In 1998 and 1997, net cash was used for operations as a result of a decrease in premiums written and a program to reduce pending claims.
At December 31, 1998 and 1997 the yield of the Company's fixed maturities portfolio was 5.8% and 5.9%, respectively, with an average maturity of 3.2 and 3.3 years for 1998 and 1997, respectively. Additionally, the Company maintains a diversified investment portfolio of securities, of which at December 31, 1998, approximately 92% of the fixed maturities portfolio was invested in issues of the U.S. Government and its agencies with the remainder primarily invested in investment grade corporate and industrial issues. The Company presently anticipates reinvesting the majority of proceeds from maturities and investment income in substantially similiar investments.
In 1997, earned premium revenues declined primarily due to a depopulation of the assigned risk pools ($9.5 million) and a reduction in certain commercial lines, principally voluntary commercial automobile ($3.1 million) and workers' compensation ($2.6 million) due to competition, reunderwriting and repricing. In addition, earned premium revenues were reduced in 1997 by $1.7 million to record premiums due under retrospectively rated reinsurance contracts written for 1995 and prior accident years. The Company re-estimated the premium due based upon its then current estimate of loss ratios for 1995 and prior accident years. Partially offsetting these reductions was an increase in certain voluntary personal lines, principally private passenger automobile and homeowners.
The 1997 reserve strengthening included approximately $3.3 million for commercial package lines of business and approximately $2.1 million for voluntary commercial automobile lines of business. During 1997, the Company reviewed the adequacy of the reserves carried for its open claims' files, as part of its normal ongoing practice, focusing on the commercial package, general liability and commercial automobile lines of business. As a result of this review and the continued unfavorable development of prior accident years losses, particularly the 1992 through 1994 accident years, the Company revised its assumptions regarding future increases in average claims severity and reserves were strengthened.
The reserving process relies on the basic assumption that past experience is an appropriate basis for predicting future events. The probable effects of current developments, trends and other relevant matters are also considered. Since the establishment of loss reserves is affected by many factors, some of which are outside the Company's control or affected by future conditions, reserving for property and casualty claims is a complex and uncertain process, requiring the use of informed estimates and judgments. As additional experience and other data become available and are reviewed, the Company's estimates and judgments may be revised. While the effect of any such changes in estimates could be material to future results of operations, the Company does not expect such changes to have a material effect on its liquidity or financial condition.
The Company, as well as most corporations in general, is affected by the problems associated with information technology systems and their ability to correctly capture and process date specific information in connection with the year 2000. The year 2000 issue is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures.
The Groups decision in 1996 for system replacement requires the new policy management system to be functional by October 1998 since renewals for certain annual policies expiring on or after January 1, 2000 will begin renewing approximately 90 days prior to the policy's effective date. The new policy management system was successfully migrated into production during 1998 for all new and renewal business. Insurance companies need to maintain historical information concerning premiums, claims, and other related policy information for many years. Currently, the historical database for information maintained by the Group prior to the migration of the new policy system remains on a non-compliant year 2000 "legacy" database. The Group expects to migrate this data to its new policy system during the third quarter of 1999. The Group had also decided in 1996 to replace its accounting system which was installed during the first quarter 1999. The Group believes the policy management and accounting systems will support the year 2000 processing capabilities.
Although a significant portion of the Group's current systems are year 2000 compliant, the Group formed a year 2000 readiness team to further increase the Group's state of readiness. The team, which meets regularly, is developing a contingency plan to address any actual failures that may occur thereby minimizing any outages in operational functions. The Group expects to complete this plan before the end of the second quarter of 1999. The team is also charged with the responsibility of monitoring all material elements of compliance including assessment, hardware, software and application environments; testing; and correction implementation.
The Group has made inquiries of third parties with whom it has material relationships as to the year 2000 compliance of such third parties. Many of such parties have reported plans to be fully compliant by the end of 1999 and most have reported substantial progress at the end of 1998. However, at this time the Company cannot predict the effect of the year 2000 issue on its material third parties or the impact any deficiency in the year 2000 readiness of such parties could have on the Group.