The selected financial data set forth in the following table for each of the five years in the period ended December 31, 1996 have been derived from the audited consolidated financial statements of the Company.
Voluntary personal lines direct premiums written for 1996 were $37,616,000, an increase of 9% from $34,393,000 in 1995. Private passenger automobile direct premiums written, which comprised 79% of total voluntary personal lines direct premiums written in 1996 and 1995, increased 8% in 1996 compared to 1995. This increase resulted from a 5% increase in policies in force and a 4% increase in average premium per policy at December 31, 1996 compared to December 31, 1995. Homeowners direct premiums written increased 14% in 1996 compared to 1995 due to a 4% increase in policies in force and an 8% increase in average premium per policy.
in commercial lines policies in force and the increase in average premium per policy. Also affecting the average policy premium has been New York State mandated reductions in workers' compensation premium rates of 12%, 9% and 18%, respectively, in 1994, 1995 and 1996.
Net investment income was $11,724,000 in 1996, an increase of 13% from $10,368,000 in 1995, primarily due to a 7% increase in average invested assets. On a taxable equivalent basis, net investment income increased 10% in 1996 compared to 1995.
Losses and loss adjustment expenses ("LAE") were $79,603,000 for 1996, an increase of 2% from $78,195,000 in 1995. The loss and LAE ratio increased to 83.1% in 1996 from 82.5% in 1995. In 1996, the Company increased its reserve for losses that occurred prior to 1996 for its workers' compensation line of business. In turn, the Company increased its estimates of losses related to workers' compensation claims for accidents that occurred in 1996 based upon the increase in prior year's workers' compensation reserves. Partly offsetting these increases was a reduction in the Company's estimate of losses for automobile insurance claims that occurred prior to 1996. The net increase in the reserve for prior year losses and LAE was $6,896,000 and added 7.2 percentage points to the loss and LAE ratio in 1996.
Net investment income increased 5% from $9,849,000 in 1994 to $10,368,000 in 1995, primarily due to a 3% increase in average invested assets. On a taxable equivalent basis, net investment income increased 3% in 1995 compared to 1994.
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 package 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 was $11,045,000 and added 11.6 percentage points to the loss and LAE ratio in 1995.
In July 1994, Mutual informed the Company that it had failed to identify and bill to MNH during the period January 1, 1985 through June 30, 1994 for a portion of MNH's share of AIP losses paid by Mutual in that period. The amount of unbilled AIP losses was approximately $7,500,000. MNH paid Mutual $3,135,000 in full and complete settlement of the unbilled AIP paid losses for the period noted above. This settlement increased the 1994 loss and LAE ratio by 3.5 percentage points.
Also included in losses in 1994 was approximately $2,400,000 of losses related to severe winter weather that struck the northeastern United States. The losses from these storms increased the loss and LAE ratio in 1994 by 2.6 percentage points.
In 1995, the Company increased its reserve for losses and LAE related to prior years by $11,045,000, compared to an increase in reserve for losses and LAE related to prior years of $4,982,000 recorded in 1994.
Involuntary automobile insurance business increased the Company's calendar year loss and LAE ratio by approximately 3.1 percentage points and decreased the Company's calendar year loss and LAE ratio by .6 percentage points for the years ended December 31, 1994 and 1995, respectively.
Net cash provided by operations increased by $123,000 from $12,505,000 in 1995 to $12,628,000 in 1996. Increases in premiums collected of $3,504,000, investment income received of $1,438,000 and income taxes recovered of $2,792,000 were offset by increases in the payment of losses and LAE of $4,954,000 and underwriting expenses of $2,408,000.
The Company has several objectives with respect to its investment portfolio, which include maximizing total return while protecting policyholders' surplus, maintaining flexibility and liquidity, and maintaining a reasonable duration match between assets and liabilities. Like other property and casualty insurers, the Company relies on premiums as a major source of cash, and therefore liquidity. Cash flows from the Company's investment portfolio, either in the form of interest or principal payments, are an additional source of liquidity. Because the duration of the Company's investment portfolio and liabilities are closely managed, increases or decreases in market interest rates are not expected to have a material effect on the Company's liquidity, or its results of operations.
At December 31, 1996, the Company's bond portfolio represented 90.8% of invested assets. Management believes that this level of bond holdings is prudent 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 1997. Furthermore, a 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, 1996, $108,001,000, or 59.0%, of the Company's bond portfolio was invested in mortgage-backed and other asset-backed securities. The Company invests in a variety of collateralized mortagage obligations ("CMO") products but has not invested in the derivative type 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.
At December 31, 1996, only $3,329,000, or 1.7%, of the Company's investment portfolio was invested in non-investment grade securities.
As a holding company, the Company is dependent upon cash dividends from MNH to meet its obligations and pay any cash dividends. MNH is subject to New Hampshire insurance laws which place certain restrictions on its ability to pay dividends without the prior approval of state regulatory authorities. These restrictions limit dividends to those that, when added to all other dividends paid within the preceding twelve months, would not exceed 10% of the insurer's policyholders' surplus as of the preceding December 31. The maximum amount of dividends that MNH could pay during any twelve month period ending in 1997 without the prior approval of the New Hampshire Insurance Commissioner is $4,391,000. The Company paid a $.05 per share quarterly cash dividend to its common stockholders totalling $634,000 in 1996.