Premiums written increased 3% from $132,819,000 in 1998 to $136,488,000 in 1999.
Net premiums earned increased 4% from $105,971,000 in 1998 to $110,544,000 in 1999. The Company generally earns premiums ratably over the assigned bond terms for the surety business and the policy term for the specialty property and casualty business.
Net losses and loss adjustment expenses increased 18% from $40,831,000 in 1998 to $48,310,000 in 1999. The increase is primarily due to a number of significant losses in the contract surety product line, continued losses on the property and casualty discontinued lines, and adverse development on property and casualty. The net losses for both years reflect the benefit of the aggregate stop loss reinsurance treaty. Losses and loss adjustment expense ceded to this treaty were $2,533,000 in 1998 and $6,981,000 in 1999 on ceded premium of $2,316,000 in 1998 and $4,822,000 in 1999.
Policy acquisition costs increased as a percentage of net premiums earned from 51%, or $53,806,000 in 1998 to 52%, or $57,723,000 in 1999. The increase in the expense ratio is primarily due to a decline in writings attributable to the discontinued California and Arizona private passenger automobile programs in the property and casualty division, increased commission expense on the surety business, a decreased ceding commission on the surety quota share reinsurance program and the elimination of quota share reinsurance on the discontinued property and casualty programs which generated ceding commission in 1998.
General operating costs remained constant as a percentage of net premiums earned at 14%, or $14,310,000 in 1998 and $15,432,000 in 1999.
Net income decreased from $6,269,000 in 1998 to $440,000 in 1999 due to the factors outlined above.
In addition, funds held increased from $30,542,000 at December 31, 1998 to $50,271,000 at December 31, 1999. The Company reflects in its consolidated financial statements funds received as collateral on which net earnings inure to the benefit of the Company. This amounted to $22,092,000 at December 31, 1998 and $37,173,000 at December 31, 1999. The increase in this amount is primarily attributed to increased commercial surety writings and timing and payment of claims activity related to draws on irrevocable letters of credit and certificates of deposit. The Company also holds funds as deposits on certain property and casualty business, certain immigration business and on funds control business. These funds amounted to $8,450,000 at December 31, 1998 and $13,098,000 at December 31, 1999. This increase is due to an increase in funds held for the Company's funds control business.
On August 6, 1994, the Company entered into a revolving credit agreement with Union Bank for $12,500,000 which refinanced a previous loan. The debt agreement was amended on April 24, 1996, July 10, 1996 and waived and amended as of September 30, 1997, February 9, 1999 and August 30, 1999 to increase the amount available under the revolving line of credit from $12,500,000 to $15,000,000 and to change certain covenants and payment requirements. At December 31, 1999, $15,000,000 is available under the revolving line of credit, $14,500,000 of which is currently utilized. The bank loan has a variable rate of interest based upon fluctuations in the London Interbank Offered Rate (LIBOR) and has amortizing principal payments. The interest rate at December 31, 1999 was 8.2%. The credit agreement contains certain financial covenants with respect to capital expenditures, business acquisitions, liquidity ratio, leverage ratio, tangible net worth, net profit and dividend payments. See Note 10 of Notes to Consolidated Financial Statements.
The Company believes that its cash flows from operations and other present sources of capital are sufficient to sustain its needs for the remainder of 2000.
The Company did not experience material Year 2000 problems and does not expect to incur any significant additional costs related to Year 2000 matters.
In 1998, the American Institute of Certified Accountants issued Statement of Position No. 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 addresses the accounting for various costs associated with the development of software for internal use. SOP 98-1 requires that costs incurred in the Preliminary Project and Post-Implementation/Operation Stages be expensed as incurred while certain costs incurred in the Application Development Stage are to be capitalized. The Company adopted the provisions of SOP 98-1 effective January 1, 1999.