(1) GAAP and statutory accounting practices (SAP) ratios reflect the Company's status as a new company and include start-up and other expenses incurred prior to the commencement of significant operations. SAP ratios reflect the combined results of the Company's insurance subsidiaries and do not include holding company costs. Expense ratios exclude the compensation charge resulting from the Company's initial public offering.
Total revenues for 1998 were $145.9 million, an increase of 30% over total revenues of $112.1 million for 1997. The growth in revenues was due primarily to the increases in net premiums earned and investment income in 1998 as compared to 1997, as discussed below.
Losses incurred in 1998 were $34.4 million, compared to $30.3 million in 1997. The Company's loss ratio decreased from 32.8% for 1997 to 27.9% for 1998. The reduction in loss ratio is due to the decline in the default rate from 1.43% at December 31, 1997 to 1.41% at December 31, 1998 and the growth rate in paid claims was significantly less than the growth rate in insurance in force. Approximately 86% of the Company's insurance in force has been issued within the last three years and has not reached the peak claim paying period. Based on historical industry experience, the majority of claims occur in the third through sixth year after loan origination. Because of the Company's limited operating history, its loss experience is expected to increase significantly as its policies continue to age.
Total revenues for 1997 were $112.1 million, an increase of 41.2% over total revenues of $79.4 million for 1996. The growth in revenues was due primarily to the increases in net premiums earned as discussed below.
Net premiums written for 1997 were $94.7 million compared to $70.0 million for 1996, which represents a 35.3% increase. The increase was primarily attributable to the 38% increase in insurance in force. Management believes that Amerin Guaranty was able to increase revenues due primarily to continued strong levels of new business with the Company's top 10 lenders, the addition of new lenders during 1997, and an annualized persistency rate on in force business of 87.2% at December 31, 1997.
Losses incurred in 1997 were $30.3 million, compared to $20.7 million in 1996, as a result of aging of the Company's policies. The Company's loss ratio decreased from 33.2% for 1996 to 32.8% for 1997 due to favorable delinquency rates on business issued during the last three years. Approximately 92% of Amerin Guaranty's insurance in force has been issued
As a result of the foregoing factors, the Company had net income of $40.8 million for 1997 or $1.54 per share on a diluted basis, compared to net income of $28.2 million for 1996 or $1.07 per share on a diluted basis.
The aggregate fair value (carrying value) of the fixed maturity securities was greater than amortized cost at December 31, 1998 by $16.8 million. At December 31, 1997, the aggregate fair value (carrying value) of the Company's fixed maturity securities was greater than amortized cost by $12.7 million. The increase during 1998 in the fair value of the Company's fixed maturity securities compared to amortized cost is due primarily to the decrease in interest rates during 1998. Fixed maturity securities of $192.9 million or 44.5% of total fixed maturity securities at December 31, 1998 have stated maturities of 10 years or greater. As a result of these long-term holdings, if interest rates should increase, the fair value of these securities will decline and common stockholders' equity will decrease.
Consolidated loss reserves increased by $12.5 million to $43.8 million at December 31, 1998 from $31.3 million at December 31, 1997, primarily due to the growth of insurance in force. See "-- Results of Consolidated Operations -- 1998 Compared to 1997." Consistent with industry practices, the Company does not establish loss reserves for future claims on insured loans which are not currently in default.
Consolidated unearned premiums increased $2.7 million from $23.4 million at December 31, 1997 to $26.1 million at December 31, 1998, reflecting the increase in insurance in force during 1998 versus 1997. The unearned premium reserve growth rate is significantly lower then the increase in insurance in force due to the increased concentration of monthly business.
The Company generated positive cash flows from operations of approximately $57.8 million, $54.6 million and $43.3 million, respectively, in 1998, 1997 and 1996, as shown on the Consolidated Statements 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 does not expect to incur significant capital costs in 1999.
In addition, dividend restrictions have been placed on the Company and its subsidiaries by Moody's Investor Services, Inc., Fitch Investor Services, L.P., and Standard & Poor's Corporation(collectively, Rating Agencies) as embodied in various support agreements (Agreements). Those restrictions require that no dividend will be declared or paid if the subsidiaries' net risk in force exceeds the maximum multiple of capital , as specified in the Agreements, or the subsidiaries' rating is less than the minimum rating allowed.
To provide against the possibility that rapid growth of the Company's business may generate levels of risk in force that could not be supported solely by internally-generated capital, the Company entered into an excess loss agreement with a major reinsurer effective January 1, 1996, and cancelable by the Company beginning in 2000. The claims-paying ability of the reinsurer is rated AA by S&P. This agreement provides additional support in the event that the Company's risk-to-capital ratio and its combined ratio both exceed specified levels and will be taken into account by S&P in measuring the Company's risk-to-capital ratio to the extent required by rapid growth. Premiums payable with respect to any quarterly period may vary to the extent that the Company's combined insurance risk-to-capital ratio exceeds certain specified levels.
The Company also has initiated discussions with its large customers and certain servicing companies to ensure that those parties have appropriate plans to fully address Year 2000 issues where their systems interface with the Company's systems or could otherwise impact its operations. The Company is assessing the extent to which its operations are vulnerable should those organizations fail to properly convert their computer systems on a timely basis. While the Company believes its planning efforts are adequate to address its Year 2000 concerns, there can be no guarantee that the systems and operations of other companies on which the Company's systems and operations rely will be converted on a timely basis. The failure of these other companies to fully convert their systems and operations on a timely basis could have a material adverse effect on the Company.
The consolidated financial statements and supplementary data are indexed in the Index to Financial Statements and Schedules which appears on Page hereof and incorporated in this Item by reference thereto.