The Company leases office space in its Winston-Salem headquarters and its six underwriting offices located throughout the country comprising approximately 31,582 square feet under leases expiring between 1998 and 2002 and which require annual lease payments of $531,613 in 1998. With respect to all facilities, the Company has, or believes it will be able to obtain, lease renewals on satisfactory terms. The Company believes its existing properties are well utilized and are suitable and adequate for its present circumstances.
The Company maintains mid-range and micro-computer systems from its corporate data center located in its headquarters building to support its data processing requirements for accounting, claims, marketing, risk management and underwriting. The Company has in place back-up procedures in the event of emergency situations.
New insurance written, which includes insurance on new and seasoned loans, was $3.8 billion for 1997 as compared to $2.2 billion in 1996, an increase of 74.0%. For the fourth quarter, new insurance written increased 32.9% to $740 million in 1997 compared to $557 million in 1996. This increase in gross new insurance written was the result of continued geographic expansion and the penetration of Triad's products in the marketplace including Triad's new risk sharing programs. Approximately 25% of 1997 new insurance written resulted from Triad's risk sharing programs. Uncertainty exists regarding the future of risk sharing programs in the mortgage insurance industry. The resolution of regulatory and industry questions regarding risk sharing programs makes the continued viability of such programs uncertain. Of the $3.8 billion in total new insurance production, approximately $950 million was attributable to seasoned loans. The Company does not expect to produce a significant amount of new business attributable to seasoned loans in 1998.
The growth in new insurance written also reflects the favorable interest rate environment in 1997 which caused home buying activities to remain strong. Refinance activity was 14.0% (18.3% in fourth quarter) of new insurance written in 1997 compared to 16.9% (11.2% in fourth quarter) of insurance written in 1996. Total direct insurance in force reached $9.2 billion at December 31, 1997 compared to $6.6 billion at December 31, 1997, an increase of 40.0%.
Net new insurance written, which includes coverage on new loans only, was $2.9 billion for 1997 compared to $2.2 billion for 1996, an increase of 30.9%. According to industry data, Triad's national market share, which is calculated based on net new insurance written, increased by approximately 39% to 2.4% for 1997 (2.2% in the fourth quarter) compared to 1.7% for all of 1996.
In late 1996, Triad introduced its Stick With Triad program featuring the Slam Dunk Loan SM approval process whereby Triad issues a certificate of insurance based on the borrower's credit score. In 1997, the Stick With Triad products accounted for 60.1% of new commitments. The popularity, to a large extent, of this product has reduced customer use of Triad's delegated underwriting program in 1997. Commitments processed through Triad's delegated underwriting program accounted for 18.2% of commitments received for 1997, compared to 38.0% for 1996.
sixth years after loan origination. Although the claims experience on new insurance written in previous years has been quite favorable, the Company expects its incurred losses to increase as a greater amount of its insurance in force reaches its anticipated highest claim frequency years. Due to the inherent uncertainty of future premium levels, losses, economic conditions and other factors that impact earnings, it is impossible to predict with any degree of certainty the impact of such higher claims frequencies on future earnings.
Net losses and loss adjustment expenses (net of reinsurance recoveries) increased by 57.9% in 1997 to $5.2 million compared to $3.3 million in 1996.This increase reflects the increase in the Company's insurance in force and the resulting recognition of a greater amount of insurance in force reaching itshigher claim frequency years.
Other operating expenses increased 41.3% to $10.3 million for 1997 compared to $7.3 million for 1996. This increase in expenses is primarily attributable to advertising, personnel, facilities and equipment costs required to support the Company's product development, technology enhancements, geographic expansion and increased production.
Net income for 1996 increased 44.3% to $11.2 million compared to $7.8 million in 1995. This improvement was attributable to a 59.8% increase in earned premiums, a 12.6% increase in net investment income, an improved expense ratio and a continuing low loss ratio.
Net income per share on a diluted basis, reflecting stock splits, increased 42.1% to $0.83 for 1996 compared to $0.58 per share in 1995. Operating earnings per share were $0.84 for 1996 compared to $0.57 per share in 1995. Operating earnings exclude realized investment losses of approximately $162,000 in 1996 and realized investment gains of approximately $173,000 in 1995.
New insurance written was $2.2 billion in 1996 compared to $1.6 billion in 1995, an increase of 36.4%. New insurance written was $557 million in the fourth quarter of 1996 compared to $479 million in the same period of 1995. The increase in new insurance written in 1996 was the result of the continued penetration of Triad's products in the marketplace coupled with a favorable interest rate environment for much of 1996, which caused both refinance and home buying activities to remain strong for the year. Refinance activity accounted for 16.9% of new insurance written in 1996 compared to 9.3% for 1995. Total direct insurance in force reached $6.6 billion at December 31, 1996 compared to $5.1 billion the previous year, an increase of 29.1%.
According to industry data, Triad's share of total new mortgage insurance written increased to 1.7% for 1996 compared to 1.5% for all of 1995. This increase was primarily the result of the Company's geographic expansion into new territories and the success of a marketing focus on larger, national mortgage lenders.
Total direct premiums written were $26.2 million for 1996, an increase of 38.4% compared to $18.9 million in 1995. Net premiums written increased by 59.7% to $24.0 million for 1996 compared to $15.0 million for 1995. Earned premiums increased 59.8% to $24.7 million in 1996 from $15.5 million in 1995. Contributing to this growth were the strong mortgage market, the Company's continued expansion into new territories, the secondary mortgage market requirements for deeper coverages and increased renewal premium due to the growth of our monthly premium product. Sales under the Company's monthly premium plan represented 93.0% of new insurance written in 1996 compared to 82.6% in 1995. Offsetting the premium growth somewhat was the decrease in Triad's persistency rate, reflecting the 1996 increase in refinancing activity. Annualized persistency was 85.3% in 1996 compared to 86.4% in 1995.
In January 1996, the Company eliminated its quota share reinsurance on new business, recaptured substantial portions of its quota share coverage on renewal business and secured excess of loss reinsurance to protect against catastrophic losses. These changes reduced the Company's quota share cede rate to 5.3% of
direct premium written in 1996 compared to 20.8% in 1995. Premiums ceded under the Company's quota share reinsurance agreements for 1996 totaled $1.4 million compared to $3.9 million in 1995. Had the Company retained its quota share reinsurance in 1996 and maintained a cede rate comparable to 1995, the Company's net written premium would have increased approximately 38.0% rather than the 59.7% noted above.
Net investment income for 1996 was $5.4 million, a 12.6% increase over $4.8 million in 1995. This increase resulted from the growth in average invested assets of $10.3 million to $89.6 million at December 31, 1996. The yield on average invested assets was 6.1% for both 1996 and 1995. The portfolio's tax equivalent yield was 7.7% in 1996 and 7.5% in 1995. This yield reflected the Company's investment strategy to emphasize tax-preferred securities which yield lower pre-tax rates than similar fully-taxable securities.
The Company's loss ratio was 13.3% for 1996 compared to 14.3% for 1995. The favorable loss ratio reflects the low level of delinquencies compared to the number of insured loans and the fact that 71% of the insurance in force was originated in the prior 36 months.
Amortization of deferred policy acquisition costs increased by 41.3% to $3.2 million in 1996 compared to $2.3 million for 1995. The increase in amortization reflects a growing balance of deferred policy acquisition costs to amortize as the Company builds its total insurance in force.
The Company's expense ratio for 1996 was 43.8% compared to 46.9% for 1995. Contributing to this improvement was the higher level of written premiums for 1996 offset somewhat by the increase in expenses.
The parent company's cash flow is dependent on cash dividends and revenues from management fees from Triad. The insurance laws of the State of Illinois impose certain restrictions on dividends from Triad. These restrictions, based on statutory accounting practices, include requirements that dividends may be paid only out of statutory earned surplus as of the end of the preceding fiscal year and limit the amount of dividends that may be paid without prior approval of the Illinois Insurance Department. Triad had an earned surplus of $2.5 million at December 31, 1997 and a deficit of $1.3 million at December 31, 1996. The Illinois Insurance Department permits expenses of the parent company to be paid by Triad in the form of management fees.
In January 1998 the Company completed a $35 million private offering of senior notes due January 15, 2028. The notes, which represent unsecured obligations of the Company, bear interest at a rate of 7.9% per annum and are non-callable. The notes are rated "A" by Standard and Poor's Corporation and "A+" by Fitch Investors Service. The Company contributed $25 million of the net proceeds from the sale of the notes to Triad in exchange for a surplus debenture. The Company will be dependent upon payments under the surplus debenture issued by Triad and upon possible future dividends from Triad, all of which will be subject to significant payment restrictions under Illinois insurance laws, to provide funds for the payment of the Company's obligations under the notes. The Company retained the balance of the net proceeds of the offering, approximately $9.4 million, which will be available for general
corporate purposes, including, without limitation, investment, payments of principal and interest on the notes and possible future contributions to the capital of Triad.
Approximately 4.8% or $4.8 million of the Company's fixed maturity portfolio at December 31, 1997 was composed of mortgage-backed securities, substantially all of which are guaranteed by U.S. Government Agencies. Certain mortgage-backed securities are subject to significant prepayment risk due to the fact that, in periods of declining interest rates, mortgages may be repaid more rapidly than scheduled as borrowers refinance higher rate mortgages to take advantage of lower rates. As a result, holders of mortgage-backed securities may receive large prepayments on their investments which must be reinvested at then current rates.
The Company's loss reserves increased to $9.0 million at December 31, 1997 compared to $6.3 million at December 31, 1996. This growth is the result of the increases in new insurance written and the maturing of the Company's risk in force. Consistent with industry practices, the Company does not establish loss reserves for future claims on insured loans which are not currently in default. The Company's reserves per delinquent loan were $23,100 at both December 31, 1997 and December 31, 1996. The Company's ratio of delinquent insured loans to total insured loans was 0.47% at December 31, 1997 compared to 0.44% at December 31, 1996.
The Company's unearned premium reserve of $8.0 million at December 31, 1997 decreased from $8.2 million at December 31, 1996. This decline is attributable primarily to the continued production of the monthly premium product, which produces little unearned premium compared to annual and single premium products. Cancellation activity also can contribute to the decrease in unearned premiums, whereby older annual premium policies are canceled or replaced by monthly premium policies.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation -- Continued
Triad's total statutory policyholders' surplus increased to $60.9 million at December 31, 1997 from $57.1 million at December 31, 1996. This increase resulted from statutory net income of $22.9 million and unrealized gains on equity securities of $1.6 million offset primarily by an increase in the statutory contingency reserve of $19.7 million. Triad's statutory earned surplus was $2.5 million at December 31, 1997 compared to a deficit of $1.3 million at December 31, 1996, reflecting growth in statutory net income greater than the increase in the statutory contingency reserve. The balance in the statutory contingency reserve was $54.8 million at December 31, 1997 compared to $35.1 million at December 31, 1996.
The Company is undertaking modifications and upgrades to enhance its computer systems and technological capabilities. The Company expects that approximately $1.6 million will be expended in 1998 to complete this system upgrade and that the project will be funded through cash flow from operations. As a part of this effort, management has initiated a program to prepare the Company's computer systems and applications to be year 2000 compliant. The Company expects to incur internal staff costs as well as consulting and other expenses related to infrastructure and facilities enhancement necessary to prepare the systems for the year 2000. Most of the modifications will be made as part of the Company's capital upgrade to its computer systems throughout 1998.
In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share. Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to Statement 128.