The following selected financial data have been summarized from the Company's consolidated financial statements and are qualified in their entirety by reference to, and should be read in conjunction with, such consolidated financial statements and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Report:
During the past several years, the Group experienced poor underwriting results and adverse reserve development in all of its lines of business. During 2001, the Group explored its options for developing a new business model and strategy. After evaluating these options, the Group announced in December 2001 that it had determined that it was in the best interest of its shareholders and policyholders to commence an orderly liquidation of all of its operations. The Group will only accept business that it is obligated to accept by contract or New York insurance law; it will not engage in any other business activities except for its claims runoff operations. The voluntary liquidation of its operations is expected to be substantially complete by 2005. Given the Group's and the Company's current financial condition, the expected costs to be incurred during the claims runoff period, and the inherent uncertainty over ultimate claim settlement values, no assurance can be given that the Company's shareholders will be able to receive any value at the conclusion of the voluntary liquidation of its operations.
At December 31, 2001 and 2000, the yield of the Company's fixed maturities portfolio was 2.4% and 6.4%, respectively, with an average maturity of 0.3 years and 2.2 years, respectively. Additionally, the Company has a diversified investment portfolio of securities, 95.0% of which is rated "investment grade" by established bond rating agencies or issued or guaranteed by the U.S. Treasury or by governmental agencies. During 2001, $34.5 million of the Company's investment in a limited partnership was liquidated and distributed to the Company. The distribution proceeds were reinvested in short-term fixed maturities. The Company's remaining balance in the limited partnership at December 31, 2001 of $6.1 million consisted of short-term investments and cash equivalents.
At December 31, 2001, the Group's contractual cash obligations under its operating leases total $4.0 million of which $1.0 million is due in less than 1 year, $1.8 million is due in 1 to 3 years, $1.0 million is due in 4 to 5 years and $0.2 million is due after 5 years.
The Company uses the liability method in providing for income taxes. Under the liability method, deferred income taxes are provided at the enacted tax rates for differences between the financial statement carrying amounts and tax bases of assets and liabilities and for net operating loss carryforwards. The Company records a valuation allowance to reduce its deferred taxes to the amount that is more likely than not to be realized. If the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment would increase income in such period. Similarly, if the Company were to determine that it would not be able to realize all or part of its net deferred taxes in the future, an adjustment would be charged to income in such period.
Net earned premium revenues of the Company were $18.3 million, $30.9 million and $42.4 million for the years ended December 31, 2001, 2000 and 1999, respectively. The Company's earned premiums declined in all lines of business during 2001 as a result of actions announced during late 2000 and the first quarter of 2001. During the fourth quarter of 2000, the Group announced that it would no longer accept any new private passenger automobile policies. Existing policies of private passenger automobile insurance will be either sold, non-renewed or cancelled in accordance with New York insurance law. If the private passenger automobile book of business is not sold, it is expected that the Group will continue to issue renewal policies over the next several years as required by applicable insurance law. In March 2001, the Group announced that, effective immediately, it would no longer issue any new (as compared to renewal) insurance policies and that it had filed plans of orderly withdrawal with the New York Insurance Department as required. Commercial lines policies will be non-renewed or canceled in accordance with New York insurance law or replaced by Tower under the 2001 Tower Agreement for the sale of the Group's renewal rights. Starting in the second quarter of 2001, Tower purchased the renewal rights for substantially all of the Group's remaining lines of business, excluding private passenger automobile and commercial automobile/garage, for a fee based on the direct written premium actually renewed by Tower. The amount of the fee is expected to be approximately $0.9 million of which the Company's share would be $0.3 million. Existing policies of private passenger automobile insurance will be either sold, non-renewed or cancelled in accordance with New York insurance law. If the private passenger automobile book of business is not sold, it is expected that the Group will continue to issue renewal policies over the next several years as required by applicable insurance law. The Group will continue to be responsible for the remaining term of its existing policies and all claims incurred prior to the expiration of these policies. After the expiration of its existing commercial lines policies, the Group will thereafter have no renewal obligations for those policies. Under New York insurance law, the Group is obligated to offer renewals of homeowners, dwelling fire, personal insurance coverage and personal umbrella for a three-year policy period; however, the Tower Agreement obligated Tower to offer their own policies as replacements for the Group's policies. Excluding the remaining terms of existing policies that the Group intends to either non-renew, cancel or that will be replaced by Tower, as of December 31, 2001, the Group's in force premium volume totaled $11.1 million. As indicated above, these policies are primarily personal lines policies whose volume will continue to decline as the Group exercises its non-renewal rights under New York insurance law.
While earned premiums declined in almost all lines of business, the most significant reductions in earned premiums during 2000 were in assigned risk automobile ($4.4 million) and voluntary private passenger automobile ($4.4 million). Effective January 1, 2000, all policy renewal obligations for assigned risk contracts were assigned to another insurance company. However, the Company remains liable for the claim settlement costs for assigned risk claims that occurred during the policy term. The decline in voluntary private passenger automobile resulted from tighter underwriting standards, increased competition and the Company's decision in 1999 to no longer accept new policies from those agents who historically have had poor underwriting results. The Company's termination of certain unprofitable agents also adversely affected premium volume in other lines of business.
During the remaining term of the Company's policies that are being sold or non-renewed at the expiration of the policy term, and for other policies which may have to be renewed under New York insurance law, the Company's estimate of losses for those policies will be based on its accumulated loss experience in those lines of insurance as well as industry trends. The Company anticipates that its accident year loss ratios for certain of these policies, in particular private passenger automobile, will remain high reflecting the poor loss experience that the Company and the insurance industry has experienced in the past.
The NAIC has adopted model laws incorporating the concept of a "risk based capital" ("RBC") requirement for insurance companies. Generally, the RBC formula is designed to measure the adequacy of an insurer's statutory capital in relation to the risks inherent in its business. The RBC formula is used by the states as an early warning tool to identify weakly capitalized companies for the purpose of initiating regulatory action. Although New York State has not adopted the RBC requirements for property and casualty insurance companies, New York does require that property and casualty insurers file the RBC information with the Department. The NAIC also has adopted various ratios for insurance companies which, in addition to the RBC ratio, are designed to serve as a tool to assist state regulators in screening and analyzing the financial condition of insurance companies operating in their respective states. The Company and Empire had certain NAIC ratios outside of the acceptable range of results for the year ended December 31, 2001.
During the third quarter of 2001, the Department informed the Company and Empire of its examination findings concerning the three-year period ended December 31, 1999. The triennial report was subsequently filed by the Department in November 2001. Among other matters, the Department's report indicated a loss and LAE reserve deficiency for the Company and Empire. The Company and Empire responded to the Department's examination findings and concluded that based on subsequent adverse development recorded by the Company, the Department's reserve estimates were within a reasonable actuarial range of acceptable estimates. As of September 30, 2001, the Company's and Empire's reserve levels for losses and LAE prior to December 31, 1999 were consistent with the Department's findings.
During 2001, the Company recorded adverse loss reserve development of $18.7 million. During 2001, the Company increased its reserve estimates for its commercial package policies lines of business, primarily due to increases in severity of liability claims for accident years 1998 and prior. The Company has exposure for third party liability claims in many of its lines of insurance. During 2001, there were several settlements and court decisions on third party liability cases for amounts that are greater than the industry's or the Company's historical experience for similar claims, which had formed the basis for the Company's estimated loss reserves. While many of these decisions are being appealed, these results may signal a change in the judicial environment in the Company's marketplace. Accordingly, the Company has increased its loss reserve estimate by $6.9 million due to an estimated increase in severity for these exposures.
During 1999, the Company recorded adverse loss reserve development of $6 million, principally due to an increase in severity of 1998 accident year losses in the assigned risk automobile and voluntary private passenger automobile lines, and 1996 accident year losses in certain classes of the commercial automobile line. As a result, the Company increased its reserves by $2.2 million for assigned risk automobile, $1.5 million for voluntary private passenger automobile and $1.4 million for commercial automobile lines.
The combination of other underwriting expenses incurred and the amortization of deferred policy acquisition costs reflected a decrease of $5.1 million or 32.0% in 2001 and approximately $3.1 million or 16.4% in 2000. The decrease in both 2001 and 2000 primarily related to the decline in premium revenue coupled with a reduction in operating expenses. In addition, during 2001, the Company expensed $2.6 million of deferred policy acquisition costs as their recoverability from premiums and related investment income was no longer anticipated.
Due to the uncertainty of future taxable income necessary for realization of the deferred tax asset, a valuation allowance has been provided as of December 31, 2001 and 2000 on the total amount of the deferred tax asset. Current income taxes for 2000 reflect a benefit of $0.4 million for a change in the Company's estimated prior year's federal tax liability.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), which is effective for all business combinations after June 30, 2001, Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which is effective for fiscal years beginning after December 15, 2001, and Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which is effective for fiscal years beginning after June 15, 2002. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which is effective for fiscal years beginning after December 15, 2001. SFAS 141 requires that companies use the purchase method of accounting for all business combinations initiated after June 30, 2001 and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS 142 addresses the initial recognition and measurement of intangible assets acquired outside a business combination and the recognition and measurement of goodwill and other intangible assets subsequent to acquisition. SFAS 143 requires recognition of the fair value of liabilities associated with the retirement of long-lived assets when a legal obligation to incur such costs arises as a result of the acquisition, construction, development and/or the normal operation of a long-lived asset. Upon recognition of the liability, a corresponding asset is recorded and depreciated over the remaining life of the long-lived asset. SFAS 144 requires that one accounting model be used for the long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions and resolves implementation issues. The Company has reviewed the impact of the implementation of these pronouncements, and does not expect them to have a material effect on the Company's financial position or results of operations.