The table below provides details on the breakdown of our policyholders by exposure category net of reinsurance as of December 31, 2002:
Safeco’s investment portfolio includes $21.1 of equity securities that are not publicly traded. Values for these securities are primarily determined using independent pricing sources.
Following Safeco’s expansion in the mid 1990’s into the large commercial account and specialty program business, as well as the 1997 acquisition of American States, Safeco’s net income declined from 1998 to 2001. During that period, our stock price underperformed both the S&P 500 Index and the S&P Insurance Index. In 2000, Safeco’s board of directors determined that it was necessary to conduct an overall review of our business to determine how to improve profitability. In January 2001, the board of directors hired Michael S. McGavick as Chief Executive Officer and President to redirect our operations. Upon joining, Mr. McGavick undertook a focused review to address our poor Property & Casualty profitability and to develop a strategic direction for Safeco. This review resulted in actions focused on addressing the following priorities: (1) ensure the success of the recovery plan for our Property & Casualty operations; (2) analyze and reduce expenses; (3) strengthen our financial position; and (4) invest in our employees. Actions taken to achieve these goals began promptly in 2001 and were substantially completed by the end of 2001.
The following table presents summary consolidated financial information for the years indicated.
Revenues also were impacted by net realized pretax investment gains of $82.5, $93.0 and $139.5 in 2002, 2001 and 2000, respectively. Included in net realized investment gains were impairment charges of $258.5, $126.8 and $35.7 in 2002, 2001 and 2000, respectively. The higher impairment losses in 2002 and 2001 reflect credit deterioration and failures of certain corporations in which we have invested.
The new auto insurance product contains additional underwriting tiers to provide both more refined price points based on risk and to make insurance available to a broader range of drivers. This new auto product has been introduced in 22 states through December 31, 2002 and is expected to be available in all states where we currently write business by the end of 2003. This new product also expands the use of automated underwriting techniques, which use multiple variants to classify auto insurance risks into tiers.
SBI - Runoff includes large commercial business accounts in runoff and 15 specialty programs that Safeco is exiting. We continue to run off poor-performing large accounts and have established programs to focus on growth in the core small-to-medium commercial business market as reflected in SBI - Regular.
Net earned premiums remained consistent in all three years increasing $2.2 in 2002 to $26.4, compared to net earned premiums of $24.2 in 2001, which was an increase from $23.0 in 2000.
In addition to the $240.0 reserve change in estimate discussed above, reserve estimates were increased at other points throughout the year by an additional $105.1, primarily for workers compensation reserves due to continued rising medical costs.
versus $692.5 in 2001. Safeco Select has a guaranteed interest rate with bonus interest for the first three years. We successfully launched a new product in 2002, Safeco Secure, which generated $191.4 of deposits. Safeco Secure offers a higher interest rate than the Select product, but does not include bonus interest. These fixed deferred annuity products were developed for sale within our financial institutions (primarily banks) distribution channel. GIC product sales were negatively impacted by our ratings downgrades in 2001. Products in Retirement Services have protection against early withdrawals in the form of surrender charges during the initial years of each policy or the option for Safeco to defer payouts over five years.
Revenues were $379.5 in 2002, an increase of $12.4 or 3.4% over 2001 revenues of $367.1, which were down $62.2 or 14.5% from 2000. The $12.4 increase in 2002 revenues was due to higher investment income of $16.3 as a result of growth in general account assets under management, offset by lower fee income due to the decrease in separate account assets under management. The $62.2 decline in revenues in 2001 from 2000 resulted primarily from our decision to stop marketing our equity indexed annuity product (EIA) in 1999. During 2002, 2001 and 2000, offers were extended to EIA policyholders to surrender their policies and receive their account values with no surrender charge. The related EIA withdrawals contributed to a decline in the overall growth of general account assets under management which resulted in lower investment income in 2001.
Safeco’s liquidity needs are met by dividends from our subsidiary operations, the sale and maturity of invested assets and external borrowings. Our subsidiaries’ primary sources of cash from operations are insurance premiums, funds received under deposit contracts, dividends, interest and asset management fees. Safeco has not engaged in the sale by securitization of any investments or other assets.
Safeco issued $300.0 of medium-term notes on March 16, 2000 at 7.875%, which mature on March 15, 2003. In conjunction with this debt issuance, we entered into interest rate swap agreements. The swaps are for notional amounts totaling $300.0 and replace the fixed rates of the medium-term notes with variable rates at 65.03 basis points over the 90-day LIBOR rate. The swaps also mature in March 2003.
The following tables summarize Safeco’s Contractual Obligations, as of December 31, 2002.
As discussed above, the $500.0 in proceeds from the senior notes issued in January 2003 will be used to repay long-term debt due or callable in 2003.
Ratings focus on factors such as results of operations, capital resources, debt-to-capital ratio, demonstrated management expertise in the insurance business, marketing, investment operations, minimum policyholders’ surplus requirements and capital sufficiency to meet projected growth, as well as access to such capital as may be necessary to continue to meet standards for capital adequacy.
Our consolidated fixed maturity and equity securities portfolio is well-diversified by issuer and by industry type. As of December 31, 2002, there were no single-issuer holdings exceeding 1% of our consolidated investment portfolio. Industry concentrations exceeding 3% of our consolidated investment portfolio are as follows at December 31, 2002: