For information regarding the Company's future minimum property lease commitments see note 11 of the notes to consolidated financial statements.
The following discussion addresses the principal factors affecting the operations of the Company.
The Company's premiums by segment for the years ended December 31, 2001 and 2000, and the combined ratio are set out in the following table:
Gross written premiums increased by 9.2% to $770.0 million in 2001 from $705.4 million in 2000. This increase arose mainly at the Lloyd's Market where gross premiums increased to $540.2 million in 2001 from $397.7 million, primarily due to increases in the Company's participation in its syndicates to 100% and the re-estimation of prior years' estimated written premiums. In addition, from late 2001, gross premiums increased due to higher prices and submissions in the professional indemnity, war and aviation programs.
The increase at the Lloyd's Market was partially offset by decreases at both the London Company Market and the Other discontinued programs. The decrease in gross written premiums at the London Company Market to $175.7 million in 2001 from $180.7 million in 2000 was predominantly the result of Terra Nova reducing its writings due to the non-renewal of unprofitable business. In line with the Company's philosophy to focus on underwriting profitability, writings on the casualty account (professional indemnity business) and marine account have also reduced in 2001, compared to 2000.
The Terra Nova downgrades by Best and S&P are expected to have a negative impact on Terra Nova's ability to retain business. The Company will attempt to retain business by moving premium writings to its Lloyd's operations or through the use of other affiliated companies in the Markel group.
Net written premiums decreased 10.7% to $486.4 million in 2001 from $544.9 million in 2000. This decrease was primarily due to additional quota share reinsurance in 2001 with certain insurance subsidiaries of Markel, as detailed in note 12 of the notes to consolidated financial statements. The Company ceded premiums of $71.3 million to these subsidiaries in 2001. In addition, the lower retention rate in 2001 was due to the net reinstatement premiums payable on World Trade Center losses. Net earned premiums decreased to $539.9 million in 2001 from $603.5 million in 2000, in line with the decrease in net written premiums.
As a consequence of the above the Company's combined ratio increased to 147.4% in 2001 compared to 133.8% in 2000. Excluding provisions (see table below) established during 2001 the continuing programs combined ratio would have been 111.2% for 2001. The Company's expense reductions have not kept pace with planned premium reductions. Expense reduction initiatives include the consolidation of the four syndicates at Lloyd's into one syndicate for 2002 and planned reduction of brokerage commissions. In addition, the Company has reduced its maximum insurance limits which should reduce future reinsurance costs and collection risks. While management believes that expense reductions are attainable, failure to do so would continue to have an adverse impact on the Company's results of operations.
The table below provides an analysis of the $177.0 million of WTC losses, prior year reserve strengthening and expense charges in 2001.
The Company also increased the allowance for reinsurance collection issues by $30.0 million in 2001. This provision included anticipated bad debts resulting from the asbestos reserve strengthening discussed above and provided for strengthened reserves for financially weak reinsurers and collection disputes with reinsurers. Approximately $5.0 million of the provision related to continuing lines in the Lloyd's Market segment and the remaining $25.0 million related to discontinued lines. The Company has begun to implement policies to reduce reliance on reinsurance in the future. Deterioration in the credit quality of existing reinsurers or disputes over the terms of reinsurance could result in additional charges, which could have an adverse impact on the Company's results of operations and financial condition.
The Company also strengthened reserves in 2001 by $39.0 million for its discontinued worldwide motor program. The Company discontinued the worldwide motor book of business shortly after the acquisition by Markel due to the program's poor administrative controls, including delegation of underwriting and claims authority to brokers around the world, and inadequate pricing. Late in 2001, the Company obtained additional information from brokers and performed broker audits in order to reassess its potential exposure. Upon completion of this review, the Company determined that reserve strengthening was required.
The Company had a pre-tax loss of $180.2 million in 2001 compared to pre-tax loss of $144.7 million in 2000, and was primarily a result of the $256.2 million underwriting loss being partially offset by $76.1 million and $16.6 million of investment income and realized investment gains, respectively. The post-tax loss was $121.2 million in 2001 compared to a post-tax loss of $132.3 million in 2000.
Liquidity pertains to a company's ability to meet the demand for cash requirements of its business operations and financial obligations. The Company's primary source of short-term liquidity is its portfolio of marketable securities. In addition, the Company relies on financing provided by its parent company to meet liquidity needs.
The Company believes that these sources are sufficient to meet its liquidity needs in the foreseeable future.