Certain statements made in this Annual Report on Form 10-K constitute forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve certain assumptions, risks and uncertainties that could cause actual results to differ materially from those included in or contemplated by those statements. These assumptions, risks and uncertainties include, but are not limited to, those associated with factors affecting the property and casualty insurance industry generally, including price competition, size and frequency of claims, increasing crime rates, escalating damage awards, natural disasters, fluctuations in interest rates and general business conditions; the Company's dependence on investment income; the geographic concentration of the Company's business in the northeastern United States and in particular in New York, New Hampshire, New Jersey, Rhode Island, Pennsylvania and Massachusetts; the adequacy of the Company's loss reserves; government regulation of the insurance industry; exposure to environmental claims; dependence of the Company on its relationship with Mutual; and the other risks and uncertainties discussed or indicated in all documents filed by the Company with the Commission. The Company expressly disclaims any obligation to update any forward-looking statements as a result of developments occurring after the filing of this report.
Voluntary personal lines direct premiums written for 1999 were $38,493,000, a decrease of 3% from $39,518,000 in 1998. Private passenger automobile direct premiums written, which comprised 76% and 78% of total voluntary personal lines direct premiums written in 1999 and 1998, respectively, decreased 5% in 1999 compared to 1998 primarily due to fewer new policies and renewal policies retained resulting from price-based market competition. Voluntary private passenger automobile policies in force at December 31, 1999, decreased 7% compared to December 31, 1998. Homeowners direct premiums written increased 6% in 1999 compared to 1998 due to a 9% increase in policies in force resulting from an increase in new business units in 1999 as compared to 1998.
The increase in commercial auto direct premiums written was primarily due to a 25% increase in policies in force at December 31, 1999 compared to December 31, 1998, partially offset by a 3% decrease in average premium per commercial auto policy at December 31, 1999 compared to December 31, 1998. The commercial auto market continues to respond favorably to the Company's commercial auto product enhancements and premium rate decreases enacted in early 1998. The increase in workers' compensation direct premiums written was due to a 9% increase in new business units in 1999 as compared to 1998. The increase in contractors coverall direct premiums written was primarily due to a 14% increase in average policies in force in 1999 compared to 1998 which in turn was due to rate decreases in this line of business effective in the first quarter of 1999.
Involuntary direct premiums written, primarily involuntary private passenger automobile insurance, which comprised 2% and 5% of total direct premiums written during 1999 and 1998, respectively, were $2,113,000 for 1999 compared to $5,192,000 in 1998. This 59% decrease resulted primarily from decreased mandatory assignments from the New York Automobile Insurance Plan ("NYAIP"), which provides coverage for individuals who are unable to obtain auto insurance in the voluntary market. During 1999 the NYAIP continued to adjust its assignments as a result of having over assigned policies to the Company in 1997 and an overall decrease in the NYAIP's pool of business. Assignments from the NYAIP vary depending upon a company's private passenger automobile market share and the size of the NYAIP.
Net losses and LAE were $66,086,000 for 1999, an increase of 1% from $65,234,000 in 1998. The increase in net losses and LAE was primarily attributable to a non-recurring charge related to insurance related assessments, which was offset by a non-recurring reduction in other underwriting expenses. Absent this non-recurring charge, net losses and LAE were relatively unchanged compared to 1998. The Company recorded decreases to its reserves for losses related to prior accident years of $3,749,000 and $2,145,000 in 1999 and 1998, respectively. These decreases in reserves for prior accident years reduced the loss and LAE ratio in 1999 and 1998 by 3.9 and 2.3 percentage points, respectively, and were primarily the result of favorable loss experience related to auto liability policies in 1998 and workers' compensation policies in 1999. The decrease in reserves for prior accident years was somewhat offset by an increase in the loss and LAE ratio for losses and LAE occurring in the current accident year.
The ratio of policy acquisition costs and other underwriting expenses to net premiums earned decreased to 34.5% in 1999 from 35.8% in 1998, primarily due to the aforementioned non-recurring reduction in insurance related assessments. Expenses that vary directly with the Company's premium volume, primarily commissions, premium taxes and state assessments, represented 20.6% and 21.7% of net premiums earned in 1999 and 1998, respectively. Certain other underwriting expenses, such as salaries, employee benefits and other operating expenses vary indirectly with volume and comprise the remainder of the Company's underwriting expenses.
The amounts recorded by the Company for income taxes in 1999 and 1998 differed from those calculated using the statutory federal income tax rate primarily due to tax exempt bond income.
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 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.
Involuntary direct premiums written, primarily involuntary private passenger automobile insurance, which comprised 5% and 10% of total direct premiums written during 1998 and 1997, respectively, were $5,192,000 for 1998 compared to $10,077,000 in 1997. This 48% decrease resulted primarily from decreased mandatory assignments from the NYAIP, which provides coverage for individuals who are unable to obtain auto insurance in the voluntary market. During 1998 the NYAIP adjusted its assignments as a result of having over assigned policies to the Company in 1997 and an overall decrease in the NYAIP's pool of business.
Net premiums earned for 1998 were $93,540,000, a decrease of $2,514,000, or 3%, from $96,054,000 in 1997. Net premiums earned decreased primarily due to a $2,503,000 (22%) decrease in involuntary earned premiums.
During 1999 the Company repurchased 267,600 shares of its common stock at an average price of $22.58 and was holding 646,000 shares in treasury as of December 31, 1999.
In August 1999, the Company arranged for a $2,000,000 unsecured credit facility from a bank in the form of a master grid note. Any borrowings under this facility are payable on demand and carry an interest rate which can be fixed or variable and is negotiated at the time of each advance. This facility is available for general working capital purposes and for repurchases of the Company's common stock. At December 31, 1999, $1,025,000 was outstanding on this loan.
As a holding company, the Company is dependent upon cash dividends from MNH to meet its obligations and to pay any cash dividends. MNH is subject to New Hampshire insurance laws which place certain restrictions on its ability to pay dividends without the prior approval of state regulatory 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 31st. The maximum amount of dividends that MNH could pay during any twelve month period ending in 2000 without the prior approval of the New Hampshire Insurance Commissioner is $5,329,000. MNH paid the maximum allowable dividend to the Company in 1999. Dividends were paid in January 1999, May 1999 and September 1999, of $2,100,000, $1,400,000 and $1,600,000, respectively. MNH paid a dividend of $2,200,000 to the Company on February 14, 2000 and as such is restricted from paying another dividend to the Company until May, 2000. The Company paid a cash dividend to its common stockholders of $.05 per share in the first quarter of 1999 and $.10 per share in the second, third and fourth quarters of 1999. Total dividends paid amounted to $955,000 in 1999.
Industry and regulatory guidelines suggest that the ratio of a property and casualty insurer's annual net premiums written to its statutory surplus should not exceed 3 to 1. The Company has consistently followed a business strategy that would allow MNH to meet this 3 to 1 regulatory guideline. MNH's ratio of net premiums written to statutory surplus for 1999 was 1.8 to 1.
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 that may have a time element. The Company has not encountered any Year 2000 related problems as of the date of this report.
The Company estimates that its share of the total expenses associated with becoming Year 2000 compliant approximated $300,000. Approximately $150,000 of the expenses were for external costs, which included $112,000 in outside consultant expenses and $38,000 for specific upgrades of software to address Year 2000 compliance, and $150,000 of the expenses have been for internal resources dedicated to achieving Year 2000 compliance. The Company estimates its share of costs incurred in 1999 to be $10,000, which has been expensed. There has not been a material impact on the Company's results of operations or financial condition as a result of information technology projects being deferred due to resource constraints caused by the Year 2000 project.
It is possible, however, that future court interpretations of policy language based on specific facts, or legislation mandating coverage, could result in coverage for losses attributable to Year 2000 problems. Such decisions or legislation could have a material adverse impact on MNH's results of operations and financial condition. It is also possible that MNH may incur expenses defending claims for which it is ultimately determined there is no insurance coverage. MNH has made no provision for reserves for losses or LAE on claims based on potential Year 2000 problems.
MNH, like many other property and casualty insurance companies, is subject to environmental damage claims asserted by or against its insureds. Management of the Company is of the opinion that based on various court decisions throughout the country, such claims should not be recoverable under the terms of MNH's insurance policies because of either specific or general coverage exclusions contained in the policies. However, there is no assurance that the courts will agree with MNH's position in every case, nor can there be assurance that material claims will not be asserted under policies which a court will find do not explicitly or implicitly exclude claims for environmental damages. Management, however, is not aware of any pending claim or group of claims which would result in a liability that would have a material adverse effect on the financial condition of the Company or MNH.