The following table presents the loss and allocated LAE reserves before reinsurance for liability coverages related to construction defect claims. The table excludes unallocated LAE reserves which were $12.1 as of December 31, 2002:
The following three tables for Property & Casualty reflect: (1) net earned premiums by segment; (2) underwriting profit (loss) by segment and (3) combined ratios by segment.
The improvements in our underwriting results also contributed to our improved combined ratio and particularly the loss ratio component. Our loss ratio steadily improved to 65.9% in 2002 from 68.8% in 2001 and 72.5% in 2000. The loss ratio improvement continued throughout 2002 reflecting the underwriting actions described above, particularly the average rate increases and the new insurance scoring model. The loss ratio improvements were partially offset by increased LAE resulting from increased training costs for claims personnel and higher underwriting expenses resulting from the increased commissions previously described.
The POS technology initiative, new product introduction, rate increases, stricter underwriting standards and increased agent commissions on new auto business are all expected to continue to contribute to improved profitability and policy growth in this line of business.
The increased earned premiums in 2002 and 2001 reflect the continued execution of the strategy implemented in 2001 for the turnaround of Homeowners. This strategy includes raising prices and reducing monoline homeowners commissions to improve underwriting results. We also will continue to decrease the amount of homeowners insurance written in states where we cannot achieve profitability. Currently, we have moratoriums on writing new business in ten states. Moratoriums will be lifted in these states as we secure approval to implement changes to move this product toward profitability. In addition, Safeco is introducing new language into homeowners policies sold in storm-prone Midwest states, which requires individuals to pay a deductible of 1 percent of their home’s value before insurance coverage on repair costs for wind and hail damage. We are also in the process of filing limits on mold damages to $5,000 or $10,000, including remediation, in all states where limits on mold coverage are allowed.
On November 26, 2002, the federal government enacted the Terrorism Risk Insurance Act of 2002 (TRIA). It requires mandatory offers of terrorism coverage to all commercial policyholders, including workers compensation and surety policyholders. TRIA does not apply to life or personal lines policyholders. In the event of a terrorism attack on behalf of a foreign interest resulting in insurance industry losses of $5.0 or greater, the U.S. government will provide funding to the insurance industry on an annual aggregate basis of 90% of covered losses in excess of individual insurance company deductibles up to $100 billion. The deductible is a percentage of each individual company’s direct earned premium and the percentage increases in each of the three calendar years covered by TRIA. In 2003, Safeco’s deductible is estimated to be $115.0. Upon enactment of TRIA, our existing terrorism exclusions were void to the extent that they excluded losses from foreign terrorist events as defined in TRIA. However, the exclusions remained effective as to acts of domestic terrorism. ISO has filed exclusions for acts of terrorism as defined in TRIA. Safeco is adopting these exclusions in all states that have accepted the filings and will use the exclusions if a policyholder rejects the mandatory offer of terrorism coverage. Some states may object to or limit the use of terrorism exclusions.
With regard to commercial lines policies, Safeco’s focus is on the small-to-medium account business. Our customers are generally not viewed as potential terrorism targets. For workers compensation the number of employees covered is considered and coverage is declined in cases where the exposure is potentially severe. Safeco’s exposure to personal lines losses is currently believed to be relatively modest due to small individual exposure and wide spread of risk. Safeco believes its terrorism exposure is relatively modest across all product lines.
Income Annuities’ main product is the structured settlement annuity which is sold to fund third-party personal injury settlements, providing a reliable income stream to the injured party. This product is extremely sensitive to financial strength ratings and our ratings downgrades in 2001 decreased our ability to sell this product. Income Annuities also sells non-structured fixed annuities, which provide an immediate payment stream. Overall sales of immediate annuities (including structured settlements) increased $6.4 to $115.3 in 2002 due to efforts to grow the sales of non-structured settlement annuity products. The success of these efforts was due in part to an agreement with a major brokerage firm to sell Advantage Immediate, our immediate annuity product sold to individuals. The 2002 sales also include annuities purchased by Property & Casualty affiliates totaling $48.0. In 2001, overall sales decreased $292.4 as a result of our ratings downgrades in 2001. These contracts are non-surrenderable and supported by long-term invested assets consisting primarily of long duration bonds and mortgage-backed securities.
Asset Management serves as the investment advisor for the Safeco mutual funds, variable insurance portfolios, and institutional and trust accounts. Investment advisory activities produced revenues of $29.9 in 2002, a decrease of $6.0 from 2001 revenues of $35.9 which decreased $7.0 from 2000. The decline in assets under management in 2002 and 2001 due mainly to declining equity markets, contributed to the overall decrease in revenues and pretax operating earnings during these years.
SFP had credit swaps with notional amounts outstanding totaling $835.0 and $490.0 at December 31, 2002 and 2001, respectively. These credit swaps involved selling credit protection for a fee that covers certain credit events on assets owned by the buyer (financial institutions and investment banks) such that if a credit event occurs SFP would make a payment to the buyer. The credit swaps are marked-to-market and this adjustment is recorded in net realized investment gains and losses on the Consolidated Statements of Income (Loss). Total realized loss in 2002 was $28.3 and included an $8.6 realized loss arising from the Worldcom bankruptcy. Total realized loss in 2001 was $18.2 and included a realized loss of $7.8 arising from the Enron bankruptcy. There were no net realized investment gains or losses in 2000.
Safeco Credit Company, Inc. (Safeco Credit) provided loans and equipment financing and leasing to commercial businesses, insurance agents and affiliated companies. In March 2001, Safeco decided to sell Safeco Credit. A plan of disposal was formalized establishing the measurement date as March 31, 2001; as a result, Safeco Credit was accounted for as a discontinued operation effective March 31, 2001. On July 24, 2001 Safeco reached a definitive agreement to sell Safeco Credit to General Electric Capital Corporation. The sale was completed on August 15, 2001 (effective as of July 31, 2001) for total cash proceeds of $918.9. The proceeds included the repayment of loans to Safeco Credit and settlement of other affiliated transactions between Safeco Credit and Safeco totaling $668.9. The sale resulted in net proceeds of $250.0 and a pretax gain of $97.0. The after-tax gain on the sale of $54.0 is reported in the Consolidated Statements of Income (Loss). Safeco Credit generated after tax profits for the seven months ended July 31, 2001 of $4.2 and $12.7 for 2000.
Safeco’s liquidity needs are being met and the successful achievement of our profitability goals will continue to enhance our liquidity position; conversely, an inability to sustain adequate profitability may adversely affect our capital resources and liquidity position.
In order to better match invested asset duration to the duration of related liabilities, during 2002 we repositioned our Property & Casualty investment portfolio to reduce the bond investment portfolio duration from approximately 7 to approximately 5. As of December 31, 2002, the bond investment portfolio’s duration was 5.3. The Property & Casualty asset allocation mix also has been adjusted to reduce volatility, by lowering the exposure to equity securities. Equity securities comprised approximately 11% of this investment portfolio at December 31, 2002 compared to approximately 18% at December 31, 2001. As a result of executing this strategy, this portfolio’s allocation to taxable bonds has increased relative to its tax-exempt holdings. As a result, pretax investment income in 2002 for the Property & Casualty investment portfolio increased 0.5% compared to 2001, while after tax investment income declined 3.5% in 2002 compared to 2001.
Property & Casualty pretax net investment income was $460.0, $457.7 and $460.5 in 2002, 2001 and 2000, respectively. On an after tax basis investment income was $345.6, $358.2 and $363.0 for 2002, 2001 and 2000, respectively. Although Property & Casualty operating cash flow was positive in all three years, the higher level of claims payments in 2001 and 2000 and the high amount of dividends paid to the parent company in 2000, combined with the declining interest rate environment and bond call activity, dampened investment income. After tax investment income in 2002 also declined due to the portfolio repositioning, discussed below. After tax investment income in 2003 is expected to be slightly lower due to low interest rates and the 2002 Property & Casualty portfolio repositioning. Property & Casualty paid dividends to the Parent Company totaling $130.0, $13.6 and $362.0 for 2002, 2001 and 2000, respectively. These dividends declined in 2001 due to underwriting losses.
Pretax net realized investment gains and losses for the years ended 2002, 2001 and 2000 by major segment and component were as follows: