Management's discussion and analysis
Liquidity
Liquidity is a measure of our ability to generate sufficient cash flows to meet the short- and long-term cash requirements of our business operations. Our underwriting operations' short-term cash needs primarily consist of paying insurance loss and loss adjustment expenses and day-to-day operating expenses. Those needs are met through cash receipts from operations, which consist primarily of insurance premiums collected and investment income receipts. Our investment portfolio is also a source of liquidity, through the sale of readily marketable fixed maturities, equity securities and short-term investments, as well as longer-term investments which have appreciated in value. Cash flows from these underwriting and investment activities are used to build the investment portfolio and thereby increase future investment income.
Cash flows from operations were $69 million in 1998, compared with $848 million in 1997 and $1.3 billion in 1996. Our cash flows have trended downward over the last three years due to deteriorating market conditions in our property-liability operations, where loss and loss expense payments have been increasing while net written premiums have gone down. Declining yields on new investment securities have also been a factor contributing to the reduction in cash flows during that three-year period. Our cash flow in 1998 was also negatively impacted by payments of $108 million for liabilities incurred related to our merger with USF&G Corporation, primarily severance and other employee-related costs, and various transaction costs. Cash flow in 1997 was also adversely affected by the increase in loss payments resulting from the runoff of Northbrook loss reserves acquired in 1996.
We do not expect an increase in operational cash flows in 1999, due to the anticipated decline in written premiums and investment income receipts. In addition, cash payments related to the merger and restructuring charges recorded in 1998 will negatively impact our 1999 cash flows, although to a lesser extent than in 1998. On a long-term basis, we believe our operational cash flows will benefit from the corrective underwriting and pricing actions under way in our property-liability operations, as well as the opportunities for profitable growth provided by our merger with USF&G in 1998. Our financial strength and conservative level of debt provide us with the flexibility and capacity to obtain funds externally through debt or equity financings on both a short-term and long-term basis should the need arise. We anticipate funding our 1999 common share repurchases primarily through the issuance of debt.
We are not aware of any current recommendations by regulatory authorities that, if implemented, might have a material impact on our liquidity, capital resources or operations.
