, the Company increased its net retention from $500,000 to $750,000 per occurrence for casualty risks, and effective April 1, 1996 the Company increased its net retention on public entity property risks from $200,000 to $500,000 per occurrence. Reinsurance costs for both TITAN Auto and TITAN Public Entity were reduced in 1995 compared to 1994 for the same reasons noted above.
reimbursement of policy acquisition expenses or profit commissions based on loss experience. The increase in fee and ceding commission income of approximately $4.7 million, to $8.1 million in 1996, stems primarily from increased policy fee income associated with the growth in TITAN Auto's operations. The increase experienced in 1996 over 1995 is more significant than the increase in 1995 over 1994 due to the expansion of TITAN Auto's operations in 1996 into Arizona, Nevada, Texas and Colorado, where policy fees are more significant. TITAN Auto premiums written outside of Michigan exceeded $26 million in 1996 compared to approximately $13 million in 1995.
The Company expects fee income to continue to increase in conjunction with the growth and expansion of its auto program into additional states.
TITAN Public Entity's overall GAAP combined ratio remained fairly constant in 1996 at 96.4% compared to 96.6% in 1995 as an increase in the loss ratio was offset by improvement in the expense ratio. TITAN Public Entity's loss ratio in 1996 of 65.8% compared to 61.9% of a year ago was affected by
The Company discontinued its involvement in an aviation program in 1993 and, effective January 1995, ceased its involvement in a contract surety program. In 1996, 1995 and 1994, the Company incurred underwriting losses of approximately $1.4 million, $1.2 million and $1.1 million, respectively, as a result of adverse development from these programs.
In early 1997, the Company plans to execute a transaction that will transfer existing loss reserves and unearned premiums and cede 100% of future business, to a reinsurer, of its preferred automobile insurance program offered to educators in Minnesota. The educators program was not material to the Company in 1996, 1995 or 1994 and will not be significant in 1997.
Net income per share in 1996 was $1.48 versus $1.33 in 1995 on approximately 21% more weighted average shares outstanding in 1996 compared to 1995. Net income per share was $1.16 in 1994 on approximately an equal amount of shares outstanding compared to 1995.
The Company's insurance subsidiaries receive substantial cash from premiums and, to a lesser extent, investment income. The principal cash outflows are for the payment of claims, reinsurance premiums, policy acquisition costs and other operating expenses. Net cash provided by operating activities was $31.0 million in 1996 versus $36.3 million in 1995 and $22.2 million in 1994. The decrease in 1996 relates primarily to an elevated level of losses paid in 1996 compared to 1995 associated with the growth in TITAN Auto's operations and the proportionally shorter loss payout period relative to TITAN Public Entity operations.
Net cash provided by financing activities includes borrowings under the Company's and WPAC's credit facility. In August of 1996 Holdings borrowed $10 million to increase the statutory surplus of the insurance companies and borrowed $2 million at various intervals throughout 1996 for working capital purposes. WPAC increased its outstanding borrowings from $7 million to $15.8 million to support its premium finance operations. Financing activities in 1995 included net proceeds from Holdings common stock offering of $20.7 million through which $11.5 million of debt was repaid, borrowings under Holdings' credit facility of $21.5 million ($20 million increased the statutory surplus of the insurance companies) and $4 million of borrowings under WPAC's facility.
expenses ("LAE") are known. Although management attempts to consider the potential effects of inflation while setting premiums, for competitive reasons such premiums may not fully compensate the Company for the effects of inflation. Public entity premium rates, by the nature of their derivation, generally respond to the effects of inflation since they are based in part upon a municipality's annual budget, which itself is susceptible to the effects of inflation. The Company also attempts to consider the impact of inflation on the payment of future losses and LAE when establishing reserves for unpaid losses and LAE. In addition, inflation may affect the rate of return and the market value of the Company's investment portfolio.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
TITAN Holdings, Inc. ("Holdings") operates specialty property and casualty insurance companies and related service companies. Through its insurance subsidiaries (TITAN Indemnity Company and TITAN Insurance Company), Holdings, provides non-standard automobile insurance in six states and property and casualty insurance for small to medium-sized cities, towns, counties and other public entities nationwide. Another wholly-owned subsidiary (Westchester Premium Acceptance Corporation) provides commercial property and casualty premium financing.
For the year ended December 31, 1996, non-standard automobile and public entity represented 62% and 35% of total premiums written, respectively. Premium writings are also concentrated as 76% of non-standard automobile premiums written are from Michigan and 79% of public entity premiums come from eight states.
In November 1995, a stock offering was completed for 1,643,600 shares at $13.50 per share which resulted in net proceeds of $20,449,000 (after offering expenses). The proceeds of this offering were principally used to increase the underwriting capacity of TITAN Indemnity Company and TITAN Insurance Company, to repay debt and for working capital purposes.
The consolidated financial statements include the accounts of Holdings and the following subsidiaries:
Westchester Premium Acceptance Corporation ("WPAC"), a wholly-owned subsidiary of TITAN Indemnity, is a Texas corporation, eligible to transact premium finance business in 37 states.
The reserve for unpaid losses and loss expenses is undiscounted and represents case-basis estimates of reported losses and estimates based on certain actuarial assumptions regarding the past experience of unreported losses. Estimated amounts of salvage and subrogation are deducted from the reserve for unpaid losses and loss expenses. Management believes that the reserve for unpaid losses and loss expenses is adequate to cover the ultimate liability. However, such estimate may be more or less than the amount ultimately paid when the claims are finally settled.
Insurance premium income is recognized on a pro rata basis over the respective terms of the policies. Policy acquisition costs net of ceding commissions are similarly deferred and amortized to income.
Holdings considers all certificates of deposit, United States government securities and commercial paper with original maturities of three months or less to be cash equivalents. At December 31, 1996 and 1995, there were no investments in cash equivalents.
Net income per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents (relating to stock options and warrants) outstanding during the year, calculated on a daily basis. The weighted average number of shares outstanding for all periods presented has been retroactively adjusted for the effects of 5% stock dividends effected on May 13, 1996 and June 1, 1995.
The amortized cost and estimated market values of fixed maturities, at December 31, 1996, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because some borrowers have the right to prepay obligations with or without prepayment penalties.
At December 31, 1996, approximately 95% of the fixed maturity portfolio was rated A- or above by Moody's Investors Services, Inc. or Standard and Poor's Corporation.
Gross realized gains and losses on sales of fixed maturities, available for sale, are as follows:
Gross realized losses on fixed maturities, held to maturity, that were called by issuers, were $14,000 and $8,000 in 1996 and 1995 respectively.
The cost and estimated market values of investments in equity securities at December 31, 1996 are as follows:
The cost and estimated market values of investments in equity securities at December 31, 1995 are as follows:
Premium finance contracts consist of loans made on insurance policies issued by the following insurers:
Premium finance contracts are secured by the unearned premium reserve related to the financed policies. The insured's coverage can be canceled by contractual right if the insured fails to make timely payments under its premium finance contract and the proceeds from the canceled policy can be used to pay off the unpaid balance. At December 31, 1996 and 1995, total premium finance contracts are net of an allowance for doubtful accounts of approximately $127,000 and $157,000, respectively.
WPAC offers premium financing to third-party insureds and may advance funds for financed premiums to independent agents who represent third-party insurers. If remittance is not made by the agency to the third-party insurer, advances made by WPAC may only be recoverable to the extent the agent's receipt of such advances is deemed to be received by the third-party insurer. Premium financing which WPAC offers to TITAN Indemnity Company's public entity insureds does not involve any credit risk since no funds are advanced to outside parties and WPAC is entitled to receive the unearned premiums on the financed policies upon cancellation.
A summary of mortgage notes receivable, by location, is as follows:
In the ordinary course of business, the insurance companies reinsure certain risks with other insurance organizations to provide greater diversification of risk and minimize exposure on larger risks. Although reinsurance agreements contractually obligate the insurance companies' reinsurers to reimburse the insurance companies for their proportionate share of losses, they do not discharge the primary liability of the insurance companies. The insurance companies are contingently at risk for the ceded amount of reserves for unpaid losses and loss expenses and unearned premiums in the event the assuming insurance organizations are unable to meet their contractual obligations.
TITAN Insurance collects and remits a mandatory statutory assessment from its Michigan non-standard automobile policyholders in order to obtain reimbursement for personal injury protection on losses (exclusive of loss expenses) in excess of $250,000 from the Michigan Catastrophic Claims Association (the "MCCA").
Holdings files a consolidated federal income tax return. The differences between the statutory tax rate and the "effective" tax rate are summarized below:
The tax effect of temporary differences that give rise to deferred tax assets and deferred tax liabilities are as follows:
Management of Holdings believes that a valuation allowance with respect to the realization of the total deferred tax assets is not necessary due to the reversal of the gross deferred tax liability and the application of the carryback provisions under the Internal Revenue Code. Holdings has not incurred a loss for financial reporting purposes or federal income tax purposes since inception, and management believes the existing net deductible temporary differences will reverse during periods in which net taxable income is generated. Accordingly, management believes it is more likely than not that Holdings will fully realize total deferred tax assets, but management cannot assure that Holdings will generate net income or any specific level of income in future years.
principles ("SAP") prescribed or permitted by these states. The insurance companies are not utilizing any material accounting methods that are permitted by state insurance agencies which are not prescribed statutory accounting practices. The accounting principles used to prepare statutory basis financial statements differ from GAAP.
Note payable -- premium finance subsidiary ($15,750,000 and $7,000,000 at December 31, 1996 and 1995, respectively) represents WPAC's borrowings under its revolving line of credit, at LIBOR plus 60 basis points (6.26% at December 31, 1996). The $25 million revolving line of credit is secured by premium finance contracts and is due July 30, 1997.
Holdings is committed under various operating lease agreements for office space, non-standard automobile retail selling locations and property and equipment. Rent expense and future minimum lease payments under these agreements are not material to the accompanying consolidated financial statements.
The loan agreements contain certain financial covenants. At December 31, 1996, Holdings was in compliance with the covenants stated in the credit facility with one exception, for which Holdings has received a waiver.
A Director of Holdings owns the company that manages the investments of Holdings and provides certain investment banking services. For the years ended December 31, 1996, 1995 and 1994, Holdings incurred $243,000, $212,000 and $154,000, respectively, for such services.
Substantially all of Holdings' retained earnings are attributable to the insurance companies. The Texas Insurance Code limits the amount of dividends TITAN Indemnity can pay to Holdings in any twelve month period to the greater of its statutory net income for the preceding year or 10% of policyholders' surplus as of
the 31st day of December of the preceding year. The Michigan Insurance Code limits the amount of dividends TITAN Insurance can pay to TITAN Indemnity in any twelve-month period to the greater of its statutory net income for the preceding year, excluding realized gains (losses) on sales of investments, or 10% of its policyholders' surplus as of the preceding year end. In addition, TITAN Insurance is specifically prohibited from paying or declaring dividends if its gross premiums written over any twelve month period exceed 300% of its policyholders' surplus. Considering such restrictions, approximately $8.0 million and $12.1 million is available for distribution by TITAN Indemnity and TITAN Insurance to their respective parent companies during 1996. In 1995, TITAN Indemnity paid dividends to Holdings of $750,000. TITAN Insurance paid $3,500,000, $1,612,000 and $1,297,000 in cash dividends to TITAN Indemnity in 1996, 1995 and 1994, respectively.
The following presents information regarding Holdings' operations by major line of business for the years ended December 31, 1996, 1995 and 1994.
Information regarding the reserve for unpaid losses and loss expenses is as follows:
The 1996 provision for losses and loss expenses for prior years related primarily to discontinued programs, certain public entity lines of business and Michigan auto personal injury protection coverage. Holdings discontinued its involvement in an aviation program in 1993 and a contract surety program in 1995. Adverse development from these discontinued programs totaled $1.4 million in 1996. Public entity experienced adverse development in 1996, which aggregated approximately $2.1 million on certain liability coverages related to 1994. Michigan personal injury protection experienced approximately $0.9 million of adverse development in 1996 on 1995 claims, principally in connection with known cases that developed additional severity. Management of Holdings has since modified underwriting criteria for such coverages and adjusted its reserving practices.
Holdings sponsors defined contribution retirement plans under Section 401(k) of the Internal Revenue Code. These plans cover substantially all employees who meet specified service requirements. Under these plans, the Holdings may, at its discretion, match 50% of each employee's contribution up to 10% of the employee's salary. Such matching contributions have not been material.
At December 31, 1996, Holdings had two stock option plans which are further described below. Holdings applies the intrinsic value method in accounting for its plans. Accordingly, no compensation expense has been recognized in the accompanying consolidated financial statements. Had compensation expense for Holding's
stock option plans been determined using the fair value method, Holding's net income and net income per share would have been reduced to the pro forma amounts indicated below. The effects of applying SFAS 123 as calculated below may not be representative of the effects on reported net income for future years.
Holdings is required to disclose estimated fair values of its financial instruments. Fair value estimates, methods and assumptions are set forth below. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect a premium or discount that could result from offering for sale at one time the entire holdings of a particular
financial instrument. Fair value estimates are based on judgments regarding economic conditions, risk characteristics of the financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision.
Financial Liabilities -- The fair value of the Company's borrowings are estimated using discounted cash flow analyses based on Holdings' current incremental borrowing rates for similar types and maturities of instruments.
The unaudited operating results by quarter for 1996, 1995 and 1994 are summarized below:
We have audited the accompanying consolidated balance sheets of TITAN Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.