New York - 37,000 square feet Chicago - 3,500 square feet San Francisco - 4,050 square feet
The Company's principal executive offices are approximately 37,000 sq. ft. in size and are located in New York City. In 1993 the Company moved into its location at 330 Madison Avenue, New York, New York, which was renovated and is in excellent condition. The lease for the Company's principal executive offices expires December 30, 2003. The minimum annual rent under the lease is $1,074,000 in 1998 and $1,184,000 from 1999 until the expiration of the lease. The lease included a cash payment by the lessor to the Company of $1,853,000 of which the benefit was deferred and amortized over the lease term.
- ---------- (1) Includes reserve liabilities reported gross of reinsurance credits pursuant to Statement of Financial Accounting Standards No. 113. (2) Fixed maturities available for sale are carried at fair value pursuant to Statement of Financial Accounting Standards No. 115. (3) Reflects the cumulative effect of calculating deferred taxes under Statement of Accounting Standards No. 109 "Accounting for Income Taxes." (4) Earnings per share data prior to 1997 have been restated as required under Statement of Financial Accounting Standards No. 128, "Earnings Per Share".
For a description of factors that materially affect the comparability of the information reflected in the Selected Financial Data, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" below.
The Company estimates reserves each year based upon, and in conformity with, the factors discussed under "Business-Reserves". The Company maintains a conservative policy for establishing reserves, especially in the year a policy is written. Changes in estimates of reserves are reflected in operating results in the year in which the change occurs.
Although net premiums earned in the aviation decreased by only 8%, gross written and net written premiums decreased by 25% and 71%, respectively. A softening of rates in the aviation line, resulting from excess industry capacity, initially started in 1996 and continued into 1997 and accounted for a reduction in gross aviation premiums written in the current year. During soft underwriting cycles, the Company seeks to reduce overall retention levels in order to avoid the negative impact of any one loss on net income. As a consequence of purchasing additional reinsurance, net writings fell at a greater percentage. The Company expects this environment to remain competitive in 1998.
Other liability earned premiums decreased by 32%. The casualty market has been severely competitive for many years. Consequently, the Company continues to underwrite this line very selectively. The Company expects the casualty market to remain competitive in1998 with premiums likely to further decline.
Premiums earned did benefit, however, from the Company's increased pool participation in the Mutual Marine Office, Inc. ocean marine and aviation pool from 90% to 100% effective for policies incepting on or after January 1, 1997.
Losses and loss adjustment expenses as a percentage of premiums earned were 58.0% in 1997 as compared to 61.2% in 1996. Improved net loss experience in the other liability and inland lines contributed to the overall decline in the loss ratios. In addition, despite an increase in the frequency of losses in the aviation line, this loss ratio actually improved from the prior year as a result of lower retention levels on losses and favorable loss development on prior year reserves. An increase in severity losses in the ocean marine line contributed to a higher loss ratio in the current year.
Policy acquisition costs as a percentage of net premiums earned for the year ended December 31, 1997 was 18.9% as compared to 19.4% for the prior year. The Company saw an improvement in the acquisition ratio in the aviation line as a result of obtaining ceding override commissions on reinsurance placed. This had the effect of reducing overall net commissions at a greater rate than the decline in premiums.
Net investment income for the year ended December 31, 1997 was flat as compared to the same period of 1996 as a result of a decrease in the investment yield in the Company's fixed maturity portfolio. The investment income generated from a larger invested asset base was offset by a decrease in investment yield in the Company's fixed maturity portfolio as a result of additional purchases of tax-exempt securities and lower interest rates overall.
Commission and other income for the year ended December 31, 1997 was $1,438,606 as compared to $1,980,632 for the same period of 1996. Commission income includes management and contingent commissions charged by Mutual Marine Office, Inc. for operating the insurance pools. As gross writings decreased and the Company increased its MMO pool participation in the ocean marine and aviation pool from 90% to 100% effective for policies incepting on or after January 1, 1997, management commission income from a non-affiliated member of the insurance pools declined.
Interest expense increased to $1,449,770 for the year ended December 31,1997 from $1,035,058 for the same period of the prior year primarily as a result of an increase in average loan principal outstanding.
Unrealized appreciation of investments as of December 31, 1997 included gross unrealized gains and losses on equity securities of $12,276,631 and $943,821 respectively, and gross unrealized gains and losses on fixed maturities available for sale of $8,601,011 and $47,998, respectively. Unrealized gains were recorded in fixed and equity securities resulting from decreases in interest rates and a strong stock market in 1997, respectively.
Ceded reinsurance payable increased to $27,307,129 at December 31, 1997 as a result of lowering the Company's retention level in the aviation line of business.
Notes payable increased to $22,458,413 as of December 31, 1997 and resulted from loans obtained to repurchase the Company's common stock. This also contributed to the increase in treasury stock, at cost, in 1997.
The inland marine line recorded the largest decline in earned premiums at 79%. This was consistent with the Company's plan in 1996 to withdraw from writing the larger multi-location assureds. After several years of unprofitable results caused by large catastrophe losses and expensive reinsurance, the Company limited its 1996 writings to those that were ancillary to its ocean marine risks. Negative premiums written for 1996 occurred as a consequence of purchasing reinsurance to cover the run-off of the prior year's catastrophe oriented business which was in force in 1996.
Although net earned premiums in the aviation line remained flat when compared to 1995, gross and net writings decreased 14% and 16%, respectively. 1995 was a peak year for aviation rates after insurers suffered several years of losses. As industry gross losses improved in 1995, competition intensified and rates subsequently softened. As a casualty of this competitive rate environment, certain accounts were not renewed in 1996 and thereby contributed to the overall decline.
Although the inland loss ratio in 1996 was adversely affected by severe weather experienced during the 1995-1996 winter season, such ratio improved when compared to the prior year. The 1995 year included large property catastrophe losses from various hurricanes.
Commission income, consisting primarily of reinsurance profit commissions and insurance pool profit and management commissions charged to members of the insurance pools other than New York Marine, decreased by 42% in 1996. Larger reinsurance contingent commissions were recorded in 1995 as a result of greater profitability in various marine war classes of business. Also, management commission from a non-affiliated member of the insurance pools decreased overall in proportion to the decline in the pool's gross writings in 1996.
Net investment income for the year ended December 31, 1996, decreased by 2% from the prior year. Investment yields decreased on the Company's fixed maturity portfolio due to both market conditions and a greater investment in tax-exempt securities which was applied against a larger investment asset base.
General and administrative expenses remained flat as compared with the prior year as a result of continuing efforts to contain personnel costs and cost effective reductions in administrative expenses.
Unrealized appreciation of investments as of December 31, 1996 included gross unrealized gains and losses on equity securities of $8,754,704 and $567,677 respectively, and gross unrealized gains and losses on fixed maturities held for sale of $5,537,330 and $1,184,493, respectively. Declines in unrealized gains were recorded in the Company's fixed maturities resulting from increases in interest rates in 1996.
The Company monitors cash and short-term investments in order to have an adequate level of funds available to satisfy claims and expenses as they become due. As of December 31, 1997, the Company's assets included approximately $19,125,000 in cash and short-term investments. The primary sources of the Company's liquidity are funds generated from insurance premiums, investment income and maturing or liquidating investments.
Historically, cash provided by operating activities was used in investing and financing activities. In 1996 and 1995 cash outflows increased on prior year loss payments as a result of catastrophe losses from the inland marine line and the Company's maturing book of casualty business. Such payments were not as large in 1997, however, increased payments were recorded in the aviation line. As premiums declined in 1997 and 1996, so did cash collected from premiums written.
The Company's largest investments are in bonds from various states and municipalities. Such securities receive favorable tax treatment under existing tax laws. Our investment position is monitored regularly as the Company has been affected by the alternative minimum tax. As net earnings were affected by several catastrophe losses in the mid 1990's, the Company further bolstered its taxable investment position. As the Company's tax position changed with improved earnings in 1995, additional investments were made in tax-exempt securities through 1997 to improve after tax investment yield.
The Company is currently modifying its existing computer operating systems in order to be Year 2000 compliant. This problem arises from computers recognizing only the last two digits of the year and may result in errors in processing information. The Company expects to complete all modifications to existing systems in 1998. The cost of this modification is not expected to be material to the financial statements, liquidity and capital resources of the Company.
The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS 131"), in June 1997 which establishes standards for the reporting of information relating to operating segments in annual financial statements, as well as disclosure of selected information in interim financial reports. Operating segments are defined as components of a company for which separate financial information is available and is used by management to allocate resources and assess performance.
The statement supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise," which requires reporting segment information by industry and geographic area. This statement is effective for year-end 1998 financial statements and interim financial information will be required beginning in 1999. The Company is currently evaluating the segment information disclosure pursuant to SFAS 131.