Net income for 1999 increased 24.8% to $30.4 million compared to $24.4 million in 1998. This improvement is attributable primarily to a 21.1% increase in earned premiums, a 13.5% increase in net investment income, and an improved combined loss and expense ratio for all of 1999.
Net income per share on a diluted basis increased 26.6% to $2.23 for 1999 compared to $1.76 per share for 1998. Operating earnings per share were $2.17 for 1999 compared to $1.72 for 1998. Operating earnings exclude net realized gains of approximately $1.2 million in 1999 and of approximately $881,000 in 1998.
Net investment income for 1999 was $10.5 million, a 13.5% increase over $9.3 million in 1998. This increase in investment income is the result of growth in the average book value of invested assets by $32.3 million to $184.0 million at December 31, 1999, from $151.7 million at December 31, 1998. The growth in invested assets is attributable to normal operating cash flow. The yield on average invested assets declined to 5.7% for 1999, as compared to 6.1% for all of 1998, reflecting the Company's continued investment strategy to emphasize tax preferred securities which yield lower pre-tax rates than similar fully taxable securities. The portfolio's tax-equivalent yield was 7.7% for 1999 versus 7.9% for 1998. Approximately 71% or $124.4 million of the Company's fixed maturity portfolio at December 31, 1999, was composed of state and municipal tax-preferred securities as compared to 70% or $107.5 million at December 31, 1998.
During periods of significant refinancing activity, it is possible that policies on stronger loans may be canceled and policies on weaker loans may remain in force, thus potentially increasing the loss ratio on older business. Substantial increases in production of new business during these periods can offset the increased loss ratio on the older business.
Net losses and loss adjustment expenses (net of reinsurance recoveries) increased by 1.5% in 1999 to $7.1 million compared to $7.0 million in 1998. This increase reflects the growing amount of the Company's insurance in force and the resulting recognition of a greater amount of insurance in force reaching its higher claim frequency years.
Amortization of deferred policy acquisition costs increased by 16.8% to $7.0 million in 1999 compared to $6.0 million for 1998. The increase in amortization reflects both a growing balance of deferred policy acquisition costs to amortize as the Company builds its total insurance in force and high cancellations due to refinance activity during 1999.
Other operating expenses increased 21.1% to $15.1 million for 1999 compared to $12.4 million for the same period in 1998. This increase in expenses is primarily attributable to advertising, personnel, and facilities and equipment costs required to support the Company's product development, technology enhancements, geographic expansion, and increased production.
The expense ratio (ratio of underwriting expenses to net premiums written) for 1999 was 34.5% compared to 35.4% for 1998. Contributing to this improvement is the higher level of written premiums in 1999 partially offset by the increase in expenses.
Net income per share on a diluted basis increased 40.0% to $1.76 for 1998 compared to $1.26 per share for 1997. Operating earnings per share were $1.72 for 1998 compared to $1.26 for 1997. Operating earnings exclude net realized gains of approximately $881,000 and $34,000 in 1998 and 1997, respectively.
The growth in new insurance written also reflected the favorable interest rate environment in 1998 which caused home buying and refinance activities to remain strong. Refinance activity was 31.7% of new insurance written in 1998 compared to 14.0% in 1997. Total direct insurance in force reached $11.3 billion at December 31, 1998, compared to $9.2 billion at December 31, 1997, an increase of 22.7%.
Total direct premiums written were $53.0 million for 1998, an increase of 32.2% compared to $40.1 million for 1997. Net premiums written increased by 35.4% to $51.9 million in 1998 compared to $38.3 million for 1997. Earned premiums increased 37.1% to $52.8 million for 1998 from $38.5 million for 1997. This growth in written and earned premium resulted from the increase in new insurance written offset by a decline in the Company's persistency rate. The Company's persistency, or the percentage of insurance remaining in force from one year prior, was 70.0% at December 31, 1998, compared to 83.5% at December 31, 1997. Sales under the Company's monthly premium plan represented 97.3% of new insurance written in 1998 compared to 94.3% in 1997.
Net losses and loss adjustment expenses (net of reinsurance recoveries) increased by 35.4% in 1998 to $7.0 million compared to $5.2 million in 1997. This increase reflected the growing amount of the Company's insurance in force
IITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
Amortization of deferred policy acquisition costs increased by 44.5% to $6.0 million in 1998 compared to $4.1 million for 1997. The increase in amortization reflected an increasing deferred policy acquisition costs asset to amortize as the Company builds its total insurance in force and a higher cancellation rate during 1998.
In January 1998, the Company completed a $35.0 million private offering of notes due January 15, 2028, which bear interest at a rate of 7.9% per annum. Interest expense relating to this debt was $2.6 million for 1998.
Standard & Poor's Corporation, in February 1999, affirmed the "AA" Financial Strength and counterparty credit rating of Triad. In addition, the "A" issuer credit rating and senior debt rating of the Company were also affirmed.
The expense ratio (ratio of underwriting expenses to net premiums written) for 1998 was 35.4% compared to 37.5% for 1997. Contributing to this year-to-date improvement was the higher level of written premiums in 1998 partially offset by the increase in expenses.
The effective tax rate for 1998 was 30.5% compared to 31.7% for 1997. This decrease was primarily the result of the increase in investment in tax preferred securities.
The Company generated positive cash flow from operating activities for 1999 of $30.8 million compared to $23.3 million for 1998. The increase in Triad's operating cash flow reflects the growth in renewal premiums and insurance written that has more than offset the increases in claims paid, interest, and other expenses.
The Company's business does not routinely require significant capital expenditures other than for enhancements to its computer systems and technological capabilities. Positive cash flows are invested pending future
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED
payments of claims and expenses. Cash flow shortfalls, if any, could be funded through sales of short-term investments and other investment portfolio securities.
Triad's ability to write insurance depends on the maintenance of its claims-paying ability ratings and the adequacy of its capital in relation to risk in force. A significant reduction of capital or a significant increase in risk may impair Triad's ability to write additional insurance. A number of states also generally limit Triad's risk-to-capital ratio to 25-to-1. As of December 31, 1999, Triad's risk-to-capital ratio was 15.4-to-1, as compared to 16.2-to-1 at December 31, 1998, and 14.8-to-1 for the industry as a whole at December 31, 1998, the latest industry data available.
The Company is undertaking modifications and upgrades to enhance its computer systems and technological capabilities. The Company expects to incur approximately $5.7 million for this system conversion and upgrade (approximately $4.3 million in capitalized costs have been incurred for the project through December 31, 1999) and is funding the project through cash flow from operations.
The Company has experienced no significant disruptions in its computer systems, third party systems, or other systems with which the Company conducts business relating to date- related issues. All critical systems were tested for Year 2000 Compliance before year end 1999 and all costs relating to the testing were expensed as incurred and were immaterial.