The Group has entered into a twenty year lease aggreement, consisting of 286,510 square feet, in an office building located at 335 Adams Street in Brooklyn, New York, in which Leucadia has an equity interest. The Group received certain incentives from both the City and State of New York in connection with this lease, which will be recognized over the term of the lease.
Empire has subleased 133,140 square feet of the office space to its parent, Leucadia at the similar terms as in the original lease.
The Group also conducts limited operations from branch offices located in Manhattan and Rochester, New York, Boston, Massachusetts and Bedford, New Hampshire. The rental charged to the Company for these facilities is prorated in accordance with the pooling agreement described in "Pooling Agreement" under Item 1, herein.
Management's Discussion and Analysis of 	Financial Condition and Results of Operations [S] The purpose of this section is to discuss and analyze the Company's financial condition, liquidity and capital resources and results of operations. This analysis should be read in conjunction with the financial statements and related notes which appear in Item 14, "Exhibits, Financial Statement Schedules, and Reports of Form 8-k" of this Report.
The Company maintains cash, short-term and readily marketable securities and anticipates that the cash flow from investment income and maturities of fixed maturities will be sufficient to satisfy its anticipated cash needs. The Company does not presently anticipate paying dividends in the near future and believes it has sufficient capital to meet its currently anticipated level of operations. [S] Results of Operations [S] For the years ended December 31, 1998, 1997 and 1996, net earned premium revenues of the Company were $67.5 million, $80.9 million and $96.1 million, respectively. In 1998, the decline in earned premium revenues was primarily due to a decline in the number of assigned risk automobile pool contracts acquired due to competition and the depopulation of the assigned risk automobile pools ($7.4 million) and a reduction in certain lines, principally voluntary commercial automobile ($2.6 million), private passenger automobile ($1.8 million), commercial package policies ($1.3 million) and workers,compensation ($1.1 million), due to tighter underwriting standards, re-underwriting and increased competition. In addition, earned premium revenues were reduced by $0.6 million for premiums due under retrospectively rated reinsurance contracts written for 1995 and prior accident years as the Company re-estimated the premium due based upon its current estimate of loss ratios for 1995 and prior accident years.
During 1998, the Company reviewed the adequacy of the reserves carried for its open claims, files, focusing on workers' compensation, commercial auto and other commercial liability lines of business. Such reviews are part of the Company's normal ongoing practice. Particular emphasis during this review was placed on reserves carried for the workers' compensation line of business. As part of the review, substantially all open workers' compensation claim files were reviewed for every accident year up to and including 1998. The Company also conducted a comprehensive review of reserves carried for other commercial liability lines of business, in which approximately 28% of the open claim files were reviewed, with a primary focus on accident years 1995 to 1997. As a result of these reviews, the Company revised its assumptions regarding average claims costs and probable ultimate losses and, accordingly, reserves were strengthened by $3.9 million for workers' compensation and $4.2 million for other commercial liability lines of business. Additionally, during 1998 the Company reorganized the commercial auto claims department. As part of this realignment, more complex claims files were reviewed by the most experienced claims examiners and assumptions regarding average claims severity and probable ultimate losses were revised and reserves were strengthened by $4.2 million for commercial automobile lines of business.
Investment income has decreased by approximately $1.2 million or 7.5% in 1998 as compared to a decrease of $0.7 million, or 4.1% in 1997, and an increase of $1.0 million or 6.5% in 1996, primarily as a result of lower invested assets due to a decrease in premiums written and a program to reduce pending claims during 1998 and 1997, and higher invested assets resulting from positive cash flows in 1996. During 1998, the Company had realized capital gains of $6.1 million principally from gains recognized on the sale of fixed maturities, primarily U.S. Treasury Notes. During 1997, the Company recorded $0.2 million in realized capital losses in the normal course of managing its investment strategy. In 1996, the Company realized gains of $1.1 million on the sale of fixed maturities, primarily U.S. Treasury Notes.
The combination of other underwriting expenses incurred and the amortization of deferred policy acquisition costs reflected an increase of approximately $1.0 million or 4.9% in 1998, a decrease of $7.8 million, or 27.8% in 1997, and an increase of $1.7 million, or 6.6% in 1996. The increase in 1998 was largely the result of expenses relating to the move of the Company's executive and administrative offices to Brooklyn, New York and higher underwriting costs relating to surveys and audits of insureds records in connection with the Company's reunderwriting efforts offset in part by $2.0 million pension curtailment gain. The decrease in 1997 was primarily the result of lower operating costs, primarily relating to pension and severance benefits for certain employees, and a decrease in the provision for servicing carriers expenses in connection with the NYPAP, offset by higher systems costs. The increase in 1996 was the result of higher operating costs primarily relating to pension and severance benefits for certain employees coupled with higher systems costs.
The Group continues to evaluate its information technology systems to determine the potential impact of the year 2000. In 1996, the Group began to evaluate its information technology systems and their ability to support future business needs. The Group engaged the services of outside consultants who recommended various solutions that included a new policy management system. This led to a decision to acquire new policy management and accounting systems. These systems provide enhanced functionality and improved processing for underwriting, claims, billing, collection, reinsurance, reporting, and accounting and are designed to be year 2000 compliant. Throughout 1998 and 1997, the Group sought the assistance of outside consultants who made further recommendations to ensure compliance, which included upgrades and improvements to desktop computers and local applications. These recommendations would also result in improved productivity, increased reliability, and expanded functionality.
Through December 1998, expenses incurred by the Group in connection with the year 2000 issue (excluding expenses related to the Group's acquisition of new systems, which was not motivated by the year 2000 concerns) did not exceed $100,000. Based upon current information, the Group does not expect that the year 2000 issue will have a material effect on its consolidated financial position or consolidated results of operations.
Statements included in this Report may contain forward-looking statements. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements may relate, but are not limited, to projections of revenues, income or loss, capital expenditures, fluctuations in insurance reserves, plans for growth and future operations (including year 2000 compatibility), competition and regulation as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this Report, the words "estimates", "expects", "anticipates", "believes", "plans", "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. The factors that could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the Company's public filings, including general economic and market conditions, changes in domestic laws, regulations and taxes, changes in competition and pricing environments, regional or general changes in asset valuation, the occurrence of significant natural disasters, the inability to reinsure certain risks economically, the adequacy of loss reserves, prevailing interest rate levels, weather related conditions that may affect the Company's operations, the difficulty in identifying hardware and software that may not be year 2000 compliant, the lack of success of third parties to adequately address the year 2000 issue, vendor delays and technical difficulties affecting the Company's ability to upgrade or replace its hardware and/or software for year 2000 compliance, and changes in the composition of the Company's assets and liabilities through acquisitions or divestitures. Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. The Company undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this Report or to reflect the occurrence of unanticipated events.