Cincinnati Financial Corporation also owns the Fairfield Executive Center, which is located on the northwest corner of our headquarters property. This four-story office building has approximately 124,000 square feet of available space. The property is carried in the financial statements at $7 million as of December 31, 2012, and is classified as land, building and equipment, net, for company use. Unaffiliated tenants occupy approximately 5 percent. This property is used by all segments reported in the Consolidated Financial Statements and accompanying Notes.
On January 1, 2012, we retrospectively adopted ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. All prior years’ information has been restated.
We measure property casualty underwriting profitability primarily by the combined ratio. Our combined ratio measures the percentage of each earned premium dollar spent on claims plus all expenses related to our property casualty operations. A lower ratio indicates more favorable results and better underlying performance. Our combined ratio improved to under 100 percent in 2012 but was over 100 percent in each of the prior three years. Initiatives to improve our combined ratio are discussed in Item 1, Strategic Initiatives, Page 10. In 2012, 2011 and 2010, favorable development on reserves for claims that occurred in prior accident years helped offset remaining incurred loss and loss expenses. Reserve development is discussed further in Property Casualty Loss and Loss Expense Obligations and Reserves, beginning on Page 88. Losses from weather-related catastrophes are another important item influencing the combined ratio and are discussed along with other factors in Commercial Lines, Personal Lines and Excess and Surplus Lines Insurance Results of Operations, beginning on Page 57, Page 68 and Page 74, respectively.
· For asbestos and environmental claims, we calculate IBNR reserves by deriving an actuarially-based estimate of total unpaid loss and loss expenses. We then reduce the estimate by total case reserves. We discuss the reserve analysis that applies to asbestos and environmental reserves in Asbestos and Environmental Reserves, Page 88.
Reserve development on prior accident years continued to net to a favorable amount in 2012, as $396 million was recognized, higher than $285 million in 2011 and $304 million in 2010. Approximately 63 percent of our reserve development on prior accident years recognized during 2012 occurred in our commercial casualty and workers’ compensation lines of business. In 2011, those lines of business were responsible for approximately 80 percent of the favorable reserve development. As discussed in Consolidated Property Casualty Insurance Development of Estimated Reserves by Accident Year, Page 92, those lines are considered long-tail lines with potential for revisions inherent in estimating reserves. Development recognized during 2010 was primarily from our commercial casualty line of business. Development by line of business is further analyzed in Consolidated Property Casualty Insurance Development of Estimated Reserves by Accident Year, Page 92.
The 2012 total loss and loss expense ratio improved 49.3 percentage points primarily due to a 33.7-point decrease in catastrophe losses. The 2012 current accident year loss and loss expense ratio before catastrophe losses also improved, compared with accident year 2011, largely due to higher earned premiums that included higher pricing. In 2011, we began fully using predictive modeling tools for auto, general liability and property coverages for some commercial package accounts included in specialty packages. In 2012, we began using predictive modeling tools to improve our pricing precision for certain additional business policies included in our specialty packages line of business. Initiatives for our property book of business, described in the commercial property section above, should also benefit our specialty packages line of business. We believe these initiatives will improve profitability over time.
Accident year loss and loss expenses incurred and ratios to earned premiums:
o 6.8 percent of losses between $100 million and $200 million
A segment premium deficiency is recorded when the sum of expected loss and loss adjustment expenses, expected policyholder dividends and unamortized deferred acquisition expenses exceeds the total of unearned premiums and anticipated investment income. A premium deficiency is first recognized by charging any unamortized acquisition costs to expense to the extent required to eliminate the deficiency. If the premium deficiency is greater than unamortized acquisition costs, a liability is accrued for the excess deficiency. We did not record a premium deficiency for the three years ended 2012, 2011 and 2010.
Recorded reserves for the deferred annuities and structured settlements were $1.043 billion and $1.025 billion at December 31, 2012, and December 31, 2011, respectively.
Declared cash dividends per share were $1.62, $1.605 and $1.59 for the years ended December 31, 2012, 2011 and 2010, respectively.
On a quarterly basis, we review these outstanding matters. Under current accounting guidance, we establish accruals when it is probable that a loss has been incurred and we can reasonably estimate its potential exposure. The company accounts for such probable and estimable losses, if any, through the establishment of legal expense reserves. Based on our quarterly review, we believe that our accruals for probable and estimable losses are reasonable and that the amounts accrued do not have a material effect on our consolidated financial condition or results of operations. However, if any one or more of these matters results in a judgment against us or settlement for an amount that is significantly greater than the amount accrued, the resulting liability could have a material effect on the company’s consolidated results of operations or cash flows. Based on our most recent review, our estimate for any other matter for which the risk of loss is more than remote is less than $500,000.
o For commercial lines, personal lines and excess and surplus lines insurance segments, we calculate underwriting profit or loss as premiums earned and fee revenue minus loss and loss expenses and underwriting expenses incurred.