Personal auto improved slightly in 2003, with a loss ratio of 79.1 percent versus 83.7 percent in 2002. Earned premium was down by 10 percent, or $3.5 million, due to our efforts to reduce the size of our personal lines business, relative to our total book of business. Despite the decrease in total premiums earned, we achieved rate increases averaging 8 percent in 12 states in which we write personal auto coverages. Additional rate increases are scheduled for the first quarter of 2004. We believe that we can further improve results in this line of business, and we are currently undertaking measures in addition to the rate adjustments in an effort to achieve better profitability in this line of business.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Overall, the factors contributing to our year-to-year redundancy include the following:
At December 31, 2001, we had a recorded minimum pension liability of $.5 million (before tax), which represents the amount that we recognized to cover a $1.3 million deficit occurring as a result of our fair value of plan assets being less than our accumulated benefit obligation. The amount of this deficit was first offset by prepaid pension cost ($.7 million) to arrive at the additional minimum pension liability required to be recognized in our Consolidated Financial Statements.
Total invested assets increased by $110.1 million, or 6.4 percent, to $1,832.1 million at December 31, 2003, compared with December 31, 2002. Of this growth, $75.0 million was attributable to changes in the market prices of our securities classified as available-for-sale, which are reported at fair value. The unrealized appreciation from these investments is reported net of tax as a separate component of stockholders’ equity. The fair value of securities in our investment portfolio may fluctuate depending on general economic and market conditions or events relating to a particular issuer of securities. Because the changes in the fair value of available-for-sale securities and other invested assets in our investment portfolio are reflected in our financial statements, fluctuations in fair value could result in unrealized investment losses, thereby affecting our stockholders’ equity.
To establish loss and loss adjustment expense reserves, we make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in our financial statements. Actual results could differ materially from those estimates.
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51.” Interpretation No. 46 addresses the consolidation of entities for which control is achieved through means other than through voting rights by extending the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties (i.e., variable interest entities). Interpretation No. 46 provides guidance on how to identify a variable interest entity and to determine when and which business enterprise (i.e., the primary beneficiary) should consolidate the variable interest entity. In addition, Interpretation No. 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a variable interest entity make additional disclosures addressing their involvement with the variable interest entity. We have evaluated the provisions of Interpretation No. 46 and have determined that our affiliate, United Fire Lloyds, meets the definition of a variable interest entity for which we are the primary beneficiary. United Fire Lloyds has been included in our consolidated financial results since we acquired the entity in 1999; therefore, no adjustment is required to be recorded in our current or prior period financial statements upon adoption of Interpretation No. 46.
The fair value of the liabilities for annuity products that are in a benefit payment phase, guaranteed investment contracts and structured settlements is based on a discount rate of 6.00 percent and 6.25 percent at December 31, 2003 and 2002, respectively. The fair value of annuities currently in an accumulation phase is based on the net cash surrender value.
We maintain a $20,000,000 bank line of credit. Under the terms of the agreement, interest on outstanding notes is payable at the lender’s prevailing prime rate minus 1.0 percent. We did not borrow against this available line of credit in 2003 or 2002. There were no loan balances outstanding at December 31, 2003 and 2002.
The table below provides an analysis of changes in our life and accident and health policy claim liabilities for 2003, 2002 and 2001 (net of reinsurance amounts). United Life Insurance Company’s reserve for life claims is based on the contractual terms of the policy. The reserve for accident and health claims is determined actuarially using morbidity assumptions relative to each claim. Changes in assumptions for such things as environmental hazards and legal actions, as well as changes in actual experience, could cause these estimates to change in the near term.
Our effective income tax rates were 30.3 percent, 20.2 percent and 15.8 percent in 2003, 2002 and 2001, respectively. These rates were lower than the applicable federal tax rates of 35 percent, due primarily to our portfolio of tax-exempt securities and, for 2001, a reduction in the contingent tax liability.
The following table provides the components of net periodic benefit cost for the plans for 2003, 2002 and 2001.
The “Medicare Prescription Drug, Improvement and Modernization Act of 2003” became effective December 8, 2003. In accordance with Financial Accounting Standards Board Staff Position 106-1, the above measures of the postretirement benefit obligation or net periodic postretirement benefit cost do not reflect the provisions of this act. For further discussion of this act and the deferral of the recognition of its provisions provided by Staff Position 106-1, refer to Note 1.
The following table summarizes information regarding the stock options outstanding at December 31, 2003.
We have two reportable business segments in our operations: property and casualty insurance and life insurance. The property and casualty insurance segment has four locations from which it conducts its business. All offices target a similar customer base, market the same products and use the same marketing strategies, and are therefore aggregated. The life insurance segment operates from our home office. The accounting policies of the segments are the same as those described in Note 1. We evaluate the two segments on both a statutory basis and on the basis of accounting principles generally accepted in the United States. Results are analyzed, based on profitability (i.e. loss ratios), expenses and return on equity. Because we sell all insurance domestically, we have no revenues allocable to foreign operations. The analysis on the following page is reported on the basis of accounting principles generally accepted in the United States and is reconciled to our Consolidated Financial Statements.