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
The selected financial data set forth in the following table for each of the five years in the period ended December 31, 1998 have been derived from the audited consolidated financial statements of the Company.
Involuntary direct premiums written, primarily involuntary private passenger automobile insurance, which comprised 5% and 10% of total direct premiums written during 1998 and 1997, respectively, were $5,192,000 for 1998 compared to $10,077,000 in 1997. This 48% decrease resulted primarily from decreased mandatory assignments from the New York Automobile Insurance Plan ("NYAIP"), which provides coverage for individuals who are unable to obtain auto insurance in the voluntary market. During 1998 the Plan adjusted its assignments as a result of having over assigned policies to the Company in 1997 and an overall decrease in the NYAIP's pool of business. Assignments from the NYAIP vary depending upon a company's private passenger automobile market share and the size of the NYAIP.
Involuntary automobile insurance business increased the Company's calendar year loss and LAE ratio by approximately 3.5 and 3.4 percentage points for the years ended December 31, 1998 and 1997, respectively. The combined ratio on involuntary automobile business was greater than the combined ratio on voluntary automobile business.
The amounts recorded by the Company for income taxes in 1998 and 1997 differed from those calculated using the statutory federal income tax rate primarily due to tax exempt bond income.
auto direct premiums written. The decrease in workers' compensation direct premiums written resulted from the Company's decision in late 1996 to exit certain unprofitable classes of that business starting in late 1996 and continuing throughout 1997. The decrease in commercial auto direct premiums written was due to a 4% decrease in policies in force at December 31, 1997 compared to December 31, 1996, which resulted in part from the Company's decision not to write certain related workers' compensation policies.
Involuntary direct premiums written, primarily involuntary private passenger automobile insurance, which comprised 10% and 8% of total direct premiums written during 1997 and 1996, respectively, were $10,077,000 for 1997 compared to $7,923,000 in 1996. This 27% increase resulted from increased assignments from the NYAIP.
Losses and LAE were $71,627,000 for 1997, a decrease of 10% from $79,603,000 in 1996. The loss and LAE ratio decreased to 74.6% in 1997 from 83.1% in 1996. In 1997, the Company recorded increases to its reserve for losses that occurred prior to 1997, primarily for its workers' compensation line of business. The net increase in the reserve for prior year losses and LAE was $4,508,000 and added 4.7 percentage points to the loss and LAE ratio in 1997. Losses and LAE in 1996 included a $6,896,000 increase in reserves for accidents that occurred prior to 1996, which added 7.2 percentage points to the loss and LAE ratio in 1996.
Losses and LAE in 1996 included $2,200,000 of higher than normal losses related to unusually severe winter weather that affected the northeastern United States during the first quarter of 1996. These higher than normal weather related losses increased the 1996 loss and LAE ratio by 2.3 percentage points. There were no such higher than normal weather related losses in 1997.
Commissions, premium taxes and other state assessments that vary directly with the Company's premium volume represented 20.8% and 22.0% of net premiums earned in 1997 and 1996, 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 recorded an income tax provision in 1997 and an income tax benefit in 1996. The amounts recorded for income taxes differed from those calculated using the statutory federal income tax rate primarily due to tax exempt bond income.
Net cash provided by operations decreased by $5,234,000, or 55%, from $9,533,000 in 1997 to $4,299,000 in 1998 primarily due to a $1,981,000 decrease in the collection of premiums, a $2,144,000 increase in the payment of losses and LAE and a $1,337,000 increase in income taxes paid.
At December 31, 1998, the Company's portfolio of fixed maturity investments represented 91.9% 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, 1998, $126,250,000, or 63.8%, of the Company's fixed maturity portfolio was invested in mortgage-backed and other asset- backed securities. The Company invests in a
At December 31, 1998, $6,706,000, or 3%, of the Company's investment portfolio was invested in non-investment grade securities, compared to $861,000, or .4%, at December 31, 1997.
During 1998 the Company repurchased 58,800 shares of its common stock at an average price of $20.26 and was holding 378,400 shares in treasury as of December 31, 1998.
As a holding company, the Company is dependent upon cash dividends from MNH to meet its obligations and to pay any cash dividends. MNH is subject to New Hampshire insurance laws which place certain restrictions on its ability to pay dividends without the prior approval of state regulatory authorities. These restrictions limit dividends to those that, when added to all other dividends paid within the preceding twelve months, would not exceed 10% of the insurer's policyholders' surplus as of the preceding December 31. The maximum amount of dividends that MNH could pay during any twelve month period ending in 1999 without the prior approval of the New Hampshire Insurance Commissioner is $5,058,000. The Company paid a $.05 per share quarterly cash dividend to its common stockholders totaling $579,000 in 1998.
Industry and regulatory guidelines suggest that the ratio of a property and casualty insurer's annual net premiums written to its statutory surplus should not exceed 3 to 1. The Company has consistently followed a business strategy that would allow MNH to meet this 3 to 1 regulatory guideline. MNH's ratio of net premiums written to statutory surplus for 1998 was 1.8 to 1.
Under the Management Agreement, Mutual is responsible for the Company's being Year 2000 compliant. The Company is relying upon the expertise of Mutual's employees for assuring that the necessary precautions for Year 2000 compliance are taken. Mutual has advised the Company that the process of preparing all of its computer systems to be Year 2000 compliant is substantially completed. Mutual began work on becoming Year 2000 compliant in 1996. The scope of the project includes: ensuring the compliance of all computer software applications and operating systems, mainframe, mid-range and personal computers, local and wide-area networks, and telecommunications equipment; addressing issues related to non-IT embedded software and equipment; remediation of affected systems and equipment; and addressing the compliance of key suppliers.
Mutual and the Company depend upon a number of key business partners and suppliers. As part of its Year 2000 project, Mutual has identified key business partners, vendors, suppliers, and service providers with whom it and the Company conduct business, and has made substantial progress in contacting these organizations to determine their Year 2000 readiness. Based upon the responses to Mutual's inquiries to these organizations, Mutual has taken and will continue to take appropriate actions. In certain instances where it may not be possible to verify with certainty a supplier's Year 2000 compliance (for example, it may not be possible for Mutual to test the operational ability of its telecommunications, electricity or gas service suppliers in a Year 2000 environment) and where alternate sources of supply are not feasible, Mutual and the Company may have to rely on the assurances of the supplier.
The Company estimates that its share of the total expenses associated with becoming Year 2000 compliant will total approximately $290,000. Approximately $150,000 of the expenses have been for external costs, which include approximately $112,000 in outside consultant expenses and $38,000 for specific upgrades of software to address Year 2000 compliance, and $140,000 of the expenses have been for internal resources dedicated to achieving Year 2000 compliance. It is estimated that any remaining external or internal costs will not be material. The Company estimates its share of costs incurred in 1998 to be $210,000, which has been expensed. There has not been a material impact on the Company's results of operations or financial condition as a result of information technology projects being deferred due to resource constraints caused by the Year 2000 project.
Although based on the successful implementation of the MOST system Mutual has notified the Company that it believes that critical systems are substantially Year 2000 compliant and that to the best of Mutual's knowledge, the likelihood that critical systems will have a failure that materially affects operating results is remote. Mutual also informed the Company that testing will continue as needed to assure that systems are Year 2000 compliant and that any situation that develops which needs to be addressed will be corrected by January 1, 2000. Mutual is continuing to work with third party vendors to assess their ability to operate in the Year 2000, to assess third-party remediation plans, and to take steps to identify and transfer support to third party vendors who are Year 2000 compliant. The Company will continue to monitor and assess the reasonably likely worst case Year 2000 scenario and plans to have contingency plans, as required, in place by mid-1999. If the Company does not complete its Year 2000 program prior to the commencement of the Year 2000, if it fails to identify and remediate all critical Year 2000 problems, or if major suppliers or customers experience material Year 2000 problems, the Company's results of operations or financial condition could be materially affected.
MNH continues to evaluate the complex issues related to insurance coverage for losses arising from the various possible situations involving Year 2000 problems and its potential liability to its insureds. The Company believes that the coverages MNH provides do not extend to the types of losses which are most likely to occur as a result of Year 2000 problems. MNH plans to use coverage exclusion endorsements based on its evaluation of the potential exposure to Year 2000 problems for certain classes of commercial risks, and has adopted endorsements to its policies based on forms provided and filed for approval with
It is possible, however, that future court interpretations of policy language based on specific facts, or legislation mandating coverage, could result in coverage for losses attributable to Year 2000 problems. Such decisions or legislation could have a material adverse impact MNH's results of operations and financial condition. It is also possible that MNH may incur expenses defending claims for which it is ultimately determined there is no insurance coverage. MNH has made no provision for reserves for losses or LAE on claims based on potential Year 2000 problems.
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. Mutual currently owns 9.0% of the Company's common stock. Under the Management Agreement, Mutual provides the Company and MNH with all facilities and personnel to operate their business. The only officers of the Company or MNH who are paid full time employees are employees of Mutual whose services are purchased under the Management Agreement. Also, the operation of the Company's insurance business, which offers substantially the same lines of insurance as Mutual through the same independent insurance agents, creates a very close relationship among the companies.
The provisions of the Management Agreement require five year's prior written notice for its termination. The Company does not expect the notice of termination to have any material, short-term effect on the Company's operations. However, the Independent Directors believe that the Management Agreement, as currently written, creates conflicts of interest between the Company and Mutual in their joint operations and prevents the Company's shareholders from realizing the fair value of their shares.