In proposing the 2001 fiscal year budget, President Clinton continued to focus attention on the property and casualty insurance industry. One of the more significant revenue raising proposals contained in the budget directly affects property and casualty insurance companies. Property and casualty insurance companies are currently limited on the deductibility of the investment income earned on tax exempt fixed maturities and certain dividends received to 85%. This reduction was the result of the Tax Act of 1986. President Clinton has proposed an additional limitation of 10% (i.e., deductibility of
The commercial lines direct written premium of the Pooled Companies increased in 1998 approximately 3.3%. The rate of growth on the Company's commercial lines has slowed in recent years. This is due primarily to a reduction in premiums in the Company's workers' compensation line of business, which reflects rate reductions driven by decreases in loss costs as promulgated by various rating bureaus. The workers' compensation line of business represents approximately 10% of the Pooled Companies' commercial business at the end of 1998.
The fluctuations in segment profit for the standard insurance segment, as discussed above, is the result of an increase in the level of catastrophe losses in 1998 as compared to 1999 and 1997. As noted above, the nonstandard insurance segment has been focusing since 1997 on improving its loss experience through implementation of a more restrictive underwriting posture and rate increases implemented during 1997 in several operating states. The result of these actions by this segment, as noted above, has improved this segment's statutory loss ratio as well as its segment profit. The increase in the investment management services segment's profit from 1998 to 1999 was primarily the result of the acquisition of Farmers Casualty and Mid-Plains, effective January 1, 1999, at which time this segment began providing investment management services to these companies. For additional information on the Company's reportable segments, see footnote 14 on Reportable Segments in the Company's consolidated financial statements.
Stateco performs investment management services (the investment management services segment) on behalf of the Company and Mutual and its subsidiary. The Investment Committee of each insurer's Board of Directors sets investment policies to be followed by Stateco.
As of December 31, 1999, the Company had fixed maturities with a fair value of $527.8 million designated as available for sale compared to $481.8 million at December 31, 1998. During 1999, the Company continued its program to increase its equity portfolio to enhance growth of statutory surplus over the long term. At December 31, 1999 and 1998, respectively, the equity portfolio totaled $55.5 million and $42.2 million, respectively.
Through Stateco, the Company provides investment management services to affiliated companies
The Company, through S.I.S., develops and sells software for the processing of insurance transactions, database management for insurance agents and electronic interfacing of information between insurance companies and agencies. S.I.S.sells services and products to affiliated companies and their agents and markets similar services and products to nonaffiliated insurers and their agencies.
(5) REINSURANCE In the ordinary course of business, the Company assumes and cedes reinsurance with other insurers and reinsurers and are members in various pools and associations. See Note 6(a) for discussion of reinsurance with affiliates. The voluntary arrangements provide greater diversification of business and limit the maximum net loss potential arising from large risks and catastrophes. Most of the ceded reinsurance is effected under reinsurance contracts known as treaties; some is by negotiation on individual risks. Although the ceding of reinsurance does not discharge the original insurer from its primary liability to its policyholder, the insurance company that assumes the coverage assumes the related liability.
The Company is required to establish a valuation allowance for any portion of the deferred tax asset that management believes will not be realized. In the opinion of management, it is more likely than not that the Company will realize the benefit of the deferred tax assets and, therefore, no such valuation allowance has been established.
Discount rate ................................. 8.00% 7.00 7.25 Expected long-term rate of return on assets ... 9.00% 9.00 9.00 Rates of increase in compensation levels ...... 5.00% 4.50 4.50