The Company's corporate headquarters are located in Buffalo, New York in a building owned by Mutual that contains approximately 113,000 square feet of office space. Mutual also has regional underwriting and/or claims office facilities in Buffalo, Albany and Hauppauge, New York; Manchester, New Hampshire; Moorestown, New Jersey and Columbus, Ohio. All of the offices except the Buffalo office are leased.
Total revenues for 2001 were $107,296,000, a decrease of $1,330,000, or 1%, from $108,626,000 in 2000.
Direct premiums written for 2001 were $100,953,000, a decrease of $6,281,000 or 6%, from $107,234,000 for 2000. Voluntary direct premiums written for 2001 were $96,515,000, a decrease of $9,201,000 or 9%, from $105,716,000 for 2000.
Net premiums written decreased $369,000 or less than 1% to $93,973,000 for 2001 from $94,342,000 for 2000.
Net losses and LAE were $75,144,000 for 2001, an increase of $3,770,000 or 5% from $71,374,000 for 2000. The loss and LAE ratio increased to 80.0% for 2001 from 75.7% for 2000. Losses and LAE include $1,305,000 of losses and LAE related to the September 11, 2001 terrorist attack on the World Trade Center (WTC) in New York City. The WTC event added 1.4 percentage points to the Company's loss and LAE ratio for 2001. Excluding the effect of the WTC event, the increase in the loss and LAE ratio resulted primarily from the increase in involuntary automobile insurance business which increased the Company's net loss and LAE ratio by 6.3 percentage points in 2001, compared to 2.7 percentage points in 2000.
The increase in commercial auto direct premiums written was primarily attributable to $5,470,000 of direct premiums written for the Auto Program. There were no Auto Program direct premiums written in 1999. Voluntary commercial auto direct premiums written excluding the Auto Program were $19,654,000, an increase of $1,083,000, or 6%, from $18,571,000 in 1999, primarily due to an increase in average premium per policy. The increase in contractors coverall direct premiums written was primarily due to a 24% increase in policies in force in 2000 compared to 1999 somewhat offset by a decrease in average premium per policy.
Net losses and LAE were $71,374,000 for 2000, an increase of 8% from $66,086,000 for 1999. The loss and LAE ratio increased to 75.7% in 2000 from 69.7% in 1999. In 2000, the Company recorded an increase to its reserves related to all prior accident years of $1,428,000. This increase, which was primarily attributable to higher than estimated loss experience on personal and commercial automobile and workers' compensation policies, added 1.5 percentage points to the Company's 2000 calendar year loss and LAE ratio.
In 1999, the Company recorded a decrease to its reserves for prior years' accidents of $3,749,000, which in turn reduced the Company's 1999 calendar year loss and LAE ratio by 3.9 percentage points.
The ratio of amortized deferred policy acquisition costs and other underwriting expenses to net premiums earned decreased to 32.1% in 2000 from 33.7% in 1999, primarily due to lower agency incentive commissions resulting from the increase in net losses and LAE and revisions to the profit sharing program for agents, and to lower incentive compensation expenses. Expenses that vary directly with the Company's premium volume, primarily commissions, premium taxes and state assessments, represented 19.3% and 20.6% of net premiums earned in 2000 and 1999, respectively. Certain other underwriting expenses, such as salaries, employee benefits and other operating expenses vary indirectly with volume and comprise the remainder of the Company's underwriting expenses.
The Company generally designates newly acquired fixed maturity investments as available for sale and carries these investments at fair value. Unrealized gains and losses related to these investments are recorded as accumulated other comprehensive income within stockholders' equity. At December 31, 2001, the Company recorded as accumulated other comprehensive income in its Consolidated Balance Sheet $1,812,000 of unrealized gains, net of taxes, associated with its investments classified as available for sale. During 2001 the Company recorded $2,687,000 of unrealized gains, net of tax, associated with its available for sale investments as other comprehensive income.
At December 31, 2001, the Company's portfolio of fixed maturity investments represented 91.6% of invested assets. Management believes that this level of bond holdings is consistent with the Company's liquidity needs because it anticipates that cash receipts from net premiums written and investment income will enable the Company to satisfy its cash obligations. Furthermore, a portion of the Company's bond portfolio is invested in mortgage-backed and other asset-backed securities which, in addition to interest income, provide monthly paydowns of bond principal.
At December 31, 2001, $41,965,000 or 19.7% of the Company's investment portfolio was invested in fixed maturity obligations of the U.S. Government or its government sponsored agencies. Of this amount, $33,802,000 was invested in United States Treasury Inflation Index Notes (TIPS). TIPS differ from traditional treasury securities in that in addition to regular coupon payments, the principal value changes daily based upon the Consumer Price Index (CPI) as published by the United States Department of Labor. Accretion based upon the CPI becomes part of the total return of the security and is subject to change as the CPI rises or falls. Accretion can therefore be positive or negative and is recorded as a component of net investment income. TIPS perform best in a declining interest rate environment when the referenced CPI is rising.
At December 31, 2001, $10,163,000, or 5%, of the Company's investment portfolio was invested in non-investment grade securities compared to $10,083,000, or 5%, at December 31, 2000. All of the Company's non-investment grade securities are currently performing to the Company's expectations at the time of purchase.
The Company maintains a $2,000,000 unsecured credit facility from a bank in the form of a master grid note. Any borrowings under this facility are payable on demand and carry an interest rate which can be fixed or variable and is negotiated at the time of each advance. This facility is available for general working capital purposes and for repurchases of the Company's common stock. At December 31, 2001, $200,000 was outstanding on this loan.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 and 142. SFAS No. 141 "Business Combinations" revised accounting standards and disclosure requirements for business combinations. The provisions for SFAS No. 141 were effective for any business combination completed after June 30, 2001. SFAS No. 142 "Goodwill and Other Intangible Assets," revises accounting standards for all purchased intangible assets. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Neither SFAS No. 141 nor No. 142 had any impact on the Company's 2001 consolidated financial statements.
The Company's and MNH's business and day-to-day operations are closely aligned with those of Mutual. This is the result of a combination of factors. Mutual has had a historical ownership interest in the Company and MNH. Prior to November 1986 MNH was a wholly-owned subsidiary of Mutual. Following the Company's initial public offering in November 1986 and until a secondary stock offering in July 1993 the Company was a majority-owned subsidiary of Mutual. At December 31, 2001 Mutual owned 11.5% of the Company's common stock. Under the Management Agreement, Mutual provides the Company and
During 1998, Mutual initiated discussions with the Company concerning proposals for the acquisition of the Company by Mutual. The Company determined that the terms proposed by Mutual were inadequate. The Company also determined that the Management Agreement, as currently written, creates a conflict of interest between the Company and Mutual in their joint operation and prevents the Company's shareholders from realizing the Company's fair value in a sale or merger. Accordingly, on July 23, 1998 the Company gave notice to Mutual of its intention to terminate the Management Agreement and, therefore, the Management Agreement will terminate on July 23, 2003, unless the parties agree to renew or extend it.
On March 4, 2002, the Company requested that Mutual extend the Management Agreement under its existing terms to December 31, 2003 in order to provide for a more orderly transition to a new management agreement with Mutual or a different manager. The Company is in discussion with various potential candidates, including Mutual, to provide management services to the Company after the current Management Agreement expires. The Company intends to base the new agreement on fee for services, rather than an allocation of expenses, as currently calculated. The Company anticipates that the future manager will be compensated for positive results through profit-sharing and that the Company will be permitted to terminate the new agreement on substantially less than the five (5) year notice that was required under the present Management Agreement.