Reducing Expenses - We have identified expense reductions across the company that will enable us to better compete in the property and casualty insurance markets. We plan to eliminate approximately 500 positions in our corporate departments. The majority of these positions were eliminated by year-end 2003. This initiative will reduce our 2004 operating expenses by approximately $75. This excludes any reduction due to the sale of our L&I businesses.
Strengthening our Financial Position - To strengthen our financial position, we sold our Safeco Credit subsidiary, reduced our quarterly dividend by 50% and wrote down goodwill by $1,214.1 pretax.
predictive value of our past data in estimating future losses. With this in mind, in the second quarter of 2003, we began performing additional actuarial analysis primarily focused on medical inflation trends and changes in Safeco claim practices and mix of business. This produced divergent indications. As a consequence, in the third quarter of 2003, we took additional steps to evaluate medical inflation trends, reviewing:
On this table, the three-year survival ratio represents the number of years that our current loss reserves would last if future payments are made at the same average annual rate experienced over the last three years. The three-year survival ratio is equal to our loss reserves divided by our average annual payment over the last three years.
Determining the Fair Value of Our Investments - In most cases, we use public market price information to determine the fair value of our investments when such information is available. When third-party market information is not available, as in the case of securities that are not publicly traded, we use other valuation techniques. Such techniques include:
• $293.3 in fixed maturities and $21.9 in equity securities on our Consolidated Balance Sheets as of December 31, 2003. These amounts represented 1.1% of our total investment portfolio.
Underwriting, Acquisition and Operating Expenses - The increases in underwriting, acquisition and operating expenses primarily resulted from growth in our businesses in 2003.
Next, net earned premiums are the primary driver of our revenues, along with net investment income:
In 2003, we increased our estimates for P&C prior years’ loss and LAE reserves by $249.9. The total increase includes:
• Construction defect claims - newly reported claims increased significantly during the first half of 2001. The increase was due primarily to increased litigation in California and more claim activity in other states. This occurred after claims appeared to have peaked in early 2000 and were trending down.
The decreases in our pretax operating earnings for both 2003 and 2002 mainly reflect the lower investment advisory fees from our assets under management as discussed above.
Seventeen percent of our total gross unrealized loss at year-end 2003 came from our investments the Diversified Financial Services sector.
Our mortgage portfolio has historically performed well, with a low loan charge-off rate. Our loan charge-off rate was less than 1% in 2003, 2002 and 2001.
Our liquidity needs vary according to our principal products. P&C liabilities are somewhat unpredictable and generally short in duration. The payments we make to policyholders depend upon losses they suffer from accidents or other unpredictable events. While we can estimate fairly well how much cash we’ll need and when we’ll need it, we cannot predict all future events, particularly catastrophes. So we use investments with greater liquidity - investments that can quickly be turned into cash - to support our P&C businesses’ need for funds. Life insurance, retirement services and other annuity-product reserves are primarily longer-duration liabilities that are typically predictable in nature and are matched with investments that are generally longer duration and less liquid.
We get cash from insurance premiums, funds received under deposit contracts, dividends, interest and asset management fees, sales or maturity of investments and debt and equity offerings.
The higher level of proceeds from the sale of fixed maturities and equity securities, and the higher level of purchases of fixed maturities in 2002 compared with 2001, arose from our portfolio repositioning discussed above. In addition, the relatively high level of proceeds from the maturity of fixed maturities in all three years reflects the high number of calls of fixed maturities and prepayments of mortgage-backed securities. These calls and prepayments were triggered by the low interest rate environment during the past three years and issuer-driven actions.
• $300.0 to pay off notes that had a 7.875% interest rate and were due March 15, 2003
In 1993, SICA issued a guarantee to the Bank of New York on behalf of Market Square Real Estate, Inc. (Market Square) a limited liability company in which SICA was an investor. The guarantee covers the repayment of $10.0 of municipal bonds issued by the City of Minneapolis. The proceeds from the 1993 bond issuance were then loaned to Market Square. In 1997, SICA sold its interest in Market Square but remained a guarantor for the repayment of the bonds. As a condition to the sale, Market Square granted SICA a first mortgage on its assets, as security, for any payments SICA may make pursuant to the guarantee. The repayment of the loan made to Market Square by the City of Minneapolis will fund the scheduled repayment of the bonds in 2006. SICA has not made any payments pursuant to the guarantee.
Impact of Financial Strength Ratings - Lower financial strength ratings could materially and adversely affect our company and its performance and could: