Total revenues, net premiums earned, net premiums written and direct premiums written were all substantially unchanged when compared to 1996. Total revenues for 1997 were $109,150,000, compared to $108,644,000 in 1996. Net premiums earned for 1997 were $96,054,000, compared to $95,752,000 in 1996. Net premiums written for 1997 were $96,811,000, compared to $96,622,000 in 1996. Direct premiums written for 1997 were $101,064,000, compared to $101,007,000 in 1996.
Net investment income was $12,770,000 in 1997, an increase of 9% from $11,724,000 in 1996, primarily due to a 4% increase in average invested assets and a 5% increase in the investment portfolio yield. Realized investment gains were $112,000 in 1997 compared to $996,000 in 1996.
Losses and loss adjustment expenses ("LAE") were $71,627,000 for 1997, a decrease of 10% from $79,603,000 in 1996. The loss and LAE ratio decreased to 74.6% in 1997 from 83.1% in 1996. In 1997, the Company recorded increases to its reserve for losses that occurred prior to 1997, primarily for its workers' compensation line of business. The net increase in the reserve for prior year losses and LAE was $4,508,000 and added 4.7 percentage points to the loss and LAE ratio in 1997.
The ratio of policy acquisition costs and other underwriting expenses to net premiums earned decreased to 33.4% in 1997 from 33.5% in 1996.
Direct premiums written for 1996 were $101,007,000, an increase of 2% from $98,553,000 in 1995 due to a 9% increase in voluntary personal lines direct written premiums, a 3% decrease in voluntary commercial lines direct written premiums and a 16% increase in involuntary direct written premiums.
Losses and LAE in 1996 included $2,200,000 of higher than normal losses related to unusually severe winter weather that affected the northeastern United States during the first quarter of 1996. These higher than normal weather related losses increased the 1996 loss and LAE ratio by 2.3 percentage points.
The ratio of policy acquisition costs and other underwriting expenses to net premiums earned decreased to 33.5% in 1996 from 35.0% in 1995. In 1995, other underwriting expenses included approximately $1,100,000 related to the 1995 resignation of the Company's former Chief Executive Officer. These expenses added approximately 1.2 percentage points to the ratio of policy acquisition costs and other underwriting expenses to net premiums earned in 1995.
Net cash provided by operations decreased by $2,331,000 or 20% from $11,864,000 in 1996 to $9,533,000 in 1997 primarily due to a $2,898,000 decrease in income taxes recovered. The Company received federal income tax refunds in 1997 and 1996 of $614,000 and $2,521,000 respectively, resulting from the net losses recorded in 1995 and 1996 respectively.
Net cash used in investing activities decreased $3,204,000 or 35% from $9,109,000 in 1996 to $5,905,000 in 1997. This decrease resulted from a $9,130,000 net increase in the purchase of fixed maturities, which was more than offset by net decreases in cash used to purchase preferred stock ($4,861,000) and other short-term investments ($7,556,000).
The Company's objectives with respect to its investment portfolio include maximizing total return while protecting policyholders' surplus, maintaining flexibility and liquidity, and maintaining a reasonable duration match between assets and liabilities. Like other property and casualty insurers, the Company relies on premiums as a major source of cash, and therefore liquidity. Cash flows from the Company's investment portfolio, either in the form of interest or principal payments, are an additional source of liquidity. Because the duration of the Company's investment portfolio and liabilities are carefully managed, increases or decreases in market interest rates are not expected to have a material effect on the Company's liquidity, or its results of operations.
At December 31, 1997, $121,450,000, or 62.4%, of the Company's fixed maturity portfolio was invested in mortgage-backed and other asset- backed securities. The Company invests in a variety of collateralized mortgage obligations ("CMO") products but has not invested in the derivative type of CMO products such as interest only, principal only or inverse floating rate securities. All of the Company's CMO investments have an active secondary market and their effect on the Company's liquidity does not differ from that of other fixed maturity investments. The Company does not own any other derivative financial instruments.
authorities. These restrictions limit dividends to those that, when added to all other dividends paid within the preceding twelve months, would not exceed 10% of the insurer's policyholders' surplus as of the preceding December 31. The maximum amount of dividends that MNH could pay during any twelve month period ending in 1998 without the prior approval of the New Hampshire Insurance Commissioner is $4,601,000. The Company paid a $.05 per share quarterly cash dividend to its common stockholders totaling $589,000 in 1997.
The Company relies to a significant degree on computer technology to operate its insurance business. Mutual is currently preparing all of its computer systems to be year 2000 compliant. Year 2000 compliance means that computer systems are able to distinguish date data between the twentieth and twenty first centuries. As part of this process, Mutual is replacing some of its systems and upgrading others, and is working to assess the status of its vendors' and customers' year 2000 compliance. The Company's share of the costs that have been incurred to upgrade these systems has not had a material adverse impact on the Company's financial position, results of operations or cash flows. However, Mutual's inability or the inability of the Company's vendors or customers to resolve year 2000 issues could result in material financial risk. The Company has been advised by Mutual that it is devoting appropriate resources to address year 2000 issues and anticipates that its computer systems will be in compliance by the end of 1998. The Company does not know the extent of its share of the future costs that Mutual will incur in this regard, but it does not believe these costs will have a material adverse impact on the Company's results of operations or financial condition.
From time to time the Directors of the Company and Mutual have discussed possible changes in the relationship among the three companies for the purposes of improving their insurance operations and reducing the instances where there might be conflicts between MNH and Mutual. For example, in November 1994 when Mutual filed an application with the New York Insurance Department to convert from a mutual to a stock corporation, the Company indicated to Mutual its willingness to consider sponsoring that conversion. However, as a result of an improvement in its financial condition, Mutual withdrew its conversion application in September 1996. Another example of the Directors' interest in changing the relationship among the companies occurred in 1994 when, as part of the settlement of issues arising out of the allocation of assigned risk automobile business, the two Boards explored the advisability and feasibility of pooling the insurance operations of MNH and Mutual in exchange for a reduction in the notice period required to terminate the Management Agreement. At that time, after extended arms' length negotiations with Mutual's Board of Directors, the Company concluded that pooling would not be in its best interest, and no changes were made. In late 1997 the companies jointly retained an independent insurance consultant to review their common insurance operations and to consider, among other things, whether pooling was advisable from each company's perspective. The independent insurance consultant recommended that the companies consider pooling, but after extensive consideration Mutual concluded that pooling would not be in its best interest at this time.