As of any balance sheet date, not all claims have been reported and some claims may not be reported for many years. As a result, the liability for unpaid losses includes significant estimates for incurred-but-not-reported ("IBNR") claims. The following table shows the estimated liability as of December 31, 2004 for unpaid claims applicable to reported claims and to IBNR (dollars in thousands) for each sub-line of business:
greater share of the reinsurance protection is related to contract bonds. Net written premiums for commercial surety increased 8.0% to $115.5 million for the year ended December 31, 2004. Fidelity and other products increased 9.7% to $30.5 million for the year 2004 as compared to 2003.
The Company's reinsurance program is predominantly comprised of excess of loss reinsurance contracts that limit the Company's retention on a per principal basis. At December 31, 2004, American Reinsurance Company, General Reinsurance Corporation, Swiss Reinsurance America Corporation, and XL Reinsurance Corporation (all rated at least A by A.M. Best) were the four reinsurers from which the Company had its largest reinsurance receivables.
The improvement in the loss ratio from 2003 to 2004 is primarily due to the absence of both the adverse development on prior accident years that was recorded in 2003 and other large losses related to accident year 2003. Past changes in the Company's business mix and reinsurance program along with increased corporate
The expense ratio increased to 62.6% for the year ended December 31, 2003 as compared to 60.3% for 2002. The increase in the expense ratio for the year ended December 31, 2003 primarily reflects the impact of higher reinsurance costs on net earned premiums and higher operating expenses. Ceded earned premium increased by $13.3 million in 2003, due to the Company's decision to reduce its per principal retention from $20 million in 2002 to $15 million in 2003 and costs associated with the purchase of an extended discovery period on a 2001 treaty. The higher ceded earned premium increased the 2003 expense ratio by 2.6 percentage points. Operating expenses increased 6.1% for the year ended December 31, 2003 primarily due to a 5.6% increase in gross earned premium. 2003 operating expenses were impacted by a $1.9 million accrual for post-employment benefits for three former senior executives that increased the 2003 expense ratio by 0.6 percentage points.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2004 of the Company and our report dated February 25, 2005 expressed an unqualified opinion on the consolidated financial statements and financial statement schedules.
The interest rate on borrowings under the 2002 Credit Facility may be fixed, at CNA Surety's option, for a period of one, two, three, or nine months and is based on, among other rates, LIBOR, plus the applicable margin. The margin, including a facility fee and utilization fee on the Revolving Credit Facility, was 1.30% at December 31, 2004 and can vary based on CNA Surety's leverage ratio (debt to total capitalization) from 1.15% to 1.45%. The margin on the Term Loan Facility was 0.625% at December 31, 2004 and can vary based on CNA Surety's leverage ratio (debt to total capitalization) from 0.48% to 0.80%. As of December 31, 2004, the weighted average interest rate was 3.2825% on the $35.0 million of outstanding borrowings. As of December 31, 2003, the weighted average interest rate on the 2002 Credit Facility was 2.4% on the $50.0 million of outstanding borrowings.
If the Company should suffer any losses that are discovered prior to September 30, 2006 arising from bonds issued to the contractor with effective dates of September 30, 2002 and prior, the Company would retain the first $60 million of losses on bonds written, and CCC would incur 100% of losses above $60 million pursuant to the extended discovery provisions of the two Excess of Loss treaties that expired on September 30, 2002. Any losses discovered after September 30, 2006 on bonds with effective dates prior to September 30, 2002 would be covered up to $150 million pursuant to the $50 million excess of $100 million contract with CCC described above and a twelve month contract with CCC effective January 1, 2004 that provides $40 million excess of $60 million reinsurance coverage exclusively for the national contractor.
The components of deferred income taxes as of December 31, 2004 and 2003 were as follows (dollars in thousands):