Risks related to the pricing and underwriting of our products, and the subsequent establishment of reserves, such as:
Interpretation of insurance policy provisions by courts or tax authorities, court decisions regarding coverage and theories of liability, trends in litigation and changes in claims settlement practices
Damage to our infrastructure or harm to our workforce resulting in a disruption of our operations
We are a property and casualty (P&C) insurance company with headquarters in Seattle, Washington. We sell insurance to drivers, home owners and small- and medium-sized businesses through a national network of distributors. Our business helps people protect what they value and deal with the unexpected. We earn revenue from insurance policy premiums and income on our invested assets.
Underwriting profit or loss is our net earned premiums less our losses from claims, loss adjustment expenses (LAE) and underwriting expenses.
We include insurance premiums in revenue as they are earned over the terms of the respective policies.
Bornhuetter/Ferguson - blends the expected loss ratio method with either the paid or incurred loss development method. Both methods are used with weights applied to each of them based on the maturity of the accident year. As an example, if the current accident year for personal automobile bodily injury is estimated to be 10% paid, then the paid loss development method would receive a weight of 10%, and the expected loss ratio method would receive 90% weight.
Our Property and Specialty lines are predominantly short-tailed business, and most claims are reported and settled within 12 months. We use standard actuarial techniques combined with management judgment to estimate reserves for those lines.
$205.0 during the third quarter as a result of higher medical cost trends for workers compensation than previously expected.
In 2002, we increased our estimates for prior years’ loss and LAE reserves by $125.8. We made increases throughout the year as part of our quarterly evaluations, based on emerging claim trends and related loss data.
Earned premiums: Our earned premiums grew 12.8% in 2004 compared with 2003, and 8.4% in 2003 compared with 2002. These increases reflect growth in policies-in-force as well as price increases primarily in our Auto, SBI Regular and Surety businesses. Starting in 2002, we introduced segmented underwriting models in Auto, Property and SBI Regular, which provide more precise matching of rates to risk characteristics. This has enabled us to expand the business we write and we are able to provide price quotes for 95% of the insurance applications in our distributors’ offices. In addition, our Web-based Safeco Now sales-and-service platform, introduced in 2003 and 2004, allows distributors to quote and issue policies quickly and easily.
Premium trend: Premiums also are impacted by the increases in those policies that insure newer and more expensive cars, or premium trend. Personal auto premium trend increased net earned premiums approximately $58 in 2004 compared with 2003, and $48 in 2003 compared with 2002.
Our SBI Regular segment provides insurance for small- to medium-sized businesses (those with annual written premiums of $200,000 or less). This is our core commercial lines business featuring these main products:
Our after-tax yields decreased in 2004 compared with 2003 due to our shift to shorter-term taxable bonds and the impact of declining interest rates. In addition, we shifted our asset allocation mix to reduce the amount of equity securities we hold to a target of approximately 10% of the P&C investment portfolio. Our after-tax yields decreased in 2003 compared with 2002 as a result of our investment portfolio repositioning in 2002 to reduce exposure to interest rate risk and stock market volatility. In doing this, we reduced the average duration of the bonds we hold, primarily by shifting from long-term tax-exempt bonds to shorter-term taxable bonds.
Pretax investment impairments for 2004, 2003 and 2002 by portfolio were: