The underwriting expense ratio is the ratio of underwriting expenses to net premiums written, expressed as a percentage, determined in accordance with statutory accounting principles. Underwriting expenses are the aggregate of policy acquisition costs, including commissions, and the portion of administrative, general and other expenses attributable to underwriting operations.
We remain focused on personal automobile insurance and related activities in Massachusetts. We have been the largest writer of personal property and casualty insurance in Massachusetts in terms of market share of direct premiums written since 1990. Our estimated share of the Massachusetts personal automobile market increased to 27.6% during the eleven months ended November 30, 2003, as shown in the table below, significantly exceeding our two nearest competitors, Safety Insurance Group, Inc. and Arbella Insurance Group, who maintained an estimated 10.6% and 9.9% market share, respectively.
For personal automobile insurance, insurers can reduce their participation ratio by voluntarily writing credit eligible business. Companies are provided credits against their participation ratio for writing those policies that are intentionally underpriced by the Commissioner in the rate setting process. Our strategy has been to maintain above average voluntary retention levels, as well as to voluntarily retain private passenger automobile risks that receive credits. This favorably affects our participation ratio compared to our market share, but also adversely impacts our voluntary loss ratio. We reinsured through CAR approximately 5.1%, 4.9% and 4.9% of our personal automobile exposures for the years ended 2003, 2002 and 2001, respectively, as compared to industry averages of 7.0%, 7.5% and 7.7% for the same periods, respectively. See "Our Business - Commonwealth Automobile Reinsurers."
Our after-tax net realized investment gains for the year ended 2003 increased by $121.8 million compared to 2002. The increase was due to after-tax net investment gains for 2003 of $53.4 million compared to after-tax net investment losses of $68.4 million for 2002. The 2003 after-tax net investment gains resulted primarily from:
Our earned premiums increased by $166.4 million, or 15.9%, in 2002 compared to 2001, primarily resulting from:
The following table reconciles beginning and ending reserves for losses and loss adjustment expense, net of reinsurance deductions from all reinsurers including CAR, as shown in our consolidated financial statements for the years indicated.
Unpaid losses and loss adjustment expense reserves prior to effect of ceded
Our property and casualty insurance operations are written through Commerce, Citation, American Commerce, and Commerce West and are marketed to affinity groups, individuals, families and businesses through our relationships with professional independent insurance agencies. Our property and casualty insurance - Massachusetts segment also includes the operations of Clark-Prout Insurance Agency, our wholly-owned subsidiary. Our wholly-owned subsidiary, Bay Finance Company, Inc., originates and services residential and commercial mortgages in Massachusetts and Connecticut. The corporate and other segment represents the remainder of our activities, including those of Commerce Group.
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").
The non-compete agreement in the amount of $1,779 represents the unamortized portion of the purchase price associated with the acquisition of American Commerce allocated to the arrangement whereby the American Automobile Association, Inc. ("AAA National") agreed not to compete with American Commerce prior to February 2009. The cost of $3,500 is being amortized on a straight-line basis over the term of the arrangement. The amount of accumulated amortization at December 31, 2003 and 2002 was $1,721 and $1,371, respectively. The Company has amortized this agreement for $350 each year since the acquisition. This will continue until the agreement is fully amortized.
Equity in earnings (losses) of closed-end preferred stock mutual funds (1)
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") was signed into law. The Act introduces a prescription drug benefit under Medicare ("Medicare Part D") as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position FAS 106-1, the Company elected to defer accounting for the effects of the Act until specific, authoritative guidance on the accounting for the federal subsidy is issued. Therefore, any measures of the accumulated benefit obligation and net periodic benefit cost of the post-retirement plan in the consolidated financial statements and accompanying notes do not reflect the effects of the Act. The authoritative guidance, when issued, could require the Company to change previously reported information, however, the Company does not expect this to have a significant effect on its financial condition or results of operation, because this applies to only six participants.
The American Commerce Agents' Plan activity for the three years ended 2003 follows: