A net loss of $648,013 was reported in 2000, compared to net loss of $1,438,024 in 1999. Net income of $1,061,530 was reported in 1998.
The increase in earned premiums during 2000 is attributable to continued growth of the AICPA Plan, primarily the result of an increase in the number of insureds under the AICPA Plan and from certain rate increases associated with a "step
plan" which was initiated during 1995. Under the step plan, insureds are offered discounted premium rates for favorable loss experience. However, as these insureds experience losses their premiums are "stepped up" accordingly. Because of the use of claims-made policies, as the number of years of coverage provided increases, CNA's (and AIG's) exposure increases. This additional exposure results in an increase in premiums charged.
Net investment income, including realized capital gains and losses, includes amounts earned on the Company's investment portfolio and cash equivalents. Net investment income decreased $720,572 or 26.7% in 2000 to $1,975,560 from $2,696,132 in 1999. Net investment income in 1999 increased by $252,137, or 10.3% from the $2,443,995 reported in 1998. Net investment income in 2000 includes net realized capital losses of $168,819 as compared to net realized capital gains in 1999 of $532,854. Net realized capital gains in 1998 were $277,627.
Policy acquisition costs of $1,927,973 were expensed in 2000 as compared to $1,770,098 in 1999, an increase of 8.9%. Policy acquisition costs expensed in 1999 reflect an increase of 7.9% from $1,641,092 in 1998. Such costs as a percentage of premiums earned (excluding the effects of reductions to retrocession premiums) are 29.5% in 2000, 28.5% in 1999 and 28.4% in 1998, and result primarily from ceding commissions paid to ceding companies determined contractually pursuant to reinsurance agreements and on federal excise taxes paid to ceding companies.
Operating and management expenses decreased by 7.7% in 2000 to $1,013,138 from $1,097,171 in 1999. Operating and management expenses for 1999 increased by 70.7% from $642,925 in 1998, due to the write-off of all expenses relating to the redomestication.
The Company's cash needs consist of settlement of losses and expenses under its reinsurance treaty and funding day-to-day operations. Management expects to be able to meet these needs from cash flows arising from its investment portfolio. Because substantially all of the Company's assets are marketable securities, the Company has sufficient flexibility to provide for unbudgeted cash needs which may arise without resorting to borrowing.
Prepaid expenses and other assets amounted to $159,800 at December 31, 2000, an increase of 98.2% from 1999.
The Company paid its twenty-second consecutive quarterly dividend of $0.65 per share during the fourth quarter of 2000.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES DEVELOPMENT (Thousands of Dollars)
The above table presents the development of balance sheet liabilities for 1990 through 2000 as of year-end 2000. The top line of the table shows the original recorded unpaid liability for losses and LAE recorded at the balance sheet date for each of the indicated years.
This liability represents the estimated amount of losses and LAE for claims arising in all prior years, both paid and unpaid at the balance sheet date, including losses that had been incurred, but not yet reported, to the Company. The upper portion of the table shows the experience as of the end of each succeeding year. The
estimate is increased or decreased as more information becomes known about the frequency and severity of claims.
The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years. For example, the 1994 liability has developed a $12,192,000 redundancy which has been reflected in income in subsequent years as the reserves were reestimated.
Equity price risk arises from fluctuations in the value of securities held. Changes in the level or volatility of equity prices affect the value of equity securities. The Company invests in equity securities in order to diversify its investment portfolio, which Management believes will assist the Company to achieve its goal of long-term growth of capital and surplus. Management has adopted investment guidelines that set out rate of return and asset allocation targets, as well as degree of risk and equity investment restrictions to minimize exposure to material risk from changes in equity prices.