The Massachusetts Commissioner of Insurance (the "Commissioner") adopted regulations ("New Rules") on December 31, 2004 enacting a wholesale change of the Massachusetts involuntary private passenger motor vehicle insurance market from a loss-sharing system to a risk-sharing system. The New Rules would be implemented in two steps, including a transition phase followed by the adoption of the risk-sharing system. If the New Rules became effective January 1, 2005, they would effect a material change in the Massachusetts automobile insurance market for risks that are reinsured through the "residual market" known as CAR. A stay has been issued by a Massachusetts trial court, barring the implementation of the New Rules until the court decides whether the New Rules are consistent with Massachusetts law. While the New Rules are stayed, CAR will operate in accordance with the rules that existed immediately prior to the Commissioner's adoption of the New Rules or any rules changes that may be permitted under the court imposed stay.
a pool comprised of the net ceded subsidies from the high loss ratio and non-high loss ratio ERPs.
The above amounts are significantly different from the amounts we previously published in our October 2004 estimate of CAR Reform because the New Rules differ substantially from the rules approved by CAR at that time, primarily in three ways. First, the October rules called for much higher expense reimbursements for business serviced by the servicing carriers versus the New Rules. Secondly, it appeared that all the high loss ratio ERP business would be required to be ceded to CAR under the October rules. Lastly, only six servicing carriers were required under the October rules versus 12 under the New Rules.
The actual state average revenue change per exposure represents the change in the average premium paid by drivers in Massachusetts, as opposed to the state mandated average rate change. As can be seen above, our average revenue change per exposure corresponds more closely to the actual state average revenue change. The reason for this is that both take into account newer vehicles, as compared to the state mandated average rate change, which does not.
Net realized investment gains (losses) for the years ended 2004 and 2003 follow:
Our gains on investment securities were partially offset by write-downs for other-than-temporary declines in the market value of certain fixed maturities, preferred stocks and common stocks totaling $14,949 and $17,616 for the years ended 2004 and 2003, respectively. The other-than-temporary write-downs for the 2004 period consisted of $1,398 for eight municipal bonds, $12,791 for sixteen corporate bonds and $760 for four preferred stocks. The other-than-temporary write-downs for the 2003 period consisted of $2,433 for one municipal bond, $7,133 for four corporate bonds, $7,240 for three preferred stocks and $810 for five common stocks.
Of the remaining $76.1 million total of net realized gains, we recognized net gains of $37.7 million for the year ended 2003 attributable to the change in the net asset value of seven closed-end preferred stock mutual funds in which we owned 20% or more through the period our ownership remained greater than 20%. During the third and fourth quarters of 2003, we dropped below the 20% ownership level and did not have the ability to exercise significant influence over operating and financial policies for six funds. Therefore, as of December 31, 2003, the investments were reported at fair market value and the unrealized gains or losses from the point our ownership fell below 20% to year end were reported as comprehensive income. See "Critical Accounting Policies - Investments." For the year ended 2003, the net realized investment gains attributable to these fund investments were $37.7 million, as compared to net realized investment losses of $45.1 million for that category of investments for 2002. Market conditions during 2003 caused a significant increase in the net asset value of those funds and, as a direct consequence, an increase in the net realized investment gains that we recognized for those investments for the year ended 2003.
Our gains on investment securities were partially offset by write-downs for other-than-temporary declines in the market value of certain fixed maturities, preferred stocks and common stocks totaling $17.6 million and $32.1 million for the years ended 2003 and 2002, respectively. The other-than-temporary write-downs for the 2003 period consisted of $2.4 million for one municipal bond, $7.1 million for three corporate bonds, $7.3 million for three preferred stocks and $0.8 million for five common stocks. The other than temporary write-downs for 2002 consisted of $0.8 million for one municipal bond, $16.1 million for three corporate bonds, $9.1 million for eight preferred stocks and $6.1 million for two common stocks.
Changes in interest rates would result in unrealized gains or losses in the market value of the fixed maturity and preferred stock portfolio due to differences between current market rates and the stated rates for these investments. The following table summarizes our interest rate risk, based on the results of the sensitivity analysis at December 31, 2004. The table also reflects the changes in market value and stockholders' equity that would be attributable to realized investment gains (losses) that we would recognize under the equity method of accounting with respect to the change in the net asset value of the mutual fund in which we own 20% or more of the shares outstanding. See "Critical Accounting Policies - Investments and Other-than-temporary Impairments."
Our exposure is generally 80% or less of the appraised value of any collateralized real property at the time of the loan origination. The ability and willingness of residential and commercial borrowers to honor their repayment commitments is generally dependent upon the level of overall economic activity and real estate values. During the years ended December 31, 2004, 2003 and 2002 we did not acquire any property through foreclosure of mortgages.
When reviewing the liability for unpaid losses and LAE, we analyze historical data and estimate the impact of various factors, including:
Liabilities for the book value awards and employee stock option programs were $29,654 and $17,512 at December 31, 2004 and 2003, respectively. Plan activity, related to employee options, for the three years ended 2004 follows:
The ACIC Plan activity for the three years ended 2004 follows:
Income consisting of expense reimbursements, which include servicing carrier fees from CAR on policies written for CAR, are deferred and amortized over the term of the related insurance policies.
Our consolidated net income on a statutory basis for the years ended December 31, 2004, 2003 and 2002 was $241,062, $136,438 and $55,120, respectively. Our statutory policyholders' surplus as reported to various state insurance departments at December 31, 2004 and 2003 was $1,290,075 and $1,075,074, respectively.