During 1998, the Company completed a $103.5 million FELINE PRIDES(SM) security offering, thereby adding new capital to the Company. The Company intends to use the proceeds from this security offering for general corporate purposes, which may include acquisitions (including, without limitation, acquisitions of programs or books of business), capital expenditures, capital contributions, and the repurchase by the Company of its common stock. From these proceeds, $33.1 million was contributed to the Company's subsidiaries, of which, $20.0 million was contributed to the Company's insurance subsidiaries to support anticipated growth. Additionally, $3.1 million was utilized to buy back the Company's common stock, under a stock buy-back program of up to $10.0 million authorized by the Company's Board of Directors.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $7.1 million (22.7%), to $38.4 million in 1998 from $31.3 million in 1997. This increase was due primarily to the 22.0% growth in net earned premiums.
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $14.9 million (37.2%) to $55.0 million in 1997 from $40.1 million in 1996 and the loss ratio decreased to 54.7% in 1997 from 55.7% in 1996. The increase in net loss and loss adjustment expenses was due primarily to the 39.5% growth in net earned premiums. Additionally, since more earned premium was retained from the lower cost of reinsurance (see "Premiums", above), and there was relatively higher net earned premium growth on products with low loss experience, the 37.2% increase in net loss and loss adjustment expenses was lower than the 39.5% net earned premium growth.
Under certain reinsurance agreements, the Company is required to maintain investments in trust accounts to secure its reinsurance obligations (primarily the payment of losses and loss adjustment expenses on business it does not write directly). At December 31, 1998, the investment and cash balances in such trust accounts totaled approximately $11.2 million. In addition, various insurance departments of states in which the Company operates require the deposit of funds to protect policyholders within those states. At December 31, 1998, the balance on deposit for the benefit of such policyholders totaled approximately $11.0 million.
The liability for unpaid loss and loss adjustment expenses includes an amount determined on the basis of claims adjusters' evaluations and an amount, based on past experience, for losses incurred but not reported. Such liabilities are necessarily based on estimates, and while management believes that the amount is adequate, the ultimate liability may be in excess of, or less than, the amount provided. The methods of making such estimates and establishing the resulting liabilities are continually reviewed and updated and any adjustments resulting therefrom are reflected in operations currently.
Premiums are generally earned on a pro rata basis over the terms of the policies. Premiums applicable to the unexpired terms of the policies in-force are reported as unearned premiums.
- Under SAP, federal income taxes are only provided on taxable income for which income taxes are currently payable, while under GAAP, deferred income taxes are provided with respect to temporary differences.
The Company had no debt or equity investments in a single issuer totaling in excess of 10% of shareholders' equity at December 31, 1998.