- --------------- (1) The range of expiration dates for these leases is November 30, 2001 (Omaha), December 31, 2001 with five-year option (Council Bluffs), June 30, 2001 (Whitsett), August 31, 2001 (Itasca), and December 31, 2001 (Overland Park). (2) 21,167 square feet are subleased to a third party. The sublease expires on November 30, 2001.
(1) For a discussion of the Company's discontinued lines of business, see "Business-Company Strategy" and "-Business Segments" and for a discussion of the accounting treatment of the Company's MPCI business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-General."
(2) Statutory data has been derived from the separate financial statements of the Insurance Companies prepared in accordance with SAP. The decline in statutory surplus from 1999 to 2000 was primarily related to the net loss incurred by the Insurance Companies. The decline in statutory surplus from 1998 to 1999 was partially related to the net loss incurred by the Insurance Companies, the repayment of a $20 million surplus note and $6.0 million dividend payment by Redland.
The principal lines of the Company's crop insurance segment are Multi-Peril Crop Insurance (MPCI), supplemental coverages, and named peril insurance. MPCI is a federally subsidized risk management program designed to encourage farmers to manage their risk through the purchase of insurance policies. MPCI provides farmers with yield coverage for crop damage from substantially all natural perils. CRC is an extension of the MPCI program which provides farmers with protection from revenue loss caused by changes in crop prices, low yields or both. As used herein, the term MPCI includes CRC, unless the context indicates otherwise. For the year ended December 31, 2000, the Company had a market share of approximately 15% of MPCI business written in the United States.
In its property and casualty segment, the Company sold its nonstandard automobile business including Phoenix Indemnity in 1999, transferred its general agency business produced by its Scottsdale office and its transportation business to other carriers in 2000, and in 2001 announced it had sold a significant portion of its remaining property and casualty business. These transactions are part of the Company's strategy in this segment. See "Business-Company Strategy" and "-Business Segments."
Forward-Looking Information Except for the historical information contained in this Annual Report on Form 10-K, matters discussed herein may constitute forward- looking information, within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking information reflects the Company's current best estimates regarding future operations, but, since these are only estimates, actual results may differ materially from such estimates.
A variety of events, most of which are outside the Company's control, cannot be accurately predicted and may materially impact estimates of future operations. Important among such factors are weather conditions, natural disasters, changes in commodity prices, changes in state and federal regulations, price competition impacting premium levels, changes in tax laws, financial market performance, changes in court decisions effecting coverages and general economic conditions.
The Company's net loss decreased from $36.0 million for the year ended December 31, 1999 to a net loss of $28.8 million for the year ended December 31, 2000. The reduction in net loss was primarily a result of the strengthening of reserves for loss and loss adjustment expenses in 1999, charges in 1999 associated primarily with the divestitures of various lines of property and casualty business, and the increase in 1999 MPCI profit share recorded in 2000. Partially offsetting these effects was a decrease in net realized capital gains, a write-off of excess of costs over acquired net assets, development of 1999 CRCPlus losses in 2000, and a charge related to the settlement of the class action suit by rice producers in 2000.
The results for 2000 reflect an increase of approximately $12.5 million in MPCI operating expenses primarily related to higher commission costs and an increase in the amount of corporate expenses allocated to the crop segment. The Company continued to be negatively impacted by the decrease in the reimbursement rate used for reimbursement of expenses related to operating its MPCI program. The year 2000 also includes an increase of $4.0 million in settlement and legal expenses related to the settlement of a class action suit by rice producers, $6.7 million in underwriting charges for adverse loss development resulting from higher than expected payments on 1999 CRCPlus losses, and $3.1 million of underwriting losses for crop hail resulting from late season storms in the Midwest.
Year ended December 31, 1999 Compared to Year Ended December 31, 1998
The Company's net income decreased from $5.5 million for the year ended December 31, 1998 to a net loss of $36.0 million for the year ended December 31, 1999. The results for 1999 were impacted by a strengthening of the Company's reserves for loss and loss adjustment expense, a reduction in net premiums written in the Company's property and casualty segment, an increase in net operating expenses as well as an increase in reinsurance costs in the Company's crop segment, a decline in MPCI profit share, and a decline in investment income. Additionally, certain charges affected the comparison of results from 1998 to 1999. Results in 1999 were negatively impacted by charges associated primarily with the divestitures of various lines of property and casualty business. They include severance costs, charges relating to discontinued software development, reduction of certain deferred policy acquisition costs and an increased allowance for doubtful accounts. Also included in 1999 results were charges associated with the Company's disputes with state regulatory authorities regarding its crop insurance business and the evaluation of strategic and capital alternatives.
Historically, the Company has performed an analysis of its loss and loss adjustment expense reserves quarterly, and has conducted an analysis, in conjunction with its independent actuary, each year that includes an actuarial study by its independent actuary. The 1999 study indicated a significant increase in the number of claims incurred by the Company but not previously reported (IBNR). The increase in previously unreported claims was principally under policies covering the 1990 through 1995 accident years, and primarily were new construction defect claims reported under general liability policies insuring contractors in the state of California. To a lesser extent, the Company also experienced an increase in reported claims for the 1998 year in its commercial automobile lines.
During 1999 the Company earned a profit share of $40.1 million on its MPCI retained pool of approximately $246.1 million while in 1998 the Company earned a profit share of $49.1 million on $196.5 million retained premium pool. Also, in 1999 and 1998, the Company recorded additional profit share relating to previous years of approximately $.8 million and $4.0 million, respectively.
The Company's net investment income declined from approximately $28.3 million for the year ended December 31, 1998 to $25.1 million for 1999. This decline in the investment income of the Company was affected by a decline in the size of the average outstanding portfolio of the Company from $498 million during the year ended December 31, 1998 to $473 million for 1999. In addition, the yield on the portfolio declined from 5.7% during the year ended December 31, 1998 to 5.3% for 1999. This decrease in yield primarily resulted from several of the Company's higher yielding preferred stock investments being called and a decrease in the Company's mortgage backed security portfolio. The mortgage backed securities were on average, $23 million less for 1999 versus 1998 as the Company reduced both the interest rate risk and the investment yield on its mortgage backed portfolio through the elimination of substantially all of its inverse floating rate collateralized mortgage obligations. Net realized gains approximated $10.2 million for the year ended December 31, 1999 as compared to $6.8 million in 1998.
At December 31, 2000, the Company has $9.2 million in cash, short-term investments and fixed maturity securities. Additionally, the Company has $33.1 million of restricted short-term investments. The restricted short-term investments is comprised of investments deposited with a trustee for the Company's issuance of an outstanding letter of credit relating to reinsurance coverage on certain crop insurance products. These funds will become available to the Company over the next six years. The Company also holds two surplus notes, each in the amount of $20 million, issued by two of its insurance company subsidiaries, bearing interest at the rate of 9% per annum payable quarterly. Although repayment of all or part of the principal of these surplus notes requires prior insurance department approval, no prior approval of interest payment is currently required.
Under the American Agrisurance profit sharing agreement, American Agrisurance receives up to 50% of the crop insurance profit after certain expenses and a margin retained by the Insurance Companies based upon a formula established by the Company and approved by the Nebraska Department of Insurance. If the calculated profit share is negative, such negative amounts are carried forward and offset future profit sharing payments. These amounts are distributed from time to time in the form of a dividend to the Company. In 2000 and 1999 there was no profit sharing distribution.
Dividends from the Insurance Companies are regulated by the regulatory authorities of the states in which each subsidiary is domiciled. The laws of such states generally restrict dividends from insurance companies to parent companies to certain statutorily approved limits. In 2001, the statutory limitation on dividends from the Insurance Companies to the Company without further insurance departmental approval is approximately $5.7 million. See "Business-Regulation."
The Company believes that the $20 million surplus note payment to it in December 1999 by one of its insurance subsidiaries and the transfer of $20 million from one of its property and casualty insurance subsidiaries to American Growers in December of 1999 in the form of a surplus note have provided for the short-term capital needs of the Company. The Company, however, continually reviews its capital needs and the surplus needs of the Insurance Companies and from time to time may seek additional funding which may include, among other things, an account receivable financing at the Insurance Companies level, arranging a new bank line of credit, a placement of equity or debt securities, or the disposition or acquisition of certain lines of property and casualty operations to satisfy liquidity needs that may arise in the future.
The Company's profit or loss from its MPCI business is determined after the crop season ends on the basis of a profit sharing formula established by law and the RMA. The Company receives a profit share in cash, with 60% of the amount in excess of 17.5% of its MPCI Retention (as defined in the profit sharing agreement) in any year carried forward to future years, or it must pay its share of losses. The Company received $62.5 million in net payments under the MPCI program in March of 2000. The Company received a net payment of approximately $50.6 million under the MPCI program in first quarter of 2001. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-General" above for additional information regarding the effects of the seasonal nature of the crop business on the Company's cash flow.
The Company's stockholders' equity decreased by approximately $20.5 million at December 31, 2000 as compared to December 31, 1999. The principal components of this decrease were a net loss of $28.8 million during 2000 partially offset by a decrease in unrealized loss on available-for-sale securities, net of tax, from $12.6 million at December 31, 1999 to a $4.4 million at December 31, 2000.
The Company's Preferred Securities of $94.875 million at December 31, 2000 and 1999 mature in August 2027 and are redeemable at the Company's option in September 2002. The Company will continue to monitor the interest rate environment and evaluate refinancing opportunities as the redemption and maturity date approaches.
The Company uses two models to analyze the sensitivity of its market risk assets and liabilities. For its fixed maturity securities, mortgage loans and mandatorily redeemable Preferred Securities, the Company uses duration modeling to calculate changes in fair value. For its marketable equity securities, the Company uses a hypothetical 20% decrease in the fair value of these securities. Actual results may differ from the hypothetical results assumed in this disclosure due to possible actions taken by management to mitigate adverse changes in fair value and because fair values of securities may be affected by credit concerns of the issuer, prepayment speeds, liquidity of the security and other general market conditions. The sensitivity analysis duration model used by the Company produces a loss in fair value of $5.9 million and $13.6 million on its fixed maturity securities and mortgage loan and a gain in fair value of $5.8 million and $6.3 million on its mandatorily redeemable Preferred Securities as of December 31, 2000 and 1999, respectively, based on a 100 basis point increase in interest rates. The hypothetical 20% decrease in fair value of the Company's marketable equity securities produces a loss in fair value of $3.5 million and $5.0 million as of December 31, 2000 and 1999, respectively. The overall decrease in market risk from December 31, 1999 to December 31, 2000 is primarily a result of a decrease in the average maturities of the fixed maturity securities and a reduction in the amount of marketable equity securities.
In April 2000, the Company signed a definitive agreement to sell Redland Insurance Company ("Redland") to Clarendon National Insurance Company ("Clarendon"). This sale closed effective as of July 1, 2000. The transaction included the appointment of other Company subsidiaries as the exclusive producer and administrator of Redland for the business the Company writes through Redland. The Company also reinsures certain portions of the business written by Redland. The sale was a cash transaction of approximately $10.9 million based upon the market value of Redland after the divestiture of various assets, including the Redland subsidiaries to a wholly-owned subsidiary of Acceptance Insurance Companies Inc. At closing, the Company pledged approximately $87 million of investments to Clarendon to secure the Company's obligations under reinsurance agreements. At December 31, 2000, approximately $86 million of fixed maturities available-for-sale and $6 million of short-term investments were pledged to Clarendon. The Company is obligated for any of Redland's uncollectible amounts from reinsurers and agents for the business under these reinsurance agreements. The Company recorded a loss on the sale of approximately $200,000.
In March 2001, the Company announced that it had sold a significant portion of its property and casualty business to Insurance Corporation of Hannover ("ICH"). The terms of the agreement included the sale of selected lines of business, a reinsurance treaty whereby the unearned premium and any additional premiums for these selected lines would be reinsured by ICH, and the transfer of certain employees to ICH. Additionally, the Company's right to repurchase Redland under the agreement between the Company and Clarendon, an affiliate of ICH, was waived.
In March 1998, the National Association of Insurance Commissioners adopted the Codification of Statutory Accounting Principles (Codification). The Codification, which is intended to standardize regulatory accounting and reporting to state insurance departments, is effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. The Company adopted the Codification effective January 1, 2001. The adoption of Codification will increase statutory capital and surplus as of January 1, 2001 by approximately $9.4 million.