RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
For a number of reasons, including the existence of an experienced claims adjustment staff and Physicians' success in managing invested assets, Physicians decided that it could more effectively manage the assets remaining after the sale of the MPL business than to sell off or fully reinsure the existing reserves. As a result, assets are managed for the maximum overall return, within prudent safety margins and the guidelines of the Ohio Department. Assets are not designated on an individual item basis as either MPL or portfolio investing assets. As a result, Physicians' invested assets produce income in both MPL and portfolio investing segments without any true segregation of assets.
The principal difference between 1996 and 1995 revenues, and operating income, was an increase in realized capital gains of $3.8 million, principally attributable to the sale of APL's holdings of Fairfield Communities, Inc. common stock. Partially offsetting the increase in realized investment gains were a $400,000 decline in net earned premiums and a $600,000 reduction in investment income. Compared to 1994, 1996 earned premiums were down $2.4 million. These reductions in net earned premiums were primarily due to APL no longer being the underwriting insurer for Physicians employee health and dental plans, effective March 1, 1996. APL had ceased writing group health and dental coverages with the exception of Physicians plans effective July 1, 1994.
inclusion, including earned premiums of $5.1 million, investment income of $1.2 million, realized investment gains of $49,000 and other income of $99,000.
Much of Sequoia's five-month 1995 loss was attributable to expenditures which are expected to continue to provide benefits in future years through improved operating efficiencies. These expenses included, among others, those associated with development of a new policy quoting and processing system and integrated claims processing and accounting systems. Software has been developed and is now in use which allows underwriters and agents to decentralize, rate policies in the field, and download the information via modem to the home office, allowing them to spend much more time in the field inspecting risks and servicing policies.
This decline in direct written premiums indicative of the increasing competitive pressures within Ohio which, among other factors, led Physicians and PRO to increase premium rates, to be more selective in underwriting and, ultimately, to withdraw from the MPL line of business.
In 1995, Physicians took a significant step in changing its strategic direction by selling its ongoing MPL insurance business and related liability insurance business. All assets and liabilities of Physicians related to insurance policies written prior to the sale of the recurring book of business were retained by Physicians. During 1995, Physicians reactivated its investment advisory subsidiary, Summit; acquired a California property and casualty insurance company, Sequoia; and purchased 38.2% of GEC, a Canadian corporation active in investment banking, agricultural services, water rights, and other businesses. See "Item 1 - -Business--History of the Company." In 1996, Physicians took another large step in the continuing process of changing its strategic direction, with the reverse acquisition of Citation.
As a result of ceasing to write MPL insurance, Physicians' operating cash flows have become, and should continue for the foreseeable future, to be negative. Cash flows from other sources within Physicians, primarily reinsurance recoveries, investment income and the sale of invested assets will provide the necessary funds. Major cash outflows most likely will include the funding of claims and loss adjustment expenses, investment purchases, dividend distributions, and operating costs. The Company's active insurance P & C subsidiaries, Sequoia and CIC, should provide positive cash flows from premium writings, investment income, and the sale of invested assets. Cash will be used to fund the payment of their own claims and operating expenses, as well as in purchasing investments. Summit should produce positive cash flow in the form of investment management fees in excess of operating costs.
At December 31, 1996, Physicians' investment portfolio on a stand-alone basis contained invested assets of
At December 31, 1996, the Company had no significant commitment for future capital expenditures, other than in the ordinary course of business and to provide certain funding for Stonebridge, which has subsequently been limited. The Company has also committed to maintain Sequoia's capital and statutory policyholder surplus level at a minimum of $7.5 million. Sequoia was well above this level as of December 31, 1996. The Company has also committed to make every attempt to maintain Sequoia's AMBest rating at or above the "B++" (Very Good) level, which may at some time in the future require additional capital infusions into Sequoia by the Company. Subsequent to year-end 1996, the Company has committed to purchase for approximately $30 million a debenture from GEC. The Company has committed to invest approximately $16 million in a limited liability corporation which owns land in Nevada. GEC has committed to purchase the remaining interest of this limited liability corporation.
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 .......................... 49
At December 31, the cost (amortized cost for fixed maturities) and estimated fair value of investments are as follows:
Equity securities include certain warrants to purchase the common stock of a publicly traded company. The estimated fair value of such warrants is their intrinsic value based on the quoted market price of the underlying common stock of the investee company. The estimated fair value and cost of such warrants were $14,530,957 and $240,000, respectively, as of December 31, 1996 and $4,737,500 and $240,000, respectively, as of December 31, 1995.
Activity in the reserve for unpaid claims and claim adjustment expenses for the year ended December 31 was as follows:
In January 1997, the Company signed a Letter of Intent to sell the net assets related to CIC's workers' compensation business. Under the terms of the Letter of Intent, the transaction will be structured as a purchase of all the issued and outstanding shares of stock of CNIC. CIC will reinsure all of its workers' compensation business into CNIC and transfer all employees working on the workers' compensation business to CNIC prior to the closing. The purchase price is estimated to be approximately $7.7 million and would be paid in cash. Consummation of the transaction is conditioned upon certain factors including negotiation and execution of a definitive agreement, negotiation of reinsurance treaties and any requisite approvals from the Commissioner of Insurance of the State of California.