(1) On June 25, 1998, the Company sold its U.S. operating subsidiaries. On July 10, 1998, the Company was placed in members' voluntary liquidation by a vote of its shareholders. Since that time, the Company has been engaged in the voluntary liquidation and winding up of its affairs and no longer has any active business.
PREMIUMS WRITTEN. Premiums written decreased by $7,028,000, or 8%, due to the following. Commercial casualty lines experienced reductions of $489,000 and $11,517,000 in its explosives and haulers lines, respectively, due to competitive market conditions, along with new more restrictive underwriting criteria in the haulers line. These competitive market conditions included both pricing competition from existing carriers as well as additional insurance company competitors that entered this marketplace. The Company expects this competition to continue in future periods. The restrictive additional underwriting criteria imposed in the haulers line was a result of experience gained in the marketplace as well as an analysis of claim trends and further refinement of the Company's actuarial pricing models. In the haulers line, and to a lesser extent the explosives and propane lines, the Company chose not to lower its pricing to match competition, which resulted in less business written. The propane line increased by $1,344,000 due to increased marketing emphasis and strategic planning. It should be noted that the propane line written premiums are significantly affected from year to year based on the marketing success with certain large accounts, which often are written for policy periods of greater or less than the standard 12 months. Specialty lines increased by $2,330,000 due to management direction and planned growth of the Atlanta surety lines as well as the continued development of the bail bond program commenced in 1996. The specialty line written premium increase in 1997 was approximately 50% growth in the Atlanta surety program and the remainder in the bail bond program. Management attention on the specialty lines in 1997 was a result of positive results in 1996 as well as perceived market opportunities. Personal lines increased by $1,304,000 through planned growth in North Carolina and expansion into other strategically targeted states during the year. The planned growth strategy included both steady and moderate price increases and/or marketing emphasis on products and areas with significant growth potential. The Company expects to continue a planned growth strategy.
REINSURANCE PURCHASED. The Company purchases reinsurance to limit maximum loss, diversify risk and to minimize exposure on large or hazardous risks. In 1997 the Company experienced a reduction of $6,318,000, or 16%, in reinsurance ceded, as a result of changes to certain of the Company's reinsurance programs. The Company's purchase of 80% quota share coverage (AmRe 80% quota share reinsurance), that amounted to $15,343,000 at December 31, 1996, was not renewed during 1997. The AmRe quota share purchased in 1996 reflected the desire to employ surplus utilization strategies. Due to the significant decline in commercial casualty business expected in 1997 as a result of the new restrictive underwriting criteria, it was determined that this additional surplus capacity was not needed in 1997. In addition, premiums associated with the primary casualty excess reinsurance treaty decreased by $2,544,000 due to changes in the structure of the agreement. These decreases were partially offset by the purchase of additional facultative reinsurance amounting to $6,419,000 on business written by four of the commercial auto agents and on twelve of the largest commercial auto risks. As part of the strategy to write less business and to minimize disruption to the Company's agency force during the transition, the Company arranged facultative reinsurance on a quota share basis to support renewal of business produced by certain key agents. With respect to the reinsurance placed for twelve of the Company's largest in-force auto accounts, the Company purchased this facultative reinsurance on an excess of loss basis to secure a favorable fixed reinsurance cost. In addition, specialty lines incurred a reinstatement premium of $2.2 million, as a result of large reinsured losses experienced by the line, plus an increase of $473,000 due to increase written premiums. The personal lines increased $2,476,000 due to a new reinsurance contract and increased direct writings.
NET CLAIMS AND CLAIMS EXPENSES. The net financial year claims ratio of 69% for 1997 compares to 76% for 1996 and is analyzed as follows:
The decrease in net claims and claims adjusting expenses may also be analyzed by line. Commercial casualty decreased by $14,476,000 as follows: (i) a decrease in earned premium of $13,058,000; (ii) a deficiency in reserves for prior years of $652,000 for 1997 versus a deficiency of $4,193,000 for 1996; and (iii) a decrease in the current year loss ratio of $4,959,000. The timing and reporting of large commercial casualty losses impacts reserves when the IBNR reserve for these types of losses is found to be deficient. If there is an increase in the ultimate loss projection for the Accident Year and the Financial Year, the incurred loss ratios would also increase. The decrease in the 1997 loss ratio is primarily attributed to the implementation of the more restrictive underwriting criteria in the haulers line.
ACQUISITION COST, NET AMORTIZATION (UNDERWRITING OPERATIONS). Acquisition cost, net of amortization attributable to underwriting operations consisted of service fees and commissions (which decreased $5,778,000), reinsurance ceding commissions (which decreased $1,677,000) and deferred policy acquisition cost amortization (which decreased $1,655,000) for a net expense decrease of $5,756,000. Commercial casualty net expense decreased $3,733,000 due primarily to the earnings of ceding commissions of $3,836,000 associated with the AmRe 80% quota share premiums. Other changes associated with reduced premium writings, increased deferral rates and increased reinsurance purchased accounted for the balance.
The principal cash requirements of the Company as of December 31, 1998 were payments of accounts payable and payment of liquidating and winding up of Company expenses, payment of a final distribution of up to $1.00 per share to the shareholders, and repayment of the RenaissanceRe limited recourse note and interest in accordance with the approved plan of liquidation.
The Company had a net decrease in cash and cash equivalents in the year ended December 31, 1998 of $4,308,000 because of the payment of the initial liquidating distribution of $13.00 per share, or $60,197,000, to shareholders in July 1998.
Certain computer programs and/or software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. The Company has completed an assessment of its business applications and computer systems, and believes that all critical business applications and systems will function properly with respect to dates in the year 2000 and thereafter.
During 1995 and 1996 the Company replaced its old systems with modern, Windows-based, client server systems. The financial systems, policy and claims systems, and the desktop systems are all prepared to handle the year 2000 and beyond.
There can be no assurance that the systems of our vendors, or other third parties the Company deals with, will be timely converted and would not have an effect on the Company. The Company has no operations other than the Liquidation. Accordingly, the Company believes that the potential for a loss due to this exposure would be minimal, if any.