In March 1999 one of the Company's subsidiaries, Fortune Insurance Company, entered into an agreement to sell two tracts of land for $415,000. The tracts had been purchased in 1987 and 1986 for $165,000 and $140,000, respectively. The transaction closed in August 1999.
All amounts have been restated for the prior-period adjustment described in Note 2 to the Consolidated Financial Statements.
The majority of the Company's portfolio is invested in high-grade, fixed-maturity securities, of which short- and intermediate term fixed-maturity securities represented $36.5 million, or 88%, at the end of 1999, compared to $59.5 million, or 75%, at the end of 1998. Equity securities represented $1.6 million, or 4%, of the portfolio at the end of 1999, compared to $1.5 million, or 2%, at the end of 1998. Common stocks represented 88% and 86% of equity securities at the end of 1999 and 1998, respectively. Other short-term investments at the end of 1999 totaled $3.5 million, compared to $18.5 million at the end of 1998.
As a result of the losses incurred by the Company in 1998 and 1999 it has current and deferred income tax assets totaling $8.7 million. The Company is amending its 1996 tax return to carry back $0.6 million, and is amending its 1997 tax return to carry back $1.4 million. The Company has historically been profitable and believes that it will be again, and that the value of the $6.7 million tax loss carryforward will be fully realized as an offset to future taxable income.
On June 10, 1997, the Company issued 924,018 shares of common stock pursuant to a 15% stock dividend on its $.025 par value common stock, effective for shareholders of record on June 23, 1997. Earnings per share and dividend per share amounts have been adjusted to reflect this stock dividend.
The Company earns fee income through its managing general agency subsidiary, its premium finance subsidiary, its excess and surplus lines insurance subsidiary and its fee-for-service subsidiary which acts as a third party servicer for the Florida Residential Property and Casualty and Florida Auto Joint Underwriting Associations (FRPCJUA and FAJUA, respectively). Managing general agency fees for 1999 totaled $3.6 million, compared to $5.2 million in 1998 and $5.7 million in 1997. This decline mirrors the decline in the Company's direct written premium. Interest income and fee revenue (net of write-offs and allowances for bad debt) in the Company's premium finance subsidiary totaled ($0.9) million for 1999, compared to $0.7 million for 1998 and $0.4 million for 1997. In the third quarter of 1999 the Company determined that not all of the receivable balances for premium-financed policies were collectible, and wrote off $1.1 million of that balance. Fees in the excess and surplus lines insurance subsidiary totaled $0.5 million in 1999, compared with $0.4 million in 1998 and $0.0 million in 1997. Fees in the Company's fee-for-service subsidiary totaled $1.7 million in 1999, compared to $3.0 million in 1998 and $2.8 million in 1997. Both the FRPCJUA and FAJUA pools of available policies have been shrinking rapidly, as more companies are willing to take out that business. In response to the declining business opportunity to provide third party servicing, the Company stopped accepting new business from the FAJUA in October and the FRPCJUA in December. The Company will continue to service the existing policy base as it declines through 2000, at which time the Company will have exited the third party fee-for-service business.
Net investment income for 1999 totaled $3.4 million, compared to $4.6 million in 1998 and $5.4 million in 1997. The Company has been liquidating its investment portfolio as its volume of business has declined and as it has been settling claims on prior business. Claims payments always lag the Company's receipt of cash for the policies it writes, so the Company will begin rebuilding its investment portfolio and therefore its net investment income once business volume increases.
Policy acquisition costs for 1999 totaled $6.8 million, compared to $8.6 million in 1998 and $2.4 million in 1997. These costs represent the commissions paid by the Company to its agents, offset by ceding commission credits received by the Company from its reinsurers. The ceding commission credits adjust over time depending upon changes in loss ratios of the underlying business ceded. Large ceding commission credits in 1997 reduced 1997's policy acquisition costs. As loss ratios increased in 1998 and 1999 the ceding commission credits were reduced, resulting in a smaller offset to the commissions paid to the Company's agents.
General and administrative expenses totaled $12.5 million for 1999, compared to $7.8 million in 1998 and $6.3 million in 1997. Late in the third quarter of 1999 the Company determined that the balances in the clearing accounts used to record premium deposits during the time before the policies are processed into the system were inaccurate. The source of the problem was traced to changes in procedures implemented during the 1998 system conversion. The Company's inability to adequately process its business in a timely fashion until the third quarter of 1999 also resulted in an inability to adequately reconcile the balances in its clearing accounts. During the fourth quarter of 1999 the Company undertook a reconciliation project to determine the correct balances in the three balance sheet accounts involved. The Company has taken a $4.6 million write-off to adjust the three accounts to their proper year-end balances. The procedures that caused this problem have been changed to prevent it from reoccurring.
General and administrative expenses for 1999 also include one-time executive retirement costs of approximately $0.5 million. Excluding the impacts of the write-off and retirement costs, general and administrative expenses for 1999 totaled $7.4 million.
During the few years immediately preceding 2000 there was worldwide concern that computer hardware and software would not appropriately recognize the rollover into the year 2000 and would therefore generate erroneous data or fail. During that time the Company took steps to address the issue within its systems and to review its relationships with vendors who might also be susceptible to the problem. The Company's systems rolled over to January 1, 2000 with only minor problems which were fixed within a few days. None caused any business interruption.
During review of a reinsurance agreement the Company discovered that in 1996 it had incorrectly calculated the ceding commission it was owed under the agreement. The cumulative effect of the error on net income and stockholders' equity for 1996, 1997 and 1998 was approximately $1 million. The year-by-year impact is shown in the Consolidated Statements of Changes in Stockholders' Equity and is further described in Note 2 to the Company's consolidated financial statements.