The personal lines business unit GAAP combined ratio increased to 104.9% for the year ended December 31, 1995. The increase was the result of a higher loss ratio caused by the reserve strengthening recorded in the third quarter of 1995, combined with higher frequency of automobile physical damage claims, as well as catastrophe losses. The increased loss ratio was offset slightly by a lower expense ratio resulting from improved operating efficiencies.
Collateral protection insurance increased gross premiums written 39% to $54,138,000. This significant increase was primarily due to geographic expansion in the Commonwealth of Puerto Rico, increased market penetration in existing states, and growth in blanket single interest insurance product line, as well as the introduction of a new product, mortgage fire. The new business written in Puerto Rico comprised 16% of gross premiums written by the collateral protection unit during the twelve months ended December 31, 1995. The growth in the blanket single interest, GAP and mortgage fire product lines increased collateral protection gross premiums written by approximately $4,829,000 during 1995.
Year Ended December 31, ---------------------------------- 1996 1995 1994 ----- ---- ---- Operating Activities: Premiums collected $496,686 $396,621 $321,000 Net investment income collected 35,102 29,938 22,969 Losses and loss adjustment expenses paid (339,442) (267,641) (199,530) Policy acquisition costs and general and administrative expenses paid (145,711) (119,821) (93,495) Interest paid (6,817) (6,005) (3,043) Nonrecurring charges paid (1,302) (978) Federal income taxes paid (2,470) (5,359) (6,108) Other receipts (payments) 8,390 1,368 (1,337) --------- ---------- -------- Net cash provided by operating activities 44,436 29,101 39,478 --------- ---------- -------- Investing Activities: Maturities of fixed maturities held to maturity 9,795 12,096 10,231 Maturities of fixed maturities available for sale 56,553 20,219 8,281 Sales of fixed maturities available for sale 49,931 40,158 37,147 Sales of equity securities 40,373 28,367 19,185 Net change in short-term investments (42,584) (20,039) 7,535 Sales of property and equipment 303 590 274 Purchases of fixed maturities held to maturity (20,780) (10,138) (16,570) Purchases of fixed maturities available for sale (100,536) (74,652) (57,989) Purchases of equity securities (29,512) (21,480) (21,883) Net change in other long-term investments 1,433 1,825 (1,376) Purchases of property and equipment (3,482) (2,950) (13,643) Acquisition of subsidiaries, net of cash acquired (94,681) (6,363) ---------- --------- --------- Net cash used in investing activities (38,506) (120,685) (35,171) ---------- --------- ---------
Basis of presentation - The consolidated financial statements and notes thereto are presented in accordance with generally accepted accounting principles ("GAAP") for property and casualty insurance companies. The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires Company management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
From November 1, 1988, through November 19, 1991, Orion Capital Corporation and its affiliates ("Orion") owned 100% of Guaranty National Corporation and subsidiaries outstanding common stock. The assets and liabilities of the Company were revalued at the time of the 1988 Orion purchase. The accompanying consolidated financial statements reflect the recording of these acquisition adjustments by Orion. Orion's current ownership is approximately 81%.
As discussed in Notes 9 and 14, there are various transactions with Orion and VCM which include certain expenses paid to Orion and VCM and other transactions with Orion affiliates and VCM. In the opinion of management, the transaction amounts with Orion are reasonable and representative of expenses that would have been incurred in transactions with unrelated parties.
The accompanying consolidated financial statements are prepared under GAAP which differs materially from practices prescribed by statutory accounting rules and regulations. Under such practices, GNIC consolidated policyholders' surplus reported to the state regulatory authorities as of December 31, 1996 and 1995 was $164,473,000 and $133,749,000, respectively, and Viking Insurance Company of Wisconsin ("VICW") consolidated policyholders' surplus as of December 31, 1996 and 1995 was $89,342,000 and $86,872,000, respectively. SStatutory net income, as reported to state insurance departments, is as follows (in thousands):
Year Ended December 31, ------------------------------------ 1996 1995 1994 ---- ---- ---- Type of investment: Fixed maturities held to maturity $ 4,090 $ 7,531 $ 7,653 Fixed maturities available for sale 24,369 15,886 10,999 Common stocks 1,686 1,420 1,147 Nonredeemable preferred stocks 2,393 2,432 2,557 Short-term investments 4,570 2,439 1,145 Other 3,702 2,397 1,166 ------ ------ ------ Total investment income 40,810 32,105 24,667 Less investment expenses 1,371 1,129 1,091 ------ ------ ------ Net investment income $39,439 $30,976 $23,576 ====== ====== ======
Net change in unrealized gains (losses) in the estimated fair value of investments is as follows (in thousands):
The Credit Agreement contains covenants with respect to minimum net worth and statutory surplus, the maximum ratio of net written premiums to surplus, the minimum fixed charge coverage ratio, the minimum level of total adjusted capital (within the meaning of the Risk-Based Capital for Insurers Model Act as promulgated by the National Association of Insurance Commissioners), and limitations on other items, such as permitted investments and disposition of material assets. The Company is currently in compliance with the affirmative, negative and financial covenants of the Agreement.
Deferred income taxes result from temporary differences in the basis of various assets and liabilities for financial statement purposes and for tax purposes, and alternative minimum tax ("AMT") credit carryforwards. The tax effects of
Year Ended December 31, ---------------------------------------- 1996 1995 1994 ---- ---- ---- Balance at beginning of year $354,634 $241,221 $220,965 Reserves acquired as a result of a business combination 80,692 Less reinsurance recoverables 68,295 61,446 55,165 ------- ------- ------- Net adjusted beginning balance 286,339 260,467 165,800
The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreements. However, the Company does not anticipate nonperformance by the counterparties.
The Company utilized the Black-Scholes option pricing model to estimate the fair value, on the date of grant, of stock options granted. The following weighted-average assumptions were used for 1996 stock options issued: 3.0% dividend yield, expected volatility of 24%, risk free interest rate of 6.1% and expected term of 6.0 years. The following weighted-average assumptions were used for 1995 stock options issued: 2.9% dividend yield, expected volatility of 24%, risk free interest rate of 6.4% and expected term of 8.7 years.
The Company had 272,749 and 233,875 nonexercisable options, including those granted under the Equity Incentive Plan and the Incentive Plan, at December 31, 1996 and 1995, respectively. All of the December 31, 1996 and 1995 nonexercisable options were time- based-exercisable options, based on the four year vesting period discussed above.
18. Quarterly Financial Data (Unaudited) Three Months Ended ---------------------------------------- March 31 June 30 Sept 30 Dec 31 -------- ------- ------- ------ (In thousands, except per share data) 1996: Total revenue $126,704 $129,823 $134,125 $138,890 Earnings before income taxes 7,241 6,945 10,402 12,293 Net earnings 5,787 5,225 7,521 8,973 Earnings per share $ 0.39 $ 0.35 $ 0.50 $ 0.60