The selected consolidated financial data presented below under the captions "Operations Statement Data" and "Balance Sheet Data" for, and as of the end of, each of the years in the five-year period ended December 31, 1996 have been derived from the Company's consolidated financial statements which have been audited by KPMG Peat Marwick LLP. The statutory data are based on statutory accounting practices ("SAP"). These data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included elsewhere herein.
Net premiums earned decreased 29.9% in 1996 to $20.8 million from $29.7 million in 1995. Net premiums earned for private passenger non-standard automobile coverages decreased 40.5% in 1996 to $10.1 million from $16.9 million for the year ended December 31, 1995. The decrease in non-standard automobile coverages resulted primarily from the 100% reinsurance of all of the Company's agency-produced non-standard automobile premium with Allstate effective May 1, 1996. Net premiums earned for direct response non-standard automobile coverages have decreased slightly for the twelve months ended December 31, 1996 versus the year earlier period as the Company refocuses its marketing efforts for this program.
Net premiums earned for specialty commercial lines, which are comprised of security, fire and alarm, police, public officials and miscellaneous commercial coverages, declined 15.8% to $10.7 million for the year ended December 31, 1996 as compared to $12.7 million for the year earlier. Within the specialty commercial lines, net premiums earned for security, fire and alarm coverages remained flat at $8.2 million. The Company has experienced a 38.6% increase in policy counts from December 31, 1995 to December 31, 1996. The Company has been actively targeting smaller insureds for its specialty commercial coverages during this period. The Company has experienced some deterioration in premium rates during 1996. The Company began writing these coverages under a quota share reinsurance arrangement with Empire effective July 18, 1996. The Company believes that Empire's A+ (Superior) A.M. Best rating will allow it to write these coverages more profitably in the future. During the first quarter of 1996, the Company decided to non-renew a substantial amount of the police business. As a result, net premiums earned for police and public official coverages (often provided in tandem) declined 58.2% during 1996.
Net investment income decreased approximately $455,000 to $5.5 million for the year ended December 31, 1996 as compared to $5.9 million for the year ended December 31, 1995. The primary reason for the decrease was the Company's recognition of a $500,000 yield maintenance fee on the early repayment of a mortgage loan in the third quarter of 1995.
At December 31, 1996, the unrealized gain on investments available for sale, net of tax, was $184,000 in comparison to a $1.3 million unrealized gain as of December 31, 1995. The market value of the Company's portfolio has been adversely affected by the general rise in interest rates during 1996.
The Company recognized a gain on the sale of the All Nation agency contracts to Deerbrook of $408,000 for the year ended December 31, 1996 (see note 9 of Notes to Consolidated Financial Statements). The gain recognized represents the net present value of the related payments from Deerbrook reduced by All Nation's estimated liability for losses under the quota share reinsurance contract with Allstate and costs attendant with the sale. Revenue related to the non-compete clause of $318,000 has been recognized through December 31, 1996 under a straight-line amortization over the 36 month term of the non-compete agreement.
Loss and loss adjustment expenses incurred decreased 28.4% to $16.6 million for the year ended December 31, 1996 from $23.2 million for the year ended December 31, 1995. The loss and loss adjustment expense ratio for private passenger automobile coverages increased to 85.0% for the year ended December 31, 1996 as compared to 81.7% for the year ended December 31, 1995. The increase resulted primarily from declining rates during 1995 due to competitive pressures in the non-standard automobile business placed through independent agents. The Company implemented rate increases in all states during 1996 in an effort to recognize pricing inadequacies and results have improved from the 103% loss ratio experienced in the first quarter of 1996. Within the specialty commercial lines, the loss and loss adjustment expense ratio increased to 72.0% for the year ended December 31, 1996 versus 71.2% for the comparable period in the preceding year. The 1995 loss ratio reflects a release of reserve redundancies approximating $200,000. There were no reserve redundancy releases in 1996.
Amortization of deferred acquisition costs and other underwriting expenses represent the Company's costs to generate premium volume. For 1996, acquisition costs and other underwriting expenses have decreased approximately $2.3 million to $8.1 million for the year ended December 31, 1996 as compared to $10.4 million for the same period in the preceding year. The Company's underwriting expense ratio increased to 43.0% for the year ended December 31, 1996 in comparison to 35.2% for the year ended December 31, 1995. The increase in the expense ratio principally occurred due to the amortization of deferred acquisition costs in a declining premium environment and the recognition of approximately $492,000 in expenses related to the Syndicate's withdrawal from the IIE.
The Company recognized net income of $1.6 million in 1996 as compared to a net loss of $52,000 in 1995. Net income for 1996 includes various components of income in connection with the sale of All Nation's agency appointments of approximately $1.5 million. The 1995 loss includes tax expense of $472,000 related to the liability for tax benefits generated by National Family. Excluding these two items, net income for 1996 decreased to $78,000 from $420,000 in 1995 due primarily to the amortization of deferred acquisition costs on a declining book of business and costs related to the Syndicate's withdrawal from the IIE.
Net investment income increased approximately $1.6 million to $5.9 million for the year ended December 31, 1995 as compared to $4.3 million for the year ended December 31, 1994. The increase resulted from three factors, including a $500,000 yield maintenance fee assessed in the third quarter of 1995 in connection with the repayment of the mortgage loan held by the Company. The increase in net investment income also reflected an increase in the Company's invested assets from the proceeds of the sale of senior subordinated notes in December 1994. In addition, a shift in the Company's portfolio from tax-exempt securities to taxable securities led to an increase in the pre-tax yield on average invested assets to 6.4% for the year ended December 31, 1995 as compared to 5.8% for the year earlier period.
At December 31, 1995, the unrealized gain on investments available for sale, net of tax, was $1.3 million in comparison to a $1.8 million unrealized loss as of December 31, 1994. The market value of the Company's portfolio was favorably affected by the decline in interest rates during 1995.
Loss and loss adjustment expenses incurred increased 21.1% to $23.2 million for the year ended December 31, 1995 from $19.2 million for the year ended December 31, 1994. The loss and loss adjustment expense ratio for private passenger automobile coverages increased to 81.7% for the year ended December 31, 1995 as compared to 69.7% for the year ended December 31, 1994. This increase resulted from several factors. During 1995, the Company experienced declining rates due to competitive pressures in the non-standard automobile business placed through independent agents. In addition, severe weather conditions in the winter months of 1995 adversely impacted the non-standard automobile loss ratio. The 1994 loss and loss adjustment expense ratio was favorably affected by mild weather in the winter months and the low average severity and frequency of claims. In addition, the Company experienced highly unfavorable loss development in 1995 in the startup of its direct marketing program for non-standard automobile coverages. Due to software development problems, the Company was unable to utilize the computer system anticipated to be used in the direct marketing program, which made monitoring of losses related to this program difficult. The Company purchased a new software package to process its direct marketing program and discontinued related advertising until the system was functional. Within the specialty commercial lines, the loss and loss adjustment expense ratio increased to 71.2% for the year ended December 31, 1995 versus 63.6% for the comparable period in the preceding year. The primary factors causing the increase in loss ratio were the emergence of claim severity in the 1992 accident year for security coverages and the 1994 and 1995 accident years for police claims made coverages and an increase in claim frequency across the security and police lines in the 1995 accident year. The 1994 specialty commercial lines loss ratio also included a $1.7 million release of reserve redundancies. Approximately $200,000 in reserve redundancies were released from the specialty commercial lines during 1995.
Amortization of deferred acquisition costs and other underwriting expenses represent the Company's costs to generate premium volume. For 1995, acquisition costs and other underwriting expenses increased approximately $466,000 to $10.4 million for the year ended December 31, 1995 as compared to $10.1 million for the same period in the preceding year. The Company's underwriting expense ratio decreased to 35.2% for the year ended December 31, 1995 in comparison to 35.9% for the year ended December 31, 1994. The decrease in the expense ratio principally occurred due to the 1994 write-off of approximately $570,000 in expenses in conjunction with preparation for a public equity offering the Company chose not to consummate.
The Company realized a net loss of $52,000 in 1995 as compared to net income of $2.9 million in 1994. The 1995 loss included interest expense of $1.1 million. Excluding interest expense, net income for 1995 decreased to $1.0 million from $2.8 million in 1994 due primarily to deteriorating loss ratios.
The Company adopted SFAS No. 107 "Disclosures About Fair Value of Financial Instruments" ("SFAS 107") in 1995. SFAS 107 requires disclosures of fair-value information about financial instruments for which it is practicable to estimate the value. The Company's financial instruments include investments, cash and cash equivalents, the note receivable and the senior subordinated notes payable. The adoption of SFAS 107 had no effect on the Company's financial position or results of operations.
At December 31, 1996, the insurance subsidiaries maintained cash and cash equivalents and short-term investments of $5.8 million to meet short-term payment obligations. In addition, the Company's investment portfolio is heavily weighted toward short-term fixed maturities and a portion of the portfolio could be liquidated without material adverse financial impact should further liquidity be necessary.
Under IIE regulations, the Syndicate maintained a $1,000,000 deposit in a Guaranty Fund Trust Account prior to its withdrawal from the IIE which required at least 50 percent of the deposit to be in cash and/or marketable securities. Under the terms of the Syndicate's withdrawal agreement with the IIE, a $1,000,000 deposit must be maintained in the Guaranty Fund Account of the IIE for a period of three years from November 7, 1996.
Property and casualty insurance premiums are established before the amounts of losses and loss expenses, or the extent to which inflation may affect such amounts, are known. The Company attempts to anticipate the potential impact of inflation in establishing its premiums and reserves. The Company, for competitive reasons, is limited in the extent to which it can increase premiums to account for anticipated inflation, and actual inflation may be greater than anticipated. In either event, the Company, rather than its insureds, may have to absorb any additional inflation costs.
The financial statements and financial statement schedules, with the independent auditor's report, listed in Item 14 are included in this Annual Report on Form 10-K.