The Company's executive offices are located at 12603 Southwest Freeway, Suite 315, Stafford, Texas, 77477. The Company leases approximately 7,000 square feet at this location with annual rental on a five-year lease expiring in September 2000 of approximately $70,000. As of December 31, 1998, the Company's legal and information systems departments are located at 475 Metro Place North, Dublin, Ohio. The Company leases approximately 6,000 square feet in Dublin, Ohio, under a five-year lease expiring in July 2001 at an annual rental of approximately $65,000. Effective in March 1999, the lease in Dublin, Ohio was cancelled and the legal and information systems departments relocated to 2550 Corporate Exchange Drive, Columbus, Ohio.
Also contributing to the loss before income taxes in 1998 were $.9 million loss incurred on discontinued lines of business, primarily consisting of agriculture, realtors' errors and omissions and auto dealership coverages; general and administrative expenses of $5.6 million; taxes, licenses and fees other than premium taxes of $.4 million; and deficit in the income of an affiliated company of $.2 million offset by net investment income of $2.2 million and other income of $.6 million.
Commercial auto produced gross premiums of $35.7 million in 1998 compared to $30.3 million and $13.8 million in 1997 and 1996, respectively. The Company's other products within the property and casualty segment (excluding extended service contracts which were sold to Lyndon effective December 31, 1997) continued their growth, producing $1.5 million in gross premiums written in 1998 compared to $.4 million and $.1 million in 1997 and 1996, respectively.
The agreements provided that within 125 days after the closing, the sales price for the Target Corporations would be decreased or increased by the amount, if any, by which the Target Corporations' combined stockholder's equity in accordance with generally accepted accounting principles ("GAAP") as of December 31, 1997 was less than or greater than, respectively, $31.6 million. As of December 31, 1997, the combined GAAP stockholder's equity of the Target Corporations was $32.1 million which resulted in a net sales price of approximately $41.0 million.
The "receivable from sale of discontinued and disposed of operations" ("receivable from sale") of approximately $.7 million as of December 31, 1998 represents the difference of approximately $.5 million between the net sales price of $41 million and the initial sales price of $40.5 million and approximately $.2 million related to the cession of vehicle extended service contract reserves to Lyndon Property. The receivable from sale of approximately $25 million as of December 31, 1997, represents the net sales proceeds of $41 million less the note payable and accrued interest of $16 million transferred to ALIC by an unaffiliated company on December 31, 1997. The Company has filed a legal action seeking declaratory judgment relief relating to a disagreement with Lyndon concerning the exact amount of the net sales price. Accordingly, the receivable from sale may be more or less than $.7 million. The Company believes the resolution of the matter will not have a material adverse effect on the financial condition or results of operations of the Company.
income taxes, as "Income from discontinued operations"; the assets and liabilities of these entities have been reported as "Assets of discontinued operations" and "Liabilities of discontinued operations"; and the net cash flows of these entities have been reported as "Net cash (used in) provided by discontinued operations."
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 and $740,000 for 1997 and 1996, respectively.
The Company's income before income taxes, discontinued operations, and extraordinary item for 1996 was $1.4 million. This income is primarily the result of the recognition of $4.3 million of other income related to a legal settlement. In 1996, particularly in the first half, the Company continued to experience adverse loss development on discontinued lines of business in the property and casualty segment. Adverse development on the farmowners and related discontinued lines amounted to $800,000.
Gross premium writings for 1998 were $43.3 million compared to $40.9 million and $25.6 million for 1997 and 1996, respectively. Premiums written increased from 1997 by $5.4 million for commercial auto and $1 million for other property and casualty programs offset by a decrease of $3.9 million for the vehicle extended service contract program which was fully ceded to Lyndon Property. The increase in premiums written in 1997 compared to 1996 was primarily the result of increases of $16.8 million for the new property and casualty programs and $1.4 million for the vehicle extended service contract program. See Table II following the narrative in Management's Discussion and Analysis.
Net premium earned was $18.8 million, $18.7 million and $12.5 million for 1998, 1997 and 1996, respectively. Commercial auto net premium earned was $18.3 million, $11.2 million and $5 million in 1998, 1997 and 1996, respectively. 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 increase in 1997 as compared to 1996 was due to the development and expansion by the Company into property and casualty lines of business.
A positive impact on 1997 earnings was the level of service fees on the extended service contracts which increased to $3.1 million in 1997 from $2.5 million in 1996. This increase was due to an overall increase in the fee levels as opposed to an increase in contract volume. These service fees were non-recurring in 1998 due to the sale of the extended service contract business to Lyndon Property as discussed previously.
Reinsurance expense recoveries increased $1.8 million in 1998 and $1.7 million in 1997 due to the increase in the long-haul trucking business written and reinsurance agreements in place on this business.
Effective April 1, 1998, the Company purchased a 25% interest in the common stock of USA Insurance Group, Inc. ("USAIG"), the parent company of Transportation Insurance Services, the Company's general agent, and a 50% shareholder in Countrywide Insurance Agency, Inc., for $5 million. This investment is accounted for using the equity method. At December 31, 1998, the investment in USAIG exceeded the Company's share of the underlying net assets by $4.1 million and is being amortized on the straight-line method over 10 years based upon a review of the operations, including a persistency review of USAIG's producing sub-agents. The Company recorded a net expense of $189,000 in 1998 for its investment in USAIG that is comprised of its share of USAIG's earnings of $142,000 offset by amortization of $331,000.
The Company's cash flows from operations have generally been adequate for its current operating needs. The Company's long haul trucking, charter bus and paratransit business generally is 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.
Due to the nature of its operations, the Company is at all times subject to pending and threatened legal actions that arise in the normal course of its activities. For information regarding legal proceedings involving the Company including developments relating to the insolvency of Galaxy Insurance Company (a subsidiary of the Company) and a suit against ALIC, who has been indemnified by the Company, by three long-term care policyholders, see "Note M" in the Notes to Consolidated Financial Statements.
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, which establishes standards for reporting and display of income and its components (revenue, expenses, gains, and losses) in a full set of general-purpose financial statements. The Company adopted SFAS No. 130 as of January 1, 1998 and has presented comprehensive income for all periods presented in the Consolidated Statements of Common Stockholders' Equity.
TABLE III - (CONTINUED) Reconciliation of Liability for Unpaid Losses and Loss Adjustment Expense