During 2002 the Company's gross loss on the sale of fixed maturity and equity securities amounted to $0.3 million and $3.2 million, respectively. The fair value of the fixed maturity and equity securities at the time of sale was $31.6 million and $14.1 million, respectively. The decision to sell these securities was based upon management's assessment of economic conditions and with regard to the equity security sales the desire to limit investment exposure to the equity market based upon this assessment. Of the equity securities sold, no equity security had been in a continuous unrealized loss position for greater than six months, except for one security, which had been in a continuous unrealized loss position for seven months, and had a fair value and loss at the date of sale of $131,000 and $33,000, respectively.
The Company conducts its impairment evaluation and recognition for interests in securitized assets in accordance with the guidance provided by the Emerging Issues Task Force of the Financial Accounting Standards Board. Under this guidance, impairment losses on securities must be recognized if both the fair value of the security is less than its book value and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent (prior) estimation date. If these criteria are met, an impairment charge, calculated as the difference between the current book value of the security and its fair value, is included in earnings as a realized loss in the period the impairment arose (see Investments).
-- The Company increased the estimated loss for unreported claims incurred and related claim adjustment expenses on residual value polices issued during the years 1998 through 2001 by $30.2 million ($20.7 million net of reinsurance). As of December 31, 2001 the Company had estimated a total liability for unpaid loss and loss adjustment expenses for these policies of $14.5 million ($8.7 million net of reinsurance). The residual value policies provide coverage guaranteeing the value of a leased automobile at the lease termination which can be up to five years from lease inception. During 2002 adverse trends further deteriorated in both frequency and severity on leases expiring in 2002. As part of the Company's monitoring and evaluation process, consulting firms were engaged during the third quarter of 2002 to aid in evaluating this deterioration and the ultimate potential loss exposure under these policies. As a result of the indications and subsequent evaluation by the Company and changes in the Company's assumptions relating to future frequency and severity of losses, the estimate for unpaid loss and loss adjustment expenses was increased. The Company primarily attributes this deterioration to the following factors that led to a softening of prices in the used car market subsequent to the September 11, 2001 terrorist attacks: prolonged 0% new car financing rates and other incentives which increased new car sales and the volume
- - Personal Lines Segment - The Company's decision to restrict new business and not renew approximately 9,000 policies in designated areas of Florida in the Company's manufactured housing and homeowners product lines, based on an evaluation of property exposures and the related catastrophe loss considerations.
Pursuant to a routine underwriting review which focused on pricing adequacy and loss experience, as well as other underwriting criteria, the Company cancelled a Commercial Automobile Excess Liability Insurance customer (Commercial Lines Underwriting Group) effective October 22, 2002 as a result of an unacceptable underwriting risk profile. Such customer's gross written premium and net written premium amounted to $36.7 million and $10.9 million, respectively, for the year ended December 31, 2002.
Other Income: Other income approximated $0.6 million for the year ended December 31, 2001 and $9.0 million for the same period of 2000. Other income primarily consists of commissions earned on brokered personal lines business. Such commissions earned continued to decrease, as planned, as brokering activities were lessened in 2001 in favor of writing business directly.
Risk-Based Capital: Risk-based capital is a method developed by the National Association of Insurance Commissioners ("NAIC") designed to measure the acceptable amount of capital and surplus an insurer should have based on the inherent specific risks of each insurer. The adequacy of a company's actual capital and surplus is evaluated by a comparison to the risk-based capital results. Insurers failing to meet minimum risk-based capital requirements may be subject to scrutiny by the insurer's domiciliary insurance department and ultimately rehabilitation or liquidation. As of December 31, 2002, PIIC, PIC, MUSA and LAIC exceeded their minimum risk-based capital requirement of $75.9 million, $10.0 million, $11.7 million and $11.7 million, respectively, by 234%, 135%, 48% and 56%, respectively.
Additionally, the Insurance Subsidiaries have investments, principally asset backed securities, which collateralize the borrowings from the Federal Home Loan Bank of Pittsburgh, see Note 9. The carrying value of these investments was $49.2 million and $33.9 million as of December 31, 2002 and 2001, respectively.