Net income for 2001 increased 17.9% to $41.3 million from $35.0 million in 2000. This improvement was led by a 17.4% increase in earned premiums and a 16.8% increase in net investment income. Net income for 2001 also included the receipt of a nonrecurring payment of approximately $1.9 million related to the voluntary cancellation of an excess of loss reinsurance contract. The payment was reported as other income in the first quarter of 2001.
Insurance written for 2001 was $13.3 billion compared to $4.4 billion in 2000, an increase of 199%. Insurance written for the fourth quarter of 2001 increased 254% to $4.8 billion from $1.3 billion in the fourth quarter of 2000. Traditional flow production was $8.5 billion in 2001 compared to $4.4 billion in 2000, an increase of 92.6%. For the fourth quarter, traditional flow production in 2001 increased 115% to $2.9 billion from $1.3 billion in 2000. The increase in insurance written from traditional flow production was driven primarily by new and expanding relationships with national lenders, strong demand for risk-sharing arrangements, and a lower interest rate environment which increased refinance activity and overall mortgage origination activity.
Consolidation within the mortgage origination industry and Triad's continued focus on national lenders has resulted in a greater percentage of production volume being concentrated among a smaller customer base. The loss of one or more of these significant customers could have a significant adverse effect on the Company's business. However, to date, the Company's market share
Total direct premiums written were $95.6 million for 2001, an increase of 24.3% compared to $76.9 million for 2000. Net premiums written increased by 18.2% to $85.0 million in 2001 from $71.9 million for 2000. Earned premiums increased 17.4% to $84.4 million for 2001 from $71.8 million for 2000. This growth in written and earned premium resulted from record levels of insurance written offset by the impact of a declining persistency rate due to a high level of mortgage refinancings.
is attributable to normal operating cash flow. The pre-tax yield on average invested assets decreased to 5.8% for 2001 as compared to 6.0% for all of 2000, reflecting the current low interest rate environment. The portfolio's tax-equivalent yield was 8.0% for 2001 versus 8.2% for 2000. Based on fair value, approximately 72% of the Company's fixed maturity portfolio at December 31, 2001, was composed of state and municipal tax-preferred securities as compared to approximately 70% at December 31, 2000. At December 31, 2001, based on fair value, approximately 93% of the Company's fixed maturity portfolio was either a U.S. government or U.S. agency obligation or was rated investment grade by at least one nationally recognized securities rating organization compared to approximately 92% of the Company's fixed maturity portfolio at December 31, 2000.
In the first quarter of 2001, the Company recognized a nonrecurring incentive payment of approximately $1.9 million related to voluntary cancellation of an excess of loss reinsurance contract maintained by the Company with a non-affiliated reinsurer. This payment was accounted for as other income. The Company also established excess of loss reinsurance coverage through a separate third-party reinsurer in the first quarter of 2001 under terms similar to the cancelled agreement.
Net losses and loss adjustment expenses (net of reinsurance recoveries) increased by 18.9% in 2001 to $9.0 million from $7.6 million in 2000. This rise reflects increased levels of insurance in force. The Company's loss ratio (the ratio of net incurred losses to earned premiums) was 10.7% for 2001 compared to 10.6% for 2000. The loss ratio was 13.2% for the fourth quarter of 2001 compared to 10.6% for the fourth quarter of 2000. As of December 31, 2001, there were no incurred losses related to the Company's bulk business.
As of December 31, 2001, approximately 76% 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 insurance written in previous years has been quite favorable, management does not expect losses to remain at the low levels currently reported. The Company expects its incurred losses to increase as a greater amount of its insurance in force reaches its anticipated highest claim frequency years. Furthermore, changes in the economic environment could accelerate paid and incurred loss development. 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.
Amortization of deferred policy acquisition costs increased by 42.6% to $11.7 million in 2001 from $8.2 million for 2000. The increase in amortization reflects growth in deferred policy acquisition costs related to the expansion of the Company's insurance in force and accelerated amortization due to higher cancellations from refinance activity in 2001.
The effective tax rate for 2001 was 30.9% compared to 30.3% in 2000. The increase in the effective tax rate was due to a lower percentage of pre-tax income being generated from tax-preferred securities as well as the recognition, on a taxable basis, of previously deferred income. 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 2000 increased 15.1% to $35.0 million from $30.4 million in 1999. This improvement was 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 from $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%.
Refinance activity was 13.2% (15.2% in the fourth quarter) of insurance written in 2000 compared to 25.0% (11.5% in the fourth quarter) in 1999, reflecting the continued rise in interest rates through the first six months of the year. Persistency, or the amount of insurance in force remaining from one-year prior, was 82.6% at December 31, 2000, compared to 77.1% at December 31, 1999.
Net investment income for 2000 was $12.6 million, a 19.9% increase over $10.5 million in 1999. This increase in investment income was 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 was 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 realized net investment gains of approximately $286,000 during 2000 compared to $1.2 million in 1999. For the fourth quarter of 2000, the Company realized net investment losses of approximately $1.4 million, which were primarily attributable to a repositioning of the fixed maturity portfolio.
Net losses and loss adjustment expenses (net of reinsurance recoveries) increased by 6.7% in 2000 to $7.6 million from $7.1 million in 1999. This 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.
The Company's loss ratio 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 reflected 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 prior 36 months.
Amortization of deferred policy acquisition costs increased by 18.1% to $8.2 million in 2000 from $7.0 million for 1999. The increase in amortization
The expense ratio for 2000 was 33.7% compared to 34.5% for 1999. Contributing to this improvement was the higher level of written premiums in 2000 partially offset by the increase in expenses.
Consolidated invested assets were $277.2 million at December 31, 2001, compared to $232.0 million at December 31, 2000. Fixed maturity securities and equity securities classified as available-for-sale totaled $258.5 million at the end of 2001. Net unrealized investment gains were $1.2 million on equity securities and $323,000 on fixed maturity securities at December 31, 2001. Based on fair value, the fixed maturity portfolio consisted of approximately 72% municipal securities, 23% corporate securities, and 5% U.S. government obligations at December 31, 2001.
Reserves are established by management using estimated claim rates (frequency) and claim amounts (severity) to estimate ultimate losses. Because the estimate for loss reserves is sensitive to our estimates of claims frequency and severity, we perform sensitivity analyses to test the reasonableness of the best estimate generated by our loss reserve estimation process. These sensitivity analyses allow us to use alternative assumptions related to claims frequency and claims severity to develop a range of reasonably possible loss reserve outcomes that we can use to challenge our best estimate. Our loss reserve estimation process and our sensitivity analyses support the reasonableness of our best estimate of loss reserves recorded as a liability in our financial statements.
Management periodically reviews the loss reserve process in order to improve its estimate of ultimate losses on loans currently in default. Adjustments to reserve estimates are reflected in the financial statements in
the periods in which the adjustments are made. During the third quarter of 2001, management refined its methodology for setting loss reserves. The enhancements made to the reserving process incorporate a more multi-dimensional analytical form that gives effect to current economic conditions and profiles delinquencies by such factors as policy year, geography, and chronic late payment characteristics in addition to profiling them by age. The growth in loss reserves is the result of the increase in reported defaults and the maturing of the Company's risk in force mitigated by favorable trends in the frequency and severity of paid losses. The Company expects loss reserves will continue to grow, reflecting changing economic conditions and the growth and aging of its insurance in force. The Company's delinquency ratio, the ratio of delinquent insured loans to total insured loans, was 0.89% at December 31, 2001, compared to 0.60% at December 31, 2000. Net paid losses and loss adjustment expenses for 2001 were $6.0 million compared to $7.3 million for 2000, a decline of 18.0%. As of December 31, 2001, there were no reported delinquencies or claims paid related to the Company's bulk business.
Triad's ability to write insurance depends on the maintenance of its financial strength ratings and the adequacy of its capital in relation to risk in force. A significant reduction of capital or a significant increase in risk may impair Triad's ability to write additional insurance. A number of states also generally limit Triad's risk-to-capital ratio to 25-to-1. As of December 31, 2001, Triad's risk-to-capital ratio was 15.0 -to-1 as compared to 14.8-to-1 at December 31, 2000, and 11.2-to-1 for the industry as a whole at December 31, 2000, the latest industry data available.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF - ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - CONTINUED -----------------------------------------------------------
The response to this item is submitted on page 51 of this report under the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations."