* Combined ratios are calculated on a GAAP basis. Expressed as a percentage, combined ratios equal losses and expenses divided by net earned premiums.
• The occurrence of bankruptcies that result in losses under surety bonds, investment losses or lower investment income
Improving Sales Growth through Independent Agents - We began the rollout of our automated underwriting platform. This technology made it easier for agents to sell all our primary lines - personal auto, homeowners and small commercial.
Commercial umbrella insurance provides protection to our customers beyond the limits of their primary liability policies. As a consequence, this product tends to result in fewer claims with higher average costs than most other commercial coverages. These claims are also reported to us more slowly than most other commercial coverages. For this line our actuarial techniques produce a wider range of results. Management considers these results together with any changes in the product or the customer profile when establishing reserve estimates.
• Unresolved legal issues including existence of coverage, definition of ultimate damages and final allocation of damages due from the financially responsible parties
• A separate claims handling function and internal legal counsel specializing in construction defect claims
On page 14, we began our discussion with a look at the various types of reinsurance and policy terms. Here, we focus on estimation of reinsurance recoverables.
Recording reinsurance recoverables requires us to make estimates because we do not know the exact amount due from the reinsurer until all our underlying losses are settled. The amount of reinsurance recoverables varies depending on the size of individual losses and the aggregate amount of losses in particular lines of business.
Improvement in our loss ratio for our personal insurance operations however, offset some of that increase in 2003. Similarly, tighter underwriting standards resulted in lower losses and LAE in 2002 compared with 2001. Our loss ratios in Personal Auto were:
newer and more expensive cars, or premium trend. Personal auto premium trend increased average rates in the low single-digits in 2003 and 2002.
These reductions in loss ratios were the primary contributors to the improvements in our combined ratios:
We’re achieving our growth and improved results through four strategic initiatives in our personal auto line:
The trend toward higher deductibles - with many homeowners increasing their deductibles from $250 to $500 - has significantly reduced the number of frequent, maintenance-type claims. Improvements in frequency outpaced severity increases, resulting in improving loss costs. Severity increases reflect inflationary trends in repair material and labor costs.
In 2003, this platform enabled us to profitably increase the number of new policies we sell. We consistently closed more than 30% of quotes with this point-of-sale technology. Sales of BOP increased by 49.4% over our 2002 levels, and in 2003 we began the launch of our commercial auto product and saw a 20.5% increase in new business over 2002. Our workers compensation product launched in November 2003 and will be phased in over the first few months of 2004. The final component to our automated platform will be the addition of commercial package policies and we will begin this implementation in late 2004.
Our combined ratios were 82.0% in 2003, 86.0% in 2002 and 97.5% in 2001. The improved combined ratio in 2003 reflects disciplined underwriting and rate increases combined with decreases in commission expense. Our 2001 underwriting results include a $59.5 loss before reinsurance related to the bankruptcy of Enron, ($18.0 net of reinsurance). On January 2, 2003, we entered into a settlement agreement to end litigation involving the Enron bankruptcy and related bond defaults.
• Fixed annuity profits depend on our returns on invested assets, net of the amounts we credit to policyholders’ accounts.
Investment returns are an important part of our overall profitability. Fluctuations in the fixed income or equity markets could affect the timing and the amount of our net investment income. Defaults by third parties in the payment or performance of their obligations - primarily on our investments in corporate bonds - could reduce our investment income or create realized investment losses.
Our investment portfolio is well diversified by issuer and industry type with no single issuer exceeding 1% of our consolidated investment portfolio.
We have not engaged in the sale of investments or other assets by securitization.
We believe it is more likely than not that our gross deferred income tax assets will be realized through our future earnings. As a result, we have not recorded a valuation allowance.