Finance contracts receivable increased $2.7 million or 37.0% from $7.2 million as of December 31, 2002 to $9.9 million as of December 31, 2003. The increase of the finance contracts receivable is the result of insureds financing the commercial general liability policies offered by American Vehicle and an increase in outstanding finance contracts for policies with a twelve month term coupled with a renewed interest in financing a specific non-affiliated insurance company.
Reinsurance recoverable increased $3.7 million or 48.2% to $11.6 million as of December 31, 2003 from $7.9 million as of December 31, 2002. This increase is the result of the increase in loss and loss adjustment expenses incurred and, to a lesser extent, the timing of settlements with our reinsurer. All amounts are considered current.
Unpaid losses and loss adjustment expenses increased $7.6 million or 44.7% to $24.6 million as of December 31, 2003 as compared to $17.0 million as of December 31, 2002. The increase is associated with an increase in frequency and severity of claims activity associated with our automobile business. Federated National's reserves increased by $2.7 million in 2003 as compared to 2002 and represents 33.6% of the total reserve increase and American Vehicle's reserves increased by $4.9 million in 2003 as compared to 2002 and represents 59.6% of the total reserve increase. Factors that affect unpaid losses and loss adjustment expenses include the estimates made on a claim-by-claim basis known as case reserves coupled with bulk estimates known as "incurred but not reported" (IBNR). Periodic estimates by management of the ultimate costs required to settle all claim files are based on the Company's analysis of historical data and estimations of the impact of numerous factors such as (i) per claim information; (ii) company and industry historical loss experience; (iii) legislative enactments, judicial decisions, legal developments in the awarding of damages, and changes in political attitudes; and (iv) trends in general economic conditions, including the effects of inflation. Management revises its estimates based on the results of its analysis. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for estimating the ultimate settlement of all claims. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of the reserves, because the eventual redundancy or deficiency is affected by multiple factors. For further discussion see Loss and Loss Adjustment Expenses.
Gross premiums written increased $10.0 million, or 15.8%, to $73.0 million for the year ended December 31, 2003, as compared to $63.0 million for the comparable period in 2002. The following table denotes gross premiums written by major product line.
Prepaid reinsurance premiums decreased $9.1 million or 160.2%, to ($3.4) million as of December 31, 2003, from $5.7 million for the year ended December 31, 2002. The decrease is due primarily to American Vehicle's decreased reliance on quota-share reinsurance on its automobile insurance products.
To retain a certificate of authority, the Florida insurance laws and regulations require that Federated National and American Vehicle maintain capital surplus equal to the greater of 10% of liabilities or the 2003 statutory minimum capital and surplus requirement of $3.60 million as defined in the Florida Insurance Code. The companies are in compliance with this requirement. The companies are also required to adhere to prescribed net premium-to-capital surplus ratios and, for the year ended December 31, 2003, the companies were in compliance with these ratios.
The estimates of unpaid losses and loss adjustment expenses are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of the process, we review historical data and consider various factors, including known and anticipated legal developments, changes in social attitudes, inflation and economic conditions. As experience develops and other data becomes available, these estimates are revised, as required, resulting in increases or decreases to the existing unpaid losses and loss adjustment expenses. Adjustments are reflected in results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates.
The fair value of our investments is estimated based on prices published by financial services or quotations received from securities dealers and is reflective of the interest rate environment that existed as of the close of business on December 31, 2003 and 2002. Changes in interest rates subsequent to December 31, 2003 may affect the fair value of our investments. Refer to Note 3(a) for details.
A summary of realized investment gains (losses) and (increases) decreases in net unrealized losses follows:
To retain our certificate of authority, the Florida Insurance Code (the "Code") requires Federated National and American Vehicle to maintain capital and surplus equal to the greater of 10 percent of their liabilities or a statutory minimum capital and surplus as defined in the Code. In 2003, 2002 and 2001, Federated National and American Vehicle were required to have capital surplus of $3.6 million, $3.25 million and $3.0 million, each, respectively. At December 31, 2003, 2002 and 2001, Federated National's statutory capital surplus was $16.7 million, $9.2 million and $5.7 million, respectively. At December 31, 2003, 2002 and 2001, American Vehicle had statutory capital surplus of $10.7 million, $4.0 million and $3.1 million, respectively. Further, the companies were also required to adhere to a prescribed net premium-to-surplus ratio. For the year ended December 31, 2003, both companies were in compliance with this requirement.