Net investment income decreased $2.1 million (14%) during 2003 reflecting lower overall pre-tax yields while average invested assets increased 6%. The average pre-tax yield on invested assets dropped to 3.3% in 2003 from 4.1% during 2002 (18%). The largest decline in yields occurred in the bond portfolio which averaged 3.9% during 2003 compared to 5.1% in 2002. Yields on short-term investments also declined from 1.4% in 2002 to .8% in 2003. After tax yields declined less than pre-tax because of a reallocation of the investment portfolio whereby corporate (fully taxable) bonds were replaced with municipal (largely tax exempt) bonds. After-tax yields were 2.4% and 2.9% for 2003 and 2002, respectively.
The effective federal tax rate for consolidated operations for 2003 was 32.5%. This rate is lower than the statutory rate primarily because of tax-exempt investment income.
In determining if and when a decline in market value below cost is other than temporary, we first make an objective analysis of each individual security where current market value is less than cost. For any security where the unrealized loss exceeds 20% of original or adjusted cost, and where that decline has existed for a period of at least six months, the decline is treated as an other than temporary impairment, without any subjective evaluation as to possible future recovery. The only exception exists where substantial recovery to cost has actually occurred prior to the issuance of the financial statements. For individual issues where the
The Company's reserves for losses and loss expenses ("reserves") are determined based on complex estimation processes using historical experience, current economic information and, when necessary, available industry statistics. Reserves are evaluated in three basic categories (1) "case basis", (2) "incurred but not reported" and (3) "loss adjustment expense" reserves. Case basis reserves are established for specific known loss occurrences at amounts dependent upon various criteria such as type of coverage, severity and the underlying policy limits, as examples. Case basis reserves are generally estimated by experienced claims adjusters using established Company guidelines and are subject to review by claims management. Incurred but not reported reserves, which are established for those losses which have occurred, but have not yet been reported to the Company, are not linked to specific claims but are computed on a "bulk" basis. Common actuarial methods are used in the establishment of incurred but not reported loss reserves using company historical loss data, consideration of changes in the Company's business and study of current economic trends affecting ultimate claims costs. Loss adjustment expense reserves, or reserves for the costs associated with the investigation and settlement of a claim, are also bulk reserves representing the Company's estimate of the costs associated with the claims handling process. Loss adjustment expense reserves include amounts ultimately allocable to individual claims as well as amounts required for the general overhead of the claims handling operation that are not specifically allocable to individual claims. Historical analyses of the ratio of loss adjusting expenses to losses paid on prior closed claims and study of current economic trends affecting loss settlement costs are used to estimate the loss adjustment reserve needs related to the established loss reserves. Each of these reserve categories contain elements of uncertainty which assure variability when compared to the ultimate costs to settle the underlying claims for which the reserves are established.
that such forward-looking statements involve risks and uncertainties including, without limitation, the following: (i) the Company's plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company; (ii) the Company's business is highly competitive and the entrance of new competitors into or the expansion of the operations by existing competitors in the Company's markets and other changes in the market for insurance products could adversely affect the Company's plans and results of operations; and (iii) other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission.
The Company's fixed maturity portfolio totaled $331.3 million at December 31, 2004. Over 80% of this portfolio is made up of U. S. Government and government agency obligations and state and municipal debt securities; 85% of the portfolio matures within 5 years; and the average life of the Company's fixed maturity investments is approximately 2.2 years. Although the Company is exposed to interest rate risk on its fixed maturity investments, given the anticipated duration of the Company's liabilities (principally insurance loss and loss expense reserves) relative to investment maturities, even a 100 to 200 basis point increase in interest rates would not have a significant impact on the Company's ability to conduct daily operations or to meet its obligations.
One customer of the fleet trucking segment represents approximately $57,767, $47,693 and $39,359 of the Company's consolidated direct and assumed premium written in 2004, 2003 and 2002, respectively.