Crum & Forster’s principal offices are located in space leased by the Company in Morristown, New Jersey. The lease covers approximately 201,887 square feet of office space at 305 Madison Avenue. The term of the lease ends December 31, 2022, and provides for up to four consecutive additional terms; the first additional period for ten years and the second, third and fourth additional periods for five years each, at the Company’s option.
There is great uncertainty involved in estimating liabilities related to these exposures. First, the number of waste sites subject to cleanup is unknown. To date, approximately 1,575 cleanup sites have been identified by the EPA and included in its National Priorities List. State authorities have identified many additional sites. Second, the liabilities of the insureds themselves are difficult to estimate. At any given site, the allocation of remediation cost among the PRPs varies greatly depending upon a variety of factors. Third, different courts have been presented with liability and coverage issues regarding pollution claims and have reached inconsistent decisions on several issues. These uncertainties are unlikely to be resolved in the near future.
Management focuses on underwriting results, which are derived from certain amounts on the consolidated statements of income and are considered a non-GAAP financial measure, to monitor performance of the Company’s underwriting operations. Underwriting results are measured both in dollars and by the combined ratio, a standard industry measure. Underwriting profit or loss equals premiums earned less losses and LAE, policy acquisition costs and other underwriting expenses, and excludes investment results, interest expense and other income or expense. The latter are excluded in order to analyze the direct relationship between the premiums earned and the related claim costs, including the costs incurred to settle such claims, acquisition expenses and other underwriting expenses. Net realized investment gains and losses relating to the Company’s investment portfolio are excluded by management when analyzing insurance operations, as they are largely discretionary and are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance.
Net income declined to $24.2 million in 2004 from $135.7 million in 2003, primarily due to lower investment results. Underwriting results for 2004, compared to 2003, were marked by higher catastrophe losses offset by decreased adverse development of prior years’ losses and LAE. Catastrophe losses were higher in 2004 than in 2003, principally due to approximately $96 million of losses, including reinstatement premiums of $13 million, associated with hurricanes Charley, Frances, Jeanne and Ivan in the third quarter of 2004. Adverse development of prior years’ losses and LAE in 2004 amounted to $69.3 million as compared to $118 million in 2003 and included adverse development of latent reserves of $100.5 million and $153.6 million in 2004 and 2003, respectively.
For the year ended December 31, 2003, premiums earned increased by $159.4 million, or 26.1%, as compared to the year ended December 31, 2002. The growth in premiums earned was due to higher net premiums written in 2003.
The Company’s other underwriting expense ratio decreased from 19.4% in 2002 to 16.5% in 2003 and to 14.3% in 2004 primarily reflecting premium growth rates in excess of expense growth rates.
Certain costs, consisting of commissions and premium taxes incurred in the acquisition of policy premiums, are deferred and amortized over the period in which the related premiums are earned. Deferred policy acquisition costs are limited to their estimated realizable value, which considers anticipated losses and loss adjustment expenses on the related policies and estimated remaining costs of servicing the contracts. Realizability is determined without considering investment income.
The number of continuous months in which securities in an unrealized loss position had been in such position is summarized as follows:
The Company uses tabular reserving for workers’ compensation indemnity reserves and discounts such reserves using a maximum interest rate of 5.0%. The amount of related discount was $84,902 and $94,257 at December 31, 2004 and 2003, respectively.
Effective January 1, 2000, the Company entered into a service agreement with TIG to obtain certain services relating to issuing policies and handling claims. Payments for these services were $113, $250 and $336 for the years ended December 31, 2004, 2003 and 2002, respectively.
The Company receives loss adjustment services from Cunningham Lindsey U.S., Inc., an affiliate of Fairfax. Expenses incurred for these services were $64, $132 and $215 for the years ended December 31, 2004, 2003 and 2002, respectively.
A reconciliation of the changes in the postretirement plans’ benefit obligation, fair value of assets, accrued benefit cost and a statement of the funded status is presented below. The Company uses a December 31st measurement date for its postretirement health care and life insurance plans.
The Company does not allocate investment results or certain corporate expenses for purposes of evaluating financial performance of each line of business.