(In thousands, except per share data and ratios) Year Ended December 31, 1997 1996 1995 1994 1993_
(1) These amounts reflect the following events: (i) in January and May, 1993, the Company converted $4,709 of its 10% Convertible Subordinated Debentures into 572 shares of common stock, (ii) in November, 1994, the Company declared a 5% stock dividend, (iii) in October, 1995 the Company converted 4 shares of its 6 1/2% Convertible Preferred Stock into 39 shares of common stock, (iv) in December, 1996 the Company declared a 10% stock dividend, and (v) in December, 1997 the Company converted 5 shares of its 6 1/2% Convertible Preferred Stock into 23 shares of common stock. Included in 1993 earnings per share was additional income of $61, or $.01 per share, resulting from the change in accounting for income taxes. Included in 1994 book value per common share was an additional $.06 per share, resulting from the change in accounting for debt and equity securities. (2) Loss ratios and combined ratios have been calculated in accordance with accounting principles prescribed or permitted by state regulatory agencies.
The profitability of property and casualty insurers is affected by many factors, including competition, weather conditions, natural disasters, the severity and frequency of claims, state regulation of premium rates, interest rates, crime rates, general business conditions and regulations, and court decisions that define the extent of coverage. One of the distinguishing features of the property and casualty insurance business is that its product must be priced before the costs are known, because premium rates generally are set before losses are reported. As a result, property and casualty insurers have experienced significant year-to-year fluctuations in underwriting results.
Revenues. Revenues decreased from $52.7 million to $49.4 million, or 6%, in 1997, primarily as a result of a decrease in net premiums earned, offset, in part, by increases in net investment income and net realized gains on investments. Even though net premiums earned decreased, premiums earned in 1997 increased $3.6 million, or 6%, over premiums earned in 1996 due to a greater amount of in force premiums in 1997. The decrease in net premiums earned is a result of the Company ceding more premiums to reinsurers in 1997 than it did in 1996. The primary reason for the increase in ceded premiums in 1997 was a quota share reinsurance treaty for commercial auto physical damage and liability premiums which was not in place in 1996. This treaty was canceled on December 31, 1997, on a cut off basis. Direct premiums written decreased $4.3 million, or 7%, in 1997 when compared to 1996. The most significant decreases in direct premiums written were auto physical damage, where the company reduced the amount of private passenger business written due to poor underwriting results, and workers' compensation, which realized substantial rate reductions. The increases in net investment income were a result of a larger average investable portfolio as well as a shift from tax-free to taxable investments. The increase in net realized gains on investments resulted from the sale of investments available for sale and other investments.
Expenses. Expenses for 1997 decreased $3.7 million, or 7%, from expenses for 1996. The decrease was primarily the result of decreases in net claims and claim settlement expenses and the amortization of deferred acquisition costs. The decrease in net claims and claim settlement expenses was the result of a decrease in net premiums earned, offset, in part, by an increase in the statutory loss ratio from 75% in 1996 to 81% in 1997. The increase in the loss ratio was due primarily to increases in the loss ratio of the Company's auto liability and auto physical damage products, offset, in part, by a reduction in the provision for workers' compensation claims. Included in net claims and claim settlement expenses in 1997 were $2.9 million of adjustments of estimates relating to losses that occurred prior to 1997. The decrease in the amortization of deferred acquisition costs was primarily the result of increases in ceding commission income and decreases in net premiums earned. The statutory combined ratio for 1997 was 114%, an increase from 104% for 1996. The increase in the effective tax rate from 0% in 1996 to 21% in 1997 was primarily the result of a reduction in tax-exempt interest.
Historically, the Company has generated funds sufficient to support its operations and has maintained a high degree of liquidity in its investment portfolio. The primary source of funds to meet the demands of claims and claim settlement expenses and operating expenses are written premiums, ceding commissions and investment income. The Company's funds generally are invested in securities with maturities intended to provide adequate funds to pay claims, claim settlement expenses and operating expenses without the forced sale of investments. As of December 31, 1997, less than 2% of the debt securities in the Company's investment portfolio were considered below investment grade, primarily because such securities were not rated.
As of December 31, 1997, the Company, on a consolidated basis, had cash and short-term investments aggregating approximately $7.8 million and a line of credit of $10.0 million, $5.5 million of which was available. On a parent company only basis, available cash and short-term investments aggregate approximately $857,000.
The Company believes that its current cash and short-term investments, together with funds generated from operations and existing loan commitments, will be sufficient to meet its operating and capital requirements for the foreseeable future.
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", was issued by the Financial Accounting Standards Board (FASB) in 1997. As defined in SFAS 130, comprehensive income is composed of net income, as well as other revenues, expenses, gains and losses that are currently excluded from net income, but are accounted for separately in the shareholders' equity section of the balance sheet. SFAS 130 requires that all items of comprehensive income be reported in a financial statement. This statement is effective for fiscal years beginning after December 31, 1997. The Company will adopt the statement in 1998.
In 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued and established standards for the way public business enterprises report information about operating segments in annual financial statements. The statement requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The statement is effective for fiscal years beginning after December 15, 1997. The Company is in the process of determining the effect of this statement upon its financial reporting requirements.