-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Oe1LkKPD36nPGtNA4lfE83CeHVP7XSItpGHxPU06VIMissaiwpoadH8EybNUlRUe pOXo6zZ4HHNnEb3m7c6qjA== 0000950144-98-003590.txt : 19980331 0000950144-98-003590.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950144-98-003590 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOBILE AMERICA CORP CENTRAL INDEX KEY: 0000067199 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 591218935 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-06764 FILM NUMBER: 98578056 BUSINESS ADDRESS: STREET 1: P O BOX 10729 CITY: JACKSONVILLE STATE: FL ZIP: 32247-0729 BUSINESS PHONE: 9043636339 MAIL ADDRESS: STREET 1: P O BOX 10729 CITY: JACKSONVILLE STATE: FL ZIP: 32247-0729 10-K405 1 MOBILE AMERICA CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 Commission file No. 0-6764 ----------------- ------ Mobile America Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) FLORIDA 59-1218935 ------- -------------------------------------------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 10475 Fortune Parkway Suite 110 Jacksonville, Florida 32256 - ------------------------------------------------------ --------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (904) 363-6339 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None None - ----------------------------------------------- ------------------------------- Securities Registered pursuant to Section 12(g) of the Act:
Common Stock $.025 par value - -------------------------------------------------------------------------------- (Title of Class) - -------------------------------------------------------------------------------- (Title of Class) The aggregate market value of the voting stock held by non-affiliates of the Registrant at March 2, 1998: $46,438,837 ----------- Common Stock ($.025 Par value) outstanding at March 2, 1998: 7,167,834 Shares ---------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] 2 PART 1 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 80% 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 coverage primarily in Florida. Fortune Life is also licensed in 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 $92.1 million during 1997. Insurance premiums earned, net of reinsurance cessions, have increased from $40.4 million in 1996 to $44.3 million in 1997. 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. Total written premium for all automobile lines totaled $80.7 million, with $75.6 million from private passenger personal Injury protection and property damage liability coverage. 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, 1997, these companies insured nearly 9,700 property risks, with a total written premium for all property lines of $6.5 million in 1997. 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. I-1 3 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 1997, gross earned premiums totaled approximately $222,000. Life Insurance Fortune Life sells annual renewable term life insurance with limited first year benefits. During 1997, total life insurance premium written was $135,000. 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 and $4,367,000 in 1997. This growth has been accomplished by expanding its product line to include homeowners, mobile homeowners and commercial multi-peril 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 could not obtain homeowners insurance. Since 1993, Fortune Financial has written in excess of $40 million in premiums on approximately 45,000 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 (PMSC) 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 $20.1 million in premiums on 23,000 policies under the June 1996 agreement. In October 1997, the FRPCJUA extended this contract through March 1999. In October 1997, the Registrant was awarded a three year contract by the FAJUA, effective January 1,1998. Fortune Financial has been servicing this business since October of 1994. During the first two months of 1998 the registrant has processed approximately 2,350 policies with a total written premium volume of over $1.7 million. While it is impossible to predict with certainty, service fees generated from these new contracts could be as much as $14 million. 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 has written $294,000 in gross premium during 1997. Premium Finance The Registrant's premium finance company subsidiary, now entering it's fifth year in the Premium Finance business, will provide some 300 broker agents a source for financing their policy premiums. During 1997, the subsidiary financed nearly 15,200 policies and thus far in 1998, is writing about 1,434 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. I-2 4 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, 1997, 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 288 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.
Losses and Loss Adjustment Expenses Unpaid Incurred Related to Payments Related to Unpaid Beginning Current Prior Total Current Prior End of of Year Year Year Incurred Year Year Year - --------------- ---------------------------- -------------- ---------------------------- -------------- Year ended December 31, 1997: - --------------------------------------------- $20,040,739 $35,706,903 $(2,736,845) $32,970,058 $23,961,413 $13,143,680 $15,905,704 Year ended December 31, 1996: - --------------------------------------------- $20,808,027 $27,215,881 $(3,390,000) $23,825,881 $15,428,840 $9,164,329 $20,040,739 Year ended December 31, 1995: - --------------------------------------------- $19,103,286 $30,737,734 $ 188,772 $30,926,506 $15,949,259 $13,272,506 $20,808,027
I-3 5
Analysis of Loss and Loss Adjustment Expense Development (In Thousands) Year Ended December 31, 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Liability for Unpaid Losses And Loss Adjustment Expenses $7,194 $7,981 $13,577 $14,996 $14,906 $17,207 $19,410 $19,103 $20,808 $20,041 $15,906 Paid (Cumulative) As of: End of Year -- -- -- -- -- -- -- -- -- -- -- One Year Later 3,275 3,792 6,311 8,583 6,245 13,306 13,641 13,273 9,164 13,143 Two Years Later 4,525 4,528 8,854 10,899 11,806 15,520 16,292 17,601 13,361 Three Years Later 4,419 5,173 9,772 11,918 12,380 16,355 17,912 19,809 Four Years Later 4,671 5,459 10,297 12,170 12,783 16,856 18,782 Five Years Later 4,820 5,603 10,390 12,313 12,939 17,175 Six Years Later 4,872 5,632 10,455 12,373 13,083 Seven Years Later 4,891 5,636 10,496 12,445 Eight Years Later 4,891 5,661 10,565 Nine Years Later 4,917 5,720 Ten Years Later 4,917 Liability Reestimated as of: End of Year 7,194 7,981 13,577 14,996 14,906 17,207 19,410 19,103 20,808 20,041 15,906 One Year Later 6,108 7,090 10,173 12,653 12,434 16,488 19,392 19,292 16,485 17,304 Two Years Later 5,901 5,555 10,496 12,203 12,916 17,507 18,856 21,027 16,732 Three Years Later 4,925 5,674 10,204 12,332 13,111 17,235 19,458 20,799 Four Years Later 4,922 5,605 10,396 12,382 13,009 17,414 19,339 Five Years Later 4,879 5,626 10,464 12,373 13,190 17,528 Six Years Later 4,891 5,675 10,487 12,517 13,388 Seven Years Later 4,924 5,655 10,628 12,731 Eight Years Later 4,910 5,788 10,832 Nine Years Later 5,044 5,982 Ten Years Later 5,179 Redundancy (Deficiency) 2,015 1,999 2,745 2,283 1,518 (321) 71 (1,696) 4,076 2,737
I-4 6 Item 2. Properties The executive and general offices of the Registrant and its subsidiaries, consisting of approximately 22,915 square feet, are located at 10475 Fortune Parkway, Suite 110, Jacksonville, Florida. In 1997 the Registrant exercised a renewal option extending the term of the lease on this space 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 7,500 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. 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 defenses available to the Registrant and its subsidiaries, management does not consider liability from threatened or pending litigation to be material. 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. I-5 7 PART II 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 Stock Market under the symbol MAME. The following table shows the range of high and low sale quotations for the Registrant's common stock for each of the last eight quarters ended December 31, 1997, as obtained from the National Association of Securities Dealers.
Quarterly Period Ended ------------------------------------- High Low ------------------------ March 31, 1996 $ 11.75 $ 10.75 June 30, 1996 11.75 11.00 September 30, 1996 10.88 9.75 December 31, 1996 10.50 8.88 March 31, 1997 11.85 9.13 June 30, 1997 11.75 9.78 September 30, 1997 10.50 9.38 December 31, 1997 14.75 9.63
Holders At March 2, 1997, the Registrant had 394 record holders of its common stock. Dividends (adjusted for stock dividends) In January, 1993 the Registrant declared and paid a dividend of $.29 per share on each of its shares of $.025 par value common stock. In September, 1993 the Registrant declared and paid a dividend of $.09 per share on each of its shares of $.025 par value common stock. In January, 1994 the Registrant declared and paid a dividend of $.18 per share on each of its shares of $.025 par value common stock. In January, 1995 the Registrant declared and paid a dividend of $.16 per share on each of its shares of $.025 par value common stock. In January, 1996 the Registrant declared and paid a dividend of $.30 per share on each of its shares of $.025 par value common stock. In January, 1997 the Registrant declared and paid a dividend of $.35 per share on each of its shares of $.025 par value common stock. In January, 1998 the Registrant declared and paid a dividend of $.35 per share on each of its shares of $.025 par value common stock. II-1 8 Item 6. Selected Financial Data Mobile America Corporation & Subsidiaries Years Ended December 31, 1997, 1996, 1995, 1994, and 1993
1997 1996 1995 1994 1993 --------------------------------------------------------------------------------------- Total Revenues $ 58,810,207 48,163,935 52,925,874 43,767,330 50,300,201 Net Income $ 6,175,796 7,571,392 5,999,694 4,048,446 4,565,307 Basic and diluted earnings per share $ 0.86 1.05 0.84 0.56 0.63 Total Assets at Year-End $138,242,138 168,414,452 182,771,162 143,815,295 134,939,579 Long-Term Obligations $ 12,000,000 12,000,000 12,000,000 0 0 Cash Dividends Per Common Share $ 0.35 0.30 0.16 0.18 0.38
Earnings per share and cash dividends per share amounts have been restated to conform with stock dividends and splits. Earnings per share amounts are presented in conformity with Statement of Financial Accounting Standards No. 128. II-2 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 1997 Compared to 1996 Operations Income before provision for income taxes decreased 1.3% in 1997 to $8,867,896 compared to $8,986,164 reported in 1996 primarily due to increased earned premium and lower acquisition costs being offset by reduced service fee income and higher salaries, wages and general and administrative costs. Net income decreased 18.4% in 1997 to $6,175,796 compared to $7,571,392 reported in 1996 principally due to a nonrecurring tax benefit resulting from the release of a valuation allowance and the recognition of income tax credits during 1996. Total consolidated revenues, exclusive of state mandated automobile assigned risk pool business, increased 3.9% from $57,836,017 in 1996 to $58,921,414 in 1997. Overall, total consolidated revenues increased 22.1% to $58,810,207 during 1997 from $48,163,935 for 1996. This change was influenced by an increase in insurance premiums earned (which was adversely effected by adjustments to state mandated assigned risk pool business in 1996), offset by a decline in service fees earned and lower net investment income. Insurance premiums earned, exclusive of state mandated automobile assigned risk pool business, increased 9.7% during 1997 due primarily to a 55.6% increase in property earned premium and a 6.7% increase in private passenger automobile personal injury protection/property damage earned premium. Overall insurance premiums earned increased 43.9% after giving effect to business associated with the state mandated automobile assigned risk pool. Direct written premium in the Registrant's automobile lines decreased 10% in 1997 to $80,727,841 reflecting a decrease in market share as a result of rate increases instituted in December 1996 and increased competition in the market place. The Registrant believes premium volume may increase if competitors adjust their premium rates to offset the impact of adverse loss experience. The Registrant has taken steps, with the March 1998 rate revision, to exploit pockets of opportunity resulting in the establishment of new territories, more competitive rates and a revised commission structure. Property insurance direct written premium produced through the Registrant's surplus lines insurance subsidiary increased 135% in 1997 to $4,367,466. The Registrant plans to remain active in this market. Service fees earned declined 18.6% in 1997 to $8,957,080 compared to $11,001,222 reported in 1996. This decrease is the result of lower fee-for-service revenue due to the cancellation of certain service agreements with the FRPCJUA during the second quarter of 1996. In the fourth quarter of 1997, the Registrant was awarded a three year servicing contract by the FAJUA, effective January 1, 1998. In November 1997, the FRPCJUA extended a major servicing contract through March 1999. While it is impossible to predict with certainty, service fees generated over the life of these contracts could be as much as $14,000,000. Investment income decreased 9.2% in 1997 due to lower available rates and the utilization of cash to meet the maturation of prior years loss costs. Total consolidated expenses, exclusive of state mandated automobile assigned risk pools, increased 3.7% from $48,385,265 during 1996 to $50,173,849 during 1997. Overall, total consolidated expenses increased 27.5% from $39,177,771 in 1996 to $49,942,311 in 1997, primarily due to losses and expenses associated with assigned risk pool business. Loss and loss adjustment expenses incurred increased 5.0% during 1997 over 1996, exclusive of assigned risk pool business, for all lines of business written by the Registrant's insurance company subsidiaries. However, substantially all of this increase is attributable to the minimum limits automobile personal injury protection line of business. Loss and loss adjustment expenses incurred as a percentage of earned premium were 81.3% in 1995, 78.2% in 1996 and 74.8% in 1997, in each case, exclusive of assigned risk pool business. In its efforts to reduce loss and loss adjustment expenses incurred, as it relates to earned premium, the Registrant initiated a significant rate increase in the minimum limits personal injury protection line of business in the fourth quarters of 1995 and 1996. The Registrant will introduce a new rate increase in March 1998. II-3 10 1997 Compared to 1996 (continued) Due to the inherent uncertainty in estimating reserves for losses and loss adjustment expenses, which are estimates of the amounts necessary to settle reported and unreported claims and their related 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 1997, 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. The Registrant believes its current reserves are adequate. The Registrant's independent actuary's range of reasonable direct reserve estimates as of December 31, 1997 is between $31.8 million and $43.0 million and net of reinsurance recoveries the reserve range is between $15.1 million to $20.5 million. The 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. The Registrant decreased the ceding percentage from 70% to 60% on certain lines effective January 1, 1996. The Registrant will increase the ceding percentage to 75% in 1998, taking advantage of reduced reinsurance costs. If the Registrant's ratio of loss and loss adjustment expenses to earned premium deteriorates, 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. Policy acquisition costs decreased 13.5% during 1997 due principally to a reduction in direct premium volume. Salary and wages increased 10.3% due to the hiring of a number of key personnel to help manage the Registrant into the next century. This included a senior vice president of claims, a vice president of information systems and a vice president of human resources. Financial Position, Liquidity and Capital Resources Net cash flow from operations was negative in 1997 as loss and loss adjustment expense payments and consolidated operating expense payments exceeded premiums, fees and investment revenues. The Registrant put forth a concerted effort in 1997 to settle outstanding claims, thereby reducing the number of claims outstanding in the minimum limits automobile personal injury protection line of business. This process accelerated loss payments contributing to the negative cash flow the Registrant experienced. The Registrant believes this practice will improve overall loss and loss expense experience by reducing ultimate loss settlement costs and litigation expenses. 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. The Registrant is optimistic that cash flow will improve as rate increases take effect and the settlement of losses returns to a more normal pattern. In January 1998, the Registrant is scheduled to begin making principal payments on the $12,000,000 note payable. Payments of $600,000 plus accrued interest are due quarterly with the entire unpaid balance due October 2002. The Registrant is in the process of purchasing a new computer system to meet the year 2000 transition and provide support for a growing business. The Registrant has budgeted $1.4 million for this project. The new computer system will allow the Registrant to process more business in-house eliminating the costs of using third party providers as well as providing cost saving opportunities on the Registrant's core business. In prior years, certain computer programs were written using two digits rather than four to define the applicable year. These programs were written without considering the impact of the upcoming change in the century and may experience problems handling dates beyond the year 1999. This could cause computer applications to fail or create erroneous results unless corrective measures are taken. Incomplete or untimely resolution of the Year 2000 issue could have a material adverse impact on the Registrant's business, operations or financial condition in the future. However, with the number of options available in the form of software solutions, the Year 2000 issue should not pose a significant problem to the Registrant. On June 10, 1997, the Registrant issued 924,018 shares of common stock pursuant to a 15% stock dividend on its $.025 par value common stock, effective for shareholders of record on June 23, 1997. Earnings per share and dividend per share amounts have been adjusted to reflect this stock dividend. II-4 11 1997 Compared to 1996 (continued) The Registrant paid an annual dividend of $.35 per share on February 3, 1998 to shareholders of record on January 20, 1998. The dividend payment totaled $2,526,724. The Registrant maintains sufficient liquidity to meet operational needs. Cash dividend, capital expenditure and operating requirements will be provided by operations and investment activities. The investment policy continues to emphasize higher quality securities matched closely with the short liability duration. Forward-Looking Statements This Form 10-K contains certain forward-looking statements within the meaning of section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are deemed by the Registrant to be covered by and to qualify for safe harbor protection provided by the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to, among other things, (a) the expected benefits from (i) the award of a three year servicing contract by the Florida Automobile Joint Underwriting Association, and (ii) the extension of a service contract by the Florida Residential Property and Casualty Joint Underwriting Association, and (b) the improvement of cash flow as a result of rate increases and a return to a more normal pattern of loss settlements. Such statements reflect the current views of the Registrant and are subject to certain risks and uncertainties that include, but are not limited to, obtaining policy volume service levels under the Joint Underwriting Association service contracts, continued market acceptance of premium rate increases in the automobile minimum limits personal injury protection line of business and adequacy of loss reserves. The Registrant disclaims any intent or obligation to update publicly these forward-looking statements, whether as a result of new information, future events or otherwise. II-5 12 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 the 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. 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. II-6 13 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. II-7 14
Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- Index to Financial Statements and Supplementary Data Report of Independent Certified Public Accountants II-9 Consolidated Balance Sheets, December 31, 1997 and 1996 II-10 Consolidated Statements of Operations II-11 Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows II-12 Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Stockholders' Equity II-13 Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements II-14-37 Item 9. Disagreements on Accounting and Financial Disclosure - ------------------------------------------------------------- None.
II-8 15 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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. CHERRY, BEKAERT & HOLLAND, L.L.P. Orlando, Florida March 27, 1998 II-9 16 Mobile America Corporation and Subsidiaries Consolidated Balance Sheets December 31, 1997 and 1996
Assets 1997 1996 - ------------------------------------------------------------------------------------------------------ Investments: Securities held to maturity at amortized cost (fair value $43,511,416 and $48,991,063) $ 43,620,417 $ 49,094,824 Securities available for sale at fair value (amortized cost $30,557,149 and $38,651,393) 30,676,634 38,955,502 Short-term investments 16,940,962 22,231,475 ------------- ------------- Total investments 91,238,013 110,281,801 ------------- ------------- Cash 4,518,020 1,802,644 Receivables: Insurance premiums 3,324,666 3,916,439 Accrued investment income 1,181,450 1,601,798 Reinsurance on paid losses 100,486 31,935 Reinsurance recoverable 17,720,613 27,638,632 Current Income taxes 384,568 327,551 ------------- ------------- Total receivables 22,711,783 33,516,355 ------------- ------------- Deferred income tax 1,581,487 2,043,257 Prepaid reinsurance premiums 16,752,315 20,347,436 Deferred policy acquisition costs (2,047,989) (2,734,995) Property and Equipment: Land, at cost 524,043 524,043 Equipment and leasehold improvements at cost less accumulated depreciation and amortization of $2,219,088 and $2,077,991 1,029,640 547,663 ------------- ------------- Total property and equipment: 1,553,683 1,071,706 ------------- ------------- Equity in pools and associations 996,160 1,185,843 Other assets 938,666 900,405 ------------- ------------- $ 138,242,138 $ 168,414,452 ============= ============= Liabilities and Stockholders' Equity 1997 1996 - -------------------------------------------------------------------------------------------------------- Insurance loss reserves, including future policy benefits $ 33,643,295 $ 47,695,655 Unearned premium 32,893,437 38,118,629 Reinsurance funds withheld and balances payable 7,001,015 17,353,367 Accrued expenses and other liabilities 12,409,880 15,636,751 Deferred income tax on net unrealized gains on securities available for sale 40,625 103,397 Unearned service fees 568,215 1,329,632 Note payable 12,000,000 12,000,000 ------------- ------------- Total liabilities 98,556,467 132,237,431 ------------- ------------- Stockholders' equity: Common stock, $.025 par value per share Authorized - 18,000,000 shares Issued - 7,644,414 shares and 6,720,396 shares 191,110 168,010 Preferred stock, $.10 par value per share Authorized - 500,000 shares Issued and outstanding - none 0 0 Capital in excess of par value 4,348,842 2,729,588 Net unrealized appreciation on securities available for sale net of deferred income taxes 78,861 200,712 Treasury stock at cost, 476,580 and 465,356 shares (1,229,403) (510,122) Retained earnings 36,296,261 33,588,833 ------------- ------------- Total stockholders' equity 39,685,671 36,177,021 ------------- ------------- $ 138,242,138 $ 168,414,452 ============= =============
See notes to consolidated financial statements. II-10 17 Mobile America Corporation and Subsidiaries Consolidated Statements of Operations Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 --------------------------------------------------- Revenues: Insurance premiums earned net of premiums ceded of $48,192,318, $52,488,683 and $56,949,921 $ 44,282,566 $ 40,363,615 $33,634,884 Insurance premiums earned, pools and associations net of premium ceded of $(278,099), $(6,296,113) and $8,129,228 (111,207) (9,672,082) 4,007,962 Service fees earned 8,957,080 11,001,222 8,624,931 Investment income 5,390,681 5,935,194 5,562,074 Equipment rentals 0 1,520 67,510 Other 27,376 12,471 670,876 Sales of modular office equipment 0 0 105,484 Net realized gains on investments 263,711 521,995 252,153 ------------------------------------------------ Total revenues 58,810,207 48,163,935 52,925,874 ------------------------------------------------ Expenses: Losses and loss adjustment expenses, net of reinsurance recoveries of $39,290,318, $45,237,935 and $52,018,005 33,107,714 31,545,501 27,367,484 Losses and expenses incurred pools and associations net of reinsurance recoveries of $(251,630), $(7,267,588) and $7,594,490 (231,538) (9,207,494) 3,911,166 Policy acquisition costs 2,295,965 2,653,599 311,980 Salaries and wages 7,454,778 6,756,416 5,478,820 General and administrative 6,301,231 6,423,989 7,114,350 Interest on note 1,014,161 1,005,760 156,375 ------------------------------------------------ Total expenses 49,942,311 39,177,771 44,340,175 ------------------------------------------------ Income before provision for income taxes 8,867,896 8,986,164 8,585,699 ------------------------------------------------ Provision and (benefit) for income taxes: Current 2,230,330 2,698,004 2,268,942 Deferred 461,770 (1,283,232) 317,063 ------------------------------------------------ Total provision for income taxes 2,692,100 1,414,772 2,586,005 ------------------------------------------------ Net income $ 6,175,796 $ 7,571,392 $ 5,999,694 ================================================ Basic and diluted earnings per share: Net income $ 0.86 $ 1.05 $ 0.84 ================================================ Weighted average number of shares of common stock outstanding 7,148,471 7,179,058 7,184,058 ================================================
See notes to consolidated financial statements. II-11 18 Mobile America Corporation and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 ------------------------------------------------- Cash Flows from Operating Activities: Net Income $ 6,175,796 $ 7,571,392 $ 5,999,694 Adjustments to reconcile net income to net cash provided (used) in operating activities: Provision for depreciation 161,611 200,882 231,449 Gain on sale of investments (263,711) (521,995) (252,153) Change in assets and liabilities: Insurance premium receivable 781,455 2,373,767 (2,685,929) Accrued investment income 420,348 369,558 (510,784) Deferred policy acquisition costs (687,006) (1,474,845) 434,862 Prepaid expenses and other assets (38,260) (346,401) (425,275) Insurance loss reserves (14,052,360) (6,950,031) 10,695,217 Unearned premium (5,225,192) (1,416,520) 4,895,469 Reinsurance funds held and balances payable (10,352,352) (8,767,138) (2,941,367) Accrued expenses (3,226,871) (2,311) 6,287,984 Current income taxes (57,017) (879,419) 730,281 Deferred income taxes recoverable 461,770 (1,283,232) (152,627) Prepaid reinsurance premium 3,595,121 3,913,258 (1,848,366) Reinsurance recoverable 9,849,468 6,151,559 (8,989,725) Unearned service fees (761,417) (1,281,270) 1,412,997 ------------------------------------------------ Net cash provided (used) in operating activities (13,218,617) (2,342,746) 12,881,727 ------------------------------------------------ Cash Flows from Investing Activities: Net change in short term investments 5,290,513 238,839 (8,100,504) Purchase of investments (9,547,210) (32,924,649) (41,507,462) Proceeds from sale and maturity of investments 23,472,111 32,817,300 27,029,634 Purchase of property and equipment (643,588) (282,162) (135,362) Sale of modular offices and equipment 0 0 10,442 Notes receivable 0 2,491 2,362 ------------------------------------------------ Net cash provided (used) in investing activities 18,571,826 (148,181) (22,700,890) ------------------------------------------------ Cash Flows from Financing Activities: Purchase, sale of treasury stock, net (162,754) (45,650) (32,503) Dividends paid to stockholders (2,474,416) (2,171,236) (1,117,776) Stock dividend, fractional shares (663) 0 0 Proceeds from note payable 0 0 12,000,000 ------------------------------------------------ Net cash provided by (used in) financing activities (2,637,833) (2,216,886) 10,849,721 ------------------------------------------------ Net increase (decrease) in cash 2,715,376 (4,707,813) 1,030,558 Cash, beginning of year 1,802,644 6,510,457 5,479,899 ------------------------------------------------ Cash, end of year $ 4,518,020 $ 1,802,644 $ 6,510,457 ================================================
See notes to consolidated financial statements. II-12 19 Mobile America Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 ------------------------------------------------ Common stock: Balance beginning of year $ 168,010 $ 168,010 $ 168,010 Stock dividend 23,100 0 0 ------------------------------------------------ Balance end of year 191,110 168,010 168,010 ------------------------------------------------ Preferred stock: No change during year 0 0 0 ------------------------------------------------ Capital in excess of par value: Balance beginning of year 2,729,588 2,686,060 2,686,060 Stock dividend 970,219 0 0 Sale of treasury stock 556,527 43,528 0 Deferred compensation 92,508 0 0 ------------------------------------------------ Balance end of year 4,348,842 2,729,588 2,686,060 ------------------------------------------------ Net unrealized appreciation on securities available for sale: Balance beginning of year 200,712 691,185 0 Increase (decrease) (184,623) (742,076) 1,046,185 Deferred taxes 62,772 251,603 (355,000) ------------------------------------------------ Balance end of year 78,861 200,712 691,185 ------------------------------------------------ Net unrealized investment gains (losses) on equity securities: Balance beginning of year 0 0 (158,099) Increase (decrease) 0 0 158,099 ------------------------------------------------ Balance end of year 0 0 0 ------------------------------------------------ Treasury stock: Balance beginning of year (510,122) (420,944) (388,441) Purchases of 86,224, 10,000 and 4,000 shares (912,754) (93,750) (32,503) Sale of 75,000, 5,000 and 0 shares 193,473 4,572 0 ------------------------------------------------ Balance end of year (1,229,403) (510,122) (420,944) ------------------------------------------------ Retained earnings: Balance beginning of year 33,588,833 28,188,679 23,306,761 Net income 6,175,796 7,571,392 5,999,694 Cash dividends $.35, $.30 and $.16 per share (2,474,416) (2,171,238) (1,117,776) Stock dividend (993,952) 0 0 ------------------------------------------------ Balance end of year 36,296,261 33,588,833 28,188,679 ------------------------------------------------ Total stockholders' equity end of year $ 39,685,671 $ 36,177,021 $31,312,990 ================================================
See notes to consolidated financial statements. II-13 20 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 The Company classifies all of its fixed maturities and equity securities as either available-for-sale or held- to-maturity. Fixed maturities held-to-maturity consist of certain bonds, presented at amortized cost, that management intends and has the ability to hold to maturity. Fixed maturities available-for-sale consist of bonds, presented at fair value, that management may not hold until maturity. Equity securities available-for-sale are comprised of common and preferred stock which are carried at fair value. Unrealized gains or losses on investments classified as available-for-sale, net of deferred income taxes, are included as a separate component of stockholders' equity. Fair values are based on quoted market prices or dealer quotes, if available. If a quoted II-14 21 Mobile America Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies (continued) market price is not available, fair value is estimated using quoted market prices for similar securities. Realized gains and losses on sale of fixed maturities and equity securities are determined on the specific identification basis using amortized cost for fixed maturities and cost for equity securities. Any gains and losses are reflected in the accompanying statements of operations. (f) 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. (g) Financial Instruments In the normal course of business, the Company enters into transactions involving various financial instruments, including debt, investments such as fixed maturities, and equity securities. These instruments involve credit risk and also may be subject to risk of loss due to interest rate fluctuations. The Company evaluates and monitors each financial instrument to minimize the risk of loss. (h) Deferred Policy Acquisition Costs The costs, primarily commissions, associated with acquiring new insurance contracts have been deferred. Such costs are being amortized to income as premiums are earned or over the contracts premium paying period. (i) 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 betterments are capitalized and depreciated. Upon retirement or disposal of assets, 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. II-15 22 Mobile America Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies (continued) (j) 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 whole-life contracts and guaranteed renewable term life contracts. The Company has not issued participating policies. (k) Insurance Loss Reserves The liabilities for unpaid claims of property-liability 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. 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, termination's, 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, 1997. II-16 23 Mobile America Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies (continued) (l) Recognition of Premium Revenues and Related Expenses Premiums for long-duration contracts are recognized as revenues when due from the policyholders. Premiums for short-duration contracts are recognized as revenues on a pro rata basis over the term of the policies. The portion of premiums written applicable to the unexpected terms of the policies is recorded as unearned premium. Benefits, losses and related expenses are matched with premiums, resulting in their recognition over the lives of the contracts. This matching is accomplished through the provision for future policy benefits, estimates of unpaid losses and amortization of deferred policy acquisition costs. Earned premiums and incurred losses are stated after a reduction for amounts ceded to reinsurers. The Company considers anticipated investment income in determining if a premium deficiency exists on short-duration contracts. (m) 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 term of the underlying insurance policies. (n) Earnings Per Share In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share". Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully dilutive earnings per share. All earnings per share amounts for all periods have been presented , and where appropriate, restated to conform to the Statement 128 requirements. (o) Supplemental Cash Flow Information Income Taxes Paid - Income taxes paid totaled $2,230,000 in 1997, $3,577,423 in 1996 and $2,008,351 in 1995. Interest paid totaled $1,014,161 in 1997, $1,005,760 in 1996 and $156,375 in 1995. II-17 24 Mobile America Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies (continued) (p) Income Taxes Income taxes are calculated under the liability method. Deferred taxes are provided for temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Items giving rise to such differences are insurance reserves and unearned premiums. (q) Stock-Based Compensation Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" , encourages, but does not require companies to record compensation costs for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, compensation cost of stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. (r) Stock Dividend All common shares and per share amounts have been adjusted to give effect to a 15% stock dividend distributed to shareholders on June 23, 1997. (s) Pending Accounting Change In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". Statement 130 requires the reporting and display of comprehensive income and it's components in a full set of financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It included all changes in equity, including net income, during a period except those resulting from investments by owners and distributions to owners. The Company will adopt Statement 130 in the first quarter of 1998 and, based on current circumstances, the only additional component of comprehensive income to be reported is the change in the net unrealized gain or loss on securities available for sale. II-18 25 Mobile America Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies (continued) (s) Pending Accounting Change (continued) Also in June 1997, the FASB issued Statement No. 131, "Disclosure about Segments of an Enterprise and Related Information". This Statement establishes standards for the way enterprises report information about operating segments and also establishes standards for related disclosure about products and services, geographic area and major customers. The Company will adopt Statement 131 in 1998 and, based on current circumstances, does not believe the effect of adoption will be material. (t) Reclassifications Certain prior-year amounts have been reclassified to conform with current-year presentations. II-19 26 Mobile America Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 2. Investments Major categories of investment income are summarized as follows:
1997 1996 1995 ---------------------------------------- Fixed Maturities $4,578,852 $4,961,776 $4,382,034 Equity Securities 30,364 51,884 94,330 Short Term Investments 781,465 921,534 1,085,222 Notes Receivable 0 0 488 ---------- ---------- ---------- $5,390,681 $5,935,194 $5,562,074 ========== ========== ==========
Net realized and change in net unrealized gains (losses) on fixed maturities and equity securities are summarized as follows:
Fixed Equity Maturities Securities Other Total --------------------------------------------------- 1997 - ---------- Realized $ (26,430) $284,396 $ 5,745 $ 263,711 Unrealized (157,110) (32,755) 0 (189,865) ---------- -------- -------- ---------- Combined $ (183,540) $251,641 $ 5,745 $ 73,846 ========== ======== ======== ========== 1996 - ---------- Realized $ 126,194 $431,862 $(36,061) $ 521,995 Unrealized (997,948) (172,805) 0 (1,170,753) ---------- -------- -------- ---------- Combined $ (871,754) $259,057 $(36,061) $ (648,758) ========== ======== ======== ========== 1995 - ---------- Realized $ 48,330 $203,823 $ 0 $ 252,153 Unrealized 1,305,503 65,688 0 1,371,191 ---------- -------- -------- ---------- Combined $1,353,833 $269,511 $ 0 $1,623,344 ========== ======== ======== ==========
II-20 27 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 of available for sale and held to maturity securities by major security type at December 31, 1997 and 1996 are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value --------------------------------------------------------------- Available for sale securities: December 31, 1997 - ---------------------------------------- U. S. Government and government agencies $11,510,997 $ 73,063 $ (6,442) $11,577,618 States, municipalities and political subdivisions 12,273,279 336,565 (2) 12,609,842 Corporate debt securities 5,259,932 75,235 (219,062) 5,116,104 Equity securities 1,512,941 177,757 (317,629) 1,373,070 --------------------------------------------------------------- $30,557,149 $662,620 $(543,135) $30,676,634 =============================================================== Held to maturity securities: December 31, 1997 - ---------------------------------------- U. S. Government and government agencies $12,194,912 $ 27,567 $ (22,208) $12,200,271 States, municipalities and political subdivisions 24,926,045 279,417 (62,055) 25,143,407 Corporate debt securities 5,253,806 29,095 (362,292) 4,920,609 Mortgage backed securities 1,245,654 4,459 (2,984) 1,247,129 --------------------------------------------------------------- $43,620,417 $340,538 $(449,539) $43,511,416 =============================================================== Available for sale securities: December 31, 1996 - ---------------------------------------- U. S. Government and government agencies $16,057,363 $ 84,332 $ (74,257) $16,067,438 States, municipalities and political subdivisions 15,436,905 339,175 (1,191) 15,774,889 Corporate debt securities 5,701,832 92,177 (29,010) 5,764,998 Equity securities 1,455,293 69,506 (176,623) 1,348,177 --------------------------------------------------------------- $38,651,393 $585,190 $(281,081) $38,955,502 =============================================================== Held to maturity securities: December 31, 1996 - ---------------------------------------- U. S. Government and government agencies $13,280,990 $ 25,952 $(127,822) $13,179,120 States, municipalities and political subdivisions 28,095,400 167,285 (152,729) 28,109,956 Corporate debt securities 5,683,205 25,326 (36,578) 5,671,953 Mortgage backed securities 2,035,229 5,330 (10,525) 2,030,034 --------------------------------------------------------------- $49,094,824 $223,893 $(327,654) $48,991,063 ===============================================================
II-21 28 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, 1997 are as follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations without penalties.
Amortized Fair Cost Value ----------- ------------- Available for sale securities: Due in one year or less $ 8,404,804 $ 8,431,926 Due after one through five years 16,551,663 16,609,035 Due after five years through ten years 2,719,631 2,870,830 Due after ten years 1,368,110 1,391,773 ----------- ----------- $29,044,208 $29,303,564 =========== =========== Held to maturity securities: Due in one year or less $ 8,103,904 $ 8,126,978 Due after one through five years 23,081,430 22,888,843 Due after five years through ten years 9,134,208 9,207,867 Due after ten years 2,055,221 2,040,599 Mortgage backed securities 1,245,654 1,247,129 ----------- ----------- $43,620,417 $43,511,416 =========== ===========
Proceeds from sales of held to maturity securities and related gross realized gains and losses were as follows:
1997 1996 1995 --------------------------------------------------- Proceeds from sales $1,723,087 $3,695,874 $5,595,785 Gross realized gains 349 142,421 66,206 Gross realized losses 6,472 956 17,876
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, 1997 and $1,550,000 at December 31, 1996. 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 carrying value of these investments was $70,000 at December 31, 1997 and 1996. II-22 29 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:
Fortune 1997 1996 1995 - ------------------------------------- ------------------------------------------ Balance at beginning of year $ (40,541) $(1,421,049) $ (438,658) Commissions and other costs deferred 5,669,882 5,898,751 7,496,662 Charged to expense (6,343,455) (4,518,243) (8,479,053) ----------- ----------- ----------- Balance at end of year $ (714,114) $ (40,541) $(1,421,049) =========== =========== =========== Mobile America Insurance Group 1997 1996 1995 - ------------------------------------- ------------------------------------------ Balance at beginning of year $(2,971,365) $(2,812,521) $(3,343,007) Commissions and other costs deferred (3,997,252) (3,784,189) (7,113,083) Charged to expense 5,104,959 3,625,345 7,643,569 ----------- ----------- ----------- Balance at end of year $(1,863,658) $(2,971,365) $(2,812,521) =========== =========== =========== Fortune Life 1997 1996 1995 - ------------------------------------- ------------------------------------------ Balance at beginning of year $ 44,532 $ 7,690 $ 4,566 Commissions and other costs deferred 106,402 60,855 10,221 Charged to expense (92,255) (24,013) (7,097) ----------- ----------- ----------- Balance at end of year $ 58,679 $ 44,532 $ 7,690 =========== =========== =========== Pegasus 1997 1996 1995 - ------------------------------------- ------------------------------------------ Balance at beginning of year $ 232,379 $ 16,040 $ 2,121 Commissions and other costs deferred 1,091,866 464,398 33,341 Charged to expense (853,141) (248,059) (19,422) ----------- ----------- ----------- Balance at end of year $ 471,104 $ 232,379 $ 16,040 =========== =========== =========== Consolidated Totals $(2,047,989) $(2,734,995) $(4,209,840) =========== =========== ===========
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 II-23 30 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 1997, 1996 and 1995 is approximately $7,932,000, $7,527,000 and $15,694,000, respectively. Deferred policy acquisition cost reinsurance credits reported in the Company's balance sheet at December 31, 1997 and 1996 are $7,049,081 and $8,516,878, respectively. Note 4. Property and Equipment Property and equipment consists of the following at December 31, 1997 and 1996:
1997 1996 -------------------------------- Land and buildings $ 538,522 $ 526,331 Transportation equipment 228,329 186,364 Office equipment and furniture 2,926,745 2,383,165 Leasehold improvements 68,193 42,855 Other 10,982 10,982 ----------------------------- 3,772,771 3,149,697 Less accumulated depreciation (2,219,088) (2,077,991) ----------------------------- Property and equipment, net $ 1,553,683 $ 1,071,706 =============================
In 1995, Statement of Financial Accounting Standards 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. II-24 31 Mobile America Corporation and Subsidiaries Notes to Consolidated Financial Statements 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 underwriting capacity, although the Company remains primarily liable to the policyholders on all risks transferred. The Company acquires property and casualty excess of loss reinsurance separately for it's primary insurance business lines. This program provides the Company with coverage in the amount of $260,000 in excess of $40,000 on a per risk basis, and up to $520,000 on a per occurrence basis. Catastrophic property losses are reinsured under two programs. Fortune limits it's liability to 5% of losses in excess of $500,000 up to $1,300,000 and up to 10% of losses in excess of $1,400,000. Pegasus limits it's liability to 5% of losses in excess $500,000 up to $10,000,000. Catastrophic reinsurance, provided by various reinsures in multiple layers, serves to protect the insurer from significant aggregate loss exposure arising from a single event such as windstorm, hail, tornado, hurricane, riot, vandalism, earthquake, freezing temperatures or other extraordinary events. The Company also maintains reinsurance coverage for extra contractual obligations and excess limits judgements up to $1,500,000 for each property risk and/or each casualty occurrence subject to a deductible of the greater of $100,000 or a loss in excess of its underlying reinsurance programs. The effect of reinsurance on premiums written and earned for 1997, 1996 and 1995 is as follows (dollars in thousands):
1997 1996 1995 ------------------------ ----------------------- ------------------------- Written Earned Written Earned Written Earned --------------------- -------------------- ---------------------- Direct $86,860 $92,085 $75,468 $76,884 $107,617 $102,722 Assumed 0 0 0 0 0 0 Ceded 44,319 47,914 42,279 46,193 66,928 65,079 --------------------- -------------------- ---------------------- Net $42,541 $44,171 $33,189 $30,691 $ 40,689 $ 37,643 ===================== ==================== ======================
The amount of reinsurance recoveries deducted from direct and pool participation losses incurred during 1997, 1996 and 1995 was approximately $39,000,000, $37,970,000 and $59,612,000, respectively. II-25 32 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, 1997 is presented below (in thousands):
Reinsurance Prepaid Funds Held Recoverable Premium or Balances Due ------------ -------- --------------- Clarendon National Insurance Company $ 4,360 $ 2,764 $ (2,546) Sirius Reinsurance Company 5,676 5,529 3,677 National Union Fire Insurance Company 3,763 4,147 6,091 Prudential Reinsurance Company 975 0 (3,719) Ranger Insurance Company 618 0 (844) Motors Insurance Company 1,557 2,764 3,001 Odyssey Reinsurance Company 750 1,382 1,526 Other 22 166 (185) ------------ -------- --------------- $ 17,721 $ 16,752 $ 7,001 ============ ======== ===============
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 1997, 1996 and 1995. II-26 33 Mobile America Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 6. Regulatory Restrictions (continued) Following are reconciliations of net income and stockholders' equity for Fortune, Fortune Life and Pegasus from a statutory basis to those presented on a GAAP basis for the year ended December 31, 1997:
Fortune Fortune Life Pegasus ------------ ----------- ----------- Net gain(loss) from operations - statutory basis $ (926,786) $ 198,050 $ 54,065 ------------ ----------- ----------- Change in deferred acquisition costs (2,141,372) 14,147 238,726 Change in deferred ceding commissions 1,467,797 0 0 Change in reserves 0 (4,791) 0 Other 257,282 (10,252) (2,102) ------------ ----------- ----------- (416,293) (896) 236,624 ------------ ----------- ----------- Net gain(loss) from operations - GAAP basis $ (1,343,079) $ 197,154 $ 290,689 ============ =========== =========== Stockholder's equity - statutory basis $ 14,383,015 $ 3,145,469 $ 4,564,616 ------------ ----------- ----------- Deferred acquisition costs 6,334,967 58,679 471,105 Deferred ceding commissions (7,049,081) 0 0 Adjustments to reserves 0 (38,423) 0 Deferred income taxes 1,370,526 (20,702) 0 Non-admitted assets 514,139 (17,218) 511 Unrealized gains 30,117 26,680 16,944 Other 741,441 10,804 0 ------------ ----------- ----------- 1,942,109 19,820 488,560 ------------ ----------- ----------- Stockholder's equity - GAAP basis $ 16,325,124 $ 3,165,289 $ 5,053,176 ============ =========== ===========
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 1997, 1996, and 1995 were $288,000, $240,000, and $210,000, respectively. II-27 34 Mobile America Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 8. Capital Stock 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. An additional 200,000 shares will be added to the plan pending shareholder approval at the 1998 Annual Meeting. 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, if the exercise price of the options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. During 1997, the Company granted options to purchase 5000 shares at $4.40 when the market price of the Company's common stock was $9.63. These options vest 20% per year beginning on the first anniversary date of grant. Compensation expense of $3,487 was charged to operations in 1997. Deferred compensation of $48,813 is reported in other assets and will be charged to operations over the vesting period. Changes in Stock Options were as follows:
Average 1997 Exercise Price 1996 1995 ---- ---- ---- Beginning Balance 153,750 $9.90 92,500 - Granted 170,000 $9.98 67,500 103,750 Exercised (75,000) $10.00 (5,000) Cancelled/ Expired (2,000) $10.25 (1,250) (11,250) -------- ------ ------- -------- Ending Balance 246,750 $9.92 153,750 92,500 ======== ====== ======= ======== Exercisable 138,150 $9.84 87,250 61,250 ======== ====== ======= ========
II-28 35 Mobile America Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 8. Capital Stock (continued) In compliance with Statement of Financial Accounting Standards No. 123, the Company has elected to provide pro forma disclosures. As such, the Company's net income and earnings per share for 1997, 1996 and 1995 adjusted to reflect pro forma amounts are indicated below (dollar amounts in thousands except for earnings per share) :
1997 1996 1995 ---- ---- ---- Net Income: As reported $ 6,176 $ 7,571 $ 6,000 ======= ======= ======= Pro forma $ 5,935 $ 7,469 $ 5,871 ======= ======= ======= Earnings Per Share: As reported $ 0.86 $ 1.05 $ 0.84 ======= ======= ======= Pro forma $ 0.83 $ 1.04 $ 0.82 ======= ======= =======
The fair value of options granted in 1997, 1996 and 1995 was estimated using the Black-Scholes option pricing model. The weighted average fair value and related assumptions were as follows:
1997 1996 1995 ---- ---- ---- Weighted average fair value: $ 3.72 $ 3.61 $ 3.36 Expected volatility 39% 39% 39% Risk free interest rate 6.20% 6.24% 6.15% Expected lives 5 Years 5 Years 5 Years Dividend yield 2.5% 2.5% 2.5%
Earnings Per Share: - ------------------ 1997 1996 1995 ---- ---- ---- Numerator: Income available to common shareholders' $ 6,175,796 $ 7,571,392 $ 5,999,694 =========== =========== =========== Denominator: Basic earnings per share weighted average shares 7,148,471 7,179,058 7,184,058 Effect of dilution: Employee stock options 57,066 12,019 593 ----------- ----------- ----------- Diluted earnings per share adjusted weighted average shares and assumed conversions 7,205,537 7,191,077 7,184,651 =========== =========== =========== Basic earnings per share $ 0.86 $ 1.05 $ 0.84 =========== =========== =========== Diluted earnings per share $ 0.86 $ 1.05 $ 0.84 =========== =========== ===========
II-29 36 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:
1997 1996 1995 ---- ---- ---- Statutory Federal rate 34% 34% 34% Increase (reductions) in effective tax rate resulting from: Tax exempt interest (8.5) (7.8) (8.0) Dividends received deduction (0.1) (0.1) (0.2) Special life insurance company deductions (0.5) (0.4) (0.1) State income taxes 3.4 2.9 7.4 Change in valuation allowance 0.0 (8.2) 0.0 Other 2.1 (4.7) (3.0) ----- ----- ----- Effective tax rate 30.4% 15.7% 30.1% ===== ===== =====
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):
1997 1996 1995 ---- ---- ---- Increase (decrease) in discounted loss and loss adjustment expense reserves $143 ($37) $733 Increase (decrease) in deferred acquisition costs 0 0 (114) Increase (decrease) in deferred insurance premiums 124 (300) (204) Decrease in valuation allowance 0 (733) 0 Various 195 (213) (98) ---- -------- ---- $462 ($1,283) $317 ==== ======== ====
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):
1997 1996 ---- ---- Discounted loss and loss adjustment expense reserves $ 627 $ 770 Deferred insurance premiums 1,209 1,333 Various (255) (60) ----------------- $1,581 $2,043 Valuation allowance 0 0 ----------------- $1,581 $2,043 =================
II-30 37 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, 1997. Deferred taxes payable of $40,625 and $61,072 are provided on unrealized gains, on equity securities and fixed maturities available for sale at December 31, 1997 and 1996, respectively. 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 sell 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. II-31 38 Mobile America Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 10. Business Segments (continued) Summarized financial information by business segment for 1997, 1996 and 1995 is as follows:
Revenues from Unaffiliated Customers 1997 1996 1995 ----------- ----------- ------------ Automobile Insurance $86,263,673 $73,211,073 $100,426,747 Personal Property Insurance 5,370,286 3,283,170 1,807,125 Commercial Lines Insurance 291,968 312,159 432,468 Life Insurance 117,293 35,464 14,193 Property Rentals and Sales 0 1,520 176,894 Fee for service 8,972,353 11,001,221 8,624,931 Other 317,553 576,702 960,591 Reinsurance revenue ceded (47,914,218) (46,192,568) (65,079,149) Investment Income 5,391,297 5,935,194 5,562,074 -------------------------------------------- Consolidated Revenues $58,810,205 $48,163,935 $52,925,874 ============================================
Operating Profit (or loss) 1997 1996 1995 ---------- ---------- ---------- Automobile Insurance $6,514,491 $5,431,895 $3,673,684 Personal Property Insurance 945,685 652,766 (110,955) Commercial Lines Insurance 127,086 (103,625) (99,874) Life Insurance 233,297 206,895 100,439 Property Rentals and Sales 0 1,520 140,692 Fee for service 2,111,976 3,418,080 2,843,555 Other 130,734 131,061 1,537,273 Investment Income 1,440,233 1,460,810 1,137,990 Corporate Expenses (2,635,607) (2,213,238) (637,105) ------------------------------------------- Income before income taxes $8,867,895 $8,986,164 $8,585,699 ===========================================
Identifiable Assets 1997 1996 1995 ------------ ------------ ------------ Automobile Insurance $101,543,332 $130,850,415 $137,386,763 Personal Property Insurance 8,947,476 8,224,013 8,095,427 Commercial Lines Insurance 841,474 1,079,838 1,574,928 Life Insurance 3,277,395 4,045,916 3,864,996 Property Rentals and Sales 0 0 25,541 Fee for service 7,732,788 9,279,618 7,116,795 Other 8,987,566 6,208,977 15,568,154 General Corporate Assets 6,912,107 8,398,124 9,138,558 --------------------------------------------- Total Assets $138,242,138 $168,086,901 $182,771,162 =============================================
II-32 39 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 premiums written state wide by all automobile insurers. A summary of FAJUA participation as reported in the accompanying financial statements for 1997,1996 and 1995 is presented below:
1997 1996 1995 ---- ---- ---- Written premium ($165,306) ($10,682,231) $4,186,376 Earned premium (111,207) (9,672,082) 4,007,962 Losses and loss adjustment expenses paid (43,252) (6,256,191) 3,224,745 Loss and loss adjustment expenses incurred (119,464) (7,718,866) 3,361,142 Commissions (112,074) (1,488,628) 550,024
In 1996 the FAJUA issued reports amending Fortune's participation for years prior to 1996. These changes were reported in the 1996 financial statements. A summary of Fortune's 1996 participation and the prior year adjustment is presented below.
1996 Prior years Total ---- ----------- ----------- Written premium $144,099 $(10,826,330) $(10,682,231) Earned premium 65,169 (9,737,251) (9,672,082) Losses and loss adjustment expenses paid 32,863 (6,289,054) (6,256,191) Loss and loss adjustment expenses incurred 62,361 (7,781,227) (7,718,866) Commissions (15,669) (1,472,959) (1,488,628)
II-33 40 Mobile America Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 12. Operating Leases The Company leases office facilities under operating leases which contain renewal options. Lease terms range from 18 months to five years. Rent expense was $329,464, $295,499 and $297,597 for 1997, 1996 and 1995, respectively. Minimum future rental payments are as follows: 1998 $238,004 1999 $218,818 2000 $224,758 2001 $230,926 2002 $ 19,287 -------- $931,793 ========
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 $900,000 and $300,000 has been provided for at December 31, 1997 and 1996, respectively. 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. II-34 41 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, reduced to 250 basis points during 1997. 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 Company's subsidiaries on October 24, 1995, as well as the execution of guaranty agreements between the bank and certain subsidiaries of the Company. The following is a schedule of the required annual principal payments: 1998 $ 2,400,000 1999 2,400,000 2000 2,400,000 2001 2,400,000 2002 2,400,000 ------------ $ 12,000,000 ============
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 sheets.
1997 1996 ---------- ---------- Beginning Balance $ 363,262 $ 425,540 Less accumulated amortization 51,898 62,278 ---------- ---------- Net loan acquisition costs $ 311,364 $ 363,262 ========== ==========
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. II-35 42 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:
1997 1996 Balance at beginning of year $47,695,655 $54,645,686 Less reinsurance recoverables 27,638,632 33,822,126 ----------- ----------- Net balance at beginning of year 20,057,023 20,823,560 =========== =========== Incurred related to: Current year 35,725,095 27,216,632 Prior years (2,736,845) (3,390,000) ----------- ----------- Total incurred 32,988,250 23,826,632 =========== =========== Paid related to: Current year 23,978,911 15,428,840 Prior years 13,143,680 9,164,329 ----------- ----------- Total paid 37,122,591 24,593,169 =========== =========== Net balance at end of year 15,922,682 20,057,023 Plus reinsurance recoverables 17,720,613 27,638,632 ----------- ----------- Balance at end of year $33,643,295 $47,695,655 =========== ===========
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. II-36 43 Mobile America Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 16. Fair Value of Financial Instruments (continued) The carrying amounts and fair values of the Company's financial instruments at December 31, 1997 and 1996 are presented below:
1997 1996 ------------------------- ------------------------- Carrying Fair Carrying Fair Value Value Value Value ------------------------- ------------------------- Cash and short-term investments $21,458,982 $21,458,982 $24,034,119 $24,034,119 Fixed maturities: Held to maturity 43,620,417 43,511,416 49,094,824 48,991,063 Available for sale 29,303,564 29,303,564 37,607,325 37,607,325 Equity securities 1,373,070 1,373,070 1,348,177 1,348,177 Premiums receivable 3,324,666 3,324,666 3,916,439 3,916,439 Note payable 12,000,000 12,000,000 12,000,000 12,000,000
II-37 44 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, 1998 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 45 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8K
Page ---- (a) 1. Financial Statements -------------------- The following financial statements are included in Part II, Item 8: Report of Independent Certified Public Accountants II-9 Consolidated Balance Sheets, December 31, 1997 and 1996 II-10 Consolidated Statements of Operations II-11 Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows II-12 Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Stockholders' Equity II-13 Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements II-14-37 2. Financial Statements Schedules ------------------------------ The following financial schedules are included in Part IV of this report: Schedule I. Summary of Investments - Other than Investments in Related Parties IV-11 December 31, 1997 and 1996 Schedule II. Condensed Financial Information of Registrant IV-12-14 Years ended December 31, 1997, 1996 and 1995 Schedule III. Supplementary Insurance Information IV-15-17 Years ended December 31, 1997, 1996 and 1995 Schedule IV. Supplementary Insurance Information - Reinsurance IV-18 Years ended December 31, 1997, 1996 and 1995 Schedule VI. Supplementary Insurance Information - Consolidated Property-Casualty Entities IV-19 Years ended December 31, 1997, 1996 and 1995
All other schedules are omitted as the required information is not applicable or the required information is otherwise presented in the financial statements or notes thereto. IV-1 46 (a) 3. Exhibits 3.3 The Articles of Incorporation and by-laws of the Company originally filed on Form S-1 Registration Statement No. 2-42438, effective March 3, 1972 are hereby incorporated herein by reference. The Amendment to the Articles of Incorporation filed as Exhibit C to the Registrant's form 10-Q for the quarter ended September 30, 1980, is also hereby incorporated herein by reference. The Amendment to the Articles of Incorporation filed as Exhibit 4 to the Registrant's Form 10-Q for the quarter ended September 30, 1987, is also hereby incorporated by reference. The Amendment to the Articles of Incorporation filed as Exhibit 4 to the Registrant's Form 10-Q for the quarter ended September 30, 1993 is also hereby incorporated by reference. 3.11 Earnings Per Share Computations IV-3 3.21 Subsidiaries of Registrant IV-4 3.27 Financial Data Schedule (for SEC use only) 3.29 Information from reports furnished to state insurance regulatory authorities IV-5-10 (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1997. IV-2 47 Exhibit 3.11 Schedule of Computation of Earnings Per Share See Note 8 to the consolidated financial statements. IV-3 48 Exhibit 3.21 Subsidiaries of Registrant The following table lists the Registrant and its subsidiaries as of December 31, 1997, the jurisdiction in which each subsidiary was organized, and the percentage of voting securities of each subsidiary owned by the immediate parent:
Percentage of Jurisdiction Voting Securities Where Owned by Immediate Name Organized Parent ---- ------------ ------------------ Mobile America Corporation Florida Mobile America Insurance Group, Inc. Florida 100% Fortune Insurance Company Florida 100% Fortune Life Insurance Company Arizona 100% Pegasus Insurance Company Oklahoma 100% Fortune Financial Corporation Florida 100% Big Gorilla Inc. Florida 100%
All of the above subsidiaries are included in the Consolidated Financial Statements of the Registrant and its subsidiaries. All unnamed subsidiaries and other affiliates, when considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. IV-4 49 Information From Reports Furnished to State Insurance Regulatory Authority Exhbit 29 Schedule P Detailed Information on Losses and Loss Expenses (In Thousands)
(1) Premiums Earned Loss and Loss Expense Payments Years in ----------------------------------------------------------------------------------------------------------------------- which Allocated Loss Premiums Loss Payments Expense Payment were ------------------------------------------- Earned and (2) (5) (7) (9) (10) (11) Losses Direct (4) Direct Direct Salvage and Unallocated Total were and (3) Net and (6) and (8) Subrogtion Loss Expense Net Paid Incurred Assumed Ceded (2 - 3) Assumed Ceded Assumed Ceded Received Payments (5-6+7-8+10) - ------------------------------------------------------------------------------------------------------------------------------------ Prior XXX XXX XXX 50 0 7 0 0 0 57 1988 20,865 9,412 11,453 9,088 3,297 1,834 463 145 429 7,591 1989 31,658 13,998 17,660 14,278 4,901 3,112 851 54 469 12,107 1990 49,043 27,158 21,885 28,434 16,166 5,256 2,779 70 451 15,196 1991 61,555 33,228 28,327 37,665 21,312 5,739 2,988 87 1,614 20,718 1992 77,171 43,120 34,051 54,297 32,236 6,795 3,315 152 1,512 27,053 1993 94,541 53,094 41,447 63,246 35,707 9,131 4,835 231 1,410 33,245 1994 87,690 53,349 34,341 61,329 36,848 8,442 4,980 172 2,710 30,653 1995 102,709 65,079 37,630 64,376 43,612 7,105 5,071 309 2,640 25,438 1996 76,849 46,191 30,658 64,235 42,126 5,773 3,503 355 3,747 28,126 1997 91,969 47,913 44,056 40,505 17,909 2,378 1,012 77 2,150 26,112 Totals XXX XXX XXX 437,503 254,114 55,572 29,797 1,652 17,132 226,296
The Registrant has no affiliations with unconsolidated subsidiaries or 50%-or-less owned equity investees. IV-5 50 Information From Reports Furnished to State Insurance Regulatory Authority Exhbit 29 Schedule P Detailed Information on Losses and Loss Expenses (In Thousands)
(1) Years in Losses Unpaid Allocated Loss Expenses Unpaid which ----------------------------------------- -------------------------------------- Premiums Case Basis Bulk & IBNR Case Basis Bulk & IBNR were ------------------- ------------------ ---------------- ----------------- (23) Earned and (13) (15) (17) (19) (22) Total Losses Direct Direct Direct Direct Unallocated Net Losses were and (14) and (16) and (18) and (20) Loss Expenses and Expenses Incurred Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Unpaid Unpaid - ------------------------------------------------------------------------------------------------------------------------------------ Prior 117 90 55 0 262 1988 0 1989 7 2 5 1990 1 0 1 1991 38 8 14 9 2 1 1 37 1992 74 37 14 7 6 4 2 48 1993 227 108 157 98 45 27 8 204 1994 475 266 489 299 38 17 13 433 1995 938 566 1,988 800 1,369 576 28 2,381 1996 2,244 2,162 869 435 677 477 74 790 1997 16,046 7,939 3,062 1,705 3,782 2,179 678 11,745 Total 20,167 11,088 6,683 3,353 5,974 3,281 804 15,906
The Registrant has no affiliations with unconsolidated subsidiaries or 50%-or-less owned equity investees. IV-6 51 Information From Reports Furnished to State Insurance Regulatory Authority Exhbit 29 Schedule P Detailed Information on Losses and Loss Expenses (In Thousands)
(1) Years in which Total Losses and Loss and Loss Expense Percentage Time Value Net Balance Sheet Premiums Expenses Incurred (Incurred/Premiums Earned) of Money Reserves After Discount were --------------------------------------------------------------------------------- (33) ----------------------- Earned and (25) (28) Inter-Company (35) Losses Direct Direct (32) Pooling (34) Loss were and (26) (27) and (29) (30) (31) Loss Participation Losses Expense Incurred Assumed Ceded Net Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid - ------------------------------------------------------------------------------------------------------------------------------------ Prior XXX XXX XXX XXX XXX XXX 207 55 1988 11,351 3,760 7,591 54.4 39.9 66.3 0 0 1989 17,866 5,754 12,112 56.4 41.1 68.6 5 0 1990 34,142 18,945 15,197 69.6 69.8 69.4 1 0 1991 45,073 24,318 20,755 73.2 73.2 73.3 35 2 1992 62,700 35,599 27,101 81.2 82.6 79.6 44 4 1993 74,224 40,775 33,449 78.5 76.8 80.7 178 26 1994 73,496 42,410 31,086 83.8 79.5 90.5 399 34 1995 78,444 50,625 27,819 76.4 77.8 73.9 1,560 821 1996 77,619 48,703 28,916 101.0 105.4 94.3 516 274 1997 68,601 30,744 37,857 74.6 64.2 85.9 9,464 2,281 Totals XXX XXX XXX XXX XXX XXX 12,409 3,497
The Registrant has no affiliations with unconsolidated subsidiaries or 50%-or-less owned equity IV-7 52 Exhbit 29 Information From Reports Furnished to State Insurance Regulatory Authority Schedule P History of Incurred Losses and Allocated Expenses (In Thousands)
Incurred Losses and Allocated Expenses Reported at Year End Development ----------------------------------------------------------------------------------------- --------------------- (1) Years in which (12) (13) Losses were (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) One Two Incurred 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Year Year - ------------------------------------------------------------------------------------------------------------------------------------ Prior 2,626 2,479 1,620 1,602 1,572 1,589 1,617 1,603 1,852 1,446 (406) (157) 1988 8,016 7,473 7,040 7,157 7,137 7,149 7,164 7,160 7,158 7,162 4 2 1989 12,521 11,367 11,561 11,377 11,559 11,578 11,623 11,632 11,642 10 19 1990 17,489 14,833 14,800 14,795 14,777 14,749 14,754 14,746 (8) (3) 1991 19,886 18,580 19,037 19,162 19,094 19,134 19,141 7 47 1992 25,323 24,973 25,777 25,644 25,658 25,586 (72) (58) 1993 32,774 31,877 31,774 32,218 32,032 (186) 258 1994 25,881 27,127 28,356 28,362 6 1,235 1995 29,790 24,412 25,150 738 (4,640) 1996 27,317 25,094 (2,223) 1997 35,029 Totals (2,130) (3,297)
The Registrant has no affiliations with unconsolidated subsidiaries or 50%-or-less owned equity IV-8 53 Exhbit 29 Information From Reports Furnished to State Insurance Regulatory Authority Schedule P History of Cumulative Paid Losses and Allocated Expenses (In Thousands)
(12) (13) Number of Number of Cummulative Paid Losses and Allocated Expenses at Year End Claims Claims (1) ------------------------------------------------------------------------------------------- Closed Closed Years in which with with Losses were (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) Loss Loss Incurred 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Payment Payment - ------------------------------------------------------------------------------------------------------------------------------------ Prior 0 1,253 1,119 1,373 1,521 1,570 1,589 1,589 1,127 1,184 1988 3,162 5,685 6,527 6,919 7,055 7,146 7,154 7,160 7,160 7,162 1989 2,996 8,571 10,469 11,099 11,485 11,550 11,610 11,627 11,637 1990 6,555 12,595 13,993 14,489 14,648 14,725 14,743 14,746 1991 9,886 16,815 18,355 18,677 18,936 19,032 19,105 1992 12,210 22,953 24,591 25,022 25,366 25,541 1993 16,925 28,351 30,166 31,284 31,835 1994 13,275 23,896 26,605 27,942 1995 15,950 20,813 22,797 1996 15,427 24,378 1997 23,962
The Registrant has no affiliations with unconsolidated subsidiaries or 50%-or-less owned equity IV-9 54 Exhbit 29 Information From Reports Furnished to State Insurance Regulatory Authority Schedule P History of Bulk and Incurred but not Reported Reserves (In Thousands)
Bulk and Incurred but not Reported Reserves on Losses and Allocated Expenses at Year End - --------------------------------------------------------------------------------------------------------------------------------- (1) Years in which Losses were (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) Incurred 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 - --------------------------------------------------------------------------------------------------------------------------------- Prior 1,036 1,183 319 134 16 117 145 1988 661 698 243 162 24 4 1989 3,749 806 707 164 35 16 3 1 1990 3,323 1,047 457 192 82 20 4 1991 3,635 697 403 303 102 64 6 1992 3,335 1,055 897 499 247 8 1993 4,475 2,165 1,019 789 78 1994 4,281 1,583 1,253 210 1995 5,278 2,566 1,981 1996 4,488 634 1997 2,960
The Registrant has no affiliations with unconsolidated subsidiaries or 50%-or-less owned equity investees. IV-10 55 Schedule I Mobile America Corporation and Subsidiaries Summary of Investments - Other than Related Parties December 31, 1997
Amount which carried in balance Market Consolidated Cost sheet Value -------------------------- ----------- ----------- ----------- Industrial Bonds $10,513,738 $10,369,910 $10,036,713 Municipal Bonds 37,199,324 37,535,888 37,753,249 U.S. Government Bonds 24,951,563 25,018,183 25,025,018 ----------- ----------- ----------- Total Bonds 72,664,625 72,923,981 72,814,980 ----------- ----------- ----------- Common Stock 1,269,859 1,188,566 1,188,566 Preferred Stock 243,082 184,504 184,504 ----------- ----------- ----------- Total Stocks 1,512,941 1,373,070 1,373,070 ----------- ----------- ----------- Certificates of Deposit 14,119,180 14,119,180 14,119,180 Industrial Bonds 2,446,881 2,446,881 2,446,881 U.S. Government Bonds 374,901 374,901 374,901 ----------- ----------- ----------- Total Short Term Investments 16,940,962 16,940,962 16,940,962 ----------- ----------- ----------- Total Investments $91,118,528 $91,238,013 $91,129,012 =========== =========== ===========
December 31, 1996 Amount which carried in balance Market Consolidated Cost sheet Value -------------------------- ----------- ----------- ----------- Industrial Bonds $ 11,431,370 $ 11,448,203 $ 11,436,951 Municipal Bonds 44,515,993 43,870,289 43,884,845 U.S. Government Bonds 30,343,561 31,383,657 31,276,592 ----------- ----------- ----------- Total Bonds 86,290,924 86,702,149 86,598,388 ----------- ----------- ----------- Common Stock 1,063,711 984,169 984,169 Preferred Stock 391,582 364,008 364,008 ----------- ----------- ----------- Total Stocks 1,455,293 1,348,177 1,348,177 ----------- ----------- ----------- Certificates of Deposit 16,898,070 16,898,070 16,898,070 Industrial Bonds 1,567,351 1,567,351 1,567,351 Municipal Bonds 579,391 579,391 579,391 U.S. Government Bonds 3,186,663 3,186,663 3,186,663 ----------- ----------- ----------- Total Short Term Investments 22,231,475 22,231,475 22,231,475 ----------- ----------- ----------- Total Investments $109,977,692 $110,281,801 $110,178,040 =========== =========== ===========
IV-11 56 SCHEDULE II Mobile America Corporation and Subsidiaries Condensed Financial Information of Registrant December 31, 1997 and 1996 Parent Company - Balance Sheets
Assets 1997 1996 -------------------------------- Cash $ 6,520 $ (5,456) Receivables: Accrued investment income 145,599 184,592 Accounts receivable 209,343 0 Income taxes recoverable 0 581,194 Intercompany receivables 6,693,156 7,221,806 -------------------------------- Total receivables 7,048,098 7,987,592 -------------------------------- Investments: Short-term investments 5,083,684 2,225,173 Securities - held to maturity at amortized cost 5,160,183 5,883,085 Securities - available for sale at market 3,974,555 4,957,436 -------------------------------- Total investments 14,218,422 13,065,694 -------------------------------- Investments in subsidiaries 30,969,042 27,453,235 Other assets 360,177 392,113 Deferred income taxes 282,946 312,578 Equipment less accumulated depreciation 198,576 188,445 -------------------------------- $53,083,781 $49,394,201 =============================== Liabilities and Stockholders' Equity Note payable $12,000,000 $12,000,000 Income taxes payable 213,850 0 Accrued expenses and other liabilities 165,026 132,946 Intercompany payables 1,019,234 1,084,234 -------------------------------- Total liabilities 13,398,110 13,217,180 -------------------------------- Stockholders' equity: Common stock 191,110 168,010 Capital in excess of par 4,348,842 2,729,588 Net unrealized appreciation on securities available for sale net of deferred taxes 78,861 200,712 Treasury stock, at cost (1,229,403) (510,122) Retained earnings 36,296,261 33,588,833 -------------------------------- Total stockholders' equity 39,685,671 36,177,021 -------------------------------- $53,083,781 $49,394,201 ================================ Cash dividends paid by consolidated subsidiaries to parent 1997 $ 2,489,378 1996 $ 2,425,000 1995 $ 3,744,319
IV-12 57 SCHEDULE II Mobile America Corporation and Subsidiaries Condensed Financial Information of Registrant Years Ended December 31, 1997, 1996 and 1995 Parent Company - Statements of Operations
1997 1996 1995 -------------------------------------------- Revenues: Investment Income $679,988 $704,100 $382,764 Rental Income 0 1,520 67,510 Other 758,589 752,962 246,273 Realized gains 102,383 109,915 7,017 Sales of modular office equipment 0 0 105,484 Service fees 237,014 7,327 170,826 -------------------------------------------- Total revenues 1,777,974 1,575,824 979,874 -------------------------------------------- Expenses: General and administrative 865,376 624,380 348,811 Interest on note payable 1,014,161 1,005,760 156,375 Cost of sales of modular office equipment 0 0 7,453 -------------------------------------------- Total expenses 1,879,537 1,630,140 512,639 -------------------------------------------- Income (loss) before taxes (101,563) (54,316) 467,235 Deferred taxes 0 0 149,063 Current taxes (credit) (92,802) (501,870) 45,076 -------------------------------------------- (92,802) (501,870) 194,139 Income (loss) before equity in earnings of subsidiaries (8,761) 447,554 273,096 Equity in earnings of subsidiaries 6,184,557 7,123,838 5,726,598 -------------------------------------------- Net income $6,175,796 $7,571,392 $5,999,694 ============================================
IV-13 58 SCHEDULE II Mobile America Corporation and Subsidiaries Condensed Financial Information of Registrant Years Ended December 31, 1997, 1996 and 1995 Parent Company - Statements of Cash Flows
1997 1996 1995 ----------- ----------- ----------- Cash Flows from Operating Activities: Net Income $ 6,175,796 $ 7,571,392 $ 5,999,694 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of investments (102,383) (109,915) (7,017) Provisions for depreciation 6,500 3,002 5,674 Equity in earnings of subsidiaries (6,184,557) (7,123,838) (5,726,598) Decrease (increase) in accrued investment income 38,993 62,925 (90,026) Decrease (increase) in prepaid and other assets (177,407) 133,427 (425,540) Decrease (increase) in intercompany balances 463,650 691,972 (6,096,907) Net change in current income taxes 795,044 (639,722) (50,472) Increase (decrease) in accrued expenses and other liabilities 32,080 105,677 (5,831) Decrease (increase) in deferred taxes 29,632 9,010 (320,627) ----------- ----------- ----------- Net cash provided by (used in) operating activities 1,077,348 703,930 (6,717,650) ----------- ----------- ----------- Cash Flows from Investing Activities: Dividends from subsidiaries 2,489,378 2,425,000 3,744,319 Investment in subsidiaries 0 (1,100,000) (1,000,000) Net change in short term investments (2,858,511) 774,730 (1,998,213) Purchase of investments (520,565) (4,642,577) (5,530,286) Proceeds from sale and maturity of investments 2,478,790 1,997,631 2,791,589 Purchase of property and equipment (16,631) (167,073) 0 Sales of modular offices and equipment 0 0 7,453 ----------- ----------- ----------- Net cash provided by (used in) investing activities 1,572,461 (712,289) (1,985,138) ----------- ----------- ----------- Cash Flows from Financing Activities: Proceeds from note payable 0 0 12,000,000 Purchase, sale of treasury stock (162,754) (45,650) (32,503) Dividends paid to stockholders (2,474,416) (2,171,238) (1,117,776) Stock dividend, fractional shares (663) 0 0 ----------- ----------- ----------- Net cash provided by (used in) financing activities (2,637,833) (2,216,888) 10,849,721 ----------- ----------- ----------- Net increase (decrease) in cash 11,976 (2,225,247) 2,146,933 Cash, beginning of year (5,456) 2,219,791 72,858 ----------- ----------- ----------- Cash, end of year $ 6,520 $ (5,456) $ 2,219,791 =========== =========== ===========
IV-14 59 Schedule III Mobile America Corporation and Subsidiaries Supplementary Insurance Information Years Ended December 31, 1997, 1996 and 1995
Losses, Claims and Policy Acquisition Costs -------------------------------------------- Premiums Commissions ------------------------------------------------------ and Unearned Unearned Premiums Losses Losses brokerage premiums Net premiums earned outstanding incurred incurred beginning premiums end of during end of during during Lines of Insurance of period written period period period period period ------------ ----------- ---------- ----------- ------------ ------------ ------------ Year ended December 31, 1995 Fortune Insurance Company Homeowners $ 556,850 $ 1,443,579 $ 791,308 $ 1,209,121 $ 387,357 $ 803,827 $ 393,467 Business Owners Package 236,931 215,687 161,624 290,994 285,881 295,557 72,813 Automobile Physical Damage 519,485 4,664,818 1,856,644 3,327,659 876,910 3,096,325 775,274 Automobile Liability 10,892,355 34,234,855 12,388,788 32,738,422 19,224,250 26,704,606 7,238,035 Other 0 0 0 0 7,636 200 (535) ------------------------- ----------- ----------- ----------- ----------- ---------- $12,205,621 $40,558,939 $15,198,364 $37,566,196 $20,782,034 $30,900,515 $8,479,054 ------------------------- ----------- ----------- ----------- ----------- ---------- Fortune Life Insurance Individual Credit Life $ 834 $ 0 $ 541 $ 293 $ 0 $ 0 $ 96 Ordinary Life 5,471 19,821 11,392 13,900 15,540 30,758 7,001 Accident and Health 0 0 0 0 0 0 0 ------------------------- ----------- ----------- ----------- ----------- ---------- $ 6,305 $ 19,821 $ 11,933 $ 14,193 $ 15,540 $ 30,758 $ 7,097 ------------------------- ----------- ----------- ----------- ----------- ---------- Pegasus Insurance Company Homeowners $ 0 $ 83,089 $ 48,058 $ 35,031 $ 10,509 $ 10,509 $ 13,404 Business Owners Package 953 4,399 2,094 3,258 977 977 894 Other Liability 14,473 23,701 14,006 24,168 14,500 14,500 5,124 ------------------------- ----------- ----------- ----------- ----------- ---------- $ 15,426 $ 111,189 $ 64,158 $ 62,457 $ 25,986 $ 25,986 $ 19,422 ------------------------- ----------- ----------- ----------- ----------- ---------- Eliminations 0 0 0 0 0 (228,633) (7,643,569) ------------------------- ----------- ----------- ----------- ----------- ---------- Consolidated Totals $12,227,352 $40,689,949 $15,274,455 $37,642,846 $20,823,560 $30,728,626 $ 862,004 ========================= =========== =========== =========== =========== ==========
IV-15 60 Schedule III Mobile America Corporation and Subsidiaries Supplementary Insurance Information Years Ended December 31, 1997, 1996 and 1995
Losses, Claims and Policy Acquisition Costs ------------------------------------------- Premiums Commissions ---------------------------------------------------- and Unearned Unearned Premiums Losses Losses brokerage premiums Net premiums earned outstanding incurred incurred beginning premiums end of during end of during during Lines of Insurance of period written period period period period period ----------- ------------ ---------- ---------- ------------ ----------- ------------- Year ended December 31, 1996 Fortune Insurance Company Homeowners $ 791,308 $ 1,580,533 $ 739,609 $ 1,632,232 $ 640,362 $ 925,804 $ 520,625 Business Owners Package 161,624 159,949 77,049 244,524 482,564 304,639 52,682 Automobile Physical Damage 1,856,644 3,574,174 1,397,118 4,033,700 722,143 3,411,448 914,071 Automobile Liability 12,388,788 26,254,197 14,668,654 23,974,331 17,874,116 18,749,139 3,030,867 Other 0 0 0 0 7,460 326 0 ----------- ----------- ----------- ----------- ----------- ----------- ---------- $15,198,364 $31,568,853 $16,882,430 $29,884,787 $19,726,645 $23,391,356 $4,518,245 ----------- ----------- ----------- ----------- ----------- ----------- ---------- Fortune Life Insurance Company Individual Credit Life $ 541 $ 0 $ 369 $ 172 $ 0 $ 0 $ 0 Ordinary Life 11,392 77,410 53,978 34,824 16,291 751 24,013 Accident and Health 0 0 0 0 0 0 0 ----------- ----------- ----------- ----------- ----------- ----------- ---------- $ 11,933 $ 77,410 $ 54,347 $ 34,996 $ 16,291 $ 751 $ 24,013 ----------- ----------- ----------- ----------- ----------- ----------- ---------- Pegasus Insurance Company Homeowners $ 48,058 $ 1,500,450 $ 818,032 $ 730,476 $ 270,379 $ 406,297 $ 236,932 Business Owners Package 2,094 (172) 0 1,922 2,246 1,269 567 Other Liability 14,006 41,730 16,384 39,352 41,462 26,962 10,559 ----------- ----------- ----------- ----------- ----------- ----------- ---------- $ 64,158 $ 1,542,008 $ 834,416 $ 771,750 $ 314,087 $ 434,528 $ 248,058 ----------- ----------- ----------- ----------- ----------- ----------- ---------- Eliminations 0 0 0 0 0 0 (3,625,344) ----------- ----------- ----------- ----------- ----------- ----------- ---------- Consolidated Totals $15,274,455 $33,188,271 $17,771,193 $30,691,533 $20,057,023 $23,826,635 $1,164,972 =========== =========== =========== =========== =========== =========== ==========
IV-16 61 Schedule III Mobile America Corporation and Subsidiaries Supplementary Insurance Information Years Ended December 31, 1997, 1996 and 1995
Losses, Claims and Policy Acquisition Costs ------------------------------------------- Premiums Commissions ------------------------------------------------------ and Unearned Unearned Premiums Losses Losses brokerage premiums Net premiums earned outstanding incurred incurred beginning premiums end of during end of during during Lines of Insurance of period written period period period period period --------- ------------ ------------ ---------- ------------- ------------- ------------ Year ended December 31, 1997 Fortune Insurance Company Homeowners $ 739,609 $ 1,125,121 $ 579,759 $ 1,284,971 $ 549,356 $ 484,418 $ 391,120 Business Owners Package 77,049 223,125 69,383 230,791 308,601 34,832 49,439 Automobile Physical Damage 1,397,118 3,572,259 1,108,801 3,860,576 1,082,960 3,135,312 860,730 Automobile Liability 14,668,654 33,830,649 12,427,143 36,072,160 13,393,970 27,978,986 5,042,166 Other 0 0 0 0 4,085 1,676 0 ------------------------- ----------- ----------- ----------- ----------- ---------- $16,882,430 $38,751,154 $14,185,086 $41,448,498 $15,338,972 $31,635,224 $6,343,455 ------------------------- ----------- ----------- ----------- ----------- ---------- Fortune Life Insurance Individual Credit Life $ 369 $ 0 $ 230 $ 139 $ 0 $ 0 $ 0 Ordinary Life 53,978 134,193 71,697 116,474 16,983 18,192 92,255 Accident and Health 0 0 0 0 0 0 0 ------------------------- ----------- ----------- ----------- ----------- ---------- $ 54,347 $ 134,193 $ 71,927 $ 116,613 $ 16,983 $ 18,192 $ 92,255 ------------------------- ----------- ----------- ----------- ----------- ---------- Pegasus Insurance Company Homeowners $ 818,032 $ 3,612,626 $ 1,869,292 $ 2,561,366 $ 497,642 $ 1,282,636 $ 840,600 Business Owners Package 0 487 0 487 3,408 1,162 287 Other Liability 16,384 42,828 14,817 44,395 65,676 51,034 12,254 ------------------------- ----------- ----------- ----------- ----------- ---------- $ 834,416 $ 3,655,941 $ 1,884,109 $ 2,606,248 $ 566,726 $ 1,334,832 $ 853,141 ------------------------- ----------- ----------- ----------- ----------- ---------- Eliminations 0 0 0 0 0 0 (5,104,959) ------------------------- ----------- ----------- ----------- ----------- ---------- Consolidated Totals $17,771,193 $42,541,288 $16,141,122 $44,171,359 $15,922,681 $32,988,248 $2,183,892 ========================= =========== =========== =========== =========== ==========
IV-17 62 Schedule IV Mobile America Corporation and Subsidiaries Supplementary Insurance Information - Reinsurance Years Ended December 31, 1997, 1996 and 1995
Percentage Ceded to Assumed of Amount Gross Other From Other Assumed Amount Companies Companies Net Amount to Net ------------- -------------- ------------- --------------- ------------ Year ended December 31, 1997 - ---------------------------- Life insurance in force $ 8,949,000 $ 13,000 $ 0 $ 8,936,000 $ 0 ============ =========== ======= =========== ===== Insurance premiums earned: Life insurance $ 117,293 $ 680 $ 0 $ 116,613 $ 0 Property and Casualty 91,968,284 47,913,538 0 44,054,746 0 ------------ ----------- ------- ----------- ----- $ 92,085,577 $47,914,218 $ 0 $44,171,359 $ 0 ============ =========== ======= =========== ===== Year ended December 31, 1996 - ---------------------------- Life insurance in force $ 5,138,000 $ 13,000 $ 0 $ 5,125,000 $ 0 ============ =========== ======= =========== ===== Insurance premiums earned: Life insurance $ 35,464 $ 468 $ 0 $ 34,996 $ 0 Property and Casualty 76,848,640 46,192,103 0 30,656,537 0 ------------ ----------- ------- ----------- ----- $ 76,884,104 $46,192,571 $ 0 $30,691,533 $ 0 ============ =========== ======= =========== ===== Year ended December 31, 1995 - ---------------------------- Life insurance in force $ 1,304,702 $ 12,500 $ 0 $ 1,292,202 $ 0 ============ =========== ======= =========== ===== Insurance premiums earned: Life insurance $ 14,661 $ 468 $ 0 $ 14,193 $ 0 Property and Casualty 102,707,334 65,078,681 0 37,628,653 0 ------------ ----------- ------- ----------- ----- $102,721,995 $65,079,149 $ 0 $37,642,846 $ 0 ============ =========== ======= =========== =====
IV-18 63 Schedule VI Mobile America Corporation and Subsidiaries Supplemental Insurance Information Consolidated Property-Casualty Entities Years Ended December 31, 1997, 1996 and 1995
Reserves for Discount Deferred Unpaid Claims if any, Policy and Claim deducted in Net Acquisition Adjustment previous Unearned Earned Investment Costs Expenses column Premiums Premiums Income - ----------------------------------------------------------------------------------------- Year Ended December 31, 1997 ($243,009) $15,905,698 $0 $16,069,195 $44,054,746 $3,858,580 Year Ended December 31, 1996 $191,839 $20,040,734 $0 $17,716,845 $30,656,536 $4,337,687 Year Ended December 31, 1995 ($1,405,008) $20,808,027 $0 $15,262,522 $37,628,653 $4,337,330 Claim and Claim Adjustment Expenses Paid Incurred Related to Amortization Claims (1) (2) of Deferred and Claim Current Prior Policy Adjustment Premium Year Years Costs Expenses Written - -------------------------------------------------------------------- Year Ended December 31, 1997 $36,833,718 ($3,863,662) ($7,196,596) $37,105,090 $42,407,097 Year Ended December 31, 1996 $27,317,000 ($3,491,118) ($4,766,302) $24,593,170 $33,110,861 Year Ended December 31, 1995 $30,737,734 $188,772 ($8,498,476) $29,221,765 $40,670,127
IV-19 64 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, The Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MOBILE AMERICA CORPORATION -------------------------- Registrant March 27, 1998 By: /s/ Allan J. McCorkle ------------------------- Allan J. McCorkle President March 27, 1998 By: /s/ Thomas L. Stinson ------------------------- Thomas L. Stinson Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By /s/ Allan J. McCorkle Chairman of the Board, - ------------------------------------------------------- and Director March 27, 1998 Allan J. McCorkle By /s/ Thomas J. McCorkle Director - ------------------------------------------------------- March 27, 1998 Thomas J. McCorkle By /s/ R. Lee Smith Director - ------------------------------------------------------- March 27, 1998 R. Lee Smith By /s/ Robert Thomas III Director - ------------------------------------------------------- March 27, 1998 Robert Thomas III By /s/ Jack Horne Chambers Director - ------------------------------------------------------- March 27, 1998 Jack Horne Chambers By /s/ John Michael Garrity Director - ------------------------------------------------------- March 27, 1998 John Michael Garrity By /s/ Thomas Edwin Perry Director - ------------------------------------------------------- March 27, 1998 Thomas Edwin Perry By /s/ Randal Lee Ringhaver Director March 27, 1998 - ------------------------------------------------------- Randal Lee Ringhaver
IV-20 EX-27 2 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF MOBILE AMERICA CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 29,303,564 43,620,417 43,511,416 1,373,070 0 0 91,238,013 4,518,020 100,486 (2,047,989) 138,242,138 33,643,295 32,893,437 0 0 12,000,000 0 0 191,110 39,494,561 138,242,138 44,171,359 5,390,681 263,711 8,984,456 32,876,176 2,295,965 14,770,170 8,867,896 2,692,100 6,175,796 0 0 0 6,175,796 .86 .86 20,040,739 35,706,903 (2,736,845) 23,961,413 13,143,680 15,905,704 2,736,845
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