Our insurance subsidiaries lease 465,433 square feet of office and warehouse space in numerous cities throughout the United States. All of these leases expire within 8 years. The most significant leased office spaces are located in Birmingham, Alabama and suburban Los Angeles, California. See Note 14 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for further information about leases. We own a 33,515 square foot call center in McAllen, Texas; a 116,433 square foot call center in Birmingham, Alabama and a 50,900 square foot call center in Tucson, Arizona.
In 2013 our gross written premium grew 6.8%. The majority of this growth came from Florida, one of our most profitable states. See Results of Operations - Underwriting - Premium for a more detailed discussion of our gross written premium growth.
Included in net earnings for the year ended December 31, 2013 was $1.9 million ($2.9 million pre-tax) of unfavorable development on prior accident year loss and LAE reserves. This development was primarily due to bodily injury and personal injury protection coverages in the states of California and Florida, respectively, related to accident year 2012. This compares to $10.5 million ($16.2 million pre-tax) of unfavorable development for 2012. The following table displays GAAP combined ratio results by accident year developed through December 31, 2013.
Insurance reserves, or unpaid losses and LAE, are our best estimate of the ultimate amounts that will be paid for (i) all claims that have been reported up to the date of the current accounting period but have not yet been paid, (ii) all claims that have occurred but have not yet been reported to us (“incurred but not reported” or “IBNR”), and (iii) unpaid claim settlement expenses.
We believe that our relatively low average policy limit and concentration on the nonstandard auto driver classification help stabilize fluctuations in frequency and severity. For example, approximately 83% of our policies include only the state-mandated minimum policy limits for bodily injury, which somewhat mitigates the challenge of estimating average severity. These low limits tend to
As noted above, the highest degree of uncertainty is associated with reserves in the first twelve to eighteen months. The following table displays the accident year combined ratios as developed through December 31, 2013 for the four most recent accident years along with the potential combined ratios based on the low and high outcomes of the loss and LAE tests utilized:
Calendar year losses incurred for ECO losses, gross and net of reinsurance, over the past five calendar years have ranged from $0.3 million to $1.7 million, averaging $0.9 million per year. Losses for 2013, 2012 and 2011 have been $1.3 million, $1.7 million and $0.8 million, respectively.
The following tables present the development of our loss reserves, net of reinsurance, on a GAAP basis for the calendar years 2003 through 2013. The top line of each table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for the indicated years. The next line, captioned Liability for unpaid losses and LAE - as re-estimated at December 31, 2013, shows the re-estimated liability as of December 31, 2013. The remainder of the table presents intervening development as percentages of the initially estimated liability. Additional information and experience in subsequent years results in development. The middle line shows a cumulative deficiency (redundancy) which represents the aggregate percentage increase (decrease) in the liability initially estimated. The lower portion of the table indicates the cumulative amounts paid as of successive periods as a percentage of the original loss reserve liability.
The following table summarizes the effect on each calendar year of reserve re-estimates, net of reinsurance, for each of the accident years presented. The total of each column details the amount of reserve re-estimates made in the indicated calendar year and shows the accident years to which the re-estimates are applicable. Favorable reserve re-estimates are in parentheses.
An increase in severity in Florida personal injury protection coverage related to accident year 2010 was the primary source of the $4.5 million of unfavorable development during the twelve months ended December 31, 2011.
We regularly evaluate our investment portfolio for potential impairment by evaluating each security position that has any of the following: a fair value of less than 95% of our book value, an unrealized loss that equals or exceeds $100,000 or one or more impairment charges recorded in the past. In addition, we review positions held related to an issuer of a previously impaired security. The process of evaluation includes assessments of each item listed above. Since accurately predicting if or when a specific security will become other-than-temporarily impaired is not possible, total impairment charges could be material to the results of operations in a future period.
The October 1, 2013 test results indicated that the fair value of our goodwill exceeded our carrying value and therefore no impairment charge was required at that date. Additionally, there was no indication of impairment at December 31, 2013.
The National Association of Insurance Commissioners’ (“NAIC”) model law for risk-based capital (“RBC”) provides formulas to determine the amount of capital that an insurance company needs to ensure that it has an acceptable expectation of not becoming financially impaired. At December 31, 2013, the capital ratios of all our insurance subsidiaries exceeded the RBC requirements.
As of December 31, 2013, the holding company had $111.8 million of cash and investments. In 2014, our insurance subsidiaries may pay us up to $66.8 million in ordinary dividends without prior regulatory approval. Rating agency capital requirements, among other factors, will be considered when determining the actual amount of dividends paid in 2014.
Our insurance subsidiaries generate liquidity to satisfy their obligations, primarily by collecting and investing premium in advance of paying claims. Our insurance subsidiaries had positive cash flow from operations of approximately $145.6 million in 2013, $175.3 million in 2012 and $72.4 million in 2011. In addition, to satisfy their obligations, our insurance subsidiaries generate cash from maturing securities from their combined $1.4 billion portfolio.
Agreement. At December 31, 2013, there were no borrowings outstanding under the Credit Agreement.
On August 3, 2010, our Board of Directors adopted a share and debt repurchase program set to expire on December 31, 2011.
Our contractual obligations and those of our insurance subsidiaries as of December 31, 2013, were (in thousands):
Our Investment Committee, which is composed exclusively of independent directors, has approved our investment guidelines. The guidelines specifically address overall investment objectives, permissible assets, prohibited assets, permitted exceptions to the guidelines and credit quality.
The $2.8 million and $48.5 million balances in receivable for securities sold at December 31, 2013 and December 31, 2012, respectively, represent fixed income securities sold in the normal course of business that had not settled prior to the end of the respective years.
The $39.9 million and $132.4 million balances in payable for securities purchased at December 31, 2013 and December 31, 2012, respectively, represent fixed income securities and treasury stock purchased in the normal course of business that had not settled prior to the end of their respective years.
The following table provides information about our fixed maturity investments at December 31, 2013, which are sensitive to interest rate risk. The table shows expected principal cash flows by expected maturity date for each of the five subsequent years and collectively for all years thereafter. Callable bonds and notes are included based on call date or maturity date depending upon which date produces the most conservative yield. MBS and sinking fund issues are included based on maturity year adjusted for expected payment patterns.
The cash flows presented take into consideration historical relationships of market yields and prepayment rates. However, the actual prepayment rate may differ from historical trends resulting in actual principal cash flows that differ from those presented above.
The following table presents the credit rating and fair value of our ABS portfolio at December 31, 2013 by deal origination
The following table presents the fair value of our state and municipal bond portfolio, by state and type of bond, at December 31, 2013 (in thousands):
Included in our investments in corporate fixed income securities at December 31, 2013 are $37.2 million of dollar-denominated
Gross written premium grew 6.8% during 2013. We implemented rate revisions in various states with an overall rate increase of 6.9% during the year. Excluding the effect of rate changes in California and Florida, our largest states, the overall rate increase was 10.7%. Policies in force at December 31, 2013 declined 4.0% compared with 2012. Gross written premium grew despite the decline in policies in force due to a shift in overall business mix toward policies offering broader coverage and higher average premium as well as growth in Florida business, which has a higher average premium per policy than our other states.
During 2013, personal auto insurance gross written premium in our Focus States grew 7.6% when compared with 2012. The increase in gross written premium is primarily due to growth in California and Florida, which grew a combined 14.6% during 2013 as a result of higher average premium and renewal business growth in both states. The growth in California and Florida was partially offset by declines in the remaining Focus States. We have raised rates and tightened underwriting restrictions in these states in order to improve their profitability.
Gross written premium grew 15.9% during 2012. We implemented rate revisions in various states with an overall rate increase of 8.0% during the year. Excluding the effect of rate changes in California, our largest state, the overall rate increase was 12.1%. Policies in force at December 31, 2012 increased 7.5% compared with 2011. Gross written premium grew more than policies in force due to a shift in overall business mix toward policies offering broader coverage and higher average premium as well as growth in Florida business, which had a higher average premium per policy than our other states.
Florida gross written premium grew 66.7% during the twelve months ended December 31, 2012. This growth was primarily a result of a 66% increase in new business application counts, higher business retention, an increase of 6.8% in average premium from rate increases and competitor rate increases.
A decline of 17.0% in Texas during 2012 partially offset the growth in California and Florida. The decline in Texas gross written premium was primarily due to actions taken, such as rate increases and the elimination of annual policies, to improve profitability in the state.
Our Commercial Vehicle gross written premium grew 18.9% during the twelve months ended December 31, 2012. This growth was primarily due to higher average premium and better retention for this product.
Gross written premium in our Classic Collector product grew 14.9% during 2012. This growth was primarily due to growth in Florida and Texas resulting from an increase in the number of agencies actively producing business for this product.
The GAAP combined ratio for the twelve months ended December 31, 2013 decreased by 2.7 points compared to 2012. Excluding the effect of development from both periods, the GAAP combined ratio decreased by 1.6 points for the twelve months ended December 31, 2013 compared to 2012. The GAAP underwriting ratio declined by 1.2 points for the twelve months ended December 31, 2013 as a result of reduced commission rates on new and renewal business, a lower proportion of new business, on which we pay a higher commission rate than renewal business, and a lower ratio of fixed costs to premium as a result of premium growth in 2013.
the effect of development from both periods, the statutory combined ratio increased by 1.5 points for the twelve months ended
ratio offset by a decline in the underwriting ratio. The increase in the loss and LAE ratio was primarily attributable to an increase in new business in states such as Florida. The underwriting ratio declined primarily as a result of spreading fixed
underwriting costs over a larger written premium base as well as a decline in advertising spending.
The GAAP combined ratio for the twelve months ended December 31, 2012 increased by 2.6 points compared to 2011.
2011. Losses from catastrophes during 2012 were primarily due to hail storms in Texas during the second quarter and Hurricane
due to unfavorable development in California and Florida. The increase in the loss and LAE ratio in the Focus States was
primarily due to a decline in the loss and LAE ratio in Illinois. We reclassified Illinois from a Focus State to an Other
State in 2012 and slowed new business production which drove the decline in the loss and LAE ratio.
2012, due to an increase in the loss and LAE ratio. The increase was due to several large losses incurred during the third quarter
Changes in investment income reflect fluctuations in market rates and changes in average invested assets. Net investment income in 2013 declined when compared to 2012 primarily due to a decline in book yields because of a general decline in market interest rates for high quality bonds.
Included in investment income in 2013 was $1.7 million related to a change in estimate for principal prepayments for mortgage-backed securities. In October 2013, we began using a better estimate of expected mortgage principal prepayments. Until then, we had used an estimate that was based on the past three months of actual prepayments. The new estimate takes into consideration current and expected market conditions.
The decline in the total realized gain in 2013 is primarily due to a large capital gain from the sale of our investment in the Vanguard U.S. broad based exchange-traded fund in 2012.
Other income of $0.7 million, $1.0 million and $0.3 million for the twelve months ended December 31, 2013, 2012 and 2011, respectively, is primarily made up of items of a non-recurring nature.
At December 31, 2013 we had $275.0 million of senior notes outstanding. These notes carry a coupon rate of 5.0% and require no principal payment until maturity in September 2022. On October 17, 2012, we fully redeemed the $195.0 million outstanding principal of senior notes (the "5.5% Senior Notes") due 2014 at a price of 106.729%, or $208.1 million plus accrued interest of $1.8 million. (See Note 4 - Long-Term Debt of the Notes to Consolidated Financial Statements for additional information on the Senior Notes).
securities fell significantly. At that time, we wrote the book value of these securities down to market as an other-than-temporary
The valuation allowance on the capital loss carryforward was released as the carryforward was utilized. In 2011, the capital loss
We also maintain a valuation allowance on a net operating loss carryforward for a 51% owned subsidiary that is required to file its federal tax return on a separate company basis. The release of the valuation allowance for 2013 relates to the utilization of a portion of the net operating loss during 2013.
Consolidated Statements of Comprehensive Income: Years ended December 31, 2013, 2012 and 2011
Consolidated Statements of Changes in Shareholders’ Equity: Years ended December 31, 2013, 2012 and 2011