During 1997, total expenses decreased $7,471,717 or 31.7% compared to 1996. This decrease was almost entirely the result of a decrease in claim losses and claim loss adjustment expenses which decreased approximately $7.1 million compared to these same expenses in 1996. During 1996 the Company experienced a significant increase in claim expense payments, and following actuarial analysis, the Company strengthened its loss and loss adjustment expense reserves for accident years prior to 1996 by approximately $4.6 million. The Company will continue to monitor the level of claim severity, and to seek input from actuaries as appropriate. The balance of the decrease in total expenses during 1997 compared to 1996 was primarily the result of a decrease in amortization of deferred acquisition costs of approximately $220,000, which is entirely related to Missouri premium taxes, and a decrease in other underwriting and insurance expenses of approximately $190,000, which was the result of a reduction in general operating expenses of approximately 7.9%.
Total consolidated assets of the Company at December 31, 1997 were $89,930,625 which was a decrease of approximately $6.8 million or 7.1% as compared to December 31, 1996. This decrease was primarily due to the payment of loss and loss adjustment expenses in excess of incurred loss and loss adjustment expenses by approximately $4.5 million and a decrease in premiums written during 1997 compared to the previous year of approximately $2.8 million which was the result of the decline in policyholders discussed earlier. In addition, the Company utilized a portion of its cash to conduct a tender offer during 1997 to purchase outstanding shares of preferred stock. This tender offer resulted in the purchase of approximately $1.8 million shares of the Company's preferred stock for approximately $700,000. Over 93% of the Company's total assets at December 31, 1997 are comprised of cash, cash equivalents, or investments and, in addition, the Company's investment portfolio is conservatively invested in high-quality investments as approximately 80% of total assets at December 31, 1997 consisted of either cash or cash equivalents, U.S. Treasury bonds or notes, or U.S. government agency bonds. In addition, the Company does not hold, either directly or indirectly, any real estate owned for investment purposes, any fixed maturity investments rated below AA by nationally recognized rating agencies, or any equities other than stock in affiliates. The composition of the Company's total investments is not anticipated to change substantially in the near future.
During 1997 the Company conducted a second tender offer for its shares of preferred stock which resulted in the Company acquiring 1,765,943 preferred shares at a cost of $0.40 per share. On November 15, 1996 the Company completed the acquisition of 2,781,338 shares of its preferred stock at $0.40 per share in a tender offer dated September 12, 1996. On June 26, 1995 the Company received $499,996 in cash for the sale of shares of Class A Common Stock to Company principals in conjunction with the consummation of the conversion of MDA to a wholly-owned stock subsidiary of the Company.
A. Pervasiveness of Estimates: The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
D. Premium Revenues and Related Expenses: Premiums are recognized as income over the terms of the related insurance policies. The unearned premium reserve represents the portion of the premiums written that relate to the unexpired terms of policies in force. Such reserves are computed on a pro rata method.
At December 31, 1997 and 1996, short-term investments consist of certificates of deposit which mature between three months and one year, a repurchase agreement investing exclusively in securities issued and guaranteed by the U.S. Treasury, and U.S. Treasury Bills with original maturities between three months and one year. The carrying amounts reported in the balance sheet for these instruments is their estimated fair values.
Company management and their independent actuary believe the reserves are reasonably stated to cover the ultimate net cost of losses and related loss adjustment expenses which are unpaid at December 31, 1997 and 1996, respectively; however, as the reserves are based on estimates, there can be no assurance that the ultimate liability will not differ from such estimates. Developments on 1995 and prior years are due primarily to increases in claim severity that have been considered in ultimate loss projections at December 31, 1997 and 1996.
SFAS 128 requires the computation of basic earnings per share ("EPS") and diluted EPS. Basic EPS is computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing income (loss) available to shareholders by the weighted-average number of common shares plus the weighted-average number of common share equivalents outstanding for the period. Anti-dilutive amounts are not shown which was the case for the year ended December 31, 1996.
All of the Company's preferred stock are convertible to common stock at a ratio of two shares of common stock to one share of preferred stock, and therefore, are considered common stock equivalents. The Company's preferred stock has no stated dividend rate, and therefore, these securities have no effect on computing basic EPS.