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3Q and Nine Months 2018 | ||||||||||||||
(dollars in thousands) | 3Q'18 | 3Q'17 | 2018 | 2017 | ||||||||||
Operating income | $ | 96,695 | $ | 81,239 | $ | 269,585 | $ | 231,627 | ||||||
Investment income | 8,431 | 8,418 | 20,801 | 21,458 | ||||||||||
Interest expense and other, net | 655 | 792 | 1,708 | 2,031 | ||||||||||
Income before income taxes | 104,471 | 88,865 | 288,678 | 251,054 | ||||||||||
Income tax expense | 24,025 | 30,322 | 62,768 | 86,108 | ||||||||||
Net income | $ | 80,446 | $ | 58,543 | $ | 225,910 | $ | 164,946 | ||||||
3Q 2018 Highlights |
• | Management fee revenue - policy issuance and renewal services increased $16.1 million, or 3.7 percent, in the third quarter of 2018 compared to the third quarter of 2017. |
• | Management fee revenue allocated to administrative services was $13.5 million in the third quarter of 2018. No management fee revenue was allocated to administrative services in the third quarter of 2017. |
• | Cost of operations - policy issuance and renewal services |
– | Commissions increased $8.1 million in the third quarter of 2018 compared to the third quarter of 2017, as a result of the 7.1 percent increase in direct and assumed premiums written by the Exchange, slightly offset by lower agent incentive costs related to less profitable growth, compared to the third quarter of 2017. |
– | Non-commission expense increased $5.9 million in the third quarter of 2018 compared to the same period in 2017. Information technology costs increased $4.0 million primarily due to higher professional fees. Administrative and other expenses increased $2.4 million primarily due to higher professional fees and personnel costs. Personnel costs in all expense categories were impacted by lower estimated costs for incentive plan awards related to underwriting performance. |
• | The administrative services reimbursement revenue and corresponding cost of operations increased both total operating revenue and total operating expenses by $140.2 million in the third quarter of 2018, but had no net impact on operating income. |
Nine Months 2018 Highlights |
• | Management fee revenue - policy issuance and renewal services increased $43.3 million, or 3.4 percent, in the first nine months of 2018 compared to the first nine months of 2017. |
• | Management fee revenue allocated to administrative services was $39.9 million in the first nine months of 2018. No management fee revenue was allocated to administrative services in the first nine months of 2017. |
• | Cost of operations - policy issuance and renewal services |
– | Commissions increased $31.9 million in the first nine months of 2018 compared to the first nine months of 2017, as a result of the 6.9 percent increase in direct and assumed premiums written by the Exchange, slightly offset by lower agent incentive costs related to less profitable growth, compared to the first nine months of 2017. |
– | Non-commission expense increased $12.9 million for the nine months ended September 30, 2018 compared to the same period in 2017. Underwriting and policy processing costs increased $5.3 million primarily due to increased personnel costs and underwriting report costs. Information technology costs increased $2.7 million primarily due to increased personnel costs. Customer service costs increased $3.4 million primarily due to increased personnel costs and credit card processing fees. Personnel costs in all expense categories were higher due to additional bonuses of approximately $4.8 million awarded to all employees as a result of tax savings realized from the lower corporate income tax rate that became effective January 1, 2018 as well as increased pension and medical costs. The total increase in personnel costs was somewhat offset by lower estimated costs for incentive plan awards related to underwriting performance. |
• | The administrative services reimbursement revenue and corresponding cost of operations increased both total operating revenue and total operating expenses by $432.6 million in the first nine months of 2018, but had no net impact on operating income. |
• | dependence upon our relationship with the Exchange and the management fee under the agreement with the subscribers at the Exchange; |
• | dependence upon our relationship with the Exchange and the growth of the Exchange, including: |
◦ | general business and economic conditions; |
◦ | factors affecting insurance industry competition; |
◦ | dependence upon the independent agency system; and |
◦ | ability to maintain our reputation for customer service; |
• | dependence upon our relationship with the Exchange and the financial condition of the Exchange, including: |
◦ | the Exchange's ability to maintain acceptable financial strength ratings; |
◦ | factors affecting the quality and liquidity of the Exchange's investment portfolio; |
◦ | changes in government regulation of the insurance industry; |
◦ | emerging claims and coverage issues in the industry; and |
◦ | severe weather conditions or other catastrophic losses, including terrorism; |
• | costs of providing policy issuance and renewal services to the Exchange under the subscriber's agreement; |
• | credit risk from the Exchange; |
• | ability to attract and retain talented management and employees; |
• | ability to ensure system availability and effectively manage technology initiatives; |
• | difficulties with technology or data security breaches, including cyber attacks; |
• | ability to maintain uninterrupted business operations; |
• | factors affecting the quality and liquidity of our investment portfolio; |
• | our ability to meet liquidity needs and access capital; and |
• | outcome of pending and potential litigation. |
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