The Company owns its principal executive offices in Lawrenceville, New Jersey, which has 53,220 square feet of office space. In addition, it leases its offices in Houston, Texas and has operating leases for its regional offices. The Company believes that it has adequate space for its current operations and to accommodate expansion.
_________ (1) The Company provides for income taxes in its statements of operations pursuant to Financial Accounting Standards Board Statement of Financial Accounting Standards No. (``SFAS'') 109, ``Accounting for Income Taxes.'' For further information regarding federal and foreign income taxes, see Note 7 to Consolidated Financial Statements.
(3) Net Premiums written to policyholder surplus includes twelve months pro forma net premiums written for American Reliance.
Net Premiums Written. Net premiums written for 2000, 1999 and 1998 were $461.0 million, $333.6 million and $374.8 million, respectively. The increase in 2000 of $127.4 million or 38.4% relates to the same factors noted above for gross written premiums. Net premiums written for the golf course program and livery program were $11.1 million and $9.0 million, respectively, reflecting the reinsurance on these programs. The decrease in 1999 compared to 1998 is primarily related to a non-recurring additional premium in 1998 of $34.6 million associated with the Company's termination of an Aggregate Excess of Loss Reinsurance Agreement (``Stop Loss Agreement''). The remaining decrease of $6.6 million in 1999 is related to the same issues affecting gross premiums written.
Debt Interest and Amortization Expense. Debt interest and amortization expense for 2000 compared to 1999 increased approximately $600,000 due to the increase in the underlying variable interest rate (LIBOR) and variable performance add- ons associated with the Company's senior bank debt. Debt interest and amortization expense for 1999 compared to 1998 decreased approximately $500,000 due to the mid-year paydown of $6.0 million of senior bank debt offset somewhat by higher interest rates.
Loss on Write-off of Subsidiary. Effective December 1999, the Company wrote- off its remaining investment in LMI which was in run-off since April 1997 when it was acquired in the purchase of American Reliance. In March 2000, the Court of Common Pleas in Franklin County, Ohio entered an Order appointing the Superintendent of Insurance of the State of Ohio as the Rehabilitator of LMI. As Rehabilitator, the Superintendent is by operation of law vested with control of LMI, including title to all of LMI's assets.
First, as required under the December 31, 2000 Amendment and Waiver to the Credit Agreement, the terms of the Debentures have been amended so that only payment in kind ("PIK") interest may be made under the Debentures until the loan under the Credit Agreement is paid. The PIK interest will be paid in the form of a new 12.5% convertible subordinated debenture due December 31, 2005 (the "New Debentures"). The New Debentures will be in the same form and have the same terms as the Debentures, except that interest is at the rate of 12.5% per annum and the New Debenture are convertible into Common Stock at a conversion price of $6.00 per share. Cash interest on the New Debentures may not be paid until the loan under the Credit Agreement is paid. Secondly, the Company has retained two investment advisors to explore strategic and other alternatives available to the Company, and to advise the Special Committee described below on proposal transactions. These alternatives include sale or merger of the entire Company, sale of certain lines of business or assets of the Company, obtaining an investment in the Company, and entering into a joint venture or other joint endeavor. There can be no assurance that the Company will be successful in pursuing any of these alternatives. If the Company is not successful, it will need to pay or refinance the loan under the Credit Agreement by April 2002. There is no assurance that the Company will have the resources to pay the loan or that it will be able to find a source of refinancing.
Highlands Group's principal sources of funds are dividends and tax sharing payments from its subsidiaries, if any, and funds that may be raised from time to time from the issuance of additional debt or equity securities. The payment of dividends by the insurance subsidiaries is subject to restrictions and limitations imposed by the insurance regulatory authorities. Due to the Company's operating losses, dividend payments to Highlands Group from its insurance subsidiaries are limited to approximately $12.7 million in 2001 without prior regulatory approval. Both the issuance of additional debt and the issuance of additional equity securities at a price less than current market price would require the consent of the holders of a majority in interest of the Debentures pursuant to the covenants contained in the Debentures.
Statutory Surplus. Maintenance of appropriate levels of statutory surplus of the Company's United States domiciled insurance subsidiaries is a primary objective of the Company and is also important to regulatory authorities and insurance rating agencies. As a result of operating losses, the statutory surplus of the Company's insurance subsidiaries has declined from $270.8 million at December 31, 1999, to $204.0 million at December 31, 2000. In addition, increased public and regulatory concerns regarding the financial stability of participants in the insurance industry have caused greater emphasis to be placed by current and potential customers upon the ratings assigned to property and casualty insurance companies. The Company's principal insurance subsidiaries have been assigned an A.M. Best secure rating of ``B++'' (Very Good). However, A.M. Best has placed this rating under review with negative implications.
The following table sets forth certain information with respect to the Company's combined statutory surplus (``U.S. Insurance Subsidiaries'') at the dates indicated.