The accompanying 1992 and 1993 financial statements have been reclassified to conform with the 1994-1996 presentation.
Net income decreased by 33% in 1996 to $2,086,778 from $3,096,985 in 1995. Net income for 1995 decreased by 19% from $3,801,325 reported in 1994.
Premiums earned decreased by 2% in 1996 to $5,386,388 from $5,494,413 in 1995. Premiums earned for 1995 decreased by 12% from $6,276,395 reported in 1994. In 1996, 1995, and 1994 premiums earned includes $693,976, $611,916, and $1,198,655, respectively resulting from reductions in the ultimate estimated premium ceded pursuant to retrocession agreements in effect during 1989 through mid-1993. Ultimate premiums are dependent on loss experience under the agreements and are reevaluated as ultimate losses are reevaluated. Excluding the effect of the reduction of estimated ultimate premiums ceded, 1996 premiums earned decreased by 4% as compared to 1995 premiums earned, and 1995 premiums earned decreased by 4% from 1994. The reduction in earned premiums, excluding the effect of the reduction of estimated ultimate premiums ceded, primarily reflects the increased competition in the accountants professional liability market which has placed downward pressure on premiums.
Net investment income, including realized capital gains and losses, includes amounts earned on the Company's investment portfolio, cash on deposit and funds held pursuant to reinsurance agreements. During 1995, the investments comprising funds held were released to the Company and were then placed by the Company into a trust account for the benefit of Virginia Surety Company. Net investment income increased by $198,926 or 9% in 1996 to $2,394,377 from $2,195,451 in 1995. 1995 net investment income increased by $39,077 or 2% from the $2,156,374 reported in 1994. Net investment income in 1996 includes net realized capital gains of $1,765 as compared to net realized capital losses in 1995 of $312,647, a net change of $314,412. Net realized capital losses in 1994 were $54,830. Capital losses are used to offset capital gains of prior and future years and recover related income taxes. Average invested assets including cash equivalents remained relatively stable at $40,077,308 in 1996 compared to $40,842,132 in 1995, a decrease of 2%. 1995 average invested assets decreased by 1% from $41,295,493 in 1994. Investment yield including realized capital gains and losses in 1996 was 6.0% as compared to 5.4% in 1995 and 5.2% in 1994.
Losses and loss adjustment expenses incurred increased by 82% to $2,717,884 in 1996 from $1,489,667 in 1995. 1995 losses and loss adjustment expense increased by 143% from $611,910 in 1994. These amounts include favorable development of prior years' estimates of losses and loss adjustment expense of approximately $2,917,000 in 1996, $3,307,000 in 1995, and $4,184,000 in 1994. As adjustments to prior estimates of losses and loss adjustment expenses become known, such adjustments are included in current operations. AIIG's loss ratio, calculated as the ratio of losses and loss adjustment expense to premiums earned, is 50% in 1996, 27% in 1995 and 10% in 1994. The ratio calculated using only losses and loss adjustment expenses incurred for the current year (excluding the effects of favorable development and excluding reductions to retrocession premiums) is 120% in 1996, 97% in 1995 and 94% in 1994.
Operating and management expenses decreased by 7% in 1996 to $727,780 from $786,037 in 1995. 1995 operating and management expenses increased by 13% from $694,967 in 1994.
The effective tax rate was 31% in 1996, 28% in 1995 and 37% in 1994. These rates differ from the statutory federal rate primarily due to the effects of tax exempt income offset by state income taxes.
Due to regulatory restrictions on the payment of dividends, $17,078,218 of AIIC's separately determined GAAP basis stockholders' equity of $18,789,442 is unavailable for distribution as dividends in 1996 without prior regulatory approval.
The following table shows the development of the estimated liability for the eight years of the Company's P/C operations:
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES DEVELOPMENT (Thousands of Dollars) Amounts prior to 1993 restated to conform with SFAS 113
The above table presents the development of balance sheet liabilities for 1988 through 1995 as of year end 1996. The top line of the table shows the original recorded unpaid liability for losses and LAE recorded at the balance sheet date for each of the indicated years.
The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years. For example, the 1989 liability has developed a $4,054,000 redundancy which has been reflected in income in subsequent years as the reserves were reestimated.
The lower section of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. For example, the 1989 year end liability was originally $8,085,000. As of December 31, 1996, the Company had paid $3,380,000 of the currently estimated $4,031,000 of losses and LAE that had been incurred for 1989 and prior years through the end of 1996; thus an estimated $651,000 in losses incurred through 1989 remain unpaid as of the current financial statement date.