In January 1998, the Registrant is scheduled to begin making principal payments on the $12,000,000 note payable. Payments of $600,000 plus accrued interest are due quarterly with the entire unpaid balance due October 2002.
In prior years, certain computer programs were written using two digits rather than four to define the applicable year. These programs were written without considering the impact of the upcoming change in the century and may experience problems handling dates beyond the year 1999. This could cause computer applications to fail or create erroneous results unless corrective measures are taken. Incomplete or untimely resolution of the Year 2000 issue could have a material adverse impact on the Registrant's business, operations or financial condition in the future. However, with the number of options available in the form of software solutions, the Year 2000 issue should not pose a significant problem to the Registrant.
On June 10, 1997, the Registrant 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.
This Form 10-K contains certain forward-looking statements within the meaning of section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are deemed by the Registrant to be covered by and to qualify for safe harbor protection provided by the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to, among other things, (a) the expected benefits from (i) the award of a three year servicing contract by the Florida Automobile Joint Underwriting Association, and (ii) the extension of a service contract by the Florida Residential Property and Casualty Joint Underwriting Association, and (b) the improvement of cash flow as a result of rate increases and a return to a more normal pattern of loss settlements. Such statements reflect the current views of the Registrant and are subject to certain risks and uncertainties that include, but are not limited to, obtaining policy volume service levels under the Joint Underwriting Association service contracts, continued market acceptance of premium rate increases in the automobile minimum limits personal injury protection line of business and adequacy of loss reserves. The Registrant disclaims any intent or obligation to update publicly these forward-looking statements, whether as a result of new information, future events or otherwise.
Total consolidated expenses, exclusive of state mandated automobile assigned risk pools, increased 20% from $40,429,009 during 1995 to $48,385,265 during 1996. Overall, total consolidated expenses decreased 12% from $44,340,175 in 1995 to $39,177,771 in 1996.
Mobile America Corporation and Subsidiaries Consolidated Balance Sheets December 31, 1997 and 1996
Mobile America Corporation and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 1997, 1996 and 1995
The accompanying consolidated financial statements include Mobile America Corporation (the Company) and its subsidiaries, including Fortune Insurance Company (Fortune), Pegasus Insurance Company (Pegasus), both property and casualty insurers and Fortune Life Insurance Company (Fortune Life), all of which are wholly-owned. All significant intercompany transactions have been eliminated in consolidation.
The Company classifies all of its fixed maturities and equity securities as either available-for-sale or held- to-maturity. Fixed maturities held-to-maturity consist of certain bonds, presented at amortized cost, that management intends and has the ability to hold to maturity. Fixed maturities available-for-sale consist of bonds, presented at fair value, that management may not hold until maturity. Equity securities available-for-sale are comprised of common and preferred stock which are carried at fair value. Unrealized gains or losses on investments classified as available-for-sale, net of deferred income taxes, are included as a separate component of stockholders' equity. Fair values are based on quoted market prices or dealer quotes, if available. If a quoted
market price is not available, fair value is estimated using quoted market prices for similar securities.
The liabilities for unpaid claims of property-liability contracts and related adjustment expenses are determined using case basis evaluations and statistical analysis and represent estimates of the ultimate net cost of all reported and unreported claims relating to insured events which are unpaid at year-end. The liabilities include estimates of future trends in claims severity and frequency and other factors which could vary as the claims are ultimately settled. Although such estimates may vary, management believes that the liabilities for unpaid claims and related adjustment expenses are adequate. The estimates are continually reviewed, and as adjustments to these liabilities become necessary, they are reflected in current operations.
Estimates of future policy benefits were based on past experience as adjusted to provide for possible adverse deviation from the estimates. Interest assumptions are based on historical assumptions and experience, and range from 3% to 4.5% at December 31, 1997.
Premiums for long-duration contracts are recognized as revenues when due from the policyholders. Premiums for short-duration contracts are recognized as revenues on a pro rata basis over the term of the policies. The portion of premiums written applicable to the unexpected terms of the policies is recorded as unearned premium. Benefits, losses and related expenses are matched with premiums, resulting in their recognition over the lives of the contracts. This matching is accomplished through the provision for future policy benefits, estimates of unpaid losses and amortization of deferred policy acquisition costs.
Earned premiums and incurred losses are stated after a reduction for amounts ceded to reinsurers. The Company considers anticipated investment income in determining if a premium deficiency exists on short-duration contracts.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". Statement 130 requires the reporting and display of comprehensive income and it's components in a full set of financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It included all changes in equity, including net income, during a period except those resulting from investments by owners and distributions to owners. The Company will adopt Statement 130 in the first quarter of 1998 and, based on current circumstances, the only additional component of comprehensive income to be reported is the change in the net unrealized gain or loss on securities available for sale.
The aggregate fair value, gross unrealized gains, gross unrealized losses and amortized cost of available for sale and held to maturity securities by major security type at December 31, 1997 and 1996 are as follows:
Proceeds from sales of held to maturity securities and related gross realized gains and losses were as follows:
The Company's two finance companies also maintain certain deposits with state regulatory agencies as a statutory licensing requirement. The carrying value of these investments was $70,000 at December 31, 1997 and 1996.
II-22 Mobile America Corporation and Subsidiaries Notes to Consolidated Financial Statements
the ceding commissions received exceed the costs to the Company of soliciting new business, thereby generating credits to commission expense and deferred policy acquisition costs. Ceding commission received in 1997, 1996 and 1995 is approximately $7,932,000, $7,527,000 and $15,694,000, respectively. Deferred policy acquisition cost reinsurance credits reported in the Company's balance sheet at December 31, 1997 and 1996 are $7,049,081 and $8,516,878, respectively.
Property and equipment consists of the following at December 31, 1997 and 1996:
The Company acquires property and casualty excess of loss reinsurance separately for it's primary insurance business lines. This program provides the Company with coverage in the amount of $260,000 in excess of $40,000 on a per risk basis, and up to $520,000 on a per occurrence basis.
Catastrophic property losses are reinsured under two programs. Fortune limits it's liability to 5% of losses in excess of $500,000 up to $1,300,000 and up to 10% of losses in excess of $1,400,000. Pegasus limits it's liability to 5% of losses in excess $500,000 up to $10,000,000. Catastrophic reinsurance, provided by various reinsures in multiple layers, serves to protect the insurer from significant aggregate loss exposure arising from a single event such as windstorm, hail, tornado, hurricane, riot, vandalism, earthquake, freezing temperatures or other extraordinary events. The Company also maintains reinsurance coverage for extra contractual obligations and excess limits judgements up to $1,500,000 for each property risk and/or each casualty occurrence subject to a deductible of the greater of $100,000 or a loss in excess of its underlying reinsurance programs.
The effect of reinsurance on premiums written and earned for 1997, 1996 and 1995 is as follows (dollars in thousands):
The amount of reinsurance recoveries deducted from direct and pool participation losses incurred during 1997, 1996 and 1995 was approximately $39,000,000, $37,970,000 and $59,612,000, respectively.
The Company evaluates the financial condition of its reinsurers to minimize its exposures to significant losses from reinsurer insolvency. Reinsurance receivables, prepaid reinsurance premiums and offsetting funds withheld/payable balances for each significant reinsurer at December 31, 1997 is presented below (in thousands):
The options are accounted for under Accounting Principles Board Opinion No. 25 (APB 25). Under APB 25, if the exercise price of the options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. During 1997, the Company granted options to purchase 5000 shares at $4.40 when the market price of the Company's common stock was $9.63. These options vest 20% per year beginning on the first anniversary date of grant. Compensation expense of $3,487 was charged to operations in 1997. Deferred compensation of $48,813 is reported in other assets and will be charged to operations over the vesting period.
In compliance with Statement of Financial Accounting Standards No. 123, the Company has elected to provide pro forma disclosures. As such, the Company's net income and earnings per share for 1997, 1996 and 1995 adjusted to reflect pro forma amounts are indicated below (dollar amounts in thousands except for earnings per share) :
Deferred taxes payable of $40,625 and $61,072 are provided on unrealized gains, on equity securities and fixed maturities available for sale at December 31, 1997 and 1996, respectively.
The Company and its subsidiaries operate principally in five business segments consisting of automobile insurance, personal property insurance, commercial lines insurance, life insurance, and fee for service insurance administration. The four insurance segments sell various forms of property, liability and life insurance marketed through independent insurance agents in the state of Florida. The Company acts as a servicing carrier for the Florida Residential Property and Casualty Joint Underwriting Association, the Florida Automobile Joint Underwriting Association and as a subcontractor for Policy Management Systems Corporation performing various underwriting and claims services for a service fee.
Fortune Insurance Company, as a direct premium writer in the state of Florida, is required to participate in the Florida Automobile Joint Underwriting Association (FAJUA). Fortune's participation is based on its automobile premium to total automobile premiums written state wide by all automobile insurers. A summary of FAJUA participation as reported in the accompanying financial statements for 1997,1996 and 1995 is presented below:
The Company leases office facilities under operating leases which contain renewal options. Lease terms range from 18 months to five years. Rent expense was $329,464, $295,499 and $297,597 for 1997, 1996 and 1995, respectively.
On October 24, 1995 the Company obtained a bank loan in the amount of $12,000,000, for which the proceeds have been used primarily as additional capital for the insurance subsidiaries. The note accrues interest at the 90 day LIBOR rate plus 275 basis points, reduced to 250 basis points during 1997. Interest only is paid through January 24, 1998 with the first principal payment due on the twenty seventh monthly interest payment date and quarterly thereafter in the amount of $600,000 each payment. The entire unpaid principal balance, together with accrued interest thereon is due and payable on the loan maturity date of October 24, 2002.
Loan acquisition costs are being amortized on a straight-line basis over the term of the loan and are included in the other asset section of the consolidated balance sheets.
Reserves for unpaid losses and loss adjustment expenses are maintained to cover the probable ultimate cost of settling all losses incurred including those not yet reported. Reserves for losses incurred in prior years may be adjusted by review or by payment which could result in either a redundancy or deficiency to the reserve reported at the end of the prior year. Such changes are reflected in current operations.
- - Investment in Securities Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
The carrying amounts and fair values of the Company's financial instruments at December 31, 1997 and 1996 are presented below:
Items 10, 11, 12, and 13 have been omitted pursuant to instructions to Form 10-K. The Registrant intends to file with the Securities and Exchange Commission not later than April 30, 1998 a definitive proxy statement to be used in connection with its Annual Meeting of Shareholders, at which time directors will be elected for the ensuing year.