The Company's loss before income taxes for 1999 was $17.2 million. A major factor affecting the loss was adverse development of insurance losses (excluding unallocated loss adjustment expense) of $4.4 million, all of which was commercial auto business. The adverse development for commercial auto consisted primarily of a revision of the actuarial ultimate losses in 1999 for the 1997 and 1998 loss years. This adverse development was attributable to certain types of commercial auto insurance that the Company is no longer writing, including large and small fleets, paratransit vehicles and charter buses. The Company is focusing its ongoing efforts in substandard auto, and in obtaining fees for insurance services. Commercial auto produced a negative underwriting margin of $7.2 and $6.4 million in 1999 and 1998, respectively, including the effects of loss development.
On October 20, 1997, ACCEL entered into agreements to sell to Lyndon Insurance Group, Inc. and Lyndon Life Insurance Company (collectively, "Lyndon") the outstanding capital stock of ALIC, ANSC and Dublin (collectively, the "Target Corporations") for $30.2 million in cash and to sell to Lyndon Property Insurance Company ("Lyndon Property") the vehicle extended service contract business of ACCEL's wholly owned subsidiary, ANIC, for $10.3 million in cash. The sale was effective December 31, 1997.
As discussed further below, the after-tax net gain in 1997 on the sale of the Auto Aftermarket Group was $3.2 million which was comprised of a gain of $10.3 million in continuing operations and a loss of $7.1 million in discontinued operations (excluding the provision for operating loss of $495,000 during the phase-out period). The gain was based upon the purchase price of approximately $41 million offset by the Company's equity in the sold subsidiaries of approximately $32.1 million, the write-off of goodwill related to ALIC of $.6 million, costs associated with the sale of $.8 million and federal income taxes related to the sale of $4.3 million.
The gain of $10.3 million from the sale of the vehicle extended service contract business was reflected within continuing operations of the Company in 1997 as a result of this business comprising only a portion of the Company's property and casualty business segment. Income before federal income taxes related to the vehicle extended service contract business included in continuing operations was $360,000 for 1997.
Net premium earned was $20.6 million, $16.0 million and $18.7 million for 1999, 1998 and 1997, respectively. Commercial auto net premium earned was $16.5 million, $18.3 million and $11.2 million in 1999, 1998 and 1997, respectively. Despite the significant decrease in 1999 gross premiums written, the run-off of the December 31, 1998 unearned premium reserve of $12.4 million to a balance of only $1.2 million at December 31, 1999, as well as a significant decrease in ceded premiums due to the termination of certain reinsurance coverages, provided stable earned premium for 1999 comparable to 1998. The total net premium earned was comparable in 1998 and 1997 as the increase in commercial auto net premium earned offset the decrease of $6.2 million in the extended service contract line.
The effect of the Company's other lines of business that are in runoff was as follows for 1999: net incurred losses and loss adjustment expenses ("LAE") for the discontinued REO line of business were $182,000 in relation to zero earned premium. The total number of open claims at December 31, 1999 was 4 and the related reserves were $35,000. Net incurred losses and LAE for the discontinued agriculture lines of business at December 31, 1999 were $140,000. The net impact on the Company's loss ratio and net loss for these two discontinued lines of business in 1999 was approximately 2.2% and $300,000 loss, respectively.
The effect of the Company's other lines of business that are in runoff was as follows for 1998: net incurred losses and loss adjustment expenses ("LAE") for the discontinued REO line of business were $245,000 in relation to zero earned premium. The total number of open claims at December 31, 1998 was 7 and the related reserves were $90,000. Net incurred losses and LAE for the discontinued agriculture lines of business at December 31, 1998 were $541,000. The net impact on the Company's loss ratio and net loss for these two discontinued lines of business in 1998 was approximately 4% and $.7 million loss, respectively.
The effect of the Company's other lines of business that are in runoff was as follows for 1997: net incurred losses and loss adjustment expenses ("LAE") for the discontinued REO line of business were ($355,000) in relation to zero earned premium. This result was due in large part to a re-evaluation of LAE reserves that lowered the reserve to the expected ultimate cost of settling the claims. The total number of open claims at December 31, 1997 was 10 and the related reserves were $351,000. Net incurred losses and LAE for the discontinued agriculture lines of business at December 31, 1997 were ($77,000). The net impact on the loss ratio and net income for these discontinued lines of business in 1997 was immaterial.
A positive impact on 1997 earnings was the level of service fees on the extended service contracts of $3.1 million in 1997. These service fees were non-recurring in 1998 due to the sale of the extended service contract business to Lyndon Property as discussed previously.
The Company's general and administrative expenses increased in 1999 by $1.8 million, or 31.4%, to $7.4 million from $5.6 million in 1998. In 1998, general and administrative expenses increased by $.8 million, or 18%, from $4.8 million in 1997. In 1999, the company accrued $1.8 million in restructuring costs that are included in its general and administrative expenses. Of the $1.8 million, $.7 million was severance and other employee termination costs, $.8 million was for cancellation of a certain stop loss agreement, $.2 million was additional commission for moving part of the company's book of business, and the remainder was for various lease agreement accruals.
Commissions and selling expenses net of reinsurance expense recoveries as a percent of net premiums written decreased to 13.5% in 1999 from 15.6% in 1998. This is due largely to changes in certain producer commission rates during 1999. Commissions and selling expenses net of reinsurance expense recoveries as a percent of net premiums written decreased to 15.6% in 1998 from 25.3% in 1997. The decrease in 1998 is due largely to commercial auto becoming the predominant product line for the Company. Commercial auto has significantly lower acquisition costs than the Company's extended service contract business that was fully ceded to Lyndon effective January 1, 1998.
The Company's cash flows from operations have generally been adequate for its current operating needs. The Company's non-renewed long haul trucking, charter bus and paratransit business was generally written for a term of one year, with the casualty claim-related liabilities extending beyond that period. The Company's liability on vehicle extended service contracts typically has extended for either one-year or five-year periods. However as previously discussed, the Company's existing vehicle extended service contract business was ceded to Lyndon Property effective January 1, 1998.
The Company's gross amounts due from reinsurers increased $6.0 million in 1999, to $45.7 million from $39.7 million at year end 1998. Therefore, the Company has approximately 9.3 times its stockholders' equity in its amounts due from reinsurers. The Company and its professional reinsurance intermediaries carefully monitor cash call positions and the financial ability of its reinsurers to fulfill their obligations to the Company.
The Company maintains liquidity in its investment portfolio to correspond with the liabilities outstanding on its lines of business. At December 31, 1999, the estimated duration of the Company's fixed income investment portfolio was 2.4 years while the estimated liability duration was approximately 1.6 years. Currently, an interest rate increase of 1% would negatively impact the fair value of the fixed maturity portfolio and stockholders' equity by a decline of approximately $.6 million. Conversely, an interest rate decrease of 1%, would positively impact the same two accounts by approximately $.5 million
Ohio domiciled insurance companies are subject to Ohio law which regulates the ability of insurance companies to pay dividends. The regulation limits the annual dividend or distribution of an insurer to the greater of (1) net income of the previous year or (2) 10% of unassigned surplus as of the end of the previous year. In addition, all dividends must come from earned surplus to qualify as a non-extraordinary dividend. Amounts greater than this would be considered extraordinary dividends and could not be paid without permission of
The estimates for the Company's policy reserves are continually under review and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations. These liabilities are necessarily subject to the impact of future changes in claim severity, frequency and other factors. Although considerable variability is inherent in such estimates, based on recent evaluations, management believes that the current level of policy reserves will be adequate to cover anticipated claim liabilities. Accordingly, the ultimate amounts required for settlement of policy benefits may vary significantly from the amounts included in the accompanying consolidated financial statements.
The National Association of Insurance Commissioners ("NAIC") has completed and adopted a project to codify statutory accounting principles with a provision for commissioner discretion in the determination of appropriate statutory accounting for insurers. Although the NAIC has indicated that January 1, 2001 is the expected date of implementation, the implementation is ultimately dependent upon the insurer's state of domicile. Implementation of the codified statutory principles may affect the surplus level of ANIC on a statutory basis. Management has not determined what impact, if any, this project will have on the statutory surplus of ANIC.
TABLE II Changes in Gross Premiums Written Year Ended December 31 (Thousands of dollars, except ratios)
Note: This table excludes the consolidated reserves of Randjill Group, Ltd which was acquired by the Company in 1991 and deconsolidated by the Company in 1994.
The table above reflects increases in the liability for insurance claims resulting from the Company's continued expansion into the Commercial Auto line of business (until all programs were discontinued in mid-1999). Maturity of claims for this line of business has resulted in recording, in 1999 and 1998, $2,670,000 and $3,667,000, respectively, in additional losses incurred for prior policy years. Additionally, lines of business discontinued prior to 1995 reevaluated in 1998, resulted in the recording, in 1998, of $859,000 in additional losses incurred.