underwriting and/or claims office facilities in Buffalo, Albany and Central Islip, New York; Bedford, New Hampshire; and Moorestown, New Jersey. All of the offices except the Buffalo office are leased.
Direct premiums written for 1998 were $98,956,000, a decrease of $2,108,000, or 2%, from $101,064,000 in 1997. Net written premiums for 1998 were $92,758,000, a decrease of $4,053,000, or 4%, from $96,811,000 in 1997.
Voluntary personal lines direct premiums written for 1998 were $39,518,000, substantially unchanged from $39,415,000 in 1997. Private passenger automobile direct premiums written, which comprised 78% and 79% of total voluntary personal lines direct premiums written in 1998 and 1997, respectively, decreased 1% in 1998 compared to 1997 primarily due to intensified price-based market competition. Homeowners direct premiums written increased 5% in 1998 compared to 1997 due to a 5% increase in average premium per policy.
The increase in commercial auto direct premiums written was primarily due to an 8% increase in average premium per policy at December 31, 1998 compared to December 31, 1997. The increase in workers' compensation direct premiums written was due to a 36% increase in new business units (policies written by the Company for the first time) in 1998 as compared to 1997. The increase in commercial package policy direct premiums written was due to an 11% increase in policies in force at December 31, 1998 compared to 1997, partially offset by a 3% decrease in average premium size.
Net investment income was $13,277,000 in 1998, an increase of 4% from $12,770,000 in 1997, due to a 5% increase in average invested assets. Realized investment losses were $2,000 in 1998 compared to $112,000 of realized gains in 1997.
The ratio of policy acquisition costs and other underwriting expenses to net premiums earned increased to 35.8% in 1998 from 33.4% in 1997 primarily due to increased agency incentive commissions related to the Company's improved underwriting results.
Voluntary commercial lines direct premiums written for 1997 were $51,572,000, a decrease of 7% from $55,467,000 in 1996. This decrease resulted primarily from a $2,416,000, or 28%, decrease in workers' compensation direct premiums written and an $804,000, or 5%, decrease in commercial
Net cash used in investing activities decreased $1,478,000, or 25%, from $5,905,000 in 1997 to $4,427,000 in 1998. This decrease resulted primarily from a $6,625,000 net decrease in cash used to purchase fixed maturities, and a $2,067,000 decrease in cash used to acquire preferred stock, partly offset by a net increase in cash used to purchase short-term investments ($5,588,000).
Net cash provided by financing activities increased $3,763,000 from a $3,629,000 use of cash in 1997 to a $134,000 source of cash in 1998, primarily due to a $2,048,000 increase in receipts from the Company's affiliate to settle monthly transactions under the Management Agreement.
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 relative to the duration of its liabilities is 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.
The Company generally designates newly acquired fixed maturity investments as available for sale and carries these investments at fair value. Unrealized gains and losses related to these investments are recorded as accumulated other comprehensive income within stockholders' equity. At December 31, 1998, the Company had recorded $1,173,000 of unrealized gains, net of tax, associated with its fixed maturity investments as accumulated other comprehensive income. During 1998 the Company recorded $112,000 of unrealized gains, net of tax, related to its investment portfolio as a component of other comprehensive income.
The Year 2000 issue relates to the way in which information systems distinguish date data between the twentieth and twenty-first centuries. Also, many systems and equipment that are not typically thought of as relating to computers contain embedded hardware or software ("non-IT") that may have a time element.
The project has three phases: assessment of systems, equipment and business relationships affected by the Year 2000 issue; definition of strategies necessary to address affected systems and relationships; and remediation or replacement and testing of affected systems, equipment and relationships.
Mutual's target for completing all phases of the project is the fourth quarter of 1999. Mutual has completed the assessment and strategy phases for all systems. Mutual began converting to a mid-range computer based policy and claims system known as "MOST" (Merchants Optimum Services & Technology) in 1994. The final phase of the conversion to MOST was completed in October 1998. All new business and policy renewals for all products are now processed on the MOST system. Mutual has advised the Company that it believes the MOST system, its mainframe, mid-range and personal computers, and its local area networks are substantially Year 2000 compliant.
During 1998, Mutual initiated discussions with the Company concerning proposals for the acquisition of the Company by Mutual. The Company's Directors who are not affiliated with Mutual