-----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, CdcRG04PJ1geSYzy4rZPc3/60O33/1d+ZcyIdDSDYY1XrImmJPC5pFybu4wWNBgp QZANXOESPS1dJHnTOZGnWg== 0000950144-99-012970.txt : 19991115 0000950144-99-012970.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950144-99-012970 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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-Q SEC ACT: SEC FILE NUMBER: 000-06764 FILM NUMBER: 99750876 BUSINESS ADDRESS: STREET 1: 10475 FORTUNE PARKWAY STREET 2: SUITE 110 CITY: JACKSONVILLE STATE: FL ZIP: 32256 BUSINESS PHONE: 9043636339 MAIL ADDRESS: STREET 1: 10475 FORTUNE PARKWAY STREET 2: SUITE 110 CITY: JACKSONVILLE STATE: FL ZIP: 32256 10-Q 1 MOBILE AMERICA CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended September 30, 1999___________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 (I.R.S. Employer Identification No.) incorporation or organization) 10475 Fortune Parkway, Jacksonville, Florida 32256 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (904) 363-6339 -------------- N/A - ------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report 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 [ ]. (APPLICABLE ONLY TO CORPORATE ISSUERS) There were 7,167,542 shares of common stock, par value $.025 per share, outstanding as of the close of business on November 10, 1999. 2 PART I Mobile America Corporation INDEX
Page Financial Statements: Part I ------ Unaudited Consolidated Balance Sheets 1 Unaudited Consolidated Statements of Operations 2 Unaudited Consolidated Statements of Comprehensive Income 3 Unaudited Consolidated Statements of Cash Flows 4 Unaudited Consolidated Statements of Changes in Stockholders' Equity 5 Notes to Financial Statements 6-8 Management's Discussion and Analysis of the Unaudited Consolidated Statements of Operations 9-12 Part II ------- Other Information, and Signatures 13 Exhibit 11 - Computations of Earnings Per Share 14
3 Mobile America Corporation and Subsidiaries Unaudited Consolidated Balance Sheets September 30, 1999 and December 31, 1998
Assets 1999 1998 - ---------------------------------------------------------------------------------------------------- Investments: Securities held to maturity at amortized cost (fair value $21,801,100 and $30,811,888) $ 22,041,303 $ 30,321,793 Securities available for sale at fair value (amortized cost $20,091,574 and $27,240,132) 20,086,821 27,919,593 Short-term investments 11,905,205 21,210,230 --------------------------------------- Total investments 54,033,329 79,451,616 --------------------------------------- Cash 1,047,387 1,082,422 Receivables: Insurance premiums 1,302,970 3,041,656 Accrued investment income 753,670 904,692 Reinsurance, paid losses and other 12,870,475 11,001,546 Reinsurance recoverable, unpaid losses 17,092,394 17,688,861 Other receivables 328,835 933,253 Current income taxes 5,512,629 2,747,359 --------------------------------------- Total receivables 37,860,973 36,317,367 --------------------------------------- Deferred income tax 1,466,145 985,578 Ceded unearned premium 10,322,958 16,372,379 Deferred policy acquisition costs (909,662) (2,743,281) Property and equipment 2,110,743 2,153,357 Equity in pools and associations 1,129,660 1,132,210 Other assets 455,275 514,919 --------------------------------------- $ 107,516,808 $ 135,266,567 ======================================= Liabilities and Stockholders' Equity 1999 1998 - ------------------------------------------------------------------------------------------------------------- Insurance loss reserves, including life insurance policy benefits of $17,741 and $17,741 $ 30,136,592 $ 29,106,729 Unearned premium 22,729,860 26,913,770 Unearned service fees 147,948 448,117 Contractholders funds 1,211,152 11,485,618 Reinsurance funds withheld and balances payable 9,794,314 17,268,136 Claim payments outstanding 3,081,965 2,073,901 Accrued expenses and other liabilities 3,115,212 1,579,854 Deferred income tax on net unrealized gains on securities available for sale 0 231,017 Note payable 7,800,000 9,600,000 --------------------------------------- Total liabilities 78,017,043 98,707,142 --------------------------------------- Stockholders' equity: Common stock, $.025 par value per share Authorized - 18,000,000 shares Issued - 7,644,414 shares 191,110 191,110 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 4,348,842 Accumulated other comprehensive income: Net unrealized gain (loss) on securities available for sale net of deferred income taxes of $0 and $231,017 (4,754) 448,444 Treasury stock at cost, 476,872 and 476,872 shares (1,233,069) (1,233,069) Retained earnings 26,197,636 32,804,098 --------------------------------------- Total stockholders' equity 29,499,765 36,559,425 --------------------------------------- $ 107,516,808 $ 135,266,567 =======================================
See notes to consolidated financial statements -1- 4 Mobile America Corporation and Subsidiaries Unaudited Consolidated Statements of Operations Quarters ended September 30, 1999 and 1998, Nine Months Ended September 30, 1999 and 1998
Quarters Ended September 30 Nine Months Ended September 30 1999 1998 1999 1998 ------------------------------ ------------------------------ Revenues: Insurance premiums earned net of premiums ceded of $8,096,408, $12,110,939, $28,789,575 and $34,436,980 $ 7,035,914 $ 8,610,027 $ 23,033,849 $ 28,107,223 Service fees earned 729,638 2,570,796 4,040,039 7,328,936 Investment income 820,034 1,157,284 2,740,692 3,506,443 Other 8,669 16,409 23,598 50,149 Net realized gains on investments 90,227 100,423 147,533 70,124 ------------------------------ ------------------------------ Total revenues 8,684,482 12,454,939 29,985,711 39,062,875 ------------------------------ ------------------------------ Expenses: Losses and loss adjustment expenses, net of reinsurance recoveries of $8,184,229, $10,779,940, $29,663,651 and $28,930,756 5,853,756 6,180,866 22,360,102 18,949,242 Policy acquisition costs 2,131,792 1,350,456 5,518,173 3,525,802 Salaries and wages 1,667,747 1,657,810 5,018,313 5,765,964 General and administrative expenses 2,667,650 1,637,918 6,330,270 5,368,728 Interest expense 157,214 217,616 499,597 688,050 ------------------------------ ------------------------------ Total expenses 12,478,159 11,044,666 39,726,455 34,297,786 ------------------------------ ------------------------------ Income (loss) before provision for income taxes (3,793,677) 1,410,273 (9,740,744) 4,765,089 ------------------------------ ------------------------------ Provision and (benefit) for income taxes: Current (1,528,944) 517,979 (3,460,855) 1,148,133 Deferred 32,249 (2,781) (480,567) 365,112 ------------------------------ ------------------------------ Total provision for income taxes (1,496,695) 515,198 (3,941,422) 1,513,245 ------------------------------ ------------------------------ Net income (loss) $ (2,296,982) $ 895,075 $ (5,799,322) $ 3,251,844 ============================== ============================== Earnings (loss) per share: Basic $ (0.32) $ 0.12 $ (0.81) $ 0.45 ============================== ============================== Diluted $ (0.32) $ 0.12 $ (0.80) $ 0.45 ============================== ============================== Dividends per share $ 0.00 $ 0.00 $ 0.11 $ 0.35 ============================== ==============================
See notes to consolidated financial statements. -2- 5 Mobile America Corporation and Subsidiaries Unaudited Statements of Comprehensive Income Quarters Ended September 30,1999 and 1998 and Nine Months Ended September 30,1999 and 1998
Quarters Ended September 30 Nine Months Ended September 30 --------------------------- ------------------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Net income (loss) $ (2,296,982) $ 895,075 $ (5,799,322) $ 3,251,844 ------------ ------------ ------------ ------------ Other comprehensive income: Unrealized gains (loss) on securities: Unrealized holding gains (losses) arising during period net of taxes $(70,173), $(90,361), $(222,134) and $36,762 (140,973) (175,406) (435,954) 71,362 Less: reclassification adjustment for gains included in net income (2,349) 73,202 17,244 70,315 ------------ ------------ ------------ ------------ Other comprehensive income (138,624) (248,608) (453,198) 1,047 ------------ ------------ ------------ ------------ Comprehensive income $ (2,435,606) $ 646,467 $ (6,252,520) $ 3,252,891 ============ ============ ============ ============
See notes to consolidated financial statements. -3- 6 Mobile America Corporation and Subsidiaries Unaudited Consolidated Statements of Cash Flows Nine Months Ended September 30, 1999 and 1998
1999 1998 --------------------------------------- Cash Flows from Operating Activities: Net income (loss) $ (5,799,322) $ 3,251,844 Adjustments to reconcile net income (loss) to net cash used in operating activities: Provision for depreciation 432,953 202,620 Loss (gain) on sale of investments (147,533) (70,124) Change in assets and liabilities: Insurance premiums receivable 1,741,235 (966,824) Accrued investment income & other receivables 755,440 79,099 Deferred policy acquisition costs (1,833,619) 2,073,947 Other assets 59,644 207,728 Insurance loss reserves 1,029,862 (9,757,657) Unearned premium (4,183,910) 3,676,645 Contractholder funds (10,274,466) (4,556,163) Reinsurance funds held and balances payable (7,473,823) 727,261 Claim payments outstanding 1,008,064 (923,736) Accrued expenses and other liabilities 1,535,358 92,506 Current income taxes (2,765,270) 809,473 Deferred income taxes (480,567) 365,112 Prepaid reinsurance premiums 6,049,422 (6,267,863) Reinsurance recoverable (1,272,462) 2,694,383 Unearned service fees (300,169) (121,877) --------------------------------------- Net cash used in operating activities (21,919,163) (8,483,626) --------------------------------------- Cash Flows from Investing Activities: Net change in short term investments 9,305,026 (1,987,167) Purchase of investments (6,870,827) (10,017,059) Proceeds from sale and maturity of investments 22,447,408 22,464,233 Purchase of property and equipment (390,339) (857,837) --------------------------------------- Net cash provided in investing activities 24,491,268 9,602,170 --------------------------------------- Cash Flows from Financing Activities: Purchase of treasury stock 0 (3,666) Dividends paid to stockholders (807,140) (2,492,629) Principal payment, note payable (1,800,000) (1,800,000) --------------------------------------- Net cash used in financing activities (2,607,140) (4,296,295) --------------------------------------- Net change in cash (35,035) (3,177,751) Cash, beginning of period 1,082,422 4,518,020 --------------------------------------- Cash, end of period $ 1,047,387 $ 1,340,269 =======================================
See notes to consolidated financial statements. -4- 7 Mobile America Corporation and Subsidiaries Unaudited Consolidated Statements of Changes in Stockholders' Equity Nine Months Ended September 30, 1999 and 1998
1999 1998 --------------------------------------- Common Stock: No Change during period $ 191,110 $ 191,110 --------------------------------------- Preferred Stock: No Change during period 0 0 --------------------------------------- Capital in excess of par value: No Change during period 4,348,842 4,348,842 --------------------------------------- Accumulated other comprehensive income: Net unrealized gain (loss) on securities available for sale: Balance at beginning of period 448,444 78,861 Increase (decrease) (684,215) 1,587 Deferred taxes 231,017 (540) --------------------------------------- Balance at end of period (4,754) 79,908 --------------------------------------- Treasury Stock: Balance at beginning of period (1,233,069) (1,229,403) Purchases of 0 and 292 shares 0 (3,666) --------------------------------------- Balance at end of period (1,233,069) (1,233,069) --------------------------------------- Retained earnings: Balance at beginning of period 32,804,098 36,296,261 Net income (loss) (5,799,322) 3,251,844 Cash dividends $.11 and $.35 per share (807,140) (2,492,629) --------------------------------------- Balance at end of period 26,197,636 37,055,476 --------------------------------------- Total stockholders' equity at end of period $ 29,499,765 $ 40,442,267 =======================================
See notes to consolidated financial statements. -5- 8 Mobile America Corporation and Subsidiaries Notes To Consolidated Financial Statements Note 1. Basis of Presentation In the opinion of management, the accompanying balance sheets and related interim statements of income, comprehensive income and cash flows include all adjustments (which include reclassifications and normal recurring adjustments) necessary to present fairly the financial position and results of operations and cash flows at September 30, 1999 and for all periods presented. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis and financial statements and notes thereto included in the Mobile America Corporation 1998 10-K. Certain amounts in prior years' financial statements have been reclassified to conform to the 1999 presentation. Note 2. Earnings Per Share Basic earnings per share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share presents the dilutive effect of options using the treasury stock method.
Quarters Ended September 30 Nine Months Ended September 30 --------------------------- ------------------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Numerator: Income (loss) available to common shareholders $ (2,296,982) $ 895,075 $ (5,799,322) $ 3,251,844 ============ ============ ============ ============ Denominator: Basic earnings per share weighted average shares 7,167,542 7,167,542 7,167,542 7,167,627 Effect of dilution: Employee stock options 20,938 12,029 61,170 57,059 ------------ ------------ ------------ ------------ Diluted earnings per share adjusted weighted average shares and assumed conversions 7,188,480 7,179,571 7,228,712 7,224,686 ============ ============ ============ ============ Basic earnings per share $ (0.32) $ 0.12 $ (0.81) $ 0.45 ============ ============ ============ ============ Diluted earnings per share $ (0.32) $ 0.12 $ (0.80) $ 0.45 ============ ============ ============ ============
-6- 9 Mobile America Corporations and Subsidiaries Notes to Unaudited Consolidated Financial Statements Note 3. Business Segments The Company and its subsidiaries operate exclusively in Florida within principally six business segments: automobile insurance, excess surplus lines property insurance, fee for service administration, premium finance, corporate and other miscellaneous. The automobile insurance segment sells personal lines automobile insurance through independent insurance agents primarily in south Florida. The excess surplus lines segment writes specialized property insurance coverage. The fee for service segment contracts 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 administration services for a fee. The premium finance segment finances policies written through the Registrant. The corporate segment includes home office revenues and assets that are not specific to any particular segment. The other category is attributable to a life insurance company and other small inactive companies that do not meet the quantitative thresholds for a separate segment. Management evaluates performance and allocates assets based on the separate entities owned by the Registrant. The reportable segments are business units that offer different products or services. The reportable segments are each managed separately. The following schedule presents segment revenues and profit before taxes for the quarters and nine months ended September 30,1999 and 1998 and assets by operating segment at September 30,1999 and December 31,1998. The reconciling items for revenues and assets include adjusting available for sale securities to market value and the reclassification of reinsurance recoverable balances and the elimination of intercompany holdings. There have been no significant differences from the last annual 10-K report in the basis of measuring segment profit or loss. During the third quarter of 1999 approximately $2,400,000 in assets were transferred into the automobile segment. These assets came from the fee-for-service segment, $1,800,000, and the corporate segment, $600,000. Other changes in assets include a decline in the assets in the automobile insurance segment due to negative operating cash flows and in the corporate segment due to the repayment of principal on the note payable. -7- 10 Mobile America Corporations and Subsidiaries Notes to Unaudited Consolidated Financial Statements Note 3. Business Segments (continued)
Quarters Ended September 30 Nine Months Ended September 30 --------------------------- ------------------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Segment revenues: Automobile insurance $ 7,416,065 $ 10,064,682 $ 25,074,967 $ 31,850,040 Excess and surplus lines insurance 1,641,896 1,248,986 3,594,251 3,429,344 Fee for service 384,631 735,030 1,412,015 2,224,905 Corporate 330,652 384,908 1,020,689 1,290,869 Premium finance (971,600) 230,913 (834,006) 523,622 Other 61,630 71,949 170,116 228,767 ------------ ------------ ------------ ------------ Total segment revenues $ 8,863,274 $ 12,736,468 $ 30,438,032 $ 39,547,547 Intercompany eliminations (178,792) (281,529) (452,321) (484,672) ------------ ------------ ------------ ------------ Total consolidated revenues $ 8,684,482 $ 12,454,939 $ 29,985,711 $ 39,062,875 ============ ============ ============ ============ Segment profit before taxes: Automobile insurance $ (2,863,380) $ 460,435 $ (8,991,851) $ 2,623,999 Excess and surplus lines insurance 327,937 612,257 967,661 1,194,803 Fee for service (45,589) 293,629 296,733 818,920 Corporate (149,886) (115,507) (948,669) (193,162) Premium finance (1,051,545) 148,656 (1,093,781) 265,634 Other 27,642 10,803 68,019 54,895 ------------ ------------ ------------ ------------ Total segment profit(loss) before taxes $ (3,754,821) $ 1,410,273 $ (9,701,888) $ 4,765,089 Intercompany eliminations $ (38,856) -- $ (38,856) -- ------------ ------------ ------------ ------------ Total consolidated profit(loss) before tax $ (3,793,677) $ 1,410,273 $ (9,740,744) $ 4,765,089 ============ ============ ============ ============
September 30,1999 December 31,1998 ----------------------------------------- Segment assets: Automobile insurance $ 75,624,619 $ 80,206,894 Excess and surplus lines insurance 10,568,343 9,589,246 Fee for service 4,194,766 6,250,161 Corporate 31,550,470 35,101,117 Premium finance 1,571,713 3,494,370 Other 3,272,260 3,180,653 -------------- -------------- Total segment assets $ 126,782,171 $ 137,822,441 GAAP adjustments & reclassifications 30,577,829 39,067,228 Intercompany eliminations (49,843,192) (41,623,102) -------------- -------------- Total consolidated segment assets $ 107,516,808 $ 135,266,567 ============== ==============
-8- 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30, 1998 Operations The Registrant reports a net loss of $5,799,322 ($.81 a share) for the nine months ended September 30, 1999. This compares to net income of $3,251,844 ($.45 a share) reported during the first nine months of 1998. The loss for the period is due to lower earned revenues, increased loss experience and higher acquisition costs. Consolidated revenues decreased 23.2% compared to the same period last year due to an 18.1% reduction in earned insurance premiums, a 44.9% reduction in service fee income and lower investment income. Direct earned premium in the automobile segment declined 18.1% to $48,517,695 from $59,254,255 earned during the first nine months of 1998. The decline reflects the reduction in direct written premium resulting from increased competition and processing backlogs from computer modification problems during the Year 2000 conversion process. Earned premium in the automobile segment net of reinsurance ceded declined 19.0% to $20,814,282 from $25,706,404 reported in 1998, following the trend in direct business. Direct written premium in the automobile segment decreased 30.7% to $43,693,500 during the current nine months period compared to the comparable period in 1998. Direct excess and surplus lines earned premium increased 8.1% to $3,288,494 during the current period. Net earned premium declined 5.2% to $2,203,132 reflecting higher reinsurance costs for excess loss coverage. Direct written premium increased 33.3% to $3,923,996 during the first nine months of 1999 over the same period in 1998. Service fee revenue, which includes fee-for-service revenue, net premium finance revenue, Mobile America Insurance Group, Inc.'s agency revenue and insurance company excess and surplus lines fee revenue declined 44.9% over the same period last year. Revenues from fee-for-service business declined 41.0% to $1,374,243 reflecting a continued decline in the Florida automobile and property joint underwriting associations' pools of available business. Premium finance revenues of $501,457 were offset by a $1,340,000 write-off in finance receivable balances, $1,117,000 occurring during the third quarter. Agency fee revenue, which is directly related to the production of new business, totaled $3,020,639 for the period compared to $4,246,711 reported in 1998. Insurance company fee revenue totaled $483,700 in 1999 compared to $248,225 reported in 1998. Investment income declined 21.8% over the first nine months of 1998 as a result of a decrease in invested assets and the reinvestment of maturing securities at lower interest rates. During 1998 the Registrant installed a new Year 2000 compliant premium and claims processing system. Due to problems with the system and its installation the Registrant experienced an increase in the backlog of policies, endorsements and cancellations to be processed, which significantly affected its business during the second half of 1998 and the first half of 1999. The processing backlog problems were addressed with increased staffing and the use of outsourcing assistance and, with the exception of endorsements, returned to normal levels during the second quarter of 1999. The Registrant continues to make progress toward eliminating the backlog of endorsements, many of which now relate to policies that have expired. All current endorsements are processed as received. During the third quarter the Registrant began assessing the quality and quantity of business delivered by each of the agents from whom it accepts business. The Registrant anticipates that this initiative will reduce the number of agents from whom it accepts business, will increase the overall quality of its business, and will increase the per-agent quantity of business from remaining agents. In October the Registrant is introducing an increase in rates for personal injury protection (PIP) coverage, as well as increases in the excess and surplus lines business. Later in the fourth quarter the Registrant expects to complete a comprehensive review of its rate structure and will initiate rate changes as appropriate based on that review. Due to a decline in new business volume from the Florida Automobile Joint Underwriting Association (FAJUA) the Registrant has determined that it is not profitable to continue to service this business. As of November 1, 1999 the Registrant will terminate its service contract with the FAJUA and will no longer accept and service new FAJUA -9- 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations business. Policies existing on November 1 will continue to be serviced and will run off over the twelve months subsequent to that date. A similar decline in new business volume from the Florida Residential Property and Casualty Joint Underwriting Association (FRPCJUA) is occurring. The Registrant services this business on a subcontracting basis. The Registrant is assessing the viability of this business and anticipates reaching a conclusion regarding ongoing involvement in the business during the fourth quarter. Consolidated expenses increased 15.8% compared to the same period last year due to an increase in incurred losses, higher policy acquisition costs and general expenses offset by lower salary and wages. Net loss and loss adjustment expenses incurred increased 18.0% for the first nine months of 1999 compared to the same period last year. The ratio of incurred loss and loss expense to earned premium is 97.1% in 1999 compared to 67.4% in 1998. During 1999 net incurred loss and loss expenses in the automobile segment increased 19.4% to $21,098,184, driven by an increase in the frequency and severity of losses in the personal injury protection (PIP) automobile line. Direct paid loss and loss adjustment expenses declined 9.0% to $49,600,495. However, this decline was more than offset by a reduction in the amount of paid loss and loss adjustment expenses ceded ($30,205,000 in 1999 versus $31,794,147 in 1998) and by amounts set aside for reserves. During 1999, $1,702,688 was added to reserves for the automobile segment while for the same period in 1998 reserves were drawn down by $5,008,982, which equates to a $6,711,670 difference in expense levels between the two periods. The net loss and loss expense ratio in this segment was 101.4% in 1999 and 68.8% in 1998. Excess and surplus lines net incurred loss and loss expenses totaled $1,231,821 in 1999 which is in line with the $1,243,539 incurred in 1998. Direct loss and loss expense payments totaled $684,073 in 1999 compared to $1,326,471 reported during 1998, primarily due to storm damage incurred during the first quarter of 1998. For 1999 the net incurred loss and loss expense ratio was 55.9% compared to 53.5% in 1998. There is 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 the related administrative and legal costs of doing so. No assurance can be made that the ultimate liability will not exceed the amounts reserved, resulting in an adverse effect on the Registrant. 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 to 60% from 75% on certain lines effective January 1, 1999. 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 ultimately not be obtainable on economically viable terms. The decrease in reinsurance participation will enhance top-line growth over time and reduce reinsurance costs. However, the Registrant will be responsible for a higher percentage of loss. Policy acquisition costs increased in 1999, reflecting reduced reinsurance participation and the reduction of reinsurance commission allowances due to the cession of higher incurred losses in the automobile segment. These charges were offset in part by the elimination of one quota share reinsurance agreement covering automobile business that resulted in a commission credit of approximately $1,000,000. Salary and wages are 13.0% lower in 1999 due to a general downsizing and the curtailment of bonuses due to the loss reported in 1998. General and administrative expenses increased 18.0% compared to the same period last year reflecting one-time executive retirement costs of approximately $500,000, additional depreciation associated with the new computer system, consulting fees, temporary staffing costs to eliminate the processing backlog and the establishment of a $500,000 reserve for unprocessed premium deposits. During the third quarter the Registrant determined that the balances in the clearing accounts used to record premium deposits during the time before the policies are processed into the system were inaccurate. The source of the problem was traced to the change in procedures implemented during the Year 2000 system conversion. Those procedures have been modified to eliminate the problem for future new business, and a reconciliation project is underway to correct the balances in the accounts. The Registrant believes that the $500,000 reserve established is adequate to cover the potential write-off. -10- 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Position, Liquidity and Capital Resources Net cash flow from operations was negative in 1999 as loss and loss adjustment expense payments, operating expense payments and debt payments exceeded premiums, fees and investment revenues. Through acceleration of settlement procedures the Registrant continues to reduce the number of outstanding claims in the minimum limits automobile personal injury protection line of business. Accelerated settlement of loss payments contributes to the negative cash flow the Registrant is currently experiencing. However, the Registrant believes this practice will ultimately improve overall loss and loss expense experience by reducing ultimate loss settlement costs, administrative and litigation expenses and thereby improving cash flow. The Registrant's practice of maintaining a highly liquid investment portfolio has allowed the Registrant to meet cash demands. The Registrant believes that cash flow will improve as rate increases take effect and the settlement of losses returns to a more normal pattern. The Registrant maintains sufficient liquidity to meet operational needs. Cash requirements for operating expenses, debt service and capital expenditures will be provided by operations and investment activities. The investment policy continues to emphasize higher quality securities matched closely with the short liability duration. Three Months Ended September 30, 1999 Compared to Three Months Ended September 30, 1998 Operations The Registrant reports a net loss of $2,296,982 for the three months ended September 30, 1999 compared to net income of $895,075 reported during the same period of 1998. The items impacting the September 30, 1999 year to date operating results had an adverse effect on third quarter 1999 operating results. Net insurance premiums earned decreased 18.3% to $7,035,914 in 1999 from $8,610,027 reported in 1998 due to declines in premiums written in the automobile segment and higher reinsurance costs in the excess and surplus lines segment, partially offset by an increase in direct excess and surplus lines earned premium. Service fees decreased 71.6% to $729,638 from $2,570,796 reflecting a continuing decline in the pools of available business from the Florida property and automobile joint underwriting associations, a decline in agency fee revenue and a write-off of $1,117,000 in premium finance receivables. Investment income continued to decline as investments matured and the proceeds were used to fund operating needs. Net loss and loss adjustment expenses declined 5.3% to $5,853,756 in 1999 from $6,180,866 reported in 1998, following the decline in new business the Registrant has been experiencing. Policy acquisition costs increased to $2,131,792 due to the impact of loss sharing arrangements in reinsurance treaties. Salaries and wages remained steady while general and administrative expenses rose by approximately $1,000,000 reflecting the establishment of a $500,000 reserve for unprocessed premium deposits and additional consulting and temporary staffing costs. Year 2000 Disclosure The Registrant is aware of the issues associated with the programming code in existing computer systems as the Year 2000 approaches. The "Year 2000" problem is pervasive and complex, as virtually every computer system will be affected in some way by the rollover of the two-digit value to "00". The issue is whether computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or fail. In the ordinary course of business, the Registrant has installed various software and hardware that is Year 2000 compliant. The Registrant believes all mission critical systems to be Year 2000 compliant. The Registrant has confirmed with its primary processing vendors that they have or will make the necessary software and hardware upgrades prior to the end of 1999. Failure of the Registrant, or its significant third party suppliers and vendors, to become fully Year 2000 compliant prior to December 31, 1999 could have a material adverse impact on the Registrant's results of operations, financial position and cash flows. The Registrant has identified certain third parties that could service its major lines of business in the event that critical system applications should fail as a result of the date roll-over to January 1, 2000. -11- 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The Registrant has conducted a comprehensive review of its underwriting guidelines and has determined that there is very little Year 2000 exposure in the insurance policies it sells. The Registrant believes that its exposure to Year 2000 claims will not be material. However, changing social and legal trends may create unintended coverage for exposures by reinterpreting insurance contracts and exclusions. It is impossible to predict what exposure, if any, insurance companies may ultimately have for Year 2000 claims whether coverage for the issue is specifically excluded or included. Market Risk - Interest Rate Risk The Registrant's exposure to market risk for changes in interest rates is concentrated in its investment portfolio. There have been no material changes in the Registrant's exposure to market risk since December 31, 1998. Other Items On May 25, 1999 the Registrant's President and Chief Executive Officer, Allan J. McCorkle, resigned and retired from the company. On August 1, 1999, J. John Wortman joined the Registrant as its new President and Chief Executive Officer. On August 9, 1999 Arthur L. Cahoon succeeded Allan J. McCorkle as Chairman of the Board. Forward-Looking Statements This Form 10-Q 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. Investors and prospective investors are referred to the Registrant's Annual Report on Form 10K for the fiscal year ended December 31, 1998 for a more detailed discussion of the factors that could cause actual results to differ. These forward-looking statements relate to, among other things, 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, 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. -12- 15 Part II OTHER INFORMATION Item 1 - Legal Proceedings None Item 2 - Changes in Securities None Item 3 - Defaults on Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders At the company's annual meeting of stockholders held on August 9,1999, the following members were elected to the Board of Directors: Allan J. McCorkle Thomas J. McCorkle R. Lee Smith Robert Thomas III John Michael Garrity Thomas Edwin Perry Holly J. McCorkle Arthur L. Cahoon
Approval was granted to increase the number of shares authorized for issuance under the Mobile America Corporation Incentive plan by 500,000 to a total of 1,045,000 shares. Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits: 11. Unaudited computations of earnings per share. 27. Financial Data Schedule (for SEC use only). (b) Reports on Form 8-K No reports on Form 8-K were filed for the quarter ended September 30,1999. SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on it's behalf by the undersigned thereunto duly authorized. MOBILE AMERICA CORPORATION -------------------------- Registrant November 12, 1999 By/s/ Mark P. Brockelman - ----------------- ------------------------- Date Mark P. Brockelman Vice President and Chief Financial Officer -13- EX-11 2 UNAUDITED COMPUTATIONS OF EARNINGS 1 EXHIBIT 11 Mobile America Corporations and Subsidiaries Unaudited Computations of Earnings Per Share Quarters ended September 30, 1999 and 1998 and Nine Months ended September 30, 1999 and 1998 See Note 2 to financial statements. -14- EX-27 3 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF MOBILE AMERICA CORPORATION FOR THE PERIOD ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1999 JAN-31-1999 SEP-30-1999 18,537,484 22,041,303 21,801,100 1,549,337 0 0 54,033,329 1,047,387 12,870,475 (909,662) 107,516,808 30,136,592 22,729,860 3,081,965 1,211,152 7,800,000 0 0 191,110 29,308,655 107,516,808 23,033,849 2,740,692 147,533 4,063,637 22,360,102 5,518,173 11,848,180 (9,740,744) (3,941,422) (5,799,322) 0 0 0 (5,799,322) (0.81) (0.80) 11,400,127 18,986,585 3,343,418 10,242,897 10,462,897 13,026,457 3,343,418
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