Our management remains focused on achieving sustainable 15% direct premium written growth and a combined ratio of 96%. In 2004, we met our profitability goals, posting our best combined ratio since 1999, and our direct premiums written grew 9.3% despite an increasingly competitive California marketing climate.
California auto retention was 93% for the year ended December 31, 2004, compared to 92% and 93% for the years ended December 31, 2003 and 2002, respectively. The increase in 2004 is primarily due to a decline in the growth rate of new customers who typically have a lower retention rate than long-time customers.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years the differences are expected to be recovered or settled. Quarterly, the Company reviews its deferred tax assets for recoverability.
In addition to stock options, we also grant restricted stock awards to certain officers and employees. Upon issuance of grants under the plan, unearned compensation equivalent to the market value on the date of grant is charged to paid-in capital and subsequently amortized over the vesting period of the grant. The Company becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares when the restrictions are released. Restricted shares are forfeited if officers and employees terminate prior to the lapsing of restrictions. We record forfeitures of restricted stock as treasury share repurchases and any compensation cost previously recognized with respect to unvested stock awards is reversed in the period of forfeiture. This accounting treatment results in compensation expense being recorded in a manner consistent with that required under SFAS No. 123, and, therefore, pro forma net income and earnings per share amounts for the Restricted Share Plan would be unchanged from those reported in the financial statements.
The Company does not have any other material VIEs that it needs, or will need, to consolidate or disclose.
Poss v. 21st Century Insurance Company was filed on June 13, 2003, in Los Angeles Superior Court. The Complaint requests injunctive and restitutionary relief against the Company under Business and Professions Code ("B&P") Sec. 17200 for alleged unfair business practices in violation of California Insurance Code ("CIC") Sec. 1861.02(c) relating to company rating practices. The plaintiffs are seeking injunctive relief and unspecified restitutionary relief. Based on the passage of California's Proposition 64 in November 2004, we have filed a motion to dismiss the complaint. Because this matter is in the pleading stages and no discovery has taken place, no estimate of the range of potential losses in the event of a negative outcome can be made at this time.
A summary of activity under the Restricted Shares Plan from 2002 through 2004 follows:
The following table reconciles our segment profit (loss) to our consolidated income before provision for income taxes for the years ended December 31: