The selected consolidated financial data presented below for, and as of the end of each of the years ended December 31, have been derived from the consolidated financial statements of the Company which have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The consolidated balance sheets as of December 31, 1996 and 1995, and the consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, and the report thereon are included elsewhere in this document. The information presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," consolidated financial statements and the notes thereto, and the other financial information included herein.
(2) Includes after tax net realized gains of $307,000, $70,000, $87,000, $3,000 and $114,000 for 1996, 1995, 1994, 1993 and 1992, respectively.
COMMERCIAL AUTO was flat in 1996 from 1995 after recording a 8% increase in 1995 from 1994. Kentucky contributed 5 points of increase, but Texas and Pennsylvania accounted for 4 points and 2 points of decrease, respectively. The AUTO GARAGE product line produced a 6% increase in 1996 after a 26% increase in 1995. Florida, Kentucky and Pennsylvania were all up significantly in 1996 and Texas was not down materially. The GENERAL LIABILITY line recorded an increase of 4% in 1996 after an increase of 3% in 1995. California and Florida produced 6 points and 5 points of increase, respectively, while Texas recorded 9 points of decrease. For 1996, gross premiums written percentages by significant state/product line are as follows: Texas commercial auto (20%), Kentucky commercial auto (8%), Pennsylvania commercial auto (6%), Texas general liability (5%), and Florida auto garage (5%) with no other individual state/product line comprising 5% or more. The persistency rate decreased to 45% in 1996 from 47% in 1995. Premiums earned increased 10% in 1996 to $106,792,928 and increased 15% in 1995 to $97,254,816 as a direct result of the continued increase in writings.
Plan servicing revenues from commercial automobile plans decreased 11% in 1996 from 1995 following a 2% increase in 1995. Written premiums are 28% behind last year as a result of decreases in the three largest state plans. These plans are depopulating as risks are moving into the voluntary market due to lower pricing. The Company continues to pursue management contracts with other states to administer their commercial automobile plans and is seeking a larger participation in the existing state plans.
Claims and claim adjustment expenses (C & CAE) increased $9,913,707 in 1996 over 1995 and $7,276,443 in 1995 over 1994. The C & CAE ratio was 54.7% in 1996, 49.8% in 1995 and 48.8% in 1994. The increase in the C & CAE ratio of 4.9 percentage points in 1996 is largely a result of development of commercial auto claims which occurred in 1995 and 1994. While the Company writes a material amount of business in areas where catastrophes have recently occurred, the gross and net claims incurred from these events were immaterial because the Company primarily writes liability coverages. With regard to environmental and product liability claims, the Company has an immaterial amount of exposure. The Company does not provide environmental impairment coverage and excludes pollution and asbestos related coverages in its policies. Less than .1% of the Company's premium writings are for product liability coverages and this is limited to non-manufacturing risks only. Inflation impacts the Company by causing higher claim settlements than may have originally been estimated. Inflation is implicitly reflected in the reserving process through analysis of cost trends and review of historical reserve results.
The change in deferred policy acquisition costs and deferred ceding commission income (DAC) resulted in a net increase to income of $519,257, $2,284,138 and $1,321,946 for 1996, 1995 and 1994, respectively. The change in the amount of the increase in DAC between the comparable periods is directly related to the rate at which unearned premiums are growing as a result of the growth rate of premium writings. Since DAC (asset) is a function of unearned premiums (liability), an increase in the growth rate of net unearned premiums would correspondingly result in an increase in the growth rate of DAC and vice versa. The ratio of DAC to net unearned premiums was 25.8%, 25.5% and 25.4% at December 31, 1996, 1995 and 1994, respectively.
The primary sources of the Company's liquidity are funds generated from insurance premiums, net investment income and maturing investments. The short-term investments and cash are intended to provide adequate funds to pay claims without selling fixed maturity investments. At December 31, 1996, the Company held short-term investments and cash of $21,707,022 which the Company believes is adequate liquidity for the payment of claims and other short-term commitments.
The increase in investments is primarily attributable to continued positive cash flows from operating activities which are the result of continued and substantial underwriting profits. Ceded unpaid claims and claim adjustment expenses increased, as well as, ceded unearned premiums largely as a result of the increase in fronting reinsurance activity mentioned previously.
During 1996, the FASB issued Statement 125, "Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". The Statement is effective for years beginning after December 31, 1996, and will not have any impact on the financial statements.