Underwriting expense ratio measures underwriting expenses as a percentage of net premiums earned.
Adjusted for effect of EITF Issue No. 04-8 in 2005, 2004, 2003 and 2002, see Footnote 9, Earnings Per Share.
Agents want a cost effective, timely and simple system for issuing and maintaining insurance policies. P.A.R.I.S. Expresssm and P.A.R.I.S. Connecttm are the cornerstone in the Group’s strategy of focusing on superior agent service. The continued success of the Group’s strategic plan depends in part on the ability to provide agents with the technological advantages of these tools. If they do not work as expected, or fail to satisfy agents’ needs, the Group may lose business to insurers with preferred technologies.
As required by SFAS 158, the Company recorded the funded status of the defined benefit retirement plan in its December 31, 2006 consolidated balance sheet, which included a decrease to accumulated other comprehensive income (AOCI), net of deferred taxes of ($24.3) ($16.4 related to prior service credits and ($40.7) for unrecognized actuarial losses). The unrecognized prior service credits were the result of the Company’s June 2004 announced changes to its defined benefit retirement plan which froze accrued benefits effective June 30, 2004 and incorporated a new benefit formula beginning in July 2004. In accordance with the provisions of SFAS 87, the prior service credits will be amortized as a reduction of net periodic pension cost over approximately an 11-year period, which represents the future period for which active employees were anticipated to receive the benefits that were eliminated. The unrecognized actuarial losses will be amortized as an increase in net periodic pension cost over approximately a 13-year period, which represents the average future service period of active participants. Unrecognized actuarial gains and losses arise from several factors including experience and assumption changes in the obligations and from the difference between expected and actual returns on plan assets. In subsequent years, as required by SFAS 158, as the unrecognized prior service credits and unrecognized actuarial losses are amortized into net periodic pension cost, there will be a corresponding adjustment to AOCI.
The process of estimating loss reserves involves a high degree of judgment and is subject to a number of risk factors. These risk factors can be related to both internal and external events, such as changes in claims handling procedures, economic inflation, legal trends and legislative changes, among others. In addition, historical trends adjusted for changes in underwriting standards, policy provisions, product mix and other underwriting and pricing factors are considered when establishing our loss reserve estimates. The impact of these risks and underwriting and pricing factors on ultimate costs for loss and LAE is difficult to estimate. Loss reserve estimation differs by product line due to differences in claim complexity, the volume of claims, the potential severity of individual claims, the determination of occurrence date for a claim and reporting lags (the time between the occurrence of the policyholder loss event and when it is actually reported to the insurer). Informed judgment is applied throughout the process. The Group continually refines its loss reserve estimates in a regular ongoing process as historical loss experience develops and additional claims are reported and settled. The Group considers all significant facts and circumstances known at the time loss reserves are established. Due to the inherent uncertainty underlying loss reserve estimates, final resolution of the estimated liability will be different from that anticipated at the reporting date. Therefore, actual paid losses in the future may yield a materially different amount than currently reserved-favorable or unfavorable. The Group reflects adjustments to reserves in the results of operations in the period the estimates are changed.
Bornhuetter-Ferguson methods: These methods are a blend of expected loss ratio methods with paid and incurred development methods. They are useful for estimating ultimate losses in the early years for lines of business when some loss information is available.
This table illustrates that favorable development can occur for one operating segment while adverse development occurs for another and that development from year to year can be either favorable or adverse for an operating segment.
(Favorable)/adverse loss development for commercial automobile was $(23.5), $(30.6), $(18.1), $2.0 and $17.0 for 2006, 2005, 2004, 2003 and 2002, respectively. The favorable development in 2004 through 2006 is primarily attributed to fewer and less severe bodily injury claims than expected. The adverse development in 2002 is due to increased severity partly related to adverse judicial decisions on Ohio uninsured motorists cases.
On February 16, 2006, the Corporation entered into a new revolving credit agreement with an expiration date of March 16, 2011. Under the terms of this new revolving credit agreement, the lenders agreed to make loans to the Corporation in an initial aggregate amount of up to $125.0 for general corporate purposes.
Regularly, the financial condition of the Corporation and the Group is reviewed by four independent rating agencies, A. M. Best, Fitch, Moody’s and S&P. These agencies assign ratings and rating outlooks reflecting the agencies’ opinions of the Group’s financial strength and the ability of the Corporation to meet its financial obligations to its debt security holders. Following are the current ratings and rating outlooks of the Corporation and the Group.