The Registrant leases its principal executive offices in Chicago, Illinois, which consists of approximately 30,000 square feet of office space and maintains a satellite office in Westchester, Illinois, which consists of approximately 6,000 square feet. The Company believes its existing property is adequate for its present operations.
Net premiums earned increased by $30.0 million to $92.3 million for 1997 from $62.3 million for 1996. This increase was primarily due to the increase in insurance in force in 1997 as compared to 1996.
Losses incurred in 1997 were $30.3 million, compared to $20.7 million in 1996, as a result of aging of the Company's policies. The Company's loss ratio decreased from 33.2% for 1996 to 32.8% for 1997 due to favorable delinquency rates on business issued during the last three years. Because of its limited operating history, the Company expects it loss experience to increase as its policies age.
Policy acquisition costs during 1997 of $10.5 million increased by $2.0 million (or 24.0%) compared to 1996 principally due to the growth in the level of marketing and underwriting activity in connection with the production of new insurance written in 1997. Underwriting and other expenses during 1997 increased by $4.0 million or 37.8% due to the increase in insurance in force which resulted in various administrative, technology, and occupancy costs relating to growth in the Company's personnel.
New insurance written in 1996 was $7.7 billion, compared to $5.9 billion in 1995. As of December 31, 1996, Amerin's primary insurance in force was $14.8 billion as compared with $8.3 billion as of December 31, 1995, which represents a 78.9% increase.
attributable to a 30.1% increase in Amerin Guaranty's new insurance written to $7.7 billion and growth in insurance in force and related renewal premiums. Management believes that Amerin Guaranty was able to increase revenues due primarily to increased use by existing lenders of the Company's BPMI, the addition of new, large lenders which began doing business with the Company during the second half of 1995 and in 1996, and increased sales of LPMI. The increase in net premiums was also due to a lesser extent to higher average premiums during 1996 compared to 1995, principally due to the increased coverage requirements imposed by Fannie Mae and Freddie Mac during the first quarter of 1995, which requirements took effect over the course of 1995. Amerin Guaranty's monthly premium plan represented 86.6% and 81.5% of new insurance written for 1996 and 1995, respectively.
Net investment income of $16.9 million for 1996 increased by $9.3 million (or 121.6%) over 1995, due primarily to investment of the proceeds from the Company's initial public offering in November 1995 (the "Initial Public Offering"), as well as Amerin's net operating cash flows over the course of 1996, which together resulted in an increase of 138.4% in the monthly average amount of invested assets. Realized investment gains for 1996 were $.2 million compared to realized investment gains of $.5 million for 1995. This decrease reflected lower sales activity within the portfolio due to the Company's desire to maintain a certain composition of the investment portfolio. Sales of investments in 1996 were made primarily in connection with the continuation of the Company's current investment strategy to increase investment in tax-exempt securities. As of December 31, 1996 and 1995, the yields to maturity on the investment portfolio were 5.8% and 6.2%, respectively, and the average durations of the investment portfolio were 6.4 years and 3.3 years, respectively, The average duration at December 31, 1995 reflected the investment of the net proceeds of the Initial Public offering in short-term investments pending their investment in tax-exempt securities with longer maturities.
Losses incurred in 1996 were $20.7 million, compared to $7.8 million in 1995, as a result of aging of the Company's policies. Because of the Company's limited operating history, its loss experience is expected to increase significantly as its policies continue to age. Policy acquisition costs during 1996 of $8.5 million increased by $1.8 million (or 27.8%) compared to 1995 principally due to the growth in the level of marketing and underwriting activity in connection with the increased
production of new insurance written in 1996 compared to 1995. Underwriting and other expenses during 1996 increased by $3.7 million or 53.6% compared to 1995 due to the institution of an excess loss treaty, the increase in insurance in force and increases in various administrative and occupancy costs relating to growth in the Company's personnel, offset in part by the elimination in the 1996 period of standby commitment fees previously paid to certain of the Company's original stockholders.
The Company's effective tax rate was 28.7% in 1996. The Company incurred tax expense in 1995 notwithstanding the fact that the Company reported a loss before taxes, which loss resulted from the Company's recording of the non-recurring non-deductible charge of $35.7 million discussed in the following paragraph. The Company fully utilized its net operating losses in 1995, with the result that no additional net operating losses were available for utilization in 1996. The effective tax rate for 1995 was below the statutory rate of 35%, principally reflecting the benefits of tax-exempt investment income.
Consolidated unearned premiums increased $2.9 million from $20.5 million at December 31, 1996 to $23.4 million at December 31, 1997, reflecting the increase in insurance in force during 1997 versus 1996. The unearned premium reserve growth rate is significantly lower then the increase in insurance in force due to the increased concentration of monthly business.
Consolidated stockholders' equity increased to $350.2 million at December 31, 1997, from $300.6 million at December 31, 1996, an increase of 16.5%. This increase resulted primarily from the results of 1997 operations and net unrealized investment gains.
The Company expects to incur aggregate capital costs of approximately $6 million in 1998 primarily to expand and enhance its computer hardware and software. The Company expects to fund such expenditures with cash flow from operations.
The Company has determined that it will need to modify or replace significant portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and beyond. In April 1996 the Company commenced a major initiative to enhance its entire computer system. While this initiative was not undertaken with the primary goal of addressing the Year 2000 issue, all internal matters relating to the Year 2000 issue will be fully addressed upon completion of this initiative.