Loss and loss adjustment expenses are a function of the amount and type of insurance and reinsurance contracts we write and of the loss experience of the underlying risks. We estimate loss and loss adjustment expenses based on an actuarial analysis of the estimated losses we expect to be reported on contracts written. Under U.S. GAAP, we reserve for catastrophic losses as soon as a loss event is known to have occurred. The ultimate loss and loss adjustment expenses will depend on the actual costs to settle claims. We will increase or decrease our initial loss estimates as actual claims are reported and settled. Our ability to estimate loss and loss adjustment expenses accurately at the time of pricing our contracts will be a critical factor in determining our profitability.
Other significant accounting policies that we use to prepare our combined financial statements are included in Note 2 to the December 31, 2002 Combined Financial Statements included in this filing.
Other Than Temporary Impairments in Investments. In accordance with our investment guidelines, our investments consist of high-grade marketable fixed maturity investments and equity securities. Fixed maturity investments are classified as available for sale and accordingly are carried at market value as determined by the most recently traded price of each security at the balance sheet date. For unquoted investments, estimated fair value is determined using the financial information received, which includes reported net asset values, other information available to management, and other economic and market knowledge as appropriate. Investments are reviewed periodically to determine if they have sustained an impairment in value that is considered to be other than temporary. The identification of potentially impaired investments involves significant management judgment. In our determination of other-than-temporary impairment, we consider several factors and circumstances including the issuer’s overall financial condition, the issuer’s credit and financial strength ratings, a weakening of the general market conditions in the industry or geographic region in which the issuer operates, a prolonged period (typically six months or longer) in which the fair value of an issuer’s securities remains below our cost and any other factors that may raise doubt about the issuer’s ability to continue as a going concern. The current economic environment and recent volatility of securities markets increases the difficulty in determining impairment and whether the impairment is considered to be other than temporary.
Gross premiums written were $73.9 million for the fourth quarter and $607.7 million for the year ended December 31, 2002. Details of gross premiums written by line of business and by geographic area of risk insured for the year ended December 31, 2002 are provided below:
During the year ended December 31, 2002, we recorded reinstatement premiums on outstanding losses of approximately $4.7 million, primarily due to reinstated coverages on assumed contracts impacted by losses arising from the flooding which occurred in central Europe in August 2002 (“European floods”). The reinstatement premiums are principally included in the property catastrophe category, with the remainder in the property specialty and other specialty categories. Additional reinstatement premiums will be recorded in future periods as additional losses are notified, consistent with our loss estimates discussed below.
In addition, modest variances exist between the ratio of gross premiums written to net premiums earned between prior quarters and the fourth quarter of 2002. These variances arose from the clarification over the year of the earnings patterns on certain customers’ proportional reinsurance contracts. The overall effect is to defer some earned premium from 2002 into 2003. We would not expect this to recur in 2003.