The Company's principal executive offices are approximately 37,000 sq. ft. in size and are located in New York City. The lease for the Company's principal executive offices expires December 30, 2003. The minimum annual rent under the lease is $1,184,000 from 2000 until the expiration of the lease. The lease included an initial cash payment by the lessor to the Company of $1,853,000 of which the benefit was deferred and is being amortized over the lease term.
(1) Earnings per share data prior to 1997 have been restated as required under Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
The Company's results of operations are derived from its three main segments which include the domestic insurance companies, the domestic agencies and Syndicate 1265. The Company's domestic insurance companies participate in pools of insurance covering ocean marine, inland marine, aircraft and non-marine liability insurance managed by MMO and affiliates. Effective January 1, 1997, the Company's participation in the pools increased to 100%. Syndicate 1265 underwrites a book of ocean marine insurance. The following represents the Company's net premiums written and net premiums earned for each of the past three years.
Aviation gross premium written grew 22% in 1999 to $44.6 million as a result of rate increases obtained in 1999 on accounts with poor loss records as well as increases in overall line size per account. As the underwriting climate for gross premiums has remained soft for several years in the aviation line, the Company maintained an adequate level of reinsurance to protect its exposure to any one loss. As a result, after excess of loss and quota share reinsurance, the Company's net writings amounted to $5.3 million in 1999. The Company expects premiums to increase in 2000 due in part to the trend in premium rates which occurred in the latter half of 1999.
Commission and other income increased substantially in 1999 when compared to 1998 and reflected larger profit commissions on the reinsurance of our ocean marine and aviation lines from our domestic insurance agency segment.
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 Syndicate 1265. In addition, larger expenses were recorded for two employee benefit plans in 1998 within the domestic insurance agencies.
The other liability loss ratio increased to 96% from 91% in 1997. The assumption of miscellaneous net casualty premiums in 1998 was subsequently commuted in the fourth quarter of 1998 at a loss ratio of 77%. Excluding this business, the loss ratio would have been approximately 152%. Adverse development from prior year losses contributed to the increase.
An improvement in the frequency of losses and favorable net loss development contributed to a lower loss ratio in the aviation line in 1998.
Net investment income in 1998 decreased by 2% to $20.8 million from $21.3 million in 1997 as a result of a decrease in investment yield in the Company's fixed maturity portfolio caused by additional purchases of tax-exempt securities and lower overall interest rates. Although investment yield was lower in 1998, Syndicate 1265's operations contributed to a larger average invested asset base in 1998.
Commission income in 1998 was $591,448 as compared to $1,438,606 for 1997. The prior year included larger profit commissions from reinsurance transactions in the aviation and ocean marine lines of business.
The Company's effective tax rate for 1998 was 19.1% as compared to 25.6% for 1997. Taxable income was greater in 1997 as a result of larger underwriting profits and realized investment gains. The decrease in the effective rate was also due to increased tax-exempt income as a percentage of pre-tax income in 1998.
and increases in gross severity claims negatively affected cash flows from operations. The Company's maturing book of casualty business also adversely affected cash flows.
In 1998, the Company entered into an interest rate swap agreement (the "agreement") with a bank for purposes of hedging its interest rate risk on its existing bank loan. The agreement requires the Company to pay interest to the bank at a rate of 6.50% on the original notional amount outstanding of $22,500,000, which is subsequently adjusted quarterly by notional reductions of $1,250,000. The bank is required to pay the Company, on the same notional amounts outstanding, an amount equal to the three month US Dollar London Interbank Offered Rate plus .65% which is reset on a quarterly basis. Interest expense recorded under the agreement was $91,462 in 1999 and $44,719 in 1998.
The Company maintains a large position in investments of bonds from various states and municipalities. Such securities receive favorable tax treatment under existing tax laws. The investment position is monitored regularly, and as a result, the Company has reduced its investment in such securities after consideration of the alternative minimum tax.
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. As of December 31, 1999, the Company had repurchased a total of 2,124,082 shares of common stock at a total cost of approximately $38,560,659 at market prices ranging from $13.69 to $28.81 per share.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", ("SFAS 133") was issued by the Financial Accounting Standards Board ("FASB") in June 1998. SFAS 133 requires derivatives to be recorded on the balance sheet at fair value. Derivatives not considered as hedges must be recorded at fair value with adjustments recorded in the income statement. For derivatives that qualify as a hedge, changes in the fair value of the derivative are offset against changes in the fair value of the hedged assets or liabilities and are recognized in the income statement or in other comprehensive income depending on the nature of the hedge. SFAS 133 is effective for years beginning after June 15, 1999.
The Company adopted AICPA Statement of Position 97-3, "Accounting by Insurance and other Enterprises for Insurance-Related Assessments," ("SOP 97-3") effective January 1, 1999. This statement provides guidance for reporting guaranty fund and other insurance related assessments. The adoption of SOP 97-3 did not have a material impact on the Company's results of operations or financial condition.