(1) The Company's consolidated financial statements have been restated to reflect the results of acquisitions accounted for in accordance with the pooling of interests method of accounting. See Note 1 of Notes to the Consolidated Financial Statements.
The ratio of SG&A expenses to total revenues (the "SG&A ratio") increased from 12.3% in fiscal year 1994 to 12.5% in fiscal year 1995 and then decreased to 12.4% in fiscal year 1996. The increase from 1994 to 1995 was due primarily to the expiration of the CRI Contract which resulted in the cessation of contract operating revenues effective January 31, 1994 while various administrative costs related to claims processing and other activities continued during the wind-down period. The decrease from 1995 to 1996 was due to completion of the wind-down period of the CRI Contract during 1995 offset in part by lower revenue from increased pricing pressure on commercial premiums.
Amortization and depreciation expense increased each year primarily due to increased depreciation as a result of the Company's ownership and construction of health care centers and increased amortization of intangibles incurred in connection with the purchase of the Intergroup minority interest and other business acquisitions during fiscal years 1994, 1995 and 1996.
represented the costs of acquiring and consolidating the companies' management information systems and administrative functions and positioning the Company to take advantage of best practices in health care delivery systems and managed care techniques after the mergers.
was $49.4 million or $.90 per share. Net income increased in fiscal year 1996 to $166.4 million or $2.86 per share over the $128.8 million (before acquisition and restructuring costs, net of related tax benefits) or $2.35 per share in fiscal year 1995.
The Company expects continued pressure from employer groups and government agencies to reduce premiums. Health care costs on a per member basis increased slightly for fiscal year 1996 as compared to fiscal year 1995. The commercial loss ratio increased from 77.5% for fiscal year 1995 to 80.2% for fiscal year 1996. The increase in the ratio was due to the continued competitive premium pressures, new enrollees in higher loss ratio products and increased health care costs. The commercial loss ratio decreased slightly to 77.5% in fiscal year 1995 from 78.5% in fiscal year 1994. This decrease was due to the emphasis on controlling health care costs. The 1994 loss ratio was impacted by competitive pressures in California offset by greater profitability of the Company's Florida and Arizona HMOs. The Company believes that commercial premiums will increase at lower rates than it has experienced historically, or will be lower than current rates which may adversely affect the commercial loss ratio. The Company continues to seek to mitigate the effects of premium pressures by continued health care cost containment efforts. In addition, as the Company's Medicare risk business increases, the loss ratio may increase, as historically this product has a higher loss ratio than the Company's other commercial products.
Government contracts revenue increased in the fiscal year 1996 over fiscal year 1995 primarily due to revenues generated by the Washington/Oregon, Region 6 and California/Hawaii Contracts. These increases were offset by the expiration of the Base Realignment and Closure ("BRAC") Contract. Government contracts revenue for fiscal year 1995 decreased from fiscal year 1994 primarily due to the expiration of the CRI Contract in January 1994. The CRI Contract contributed revenues of $431.3 million in fiscal year 1994. The Company commenced health care delivery under its managed care contract in Louisiana and Texas in May 1993 and under the Washington/Oregon Contract in March 1995. Government contracts revenue is impacted by semi-annual bid price adjustments, annual price increases or decreases, risk sharing provisions and various other price adjustments attributable to change orders for additional services, inflation and other factors.
The government contracts ratio improved in fiscal years 1994 and 1995. The improvement in those fiscal years was due primarily to lower health care costs under the CRI Contract attributable to effective managed care techniques, shifting of claims processing from an outside vendor to an internal function and increased change order revenue. The government contracts ratio improved slightly during fiscal year 1996 compared to fiscal year 1995. This was due primarily to several of the contracts being in the implementation period. Comparability of the government contracts ratio between periods is dependent on the mix of the contracts that are in the implementation phase versus contracts that are in the health care delivery phase. Administrative expenses relating to both phases are recorded as part of SG&A costs. Once the delivery of health care services begins, however, the expenses related to health care services are recorded either as government contracts health care services or as government contracts subcontractor costs. The government contracts ratio is expected to increase during fiscal year 1997 as health care services will be delivered under all three CHAMPUS contracts during the fiscal year 1997 as compared to staggered implementation during the fiscal year 1996. Health care services commenced in March 1995 under the Washington/Oregon Contract, in November 1995 under the Region 6 Contract and in April 1996 under the California/Hawaii Contract.
Specialty services revenues increased substantially during each of the last three fiscal years. A significant part of the increases was due to revenues generated by CalComp, the Company's workers' compensation bill review and third party administration subsidiaries and the acquisition of BICO by CalComp in February 1995.
The following table sets forth CalComp's and its subsidiaries underwriting experience as measured by its combined ratio and its components (computed on a generally accepted accounting principles basis) for the fiscal years ended June 30, 1996, 1995 and the eleven months from August 1, 1993 (the date of acquisition) to June 30, 1994:
1996 1995 1994 ---- ---- ---- Loss and loss adjustment expense ratio. . . . 64.2% 62.8% 62.8% Underwriting expense ratio. . . . . . . . . . 24.5 22.7 24.0 Policyholder dividend ratio . . . . . . . . . 1.1 1.4 7.4 --- --- --- Combined ratio. . . . . . . . . . . . . . . . 89.8% 86.9% 94.2% ----- ----- ----- ----- ----- -----
While average premium rates decreased during fiscal 1996, CalComp's loss and loss adjustment expense ratio showed a slight increase of 1.4%. CalComp continues to emphasize writing accounts and classes of business with the potential for lower than average claim severity and higher claim frequency, which permits CalComp's loss control staff and managed workers' compensation programs to reduce the number of reported claims. As a percent of covered insured payroll,
The underwriting expense ratio increased by 1.8%, primarily due to the reduction in premium rates in fiscal year 1996 over fiscal year 1995. The increase in these costs was greater than the increase in net premiums earned. This ratio, as a percent of net premiums earned, was significantly impacted by the reduction to premium rates in California for policies written after January 1, 1995. Premiums earned in fiscal 1995 included premiums for policies issued prior to the start of competitive rating. Premiums earned in fiscal 1996 were derived primarily from policies written subsequent to the start of competitive rating in California. In addition, operating costs were impacted by the establishment of regional offices for BICO in strategic locations in western and southern states.
In connection with construction of its health care centers and of its administrative facilities the Company has a $60 million tax-retention operating lease financing with Nations Bank of Texas, N.A., as Administrative Agent for the Lenders parties thereto and First Security Bank of Utah, N.A., as Owner Trustee (the "TROL" financing). As of June 30, 1996, approximately $26 million of the TROL financing had been used for construction of health care centers. The Company expects that up to $5 million of the TROL financing will be used during fiscal year 1997 for the construction of its administrative facilities.
The Company's regulated subsidiaries are required to maintain minimum tangible net equity or capital and surplus. As of June 30, 1996, restricted net assets of the subsidiaries totaled approximately $71.5 million. Certain subsidiaries must also maintain current ratios of 1:1. During fiscal year 1996, the Company contributed or advanced approximately $115 million to various of its subsidiaries to allow them to support and expand premium and revenue growth and to meet rating and regulatory agency requirements. As the Company's businesses continue to grow, the Company expects to contribute additional cash to certain subsidiaries to support premium and revenue growth. Subsequent to June 30, 1996, the Company drew down $65 million on its Credit Agreement to support premium and revenue growth in its insurance subsidiaries. Certain of the Company's regulated subsidiaries are required to keep securities on deposit in various states where they are licensed. At June 30, 1996, approximately $405 million in securities were restricted to satisfy various state regulatory and licensing requirements.
sustain growth in certain of the Company's regulated subsidiaries during fiscal year 1997. There currently are no other material definitive commitments for future use of the Company's available cash resources; however management continually evaluates opportunities to expand its operations, which includes internal development of new products and programs and may include additional acquisitions.