As of December 31, 2000, the Company leases office space in its Winston-Salem headquarters and its eleven underwriting offices located throughout the country comprising approximately 45,000 square feet under leases expiring between 2001 and 2008 and which require annual lease payments of approximately $893,000 in 2001. 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF - ------- FINANCIAL CONDITION AND RESULTS OF OPERATION --------------------------------------------
Net income for 2000 increased 15.1% to $35.0 million compared to $30.4 million in 1999. This improvement is attributable primarily to a 12.3% increase in earned premiums, a 19.9% increase in net investment income, and an improved combined loss and expense ratio for all of 2000.
Net income per share on a diluted basis increased 14.4% to $2.55 for 2000 compared to $2.23 per share for 1999. Included in 2000 earnings per share is $0.01 per share of net realized investment gains compared to $0.06 per share in 1999. Operating earnings per share, which exclude net realized investment gains, were $2.54 for 2000 compared to $2.17 for 1999, an increase of 16.6%.
Net new insurance written was $4.4 billion for 2000, a decrease of less than 1% from 1999 levels. For the fourth quarter, net new insurance written increased 49.7% to $1.3 billion in 2000 compared to $892 million in 1999. Triad achieved this level of new insurance written during a year in which industry new insurance written decreased 13.6%, although this decline moderated substantially in the third and fourth quarters. For 2000, new insurance written was driven by expanded relationships with national lenders as well as innovative product offerings. According to industry data, Triad's national market share of new insurance written increased to 2.7% for all of 2000 (3.1% in the fourth quarter) from 2.3% for all of 1999. Total direct insurance in force reached $15.1 billion at December 31, 2000, compared to $13.0 billion at December 31, 1999, an increase of 16.0%.
Total direct premiums written were $76.9 million for 2000, an increase of 17.6% compared to $65.4 million for 1999. Net premiums written increased by 12.8% to $71.9 million in 2000 compared to $63.7 million for 1999. Earned premiums increased 12.3% to $71.8 million for 2000 from $64.0 million for 1999. This growth in written and earned premium resulted from both new insurance production in 2000 and an improvement in the Company's persistency. The growth in direct premiums written was offset somewhat by the increase in ceded premium written. Driven primarily by increases in risk-sharing arrangements and excess of loss reinsurance, ceded premium written for 2000 increased 200% to $5.0 million compared to $1.7 million in 1999. Approximately 42.9% of new insurance written in 2000 was subject to captive mortgage reinsurance and similar arrangements compared to 22.9% in 1999. Management anticipates ceded premiums will continue to increase as a result of the expected increase in risk-sharing programs.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF - ------- FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED ----------------------------------------------------------
Net investment income for 2000 was $12.6 million, a 19.9% increase over $10.5 million in 1999. This increase in investment income is the result of growth in the average book value of invested assets by $28.0 million to $212.0 million for the year ended December 31, 2000, from $184.0 million for 1999. The growth in invested assets is attributable to normal operating cash flow. The pre-tax yield on average invested assets increased to 6.0% for 2000 as compared to 5.7% for all of 1999. The portfolio's tax-equivalent yield was 8.2% for 2000 versus 7.7% for 1999. Approximately 69% or $139.9 million of the Company's fixed maturity portfolio at December 31, 2000, was composed of state and municipal tax-preferred securities as compared to approximately 71% or $124.4 million at December 31, 1999.
The Company's loss ratio (the ratio of net incurred losses to earned premiums) was 10.6% for 2000 compared to 11.1% for 1999. The loss ratio was 10.6% for the fourth quarter of 2000 compared to 7.8% for the fourth quarter of 1999. The Company's favorable loss ratio reflects the low level of delinquencies compared to the number of insured loans and the fact that approximately 75% (79% at year-end 1999) of the Company's insurance in force was originated in the last 36 months. Management believes, based upon its experience and industry data, that claims incidence for it and other private mortgage insurers is generally highest in the third through sixth years after loan origination. Although the claims experience on new insurance written in previous years has been quite favorable, the Company does not expect its loss ratio to remain at its current low level and expects incurred losses to increase as a greater amount of 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 affect earnings, it is impossible to predict with any degree of certainty the impact of such higher claim frequencies on future earnings.
The effective tax rate for 2000 was 30.3% compared to 30.5% in 1999. For the fourth quarter of 2000, the effective tax rate was 29.6%. The lower fourth quarter rate was primarily the result of a higher percentage of pre-tax income being generated from tax-preferred securities. Management expects the Company's effective tax rate to remain at about the same annual rate as long as yields from new funds invested in tax-preferred securities remain favorable in relation to fully taxable securities.
Net income for 1999 increased 24.8% to $30.4 million compared to $24.4 million in 1998. This improvement was attributable primarily to a 21.1% increase in earned premiums, a 13.5% increase in net investment income, and an improved combined loss and expense ratio for all of 1999.
1998. The Company also produced approximately $11 million of new insurance written on seasoned loans in 1999 compared to $225 million in 1998. The decrease in new insurance written was the result of changing business relationships and declines in the mortgage insurance market, especially during the fourth quarter of 1999. Driven by a higher interest rate environment, the total net new mortgage insurance written market decreased approximately 27% in the fourth quarter of 1999 compared to the fourth quarter of 1998, according to industry data. Based upon this information, Triad's national market share of net new insurance written was 2.3% for all of 1999 compared to 2.6% for 1998. Total direct insurance in force reached $13.0 billion at December 31, 1999, compared to $11.3 billion at December 31, 1998, an increase of 15.8%.
Total direct premiums written were $65.4 million for 1999, an increase of 23.4% compared to $53.0 million for 1998. Net premiums written increased by 22.8% to $63.7 million in 1999 compared to $51.9 million for 1998. Earned premiums increased 21.1% to $64.0 million for 1999 from $52.8 million for 1998. This growth in written and earned premium resulted from both new insurance production in 1999 and an improvement in the Company's persistency. In 1999, 22.9% of new insurance written was subject to captive mortgage reinsurance and similar arrangements compared to 6.6% of new insurance written in 1998. Ceded premiums for 1999, which includes third party reinsurance arrangements as well as captive reinsurance agreements, increased 52.8% over 1998.
increase reflected the growing amount of the Company's insurance in force and the resulting recognition of a greater amount of insurance in force reaching its highest claim frequency years.
Amortization of deferred policy acquisition costs increased by 16.8% to $7.0 million in 1999 compared to $6.0 million for 1998. The increase in amortization reflected both a growing balance of deferred policy acquisition costs to amortize as the Company builds its total insurance in force and high cancellations due to refinance activity during 1999.
Other operating expenses increased 21.1% to $15.1 million for 1999 compared to $12.4 million for the same period in 1998. This increase in expenses was primarily attributable to advertising, personnel, and facilities and equipment costs required to support the Company's product development, technology enhancements, geographic expansion, and production.
The parent company's cash flow is dependent on interest income and payments from Triad including cash dividends, management fees, and interest payments under surplus notes. 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 and limit the amount of dividends that may be paid without prior approval of the Illinois Insurance Department. The Illinois Insurance Department permits expenses of the parent company to be reimbursed by Triad in the form of management fees.
Consolidated invested assets were $232.0 million at December 31, 2000, compared to $191.6 million at December 31, 1999. Fixed maturity securities and equity securities classified as available-for-sale totaled $215.0 million at the end of 2000. Net unrealized investment gains were $1.5 million on equity securities and $2.1 million on fixed maturity securities at December 31, 2000. The fixed maturity portfolio consisted of approximately 69% municipal securities, 24% corporate securities, 6% U.S. government obligations, and 1% mortgage-backed bonds at December 31, 2000.
Fixed maturity securities represent approximately 88% of the Company's invested assets at December 31, 2000, and the fair value of these fixed rate securities generally bears an inverse relationship to changes in prevailing market interest rates. The Company's long-term debt bears interest at a fixed rate of 7.9% per annum, and as a result, the fair value of this debt is sensitive to changes in prevailing interest rates. A 10% relative increase or decrease in market interest rates that affect the Company's financial instruments would not have a material impact on earnings during the next fiscal year, and would not materially affect the fair value of the Company's financial instruments.
In December 2000, the Company completed the initial phase of its policy management system conversion and began amortization of the system asset. The Company incurred approximately $7.7 million for this phase of its policy system conversion and upgrade, and the Company has funded this project through cash flow from operations. This new system will be amortized over 60 months. Amortization on the system began in December of 2000.