Total insurance written in 2002 was $13.4 billion compared to $13.3 billion in 2001, an increase of 1.3%. Total insurance written includes insurance written from traditional flow production and insurance written attributable to structured bulk transactions. Total direct insurance in force reached $25.4 billion at December 31, 2002, compared to $21.7 billion at December 31, 2001, an increase of 16.8%. Significant refinance activity in 2002 drove a high level of policy cancellations that partially offset the impact that the high level of insurance written had on in force growth.
Total direct premiums written were $124.2 million for 2002, an increase of 30.0% compared to $95.6 million for 2001. Net premiums written increased by 24.6% to $105.9 million in 2002 from $85.0 million for 2001. Earned premiums increased 24.6% to $105.1 million for 2002 from $84.4 million for 2001. This growth in written and earned premium resulted from record levels of insurance written offset by the impact of a declining persistency rate due to a high level of refinance activity.
The Company currently participates in excess of loss risk-sharing arrangements with various entrance and exit attachment points. One of the Company's competitors has announced that as of March 31, 2003, it will not participate in excess of loss risk-sharing arrangements where the net premium cede rate is greater than 25%. The Company believes that its risk-sharing arrangements provide valuable reinsurance protection and potentially reduce the risk of volatility in the Company's earnings. The Company plans to continue to participate in its excess of loss risk-sharing arrangements. It is uncertain at this time what impact, if any, the competitor's decision to exit this business will have on the Company's direct insurance in force subject to risk-sharing arrangements and its market share.
Refinance activity was 40.1% of insurance written (47.0% in the fourth quarter) in 2002 compared to 35.8% (43.3% in the fourth quarter) in 2001. Excluding structured bulk transactions, refinance activity was 40.1% of insurance written (47.0% in the fourth quarter) in 2002 compared to 37.5% of insurance written (44.4% in the fourth quarter) in 2001. Persistency, or the percentage of insurance in force remaining from one year prior, was 60.9% at December 31, 2002, compared to 67.6% at December 31, 2001. The high level of refinance activity and the resulting decrease in persistency is reflective of the low interest rate environment that has been in place during the past year. Low persistency results in an acceleration of the amortization of deferred policy acquisition costs and a reduction in renewal premiums. The annualized quarterly persistency run rate for the fourth quarter of 2002 was 32.1% compared to 40.8% for the fourth quarter of 2001.
The Company defines persistency as the percentage of insurance in force remaining from 12 months prior. Run off, defined as cancelled or terminated policies, of production originated during the past 12 months is not considered in the Company's calculation of persistency. The Company calculates persistency
Net losses and loss adjustment expenses (net of reinsurance recoveries) increased by 55.9% in 2002 to $14.1 million from $9.0 million in 2001. The rise reflects an increase in paid losses and delinquent loans as the Company's insurance in force grows and the condition of the economy remains weak. Net paid losses and loss adjustment expenses increased to $10.7 million during 2002 from $6.0 million during 2001. Reported delinquent loans totaled 2,379 at December 31, 2002, compared to 1,420 at December 31, 2001, an increase of 67.5%. The delinquency inventory count includes all reported delinquencies that are three or more payments in arrears at the reporting date and all reported delinquencies
Other operating expenses increased 26.3% to $22.9 million for 2002 from $18.1 million for 2001. This increase in expenses is primarily attributable to personnel, technology amortization, and equipment and software costs required to support the Company's increased levels of production, product development, system enhancements, and geographic expansion. The expense ratio (ratio of the amortization of deferred policy acquisition costs and other operating expenses to net premiums written) for 2002 was 34.6% compared to 35.1% for 2001.
Insurance written for 2001 was $13.3 billion compared to $4.4 billion in 2000, an increase of 199%. Traditional flow production was $8.5 billion in 2001 compared to $4.4 billion in 2000, an increase of 92.6%. The increase in insurance written from traditional flow production was driven primarily by new and expanding relationships with national lenders, strong demand for risk-sharing arrangements, and a lower interest rate environment which increased refinance activity and overall mortgage origination activity. Insurance written for 2001 also included approximately $4.7 billion attributable to structured bulk transactions. For the comparable period of 2000, there was no insurance written attributable to these transactions. According to industry data, Triad's national market share of net new primary insurance written increased to 3.6% for all of 2001 from 2.7% for all of 2000. Total direct insurance in force reached $21.7 billion at December 31, 2001, compared to $15.1 billion at December 31, 2000, an increase of 43.7%.
Growth in direct premiums written was partially offset by the increase in ceded premiums written. Driven primarily by increases in risk-sharing arrangements and also by excess of loss reinsurance, ceded premiums written increased 111% to $10.6 million from $5.0 million in 2000. The Company's premium cede rate (the ratio of ceded premiums written to direct premiums written) was 11.0% for 2001 compared to 6.5% for 2000. Approximately 37.3% of insurance written (57.9% excluding bulk transactions) during 2001 was subject to captive mortgage reinsurance and other risk-sharing arrangements compared to 42.9% of insurance written in 2000.
Net investment income for 2001 was $14.8 million, a 16.8% increase over $12.6 million in 2000. This increase was the result of growth in the average balance of invested assets by $40.5 million to $252.5 million for 2001, from
$212.0 million for 2000. The growth in invested assets was attributable to normal operating cash flow. The pre-tax yield on average invested assets decreased to 5.8% for 2001 as compared to 6.0% for all of 2000, reflecting the low interest rate environment during 2001. The portfolio's tax-equivalent yield-to-maturity was 8.0% at December 31, 2001, versus 8.2% at December 31, 2000. Based on fair value, approximately 72% of the Company's fixed maturity portfolio at December 31, 2001, was composed of state and municipal tax-preferred securities as compared to approximately 70% at December 31, 2000. At December 31, 2001, based on fair value, approximately 93% of the Company's fixed maturity portfolio was either a U.S. government or U.S. agency obligation or was rated investment grade by at least one nationally recognized securities rating organization compared to approximately 92% of the Company's fixed maturity portfolio at December 31, 2000.
In the first quarter of 2001, the Company recognized a nonrecurring incentive payment of approximately $1.9 million related to voluntary cancellation of an excess of loss reinsurance contract maintained by the Company with a non-affiliated reinsurer. This payment was accounted for as "other income". The Company also established excess of loss reinsurance coverage through a separate third-party reinsurer in the first quarter of 2001 under terms similar to the cancelled agreement.
Other operating expenses increased 13.3% to $18.1 million for 2001 from $16.0 million for 2000. This increase in expenses was primarily attributable to personnel, technology amortization, and equipment costs required to support the Company's product development, system enhancements, and expanded production. The expense ratio for 2001 was 35.1% compared to 33.7% for 2000.
The effective tax rate for 2001 was 30.9% compared to 30.3% in 2000. The increase in the effective tax rate was due to a lower percentage of pre-tax income being generated from tax-preferred securities as well as the recognition, on a taxable basis, of previously deferred income.
The Company generated positive cash flow from operating activities for 2002 of $47.0 million compared to $43.8 million for 2001 and $32.7 million for 2000. The increase in cash flow from operating activities in 2002 reflects the growth in premium and investment income and the effects of tax benefits resulting from the exercise of stock options offset partially by the increase in underwriting expenses and losses paid. The Company's business does not routinely require significant capital expenditures other than for enhancements to its computer systems and technological capabilities. Positive cash flows are invested pending future payments of claims and expenses. Cash flow shortfalls, if any, could be funded through sales of short-term investments and other investment portfolio securities.
Consolidated invested assets were $344.6 million at December 31, 2002, compared to $277.2 million at December 31, 2001. Fixed maturity securities and equity securities classified as available-for-sale totaled $309.3 million at December 31, 2002. Net unrealized investment gains were $13.7 million on fixed maturity securities and net unrealized investment losses were $458,000 on equity securities at December 31, 2002. Based on fair value, the fixed maturity portfolio consisted of approximately 81% municipal securities, 15% corporate securities, and 4% U.S. government obligations at December 31, 2002. At December 31, 2001, the fixed maturity portfolio consisted of approximately 72% municipal securities, 23% corporate securities, and 5% U.S. government obligations. The weighted-average duration to maturity of the Company's fixed maturity portfolio was 12.1 years at December 31, 2002, compared to 11.2 years at December 31, 2001. This increase in duration was due to shifts in the portfolio from corporate securities to municipal securities, where the yield curve was more attractive on longer duration investments.
Reserves are established by management using estimated claim rates (frequency) and claim amounts (severity) to estimate ultimate losses. The reserving process incorporates numerous factors in a formula that gives effect to current economic conditions and profiles delinquencies by such factors as policy year, geography, chronic late payment characteristics, and the number of months the policy has been in default. Because the estimate for loss reserves is sensitive to the estimates of claims frequency and severity, management performs sensitivity analyses to test the reasonableness of the best estimate generated by the loss reserve process. These sensitivity analyses allow management to use alternative assumptions related to claims frequency and claims severity to develop a range of reasonably possible loss reserve outcomes that can be used to challenge the best estimate. The loss reserve estimation process and the sensitivity analyses support the reasonableness of the best estimate of loss reserves recorded as a liability in the financial statements. Management periodically reviews the loss reserve process in order to improve its estimate of ultimate losses on loans currently in default. Adjustments to reserve estimates are reflected in the financial statements in the periods in which the adjustments are made.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - CONTINUED
Total stockholders' equity increased to $309.4 million at December 31, 2002, from $246.1 million at December 31, 2001. This increase resulted primarily from net income of $45.1 million, an increase in net unrealized gains on invested assets classified as available-for-sale of $7.7 million (net of income tax), and additional paid-in-capital of $10.2 million resulting from the exercise of employee stock options and the related tax benefit.