There are distinct differences in the timing of written premiums in traditional transportation insurance and our alternative risk transfer (captive) insurance components. We write traditional transportation insurance policies throughout all 12 months of the year and commence new annual policies at the expiration of the old policy. Under the captive programs, all members of the group share a common expiration date. These common expiration dates are scheduled during the first half of the calendar year. Any new captive program participant written during the last half of the calendar year will be written for less than a full annual term so its next renewal date coincides with the common expiration date of the group captive program it has joined. The alternative risk transfer component of our business remained constant at 32.0% of total gross premium written during 2004 as compared to 32.6% in 2003. This includes recognition of National Interstate’s traditional transportation policyholders that elected to convert to a group captive program in 2004. Our traditional transportation insurance premiums have decreased 1.6% in 2004 as compared to 2003, reflecting the conversion of traditional transportation policyholders to the group captive program.
cumulative unfavorable impact that this 1.0% change would have on our 2004 net earnings is shown below (in thousands):
Within each line, Great American Insurance Company actuaries review the results of individual tests, supplementary statistical information and input from management to select their point estimate of the ultimate liability. This estimate may be one test, a weighted average of several tests, or a judgmental selection as the actuaries determine is appropriate. The actuarial review is performed each quarter as a test of the reasonableness of management’s point estimate and to provide management with a consulting opinion regarding the advisability of modifying its reserve setting assumptions for future periods. The Great American Insurance Company actuaries do not develop ranges of losses.
The loss and LAE ratio for the 2004 increased 4.2 points to 58.6% compared to 54.4% in 2003. The variance reflects less favorable development in 2004 compared to 2003 of losses that occurred in prior years, the adverse impact of four hurricanes that occurred in the third quarter of 2004 and unusually low frequency and severity of incurred losses experienced in 2003. Favorable development of $2.3 million in 2004 on net reserves of $86.7 million compared to $3.7 million for 2003 on net reserves of $67.2 million resulted in a reduction of 1.4 points of the variance. The favorable development for both years was primarily the result of settlements below the established case reserves or revisions to our estimated settlements on an individual case by case basis, and primarily related to the preceding two years. The revisions to our case reserves reflect new information gained by our claims adjusters in the normal course of adjusting claims and then reflected in the financial statements when the information becomes available. It is typical for our larger commercial auto liability claims to take several years to settle and we continually revise our estimates as more information about the losses and related bodily injuries becomes known and the claims get closer to being settled. We did not make any significant revisions to our reserving methodology or assumptions in 2003 or 2004. The 2004 results reflect $2.4 million from hurricane losses that contributed 1.5 points of the variance. None of the
The loss and LAE ratio for 2003 decreased 8.6 points to 54.4% compared to 63.0% for 2002. The variance reflects favorable development in 2003 of losses that occurred in prior years and unusually low frequency and severity of incurred losses experienced in 2003. Favorable development of $3.7 million in 2003 on net reserves of $67.2 million caused 2.9 points of the variance. The favorable development was primarily the result of settlements below the established case reserves or revisions to our estimated settlements on an individual case by case basis, and primarily related to the preceding two years. The unusually low frequency and severity of incurred losses in 2003 coupled with the adverse residual impact in 2002 of high losses from the start up of our truck product in 2001 was the primary reason for the remaining 5.7 point variance. We believe that the low frequency and severity of losses in 2003 was more favorable than is typical, but not outside expected parameters. Because we write primarily twelve month policy terms in our truck product, inadequate pricing and risk selection during the product’s introduction in 2001 had a residual adverse impact on 2002 results. We took corrective actions in the product structure and the management structure of the truck product during the fourth quarter of 2001 and underwriting results subsequently improved.
2003 compared to 2002. Net realized gains were $1.5 million in 2003 compared to losses of $0.4 million in 2002. The net gains in 2003 were due primarily to sales of fixed income securities. The net losses in 2002 included provisions for other-than-temporary impairments of $0.4 million that were not present in 2003.
2004 compared to 2003. Interest expense for 2004 increased to $1.6 million compared to $1.0 million in 2003 reflecting the issuance of the $15.5 million junior subordinated debt in May 2003 and a $15.0 million note payable to affiliate in June 2004.
Our $15.0 million promissory note payable to Great American, our majority shareholder, executed in June 2004 and due June 2009 is not included in the above table. We used a portion of the net proceeds from the initial public offering to repay this note in full. We had no material contractual purchase obligations or other long-term liabilities at December 31, 2004.
The promissory note from officer and all accrued interest was paid off on September 14, 2004. The note paid interest quarterly computed at 0.75% below the prime rate of a major lending institution. National Interstate Corporation common shares with a book value in excess of the face amount of the note were held as collateral.