We conduct our Massachusetts operations from approximately 436,000 square feet of space in several buildings that we own in Webster, Massachusetts, which is located approximately 50 miles southwest of Boston. Our principal administrative offices in Webster are recently rehabilitated and newly constructed buildings. Our data processing and operational departments are housed in modern office buildings on a separate 28 acre site. During 2001, we purchased a 130,000 square foot building adjacent to that site. We expended approximately $13 million renovating the building in 2002. Commerce West currently leases approximately 17,000 square feet of office space in Pleasanton, California. Commerce West anticipates it may relocate from its existing leased location within the next one to three years. American Commerce conducts its operations from approximately 40,000 square feet of space in a building it owns located on a two acre site in Columbus, Ohio. American Commerce also leases property at three district claims offices.
Estimated by CAR; market share estimate is as of November 30, 2003.
Loss and LAE reserves prior to the effect of ceded reinsurance recoverable, end of year
Unpaid losses and loss adjustment expense reserves, beginning of year, prior to effect of
Losses and loss adjustment expenses attributable to insured events of prior years
Our fixed income portfolio's weighted average duration (which includes all fixed maturities and preferred stocks) as of December 31, 2003, was 5.6 years. At December 31, 2002, our fixed income portfolio had a weighted average duration of 4.5 years versus 5.7 years at December 31, 2001. The "duration" of a security is the time-weighted present value of the security's expected cash flows and is used to measure a security's price sensitivity to changes in interest rates. The 2003 weighted average duration is short compared to the average stated maturity of 22.9 years because of our holdings in GNMA, FNMA and municipal housing bonds in the fixed maturity portfolio. The duration reflects industry prepayment assumptions. The municipal housing bonds are similar in nature to GNMAs in that they pay down principal during the life of the bond. For these types of bonds, investors are compensated primarily for reinvestment risk rather than credit quality risk. During periods of significant interest rate volatility, the underlying mortgages may prepay more quickly or more slowly than anticipated. If the repayment of principal occurs earlier than anticipated during periods of declining interest rates, investment income may decline due to the reinvestment of these funds at the lower current market rates. The analytic systems we used to calculate the above duration data utilize optional call dates, sinking fund requirements and assume a non-static prepayment pattern in deriving these averages.
The equity price risk is defined as a hypothetical change of plus-or-minus 10% in the market value of common stocks. The following table summarizes our equity price risk, based on the results of the sensitivity analysis at December 31, 2003:
Mortgage loans on real estate and collateral notes receivable (less allowance for
In addition to reviewing the amount a security has declined, management also assesses the aging of all unrealized losses. That is, management looks at how long a security has been at an unrealized loss position by classifying it within the following categories: under 6 months, 6 to 12 months, 12 to 24 months, 24 to 34 months and greater than 34 months.
The cash and cash equivalent balances at December 31, 2003 and 2002 include $39.5 million and $36.4 million, respectively, which represents outstanding checks for which there was no right of offset. These amounts are also included in other liabilities and accrued expenses for the respective years.
In 2002, the Company restated 2001 for the effect of a change in accounting for employee stock options. For employee stock options issued from 1999 through 2001, the Company used fixed accounting treatment through September 30, 2002. At that time, the Company concluded that variable accounting treatment was more appropriate than fixed accounting treatment. Therefore, variable accounting treatment was applied in 2002, as well as retroactively to 2001 and prior years. Accordingly, in 2002, the Company restated results for 2001 and the first three quarters of 2002. The impact of the restatement for the year ended 2001 resulted in a decrease in net earnings of $2.8 million, or $0.08 per diluted share. As allowed by SFAS No. 148, the Company has elected to continue to apply variable accounting for stock options granted in 1999 and 2000. The Company uses fixed accounting treatment under Accounting Principles Board ("APB") Opinion No. 25 and related interpretations for the employee stock options granted in 2001.
Mortgage loans on real estate and collateral notes receivable at December 31 follow:
The current CAR utilization-based participation ratio has been in place for the personal automobile market since 1994. During 2003, 2002 and 2001, the Company's amount of personal automobile exposures it reinsured through CAR approximated 5.1%, 4.9%, and 4.9%, respectively, as compared to industry averages of 7.0%, 7.5% and 7.7%, respectively.