During 1992, 1993, 1994 and 1995, the Company ceded losses of $1,267,000, $423,000, $213,000 and $6,600, respectively, to reinsurers, and for which it has been fully reimbursed. The Company seeks to limit its exposure with respect to any failure by a reinsurer to fulfill its obligations by evaluating the financial condition and rating of members of its reinsurance pool (the Company's policy is to only purchase reinsurance with U.S. insurers rated "A" or better by A.M. Best) at the time of such purchase and by diversifying the reinsurance pool.
Loss and loss adjustment expenses ("LAE") represent losses paid related to force-place insurance underwritten or reinsured by the Insurance Subsidiary, adjusted for changes in reserves for losses that are in the course of settlement and losses that have been incurred but not yet reported. Commissions paid to nonaffiliates represent amounts paid to third party agents and brokers, and other producers related to sales of the Company's services and products. Personnel expenses represent salaries, wages, sales commissions and
bonuses paid to Company employees and related employee benefits. All other expenses primarily consist of occupancy costs, including office rent and utilities, equipment maintenance and depreciation, amortization of acquisition costs, sales and marketing expenses, professional services and expenses related to the delivery of products and services such as postage and printing.
The Company has considered the potential impact of the year 2000 to its computer systems. Through normal, planned enhancements of existing systems, future development of new systems, and upgrades to operation systems and databases already covered by maintenance agreements, the Company believes that year 2000 compliance will be achieved over approximately the next 18 months. The Company does not anticipate any purchases of specific software or hardware, nor does it anticipate the need to engage outside consultants, to achieve compliance. While management expects some costs associated with compliance, it is anticipated that those costs will not be material. The accounting treatment of costs incurred in connection with year 2000 compliance will be treated as period costs and will be expensed as incurred.
Total revenue increased from $35.9 million in 1995 to $40.7 million in 1996, an increase of $4.8 million or 13.4%. Net premiums written decreased from $15.0 million in 1995 to $12.6 million in 1996, a decrease of $2.4 million or 16.0%. The decrease in net premiums was principally due to an increase in reserves to provide for return of premiums for anticipated policy cancellations and the run-off of certain accounts.
Flood inquiry fees increased from $10.6 million in 1995 to $18.5 million in 1996, an increase of $7.9 million or 74.5%. The addition of new customers contributed approximately $6 million of the increase. A change in estimate of deferred revenue related to Pinnacle's future servicing obligations for its life of loan services contributed approximately $900,000 of the increase. Interest rates have remained generally favorable for real estate borrowers with loan origination volumes increasing with Pinnacle's existing customers.
Personnel expenses increased from $16.9 million in 1995 to $18.9 million in 1996, an increase of $2.0 million or 11.8%. The increase in personnel expenses was due to staff additions and increased outside labor in response to the volume increases in the Flood Zone Determinations Services business. Personnel expenses as a percent of total revenue decreased from 47.0% in 1995 to 46.6% in 1996.
As a result of the above factors, income before provision for income taxes increased from a loss of $7.4 million in 1995 to a profit of $1.6 million in 1996, an increase of $9.0 million.
servicing portfolio was sold by the Resolution Trust Corporation in late 1994 and therefore, the customer did not contribute to premiums in 1995. These decreases were partially offset by additional business from new customers.
Flood inquiry fees increased from $8.0 million in 1994 to $10.6 million in 1995, an increase of $2.6 million or 32.5%. Flood determinations are performed as part of the mortgage loan origination process and the increase in flood inquiry fee revenues is primarily due to the decline in mortgage interest rates and the addition of new customers. Interest rates began to decline during the first quarter of 1995 contributing to increases in loan origination volumes. In addition, Pinnacle added new customers and converted many of its existing customers to the higher priced life-of-loan product as the industry complies with recent federal regulations.
Tracking fees for the period increased from $3.0 million in 1994 to $4.8 million in 1995, an increase of $1.8 million or 60.0%. The increase was due to the addition of several new customers.
Loss and LAE was $7.9 million in 1994 (37.7% of net premiums earned) and $6.0 million in 1995 (35.5% of net premiums earned), a decrease of $1.9 million or 24.1%. The decrease was due in part to fewer occurrences of catastrophic events in 1995 as compared to 1994.
The Company incurred expenses of a non-recurring nature in the amount of $4.1 million during 1995. On June 13, 1995, the California Department of Insurance notified the Company that its application for adjustment of its Proposition 103 return premium liability had been denied and the Company accrued an additional $4.1 million for the constitutionally mandated roll-back of insurance premiums under the Proposition. This amount is included on the balance sheet as Reserve for Prop 103 and on the income statement as Non-recurring Expense.
Of the Company's cash and short-term investments, $8.3 million is held by the Insurance Subsidiary. Insurance companies, including the Insurance Subsidiary, are subject to laws and regulations which restrict their ability to pay dividends to parent companies or other shareholders. Under California law, the maximum amount of dividends that the Insurance Subsidiary may pay the Company in any twelve (12) month period without prior regulatory approval is the greater of (i) net income for the preceding calendar year, or (ii) 10% of policyholders' surplus (shareholders' equity adjusted to a statutory basis) as of the previous December 31. For the year ended December 31, 1996, the Insurance Subsidiary had net income of $2.8 million and as of December 31, 1996, statutory policyholders' surplus of $26.8 million. For the year ended December 31, 1996, the maximum dividend permitted to be paid by the Insurance Subsidiary to National was approximately $2.8 million. See "Market for Registrant's Common Equity and Related Stockholder Matters" and Note 14 of Notes to Consolidated Financial Statements.
In September 1996, the Company concluded a note agreement providing $2.0 million for the purpose of partially financing the repurchase of 705,300 shares of its common stock. The total purchase price of the stock was approximately $5.0 million. See Note 20 of Notes to Consolidated Financial Statements.
The Company's financial results can be significantly affected by a number of factors, including, but not limited to, the volume of force-place insurance and the rate of cancellation of insurance policies, the addition or loss of significant customers, significant changes in the number of loans or personal property leases being tracked for major customers, increases or decreases in interest rates, and catastrophic loss events. For example, in 1992 the Insurance Subsidiary incurred net losses relating to the Los Angeles riots and Hurricane Andrew of $612,000 and $527,000, respectively. In November 1993, the Insurance Subsidiary received claims of approximately $650,000 from policyholders for losses arising out of the October and November 1993 series of fires in Southern California. The Company also received an assessment of $725,000 from the California Fair Plan Association, a mandatory insurance pool for certain California real estate, relating to losses from those fires. In addition, revenues from the Company's Flood Zone Determination Services are directly related to the volume of mortgage loan originations, both new and refinanced, and any change in the level of such activity could have a material impact on the Company's performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors Affecting Operating Results -- The Insurance Industry", and "Management's Discussion and Analysis of Financial Condition and Results of Operations".
The Insurance Subsidiary is required to maintain reserves to cover its estimated ultimate liability for loss and loss adjustment expenses with respect to reported losses and incurred but not reported claims. These reserves are estimates of what the Insurance Subsidiary expects the ultimate settlement and administration of claims will cost, and are based on known facts and circumstances, predictions of future events, estimates of future trends in claims severity and other variable, subjective factors. No assurances can be given that such estimates will be adequate to cover actual losses incurred by the Insurance Subsidiary. Any significant changes
The Insurance Subsidiary also maintains a reserve for return premiums which is based upon the Insurance Subsidiary's historical experience. As is prevalent in the force-place insurance industry, a substantial amount of the Insurance Subsidiary's net premiums written are refunded to policyholders. The amount of such refunds can be affected by, among other things, inaccurate or untimely data submitted by customers, which the Insurance Subsidiary uses as a basis for recording written premiums or the loss of a significant customer. No assurance can be given that the reserve for return premiums will be adequate to cover actual refunded premiums paid by the Insurance Subsidiary in the future. See, "Business - Insurance Operations", and "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Traditional insurance companies underwrite risks individually or by class, following an in-depth analysis of such risks. Although the Insurance Subsidiary applies underwriting techniques to a small portion of insured risks, the immediate coverage required by purchasers of force-place insurance generally requires the Insurance Subsidiary to write specialized insurance within predesignated limits and geographic area, at a flat rate, without the application of traditional underwriting criteria to individual risks. Accordingly, the Insurance Subsidiary may be insuring individual risks that it might not have insured had it applied traditional analysis to such risks. In addition, the Insurance Subsidiary may not have adequate spread of risk in a particular geographic area. See "Insurance Operations -Underwriting".
The markets for the Company's information services are highly competitive and characterized by rapidly changing technology. The Company believes that its future success will depend, in part, on its ability to identify, develop, install and support new services in a timely fashion, and on market acceptance of such