Item 1. Business Introduction
Mobile America Corporation (the "Registrant"), through its two (2) principal, wholly owned subsidiaries, Mobile America Insurance Group, Inc. ("MAIG"), a managing general agent for the Registrant's insurance company subsidiaries, and Fortune Insurance Company ("Fortune"), a Florida domiciled property and casualty insurance company, is engaged primarily in the underwriting and marketing of minimum requirement automobile insurance in Florida. This business has accounted for more than 90% of the Registrant's consolidated revenues in each of the last five (5) years.
The Registrant's other significant wholly owned subsidiaries are as follows:
Fortune Life Insurance Company ("Fortune Life"), an Arizona domiciled company, is engaged in the business of writing life insurance coverages primarily in Florida and Louisiana.
Pegasus Insurance Company ("Pegasus"), an Oklahoma domiciled property and casualty insurance company, was acquired in 1993 to operate as an excess and surplus lines insurer in Florida.
Fortune Financial Corporation ("Fortune Financial") acts as a servicing provider for Fortune Insurance Company which is a servicing carrier for the Florida Automobile Joint Underwriting Association (FAJUA) and a subcontractor, through a third party arrangement, for the Florida Residential Property and Casualty Joint Underwriting Association (FRPCJUA).
Big Gorilla, Inc., a licensed Florida premium finance company, provides a policy financing source for MAIG's brokers.
Operations
The Registrant and its subsidiaries are primarily engaged in insurance and insurance related services with the bulk of the business being minimum requirement automobile insurance coverages in the State of Florida. The insurance operations of the Registrant generated gross insurance premiums earned of $76.8 million during 1996. Insurance premiums earned, net of reinsurance cessions, have increased from $33.6 million in 1995 to $40.4 million in 1996.
Automobile Insurance
During 1980, Fortune began to market automobile insurance, placing emphasis on physical damage, personal injury protection, and in recent years, property damage liability coverage in the private passenger automobile market. Because of the nature of private passenger and commercial automobile insurance, Fortune carefully monitors underwriting results in these lines. Fortune's marketing and underwriting will strive to improve results and the Registrant will continue to emphasize and actively market these lines.
Personal Property Insurance
The Registrant's property and casualty insurance subsidiaries, Fortune and Pegasus, have continued to write homeowners and dwelling fire policies throughout the State of Florida. As of December 31, 1996, these companies insured nearly 8,000 property risks, with a total written premium for all property lines of $4.0 million in 1996. Growth in this area is primarily related to the expansion of excess and surplus lines business written through Pegasus. The Registrant plans to be active in this line of business, however, extreme caution will be exercised with respect to rates, profitability and the competitive market.
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Commercial Lines
The Registrant's two property and casualty insurance subsidiaries also write Special Multi-peril insurance on restaurants, small offices, businesses, and churches, all in Florida. In 1996, gross earned premiums totaled approximately $312,000.
Life Insurance
Fortune Life sells annual renewable term life insurance with limited first year benefits. During 1996, total life insurance premium written was $77,000..
Excess and Surplus Lines Insurance
During 1993, the Registrant purchased Pegasus which was subsequently admitted on an excess and surplus lines basis in Florida during December 1993. In September 1994, Pegasus marketed its first insurance program, a commercial general liability (CGL) policy for artisan contractors. Pegasus wrote $133,000 in premiums in 1995 and has increased its premium writings to $1,858,000 in 1996 by expanding its product line to include homeowners and commercial multiperil products.
Fee for Service Operations
During 1993, Fortune Financial was formed to act as a servicing provider for Fortune which was selected as one of eight servicing carriers for the FRPCJUA, the first residential underwriting association in the nation. This association was formed to function as an insurance pool for individuals who, because of Hurricane Andrew, either lost their homeowners insurance or cannot obtain homeowners insurance.
Since 1993, Fortune Financial has written in excess of $35 million in premiums on 101,000 policies for the FRPCJUA. As a servicing provider, Fortune Financial underwrites and pays claims with no risk of loss because the FRPCJUA provides the funds for claim payments. For providing this service, Fortune Financial retains a percentage of the gross written premiums generated from the policies it services. This agreement terminated during 1996 and is currently in runoff status. Fortune Financial continues to service policies in force. In June 1996, Fortune Financial entered into an agreement to act as a subcontractor for Policy Management Systems Corporation with responsibility for processing FRPCJUA policies. For providing this service Fortune Financial retains a percentage of the gross written premiums (less catastrophe premiums) generated from policies it services. As of year-end Fortune Financial has written in excess of $10 million in premiums on 18,000 policies under the June 1996 agreement.
In October of 1996, Fortune Financial renewed their FAJUA contract, for a period of one year. Fortune has been servicing this business since October of 1994. Fortune Financial is currently servicing approximately 1000 agents, processing in excess of 250 applications per week.
In November 1994, Fortune was selected by the Federal Insurance Administration to be a producer of the Federal Government's Write Your Own Flood Program. Fortune wrote $120,000 in gross written premium during 1996.
Premium Finance
The Registrant's premium finance company subsidiary, now entering it's fourth year in the Premium Finance business, will provide some 215 broker agents a source for financing their policy premiums. During 1996 the subsidiary financed nearly 20,000 policies and thus far in 1997, is writing about 1,650 contracts per month. The subsidiary is planning for significant growth in this area since 95% of Fortune's and Pegasus' insureds utilize this method of financing.
Property Rentals and Sales
The Registrant engaged in the leasing and sales of modular office units for over 20 years and finally discontinued this small, but profitable segment in December 1995.
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Financial Information about Industry Segments
The financial information regarding the Registrant's Industry segments presented in Note 10 of Notes to Consolidated Financial Statements for the three years ended December 31, 1996, is incorporated herein by reference.
Competitive Conditions
The insurance industry is a highly competitive industry. Certain of the Registrant's competitors have been in the business longer, have a larger volume of business and have substantially greater financial resources than the Registrant. Since the Registrant's insurance operations are modest compared to several of its significant competitors (the Registrant employed 286 people at year-end), management is continuing to focus its marketing and other operations on specialized insurance coverages. Additionally, since the Registrant's insurance subsidiaries transact their business in a heavily regulated industry, they are sensitive to both adverse legislation and administrative directives.
Loss and Loss Adjustment Expense Reserves
Reserves for unpaid claims and adjustment expenses are maintained to cover the probable ultimate cost of settling all losses incurred, including those not yet reported. Reserves for losses incurred in prior years may be adjusted by review or by payment which could result in either a redundancy or deficiency to the reserve reported at the end of the prior year. Such changes are reflected in current operations.
The Registrant's insurance subsidiaries have entered into several reinsurance agreements covering specific lines of business, which provide reinsurance protection on a quota share or excess of loss basis.
Adverse loss and loss adjustment expense development is generally experienced in liability lines where settlements may not be reached until several years following the initial claim. Claims adjustment costs consisting primarily of legal expenses, are traditionally high on these particular losses.
The following tables present loss and loss adjustment expenses on a paid and incurred basis for the past three one year periods, and development of losses and loss adjustment expenses over the past ten years, all net of reinsurance.
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Item 2.
Item 2. Properties
The executive and general offices of the Registrant and its subsidiaries, consisting of approximately 22,915 square feet, are located at 100 Fortune Parkway, Jacksonville, Florida. The space is leased by the Registrant for a period ending January 31, 1997, at an initial aggregate annual rental of $179,195 increasing to $202,110. In 1997 the Registrant exercised a renewal option extending the term of the lease to 2002. Annual lease payments range from $207,839 to $231,442 in the final year of the lease.
In 1997, the Registrant expanded its facilities by leasing approximate 7500 square feet for its personal property, excess and surplus lines and fee for service processing. Annual lease payments range from $58,155 to $61,445 over a three year period.
The Registrant's subsidiaries, Fortune Insurance Company and Fortune Life Insurance Company own property in Jacksonville, Florida for which there are no definite plans for development at this time. Fortune Insurance Company purchased land in 1987 and 1986 for $165,000 and $140,000 respectively. During 1982, Fortune Life Insurance Company purchased land and a building for $88,000. In 1996 the Registrant purchased land and a building in Jacksonville, Florida for $167,000. This facility serves as off-sight storage.
Item 3.
Item 3. Legal Proceedings
The Registrant, through its subsidiaries, is routinely a party to pending or threatened legal proceedings and arbitrations. These proceedings may include claims for punitive damages in addition to other specified relief. Based upon information currently available, and in light of legal and other defences available to the Registrant and its subsidiaries, management does not consider liability from threatened or pending litigation to be material.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report.
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PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
Market Information
The Registrant's common stock is traded on the NASDAQ SmallCap Market tier of the NASDAQ Stock Market under the symbol MAME.
The following table shows the range of high and low bid, asked and sale quotations for the Registrant's common stock for each of the last eight quarters ended December 31, 1996, as obtained from the National Association of Securities Dealers.
Holders
At March 1, 1997, the Registrant had 352 record holders of its common stock.
Dividends
In January, 1993 the Registrant declared and paid a dividend of $.335 per share on each of its shares of $.025 par value common stock.
In September, 1993 the Registrant declared and paid a dividend of $.10 per share on each of its shares of $.025 par value common stock.
In January, 1994 the Registrant declared and paid a dividend of $.21 per share on each of its shares of $.025 par value common stock.
In January, 1995 the Registrant declared and paid a dividend of $.18 per share on each of its shares of $.025 par value common stock.
In January, 1996 the Registrant declared and paid a dividend of $.35 per share on each of its shares of $.025 par value common stock.
In January, 1997 the Registrant declared and paid a dividend of $.40 per share on each of its shares of $.025 par value common stock.
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Item 6.
Item 6. Selected Financial Data
Mobile America Corporation & Subsidiaries
Years Ended December 31, 1996, 1995, 1994, 1993, and 1992
Earnings per share and cash dividends per share amounts have been restated to conform with stock splits.
Total revenues and net income amounts have been restated to conform with the new accounting standard for realized gains and losses.
Total asset amounts have been restated to conform with the new accounting standard for accounting and reporting for reinsurance.
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Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 1996 Compared to 1995
Operations
Total consolidated revenues, exclusive of state mandated automobile assigned risk pool business, increased 18% from $48,917,912 in 1995 to $57,836,017 in 1996. Overall, total consolidated revenues decreased 9% to $48,163,935 during 1996 from $52,925,874 for 1995.
Insurance premiums, exclusive of state mandated automobile assigned risk pool business, increased 20% during 1996 due primarily to an increase in automobile personal injury protection and property damage rates initiated in September and October 1995 as well as continued earning of premiums at a lower reinsurance cession rate. Overall insurance premiums decreased 19% as a result of an amendment of premiums assumed from the state mandated automobile assigned risk pool. This amendment resulted in no material effect on net income.
Service fees earned during 1996 increased 28% over 1995 due to increases in the number of policies administered for the FAJUA and FRPCJUA/PMSC, fees earned on business produced by the Registrant's managing general agency subsidiary and continued growth in the number of policies financed by the Registrant's premium financing subsidiary. Investment income increased 7% from $5,562,074 for 1995 to $5,935,194 in 1996. This increase is attributable to an increase in interest rates on taxable fixed assets combined with a repositioning of securities from tax exempt to taxable investments in the Registrant's principal property and casualty insurance subsidiary. Net realized gains on the sale of investments increased 107% from $252,153 in 1995 to $521,995 in 1996.
Total consolidated expenses, exclusive of state mandated automobile assigned risk pools, increased 20% from $40,429,009 during 1995 to $48,385,265 during 1996. Overall, total consolidated expenses decreased 12% from $44,340,175 in 1995 to $39,177,771 in 1996.
The reserves for loss and loss adjustment expenses established by the insurance subsidiaries of the Registrant are estimates of the amounts necessary to settle reported and unreported claims and their related loss adjustment expenses. Loss and loss adjustment expenses increased 15% during 1996 over 1995. This increase is principally due to continued strengthening of the Registrant's property and casualty insurance company subsidiary's loss and loss adjustment expense reserves relating to the minimum limits automobile personal injury protection line of business. Policy acquisition costs increased significantly due principally to reduced ceding commission rates. Total consolidated expenses, including the state mandated automobile assigned risk pool, decreased 12% as a result of an amendment of losses assumed from the state mandated automobile assigned risk pool. Interest payments due on the Note have to date been generated from the proceeds of the $12,000,000 loan which was consummated in the fourth quarter 1995.
Loss and loss adjustment expenses as a percentage of earned premium were 77.0% in 1994, 81.6% in 1995 and 72.8% in 1996. The Registrant believes that its current reserves are adequate and proper, however, additional reserve increases may be required in the future. In it's efforts to reduce loss and loss adjustment expenses, as it relates to earned premium, the Registrant initiated a significant rate increase in the minimum limits personal injury protection line of business during the fourth quarter 1996. This increase follows closely behind a similar sized rate increase in the fourth quarter 1995. Due to the inherent uncertainty in estimating reserves for losses and loss adjustment expenses there can be no assurance that the ultimate liability will not exceed the amounts reserved, resulting in an adverse effect on the Registrant. At year end 1996, the Registrant's loss and loss adjustment expense reserves were at the lower end of a range which the Registrant's independent actuary deems appropriate. During 1997, the Registrant intends to establish additional reserves in an effort to move toward a more conservative reserve position. The Registrant's independent actuary's range of reasonable direct reserve estimates as of December 31, 1996 is between $46.5 million and $61.5 million and net of reinsurance recoveries the reserve range is between $19.3 million to $25.5 million.
The increasing loss and loss adjustment expense experienced on the business which the Registrant originates and cedes to its reinsurers may also adversely affect the Registrant's profitability in the future. In an effort to reduce it's reliance on reinsurance, the Registrant decreased the ceding percentage from 70% to 60% on certain lines effective January 1, 1996. If the Registrant's ratio of loss and loss adjustment expenses to earned premium does not improve, or continues to deteriorate, it is likely that over time the Registrant's cost of reinsurance would increase, and it is possible that at some future point the Registrant could not obtain reinsurance on economically viable terms.
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1996 Compared to 1995 (continued)
Financial Condition
Cash dividend and capital expenditure requirements continue to be provided by funds generated from operations. The Registrant maintains sufficient liquidity to meet operational needs. The Registrant's investment policy continues to emphasize high quality securities matched closely with the Registrant's short liability duration.
Net cash flow from operations was negative in 1996 as loss and loss adjustment expense payments and consolidated operating expense payments exceeded premium and investment revenues. Such negative cash flow resulted in part from poor loss development in the minimum limit automobile personal injury protection line of business for the years prior to 1996. The Registrant's practice of maintaining a highly liquid investment portfolio allowed the Registrant to meet cash demands with no adverse impact on operating performance. Management is optimistic that cash flow will improve during 1997 as additional rate increases take affect and the settlement of losses returns to a more normal pattern.
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1995 Compared to 1994
Operations Total consolidated revenues of $52,925,874 for 1995 increased 21% from consolidated revenues of $43,767,330 for 1994.
Insurance premiums earned increased by 10% in 1995 as a result of increases in the automobile segments primarily generated by increased assumptions of business from state mandated assigned risk pools. Reduced reinsurance cessions and regulatory assessments during 1995 also contributed to this overall increase in revenues. Material rate increases introduced in the fourth quarter of 1995 to the major private passenger automobile segment have provided increased premium writings and will provide generous assistance to the overall profitability of this segment.
Service fees earned in 1995 increased 100% from 1994 due to the strong volume of policies administered for the State of Florida; FRPCJUA AND FAJUA as well as growth in the Registrant's premium financing subsidiary. Investment income increased 34% as a result of the continued conversion of funds available for investment from tax advantaged to taxable securities with their inherent higher yields.
Total consolidated expenses of $44,340,175 for 1995 increased 15% from consolidated expenses of $38,514,858 for 1994.
Loss and loss adjustment expenses increased 16% as a result of increases in losses assumed from the state mandated assigned risk pools and reserve strengthening of the Registrant's voluntary business as indicated by actuarial reviews of the automobile segment's loss trending patterns. Policy acquisition costs decreased as a result of reduced commissions allowed to the producers of the Company's automobile business together with increased ceding commissions received on the increased premiums written during the year.
Loss and loss adjustment expense as a percentage of earned premium was 77.6% in 1993, 77.0% in 1994 and 81.6% in 1995. The Company believes that its current reserves are adequate and proper. The Company has continued corrective action, specifically in the form of substantial rate increases in the fourth quarter of 1995, to reduce the ratio of loss and loss adjustment expense to earned premium. However, additional reserve strengthening may be required in the future. The Company continues to have comprehensive independent actuarial reviews of its reserves. At year end 1995, the Company's loss reserves are within a range which the Company's independent actuary deems appropriate but is approximately 7.1% below the midpoint of that range.
The increasing loss and loss adjustment expense experienced on the business which the Company originates and cedes to its reinsurers may also adversely affect the Company's profitability in the future. If the Company's ratio of loss and loss adjustment expense to earned premium does not improve or should continue to deteriorate, it is likely that over time, the Company's cost of reinsurance would increase, and it is possible that the Company could not obtain reinsurance on economically viable terms.
Salaries and wages and general and administrative expenses increased 41% as a result of the increased costs associated with the growth in the fee for service segment.
Financial Condition
The Registrant consummated a $12,000,000 loan in the fourth quarter of 1995 with the proceeds to be used for additional capital infusion into the insurance subsidiaries to absorb planned growth. A very sound financial condition was maintained in 1995 with a 48% increase in earnings per share. Cash dividend and capital expenditure requirements continue to be provided from funds generated from operations. Liquidity is substantial for new operational or investment opportunities.
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders Mobile America Corporation Jacksonville, Florida
We have audited the accompanying consolidated balance sheets of Mobile America Corporation and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements and schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mobile America Corporation and Subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the accompanying Index in Item 14(a)2 of this Form 10-K are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
As discussed in Note 1 to the consolidated financial statements, the company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," in 1994.
CHERRY, BEKAERT & HOLLAND, L.L.P.
Orlando, Florida March 26, 1997
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995
CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995 MOBILE AMERICA CORPORATION AND SUBSIDIARIES
See notes to consolidated financial statements
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
See notes to consolidated financial statements.
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
See notes to consolidated financial statements.
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
See notes to consolidated financial statements
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
(a) Basis of Financial Statement Presentation
The consolidated financial statements have been prepared on the basis of generally accepted accounting principles which vary from statutory reporting practices prescribed or permitted for insurance companies by regulatory authorities.
(b) Principles of Consolidation
The accompanying consolidated financial statements include Mobile America Corporation (the Company) and its subsidiaries, including Fortune Insurance Company (Fortune), Pegasus Insurance Company (Pegasus), both property and casualty insurers and Fortune Life Insurance Company (Fortune Life), all of which are wholly-owned. All significant intercompany transactions have been eliminated in consolidation.
(c) Nature of Operations
The Company is a publicly held holding company providing property and casualty insurance, life insurance, insurance administrative services to various state underwriting associations on a fee for service basis and premium financing. The Company is principally involved in writing personal lines automobile insurance in Florida.
(d) Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
(e) Method for Valuing Investments
Fixed maturity investments are securities that mature at a specified future date more than one year after being acquired. On January 1, 1994, the Company implemented Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The Company classified its entire fixed maturity investment portfolio as "held to maturity". Accordingly, these investments are reported at amortized cost, adjusted for amortization of premiums or discounts and other than temporary declines in fair value. At December 29, 1995, the Company reassessed the appropriateness of the classifications of all securities held at that time and reclassified from the held to maturity category a portion of the Company's fixed maturity portfolio to the
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (continued)
available for sale category. Classifying these securities as available for sale did not impact net income.
Common Stock, redeemable preferred stock and fixed maturities, not classified as held to maturity are classified as available for sale and are reported at fair value, with unrealized gains and losses reported as a separate component of stockholders' equity. Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
(f) Realized Investment Gains and Losses
The cost of securities sold is based upon the specific identification method and any gains or losses are reflected in the accompanying statements of operations.
(g) Deferred Policy Acquisition Costs
The costs, primarily commissions, associated with acquiring new insurance contracts have been deferred. Such costs are being amortized in proportion to premiums earned on the underlying contracts or over the contracts premium paying period.
(h) Property and Equipment
Property and equipment is carried at cost and is depreciated principally under the straight-line method over the estimated useful lives of the respective assets. Maintenance and repairs are charged to expenses as incurred; additions and major betterment's are capitalized and depreciated. At the time of retirement or other disposition of modular offices, equipment and leasehold improvements, the accounts are relieved of the cost and the related accumulated depreciation and any gains or losses are reflected in the consolidated statements of operations.
(i) Insurance Contracts
The insurance contracts accounted for in these financial statements include both short-duration contracts and long-duration contracts. Short-duration contracts provide insurance protection for a fixed period of short-duration, usually six months to one year, and enable the insurer to cancel the contract or to adjust the provisions at the end of any contract period. Most property-liability insurance contracts and certain term life insurance contracts are short-term and generally are not subject to unilateral changes in their provisions and require the performance of various functions and services, including insurance protection, for the contract term. Long-duration contracts include
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (continued)
whole-life contracts and guaranteed renewable term life contracts. The Company has not issued participating policies.
(j) Insurance Loss Reserves
The liability for future policy benefits of long-duration contracts has been provided for on a net level premium method based on estimated investment yields, withdrawals, mortality, terminations, morbidity, and other assumptions which were appropriate at the time the contracts were issued.
Estimates of future policy benefits were based on past experience as adjusted to provide for possible adverse deviation from the estimates. Interest assumptions are based on historical assumptions and experience, and range from 3% to 4.5% at December 31, 1996.
The liabilities for unpaid claims of short-duration contracts and related adjustment expenses are determined using case basis evaluations and statistical analysis and represent estimates of the ultimate net cost of all reported and unreported claims relating to insured events which are unpaid at year-end. The liabilities include estimates of future trends in claims severity and frequency and other factors which could vary as the claims are ultimately settled. Although such estimates may vary, management believes that the liabilities for unpaid claims and related adjustment expenses are adequate. The estimates are continually reviewed, and as adjustments to these liabilities become necessary, they are reflected in current operations.
(k) Recognition of Premium Revenues and Related Expenses
Premiums for long-duration contracts are recognized as revenues when due from the policyholders. A liability for the expected costs relating to such long-duration contracts is accrued over the current and expected renewal periods.
Premiums for short-duration contracts are recognized as revenues over the period of the contract in proportion to the amount and duration of the insurance protection provided.
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (continued)
Earned premiums are stated after a reduction for related premiums ceded to reinsurers. The Company considers anticipated investment income in determining if a premium deficiency exists on short-duration contracts.
(l) Recognition of Service Fee Income
Service fees represent proceeds from servicing insurance policies for third parties on a fee-for-service basis. Fees are recognized as revenue over the expected service life of the underlying insurance policies.
(m) Earnings per Share
Earnings per share are computed on the basis of the weighted average number of common shares outstanding during each year. The effect of stock options is not material to the computation of earnings per share.
(n) Cash and Short-term Investments
For purposes of the consolidated statement of cash flows, cash includes balances in bank deposit accounts maintained with high credit quality financial institutions. Short-term investments are stated at cost, and consist primarily of certificates of deposits, money market accounts, commercial paper and repurchase agreements. For purposes of the consolidated statement of cash flows, the Company does not consider short-term investments to be cash equivalents as they generally have original maturities in excess of three months.
(o) Supplemental Cash Flow Information
Income Taxes Paid - Income taxes paid totaled $3,577,423 in 1996, $2,008,351 in 1995 and $34,326 in 1994.
(p) Income Taxes
Income tax provisions are based on the asset and liability method. Deferred income taxes have been provided for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements.
(q) Reclassifications
Certain fees earned, previously reported as a reduction in policy acquisition costs, were reclassified in the 1994 financial statements to conform to 1995 presentation. These reclassifications had no effect on net income, or shareholders' equity, as previously reported.
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Investments
Major categories of investment income are summarized as follows:
Net realized and net unrealized gains (losses) on fixed maturities and equity securities are summarized as follows:
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Investments (continued)
The aggregate fair value, gross unrealized gains, gross unrealized losses and amortized cost for available for sale and held to maturity securities by major security type at December 31, 1996 and 1995 are as follows:
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Investments (continued)
The scheduled maturities of available for sale and held to maturity securities at December 31, 1996 are as follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations without penalties.
Proceeds from sales of investments in debt maturities and related gross realized gains and losses were as follows:
The Company's three insurance subsidiaries, Fortune, Fortune Life, and Pegasus maintain certain deposits with state regulatory agencies as a statutory licensing requirement. The carrying value of the investments on deposit was $1,550,000 at December 31, 1996 and $1,544,762 at December 31, 1995. These deposits are included in the investment tables and exhibits of this report.
The Company's two finance companies also maintain certain deposits with state regulatory agencies as a statutory licensing requirement. The carring value of these investments was $70,000 at December 31, 1996 and 1995.
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Deferred Policy Acquisition Costs
Costs, principally commissions, related to the production of new business, are deferred and amortized as summarized below:
Several of the automobile insurance lines written by Fortune have been reinsured on a quota share basis, whereby a reinsurer provides ceding commission to the Company in return for ceded premium. In some instances
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Deferred Policy Acquisition Costs (continued)
the ceding commissions received exceed the costs to the Company of soliciting new business, thereby generating credits to commission expense and deferred policy acquisition costs. Ceding commission received in 1996, 1995 and 1994 is approximately $7,527,000, $15,694,000 and $13,756,000, respectively. Deferred policy acquisition cost reinsurance credits reported in the Company's balance sheet at December 31, 1996 and 1995 are $8,516,878 and $10,298,723, respectively.
Note 4. Modular Office Units, Land and Equipment and Leasehold Improvements
The cost and annual rates of depreciation and amortization for the major classifications of property, equipment and leasehold improvements are as follows:
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Modular Office Units, Land and Equipment and Leasehold Improvements (continued)
In 1995, Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" was issued. This statement requires the recognition of an impairment loss for an asset held for use when the estimate of undiscounted future cash flows expected to be generated by the asset is less than its carrying amount. Due to the nature of the Company's business, with limited use of long-lived assets, it has been determined that no impairment loss need be recognized.
Note 5. Reinsurance
The insurance subsidiaries have various reinsurance agreements which significantly affect their operations. Risks are reinsured to limit loss size and to increase writing capacity, although the Company remains primarily liable to the policyholders on all risks transferred.
Fortune and Pegasus have limited their property and liability losses to a maximum of $40,000 per occurrence. On catastrophe losses up to $5,000,000, liability is limited to 5% of the loss in excess of $400,000 in a treaty year. Additionally, with several of the automobile insurance lines, Fortune has reinsured various percentages of its liability on a quota share basis
Fortune Life has entered into reinsurance agreements which limit its loss to $10,000 per individual risk.
The effect of reinsurance on premiums written and earned for 1996, 1995 and 1994 is as follows (dollars in thousands):
The amount of reinsurance recoveries deducted from direct and pool participation losses incurred during 1996, 1995 and 1994 was approximately $37,970,000, $59,612,000 and $38,639,000, respectively.
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Reinsurance (continued)
The Company evaluates the financial condition of its reinsurers to minimize its exposures to significant losses from reinsurer insolvency. Reinsurance receivables, prepaid reinsurance premiums and offsetting funds withheld/payable balances for each significant reinsurer at December 31, 1996 is presented below (in thousands):
Note 6. Regulatory Restrictions
Fortune, Fortune Life and Pegasus are subject to regulation by the insurance departments of the states in which they are licensed. Under the regulations, cash dividends may only be paid out of accumulated surplus funds derived from net operating profits and capital gains, or out of earned surplus even though total surplus may be less than capital stock and paid-in capital. Fortune, which is subject to Florida law, may not pay, unless otherwise approved by the State Insurance Commissioner, dividends in any one year which exceed the greater of (a) 10% of such surplus funds or (b) the total amount of such funds derived during the immediate preceding year. The insurance companies did not pay dividends in 1996, 1995 and 1994.
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Regulatory Restrictions (continued)
The following represent reconciliations of net income and stockholder's equity of Fortune, Fortune Life and Pegasus from a statutory basis to those presented on a GAAP basis for the year ended December 31, 1996:
Note 7. Pension Plan
The Company's defined contribution pension plan covers substantially all full-time employees. Contributions are based on employee earnings. Total contributions made by the Company during 1996, 1995, and 1994 were $240,739, $210,000, and $170,000 respectively.
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Stock Options
The Company's incentive plan, adopted in 1995, provides for the issuance to key employees and directors of up to 300,000 shares of common stock through options, stock appreciation rights and other stock-based awards as defined under current tax laws. Incentive stock options for employees are exercisable for periods of up to ten years from the date of the grant at a price equal to the fair market value on the date of the grant. In the case of an incentive option granted to an individual who owns at least 10% of the total combined voting power of the Company, the exercise price must be at least 110% of the fair market value of the common stock on the date of grant and the option term cannot exceed five years. Stock appreciation rights entitle the recipient to receive the difference between the fair market value of the common stock on the date of exercise and the stock appreciation rights price, in cash or in shares of common stock, or a combination. Restricted stock awards entitle the recipient to receive shares of common stock subject to forfeiture restrictions that lapse over time or upon the occurrence of specific events.
The options are accounted for under Accounting Principles Board Opinion No. 25 (APB 25). Under APB 25, because the exercise price of the options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Following is a summary of stock options activity:
At December 31, 1996 options for 87,250 shares were exercisable. The proforma disclosure required by Statement of Financial Accounting Standards No. 123 has been omitted because management believes the shares under option are not material.
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Income Taxes
The following analysis reconciles the statutory Federal income tax rate to the effective tax rates:
Consolidated deferred tax expense (credit) results from timing differences in the recognition of revenue and expense for tax and financial statement purposes. The source of these differences and their tax effect are summarized as follows (in thousands):
Consolidated deferred taxes receivable resulting from temporary differences in the recognition of revenue and expense for tax and financial statement purposes are summarized as follows (in thousands).
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Income Taxes (continued)
The Company believes, that based upon its lengthy and consistent history of profitable operations, it is probable that the deferred tax asset will be realized and no deferred tax allowance is deemed necessary at December 31, 1996.
Deferred taxes payable of $61,072 and $355,000 are provided on unrealized gains, on equity securities and fixed maturities available for sale at December 31, 1996 and 1995, respectively.
Fortune Life Insurance Company's "policyholders surplus account" which arose under prior tax law, is generally that portion of the life insurance company's gain from operations that has not been subjected to tax. The balance of this account, which under provisions of the Tax Reform Act of 1984, will not increase after 1983, is approximately $98,000 at December 31, 1996. This amount has not been subjected to current income tax, but under certain conditions, may become subject to income tax in future years. At current tax rates, the maximum amount of such tax (for which no provision has been made in the financial statements) is approximately $33,000.
Beginning in 1995, the Company and its subsidiaries filed a consolidated federal income tax return, while prior to 1995 the life insurance subsidiary filed a separate return.
Note 10. Business Segments
The Company and its subsidiaries operate principally in five business segments consisting of automobile insurance, personal property insurance, commercial lines insurance, life insurance, and fee for service insurance administration. The four insurance segments furnish various forms of property, liability and life insurance marketed through independent insurance agents in the state of Florida. The Company acts as a servicing carrier for the Florida Residential Property and Casualty Joint Underwriting Association, the Florida Automobile Joint Underwriting Association and as a subcontractor for Policy Management Systems Corporation performing various underwriting and claims services for a service fee.
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Business Segments (continued)
Summarized financial information by business segment for 1996, 1995 and 1994 is as follows:
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Pools and Associations
Fortune Insurance Company, as a direct premium writer in the state of Florida, is required to participate in the Florida Automobile Joint Underwriting Association (FAJUA). Fortune's participation is based on its automobile premium to total automobile premium written state wide by all automobile insurers. In 1996 the FAJUA issued reports amending Fortune's participation for years prior to 1996. These changes are reported in the current year. A summary of Fortune's 1996 participation and the prior year adjustment is presented below.
A summary of FAJUA activity reported in 1995 and 1994 is as follows:
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Operating Leases
The Company leases certain office facilities under operating leases which contain renewal options. Lease terms range from 18 months to five years. Rent expense was $295,499, $297,597 and $263,649 for 1996, 1995 and 1994, respectively.
Minimum future rental payments are as follows:
Note 13. Concentrations of Credit Risk
The Company is subject to credit risk through short-term cash investments, insurance premium receivables and reinsurance receivables. Short-term investments are placed with high credit quality financial institutions or in short duration high quality debt securities. At times, such investments may be in excess of FDIC insurance limits. No losses have been experienced on such investments.
A significant portion of insurance premium receivables relates to the financing of automobile insurance premiums in south Florida. An allowance for non-collection of $300,000 has been provided for at December 31, 1996. The Company's exposure to loss is limited by the fact that non-payment of premiums will result in cancellation of the underlying insurance policy.
For a discussion of credit risk related to reinsurance see note (5) of the consolidated financial statements.
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Note Payable
On October 24, 1995 the Company obtained a bank loan in the amount of $12,000,000, for which the proceeds have been used primarily as additional capital for the insurance subsidiaries. The note accrues interest at the 90 day LIBOR rate plus 275 basis points. Interest only is paid through January 24, 1998 with the first principal payment due on the twenty seventh monthly interest payment date and quarterly thereafter in the amount of $600,000 each payment. The entire unpaid principal balance, together with accrued interest thereon is due and payable on the loan maturity date of October 24, 2002.
The note was collateralized by the assignment of the capital stock of the Registrant's subsidiaries on October 24, 1995, as well as the execution of guaranty agreements between the bank and certain subsidiaries of the Registrant.
The following is a schedule of the required annual principal payments:
Loan acquisition costs are being amortized on a straight-line basis over the term of the loan and are included in the other asset section of the consolidated balance sheet.
The Company paid interest of $1,005,760 in 1996 and $156,375 in 1995.
Note 15. Insurance Loss Reserves
Reserves for unpaid losses and loss adjustment expenses are maintained to cover the probable ultimate cost of settling all losses incurred including those not yet reported. Reserves for losses incurred in prior years may be adjusted by review or by payment which could result in either a redundancy or deficiency to the reserve reported at the end of the prior year. Such changes are reflected in current operations.
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MOBILE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Insurance Loss Reserves (continued)
Activity in the liability for insurance loss reserves is summarized as follows:
Note 16. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:
- - Cash and Short-term Investments The carrying amounts approximates fair value because of the short-term maturity of these investments.
- - Investment in Securities Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
- - Insurance Premium Receivable The carrying amount approximates fair value due to the short-term nature of the receivable.
- - Note Payable The interest rate on the note payable is reset monthly to reflect current market rates, consequently the carrying value of the note approximates fair value.
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Part III
Items 10, 11, 12, and 13 have been omitted pursuant to instructions to Form 10-K. The Registrant intends to file with the Securities and Exchange Commission not later than April 30, 1997 a definitive proxy statement to be used in connection with its Annual Meeting of Shareholders, at which time directors will be elected for the ensuing year.
III-1
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8K
(a) 1. Financial Statements The following financial statements are included in Part II, Item 8: