The Company's corporate headquarters are located in Buffalo, New York in a building owned by Mutual that contains approximately 113,000 square feet of office space. Mutual also has regional underwriting and/or claims office facilities in Buffalo, Albany and Central Islip, New York; Bedford, New Hampshire; and Moorestown, New Jersey. All of the offices except the Buffalo office are leased.
Net premiums written increased 8% from $90,187,000 in 1994 to $97,577,000 in 1995, primarily due to 10% increase in direct premiums written. This increase in direct premiums written was partially offset by a 48% decrease in premiums written assumed from Mutual in accordance with the quota share reinsurance agreement between Mutual and MNH. In December 1995, Mutual informed MNH that it would exercise its option to reduce its cessions to MNH under the agreement to 0% of Mutual's direct voluntary premiums written effective for calendar year 1996, including premiums written in 1995 but which were unearned as of December 31, 1995. As a result, premiums written assumed by the Company from Mutual under this reinsurance agreement decreased from $4,086,000 in 1994 to $2,110,000 in 1995.
Voluntary personal lines direct premiums written increased 7% from $32,101,000 in 1994 to $34,393,000 in 1995. Private passenger automobile direct premiums written, which comprised 79% of total voluntary personal lines direct premiums written in 1995, increased 5% in 1995 compared to 1994. Homeowners' direct premiums written increased 17% in 1995 compared to 1994 due to a 4% increase in policies in force and a 13% increase in average premium per policy.
Losses and LAE increased 10% from $70,800,000 in 1994 to $78,195,000 in 1995. The loss and LAE ratio increased from 77.9% in 1994 to 82.5% in 1995. As a result of greater than expected reported loss experience during 1995, the Company increased its estimate for claims that occurred in 1989 through 1994 for the homeowners, businessowners, workers' compensation, and commercial lines of business. Partly offsetting these increases was a reduction in the Company's estimate of automobile insurance claims that occurred in 1993 and 1994. The net increase in the reserve for prior year losses and LAE approximated $11,000,000 and 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 20.6% of net premiums earned in 1995 and 1994. 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.
The Company recorded an income tax benefit in 1995 and 1994. The benefits recorded were larger than that calculated using the statutory federal income tax rate due to tax exempt bond income.
Total revenues increased 2% from $99,496,000 in 1993 to $101,352,000 in 1994. Of the $1,856,000 increase, $2,664,000 was attributable to a 3% increase in net premiums earned and $694,000 was attributable to an 8% increase in net investment income. These increases were partly offset by a $1,447,000 decrease in net realized investment gains and a $55,000 decrease in other revenues.
Net premiums written decreased 1% from $91,192,000 in 1993 to $90,187,000 in 1994, primarily due to a decline in the premiums assumed from Mutual in accordance with the quota share reinsurance agreement. The Company assumed $6,114,000 and $4,086,000 of written premiums from Mutual in 1993 and 1994, respectively, under the terms of this agreement. This decrease in net premiums written was partially offset by a 2% increase in direct written premiums.
Losses and LAE increased 13% from $62,407,000 in 1993 to $70,800,000 in 1994. The loss and LAE ratio increased from 70.8% in 1993 to 77.9% in 1994. Losses in 1994 included $3,135,000 paid to Mutual as a one time settlement for losses relating to the 1985 through 1994 accident years on involuntary automobile insurance policies issued by Mutual under AIP's.
In 1994, the Company increased its reserve for losses and LAE related to prior years by $4,982,000, compared to an increase in reserve for losses and LAE related to prior years of $2,125,000 recorded in 1993. Approximately $3,100,000 of the $4,982,000 related to the settlement of AIP losses with Mutual.
Involuntary automobile insurance business increased MNH's calendar year loss and LAE ratio by approximately 2.1 and 3.1 percentage points for the years ended December 31, 1993 and 1994, respectively. The combined ratio on involuntary automobile business was substantially greater than the combined ratio on voluntary automobile business.
The ratio of policy acquisition costs and other underwriting expenses to net premiums earned decreased from 33.7% in 1993 to 33.4% in 1994. In 1993, policy acquisition costs and other underwriting expenses included a $368,000 credit for New Hampshire Business and Profits Tax credits, relating to the years 1989 through 1992. Excluding the effect of this non-recurring credit, the ratio of amortized policy acquisition costs and other
Net cash used in investing activities increased $4,785,000 from $7,688,000 in 1994 to $12,473,000 in 1995. This increase resulted primarily from a $6,375,000 decrease in cash provided by the maturity or sale of fixed maturities.
The Company generally designates newly acquired fixed maturity investments as available for sale and carries these investments at fair value. In December 1995, the Company re-assessed the classification of all its fixed maturity investments as permitted by the Financial Accounting Standards Board. As a result, the Company reclassified as available for sale certain fixed maturity securities that had previously been classifed as held to maturity. This transfer resulted in a $1,044,000 increase in stockholders' equity at December 31, 1995.
As a result of the decrease in market interest rates during 1995 and their favorable impact on bond prices, and the effect of the realized loss recognized on the Signet investment, the Company recorded a before tax reduction of $9,880,000 to its unrealized losses during 1995.
At December 31, 1995 the Company's bond portfolio represented 95.3% of invested assets. Management believes that this level of bond holdings will not adversely affect the Company's liquidity because it expects that cash receipts from net premiums written and investment income will be sufficient to enable the Company to satisfy its cash obligations in 1996. Furthermore, a substantial 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, 1995, $81,597,000, or 44.5% of the Company's bond portfolio was invested in mortgage-backed and other asset-backed securities, primarily planned amortization class ("PAC") and sequential pay collateralized mortgage obligations ("CMO"). A PAC-CMO has an amortization schedule that is protected against prepayment risk under a wide range of interest rate scenarios and is therefore less susceptible to prepayment risk than other mortgage backed securities. The Company has not invested in the more volatile types of CMO products such as interest only, principal only or inverse floating rate securities. All of the Company's CMO investments have an active secondary market and their effect on the Company's liquidity does not differ from that of other fixed maturity investments. The Company does not own any other derivative financial instruments such as futures or options.
At December 31, 1995, $2,557,000, or 1.3%, of the Company's investment portfolio was invested in non-investment grade securities.
MNH, like many other property and casualty insurance companies, is subject to environmental damage claims asserted by or against its insureds. Management of the Company is of the opinion that based on various court decisions throughout the country, such claims should not be recoverable under the terms of MNH's insurance policies because of either specific or general coverage exclusions contained in the policies. However, there is no assurance that the courts will agree with MNH's position in every case, nor can there be assurance that material claims will not be asserted under policies which a court will find do not explicitly or implicitly exclude claims for environmental damages.
Management, however, is not aware of any pending claim or group of claims which would result in a liability that would have a material adverse effect on the financial condition of the Company or MNH.
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 it to meet this 3 to 1 regulatory guideline. MNH's ratio of net premiums written to statutory surplus during 1995 was 2.1 to 1.
Inflation affects the Company, like other companies in the property and casualty insurance industry, by contributing to higher losses, LAE and operating costs, as well as greater investment income resulting from the higher interest rates which can prevail in an inflationary period. Premium rates, however, may not keep pace with inflation since competitive forces generally limit the Company's ability to increase premium rates.
The Company considers inflationary trends in estimating its reserves for claims reported and for incurred but not reported claims. Management believes that its policy of timely recording and settling claims has helped it to lessen the potential effect that inflation can have on claims which remain open for several years.