Note: Net income (loss) per share reflects the adoption of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 128, Earnings per Share ("EPS"). Both basic EPS and EPS assuming dilution have been presented accordingly.
Also contributing to the loss before income taxes in 1999 were $2.4 million of losses incurred on other discontinued lines of business, primarily consisting of agriculture, realtors' errors and omissions and auto dealership coverages; general and administrative expenses of $7.2 million; commission and selling expenses net of reinsurance expense recoveries of $1.9 million; taxes, licenses and fees other than premium taxes of $0.8 million; and a legal settlement agreement expense of $3.0 million offset by net investment gain of $1.9 million and other income of $0.3 million.
Commercial auto produced gross premiums of $17.6 million in 1999 compared to $35.7 and $30.3 million in 1998 and 1997, respectively. The Company's other discontinued products within the property and casualty segment (excluding extended service contracts which were sold to Lyndon effective December 31, 1997) produced $3.8 million in gross premiums written in 1999 compared to $1.5 million and $.4 million in 1998 and 1997, respectively. Of the $3.8 million of other gross premiums written in 1999, $2.2 million were from the 100%-ceded aviation business.
Upon consummation of the aforementioned sale, the Company ceased to be engaged in the Auto Aftermarket Group business. The consolidated financial statements of the Company for 1997 reflect the disposition of ALIC and Dublin which comprised the Life/Health business segment. Accordingly, the revenues, benefits and expenses, assets and liabilities, and cash flows of ALIC and Dublin have been excluded from the respective captions in the consolidated statements of operations and consolidated statements of cash flows. The net operating results of these entities have been reported, net of applicable income taxes, as "Income from discontinued operations" and the net cash flows of these entities have been reported as "Net cash (used in) provided by discontinued operations."
Effective January 1, 1998, ANIC ceded to Lyndon via quota share reinsurance 100% of its liability related to existing and future vehicle extended service business written on ANIC's policy forms. In connection with the sale, ANIC granted Lyndon the authority to write new vehicle extended service contracts insured by contractual liability policies issued in the name of ANIC for a maximum period of eighteen months which expired in July 1999. All new business written by Lyndon utilizing ANIC's policy forms was automatically reinsured by Lyndon under the terms of the aforementioned reinsurance agreements.
The Company's income before income taxes and discontinued operations for 1997 was $8.1 million. This income was primarily the result of the gain on the sale of the vehicle extended service contract business to Lyndon which amounted to $10.3 million.
The net loss and loss adjustment expense ratios decreased to 117.8% in 1999 from 120.2% in 1998 and 82.1% in 1997. See Table I following the narrative in Management's Discussion and Analysis for further information on key operating ratios and see Table III for reserve development for the preceding ten years and a reconciliation of the beginning and ending liability for unpaid losses and loss adjustment expense.
association dues of $.1 million each which were both the result of increased commercial auto premium writings since 1996 and various other expenses totaling $.3 million. These increases were offset by decreased consulting fees of $.2 million and $.3 million in expense reimbursements received from Lyndon in connection with Lyndon's usage of the Company's information systems.
On August 10, 1999, the Company sold its 25% interest in USA Insurance Group, Inc. ("USAIG"), the parent company of Transportation Insurance Specialists, the Company's former general agent, producing a capital gain of $0.3 million. The Company also received interest income associated with the sale of approximately $0.3 million from a put option available in the purchase documents. The original purchase of the USAIG investment was April 1, 1998, for $5 million. This investment was accounted for using the equity method. At December 31, 1998, the investment in USAIG exceeded the Company's share of the underlying net assets by $4.1 million and was being amortized on the straight-line method over 10 years based upon a review of the operations, including a persistency review of USAIG's producing sub-agents. The Company recorded a net expense of $65,000 and $189,000 in 1999 and 1998 respectively for its investment in USAIG that was comprised of its share of USAIG's earnings of $156,000 and $142,000 offset by amortization of $221,000 and $331,000 in 1999 and 1998 respectively.
The Company's "available for sale" fixed maturity securities at December 31, 1999 included $2.8 million of mortgage-backed securities, $.8 million of collateralized mortgage obligation securities, and $6.5 million of asset-backed collateralized securities. The mortgage and asset-backed securities are subject to risks associated with variable prepayments. As such, those securities may have a different actual maturity and yield than planned at the time of purchase. The degree to which a security is susceptible to either gains or losses is influenced by the difference between its amortized cost and par value, relative sensitivity of the underlying mortgages to prepayment risk in a changing interest rate environment and relative priority of the securities in the overall securitization.
The Company limits the extent of its risks on fixed maturity securities by generally avoiding securities whose cost significantly exceeds par, by purchasing securities that are backed by stable collateral, and by concentrating on securities that have either a planned amortization or sequential pay classes. The collateralized mortgage obligations and asset backed securities owned have primarily short to intermediate average lives. At December 31, 1999, the Company did not have a significant amount of higher risk mortgage or asset backed securities, which had a significant risk of loss or principal. There are negligible default risks on the mortgage and asset backed security portfolios as a whole as the vast majority of the assets are either guaranteed by U. S. government-sponsored entities or are supported in the securitization structure by junior securities enabling the assets to achieve high investment grade status. The Company's collateralized mortgage obligations and asset backed securities are predominantly sequential pay with little or no exposure to interest only obligations ("IOs") or inverse IOs.
the Ohio Department. Based on this regulation, ANIC would require Ohio Department approval to pay any dividend to ACCEL during 2000. See "Note O" in the Notes to Consolidated Financial Statements for a discussion regarding Risk Based Capital.
In January 1998, upon closing the sale of the Auto Aftermarket Group, the Company used a portion of the proceeds to retire the outstanding balance of $15 million of senior notes held by ALIC. ALIC had received these senior notes from an unaffiliated company, along with accrued interest of approximately $1.1 million. The Company utilized a portion of the sale proceeds to make a capital contribution of $3.5 million to ANIC, to pay taxes on the sale of approximately $4.3 million, to transfer $8.8 million in cash to Lyndon in connection with the ceding of the existing vehicle extended service contract business on January 1, 1998 and utilized the remainder for general corporate purposes.
Due to the nature of its operations, the Company is at all times subject to pending and threatened legal actions that arise in the normal course of its activities. For information regarding legal proceedings involving the Company including developments relating to the insolvency of Galaxy Insurance Company (a former subsidiary of the Company) see "Note M" in the Notes to Consolidated Financial Statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and, if it is, the type of hedge transaction. The Company does not expect the adoption of SFAS No. 133 to have a material impact on its consolidated financial statements because the Company does not currently hold any derivative instruments.
Although the cumulative effects of inflation on premium growth cannot be fully determined, increases in the value of commercial property results in increased premiums for property coverages. The combination of severity (which is affected by inflation) and frequency of loss trends in commercial auto and general liability are recognized in premium increases or decreases by the adoption of filed premium rates.
TABLE III Analysis of Loss and Loss Adjustment Expense Development (Thousands of dollars)