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, 1995 and 1994, and the consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995, 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.
(1) Excludes premiums of $5,626,000 in 1995, $5,056,000 in 1994, $5,418,000 in 1993, $6,942,000 in 1992 and $4,452,000 in 1991 from the commercial automobile plans of Arkansas, California, Louisiana, Mississippi, and Pennsylvania under which a subsidiary of the Company is a servicing carrier.
The discussion below primarily relates to the Company's insurance operations, although the selected consolidated financial data appearing elsewhere is on a consolidated basis. The revenue item "Insurance services" includes net revenues from the computer software operation, the plan servicing operation and the premium finance operation. The expense item "Underwriting and operating expenses" includes the operating expenses of these operations.
COMMERCIAL AUTO increased 8% in 1995 from 1994 after recording a 13% increase in 1994 from 1993. Significant growth continued for this product in Kentucky and Pennsylvania in 1995, as it had in 1994, with New Jersey contributing in 1995. The AUTO GARAGE product line produced a 26% increase in 1995 after a 25% increase in 1994. Florida and Pennsylvania continued to provide significant growth in 1995, as was the case in 1994. Entry into the Connecticut market and significant growth in Kentucky in 1995 also contributed. The GENERAL LIABILITY line continues to record increases with 3% in 1995 after an increase of 14% in 1994. For 1995, gross written percentages by significant state/product line are as follows: Texas commercial auto (23%), Pennsylvania commercial auto (7%), Texas general liability (7%), and Kentucky commercial auto (5%) with no other individual state/product line comprising 5% or more. The persistency rate increased for all major product lines, overall the rate went from 44% in 1994 to 47% in 1995. Premiums earned increased 15% in 1995 to $97,254,816 and increased 11% in 1994 to $84,394,874 as a direct result of the continued increase in writings.
Net investment income increased 19% in 1995 over 1994 and increased 12% in 1994 over 1993.
These increases are the result of growth in the portfolio due to continued positive cash flows from operations. The return on average investments for 1995 is 4.8% versus 4.6% in 1994 and 4.8% in 1993. The increase from 1994 to 1995 is attributable to the reinvestment of maturing securities at higher yields. The decrease from 1993 to 1994 is related to the Company maintaining larger than usual balances in short-term funds (which have lower yields than bonds), during the third quarter of 1994 in anticipation of an increase in interest rates. Inflation can cause interest rates to increase, which would cause the Company's interest income to increase. Because of the Company's profitability in the underwriting operations, the Company achieves the highest after tax net income by investing predominantly in tax-exempt securities. At December 31, 1995, 89% of the Company's investments were in investment grade tax-exempt bonds with an average maturity of approximately 3.5 years. Since the majority of the Company's investments are tax-exempt, the yields appear lower than those of the industry; however, the industry as a whole has a significantly larger percentage of investments in taxable securities with substantially longer maturities. On a taxable equivalent basis the return on average investments was 6.6% in 1995, 6.4% in 1994 and 6.6% in 1993. The Company has the ability to hold its fixed maturity securities until their maturity date. The Company does not actively trade its bonds, however, it does classify certain bond securities as available for sale. At December 31, 1995, approximately 5% of the Company's investments were in U.S. Treasury securities and 5% were in short-term money market funds. The Company has not and does not intend to invest in derivatives or high-yield ("junk") securities, nor equity securities in issuers of "junk" debt securities. The Company does not have any non-performing fixed maturity securities.
Insurance services revenue increased $126,152 from 1994 to 1995 following a decrease of $331,175 in 1994 from 1993. The table below presents the components.
than offset by the addition of the California plan in the second quarter of 1995. The decrease in 1994 was largely due to a decrease in premium writings in the Louisiana plan. In 1994, the Pennsylvania and Mississippi plans recorded significant increases in premium writings but fell short of the decrease in the Louisiana plan. The Company continues to pursue management contracts with other states to administer their commercial automobile plans.
The change in deferred policy acquisition costs and deferred ceding commission income (DAC) resulted in a net increase to income of $2,284,138, $1,321,946 and $305,495 for 1995, 1994 and 1993, 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 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 25.5%, 25.4% and 25.3% at December 31, 1995, 1994 and 1993, respectively.
With regard to long term liquidity, the average duration of the investment portfolio is approximately 2.8 years. The fair value of the fixed maturity portfolio at December 31, 1995 was $2,772,216 above amortized cost. With regard to the availability of funds to the holding company, see Note 6 of Notes to Consolidated Financial Statements for restrictions on the payment of dividends by the insurance companies.
The Company's fronting arrangements require that it maintain escrow accounts to assure payment of the unearned premiums and unpaid claims and claim adjustment expenses relating to risks insured through such fronting arrangements and assumed by the Company. At December 31, 1995 and 1994, the balance in such escrow accounts totalled approximately $1,100,000. In addition, various insurance departments of states in which the Company operates require the deposit of funds to protect policyholders within those states. At December 31, 1995 and 1994, the balance on deposit for the benefit of such policyholders totalled approximately $11,860,000 and $11,010,000, respectively.
The increase in common stock is largely the result of the 5% stock dividends paid on April 14 and October 16, 1995. This also accounts for the increase in additional paid-in capital and the decrease in retained earnings.
Financial Accounting Standards Board Statement 115, "Accounting for Certain Investments in Debt and Equity Securities" was adopted by the Company in the first quarter of 1994. This Statement specifies the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Under this statement, the Company classifies certain debt securities as "available for sale" and records them at fair value. As a result of the "Implementation Guide" for Statement 115, in December, 1995, the Company transferred certain fixed maturity securities from the held to maturity classification to the available for sale classification. The amortized cost of these transfers was $18,519,856 with unrealized gains of $93,803, net of tax.
The unrealized gains or losses on fixed maturities available for sale are presented, net of tax, as a separate component of shareholders' equity (see Note 2 of Notes to Consolidated Financial Statements). The net unrealized gain on the fixed maturities classified as held to maturity was $1,120,527 at December 31, 1995.
In October 1995, the FASB issued Statement 123, "Accounting for Stock-Based Compensation." The Statement is effective for years beginning after December 15, 1994, if awards are granted in the fiscal year. The Company did not grant any awards during 1995.
The Company is not aware of any current recommendations by the regulatory authorities, which if implemented, would have a material effect on the Company's liquidity, capital resources or results of operations. The Company's statutory capital significantly exceeds the benchmark capital level under the Risk Based Capital formula.
The following Consolidated Financial Statements Schedules are on pages 57 through 68: