During 2002 the Company utilized a disciplined marketing strategy in conjunction with its underwriting capabilities to capitalize on turmoil in the property and casualty insurance market. The turmoil created a general environment of rate increases and conservative risk selection in the marketplace and arose in part due to the following:
- - The significant property and casualty industry losses as a result of the tragedy of September 11, 2001;
- - Lower interest rates resulting in reduced investment income and a greater focus on underwriting margins.
The Company's investment objective is the realization of relatively high levels of investment income while generating competitive after-tax total rates of return within a prudent level of risk and within the constraints of maintaining adequate securities in amount and duration to meet cash requirements of current operations and long-term liabilities, as well as maintaining and improving the Company's A.M. Best rating. The Company utilizes external independent professional investment managers for its fixed maturity and equity investments. These investments consist of diversified issuers and issues, and as of December 31, 2002, approximately 90.2% and 5.6% of the total invested assets (total investments plus cash equivalents) on a cost basis consisted of investments in fixed maturity and equity securities, respectively, versus 88.7% and 4.8%, respectively, at December 31, 2001.
write down is included in earnings as a realized loss in the period the impairment arose. This evaluation resulted in non-cash realized investment losses of $2.1 million and $0 million for the years ended December 31, 2002 and 2001, respectively. This $2.1 million in non-cash realized investment losses resulted from other than temporary declines in the fair value of certain holdings in the Company's common stock portfolio. The Company primarily attributes these other than temporary declines in fair value to an uncertain economic climate, the overhang of corporate governance issues, high profile bankruptcies, and most recently, war prospects.
Additionally, the Company conducts its impairment evaluation and recognition for interests in securitized assets in accordance with the guidance provided by the Emerging Issues Task Force of the Financial Accounting Standards Board ("EITF"). Under this guidance, impairment losses on securities must be recognized if both the fair value of the security is less than its book value and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent (prior) estimation date. If these criteria are met, an impairment charge, calculated as the difference between the current book value of the security and its fair value, is included in earnings as a realized loss in the period the impairment arose. This evaluation resulted in non-cash realized investment losses of $1.6 million and $5.8 million for the years ended December 31, 2002 and 2001, respectively. These non-cash realized investment losses were primarily due to investments in collateralized bond obligations as a result of the current historical highs in non investment grade default rates.
The following table presents certain information with respect to individual securities with a significant unrealized loss position as of December 31, 2002.
upon its detailed review, or if a decline in value for an equity investment has persisted continuously for nine months, the cost basis of the security is written down to its fair value. The factors considered in reaching the conclusion that a decline below cost is other-than-temporary include, but are not limited to, whether: the issuer is in financial distress; the investment is secured; a significant credit rating action has occurred; scheduled interest payments have been delayed or missed; changes in laws and/or regulations have impacted an issuer or industry. The amount of any write down is included in earnings as a realized loss in the period the impairment arose (see Investments).
The liability for unpaid loss and loss adjustment expenses ($445.6 million and $302.7 million as of December 31, 2002 and 2001, respectively) reflects the Company's best estimate for future amounts needed to pay losses and related settlement expenses with respect to insured events. Based upon past experience this estimate has been redundant by as much as 18.8% and deficient by as much as 21.9%. The process of establishing the liability for property and casualty unpaid loss and loss adjustment expenses is a complex and imprecise process, requiring the use of informed estimates and judgments. This liability includes an amount determined on the basis of claim adjusters' evaluations with respect to insured events that have occurred and an amount for losses incurred that have not been reported to the Company. In some cases significant periods of time, up to several years or more, may elapse between the occurrence of an insured loss and the reporting of such to the Company. The method for determining the Company's liability for unpaid loss and loss adjustment expenses includes but is not limited to reviewing past loss experience and considering other factors such as legal, social, and economic developments. The methods of making such estimates and establishing the resulting liabilities are regularly reviewed and updated and any adjustments resulting therefrom are made in the accounting period in which the adjustment arose.
During 2002 the Company increased the liability for unpaid loss and loss adjustment expenses by $68.0 million ($27.6 million net of reinsurance) primarily for accident years 1997 through 2001. As of December 31, 2001 the Company had estimated a total liability for unpaid loss and loss adjustment expenses for these accident years of $295.0 million ($243.1 million net of reinsurance). This increase in the liability for unpaid loss and loss adjustment expense net of reinsurance was primarily due to the following:
of trade-ins, daily rental units being sold into the market earlier and in greater numbers than expected further adding to the over supply of used cars; and the overall uncertain economic conditions.
The Company further increased the liability for unpaid loss and loss adjustment expenses by $30.8 million ($0 net of reinsurance) as a result of the emergence of higher than expected losses in certain products of the Commercial and Specialty lines segments primarily occurring in accident years 1999 through 2001 and changes in the Company's assumptions relating to future frequency and severity of losses. Approximately 97% of such losses are reinsured with companies rated "A" excellent or better by A.M. Best Company.
- - The continued consolidation of certain competitor property and casualty insurance companies has led to the displacement of certain of their independent agency relationships. This consolidation continues to result in new agency relationship opportunities for the Company, which have resulted in additional prospects and premium writings for the Company's commercial and specialty lines segments.
Overall premium growth has been offset in part by the following factors:
- - Specialty Lines Segment - The Company's decision not to renew approximately 2,000 policies in the professional liability product lines due to inadequate pricing levels being experienced as a result of market conditions and/or an unacceptable underwriting risk profile.
Net Investment Income: Net investment income approximated $37.5 million in 2002 and $32.4 million in 2001. Total investments grew to $908.9 million at December 31, 2002 from $673.4 million at December 31, 2001. The growth in investment income is due to investing net cash flows provided from operating activities and the proceeds of the Company's fourth quarter 2001 equity offering. The capital market environment during 2001 and most of 2002 (low U.S. Treasury yields) had the effect of increasing the level of prepayments in certain of the Company's interest rate sensitive investments. The Company's average duration of its fixed income portfolio approximated 3.2 years at December 31, 2002, compared to 2.7 years at December 31, 2001. Additionally, due to the capital market environment, the Company has invested approximately $75.1 million in overall "AAA" rated floating rate and shorter amortizing securities to reduce interest rate risk with the expectation of reinvesting these funds into longer duration investments at higher future fixed income rates. The Company's tax equivalent book yield on its fixed income holdings was 5.2% at December 31, 2002, compared to 6.0% at December 31, 2001.
- - A lower weighted average effective commission rate incurred on the commercial and specialty lines segment products of approximately 12.7% for the year ended December 31, 2002 compared to a weighted average effective commission rate of approximately 13.9% for the year ended December 31, 2001. The Company has been able to incur a relatively lower commission rate on business produced by independent agents in the current market environment.
- - Incremental written premium growth without a corresponding incremental increase in operating costs.
Other Operating Expenses: Other operating expenses decreased $0.4 million to $6.4 million for the year ended December 31, 2002 from $6.8 million for the same period of 2001. The decrease in other operating expenses was primarily due to the discontinuance of goodwill amortization effective January 1, 2002, which amounted to $1.5 million for the year ended December 31, 2001. This decrease has been partially offset by an increase in expenses attributable to increased operating activities.
Net Investment Income: Net investment income was $32.4 million for the year ended December 31, 2001 and $25.8 million for the same period of 2000. Total investments grew to $673.4 million at December 31, 2001 from $437.3 million at December 31, 2000. The growth in investment income is attributable to investing net cash flows provided by operating activities and the proceeds of the Company's equity offering received late in the fourth quarter. In addition, the Company increased the percentage invested in taxable investments versus tax exempt investments in order to achieve the incremental after tax net investment income available from taxable investments. The low level of U.S. Treasury yields persisted throughout 2001. This capital markets environment had the effect of both increasing the level of prepayments in certain of the Company's interest rate sensitive investments and causing the Company to slightly shorten its duration position in the expectation of higher future fixed income yields. As a result, the Company's average duration on its fixed income portfolio approximated 2.7 years at December 31, 2001, compared to 3.5 years at December 31, 2000. As a consequence of the above factors, the Company's tax equivalent book yield on its fixed income holdings was 6.00% at December 31, 2001, compared to 7.37% at December 31, 2000.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $21.9 million (29.2%) to $97.0 million for the year ended December 31, 2001 from $75.1 million for the same period of 2000. This increase was due primarily to the 30.3% growth in net earned premiums, offset by relative changes in the Company's product mix and associated distribution channel expense, primarily the weighted average commission rate, which approximated 13.9% for the year ended December 31, 2001 versus 14.6% for the year ended December 31, 2000.
Other Operating Expenses: Other operating expenses decreased $7.9 million to $6.8 million for the year ended December 31, 2001 from $14.7 million for the same period of 2000. The decrease in other operating expenses was primarily due to the decrease in brokering activities resulting in a decrease in the amount of broker commissions (see "Other Income" above). Goodwill amortization of $1.5 million per year, both for 2001 and 2000 ceased on
Income Tax Expense: The Company's effective tax rate for the years ended December 31, 2001 and 2000 was 33.9% and 32.4%, respectively. The effective rates differed from the 35% statutory rate principally due to investments in tax-exempt securities, offset in part by non-deductible goodwill amortization. The increase in the effective tax rate is principally due to a greater investment of cash flows in taxable securities relative to tax-exempt securities.
In the normal course of business, the Company has entered into various reinsurance contracts with unrelated reinsurers. The Company participates in such agreements for the purpose of limiting loss exposure and diversifying business. Reinsurance contracts do not relieve the Company from its obligations to policyholders. To reduce the potential for a write off of amounts due from reinsurers, the Company: evaluates the financial condition of its reinsurers; principally contracts with large reinsurers that are rated at least "A-" (Excellent) by A.M. Best Company; regularly monitors its reinsurance receivables; and attempts to collect the obligations of its reinsurers on a timely basis.
Under certain reinsurance agreements, the Company is required to maintain investments in trust accounts to secure its reinsurance obligations (primarily the payment of losses and loss adjustment expenses on business it does not write directly). At December 31, 2002, the investment and cash balances in such trust accounts totaled approximately $1.6 million. In addition, various insurance departments of states in which the Company operates require the deposit of funds to protect policyholders within those states. At December 31, 2002, the balance on deposit for the benefit of such policyholders totaled approximately $13.5 million.
Risk-based capital is a method developed by the NAIC designed to measure the acceptable amount of capital and surplus an insurer should have based on the inherent specific risks of each insurer. The adequacy of a company's actual capital and surplus is evaluated by a comparison to the risk-based capital results. Insurers failing to meet minimum risk-based capital requirements may be subject to scrutiny by the insurer's domiciliary insurance department and ultimately rehabilitation or liquidation. As of December 31, 2002, PIIC, PIC, MUSA and LAIC exceeded their minimum risk-based capital requirement of $75.9 million, $10.0 million, $11.7 million and $11.7 million, respectively, by 234%, 135%, 48% and 56%, respectively.
The Company has certain contractual obligations and commitments which are summarized below:
(1) Represents 12 month collateralized borrowings from the Federal Home Loan Bank of Pittsburgh, the proceeds from which are invested to achieve a positive spread between the investment and borrowing interest rates.
(2) Represents open commitments under certain limited partnership and information technology development agreements.
In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure ("SFAS No. 148") which amends SFAS Statement No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). The objective of SFAS No. 148 is to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 does not change the provisions of SFAS No.
FASB Interpretation 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" became effective December 15, 2002. This interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. Management has determined that this interpretation will have no effect on the Company's consolidated financial statements.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of Philadelphia Consolidated Holding Corp. and Subsidiaries (the "Company") at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Investments in fixed maturities are adjusted for amortization of premiums and accretion of discounts to maturity date, except for collateralized mortgage and asset backed securities which are adjusted for amortization of premiums and accretion of discounts over their estimated lives. Certain collateralized mortgage and asset backed securities repayment patterns will change based on interest rate movements and, accordingly, could impact future investment income if the reinvestment of the repayment amounts are at lower interest rates than the underlying securities. Collateralized mortgage and asset backed securities amounted to $90.7 million and $286.1 million, respectively, at December 31, 2002 and $70.9 million and $273.3 million, respectively, at December 31, 2001. The collateralized mortgage and asset backed securities held as of December 31, 2002 and 2001 are shorter tranche securities possessing favorable prepayment risk profiles.
The liability for unpaid loss and loss adjustment expenses reflects the Company's best estimate for future amounts needed to pay losses and related settlement expenses with respect to insured events. Based upon past experience this estimate has been
redundant by as much as 18.8% and deficient by as much as 21.9%. The process of establishing the ultimate claims liability is necessarily a complex imprecise process, requiring the use of informed estimates and judgments using data currently available. The liability includes an amount determined on the basis of claim adjusters' evaluations with respect to insured events that have occurred and an amount for losses incurred that have not been reported to the Company. In some cases significant periods of time, up to several years or more, may elapse between the occurrence of an insured loss and the reporting of such to the Company. The method for determining the Company's liability for unpaid loss and loss adjustment expenses includes, but is not limited to, reviewing past loss experience and considering other factors such as legal, social, and economic developments. The methods of making such estimates and establishing the resulting liabilities are regularly reviewed and updated and any adjustments therefrom are made in the accounting period in which the adjustment arose. If the Company's ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded at December 31, 2002, the related adjustments could have a material adverse impact on the Company's financial condition, and results of operations.
The Insurance Subsidiaries are subject to state guaranty fund assessments, which provide for the payment of covered claims or meet other insurance obligations from insurance company insolvencies, and other assessments related to its insurance activities. Each state has enacted legislation establishing guaranty funds and other insurance activity related assessments resulting in a variety of assessment methodologies. Expense for guaranty fund and insurance activity related assessments are recognized when it is probable that an assessment will be imposed, the obligatory event has occurred and the amount of the assessment is reasonably estimated.
Components of comprehensive income, as detailed in the Consolidated Statements of Operations and Comprehensive Income, are net of tax. The related tax effect of Holding Gains (Losses) arising during the year was $3.0 million, ($1.5) million and $4.1 million in 2002, 2001 and 2000, respectively. The related tax effect of Reclassification Adjustments was ($1.2) million, $1.2 million, and $4.1 million in 2002, 2001 and 2000, respectively.
GAAP differs in certain respects from SAP prescribed or permitted by the Insurance Department of the Commonwealth of Pennsylvania and/or the State of Florida. The principal differences between SAP and GAAP are as follows:
There are no material investments in fixed maturity securities that were non-income producing for the twelve month periods ended December 31, 2002, 2001, or 2000. Investment expense includes $77,000, $107,000, and $182,000, in investment management fees paid to a director of the Company in 2002, 2001, and 2000, respectively. These transactions are in the ordinary course of business at negotiated prices comparable to those of transactions with other investment advisors.
Realized pre-tax gains (losses) on the sale of investments for the years ended December 31, 2002, 2001, and 2000 are as follows (in thousands):
The Insurance Subsidiaries have investments, principally U.S. Treasury securities, on deposit with the various states in which they are licensed insurers. At December 31, 2002 and 2001, the carrying value of the securities on deposit totaled $13.5 million.
The Company maintains investments in trust accounts under reinsurance agreements with unrelated insurance companies. These investments collateralize the Company's obligations under the reinsurance agreements. The Company possesses sole responsibility for investment and reinvestment of the trust account assets. All dividends, interest and other income, resulting from investment of these assets are distributed to the Company on a monthly basis. At December 31, 2002 and 2001 the carrying value of these trust fund investments were $1.6 million and $11.9 million, respectively.
The following table provides a reconciliation of the prior two year's ended December 31 reported net income to adjusted net income had SFAS No. 142 been applied at the beginning of fiscal 2000 (in thousands, except per share amounts):
During 2002, the Company increased the estimated loss for unreported claims incurred and related claim adjustment expenses on residual value polices issued during the years 1998 through 2001 by $30.2 million ($20.7 million net of reinsurance). As of December 31, 2001 the Company had estimated a total liability for unpaid loss and loss adjustment expenses for these policies of $14.5 million ($8.7 million net of reinsurance recoverables). The residual value policies provide coverage guaranteeing the value of a leased automobile at the lease termination which can be up to five years from lease inception. During 2002 adverse trends further deteriorated in both frequency and severity on leases expiring in 2002. As part of the Company's monitoring and evaluation process, consulting firms were engaged during the third quarter of 2002 to aid in evaluating this deterioration and the ultimate potential loss exposure under these policies. As a result of the indications and subsequent evaluation by the Company and changes in the Company's assumptions relating to future frequency and severity of losses, the estimate for unpaid loss and loss adjustment expenses was increased. The Company primarily attributes this deterioration to the following factors that led to a softening of prices in the used car market subsequent to the September 11, 2001 terrorist attacks: prolonged 0% new car financing rates and other incentives which increased new car sales and the volume of trade-ins, daily rental units being sold into the market earlier and in greater numbers than expected further adding to the over supply of used cars; and the overall uncertain economic conditions.
The Company also increased the liability for unpaid loss and loss adjustment expenses on the Commercial Automobile Excess Liability Insurance ("Excess Liability") product sold to rental car companies (Commercial Lines Underwriting Segment) primarily for the 2000 and 2001 accident years by $6.9 million ($4.9 million net of reinsurance). As of December 31, 2001 the Company had estimated a total liability for unpaid loss and loss adjustment expenses for the Excess Liability policies issued in these years of $23.0 million ($21.6 million net of reinsurance). Excess Liability provides automobile liability coverage in excess of the state mandated limits which are provided by the rental car company. During the third quarter of 2002, pursuant to a routine underwriting review focusing on price adequacy and loss experience, the Company non-renewed a significant Excess Liability customer as a result of an unacceptable underwriting risk profile (Results of Operations (2002 versus 2001)). This adverse loss development was primarily due to pricing inadequacy and the adverse loss experience of this customer. Additionally, the Company has experienced a delay in both the reporting of claims and the claim litigation discovery process as a result of this policyholder and another Excess Liability policyholder filing for Chapter 11 during the third quarter 2002 and fourth quarter 2001, respectively.
Under the Company's stock option plan, stock options may be granted for the purchase of common stock at a price not less than the fair market value on the date of grant. Options are primarily exercisable after the expiration of five years following the grant date. Under this plan, as amended, the Company has reserved 3,500,000 shares of common stock for issuance pursuant to options granted under the plan. As of December 31, 2002, 2,460,800 shares of common stock remain reserved for future issuance pursuant to options granted under this plan.
In addition to stock options granted pursuant to the Company's stock option plan, the Company's Board of Directors have granted previous awards of 2,613,492 stock options. During 2000 all such stock options were exercised.
Employee Stock Purchase Plan (the "Stock Purchase Plan"): The aggregate maximum number of shares that may be issued pursuant to the Stock Purchase Plan as amended is 1,000,000. Shares may be purchased under the Stock Purchase Plan by eligible employees during designated one-month offering periods established by the Compensation Committee of the Board of Directors at a purchase price of the lesser of 85% of the fair market value of the shares on the first business day of the offering period or the date the shares are purchased. The purchase price of shares may be paid by the employee over six years pursuant to the execution of a promissory note. The promissory note(s) are collateralized by such shares purchased under the Stock Purchase Plan and are interest free. Under the Stock Purchase Plan, the Company issued 77,730 and 103,855 shares in 2002 and 2001, respectively. The weighted-average fair value of those purchase rights granted in 2002 and 2001 was $4.47 and $3.85, respectively.
In May 2002, the Nonqualified Employee Stock Purchase Plan was approved by the Company's shareholders (the "Nonqualified Stock Plan"): The aggregate maximum number of shares that may be issued pursuant to the Nonqualified Stock Plan is 1,000,000. Shares may be purchased under the Nonqualified Stock Plan by eligible employees during designated one-month offering periods established by the Compensation Committee of the Board of Directors at a purchase price of the lesser of 85% of the fair market value of the shares on the first business day of the offering period or the date the shares are purchased. The purchase price of shares may be paid by the employee over nine years pursuant to the execution of a promissory note. The promissory note(s) are collateralized by such shares purchased under the Nonqualified Stock Plan and are interest free. Under the Nonqualified Stock Plan, the Company issued 242,444 shares in 2002. The weighted-average fair value of those purchase rights granted in 2002 was $4.47.
Directors Stock Purchase Plan ("Directors Plan"): The Directors Plan has been established for the benefit of non-employee Directors. The aggregate maximum number of shares that may be issued pursuant to the Directors Plan is 50,000. Non-employee Directors, during monthly offerings periods, may designate a portion of his or her fees to be used for the purchase of shares under the terms of the Directors Plan at a purchase price of the lesser of 85% of the fair market value of the shares on the first business day of the offering period or the date the shares are purchased. Under the Directors Plan, the Company
issued 2,237 and 1,709 shares in 2002 and 2001, respectively. The weighted-average fair value of those purchase rights granted in 2002 and 2001 was $5.63 and $4.56, respectively.
The loss and loss adjustment expense reserves ceded under such arrangements were $85.8 million and $52.6 million at December 31, 2002 and 2001, respectively. The Company evaluates the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies. The percentage of ceded reinsurance reserves (excluding reserves ceded to voluntary and mandatory pool mechanisms) that are with companies rated "A" (Excellent) or better by A.M. Best Company is 97.0% as of December 31, 2002 and 2001, respectively. Additionally, approximately 1%, 3% and 4% of the Company's net written premiums for the years ended December 31, 2002, 2001, and 2000, respectively, were assumed from an unrelated reinsurance company.
The Company sponsors an unfunded nonqualified key employee deferred compensation plan. Under the plan deferred compensation benefits are provided through deferrals of base salary and bonus compensation ("Employee Deferrals") and discretionary contributions by the Company ("Employer Contributions") for a select group of management and highly compensated employees of the Company and its subsidiaries. Each participant is permitted to specify an investment or investments from among permissible investments which shall be the basis for determining the gain or loss adjustment applicable to such participant's plan deferral account. A participant's interest in the portion of his or her plan deferral account that is attributable to Employee Deferrals are fully vested at all times. That portion of a participant's plan deferral account attributable to Employer Contributions generally will vest over the course of a five year period beginning on the last day of the first year after the plan year for which the Employer Contribution was made. The amounts in each participant's plan deferral account represent an obligation of the Company to pay the participant at some time in the future. At December 31, 2002 the Company had a $0.1 million deferred compensation obligation pursuant to this plan.
The Company is a defendant in a lawsuit to which PIIC issued insurance coverages to a policyholder for residual value protection. The complaint asks for damages and a declaratory judgment against PIIC. The complaint arises principally out
of a loss adjustment change and also relates to other coverage interpretations made by PIIC under the terms of residual value protection insurance policies issued to the plaintiff. The complaint alleges that as a result of the loss adjustment change the plaintiff may suffer damages as much as $75 million. On June 27, 2002, PIIC filed an answer to the complaint denying liability with respect to the matters set forth above. PIIC believes that this claim is without merit and is vigorously defending this action.
The Company is subject to routine legal proceedings in connection with its property and casualty insurance business. The Company also is not involved in any other pending or threatened legal or administrative proceedings which management believes can reasonably be expected to have a material adverse effect on the Company's financial condition or results of operations.
The Company currently leases office space to serve as its headquarters location and 36 field offices for its production underwriters. In addition, the Company leases certain computer equipment. Rental expense for these operating leases was $3.1 million, $2.6 million and $2.2 million for the years ended December 31, 2002, 2001, and 2000, respectively.
(1) During the three months ended June 30, 2002, a 2001 accident year aggregate stop loss reinsurance program was commuted. As a result of this commutation, net earned premiums and net income increased by $3.6 million and $2.3 million, respectively.
(2) Net Realized Investment Gain (Loss) for the three months ended June 30, 2002, September 30, 2002 and December 31, 2002 includes non-cash realized losses of $1.2 million, $0.3 million, and $2.2 million, respectively, as a result of impairment evaluations.
The Company's operations are classified into three reportable business segments which are organized around its three underwriting divisions: The Commercial Lines Underwriting Group which has underwriting responsibility for the Commercial Automobile and Commercial Property and Commercial multi-peril package insurance products; The Specialty Lines Underwriting Group which has underwriting responsibility for the professional liability insurance products; and The Personal Lines Group which designs, markets and underwrites personal property and casualty insurance products for the Manufactured Housing and Homeowners markets. Effective June 30, 2000, due to a change in market focus, the previously reported Specialty Property Underwriting Group segment was restructured resulting in the combination of this Underwriting Group with the Commercial Lines Underwriting Group. Accordingly, prior information has been reclassified to reflect this change. Each business segment's responsibilities include: pricing, managing the risk selection process, and monitoring the loss ratios by product and insured. The reportable segments operate solely within the United States and have not been aggregated.
The segments follow the same accounting policies used for the Company's consolidated financial statements as described in the summary of significant accounting policies. Management evaluates a segment's performance based upon premium production and the associated loss experience which includes paid losses, an amount determined on the basis of claim adjusters' evaluation with respect to insured events that have occurred and an amount for losses incurred that have not been reported. Investments and investment performance including investment income and net realized investment gain (loss); acquisition costs and other underwriting expenses including commissions, premium taxes and other acquisition costs; and other operating expenses are managed at a corporate level by the corporate accounting function in conjunction with other corporate departments and are included in "Corporate".