Total revenues .......... $100,733 $ 89,494 $106,428 $121,019 $125,566 -------- -------- -------- -------- --------
Management's Discussion and Analysis of Financial Condition and Results of Operations. ---------------------------------------------
(a) Includes net premiums written from MMO London of $27,654, $17,365 and $16,832 for 2000, 1999 and 1998, respectively.
(b) Includes net premiums earned from MMO London of $26,399, $13,614 and $14,832 for 2000, 1999 and 1998, respectively.
The Company reported an operating loss, which excludes the effects of realized investment gains after taxes, for the year ended December 31, 2000, of $8.9 million or $.96 per diluted share compared with operating income of $8.3 million, or $.86 per diluted share, for the year ended December 31, 1999. The decline in operating income in 2000 principally reflects the underwriting losses attributable to MMO London including costs associated with the run-off of Syndicate 1265 which ceased underwriting in the third quarter of 2000. Results from operations were reduced by such losses for the year ended December 31, 2000 by $1.67 per diluted share. This compares with losses of $.10 per diluted share from MMO London in the prior year. The exchange of the Company's Lloyd's agency for a minority interest in Cathedral Capital PLC, in the fourth quarter of 2000, resulted in an after tax gain of approximately $450,000 or $.05 per diluted share.
Net premiums earned increased by 34% for the year ended December 31, 2000 when compared to the prior year. The increase in the current year's premiums is largely attributable to premiums emanating from the participation in Syndicate 1265 through MMO London. Net premiums earned from MMO London grew to $26.4 million in 2000 as compared to $13.6 million in 1999 and much of the increase is attributable to a transaction involving a one-time assumption of approximately $7.4 million of ocean marine and casualty premiums. The Company placed Syndicate 1265 into run-off in the third quarter of 2000. In 2001, MMO London will maintain a position in Syndicate 2010 and will derive its share of gross premium writings up to a maximum of $13.6 million. Such writings will be concentrated mainly in assumed reinsurance of aviation and property business.
Net premiums earned from domestic insurance companies increased by 15% in 2000 due mainly to growth in the aviation line of business. Aviation net premiums earned grew 142% for the year as a result of the effect of higher retention levels in 2000 due to the non-renewal of a 75% quota share treaty which the Company maintained since 1997 as well as rate increases on policies. The increase in aviation writings was offset by a reduction in policy count and average line size. In 2001, the Company expects gross premium rates to continue to firm; however, additional reinsurance costs as a result of the hardening of the aviation reinsurance market will mitigate such increases.
Net losses and loss adjustment expenses incurred as a percentage of net premiums earned (the "loss ratio") was 90.2% for the year ended December 31, 2000 as compared to 65.6% for the prior year. The increase resulted from a significant frequency of larger than anticipated losses derived from the underwriting operations of MMO London which resulted in a loss ratio of 137.4% for year ended December 31, 2000. The loss ratio from the domestic insurance companies increased in 2000 to 64.8% from 61.7% in the prior year primarily due to increases in both the frequency and severity of losses in the aviation line of business. The Company's domestic insurance companies recorded favorable net loss experience in the ocean marine line compared to the prior year period.
Net investment income for the year ended December 31, 2000 decreased by 3% from the level of net investment income achieved in 1999. The decline was principally caused by a reduction in invested assets offset by higher yields on investments due to a higher interest rate environment in 2000 and increased investments in taxable securities.
Commission income was approximately $900,000 for the year ended December 31, 2000 as compared to $2.0 million in the prior year. 1999 reflected larger reinsurance contingent commissions derived from the profitability of certain reinsurance agreements in the aviation and ocean marine lines.
Losses and loss adjustment expenses incurred as a percentage of net premiums earned were 65.6% for the year ended December 31, 1999, as compared to 56.6%, excluding one time items, for the prior year. The domestic insurance subsidiaries recorded higher loss ratios in the aviation line of business in 1999 due to increases in both the frequency and severity of losses. In addition, the Company's ocean marine line recorded higher loss ratios in 1999, primarily attributable to the loss experience produced from MMO London which experienced a relatively high frequency of marine hull claims in 1999.
Policy acquisition expenses as a percentage of net premiums earned for the year ended December 31, 1999 were 19.7% as compared with 13.3% for the prior year. The increase in the ratio is due in large part to the two transactions involving assumptions of premiums in 1998. Absent such business, the ratio would have been approximately 19.7% for the year ended December 31, 1998.
General and administrative expenses decreased by 10.2% in 1999 from 1998. The prior year's amounts included certain non-recurring expenses incurred in connection with the assumption of premiums and the formation of MMO London. In addition, larger expenses were recorded for two employee benefit plans in 1998 within the domestic insurance agencies.
Realized investment gains of $12,504,000 for the year ended December 31, 1999 resulted in large part from the sale of appreciated equity securities. In addition, sales resulted from monitoring the Company's overall exposure to equity securities to be in accordance with its investment guidelines.
Cash flows were used in operating activities in each of the past three years as declines in premium rates, increases in ceded reinsurance premium costs and increases in gross severity claims negatively affected cash flows from operations. The Company's maturing book of other liability business also adversely affected cash flows. The cash flows used in operating activities in the past three years was provided by investing activities and, in particular, through the sale or maturity of fixed income securities.
Under the Common Stock Repurchase Plan, the Company may purchase up to $55,000,000 of the Company's issued and outstanding shares of common stock on the open market. During 2000, the Company repurchased 520,326 shares of common stock, under the Company's Common Stock Repurchase Plan, for a total cost of approximately $6.7 million. As of December 31, 2000, the Company had repurchased a total of 2,644,408 shares of common stock at a total cost of approximately $45,285,581 at market prices ranging from $12.38 to $28.81 per share.