New insurance written in 1996 was $7.7 billion, compared to $5.9 billion in 1995. New insurance written was $1.7 billion in the fourth quarter of 1996 as compared with $1.9 billion in the fourth quarter of 1995. As of December 31, 1996, Amerin's primary insurance in force was $14.8 billion as compared with $8.3 billion as of December 31, 1995, which represents a 78.9% increase.
Net premiums earned increased by $34.8 million to $62.3 million for 1996 from $27.6 million for 1995. This increase was primarily due to the increase in insurance written and in force in 1996 as compared to 1995.
Losses incurred in 1996 were $20.7 million, compared to $7.8 million of losses incurred in 1995, as a result of aging of the Company's policies. Because of the Company's limited operating history, its loss experience is expected to increase significantly as its policies continue to age. Policy acquisition costs during 1996 of $8.5 million increased by $1.8 million (or 27.8%) compared to 1995 principally due to the growth in the level of marketing and underwriting activity in connection with the increased production of new insurance written in 1996 compared to 1995. Underwriting and other expenses during 1996 increased by $3.7 million or 53.6% compared to 1995 due to the institution of an excess loss treaty, the increase in insurance in force and increases in various administrative and occupancy costs relating to growth in the Company's personnel, offset in part by the elimination in the 1996 period of standby commitment fees previously paid to certain of the Company's original stockholders.
The Company's effective tax rate was 28.7% in 1996. The Company incurred tax expense in 1995 notwithstanding the fact that the Company reported a loss before taxes, which loss resulted from the Company's recording of the non-recurring non-deductible charge of $35.7 million discussed in the following paragraph. The Company fully utilized its net operating losses in 1995, with the result that no additional net operating losses were available for utilization in 1996. The effective tax rate for 1996 was below the statutory rate of 35%, principally reflecting the benefits of tax-exempt investment income.
As a result of the foregoing factors, the Company had net income of $28.2 million for 1996, or $1.07 per share, compared to a net loss before pay-in-kind dividends on its previously outstanding 13.5% Convertible Preferred Stock of $22.8 million for 1995. The 1995 net loss was due to a non-recurring non-deductible charge of $35.7 million in the fourth quarter of 1995 as a result of its Chairman and President being entitled to shares of Common Stock pursuant to the MSV Agreement upon consummation of the Initial Public Offering. The net loss applicable to common shareholders (after pay-in-kind dividends) was $28.1 million, or $2.32 per share, for 1995. The 13.5% Convertible Preferred Stock was redeemed in connection with the Initial Public Offering.
Losses incurred in 1995 were $7.8 million, compared to $0.3 million of losses incurred in 1994 as a result of the fact that the Company's book of business was at an early stage of development. Policy acquisition costs during 1995 of $6.6 million increased by $4.2 million (or 170.4%) compared to 1994 principally due to the growth in the level of marketing and underwriting activity in connection with the increased production of new insurance written in 1995 compared to 1994.
The Company's consolidated total investments were $328.8 million at December 31, 1996, compared with $297.0 million at December 31, 1995. The Company generated consolidated cash flows from operating activities of $43.3 million during 1996, compared to $22.2 million generated during 1995. All of the Company's $308.0 million of fixed income securities at December 31, 1996 are rated "investment grade," which is defined by the Company as a security having a National Association of Insurance Commissioners ("NAIC") rating of 1 or 2 or an S&P rating ranging from "AAA" to "BBB-."
The aggregate fair value (carrying value) of the fixed income securities was greater than amortized cost at December 31, 1996 by $.3 million. At December 31, 1995, the aggregate fair value (carrying value) of the Company's fixed income securities was greater than amortized cost by $5.0 million. The decrease during 1996 in the market value of the Company's fixed income securities compared to amortized cost reflects the increase in interest rates during 1996 as well as the percentage of the Company's fixed income securities with long-term maturities. Fixed income securities of $203.5 million or 66% of total fixed
income securities at December 31, 1996 have maturities of 10 years or greater. As a result of these substantial long-term holdings, if interest rates should increase, the fair value of these securities will decline and common stockholders' equity will decrease.
The Company's consolidated sources of funds consist primarily of premiums written and investment income. The principal uses of funds are the payment of claims and expenses. The Company's principal expense categories are policy acquisition costs, underwriting and other expenses and losses incurred on insurance policies. Policy acquisition costs include only those expenses that relate directly to, and vary with premium production, such as compensation of employees involved in underwriting, marketing and policy issuance functions, state premium taxes, and certain other underwriting expenses. Underwriting and other expenses include occupancy costs, personnel-related costs of non-production personnel, and administrative support and compliance costs.
The Company generated positive cash flows from operations of approximately $43.3 million, $22.2 million and $5.1 million, respectively, in 1996, 1995 and 1994, as shown on the Consolidated Statement of Cash Flows. Positive cash flows are invested pending future payments of claims and other expenses. Should Amerin Guaranty experience cash flow shortfalls due to significantly higher than anticipated claims, or for other reasons, the Company anticipates funding such shortfalls through sales of short-term investments and, if required, other investment portfolio securities.
The Company expects to incur aggregate capital costs of approximately $4 million in 1997 to expand and enhance its computer hardware and software. The Company expects to fund such expenditures with cash flow from operations.
Amerin Guaranty is the principal insurance subsidiary of the Company. Amerin Guaranty's risk-to-capital ratio was 13.3:1 at December 31, 1996, compared to 8.2:1 at December 31, 1995. This increase was due to the growth in Amerin Guaranty's risk in force during 1996. The Company's combined insurance risk-to-capital ratio was 12.4:1 at December 31, 1996, compared to 7.7:1 at December 31, 1995. The increase was due to the reasons described above.