The selected financial data set forth in the following table for each of the five years in the period ended December 31, 1997 have been derived from the audited consolidated financial statements of the Company.
Voluntary personal lines direct premiums written for 1997 were $39,415,000, an increase of 5% from $37,616,000 in 1996. Private passenger automobile direct premiums written, which comprised 79% of total voluntary personal lines direct premiums written in 1997 and 1996, increased 5% in 1997 compared to 1996. This increase resulted primarily from a 6% increase in average premium per policy at December 31, 1997 compared to December 31, 1996. Homeowners direct premiums written increased 4% in 1997 compared to 1996 due to a 6% increase in average premium per policy.
Voluntary commercial lines direct premiums written for 1997 were $51,572,000, a decrease of 7% from $55,467,000 in 1996. This decrease resulted primarily from a $2,416,000 or 28% decrease in workers' compensation direct premiums written and an $804,000 or 5% decrease in commercial auto direct premiums written. The decrease in workers' compensation direct premiums written resulted from the Company's decision in late 1996 to exit certain unprofitable classes of that business starting in late 1996 and continuing throughout 1997. The decrease in commercial auto direct premiums written resulted from a 4% decrease in policies in force at December 31, 1997 compared to December 31, 1996. The decrease in commercial auto policies in force resulted in part from the Company's decision not to write certain related workers' compensation policies.
Involuntary direct premiums written, primarily involuntary private passenger automobile insurance, which comprised 10% and 8% of total direct premiums written during 1997 and 1996, respectively, were $10,077,000 for 1997 compared to $7,923,000 in 1996. This 27% increase resulted from increased mandatory assignments from the New York Automobile Insurance Plan (the "Plan"), which provides coverage for individuals who are unable to obtain auto insurance in the voluntary market. Assignments from the Plan vary depending upon a company's private passenger automobile market share and the size of the Plan.
Losses and LAE in 1996 included a $6,896,000 increase in reserves for accidents that occurred prior to 1996 which added 7.2 percentage points to the loss and LAE ratio in 1996.
Net premiums earned for 1996 were $95,752,000, an increase of $1,003,000, or 1% from $94,749,000 in 1995. Net premiums written for 1996 were $96,622,000, an increase of 3% excluding the effect of the decision by Mutual to exercise its option to not cede any of its direct voluntary premiums written to MNH for calendar year 1996, under the quota share reinsurance agreement between Mutual and MNH. In 1995, MNH assumed $2,110,000 of Mutual's direct voluntary premiums written under this agreement. The increase in net premiums written resulted primarily from a 2% increase in direct premiums written.
Voluntary personal lines direct premiums written for 1996 were $37,616,000, an increase of 9% from $34,393,000 in 1995. Private passenger automobile direct premiums written, which comprised 79% of total voluntary personal lines direct premiums written in 1996 and 1995, increased 8% in 1996 compared to 1995. This increase resulted from a 5% increase in policies in force and a 4% increase in average premium per policy at December 31, 1996 compared to December 31, 1995.
Homeowners direct premiums written increased 14% in 1996 compared to 1995 due to a 4% increase in policies in force and an 8% increase in average premium per policy.
In 1996 the Company continued the program initiated in 1995 to increase its mandatory deductibles and its minimum premium levels on certain of its commercial lines of business, primarily its businessowners and multi-peril lines. In conjunction with these actions, the Company discounted its premium rates 15% for its workers' compensation line of business. These discounted rates combined with other refinements were designed to attract the entire insurance business of preferred risk commercial accounts and to eliminate certain small premium policies which were generally unprofitable. These actions contributed to the decrease in commercial lines policies in force and the increase in average premium per policy. Also affecting the average policy premium has been New York State mandated reductions in workers' compensation premium rates of 12%, 9% and 18%, respectively, in 1994, 1995 and 1996.
Involuntary direct premiums written, primarily involuntary private passenger automobile insurance, which comprised 8% and 7% of total direct premiums written during 1996 and 1995, respectively, were $7,923,000 for 1996 compared to $6,854,000 in 1995. This 16% increase resulted primarily from additional policy premiums related to an increase in the legally required minimum automobile policy limits in New York State, which became effective January 1, 1996.
Realized investment gains were $996,000 in 1996 compared to a loss of $832,000 in 1995. During 1996, the Company sold its investment in Signet Group PLC ("Signet") cumulative auction rate preference shares and recognized a realized gain of $900,000 before taxes. In 1995, the Company recorded an $840,000 unrealized loss on its investment in Signet, which was included as a component of realized investment gains and losses in the Company's 1995 consolidated statement of operations. In addition to the realized gain related to its investment in Signet, the Company realized $96,000 of pre-tax gains on the sale of other investments which were sold in 1996. The Company recorded $8,000 of realized gains not related to Signet in 1995.
Losses and LAE were $79,603,000 for 1996, an increase of 2% from $78,195,000 in 1995. The loss and LAE ratio increased to 83.1% in 1996 from 82.5% in 1995. In 1996, the Company increased its reserve for losses that occurred prior to 1996 for its workers' compensation line of business. In turn, the Company increased its estimates of losses related to workers' compensation claims for accidents that occurred in 1996 based upon the increase in prior year's workers' compensation reserves. Partly offsetting these increases was a reduction in the Company's estimate of losses for automobile insurance claims that occurred prior to 1996. The net increase in the reserve for prior year losses and LAE was $6,896,000 and added 7.2 percentage points to the loss and LAE ratio in 1996.
Losses and LAE in 1995 included an $11,045,000 increase in reserves for accidents that occurred prior to 1995 which added 11.6 percentage points to the loss and LAE ratio in 1995.
Commissions, premium taxes and other state assessments that vary directly with the Company's premium volume represented 22.0% and 20.6% of net premiums earned in 1996 and 1995, 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.
Net cash used in financing activities increased $846,000 or 30% from $2,783,000 in 1996 to $3,628,000 in 1997 primarily due to a $964,000 increase in payments by the Company to its affiliate to settle monthly transactions under the Management Agreement.
The Company generally designates newly acquired fixed maturity investments as available for sale and carries these investments at fair value. Unrealized gains and losses related to these investments are recorded as a component of stockholders' equity. At December 31, 1997, the Company recorded $1,061,000 of unrealized gains, net of tax, associated with its fixed maturity investments. During 1997 the Company recorded $1,664,000 of unrealized gains, net of tax, related to its investment portfolio.
At December 31, 1997, the Company's portfolio of fixed maturities represented 92.5% of invested assets. Management believes that this level of bond holdings is consistent with the Company's liquidity needs because it anticipates that cash receipts from net premiums written and investment income will enable the Company to satisfy its cash obligations. Furthermore, a portion of the Company's bond portfolio is invested in mortgage-backed and other asset-backed securities which, in addition to interest income, provide monthly paydowns of bond principal.
At December 31, 1997, only $861,000, or .4%, of the Company's investment portfolio was invested in non-investment grade securities, which was down from $3,329,000, or 1.7%, at December 31, 1996. At December 31, 1996, MNH owned an investment represented by a capital advance issued by Mutual in the principal amount of $1,350,000. During 1997, MNH received $49,025 of dividends related to this capital advance and Mutual repaid to MNH the full amount of the advance.
During 1997 the Company repurchased 158,900 shares of its common stock at an average price of $18.40 and is holding 319,600 shares in treasury as of December 31, 1997.
As a holding company, the Company is dependent upon cash dividends from MNH to meet its obligations and 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
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 1997 was 2.1 to 1.
The Company's and MNH's business and day-to-day operations are closely aligned with those of Mutual. This is the result of a combination of factors. Mutual has had a historical ownership interest in the Company and MNH. Prior to November 1986 MNH was a wholly-owned subsidiary of Mutual. Following the Company's initial public offering in November 1986 until a secondary stock offering in July 1993 the Company was a majority-owned subsidiary of Mutual. Mutual currently owns 8.8% of the Company. Under the Management Agreement, Mutual provides the Company and MNH with all facilities and personnel to operate their business. The only officers of the Company or MNH who are paid full time employees are employees of the Mutual whose services are purchased under the Management Agreement. Also, the operation of the Company's insurance business, which offers substantially the same lines of insurance as Mutual through the same independent insurance agents, creates a very close relationship among the companies.
The Company has recently been informed by Mutual that Mutual is considering whether it would be in its best interest to purchase all or substantially all of the stock of the Company or MNH, and that Mutual has retained an investment banking firm and independent legal counsel to assist it in determining whether such a proposal is advisable and, if so, whether Mutual could finance any such proposal. The Company is studying what alternatives, if any, are available to it should Mutual either not present a proposal or present a proposal which is unacceptable to the Company. Among the alternatives being considered by the Company are the possible sale or merger of the Company or MNH. There can be no assurance that Mutual will present any proposal to the Company, or if it does whether such proposal would be acceptable to the Company or whether Mutual would be able to secure the financing and regulatory approvals necessary to complete any such proposal. There can also be no assurance that any of the alternatives being considered by the Company can be implemented on terms acceptable to the Company.