Management's Discussion and Analysis of Financial Condition and Results of Operations--
USCIC has been predominately a New York private passenger automobile insurer. In 1995, USCIC's underwriting activities included commercial automobile, general liability, professional liability and property liability. USCIC mainly writes in the states of New York, California and Louisiana. Gross premiums written in 1995 were $65.5 million, as compared to $25.4 million in 1994 and $36.0 million in 1993. Net premium writings for those years were $47.7 million, $24.4 million and $34.4 million, respectively. The decrease in the premium volume in 1994 resulted primarily from the cancellation of an assumed auto program in Louisiana which, although profitable, had become too large for a principally direct writing company.
In 1995 earned premium increased to $37.1 million as premiums for non-standard automobile business in California increased by approximately $7.9 million. Additionally, the Company's non-standard private passenger automobile business in the state of Texas produced earned premiums of $3.1 million, as compared to $0.4 million in 1994.
When gross premium volume in 1995 exceeded expectations, management reacted in the third and fourth quarter of 1995 by curtailing its business sources. This included ending the flow of business from all except one New York producer of private passenger automobile policies; curtailing USCIC's short term automobile rental program in New York; and ending the non-standard automobile program in Louisiana and Texas, and the small auto dealers and garage keepers program in California.
Overall combined ratio was 7.5% over 1994, but was improved by 3.9% over 1993. The 16.5% increase in the loss ratio between 1995 and 1994 was offset by a 7.9% decrease in the underwriting expense ratio. The loss adjusting expense ratio decreased by approximately 1%.
The loss and loss adjustment expenses incurred on a statutory basis as a percentage of earned premiums were 88.5% in 1995, 73.1% in 1994, and 86.7% in 1993. This significant increase in the loss and loss adjustment expense incurred ratio between 1995 and 1994 is a direct result of the adverse development on canceled programs of approximately $3.2 million and an increase in IBNR of approximately $5.9 million.
In 1993, USCG adopted SFAS Statement 115, "Accounting for Certain Investments in Debt and Equity Securities." In complying with the statement, USCG has classified its fixed maturity investments and its equity securities into a category entitled "securities available for sale." Such securities are adjusted to reflect market value. Unrealized investment gains and losses on securities available for sale are credited or charged directly to shareholders' equity, net of applicable tax provisions or credits. The net unrealized gain on securities available for sale was $1.7 million in 1995, as compared to an unrealized loss of $5.6 million in 1994, and an unrealized gain of $4.0 million in 1993. USCG does not purchase fixed maturity investments with a view to resale. Accordingly, the "available for sale" classification does not denote a trading account.
USCG is a holding company, receiving cash principally through sales of equities, borrowings, and dividends from its subsidiaries, some of which are subject to dividend restrictions described in "Note L" to the "Consolidated Financial Statements". The ability of insurance and reinsurance companies to underwrite insurance and reinsurance is based upon maintaining liquidity and capital resources sufficient to pay claims and expenses as they become due. The primary sources of liquidity for USCG subsidiaries are funds generated from insurance and reinsurance premiums, investment income, commission and fee income, and proceeds from sales and maturities of portfolio investments. The principal expenditures are for payment of losses and loss adjustment expenses, operating expenses, and commissions.
The Company incurred net losses in 1995 which will carry forward as net operating losses to be utilized against future net income. As a result of an audit for federal income tax years through June 30, 1990, USCG received refunds of $262,000 and $594,000 in 1995 and 1996, respectively, for net operating loss carry backs to the tax year ended June 30, 1987.
The NAIC adopted a model risk-based capital act intended to provide a tool for regulators to evaluate the capital of insurers and reinsurers with respect to the risks assumed by them, and to determine whether there is a perceived need for corrective action. The nature of the corrective action depends upon the extent of the calculated risk-based capital deficiency. Although the risk-based capital requirements have not been adopted by any state, in a related action the NAIC adopted a proposal that requires insurers to report the results of their risk-based capital calculations as part of 1994 and subsequent statutory annual statements filed with the state regulatory authorities.
USCIC and PAIL's risk-based capital level, as calculated in accordance with the NAIC model act and included in their 1995 statutory annual statements, were within the average range of domestic insurance companies, and thus do not indicate any need of corrective action.
The Company adopted SFAS No. 112, "Employers Accounting for Post Employment Benefits". This Statement requires employers to recognize an obligation for all benefits provided to former and inactive employees after employment but before retirement. Examples of these benefits include, but are not limited to, severance pay, continuation of health care benefits, and leaves of absence benefits. The adoption of this statement in 1994 did not have a material impact upon the financial statements of the Company.
The Consolidated Financial Statements of USCG and its subsidiary companies appear on pages through, attached.