Net income decreased by 36% in 1997 to $1,331,171 from $2,086,778 in 1996. Net income for 1996 decreased by 33% from $3,096,985 reported in 1995.
Net investment income, including realized capital gains and losses, includes amounts earned on the Company's investment portfolio, cash on deposit and funds held pursuant to reinsurance agreements. During 1995, the investments comprising funds held were released to the Company and were then placed by the Company into a trust account for the benefit of Virginia Surety Company. Net investment income increased by $178,162 or 7% in 1997 to $2,572,539 from $2,394,377 in 1996. 1996 net investment income increased by $198,926 or 9% from the $2,195,451 reported in 1995. Net investment income in 1997 includes net realized capital gains of $305,252 as compared to net realized capital gains in 1996 of $1,765, a net change of $303,487. Net realized capital losses in 1995 were $312,657. Capital losses are used to offset capital gains of prior and future years and recover related income taxes. Average invested assets including cash equivalents increased by $1,297,437 or 3% to $41,374,745 in 1997 compared to $40,077,308 in 1996. 1996 average
invested assets decreased by 2% from $40,842,132 in 1995. Investment yield including realized capital gains and losses in 1997 was 6.2% as compared to 6.0% in 1996 and 5.4% in 1995. Excluding realized gains and losses, the yield is computed at 5.50% in 1997, 6.0% in 1996 and 6.1% in 1995. The changes in the yields excluding realized gains and losses reflect the relatively stable interest rates during the last three years, combined with the effects of an increase in the portion of invested assets in equity and tax exempt securities.
The composition of the investment portfolio at December 31, 1997 and 1996 is as follows:
Losses and loss adjustment expenses incurred increased by 75% to $4,748,833 in 1997 from $2,717,884 in 1996. 1996 losses and loss adjustment expense increased by 83% from $1,489,667 in 1995. These amounts include favorable development of prior years' estimates of losses and loss adjustment expense of approximately $1,411,000 in 1997, $2,917,000 in 1996 and $3,307,000 in 1995. As adjustments to prior estimates of losses and loss adjustment expenses become known, such adjustments are included in current operations. AIIG's loss ratio, calculated as the ratio of losses and loss adjustment expense to premiums earned, is 81% in 1997, 50% in 1996 and 27% in 1995. The ratio calculated using only losses and loss adjustment expenses incurred for the current year (excluding the effects of favorable development and excluding reductions to retrocession premiums) is 105% in 1997, 105% in 1996, 87% in 1995.
The effective tax rate was 16% in 1997, 31% in 1996 and 28% in 1995. These rates differ from the statutory federal rate primarily due to the effects of tax exempt income offset by state income taxes. Gross tax exempt investment income increased by 110% in 1997 to $527,600 from $250,913 in 1996. Gross 1996 tax exempt investment income increased by 10% from $227,407 in 1995.
During 1997 and 1996, the Board of Directors declared quarterly dividends of $0.65 per share totaling $867,735 and $869,661 during 1997 and 1996 respectively. During 1995, the Board of Directors declared two quarterly dividends of $.65 per share totaling $435,412. Continuation of quarterly dividend payments is subject to the Board of Directors' continuing evaluation of the Company's level of surplus vis a vis its capacity to accept more business. It is an objective of the Company to build surplus in anticipation of the next "hard market", that is to say, the next period in which accountants' professional liability insurance becomes difficult or impossible to obtain at reasonable prices, and to retain flexibility for any future business expansions.
Due to regulatory restrictions on the payment of dividends, $18,200,893 of AIIC's separately determined GAAP basis stockholders' equity of $19,940,953 is unavailable for distribution as dividends in 1998 without prior regulatory approval.
The consolidated financial statements include the established liability for unpaid losses and loss adjustment expenses (LAE) of the Company's property/casualty (P/C) insurance operations. The liabilities for losses and loss adjustment expenses are determined using case-basis evaluations and statistical projections and represent estimates of the ultimate net cost of all unpaid losses and LAE incurred through December 31 of each year. These estimates are subject to the effect of trends in future claim severity and frequency. The estimates are continually reviewed, and as experience develops and new information becomes known, the liability is adjusted as necessary. Such adjustments are reflected in current operations.
The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years. For example, the 1994 liability has developed a $7,629,000 redundancy which has been reflected in income in subsequent years as the reserves were reestimated.
See Note F to the Consolidated Financial Statements regarding an anticipated codification of statutory accounting practices by the National Association of Insurance Commissioners.
The Board of Directors of the Company has approved a redomestication and restructuring of the Company, which is subject to shareholders approval, regulatory approvals and the approval of certain other third parties. See Note G to the Consolidated Financial Statements for a further description of the proposed transaction.