(2) Gross written premiums are the amount received or to be received for insurance policies written by the Company without reduction for acquisition costs, reinsurance costs and other deductions.
Net investment income increased 13.1% to $13.3 million for 2003 compared with $11.8 million for 2002, due primarily to growth in average invested assets, partially offset by a decrease in the average yield on fixed-maturity investments.
primarily attributable to rate increases implemented in 2002 and 2003, partially offset by $5.5 million in losses and loss adjustment expenses attributable to insured events of prior years and an increase in catastrophe-related losses, which were $3.1 million in 2003 and $1.4 million in 2002. This increase in catastrophe-related losses was due primarily to claims the Company received on a series of severe storms in the Midwestern states which occurred in the second quarter of 2003 and claims the Company received related to Hurricane Isabel which occurred in the third quarter of 2003. For more information regarding the $5.5 million in losses and loss adjustment expenses attributable to insured events of prior years, see the section entitled “Critical Accounting Estimates” of this discussion and analysis beginning on page 28.
The table below illustrates the sensitivity to a hypothetical change in the Company’s net loss and loss adjustment expense reserves as of December 31, 2003. The selected scenarios are not predictions of future events, but rather illustrative of the effect that such events may have on stockholders’ equity.
the case of an air carrier or a vessel) and that is committed by an individual or individuals acting on behalf of a foreign person or foreign interest, as part of an effort to coerce the civilian population of the United States or to influence the policy or affect the conduct of the United States Government by coercion (“certified act(s) of terrorism”).
Facultative. The Company may write individual policies with limits of liability greater than the aforementioned Company policy limits. These limits of liability are 100% reinsured on a facultative reinsurance basis.
The Company continually evaluates its short and long-term liquidity. The Company has generated positive cash flows from operations and acquired capital resources to support its liquidity. The Company believes that cash flows from operations and strategy of matching its investment maturities with liability durations will continue to support its short-term and long-term liquidity.
Inflation can have a significant impact on property and casualty insurers because premium rates are established before the amounts of losses and loss adjustment expenses are known. The Company attempts to anticipate increases from inflation in establishing rates, subject to limitations imposed for competitive pricing. The Company also considers inflation when estimating liabilities for losses and loss adjustment expenses, particularly for claims having a long period between occurrence and settlement. The liabilities for losses and loss adjustment expenses are management’s best estimates of the ultimate net cost of underlying claims and expenses and are not discounted for the time value of money. In times of high inflation, the normally higher yields on investments may be offset partially by higher claims and expenses.
Losses and Loss Adjustment Expenses. The liability for losses and loss adjustment expenses represents the Company’s best estimate of the ultimate amounts needed to pay both reported and unreported claims. These estimates are based on certain actuarial and other assumptions. The Company continually reviews these estimates and, based on new developments and information, the Company includes adjustments of the probable ultimate liability in the operating results for the periods in which the adjustments are made.
behalf of the Company have been allocated to the Company and are reflected in the financial statements. Management believes that the methods used to allocate such costs are reasonable and that the Company’s expenses on a stand-alone basis would not be materially different.
The Company invests primarily in investment-grade fixed maturities, substantially all of which are rated “A” or higher by Standard & Poor’s. The cost, gross unrealized gains and losses and fair values of investments are as follows:
In the normal course of business, the Company seeks to reduce the losses that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risks in various areas of exposure with other insurance enterprises, or reinsurers. Reinsurance contracts do not relieve the Company of its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. Allowances have been established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. At December 31, 2003, the total of reinsurance recoverable and prepaid reinsurance premiums associated with two major reinsurers, General Reinsurance Corporation and American Reinsurance Corporation, were $17,632,000 and $32,952,000, respectively.
adjustment expense was attributable to insured events of prior years related to the Company’s exited automobile lines of business. In 2003, the Company experienced an unanticipated increase in paid allocated loss adjustment expenses on its remaining open commercial automobile liability claims. Consequently, combined with the unanticipated activity in 2003 and review of open claims, the Company increased its estimates for loss and loss adjustment expense reserves.
The Company previously disclosed in its third quarter 2003 report on Form 10-Q that the Eighteenth Circuit Court in the State of Michigan entered a judgment of $4,900,000 against one of the Company’s insureds, which judgment the Company had appealed. In February 2004, the Company settled this claim for $2,975,000. The Company’s reinsurance program provided coverage for $2,725,000 of this total settlement. The Company’s liability, net of reinsurance, was $250,000 and was included in its estimate for unpaid loss and loss adjustment expense reserves at December 31, 2003.