Legislative and regulatory developments affecting the actions of insurers, including requirements regarding rates, taxes, agent and broker commissions and availability of coverage
Competitors of L&I delivered better results, despite the adverse conditions affecting all players in the life and investments business
Current Accident Year Losses - For long-tailed lines of business, an annual expected loss ratio approach is used. Under this approach, an expected loss ratio is applied to current period earned premiums resulting in an estimate of ultimate losses. The resulting estimate of ultimate losses is reduced by the current period paid and case-basis reserve activity resulting in the current period IBNR. For short-tailed lines of business, a ratio of IBNR to earned premiums is used. Under this approach, an IBNR percentage is applied to current period earned premiums resulting in current period IBNR.
Expected loss ratios and IBNR to earned premiums percentages are developed based on analysis of prior accident years supplemented with data about changes in our book of business, changes in the external environment in which we operate, changes in our pricing and underwriting and changes in our claims handling practices. We review these ratios throughout the year, and we revise the expected loss ratio periodically based on these analyses. Changes in the selection of the expected loss ratio result in a change in the loss reserve estimate for the current year, which we record in current period earnings.
Auto policies provide coverage for bodily injury, uninsured motorists, personal injury protection, medical payments, property damage, and comprehensive and collision losses.
Our increase in new business, which generally has higher claim frequencies than business already on the books for longer than one year
In determining management’s best estimate for workers compensation reserves, long-term medical cost inflation trends over the average claim payout period represent our most significant assumption. We have assumed that double-digit medical cost inflation will continue in the near-term, moderating over time to historical levels, resulting in a 5%-6% average medical severity trend over the life of the reserves. Our best estimate of workers compensation reserves presents risk of unfavorable reserve development should medical inflation trends not abate. A one-point increase in our estimate of the average medical severity trend would yield an approximate $66 increase in our estimated reserve.
Estimating Loss Reserves for Asbestos - Estimating loss reserves for asbestos claims requires more judgment than our other lines of business. That’s primarily because past claim experience may not be representative of future claims.
Surety - Our Surety bonds insure construction performance, as well as legal matters that include appeals, probates and bankruptcies. By their nature, Surety claims result in lower loss frequency and higher loss severity than most of our P&C businesses. In addition, Surety claims provide us with substantial opportunity for subrogation and salvage, the nature and extent of which vary from case to case.
As of December 31, 2004, our Surety loss and ALAE reserves net of salvage and subrogation recoveries were $12.2. As of December 31, 2003, our expected salvage and subrogation recoveries exceeded our Surety loss and ALAE reserves by $14.0. Surety reserves fluctuate from period to period due to the lag between the time payments are made on a claim and the time we receive salvage and subrogation amounts.
Reinsurance - the amount we expect to be reimbursed by our reinsurers
In the Analysis of Losses and LAE Reserve Development table, all amounts include the effects of changes in amounts for prior periods.
More information on our investments can be found on page 62.
Net realized investment gains: In 2004, net realized investment gains increased $76.3 as we reduced our equity holdings to our target level of approximately 10% of our investment portfolio. The decrease in net realized investment gains in 2003 compared with 2002 was due to net realized investment gains of $191.6 in 2002 when we repositioned our investment portfolio to shorten the duration of our fixed maturity investments and to reduce our equity holdings. Net realized investment gains included pretax impairments of $9.0 in 2004, $47.8 in 2003 and $64.4 in 2002.
Discontinued Operations: In 2004, Results from Discontinued Operations included the after-tax loss on the sale of our L&I operations of $131.0. This was partially offset by $73.2 in Income from Discontinued Operations. Income from Discontinued Operations was $53.7 in 2003 and $62.0 in 2002.
Rate increases: Our homeowners rate increases improved our combined ratio by 8.8 points in 2004 compared with 2003, and 10.8 points in 2003 compared with 2002.
Loss experience: We experienced higher loss and LAE ratios for our umbrella business in 2004. In 2003, our loss and LAE experience for our umbrella business was unusually low, resulting in a lower combined ratio and increased underwriting profit.
These tables show our investment types and industries of our fixed maturities and marketable equity securities that exceed 3% of our portfolio at year-end 2004 and 2003:
To calculate net periodic pension cost for the year ended December 31, 2004, we used a weighted average discount rate of 6.25% and an expected long-term rate of return of 8.00%. A decrease of 100 basis points in the weighted average discount rate would result in an increase of $0.9 in pension cost in 2004. A decrease of 100 basis points in the expected long-term rate of return on plan assets would result in an increase of $1.1 in pension cost in 2004.