The property and casualty business is cyclical in nature with periods of high competition resulting in low premium rates, sometimes referred to as a "soft market" or "downcycle" followed by periods of reduced competition and higher premium rates, referred to as a "hard market" or "upcycle." The 1990's were a soft market period; prices started to harden in 2000 and accelerated significantly following the terrorist attacks in 2001. Rate increases moderated during the latter part of 2003 and continued that trend during 2004.
Significant accounting policies are summarized in Note A to the financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that can have a significant effect on amounts reported in the financial statements. As more information becomes known, these estimates and assumptions could change and thus impact amounts reported in the future. Management believes that the establishment of insurance reserves, especially asbestos and environmental-related reserves, the recoverability of deferred acquisition costs, and the determination of "other than temporary" impairment on investments are the areas where the degree of judgment required to determine amounts recorded in the financial statements make the accounting policies critical. See "Liquidity and Capital Resources - Investments" for discussion of impairments on investments and "Liquidity and Capital Resources -Uncertainties" for a discussion of insurance reserves.
Fixed income investment funds are generally invested in securities with intermediate-term maturities with an objective of optimizing total return while allowing flexibility to react to changes in market conditions. At December 31, 2004, the average life of AFG's fixed maturities was about 6-1/2 years.
In the personal lines, personal injury and uninsured motorist claims experienced increased severity. During 2002, claims remained open longer and settlement amounts were higher than in previous years.
The Specialty group reported an underwriting profit of $123 million for 2004, including $37 million (1.8 points) for the effect of Southeastern U.S. hurricane losses. Overall, the combined ratio for 2004 improved 1.9 points compared to 2003.
2003 compared to 2002 The increase in annuity and life acquisition expenses in 2003 compared to 2002 reflects the continued narrowing of spreads in the fixed annuity operations, including the charges discussed above, and an increase in in-force policies, primarily in the annuities and supplemental insurance operations.
Annuity and Life Acquisition Expenses Annuity and life acquisition expenses on the Statement of Earnings consists primarily of amortization of DPAC related to the annuity and life, accident and health businesses. This line item also includes certain marketing and commission costs that are expensed as paid.
(c) There is no earned premium or underwriting profit for the Personal group in 2004
property and transportation (2004 premium of $25 million and underwriting profit of
GAFRI recorded a goodwill impairment charge of $4.0 million (included in "Other operating and general expenses") during the third quarter of 2004 related to an insurance agency subsidiary. A review for impairment was prompted by a decrease in estimated future earnings from this agency. Fair value of the agency was estimated using the present value of expected future cash flows.
Other operating and general expenses included charges for possible losses on agents' balances, other receivables and other assets in the following amounts: 2004 - $15.1 million; 2003 - $1.3 million; and 2002 - $2.7 million. Losses and loss adjustment expenses included charges for possible losses on reinsurance recoverables of $12.7 million in 2004, $4.7 million in 2003, and $6.6 million in 2002. The aggregate allowance for all such losses amounted to approximately $82 million and $84 million at December 31, 2004 and 2003, respectively.
AFG expensed approximately $17 million in 2004 and $20 million in both 2003 and 2002 for its retirement and employee savings plans.