Total revenues increased by $34.8 million to $608.1 million in 2004, as compared with 2003. Net premiums earned increased by $27.7 million to $492.3 million, an increase of 6.0 percent. In 2004, we recorded other-than-temporary investment impairments of $.3 million, compared with $6.4 million in 2003. Refer to the section titled “Critical Accounting Policies” for discussion of our investment impairment policy.
To reduce our exposure to large losses and to catastrophic losses, we cede a portion of our business to other insurance companies. In 2004, we recorded ceded premiums written of $28.2 million compared with $31.4 million in 2003. To reduce the cost of reinsurance, we increased our retention levels in both 2003 and 2004. For our property and casualty lines of business, our retention for 2004 was $2.0 million, which means that we had reinsurance for any single claim over $2.0 million. Our loss retention was $1.5 million for losses that occurred in 2003, $1.3 million for losses that occurred in 2002, $1.0 million for losses that occurred in years 1995 through 2001 and $.8 million or less for losses that occurred in years prior to 1995. In addition, we reinsure personal and commercial umbrella policy losses in excess of $1.0 million up to $5.0 million, and we reinsure surety policy losses in excess of $1.25 million up to $5.0 million, 90 percent of losses from $5.0 million up to $15.0 million and 80 percent of losses from $15.0 million up to $20.0 million. We also have reinsurance that limits the total direct loss we may incur from a single catastrophe. The catastrophe reinsurance program provides coverage of 95 percent of $95.0 million for losses in excess of our retention of $10.0 million for a catastrophic event. Our catastrophe retention was $7.5 million in 2002 and 2003 and $5.0 million from 1993 through 2001. Our reinsurance contracts limit or exclude coverage for losses sustained as a result of terrorist activities.
To reduce our exposure to large losses and to catastrophic losses, we cede a portion of our business to other insurance companies. In 2003, we recorded ceded premiums written of $31.4 million compared with $35.2 million in 2002. To reduce the cost of reinsurance, we increased our retention levels in both 2002 and 2003. For our property and casualty lines of business, our retention for 2003 was $1.5 million, which means that we had reinsurance for any single claim over $1.5 million. Our loss retention was $1.3 million for losses that occurred in 2002, $1.0 million for losses that occurred in years 1995 through 2001 and $.8 million for losses that occurred in years prior to 1995. Our catastrophe retention level was $7.5 million. This means that the total direct loss that we could incur from a single catastrophe, after reinsurance was $7.5 million, plus five percent of losses in excess of $7.5 million. From 1993 to 2001, our catastrophe retention was $5.0 million.
In 2003, we recorded $17.6 million in catastrophe losses, compared with $18.0 million in 2002. The most significant catastrophes in 2003 included a hailstorm in Texas resulting in losses of $3.6 million, and a series of severe storms that struck the Midwest and South resulting in losses of $7.5 million.
At December 31, 2004 we have no off balance sheet arrangements. Our only long-term commitment relates to the operating leases we currently have in effect. Refer to Note 16 of the Notes to Consolidated Financial Statements for further discussion of our lease obligations.
We establish an asset for deferred policy acquisition costs such as commissions, premium taxes and other variable costs incurred in connection with writing our property and casualty lines of business. The asset is amortized over the life of the policies written. We assess the recoverability of deferred policy acquisition costs on a quarterly basis. We do not consider anticipated investment income in determining the recoverability of these costs. The loss and loss adjustment expense ratio we use to estimate the recoverability of costs is based primarily on the assumption that the future loss and loss adjustment expense ratio will approximate that of the recent past. Actual results could differ materially from our estimates, requiring adjustments to the recorded deferred policy acquisition cost asset. Such adjustments are recorded through income in the period the adjustments are identified. As of December 31, 2004, we have $47.3 million in deferred policy acquisition costs, compared with $45.0 million at December 31, 2003. The increase between years was due to growth in variable operating expenses related to the underwriting of our property and casualty insurance policies.
Establishing reserves that are appropriate and reasonable, but assume a pessimistic view of potential outcomes;
Though insurance companies are subject to state regulation, some federal legislation and policies do affect the insurance industry. From time to time, federal regulation is discussed as an addition, or as an alternative, to state regulation. A recently enacted federal law, the Terrorism Risk Insurance Act of 2002, impacts the insurance industry with its provision of a “back-stop” to property and casualty insurers in the event of future terrorist acts perpetrated by foreign agents or interests. The law limits the industry’s aggregate liability by requiring the federal government to share 90 percent of certified losses once a company meets a specific retention or deductible as determined by its prior year’s direct written premiums and limits the aggregate liability to be paid by the government and industry, without further action by Congress, to $100 billion. In exchange for this “back-stop,” primary insurers are required to make coverage available to commercial insureds for losses from acts of non-domestic terrorism as specified in this Act. We are complying with the requirements of this Act in order to ensure our ability to be reimbursed by the federal government for any losses we may incur as a result of future terrorist acts.
The change in the effect on deferred policy acquisition costs that results from assumed realization of unrealized gains (losses) is recognized with an offset to unrealized investment appreciation (depreciation) as of the balance sheet dates. As of December 31, 2004, a pre-tax adjustment to increase deferred policy acquisition costs by $5,229,000 was made with a corresponding increase to unrealized investment appreciation (depreciation). In 2003 and 2002, the adjustment decreased deferred policy acquisition costs by $16,639,000 and $31,067,000 respectively.
Our intangibles are comprised entirely of agency relationships, which are being amortized by the straight-line method over periods of up to 10 years. We regularly review the carrying value of our intangibles for impairment in the recoverability of the underlying asset. Any impairment is charged to operations in the period that the impairment was recognized. We did not recognize an impairment write-down to the carrying value of our intangibles in 2004, 2003 or 2002.
The amortized cost and fair value of held-to-maturity, available-for-sale and trading fixed maturities at December 31, 2004, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Our investment portfolio includes trading securities with embedded derivatives. These securities, which are primarily convertible redeemable preferred debt securities, are recorded at fair value. Income or loss, including the change in the fair value of these trading securities, is recognized currently in earnings as a component of realized investment gains (losses). Our portfolio of trading securities had a fair value of $10,518,000 at December 31, 2004, compared with $8,099,000 at December 31, 2003.
As of December 31, 2004, our life insurance segment has purchased reinsurance to limit the dollar amount of any one risk of loss. On standard individual life cases where the insured is age 65 or less, our retention is $200,000. On standard individual life cases where the insured is age 66 or older, our retention is $80,000. Our accidental death benefit rider on an individual policy is reinsured at 100 percent up to a maximum benefit of $250,000. Our group coverage, both life and accidental death and dismemberment, is reinsured at 50 percent. Catastrophe excess coverage applies when three or more insureds die in a “catastrophic accident.” For catastrophe excess claims, we retain the first $1,000,000 of ultimate net loss, and the reinsurer agrees to indemnify us for the excess up to a maximum of $5,000,000. We supplement this coverage when appropriate with “known concentration” coverage. Known concentration coverage is typically tied to a specific event and time period, with a threshold of a minimum number of lives involved in the event, minimum event deductible (company’s retention) and a maximum payout.
Note 8. Statutory Reporting, Capital Requirements and Dividend and Retained Earnings Restrictions
The annual per capita contributions for the benefits provided to retired American Indemnity Financial Corporation employees are capped. As a result, increases in the assumed health care cost trend rate will have no significant effect on the accumulated postretirement benefit obligation or on the net periodic postretirement benefit cost related to these employees as of December 31, 2004.
The following table summarizes information regarding the stock options outstanding and exercisable at December 31, 2004.
(2) Recorded primarily in connection with the purchase of American Indemnity Financial Corporation.