The Company invests in fixed maturity, short-term and equity securities. The Company's investment strategy recognizes its need to maintain capital adequate to support its insurance operations. Therefore, the Company evaluates the risk/reward trade-offs of investment opportunities, measuring their effects on stability, diversity, overall quality and liquidity of the investment portfolio. The majority ($2,319.4 million, or 72.9%, in 1994 and $2,135.1 million, or 76.6%, in 1993) of the portfolio was in short-term and intermediate-term, investment-grade fixed-income securities. A relatively small portion ($476.3 million, or 15.0%, in 1994 and $453.9 million, or 16.3%, in 1993) of the investment portfolio was invested in preferred and common equity securities providing risk/reward balance and diversification. The remainder of the portfolio was invested in long-term investment-grade fixed-income securities ($245.0 million, or 7.7%, in 1994 and $77.6 million, or 2.8%, in 1993) and non-investment-grade fixed-income securities ($139.3 million, or 4.4%, in 1994 and $119.8 million, or 4.3%, in 1993). The non-investment-grade fixed-income securities, although constituting only a small portion of the portfolio, offer the Company high returns and added diversification without a significant adverse effect on the stability and quality of the investment portfolio as a whole. These securities may involve greater risks often related to creditworthiness, solvency and relative liquidity of the secondary trading market. Financial instruments with off-balance-sheet risk are used to manage the risks and enhance the yields of the available-for-sale portfolio. This is accomplished by modifying the basis, duration or interest rate characteristics of the portfolio, or hedging securities. Net cash requirements are limited to changes in market values which may vary based upon changes in interest rates and other factors. Exposure to credit risk is limited to the carrying value; unless otherwise noted, collateral is not required to support the credit risk. The weighted average fully taxable equivalent book yield of the portfolio was 6.7%, 6.8%, and 7.9% for the years ended December 31, 1994, 1993 and 1992, respectively.
As of December 31, 1994, the Company's portfolio had $41.1 million in unrealized losses, compared to $70.2 million in unrealized gains in 1993. This decrease was due largely to the adverse impact on the Company's fixed-income portfolio of rapidly rising interest rates throughout 1994.
Claim costs, the Company's most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of its policyholders, including expenses required to settle claims and losses. These costs include a loss estimate for future assignments and assessments, based on current business, under state-mandated involuntary automobile programs. Claims costs are influenced by inflation and loss severity and frequency, the impact of which is mitigated by adequate pricing. Increases in the rate of inflation increase loss payments, which are made after premiums are collected. Accordingly, anticipated rates of inflation are taken into account when the Company establishes premium rates and loss reserves. Claim costs, expressed as a percentage of premiums earned, were 64% in 1994, compared to 62% in 1993 and 65% in 1992.
recoverable from reinsurers. The Company will continue to monitor these exposures, adjust the related reserves appropriately as additional information becomes known and disclose any material developments.
The Consolidated Financial Statements of the Company, along with the related notes, supplementary data and report of independent accountants, are incorporated by reference from the Company's 1994 Annual Report, pages 33 through 53.