The Registrant and a group of affiliated corporations provide property and casualty insurance related services.
On March 1, 2000, the Registrant completed the acquisition of Mountain Valley Indemnity Company ("Mountain Valley") from Unitrin, Inc. for $7.5 million in cash. Mountain Valley was incorporated in 1995 in the State of New Hampshire and writes small and mid-sized commercial coverages in New York and all of the New England states except Connecticut. The Registrant believes that these acquisitions fully establish it as a regional commercial lines company in New England and the Mid-Atlantic regions.
The Registrant anticipates continuing its emphasis of the small commercial and ancillary coverages written by Preserver in the State of New Jersey and through newly acquired American Colonial in New York and Mountain Valley in the States of New York, Massachusetts, New Hampshire, Vermont, Rhode Island and Maine. North East is expected to increase its emphasis of small commercial coverages as well. Motor Club and North East write PPA business in the States of New Jersey and Maine, respectively. PPA business is expected to increase.
Excluding these items, net income decreased $2,621,779 to $1,634,012 in 1999 from the $4,255,791 reported in 1998. The decrease was the result of significantly higher New Jersey PPA losses occurring in 1999, specifically PIP (No Fault) first party claims. The provision for current year claims was $2,301,000 higher in 1999 than 1998. The Company believes that this development is attributable to the 1999 implementation of the New Jersey Automobile Cost Reduction Act ("AICRA"), which was designed to reduce both premium and losses in that line of business in that State.
The Registrant's net income was also reduced by $511,000 of losses and expenses incurred as a result of Hurricane Floyd which struck New Jersey in September 1999 and $217,000 in losses from severe storms which struck New Jersey in September 1998.
Insurance premiums declined by $1,553,000 or 3% in 1999 as compared to 1998, due principally to the rate rollback provisions of AICRA which were implemented commencing in 1999. These amounts were offset by increases in Preserver insurance premiums, particularly those generated by its commercial lines business. The following table details the annual changes in the 1999 Insurance Premiums and underlying in force policy counts as compared to 1998:
As the table identifies, the decrease in PPA business written by Motor Club was attributable to the rate rollback and not a significant change in the number of policies inforce at December 31, 1999 as compared to 1998. The increase in Commercial Lines insurance premiums is reflective of the increased number of policies that Preserver wrote during 1999. Personal Property insurance premiums written by Preserver reflect modest amounts of new business written offset by a slightly higher attrition rate on existing policies in 1999 as compared to 1998.
Losses and loss expenses increased by $1,778,217 or 5%, which produced the following loss and loss expense ratios:
1999 1998 ----- ----- Motor Club 76.8% 71.6% Preserver 66.7% 59.6% ---- ---- 74.1% 68.6% ==== ====
While this acceleration increased the level of reported losses incurred by Motor Club in 1999, the Registrant reserved for its projected ultimate losses for Accident Year 1999 in this coverage, generally using historical loss development patterns which indicate longer development patterns than those which may occur in Accident Year 1999. Therefore the Registrant increased the amount of incurred but not reported reserves for this coverage by $317,000 or 19% in 1999 as compared to 1998.
The Registrant does not believe that the Motor Club Accident Year 1999 loss experience is indicative of longer-term trends in PPA. The Registrant expects to closely monitor loss development patterns in 2000 and beyond to ensure that the level of reserves carried for PPA is adequate and appropriate as dictated by actual loss development.
1999 1998 ---- ---- Direct Loss Ratio 56.7% 69.2% Ceded Loss Ratio 16.7% 117.2% ---- ----- Net Loss Ratio 66.7% 59.6% ==== ====
The Registrant continues to place emphasis on reducing overhead expenses relative to premium volume. Though the expense ratio increased to 34.3% in 1999 from 29.1% in 1998, the increase is primarily related to nonrecurring events. The Policy Term Conversion, completed in 1999, will provide greater consistency in the amount of expense amortized related to acquisition expenses in 2000. Expenses associated with merger and acquisition efforts, by definition are included in the expense ratio, and are part of the Registrant's ongoing efforts to expand and diversify its operations beyond the State of New Jersey.
The Registrant's book value decreased to $12.97 per share at December 31, 1999 from $13.15 per share at December 31, 1998.
As a company with insurance subsidiaries that invests substantial sums in fixed income securities, the Registrant is accustomed to fluctuations in the value of its fixed income investments. As noted, it has also identified one hundred percent of those investments as available for sale pursuant to SFAS 115. Accordingly, changes in the value of those investments are recorded as other comprehensive income. Because the Registrant and the Insurance Companies' investment portfolios are composed completely of securities which are generally highly liquid (i.e., U.S. government securities and investment grade corporate bonds), and that no default notices have been received on any of those securities, there are no grounds to believe that the unrealized losses incurred in 1999 are other than temporary. In addition, the combination of the duration of the portfolio being sufficiently short (approximately 3.60 years at December 31, 1999), combined with the highly liquid nature of those securities and the Registrant's proclivity to hold those bonds to maturity (although they are classified as available to sale), the par value of those bonds should be fully realized at maturity, resulting in those unrealized losses being temporary.
The 22% increase in net income was largely due to the elimination of FAIR Act assessments paid through 1997, when $971,000 in expenses were incurred for this assessment. Absent the FAIR Act assessments in 1997, pre-tax income increased $118,000 or 2% in 1998 as compared to 1997, due to continuing improvements in the combined ratio and higher revenues for Preserver, higher investment income, offset by higher combined ratios for Motor Club due to the increasing effects of the new PPA business which it has written.
Net investment income increased $710,000 or 20% resulting from an increase in invested assets. Average invested assets (at amortized cost) were $68,374,000 during 1998 as compared to $56,239,000 during 1997. The increase in insurance premiums noted above, combined with the Note Payable discussed in Liquidity and Capital Resources, provided the increase in invested assets. Other revenues decreased $53,000 or 24%, due to declines in mortgage loan revenue, servicing fee income and other miscellaneous income items.
1998 1997 ---- ---- Motor Club 71.6% 66.8% Preserver 59.6% 59.7% ---- ---- Total 68.6% 65.1% ==== ====
The increase in Motor Club's PPA loss and loss expense ratio was largely due to the new business written by Motor Club since January 1995 which constituted 53% of Motor Club's total PPA business as of December 31, 1998.
Preserver continues to experience stable loss and loss expenses and loss ratios. During September 1998, severe storms struck New Jersey, resulting in $217,000 in losses to Preserver which increased its loss ratio by 2 points during 1998. Frequency of losses remains at acceptable levels for all lines of Preserver's business.
The $343,000 or 20% increase in other operating expenses was due to increased expenditures related to the Registrant's merger and acquisition efforts along with expenditures to comply with the PPA reforms being implemented in New Jersey.
These increases in book value were offset by the dilutive effects ($.09 per share) of the issuance of 22,000 shares of common stock upon exercise of employee stock options granted under the 1987 and 1992 Stock Option plans. See Note P of the Notes for additional information regarding the Registrant's stock option plans.
The Registrant paid no dividend on its common stock in 1999, 1998 and 1997.
In connection with its acquisition of Mountain Valley, on February 29, 2000 the Registrant borrowed $11.5 million ("Debt") from its three Executive Committee members, who presently own 42% of the Registrant's outstanding shares. For more information on the Debt, please refer to Note T in the Notes to Consolidated Financial Statements.
In October 1998, AcSEC issued SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk." This Statement identifies several methods of deposit accounting and provides guidance on the application of each method. This Statement classifies insurance and reinsurance contracts for which the deposit method is appropriate as contracts that (i) transfer only significant timing risk, (ii) transfer only significant underwriting risk, (iii) transfer neither significant timing nor underwriting risk, and (iv) have an indeterminate risk. This Statement is effective for financial statements for the year commencing January 1, 2000. Restatement of previously issued financial statements is not permitted. The Registrant does not believe the Insurance Companies' reinsurance contracts would require the deposit method of accounting.