SAP loss and LAE ratio is statutory losses and loss expenses as a percentage of net earned premium. SAP expense ratio is statutory underwriting expenses and miscellaneous expenses offset by miscellaneous income (“underwriting expenses”) as a percentage of net written premiums. SAP combined ratio is the sum of the SAP loss and LAE ratio and the SAP expense ratio.
We measure our top-line growth for our insurance segments based on net written premiums, which represent the premiums on the policies we have issued for a period, net of reinsurance. Net written premiums provide us with an indication of how well we are doing in terms of revenue growth before it is actually earned. Our policies provide a fixed amount of coverage for a stated period of time, often referred to as “the policy term.” As such, our written premiums are recognized as earned ratably over the policy term. The unearned portion of written premiums, called unearned premiums, is reflected on our balance sheet as a liability and represents our obligation to provide coverage for the unexpired terms of the policy.
We hold ceded loss reserves in anticipation of transferring liabilities to reinsurers and other pools and associations. In 2006, ceded loss reserves developed favorably by $23.7 million, meaning the actual ceded losses were above anticipated levels. Historically, we have had less ceded loss activity because our reinsurance retention levels are generally high enough to exclude most claims. This favorable development occurred primarily in the auto and commercial multi-peril lines.
A review of our investment portfolio at December 31, 2006 determined there were no individual investments with an unrealized holding loss that had a fair value significantly below cost continually for more than one year. There were also no individual material securities with an unrealized holding loss at December 31, 2006.
are appropriately structured to enable the insurance subsidiaries to meet anticipated short and long-term cash requirements without the need to sell investments to meet fluctuations in claim payments.
To fund these capital transactions and provide additional working capital to State Auto Financial, on September 12, 2007, State Auto P&C and Milbank declared cash dividends of $40.0 million and $10.0 million, respectively, to State Auto Financial. The cash transfer of dividends was completed in October 2007.
At December 31, 2007, our notes payable are summarized as follows:
Our significant contractual obligations as of December 31, 2007, were as follows:
Interest on the subordinated debentures was calculated using an interest rate equal to the three-month LIBOR rate at December 31, 2007 of 4.7025% plus 4.20%, or 8.9025%.
The accumulated benefit obligation (“ABO”) of a defined benefit plan represents the actuarial present value of benefits attributed by the pension benefit formula to employee service rendered prior to the measurement date and based on current and past compensation levels, while the PBO is the ABO plus a factor for future compensation levels. At December 31, 2007, the ABO and PBO were $194.3 million and $217.3 million, respectively. At December 31, 2007 the fair value of the assets of our defined benefit pension plan was $220.0 million, which resulted in an overfunding status within our balance sheet of $2.7 million. The State Auto Group has consistently targeted contributions to our defined benefit pension plan with the objective of maintaining a fully funded status on an ABO basis. Historically our plan assets have exceeded our ABO. The ABO, which considers current compensations level only, provides information about the obligation an employer would have if the plan were discontinued at the date of measurement date. This funding objective has served our plan participants well knowing that we were fully funded on a current basis as well as the fact that we have not had to recognize in 2006 or anytime prior an additional minimum liability as would have been previously required under SFAS 87.
Certain reclassifications have been made to the 2006 and 2005 financial statements to conform to the 2007 presentation. This includes reclassifications in the consolidated balance sheet that consist of separately presenting certain other invested assets that are included in the Company’s available-for-sale portfolio from all other invested assets as well as aggregating the Company’s benefit plans where permitted, namely postretirement and pension liability or asset presentation. Consistent with balance sheet reclassifications, 2006 and 2005 line items in the consolidated statement of cash flows have been combined to conform with balance sheet presentation, specifically postretirement and pension benefits (assets).
State Auto P&C assumes catastrophe reinsurance from the State Auto Group and Beacon National Insurance Company (“Beacon National”), a subsidiary of State Auto Mutual, in the amount of $100.0 million excess of $135.0 million in exchange for a premium paid by each reinsured company. Under this agreement, the Company has assumed from State Auto Mutual and its affiliates premiums written and earned of $3.1 million, $3.0 million and $2.7 million for 2007, 2006 and 2005, respectively. There have been no losses assumed under this agreement. The catastrophe reinsurance program with State Auto P&C has been excluded from the Pooling Arrangement.
The Company uses September 30 as its measurement date to determine its pension and postretirement benefit obligations.
Aggregate intrinsic value for total options outstanding at December 31, 2007 is $12.3 million. Aggregate intrinsic value for total options exercisable at December 31, 2007 is $12.3 million.