The Registrant's, Arista's and The Collection Group, Inc.'s principal executive offices are located at 116 John Street, New York, New York 10038. The offices contain approximately 16,100 square feet. On January 9, 1995, effective on or about June 1, 1995, the Company entered into a five year lease for its new principal executive office space at an average rent over the term of the lease of approximately $210,000 per year, exclusive of electricity.
The financial statements of the Company have been prepared in accordance with generally accepted accounting principles, which differ in certain respects from those followed in financial statements prepared for regulatory authorities. (See Note 15 to the accompanying Consolidated Financial Statements.)
The Company's net income for the year 1997 was approximately $100,000 ($0.04 per share), as compared with a net loss of approximately $1,176,000 (approximately $0.51 per share) for 1996. The profit, before provision for income taxes, was approximately $493,000 in 1997, as compared with a loss before provision for income taxes of approximately $1,650,000 for 1996. The Company's loss in 1996 included approximately $757,000 attributable to additional compensation expenses incurred from the exercise of warrants and options during that year. The current operations for the year 1997 included a reduction in gross claims liabilities of approximately $960,000, or 4.6% of gross premiums earned.
Arista's gross claims incurred for 1997 were approximately $12.2 million or 58.8% of gross premiums earned. For the year 1996, gross claims incurred were approximately $15.3 million, representing 66.0% of gross premiums earned. Gross claims incurred includes claim reserves for unpaid losses, unpaid loss adjustment expenses and required assessments. Unpaid loss reserves are only estimates of what the insurer expects to pay on claims, based on facts and circumstances then known. A degree of variability is inherent in such estimates. The estimates are continually reviewed and adjusted as necessary, and such adjustments are reflected in current operations.
Consolidated investment income for 1997 was approximately $514,000, representing an increase of approximately $73,000, due mainly to a small increase in the Company's average annual yield on total investments. In addition, Arista had insignificant net realized and unrealized investment losses for 1997 and 1996.
The Company's net loss for the year 1996 was approximately $1,176,000 (approximately $0.51 per share, as restated) compared with a net income of approximately $59,000 from continuing operations (approximately $0.02 per share, diluted) in 1995. The loss, before income tax (benefit) for 1996, was approximately $1,650,000 compared with a profit before provision for income taxes and tax benefit, of approximately $151,000 in 1995. The Company's operating loss in 1996 included approximately $757,000 (approximately $0.29 per share) attributable to additional compensation expenses incurred from the exercise of warrants and options.
Arista's gross premiums earned for the year 1996 were approximately $23.2 million as compared with approximately $26.1 million for 1995. The reduction in gross premiums earned was the result of Arista's termination of its assumption reinsurance agreement during the first quarter of 1996 wherein Arista had assumed Hawaii Temporary Disability Insurance Business that had been ceded by Allianz Life Insurance Company of North America together with a continuation of the net loss of covered lives and of policyholders. The continued net loss of covered lives was a function of increased competition for experience-rated groups and a lower competitive rate structure for non-experience-rated groups. The Company expects this trend to continue.
Arista's gross commissions incurred for 1996 were approximately $4.2 million or 18.2% of gross premiums earned. For the year 1995, gross commission incurred were approximately $4.6 million or 17.7% of gross premiums earned. This increase was due in part to a larger portion of more recently issued policies acquired from other insurers, requiring the payment of slightly higher average commissions.
The consolidated general and administrative expenses increased from approximately $5.0 million for the year 1995 to $5.7 million for the year 1996. This change was mainly attributable to an aggregate increase in compensation expense of $757,000 resulting from the exercise of options and warrants, as well as decreases in payroll and benefits of approximately $266,000, amortization of intangible expenses of approximately $249,000 and reinsurance costs of approximately $116,000 related to assumed business; offset by increases and professional fees of approximately $220,000 and interest on the surplus note of $330,000.
Retained earnings increased from $935,665 at December 31, 1996 to $1,035,985 at December 31, 1997 as a result of the Company's increase in operating profits.
At present, management considers Arista's statutory capital and surplus of approximately $6.2 million at December 31, 1997 sufficient to support its current annual premium level, as well as providing capacity for additional annual premiums. Pursuant to the termination of Arista's reinsurance agreement with Cologne Life Reinsurance Company, the existing $3,000,000 surplus note, plus accrued interest, will be repaid as soon as practicable, subject to regulatory approval.