The Company's other insurance lines include direct municipal bond insurance, credit reinsurance, surety, excess-SIPC/excess-ICS and other surety lines. Net premiums written from these businesses have grown from $18.3 million (21.1%) in 1993 to $48.7 million (37.7%) in 1998. The Company expects that these other insurance lines will continue to contribute a significant component of its premium revenues. In connection with certain of its other insurance lines, the Company underwrites with the anticipation of higher loss levels than those associated with its core municipal and non-municipal reinsurance business. The Company takes into account these higher loss levels in determining appropriate premium rates.
The Company's insurance operating expense ratio for 1997 was 50.3% compared to 49.2% in 1996. Policy acquisition costs totaled $30.0 million and $26.7 million in 1997 and 1996, respectively, representing 35.1% and 34.5% of premiums earned in those respective periods. Other operating expenses increased to $12.2 million in 1997 from $10.5 million in 1996.
The Company maintains a credit facility providing for borrowings to be used for general corporate purposes. During the second quarter of 1998, the Company entered into a new unsecured credit agreement with four major commercial banks for up to $100 million of borrowings, an increase of $25 million over the previous agreement (which was terminated). The total outstanding under the Credit Agreement at year-end 1998 was $53.5 million.
The insurance policies issued or reinsured by the insurers of the Company do not contain specific exclusions for Year 2000-related defaults. Generally, a default by an obligor insured or reinsured by the insurers would be covered in such case. Although the insurers would expect to eventually recover the amounts paid in claims for Year 2000-related defaults by obligors, the coincidence of several such unanticipated claims could result in short-term liquidity risk for the insurers. Failure of a trustee or paying agent for an obligor insured by the insurers to make payment on an obligation as a result of a Year 2000-related event (or otherwise) would generally not be covered by policies insured or reinsured and no such claims are expected. Nevertheless, the Company is investigating whether its insured obligors as well as their trustees, paying agents and other related parties will be Year 2000 compliant, and it will establish appropriate contingency plans based upon the results of this inquiry.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities," management classifies all securities at the time of purchase as "held to maturity" or "available for sale." Fixed maturity securities held to maturity are those securities which the Company intends and has the ability to hold until maturity and are carried at amortized cost. All other fixed maturity securities are classified as available for sale and carried at fair value. Unrealized gains and losses, net of taxes, on the available for sale portfolio are charged or credited to accumulated other comprehensive income.
The consolidated financial statements are prepared on the basis of GAAP which, for the Insurance Subsidiaries, differ in certain material respects from accounting practices prescribed or permitted by insurance regulatory authorities. The significant differences result from statutory accounting practices which treat premiums earned, policy acquisition costs, deferred income taxes, investments in fixed maturities and loss reserves differently.
In thousands Amortized Cost Fair Value -------------- ---------- Fixed maturities, held to maturity Due in one year or less $ 16,926 $ 16,963 Due after one year through five years 95,837 99,167 Due after five years through ten years 51,825 54,669 Due after ten years 32,180 34,993 -------- -------- $196,768 $205,792 ======== ========
In 1995, the Company entered into a reverse interest-rate swap transaction based on a notional amount of $50 million over the term equal to the remaining term of Enhance Financial's 6.75% Debentures. On June 1, 1995, the Company terminated the swap and realized a gain on termination in the amount of $4.6 million. The gain has been deferred and is being amortized over the original term of the swap.
Loss And Loss Adjustment Reserves - The carrying amount, net of reinsurance recoverable on unpaid losses, is composed of the present value of the expected cash flows for specifically identified claims combined with a general estimate for non-specific reserves. Therefore, the carrying amount is a reasonable estimate of the fair value of the reserve.
Net incurred related to: Current year 6,000 6,002 6,087 Prior years 4,324 3,753 3,097 ------- ------- ------- Net incurred 10,324 9,755 9,184 ------- ------- -------