Harleysville Group holds securities with unrealized losses at December 31, 2007 as follows:
Effective for one year from July 1, 2007, the Company’s subsidiaries and the Mutual Company and its wholly owned subsidiaries renewed its catastrophe reinsurance which provides coverage ranging from 75% to 85% of up to $250.0 million in excess of a retention of $50.0 million for any given catastrophe excluding terrorism for commercial lines. Harleysville Group’s 2007 pooling share of this coverage would range from 75% to 85% of up to $180.0 million in excess of a retention of $36.0 million for any given catastrophe. Pursuant to the terms of the treaty, the maximum recovery would be $195.0 million for any catastrophe involving an insured loss equal to or greater than $300.0 million. Harleysville Group’s 2007 pooling share of this maximum recovery would be $140.4 million for any catastrophe
Premiums earned decreased $2.7 million for the year ended December 31, 2006. The decrease was primarily due to a decrease in premiums earned for personal lines of $8.8 million, partially offset by an increase of $6.1 million in commercial lines premiums earned. The increase in premiums earned for commercial lines was primarily due to higher average premiums, partially offset by fewer policy counts in the commercial automobile line of business. The decline in premiums earned for personal lines was primarily due to fewer policy counts. The reduction in personal lines volume was driven primarily by a reduction of personal automobile business from the continued implementation of more stringent underwriting processes.
Liquidity is a measure of the ability to generate sufficient cash to meet cash obligations as they come due. Harleysville Group’s primary sources of cash are premium income, investment income and maturing investments. Cash outflows can be variable because of uncertainties regarding settlement dates for liabilities for unpaid losses and because of the potential for large losses, either individually or in the aggregate. Accordingly, Harleysville Group maintains investment and reinsurance programs generally intended to provide adequate funds to pay claims without forced sales of investments. Harleysville Group models its exposure to catastrophes and has the ability to pay claims without selling held to maturity securities even for events having a low (less than 1%) probability. Even in years of greater catastrophe frequency, Harleysville Group has been able to pay claims without liquidating any investments. Harleysville Group has also considered scenarios of declines in revenue and increases in loss payments, and has the ability to meet cash requirements under such scenarios without selling held to maturity securities. Harleysville Group’s policy with respect to fixed maturity investments is to purchase only those that are of investment grade quality.
The fixed maturity investments in the SIVs consist predominantly of asset-backed and mortgaged-backed securities. Each of the SIVs listed above represents a senior claim on the assets of the issuer. The Cheyne and Stanfield Victoria holdings are in technical default and are currently under the supervision of receivers appointed to protect the interests of senior creditors. In the fourth quarter of 2007, an impairment loss of $0.8 million was recognized on the Cheyne holding due to a significant deterioration in the credit worthiness of the issuer.
If our investments, including our securities lending collateral, lose value, our revenues, earnings and financial position will be adversely affected.
Intercompany balances are created primarily from the pooling arrangement (settled quarterly), allocation of common expenses, collection of premium balances and payment of claims (settled monthly). No interest is charged or received on intercompany balances due to the timely settlement terms and nature of the items. Interest expense on the loan from Mutual described in Note 7 was $1,057,000, $1,016,000 and $699,000 in 2007, 2006 and 2005, respectively.
Cash received from option exercises under all share-based payment arrangements for 2007, 2006 and 2005 was $9,034,000, $20,050,000 and $5,101,000, respectively. The actual tax benefit realized for the tax deductions from option exercises of the share-based payment arrangements was $1,439,000, $3,281,000 and $557,828, respectively, for 2007, 2006 and 2005.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Harleysville Group Inc.'s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 7, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.