Pre-tax net investment income for the year ended December 31, 2013 was $35.5 million compared to $37.6 million for 2012. The decrease in pre-tax net investment income is a result of low investment yields on new money.
Our book value per share increased 1.0% from $56.55 at December 31, 2012 to $57.09 at December 31, 2013. This increase was primarily due to net earnings partially offset by a decline in unrealized gains as a result of an increase in interest rates and shareholder dividends during 2013.
The preparation of financial statements requires management to make estimates and assumptions that can have a significant effect on amounts reported in the financial statements. As more information becomes known, these estimates and assumptions could change and thus impact amounts reported in the future. We believe that the establishment of insurance reserves, the determination of “other-than-temporary” impairment on investments, accruals for litigation and goodwill are the areas where the degree of judgment required to determine amounts recorded in the financial statements makes the accounting policies critical.
We performed this test as of October 1, 2013 using a variety of methods, including estimates of future discounted cash flows and comparisons of our market value to that of our major competitors. Our cash flow projections rely on assumptions that are subject to uncertainty, including premium growth, loss and LAE ratios, interest rates and capital requirements.
We are a holding company and our insurance subsidiaries conduct our operations. Accordingly, we will have continuing cash needs for administrative expenses, the payment of interest on borrowings, shareholder dividends, share repurchases and taxes.
In February 2014, we increased our quarterly dividend to $0.36 per share from $0.30 per share. At this current amount, our 2014 annualized dividend payments will be approximately $16.6 million.
Our consolidated investment portfolio at December 31, 2013 contained $1.4 billion in fixed maturity securities, $91.1 million in equity securities and $2.6 million of short-term investments, all carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income, a separate component of shareholders' equity on an after-tax basis. At December 31, 2013, we had pre-tax net unrealized gains of $9.2 million on fixed maturities and pre-tax net unrealized gains of $16.4 million on equity securities. Combined, the pre-tax net unrealized gain declined by $21.3 million for the twelve months ended December 31, 2013 as a result of increases in market interest rates during 2013.
Approximately 90.6% of our fixed maturity portfolio at December 31, 2013 was rated “investment grade” (credit rating of AAA to BBB) by nationally recognized rating agencies. The average credit rating of our fixed maturity portfolio was AA- at December 31, 2013. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated or non-investment grade. We believe that a high quality investment portfolio is more likely to generate stable and predictable investment returns.
Of the $323.3 million of residential mortgage-backed securities, $239.8 million were issued by government-sponsored enterprises (“GSE”).
The following table presents the credit rating and fair value of our commercial mortgage-backed securities at December 31, 2013 by deal origination year (in thousands):
None of the $35.8 million of commercial mortgage-backed securities were issued by GSEs.
The following table presents the credit rating and fair value of our collateralized mortgage obligation portfolio at December 31, 2013 by deal origination year (in thousands):
None of the $1.3 million of collateralized mortgage obligations were issued by GSEs.
The following table presents the fair value of the revenue category of our state and municipal bond portfolio, by state and further classification, at December 31, 2013 (in thousands):
Equity price risk is the potential economic loss from adverse changes in equity security prices. Our exposure to equity price risk is limited, as our equity investments comprise only 6.3% of our total investment portfolio. At December 31, 2013, the fair value of our equity portfolio was $91.1 million.
Our Commercial Vehicle gross written premium grew 11.3% during the twelve months ended December 31, 2013. This growth is primarily due to higher average premium and renewal business growth for this product.
Gross written premium in our Classic Collector product grew 7.5% during 2013. This growth is primarily due to growth in renewal business.
During 2012, personal auto insurance gross written premium in our Focus States grew 16.4% when compared with 2011. The increase in gross written premium was primarily due to growth in California and Florida.
California gross written premium grew 7.4% during the twelve months ended December 31, 2012. Rate actions taken by competitors and an increase in business retention stimulated premium growth in the state.
The statutory combined ratio for the twelve months ended December 31, 2013 decreased by 2.2 points from the same period of 2012. The twelve months ended December 31, 2013 included $2.9 million of unfavorable development on prior year loss and LAE reserves compared to $16.2 million of unfavorable development on prior year loss and LAE reserves in 2012. Excluding the effect of development from both periods, the statutory combined ratio decreased by 1.1 points for the twelve months ended December 31, 2013 compared to 2012.
Excluding the effect of development, the GAAP combined ratio was 97.7% for the twelve months ended December 31, 2013. As we did in 2013, we will continue to raise rates and tighten underwriting standards in under performing states such as Arizona, Georgia and Pennsylvania. We will also continue to grow our profitable business in California and Florida personal auto as well as our Commercial Vehicle product. We expect these actions to result in a lower combined ratio. Accordingly, we expect the GAAP combined ratio, excluding reserve development, to be between 95.5% and 96.5% for 2014.
Losses from catastrophes were $1.8 million for the twelve months ended December 31, 2013 compared to $4.0 million for 2012.
The combined ratio in the Focus States decreased by 2.4 points for the twelve months ended December 31, 2013. The decline was primarily due to improvement in the loss and LAE ratio in all states except California coupled with an overall decline in the underwriting ratio in the Focus States. As we experience premium growth in these states, the ratio of fixed underwriting costs to premium has declined. Also, the average commission ratios declined due to a shift in business mix from new to renewal business. We typically pay lower commission rates on renewal business than on new business.
The statutory combined ratio for the twelve months ended December 31, 2012 increased by 2.5 points from the same period of
2011. The twelve months ended December 31, 2012 included $16.2 million of unfavorable development on prior year loss and
LAE reserves compared to $4.5 million of unfavorable development on prior year loss and LAE reserves in 2011. Excluding
December 31, 2012 compared to 2011. The increase was primarily due to an increase in the current accident year loss and LAE
Excluding the effect of development from both periods, the GAAP combined ratio increased by 1.7 points for the twelve
Losses from catastrophes were $4.0 million for the twelve months ended December 31, 2012 compared to $4.4 million for
The combined ratio in the Focus States increased by 2.7 points for the twelve months ended December 31, 2012. An increase in
partially offset by a decline in the underwriting ratio of 2.1 points. As we experienced premium growth in these states, the ratio
The combined ratio in the Other States decreased by 8.5 points for the twelve months ended December 31, 2012,
The combined ratio for the Commercial Vehicle product increased by 0.2 points during the twelve months ended December 31,
Annualized returns declined due to new money rates that were lower than the book yields of maturing securities. Additionally, new money from operating cash flows was invested at these lower new money rates.
Net investment income for the year ended December 31, 2012 decreased compared to 2011 primarily due to a decline in book yields because of a general decline in market interest rates for high quality bonds.
The increase in the total realized gain in 2012 was primarily a result of securities sold in the fourth quarter of 2012. To improve diversification, we sold our investment in a Vanguard U.S. broad based exchange-traded fund for a pretax gain of $13.8 million and reinvested in a global exchange-traded fund.
In the future we intend to sell or dissolve other inactive shell companies. The primary reason for the sale of the companies is to reduce the administrative costs associated with maintaining licenses that are no longer needed to support our insurance operations.
106.729%, or $208.1 million, plus accrued interest of $1.8 million. As a result, we recognized a pre-tax loss on redemption as follows (in thousands):
Other expenses for the twelve months ended December 31, 2013 increased $0.5 million, primarily due to a $0.3 million increase in corporate litigation expense made up of items of a non-recurring nature.
The following table reconciles our U.S. statutory rate and effective tax rate for the periods ended December 31, 2013, 2012 and 2011:
In 2008, as a result of the significant fall in the stock market, the fair value of both our exchange-traded fund (“ETF”) and fixed
impairment (“OTTI”) and thereby incurred a GAAP pre-tax loss. This loss created a basis difference that generated
a significant deferred tax asset. Given the market conditions at the time, and the fact that we were in a capital loss carryforward
position, we did not believe that it was more-likely-than-not that this deferred tax asset would be recognized. Therefore, a full
valuation allowance was established for this deferred tax asset. This was consistent with the full valuation allowance that had
carryforward was fully utilized. The valuation allowance on the OTTI deferred tax asset was released as the securities were sold.
In the fourth quarter of 2012, the ETF was sold as part of our plan to seek better diversification in our equity portfolio, resulting
in a release of the valuation allowance related to the ETF. Due to the market recovery, the tax loss was fully recognized. Based
on the remaining OTTI balance as of December 31, 2012, and our carryback potential, it was management's belief that it was more likely-than-not that we would be able to fully utilize the tax deductions related to OTTI that would be recognized in the future. Therefore, the balance in the valuation allowance was released in the fourth quarter of 2012.
Consolidated Statements of Earnings: Years ended December 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows: Years ended December 31, 2013, 2012 and 2011