The Company's agency operations revenues include service fees related to the servicing of MPCI and crop hail insurance, excess loss adjusting expense reimbursement related to MPCI premiums serviced and profit sharing amounts, if any, resulting from underwriting gains, if any, on the premiums it services.
On March 20, 1997, a draft of the SRA (effective for the 1998 crop year) was released by the FCIC. The draft SRA proposes to revise the expense reimbursement for Buy-Up Coverage to an amount equal to a flat $100 per policy plus 18% of the premium related to that policy (17% in the case of Crop Revenue Coverage policies, a revenue protection coverage introduced by the FCIC in the 1997 crop year). For Basic Coverage, private companies would receive a flat $50 per policy plus 4.8% of the premium related to that policy (based on a 50% production guarantee at a 60% price election). The draft SRA also proposes certain changes to the risk sharing arrangement (calculation of underwriting gain or loss on premiums retained by private companies) between private companies and the
The Company is not able to predict whether any or all of the proposed revisions to the SRA will ultimately be adopted, but believes that the proposed revisions (particularly the revisions to the expense reimbursement), if implemented as proposed, would have an adverse impact on the Company's results of operations in the 1998 crop year. The FCIC has requested written comments on the proposed SRA draft by April 11, 1997. The Company cannot predict what the final terms of the SRA will ultimately be or what other legislative or administrative actions may occur as a part of the SRA revision process or the federal budget process. For the 1998 crop year the Company expects to negotiate with agents regarding reduced commissions on Buy-Up coverage to offset expense reimbursement reductions, however, there is no assurance that any reduction will be able to be passed through to agents as a result of competitive or other factors.
Under its MPCI contracts, the Company is also entitled to receive any excess loss adjustment expense reimbursement from the FCIC. The FCIC pays contracting insurance companies an amount up to 4% of premium on Buy-Up coverage for excess loss adjusting expenses on such coverage if loss ratios on the Company's total book of MPCI business, by state and by risk retention fund, are in excess of the ratios established by the FCIC. Generally, the excess loss adjustment expense reimbursement increases as the loss ratio increases. Under Basic Coverage policies, the FCIC pays contracting insurance companies an amount up to 1.7% of the imputed premium for excess loss adjusting expenses in the event loss ratios on the overall book of Basic Coverage are in excess of loss ratios established by the FCIC.
Additionally, the Company has arrangements with its third party insurance companies pursuant to which it is entitled to receive a percentage of the underwriting gains, if any, on MPCI premiums it services. These gains, or profit sharing, are reflected as additional service fees.
Other direct costs include overwrite fees payable to third party insurance companies, loss adjusting expenses, premium taxes on crop hail insurance, bureau fees and other costs. These costs, except for loss adjusting expense, vary proportionally with the amount of premiums serviced. Beginning in the 1997 crop year and as a result of the restructuring of its MPCI agreement with Fireman's Fund, the Company will no longer pay any overwrite fees on MPCI premiums it places with Fireman's Fund.
Crop Growers recognizes service fees from MPCI policies and the related direct costs as of the sales closing date for the particular policy. The sales closing date, which is established by the FCIC, is the date on which coverage for a crop must be bound or renewed by the policyholder and when substantially all required services relating to placing the insurance have been rendered by the Company. Unless canceled by the farmer, policies in place from the prior year automatically renew on the same terms on the sales closing date.
Since sales closing dates precede the date on which farmers plant their insured crop, MPCI coverage and related premiums are estimated by the Company until the farmer subsequently submits his or her report on actual acreage planted. The effect of changes in such estimated premiums are included in the results of operations in the period in which the estimates are changed.
The Company's software operations revenues include sales of VisAg-TM- software, mapping products, and hardware products. Costs include commissions on software and mapping sales, mapping product development costs, hardware costs, and other direct costs such as shipping, postage, and packaging. The VisAg-TM- product is a PC-based map driven farm management system designed for use by small family farms to large corporate operations. Mapping products are computer generated geo-referenced maps which allow an agent or farmer to view an entire agricultural operation on a single map. Hardware products represent various hardware products manufactured by third parties sold to agents and other outside customers. Revenues from the sale of VisAg-TM-, mapping products and hardware are recognized upon shipment to the customer.
For the 1996 and 1997 crop years, the Company did not and will not retain any MPCI premiums underwritten by its insurance company subsidiaries. For the 1996 crop hail season, the Company retained 15% of crop hail premiums underwritten by Dawson. In 1995, Dawson retained a certain amount of risk on premiums underwritten and reinsured prior to its acquisition by the Company in excess of the Company's risk retention strategy.
The Company's quarterly operating results vary substantially from quarter to quarter as a result of various factors, including MPCI sales closing dates, crop production cycles and recognition of underwriting gains, if any. The Company recognizes the highest amount of service fees and related direct costs in the first quarter because the sales closing date for the majority of spring crops is March 15. The majority of these amounts are attributed to service fees related to MPCI. Virtually all of the Company's service fees and direct costs related to crop hail insurance are recognized in the second quarter. The Company generally recognizes its second highest amount of revenues and related direct costs in the third quarter because the MPCI sales closing date for the majority of fall crops is September 30. In addition, the Company may recognize a portion of underwriting gains or losses, if any, on the premiums it services or underwrites in the third quarter. In the fourth quarter, the Company also recognizes underwriting gains or losses, if any, on the premiums it services or underwrites, most of the interest income on MPCI deferred premium financing and service fees on MPCI premiums with sales closing dates occurring in the fourth quarter. Crop Growers cannot predict whether MPCI sales closing dates will be changed in the future, but any such change could have a material effect on the Company's quarterly results of operations. Because the Company's business is directly tied to the production cycle of crops, the Company expects that seasonal patterns in its operating results will continue.
AGENCY OPERATIONS. Service fees in the year ended December 31, 1996 increased $19.6 million to $104.6 million from $85.0 million in the year ended December 31, 1995. Although overall MPCI premiums serviced increased during 1996, the increase was primarily the result of the acquisition of Dawson and FCIC established rate increases on MPCI premiums in the 1996 crop year. The increase was partially offset by a loss of premiums written by certain agencies who elected to have their premiums serviced by other insurance companies, a reduction in the expense reimbursement paid by the FCIC from 31% in the 1996 crop year to 29% in the 1997 crop year and the impact of the dissolution of its MPCI agreement with CNA. See ""-- Restructuring and Non-Core Expenses.'' Management believes the Company's premiums in the first quarter of 1997 will continue to be adversely impacted by certain factors including competitive pressures, principally relating to commissions, and the dissolution of its MPCI agreement with CNA.
Also included in service fees is $10.9 million in profit sharing revenue in the year ended December 31, 1996 as compared to $9.1 million in the year ended December 31, 1995. The increase in profit sharing was primarily the result of the increase in premiums serviced in 1996 compared to 1995. Profit sharing revenue as a percentage of premiums serviced decreased to 4.9% in 1996 from 5.8% in 1995. The decrease was primarily attributed to less favorable underwriting results on the premiums serviced in 1996 as compared with 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 16.6% in the year ended December 31, 1996 to $33.7 million from $28.9 million in the year ended December 31, 1995. The increase was due primarily to the increase in the number of employees hired to service increased MPCI premium and crop hail premium volume and additional general and administrative costs incurred as a result of the acquisitions made by the Company in 1995 as the operations have now been included for a full year.
Depreciation and amortization expenses increased to $3.3 million in the year ended December 31, 1996 from $2.4 million in the year ended December 31, 1995. The increase was primarily a result of increased property and equipment purchased in late 1995 and 1996 and an increase in the amortization of intangible assets as a result of the acquisitions during 1995.
LEGAL MATTERS. In the year ended December 31, 1996, the Company incurred approximately $4.0 million in expenses, primarily legal fees, in connection with indictments of the Company and certain of its former officers by the Independent Counsel appointed to investigate matters relating to former Secretary of Agriculture, Mike Espy. Included in this amount, are amounts advanced by the Company pursuant to indemnification agreements between the former officers and the Company. In January 1997, the Company settled this matter and agreed to pay $2.0 million. This amount, which is not tax deductible, was accrued as an expense in 1996. The Independent Counsel matter continues against one former officer of the Company.
The Company also incurred approximately $200,000 in the year ended December 31, 1996 in connection with defending a shareholder class action lawsuit filed in May 1995. In February 1997, the Company settled this matter and agreed to pay $2.5 million, $1.22 million of which is payable by the Company and the remainder of which is payable under the terms of a directors' and officers' insurance policy. The $1.22 million was accrued as an expense in 1996.
INTEREST EXPENSE. Interest expense increased to $1.5 million in the year ended December 31, 1996 from $859,000 in the year ended December 31, 1995. The increase in interest expense was a result of additional borrowings necessary to finance operating expenses attributed to the increase in premium volumes as well as MPCI deferred premiums in the 1996 crop year.
INSURANCE OPERATIONS. Premiums earned decreased in 1995 to $(182,000) from $1.3 million in 1994. Losses incurred decreased in 1995 to $(2.3) million from $1.3 million in 1994. The decreases were due primarily to the acquisition of Dawson. In connection with the purchase of Dawson, at July 14, 1995, initial estimates were made of premiums and losses related to the MPCI and crop hail business underwritten by Dawson prior to the acquisition. The Company's practice is to estimate a breakeven underwriting result until late in the third quarter, when more information is available on the underwriting results of its premiums serviced. Subsequent to the acquisition, the FCIC changed the MPCI program to provide insurance companies relief for most of the prevented planting losses, and as a result the level of loss reserves estimated at the acquisition date was higher than the amount ultimately necessary. This reduction of loss reserves along with other changes in estimates made as of the acquisition date, resulted in the business acquired having an underwriting gain of approximately $2.3 million.
INVESTMENT INCOME. Investment income increased $766,000 in the year ended December 31, 1995 to $2.2 million from $1.4 million in the year ended December 31, 1994. The increase in investment income was due primarily to realized gains on investment securities sold during 1995 to fund the Dawson acquisition.
INCOME TAXES. For the year ended December 31, 1994, the Company recognized approximately $264,000 of a rehabilitation tax credit related to the renovation of the Company's new office building which qualified as a historic structure. This had the effect of reducing the Company's effective tax rate as compared to the year ended December 31, 1995.
Net cash provided by operating activities was $12.2 million and $2.9 million during 1996 and 1994, respectively, compared with cash used by operating activities of $15.3 million in 1995. The increase in cash provided by operating activities in 1996 was primarily the result of the Company settling with insurance companies on crop hail and MPCI premiums in the first quarter of 1997 rather than in the fourth quarter of 1996. In addition, in 1995, the FCIC extended the payment due dates for the 1995 crop year by one month for policyholders which delayed policyholders payments to the Company for MPCI premiums due. This had the effect of delaying the Company's receipt of a portion of the expense reimbursement payable to the Company on MPCI premiums serviced. This delay, which did not happen in 1994, nor reoccur in 1996, substantially increased cash used for operations during 1995.
In addition, under the crop hail general agency agreement between the Company and Fireman's Fund, Fireman's Fund will fund crop hail losses. Accordingly, the Company will not need to finance crop hail losses in 1997.
The Company believes that the cash generated from operations and the availability of borrowings under the Fireman's Fund commitment to provide working capital will provide sufficient resources to finance the Company's current operations and projected working capital needs for the next 12 months.
Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 38
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 39
We have audited the accompanying consolidated balance sheets of Crop Growers Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Crop Growers Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
CROP GROWERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
Premiums payable $ 29,504,825 $ 6,336,084 Commissions payable 16,239,692 14,142,811 Underwriting gain payable 1,216,780 4,512,961 Deferred tax liability -- 1,244,852 Accounts payable and accrued liabilities 12,253,886 4,259,312 Reinsurance balances payable 17,010,461 17,787,551 Loss reserves 32,147,342 21,726,157 Deferred service fees 3,513,445 2,678,871 Notes payable to bank -- 32,245,539 Long-term debt 3,290,672 4,188,540 ------------ ------------ 115,177,103 109,122,678
CROP GROWERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
CROP GROWERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995, AND 1994
Crop Growers Corporation and subsidiaries (the Company) markets and services federal multi-peril crop insurance, crop hail and other insurance products on behalf of insurance companies, including its wholly-owned subsidiaries, Plains Insurance Company (Plains) and Dawson Hail Insurance Co. (Dawson). The Company is also involved in development and marketing of proprietary software applications for use in the agriculture industry by insurance agents and farmers.
The accompanying consolidated financial statements have been prepared on the basis of generally accepted accounting principles ("GAAP") which, as to the insurance company subsidiaries, vary from statutory accounting practices prescribed or permitted by insurance regulatory authorities. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Premiums associated with the underlying coverage are recognized as due from the insured or agent and payable to the United States Department of Agriculture's Federal Crop Insurance Corporation (FCIC), insurance company or reinsurance company concurrent with the recognition of service fees. Premiums on multi-peril and crop hail insurance written by Plains and Dawson are considered earned when written. For multi-peril crop insurance, premiums are written based on estimates of premium as of the sales closing date.
Loss reserves are based upon estimates for losses reported and estimates for losses incurred but not yet reported. For multi-peril crop insurance, loss reserves are recorded at 100% of estimated premiums earned at the sales closing date. Reinsurance recoverable is recorded at the same time for the portion of losses not retained by the Company.
The liability for losses and the related estimation methods are continually reviewed and revised to reflect current conditions and trends. The resulting adjustments are reflected in operations in the periods in which they are determined. While management believes the reserves for losses are adequate to cover the ultimate liability, the actual ultimate loss costs may vary from amounts provided.
Deferred service fees represent management's estimate of such amounts needed for all Company loss adjusting costs to settle claims incurred or to be incurred on policies for which revenue has been recognized plus a provision for related gross profit. The estimated deferred service fees are continuously reviewed and variances, if any, in estimated versus actual amounts are reflected in current operations.
Intangible assets include contract rights, which represent costs assigned to agency contracts and policyholder lists obtained in the acquisitions of "books of business," non-compete agreements, software development costs, management and services agreements, and insurance licenses. These assets are being amortized on a straight-line basis over the following periods:
Certain software development costs are capitalized when incurred. Capitalization of software development costs begins upon the establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future revenues, estimated economic life and changes in software technologies.
Certain reclassifications have been made to the 1994 and 1995 consolidated financial statements to conform with the 1996 presentation.
The amortized cost and estimated market value of investments in fixed maturities are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
Estimated Amortized Market Cost Value ---- ----- Held to maturity: Due in 1 year or less $ -- $ -- Due after 1 year through 5 years 400,209 403,876 Due after 5 years through 10 years -- -- Due after 10 years 908,230 944,721 ---------- ----------- $1,308,439 $1,348,597 ---------- ----------- ---------- -----------
Estimated Amortized Market Cost Value ---- ----- Available for sale: Due in 1 year or less $ 50,284 $ 50,686 Due after 1 year through 5 years 1,997,337 2,027,157 Due after 5 years through 10 years 1,495,515 1,535,449 Due after 10 years 1,567,562 1,586,416 ---------- ----------- $5,110,698 $5,199,708 ---------- ----------- ---------- -----------
The following is a summary of investment income for the years ended December 31, 1996, 1995 and 1994:
December 31, ------------ 1996 1995 ---- ---- Contract rights $ 7,430,952 $ 7,430,952 Software development costs 1,293,363 943,319 Non-compete agreements 590,000 590,000 Management and services agreements 883,982 972,492 Insurance licenses 1,275,000 1,388,529 Other 2,046,755 1,396,880 ----------- ----------- 13,520,052 12,722,172 Less accumulated amortization 3,662,814 2,193,542 ----------- ----------- $ 9,857,238 $10,528,630 ----------- ----------- ----------- -----------
9% note, payable in aggregate monthly installments of $24,910 through November 15, 1999, secured by equipment. 754,370 973,497
Various notes with interest rates ranging from 2.9% to 9.5%, payable on demand or in aggregate monthly installments of $13,161 including interest, maturing at various dates through December 15, 1998; secured by vehicles and office equipment. 130,758 539,369 ---------- ----------
At December 31, 1995, the Company had two revolving line of credit agreements for $35,000,000 and $15,000,000, respectively. The $15,000,000 line of credit was available solely to pay hail losses with respect to policies issued by or through the Company or its subsidiaries. This line, which was not utilized during 1996, matured on October 31, 1996 and was not renewed. Historically, the Company has utilized the $35,000,000 line of credit to finance working capital needs as well as MPCI premiums due to the FCIC which have not yet been paid to the Company by the policyholder. This line matured on November 30, 1996 and was not renewed by the Company. See Note 14 for the financing of MPCI premiums for 1996.
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are presented below:
December 31, ------------ 1996 1995 ---- ---- Deferred tax assets: Allowance for doubtful accounts $ 1,215,049 $ 434,392 Asset write downs 717,430 -- Nondeductible reserves 973,683 120,677 Other 172,850 107,230 ----------- ---------- 3,079,012 662,299 ----------- ---------- Deferred tax liabilities: Differences in depreciation and amortization (1,137,323) (1,294,877) Unrealized appreciation of investments (33,847) (133,566) Difference in revenue recognition -- (363,441) Change in tax status (46,202) (115,267) ----------- ---------- (1,217,372) (1,907,151) ----------- ---------- Net deferred tax asset (liability) $ 1,861,640 $(1,244,852) ----------- ---------- ----------- ----------
The following unaudited pro forma information provides a summary of income taxes as if the Company had been subject to federal and state income taxes for the year ended December 31, 1994 prior to the termination of the S Corporation status:
On June 30, 1994, the Company completed an initial public offering of 2,780,748 shares of common stock at $7.50 per share. The net proceeds from the offering totaled $18,096,107 and were used to purchase and capitalize Plains, redeem preferred stock of certain subsidiaries, pay certain stockholders the remaining contingent purchase price related to the acquisition of the Company's software development subsidiary, make certain distributions to former S Corporation stockholders, prepay the remaining amount owed under the noncompete agreement with a former stockholder, reduce outstanding short-term borrowings and for general corporate purposes, including working capital.
Prior to the Reorganization described below, the accompanying consolidated financial statements represent the historical combined operations of Crop Growers Insurance, Inc., Prairie Mountain Insurance, Inc., Cimarron Crop Insurance Services, Inc., Wheat Growers General Agency, Inc., Crop Growers Software, Inc. (formerly AgriPeril Software, Inc.) and Insurance Acquisition Corporation, collectively referred to as the Entities.
The board of directors of a newly formed Delaware corporation, and the stockholders of the Entities entered into a Reorganization Agreement with the Company. Pursuant to the Reorganization Agreement, the outstanding common stock of the Entities were exchanged for 3,570,000 shares of the Company's common stock and $3,010,000 of promissory notes with certain stockholders. The transaction was accounted for as an exchange of interest under common control, similar to a pooling of interest. All name references in the consolidated financial statements and the notes thereto, have been changed to reflect this Reorganization.
On December 6, 1994, the Company completed a second public offering of 1,400,000 shares of its common stock at $14.00 per share. The net proceeds from this offering totaled $17,774,886 and were used to provide additional capital to Plains, support additional product development efforts relating to software systems and for general corporate purposes.
At December 31, 1996, 254,640 shares remain eligible for future grant under the Incentive Plan.
The Company accounts for stock options in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
The per share weighted-average fair value of stock options granted during 1996 and 1995 was $4.23 and $8.43 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 1996 - expected dividend yield 0%, risk-free interest rate of 8.0%, expected volatility factor of 30%, and an expected life of 6 years; 1995 - expected dividend yield 0%, risk-free interest rate of 8.0%, expected volatility factor of 30%, and an expected life of 6 years.
Since the Company applies APB Opinion No. 25 in accounting for its plan, no compensation cost has been recognized for its stock options in the financial statements. Had the Company recorded compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net (loss) income and earnings per share for 1996 and 1995 would have been (increased) reduced by approximately 10.0% and 6.3%, respectively. Pro forma net income reflects only options granted in 1996 and 1995. Compensation cost for options granted prior to January 1, 1995 is not considered.
The Company has a Non-Employee Director Stock Option Plan (Director Plan), which provides for automatic grants of options, which do not qualify as incentive stock options, to non-employee directors of the Board of Directors. A total of 50,000 shares of Common Stock have been reserved for the granting of awards under the Director Plan at 100% of the fair market value at the grant date. Under the terms of the Director Plan, options granted are exercisable in full six months from the date of grant and expire ten years from such date. At December 31, 1996, 18,000 options had been granted under the Director Plan at prices ranging from $7.50 to $27.13 and 32,000 shares remain eligible for future grants.
Plains and Dawson are domiciled in Kansas and North Dakota, respectively, and prepare their statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the Kansas and North Dakota Insurance Departments, respectively. "Prescribed" statutory accounting practices include state laws, regulations and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners ("NAIC"). Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. Plains and Dawson have no significant permitted accounting practices that vary from prescribed accounting practices, except as noted below.
December 31, ------------ 1996 1995 ---- ---- Stockholder's equity: Plains $ 7,134,453 $7,447,433 Dawson 8,180,807 8,204,035
Dawson has entered into a reinsurance agreement with a non-affiliated insurance company under which Dawson assumed 100% of the multi-peril crop insurance and losses written by the non-affiliated insurance company in the State of Kansas. Dawson has currently ceded all of this business to Fireman's Fund. This agreement was not renewed for the 1997 crop year.
During 1995, Plains entered into a reinsurance agreement with non- affiliated insurance companies. With respect to this agreement, additional commissions predicated on loss experience with respect to MPCI business were $1,249,200 at December 31, 1995. This agreement was terminated in 1996.
Premiums earned: Multi-peril Crop hail Other Total ----------- --------- ----- ----- Direct $ 4,529,509 $ 5,905,422 $ 438 $10,435,369 Ceded 3,199,208 5,905,422 350 9,104,980 ----------- ----------- ------ ----------- Net $ 1,330,301 $ -- $ 88 $ 1,330,389 ----------- ----------- ------ ----------- ----------- ----------- ------ -----------
Losses incurred: Multi-peril Crop hail Other Total ----------- --------- ----- ----- Direct $ 4,529,509 $ 3,206,714 $ -- $ 7,736,223 Ceded 3,199,208 3,206,714 -- 6,405,922 ----------- ----------- ------ ----------- Net $ 1,330,301 $ -- $ -- $ 1,330,301 ----------- ----------- ------ ----------- ----------- ----------- ------ -----------
In connection with the purchase of Dawson at July 14, 1995, initial estimates were made of premiums and losses related to the MPCI and crop hail business underwritten by Dawson prior to the acquisition. Subsequent to the acquisition, the FCIC changed the MPCI program to provide insurance companies relief for most of the prevented planting losses, and as a result the level of loss reserves estimated at the acquisition date was higher than the amount ultimately necessary.
The fair values of financial instruments presented in the applicable notes to the Company's consolidated financial statements are estimates of the fair values at a specific point in time using available market information and appropriation valuation methodologies. These estimates are subjective in nature and involve uncertainties and significant judgment in the interpretation of current market data. Therefore, the fair values presented are not necessarily indicative of amounts the Company could realize or settle currently. The Company does not necessarily intend to dispose of or liquidate such instruments prior to maturity. Fair values of these financial instruments have been determined as follows:
Cash, short-term investments and accrued investment income and notes payable to bank - these financial instruments are short-term in nature; therefore, the carrying value and fair value are approximately the same.
Fixed maturity and equity securities - fair value for fixed maturity and equity securities are based on quoted market prices from major pricing services, where available; for securities that are not actively traded, estimated fair values are based on values of issues of comparable yield and quality.
Debt - the fair values are based on the interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities.
Future minimum lease payments under noncancelable operating leases for the next five years are as follows:
Aggregate Net Years ending Minimum Sublease Minimum December 31, Lease Payments Payments Lease Payments ------------ -------------- -------- -------------- 1997 $1,280,555 $ (92,145) $ 1,118,410 1998 1,163,476 (83,520) 1,079,956 1999 985,608 (20,880) 964,728 2000 911,370 -- 911,370 2001 721,591 -- 721,591
The majority of the Company's revenues since inception have been derived from servicing multi-peril crop insurance. The Company expects that at least a majority of its revenue will continue to be derived from its multi- peril crop insurance business for the foreseeable future. Therefore, the Company's results of operations and financial condition are substantially dependent upon the multi-peril crop insurance program.
Insurance companies that are involved in the multi-peril crop insurance program, including Fireman's Fund, Plains, and Dawson, are subject to periodic review by the FCIC for, among other things, the availability of adequate capital and surplus and compliance with underwriting, loss adjustment, and other requirements of the multi-peril crop insurance program. In addition, as a part of the FCIC's review process, the Company, as a servicer on behalf of Fireman's Fund, Plains and Dawson, is periodically reviewed for its compliance with FCIC rules and regulations. A failure to comply with such rules could result in the FCIC choosing not to allow the Company, Fireman's Fund, Plains or Dawson to participate in the MPCI program.
The Company and CNA terminated their existing agreements effective for the 1997 crop year in the case of multi-peril crop insurance and the 1997 year for crop hail insurance.
The Company and Fireman's Fund entered into an agreement in November 1996, whereby Fireman's Fund agreed to finance the premiums due to the FCIC in exchange for the interest charged on the deferred premiums. The Company continues to administer the collection of the receivables and is ultimately responsible for the collection of the balances. The Company receives an administrative fee from Fireman's Fund for administrative costs related to the premiums financed. This financing arrangement has been reflected as premiums payable in the accompanying consolidated balance sheet.
On March 14, 1995, the Company acquired the agency operations of Dawson and on July 14, 1995, the Company acquired all of the outstanding common stock of Dawson. The purchase price for Dawson was approximately $7,900,000 in cash and a contingent payment of up to $3,400,000, payable over up to 12 years (subject to an annual cap of $700,000), based on a percentage of the Company's future net profit sharing, if any, on its crop insurance book of business. In connection with the recognition of underwriting gains in 1996 and 1995, the Company recognized contingent consideration of $700,000 in both of those years (which is reflected as an additional acquisition cost of Dawson). The Company also contributed $1,500,000 to the capital of Dawson to repay a surplus note.
The pro forma information above does not purport to be indicative of the results of operations that would have occurred had the transactions taken place at the beginning of 1994 or of future results of operations.
During 1995, the Company also acquired several additional crop insurance agency operations. Certain acquisitions were accounted for on the pooling- of-interests method of accounting. The consolidated financial statements were not restated, as the acquisitions were not material. The remaining acquisitions were accounted for on the purchase method of accounting. The consolidated results of operations would not have been materially different had these acquisitions been completed on January 1, 1995.
On October 14, 1994, the Company acquired Plains. The purchase price was approximately $3,800,000 of which $975,000 represented the value of Plains' licenses and $2,800,000 represented Plains' statutory capital and surplus at the date of closing. The acquisition was accounted for as a purchase and, accordingly, the consolidated statements of operations include Plains' results of operations since the date of acquisition. The consolidated results of operations would not have been materially different had this acquisition been completed on January 1, 1994.
The Company also incurred approximately $200,000 in the year ended December 31, 1996 in connection with defending a shareholder class action lawsuit filed in May 1995. In February 1997, the Company settled this matter and agreed to pay $2.5 million, $1.22 million of which is payable by the Company and the remainder is to be paid out under the terms of a directors' and officers' insurance policy. The $1.22 million was accrued as an expense in 1996. The terms of the settlement are subject to court approval.
Included in the loss on discontinuation of non-core operations is $1.0 million in write offs representing the Company's investment in and advances to Coelho Associates LLC, a joint venture between the Company, a former director of the Company, and other parties.
CROP GROWERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996, 1995, AND 1994
In the fourth quarter of 1996, the Company recorded several adjustments as a result of its review of certain estimates made on MPCI premiums and the related revenues and direct costs and its assessment of the adequacy of certain reserves and allowances. These adjustments are summarized in the table below and are included in service fees or agent commissions and other direct costs for the year ended December 31, 1996.
In the fourth quarter the Company recorded $4.6 million of costs associated with settling legal matters as discussed in Note 16. In the fourth quarter the Company recorded $2.0 million of restructuring and non-core expenses, $1.5 million of which was related to the loss on discontinuation of non-core operations as discussed in Note 17.