In 2002, NEIL experienced a net loss of $49 million compared to net income of $5 million in 2001. The decrease resulted from lower investment earnings, partially offset by a decrease in distributions and an increase in underwriting income. In 2002, due to declines in the equity markets, a lower level of gains was realized upon liquidation of securities to fund the March distribution.
Despite weakness in the financial markets, NEIL remains financially strong and has continued to make significant distributions to its Members. In December 2002, the Board declared a distribution of $250 million that was paid on March 31, 2003.
Earnings From Underwriting Operations
Underwriting earnings have nearly doubled in 2002 as a result of additional premiums from new business and decreased losses. Earnings from underwriting operations were $104 million in 2002 compared to $57 million in 2001.
Net premiums earned increased 22% from $166 million in 2001 to $203 million in 2002 primarily due to a higher level of conventional and non-member premiums. In addition, underwriting results were enhanced by favorable claims experience on both the nuclear and conventional sides.
NEIL remains a very sound financial organization. Since our initial rating in 1995, we have maintained an A (excellent) rating with the AM Best Company, which has ranked us among the top 20 P&C insurance companies based on surplus size.
At December 31, 2002, surplus was $2.9 billion, down 9% from the prior year. The decline in surplus reflects a decline in the market value of investments and the $250 million distribution approved in 2002.
Assets and Liabilities
At December 31, 2002, total assets were nearly $3.5 billion, representing a decrease of 13% from the prior year. The decrease resulted from payment of distributions and market declines in our investment portfolio.
Liabilities have decreased by 32% to $521 million at December 31, 2002, because of a lower level of distributions payable coupled with a reduction in the Companys deferred tax liability due to market declines in our investments.
Diversification once again proved its benefits by cushioning the 22% decline in the US equity market. Major equity indices lost ground for the third straight year, an unusual occurrence that last happened 70 years ago in connection with the Great Depression. Investment grade bonds and real estate generated strong positive returns, and non-US equities suffered less than US equities, in part from the strength of many major currencies relative to the US dollar. The aggregate NEIL portfolio return was -8%.
An asset allocation study was completed in September 2002 that confirmed that the basic asset allocation targets in place for many years continue to be appropriate for the long term. The Board refined that basic philosophy by agreeing to ranges around the target allocation to fixed income, equities and real estate. Within these ranges, the market environment will influence whether exposures should be more or less conservative. Equity exposure, which has historically been achieved using a passive indexing approach, will rely to greater extent on active management in the less efficient markets for smaller cap US and non-US equities.
From time to time, investments may be made in high-yield, fixed income or other alternative-asset classes that may be considered equity surrogates. These would be selected based on the belief that they might participate meaningfully in a strong up market but offer better downside protection in a weak equity market environment than would direct investment in common stock. The last element of the new approach is the willingness to consider modest levels of investment on an opportunistic basis in non-core investments that appear attractively valued, based on fundamentals to value-oriented investors.
It is expected to take a full year to select new managers and implement new actively managed mandates to replace portions of the portfolio that are currently indexed. Other elements of the new strategy will be implemented as the ever-changing marketplace presents new opportunities.
A Record of Achievement