(2) Loss ratio measures net losses incurred as a percentage of net premiums earned.
(6) Statutory policyholders' surplus is equal to an insurance company's admitted assets minus liabilities.
- --------------- (a) Accident year 2005 as of December 31, 2005 measures insured events for the twelve months of 2005. Accident year 2004 as of December 31, 2005 measures insured events for the twelve months of 2004 with remaining related liabilities estimated as of December 31, 2005. Accident year 2003 as of December 31, 2005 measures insured events for the twelve months of 2003 with remaining related liabilities estimated as of December 31, 2005. Accident periods may not be comparable due to seasonality, claim reporting and development patterns, claim settlement rates and other factors.
The 2005 commercial umbrella combined ratio was 101.9% compared to 103.2% and 85.5% in 2004 and 2003, respectively. The 2005 combined ratio included 12.4 points of favorable development on prior year loss and LAE reserves compared to 4.9 points and 12.7 points in 2004 and 2003, respectively. Also impacting the comparison of 2005 to 2004 is the $6.1 reinstatement accrual in 2004, which reduced net premium written and earned, putting upward pressure on the combined and component ratios in 2004.
There is a great deal of uncertainty in the loss reserve estimates and unforeseen events can have unfavorable impacts on the loss reserve estimates. Reinsurance is purchased to mitigate the impact of large losses and catastrophic events. The estimate of reinsurance recoverables is considered a critical accounting estimate and discussed on pages 41 and 42 of this Annual Report on Form 10-K.
Defense costs are also a part of the insured costs covered by liability policies and can be significant, sometimes greater than the cost of the actual paid indemnity amounts. For most of our policies defense costs are outside of policy limits, meaning that amounts paid are in addition to the indemnity limits provided by the policy.
Regularly the financial condition of the Consolidated Corporation and the Group is reviewed by four independent rating agencies, A. M. Best, Fitch, Moody's and S&P. These agencies assign ratings and rating outlooks reflecting the agencies' opinions of the Group's financial strength and the ability of the Corporation to meet its financial obligations to its debt security holders. Following are the Consolidated Corporation's current ratings and rating outlooks.
Statutory surplus, a traditional insurance industry measure of financial strength and underwriting capacity, was $1,004.5 at December 31, 2005, compared with $972.0 at December 31, 2004. Statutory surplus increased 3.3% from 2004 resulting primarily from statutory net income of the Group offset by the payment of $138.3 of dividends to the Corporation.
The fixed income portfolio is allocated between investment grade and below investment grade as follows:
Equity securities are carried at fair market value on the consolidated balance sheets. As a result, shareholders' equity and statutory surplus fluctuate with changes in the value of the equity portfolio. As of December 31, 2005, the equity portfolio consisted of stocks in a total of 60 separate entities covering all ten major S&P industry sectors. Of this total, 24.2% was invested in five companies and the largest single position was 5.4% of the equity portfolio. At December 31, 2004, the equity portfolio consisted of stocks in 50 separate entities in nine S&P industry sectors. Of this total, 31.2% was invested in five companies and the largest single position was 7.3% of the equity portfolio.