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38
Legal Matters" above and Note 17. Commitments and Contingencies, of the Notes to Consolidated Financial Statements in "Item
8. Financial Statements and Supplementary Data."
Premiums
The Company’s insurance premiums are recognized as income ratably over the term of the policies and in proportion to
the amount of insurance protection provided. Unearned premiums are carried as a liability on the consolidated balance sheets and
are computed monthly on a pro-rata basis. The Company evaluates its unearned premiums periodically for premium deficiencies
by comparing the sum of expected claim costs, unamortized acquisition costs, and maintenance costs partially offset by investment
income to related unearned premiums. To the extent that any of the Company’s lines of insurance business become unprofitable,
a premium deficiency reserve may be required.
RESULTS OF OPERATIONS
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Revenues
Net premiums written and net premiums earned in 2015 increased 5.6% and 5.8%, respectively, from 2014. The increase
in net premiums written was primarily due to higher average premiums per policy arising from rate increases in the California
private passenger automobile line of insurance business and growth in the number of homeowner policies written in California
and private passenger automobile policies written in several states outside of California.
Net premiums written is a non-GAAP financial measure which represents the premiums charged on policies issued during
a fiscal period less any applicable reinsurance. Net premiums written is a statutory measure designed to determine production
levels. Net premiums earned, the most directly comparable GAAP measure, represents the portion of net premiums written that
is recognized as revenue in the financial statements for the period presented and earned on a pro-rata basis over the term of the
policies.
The following is a reconciliation of total net premiums written to net premiums earned:
Year Ended December 31,
2015 2014
(Amounts in thousands)
Net premiums written $ 2,999,392 $ 2,840,922
Change in net unearned premium (41,495)(44,727)
Net premiums earned $ 2,957,897 $ 2,796,195
Expenses
Loss and expense ratios are used to interpret the underwriting experience of property and casualty insurance companies.
The following table presents the Insurance Companies' consolidated loss, expense, and combined ratios determined in accordance
with GAAP:
Year Ended December 31,
2015 2014
Loss ratio 72.5% 71.0%
Expense ratio 26.7% 27.7%
Combined ratio (1) 99.2% 98.8%
__________
(1) Combined ratio for 2014 does not sum due to rounding.
Loss ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned. The Company’s loss ratio
was affected by unfavorable development of approximately $13 million and favorable development of approximately $3 million
on prior accident years’losses and loss adjustment expense reserves for the years ended December 31, 2015 and 2014, respectively.
The unfavorable development in 2015 was primarily from the California homeowners and automobile lines of business outside
of California, which was partially offset by favorable development in the California personal automobile line of business. The
favorable development in 2014 was primarily from California personal automobile lines of insurance business partially offset by
adverse development in other states. The 2015 loss ratio was also negatively impacted by a total of $19 million of catastrophe